<PAGE>
PROSPECTUS
MITCHELL BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR MITCHELL SAVINGS BANK, INC., SSB)
UP TO 1,219,000 SHARES OF COMMON STOCK (ANTICIPATED MAXIMUM)
$10.00 PURCHASE PRICE PER SHARE
Mitchell Bancorp, Inc. ("Holding Company"), a North Carolina corporation,
is offering between 901,000 and 1,219,000 shares of its common stock, $.01 par
value per share ("Common Stock"), in connection with the conversion of Mitchell
Savings Bank, SSB ("Savings Bank") from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered capital stock savings bank to be
known as "Mitchell Savings Bank, Inc., SSB," and the simultaneous issuance of
the Savings Bank's capital stock to the Holding Company. The simultaneous
conversion of the Savings Bank to stock form, the issuance of the Savings Bank's
capital stock to the Holding Company and the offer and sale of the Common Stock
by the Holding Company are being undertaken pursuant to an Amended Plan of
Holding Company Conversion ("Plan of Conversion"), and are referred to herein as
the "Conversion."
(COVER CONTINUED ON FOLLOWING PAGE)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK, CALL THE
STOCK INFORMATION CENTER AT (704) 765-1924.
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 1.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION ("FDIC"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR
ANY OTHER GOVERNMENT AGENCY, NOR ARE SUCH SHARES GUARANTEED BY THE
HOLDING COMPANY OR THE SAVINGS BANK AND THERE CAN BE NO ASSURANCE
THAT PURCHASERS WILL BE ABLE TO SELL THEIR SHARES AT OR
ABOVE THE PURCHASE PRICE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("SEC"), THE ADMINISTRATOR, THE FDIC OR ANY OTHER
FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SEC, THE
ADMINISTRATOR, THE FDIC OR ANY OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
ESTIMATED UNDERWRITING
PURCHASE COMMISSIONS AND ESTIMATED NET
PRICE (1) OTHER EXPENSES (2) PROCEEDS TO ISSUER (3)
<S> <C> <C> <C>
Minimum Price Per Share............................. $10.00 $0.71 $9.29
Midpoint Price Per Share............................ $10.00 $0.67 $9.33
Maximum Price Per Share............................. $10.00 $0.63 $9.37
Maximum Price Per Share, as adjusted (4)............ $10.00 $0.60 $9.40
Minimum Total (5)................................... $9,010,000 $640,000 $8,370,000
Midpoint Total (6).................................. $10,600,000 $705,000 $9,895,000
Maximum Total (7)................................... $12,190,000 $770,000 $11,420,000
Maximum Total, as adjusted (4)(8)................... $14,018,500 $845,000 $13,173,500
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by Baxter
Fentriss and Company ("Baxter Fentriss") as of April 10, 1996, which states
that the estimated aggregate pro forma market value of the Holding Company
and the Savings Bank ranged from $9.01 million to $12.19 million, with a
midpoint of $10.60 million ("Estimated Valuation Range"). Based on the
Estimated Valuation Range, the Board of Directors of the Savings Bank
established the estimated price range of $9.01 million to $12.19 million, or
between 901,000 and 1,219,000 shares of Common Stock at a fixed price of
$10.00 per share ("Purchase Price") to be paid for each share of Common
Stock subscribed for or purchased in the Offerings. Baxter Fentriss'
appraisal is based upon estimates and projections that are subject to
change, and the valuation must not be construed as a recommendation as to
the advisability of purchasing such shares or that a purchaser will
thereafter be able to sell such shares at or above the Purchase Price. See
"THE CONVERSION -- Stock Pricing and Number of Shares to be Issued."
(2) Includes estimated costs to the Holding Company and the Savings Bank arising
from the Conversion, including fees to be paid to Trident Securities in
connection with the Offerings. Such fees may be deemed to be underwriting
fees and Trident Securities may be deemed to be an underwriter. Expenses of
the Conversion, excluding fees to be paid to Trident Securities, are
estimated to be approximately $273,000, $271,000, $269,000 and $267,000 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. Actual expenses, and thus net proceeds, may
be more or less than estimated amounts. The Holding Company and the Savings
Bank have agreed to indemnify Trident Securities against certain
liabilities, including liabilities that may arise under the Securities Act
of 1933, as amended ("Securities Act"). See "USE OF PROCEEDS" and "THE
CONVERSION -- Plan of Distribution for the Subscription, Direct Community
and Syndicated Community Offerings."
(3) Actual net proceeds may vary substantially from the estimated amounts
depending upon the relative number of shares sold in the Offerings. See "USE
OF PROCEEDS" and "PRO FORMA DATA."
(4) Gives effect to the sale of an additional 182,850 shares in the Conversion,
either in the Subscription Offering, Direct Community Offering or Syndicated
Community Offering. In the event of an oversubscription in the Offerings,
such additional number of shares may be issued to cover an increase in the
appraised value of the Common Stock or additional subscriptions, without the
resolicitation of subscribers or any right of cancellation. The issuance of
such additional shares will be conditioned on a determination of Baxter
Fentriss that such issuance is compatible with its determination of the
estimated pro forma market value of the Common Stock. See "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued."
(5) Assumes the issuance of 901,000 shares at $10.00 per share.
(6) Assumes the issuance of 1,060,000 shares at $10.00 per share.
(7) Assumes the issuance of 1,219,000 shares at $10.00 per share.
(8) Assumes the issuance of 1,401,850 shares at $10.00 per share.
TRIDENT SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS MAY 8, 1996.
<PAGE>
Nontransferable rights to subscribe for the Common Stock ("Subscription
Rights") have been given, in order of priority, to (i) depositors with $50.00 or
more on deposit at the Savings Bank as of December 31, 1994 ("Eligible Account
Holders"), (ii) the Savings Bank's employee stock ownership plan ("ESOP"), a
tax-qualified employee benefit plan, (iii) depositors with $50.00 or more on
deposit at the Savings Bank as of March 31, 1996 ("Supplemental Eligible Account
Holders"), and (iv) depositors and borrowers of the Savings Bank as of May 3,
1996 ("Voting Record Date") ("Other Members"), subject to the priorities and
purchase limitations set forth in the Plan of Conversion ("Subscription
Offering"). SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE. PERSONS FOUND TO BE
TRANSFERRING SUBSCRIPTION RIGHTS OR ATTEMPTING TO PURCHASE SHARES ON BEHALF OF
OTHER PERSONS WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE FURTHER
SANCTIONS AND PENALTIES IMPOSED BY THE ADMINISTRATOR, SAVINGS INSTITUTIONS
DIVISION, NORTH CAROLINA DEPARTMENT OF COMMERCE ("ADMINISTRATOR"). See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings" and " -- Limitations on Purchases of Shares." Concurrently, but
subject to the prior rights of holders of Subscription Rights, the Holding
Company is offering the Common Stock for sale through a direct community
offering ("Direct Community Offering") to natural persons and trusts of natural
persons who are permanent residents of Mitchell, Yancey, Avery and McDowell
counties of North Carolina ("Local Community"), subject to the right of the
Holding Company to accept or reject these orders in whole or in part. If any
shares remain available on the Expiration Date (as hereinafter defined), the
Direct Community Offering, in the discretion of the Holding Company and the
Savings Bank, may be expanded to include other members of the general public. NO
ORDERS WILL BE ACCEPTED IN THE DIRECT COMMUNITY OFFERING FROM NATURAL PERSONS OR
TRUSTS OF NATURAL PERSONS RESIDING OUTSIDE THE LOCAL COMMUNITY UNLESS THE DIRECT
COMMUNITY OFFERING IS EXPANDED TO INCLUDE SUCH PERSONS. The Subscription
Offering and the Direct Community Offering are referred to herein as the
"Subscription and Direct Community Offering." It is anticipated that shares of
Common Stock not subscribed for or purchased in the Subscription and Direct
Community Offering will be offered to eligible members of the general public on
a best efforts basis by a selling group of broker-dealers managed by Trident
Securities, Inc. ("Trident Securities") in a syndicated offering ("Syndicated
Community Offering"). The Subscription and Direct Community Offering and the
Syndicated Community Offering are referred to collectively as the "Offerings."
With the exception of the ESOP, which is expected to purchase 8% of the
Common Stock issued in the Conversion, subject to the approval of the
Administrator, NO PERSON OR ENTITY, TOGETHER WITH ASSOCIATES OR PERSONS ACTING
IN CONCERT, MAY SUBSCRIBE FOR SHARES WITH AN AGGREGATE PURCHASE PRICE OF MORE
THAN $121,900 (OR 12,190 SHARES BASED ON THE PURCHASE PRICE). Under certain
circumstances, the maximum purchase limitation may be increased at the sole
discretion of the Savings Bank and the Holding Company, See "THE
CONVERSION -- The Subscription, Direct Community and Syndicated Community
Offerings" and " -- Procedure for Purchasing Shares in the Subscription and
Direct Community Offering" for other purchase and sale limitations. The minimum
order is 50 shares.
THE SUBSCRIPTION OFFERING WILL EXPIRE AT NOON, EASTERN TIME, ON JUNE 12,
1996 ("EXPIRATION DATE"), UNLESS EXTENDED BY THE SAVINGS BANK AND THE HOLDING
COMPANY FOR UP TO 16 DAYS TO JUNE 28, 1996. SUCH EXTENSION MAY BE GRANTED
WITHOUT ADDITIONAL NOTICE TO SUBSCRIBERS. THE DIRECT COMMUNITY OFFERING IS ALSO
EXPECTED TO TERMINATE ON THE EXPIRATION DATE OR AT ANY DATE THEREAFTER, HOWEVER,
IN NO EVENT LATER THAN AUGUST 12, 1996. The Holding Company must receive a
properly completed and signed stock order form ("Order Form") along with full
payment (or appropriate instructions authorizing a withdrawal from a deposit
account at the Savings Bank) of $10.00 per share for all shares subscribed for
or ordered. Funds so received will be placed in a segregated account created for
this purpose at the Savings Bank, and interest will be paid at the passbook rate
from the date payment is received until the Conversion is completed or
terminated; these funds will be otherwise unavailable to the depositor until
such time. Payments authorized by withdrawals from deposit accounts will
continue to earn interest at the contractual rate until the Conversion is
completed or terminated, although such funds will be unavailable for withdrawal
until the Conversion is consummated or terminated. The Holding Company is not
obligated to accept orders submitted on photocopied or telecopied Order Forms.
If the Conversion is not completed within 45 days after the last day of the
Subscription and Direct Community Offering (which date will be no later than
August 12, 1996) and the Administrator consents to an extension of time to
complete the Conversion, subscribers will be given the right to increase,
decrease or rescind their orders. If such period is not extended or, in any
event, if the Conversion is not completed by November 8, 1996, all subscription
funds will be promptly returned, together with accrued interest, and all
withdrawal authorizations terminated. SUBJECT TO THE FOREGOING, ORDERS SUBMITTED
ARE IRREVOCABLE AND MAY NOT BE MODIFIED, AMENDED OR RESCINDED WITHOUT THE
CONSENT OF THE SAVINGS BANK.
The Savings Bank and the Holding Company have engaged Trident Securities as
their financial advisor and to assist the Holding Company in the sale of the
Common Stock in the Offerings. In addition, in the event the Common Stock is not
fully subscribed for in the Subscription and Direct Community Offering, Trident
Securities will manage the Syndicated Community Offering. Neither Trident
Securities nor any other registered broker-dealer is obligated to take or
purchase any shares of Common Stock in the Offerings. The Holding Company and
the Savings Bank reserve the right, in their absolute discretion, to accept or
reject, in whole or in part, any or all orders in the Direct Community or
Syndicated Community Offerings either
(COVER CONTINUED ON FOLLOWING PAGE)
<PAGE>
at the time of receipt of an order or as soon as practicable following the
termination of the Offerings. See "THE CONVERSION -- Plan of Distribution for
the Subscription, Direct Community and Syndicated Community Offerings." Trident
Securities is a registered broker-dealer and member of the National Association
of Securities Dealers, Inc. ("NASD").
In the Subscription and Direct Community Offering, officers and directors
of the Savings Bank, subject to applicable state securities laws, may be
available to answer questions about the Offerings and may also hold
informational meetings for interested persons. Such officers and directors are
not authorized to render investment advice. The Savings Bank has established a
Stock Information Center for purposes of coordinating the Offerings, including
tabulating orders and answering questions about the Offerings by telephone. The
Stock Information Center will be located at the Savings Bank. It is expected
that Savings Bank personnel will be present in the Stock Information Center to
assist employees of Trident Securities in responding to questions. An employee
of the Savings Bank, under the supervision of Trident Securities, will manage
the activities in the Stock Information Center and, subject to applicable state
securities laws, may respond to inquiries regarding the Subscription and Direct
Community Offering. All subscribers for or purchasers of the shares to be
offered in the Subscription and Direct Community Offering will be instructed to
send payment directly to the Savings Bank, where such funds will be held in a
segregated account and not released until all shares are sold or the Offerings
are terminated. See "THE CONVERSION."
The Boards of Directors and management of the Savings Bank and the Holding
Company make no recommendation concerning whether any person or entity should
purchase shares of Common Stock. Subscribers are urged to consult with their own
financial advisors with respect to the suitability of an investment in the
Common Stock. Trident Securities makes no recommendation relating to such
investment.
Prior to the Offerings, the Holding Company has not issued any capital
stock and accordingly there has not been a market for the shares offered hereby.
The Holding Company has filed an application to have the Common Stock listed for
quotation on The Nasdaq SmallCap Market upon consummation of the Conversion.
There can be no assurance, however, that such application will be approved or
that the Common Stock will be quoted on The Nasdaq SmallCap Market. In the event
the Common Stock does not qualify for quotation on The Nasdaq SmallCap Market,
the Holding Company intends to list the Common Stock over-the-counter through
the National Daily Quotation System "Pink Sheets" published by the National
Quotation Bureau, Inc., and to request that Trident Securities undertake to
match offers to buy and offers to sell the Common Stock. Trident Securities
intends to be a market maker for the Common Stock. There can be no assurance
that timely or accurate quotations will be available in the "Pink Sheets." In
addition, the existence of a public trading market will depend upon the presence
in the market of both willing buyers and willing sellers at any given time. As a
result of the small number of shares of Common Stock being offered in the
Conversion, it is unlikely that an active and liquid trading market for the
Common Stock will develop and be maintained. See "RISK FACTORS -- Absence of
Prior Market for the Common Stock" and "MARKET FOR COMMON STOCK."
<PAGE>
MITCHELL SAVINGS BANK, SSB
SPRUCE PINE, NORTH CAROLINA
[MAP]
THE SAVINGS BANK'S CONVERSION TO A STOCK ORGANIZATION IS CONTINGENT UPON
APPROVAL OF THE SAVINGS BANK'S PLAN OF CONVERSION BY AT LEAST A MAJORITY
OF ITS VOTING MEMBERS, THE SALE OF AT LEAST 901,000 SHARES OF COMMON STOCK
PURSUANT TO THE PLAN OF CONVERSION AND RECEIPT OF ALL REGULATORY APPROVALS.
<PAGE>
CAPSULE SUMMARY
THE INFORMATION SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH AND
IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) PRESENTED ELSEWHERE IN THIS
PROSPECTUS. THE PURCHASE OF COMMON STOCK IS SUBJECT TO CERTAIN RISKS. SEE "RISK
FACTORS."
MITCHELL SAVINGS BANK, SSB The Savings Bank, a North
Carolina-chartered mutual savings bank,
is a traditional, community oriented
financial institution engaged primarily
in the business of attracting deposits
from the general public and using these
funds to originate one- to four-family
residential mortgage loans and, to a
significantly lesser extent loans
secured by multi-family properties,
land, churches, and selected commercial
properties, and consumer loans. See
"MITCHELL SAVINGS BANK, SSB."
Unlike most other savings associations,
the Savings Bank holds substantially all
of its assets in fixed rate loans that
do not reprice in response to changes in
interest rates. As a result, a material
and prolonged increase in interest rates
generally would adversely affect the
Savings Bank's net interest income. The
Savings Bank's one-year interest rate
sensitivity gap to total rate sensitive
assets percentage was a negative 55% at
December 31, 1995. See "RISK FACTORS --
Above Average Interest Rate Risk
Associated With Fixed- Rate Loan
Portfolio," "-- Potential Adverse Impact
of Changes in Interest Rates" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset and Liability
Management and Interest Rate Risk."
THE CONVERSION The Savings Bank is converting from a
North Carolina- chartered mutual savings
bank to a North Carolina-chartered
capital stock savings bank and, in
connection with the Conversion, has
formed the Holding Company. As part of
the Conversion, the Savings Bank will
issue all of its capital stock to the
Holding Company in exchange for 50% of
the net proceeds from the sale of the
Common Stock. Simultaneously, the
Holding Company will sell its Common
Stock in the Offerings. ORDERS SUBMITTED
ARE IRREVOCABLE UNTIL THE COMPLETION OF
THE CONVERSION. The Conversion is
subject to the approval of the
Administrator and the non- objection of
the FDIC, as well as the approval of the
Savings Bank's members at a special
meeting to be held on June 13, 1996.
The Plan of Conversion requires that the
aggregate purchase price of the Common
Stock to be issued in the Conversion be
based upon an independent appraisal of
the estimated pro forma market value of
the Holding Company and the Savings
Bank. Baxter Fentriss has advised the
Savings Bank that in its opinion, at
April 10, 1996, the aggregate estimated
pro forma market value of the Holding
Company and the Savings
(i)
<PAGE>
Bank ranged from $9.01 million to $12.19
million or from 901,000 shares to
1,219,000 shares, assuming a $10.00 per
share Purchase Price. The appraisal of
the pro forma market value of the
Holding Company and the Savings Bank is
based on a number of factors and should
not be considered a recommendation to
buy shares of the Common Stock or any
assurance that after the Conversion
shares of Common Stock will be able to
be resold at or above the Purchase
Price. The appraisal will be updated or
confirmed prior to the completion of the
Conversion. See "THE CONVERSION."
THE SUBSCRIPTION, DIRECT COMMUNITY
AND SYNDICATED COMMUNITY OFFERINGS The Holding Compamy is offering up to
1,219,000 shares of Common Stock
(subject to adjustment) at $10.00 per
share to holders of Subscription Rights
in the following order of priority: (i)
Eligible Account Holders; (ii) the
Savings Bank's ESOP; (iii) Supplemental
Eligible Account Holders; and (iv) Other
Members. Concurrently, and subject to
the prior rights of holders of
Subscription Rights, any shares of
Common Stock not subscribed for in the
Subscription Offering are being offered
in the Direct Community Offering to
natural persons and trusts of natural
persons who are permanent residents of
the Local Community. If any shares
remain available on the Expiration Date
of the Direct Community Offering, in the
discretion of the Holding Company and
the Savings Bank, the Direct Community
Offering may be expanded to include
other members of the general public. NO
ORDERS WILL BE ACCEPTED IN THE DIRECT
COMMUNITY OFFERING FROM NATURAL PERSONS
OR TRUSTS OF NATURAL PERSONS RESIDING
OUTSIDE THE LOCAL COMMUNITY UNLESS THE
DIRECT COMMUNITY OFFERING IS EXPANDED TO
INCLUDE SUCH PERSONS. See "THE
CONVERSION -- The Subscription, Direct
Community and Syndicated Community
Offerings."
The Savings Bank has engaged Trident
Securities to consult with and advise
the Holding Company and the Savings Bank
in the Offerings, and Trident Securities
has agreed to use its best efforts to
assist the Holding Company with the
solicitation of subscriptions and
purchase orders for shares of Common
Stock in the Offerings. Trident
Securities is not obligated to take or
purchase any shares of Common Stock in
the Offerings. If all shares of Common
Stock to be issued in the Conversion are
not sold through the Subscription and
Direct Community Offering, then the
Holding Company expects to offer the
remaining shares in a Syndicated
Community Offering managed by Trident
Securities, which would occur as soon as
practicable following the close of the
Subscription and Direct Community
Offering but may commence during the
Subscription and Direct Community
Offering, subject to the prior rights of
subscribers in the Subscription and
Direct Community Offering and to the
right
(ii)
<PAGE>
of the Holding Company to accept or
reject these orders in whole or in part.
All shares of Common Stock will be sold
at the same price per share in the
Syndicated Community Offering as in the
Subscription and Direct Community
Offering. See "USE OF PROCEEDS," "PRO
FORMA DATA" and "THE CONVERSION -- Stock
Pricing and Number of Shares to be
Issued." The Subscription Offering will
expire at Noon, Eastern Time, on June
12, 1996, unless extended by the Savings
Bank and the Holding Company for up to
16 days. The Direct Community Offering
and Syndicated Community Offering, if
any, are also expected to terminate on
June 12, 1996, and may terminate on any
date thereafter, however, in no event
later than August 12, 1996.
SUBSCRIPTION RIGHTS ARE
NON-TRANSFERRABLE. PERSONS FOUND TO BE
TRANSFERRING SUBSCRIPTION RIGHTS OR
ATTEMPTING TO PURCHASE SHARES OF COMMON
STOCK ON BEHALF OF OTHER PERSONS WILL BE
SUBJECT TO FORFEITURE OF SUCH RIGHTS AND
POSSIBLE FURTHER SANCTIONS AND PENALTIES
IMPOSED BY THE ADMINISTRATOR.
PURCHASE LIMITATIONS With the exception of the ESOP, which is
expected to subscribe for 8% of the
shares of Common Stock issued in the
Conversion, no Eligible Account Holder,
Supplemental Eligible Account Holder or
Other Member may purchase in their
capacity as such in the Subscription
Offering more than 12,190 shares of
Common Stock offered in the Conversion;
no person, together with associates of
and persons acting in concert with such
person, may purchase in the Direct
Community Offering and the Syndicated
Community Offering more than 12,190
shares of Common Stock issued in the
Conversion; and no person, together with
associates and persons acting in concert
with such person, may purchase in the
aggregate more than 12,190 shares of
Common Stock issued in the Conversion.
THIS MAXIMUM PURCHASE LIMITATION MAY BE
INCREASED AS CONSISTENT WITH NORTH
CAROLINA REGULATIONS IN THE SOLE
DISCRETION OF THE HOLDING COMPANY AND
THE SAVINGS BANK SUBJECT TO ANY REQUIRED
REGULATORY APPROVAL. The minimum
purchase is 50 shares. In addition,
stock orders received either through the
Direct Community Offering or the
Syndicated Community Offering may be
accepted or rejected, in whole or in
part, at the discretion of the Holding
Company and the Savings Bank. See "THE
CONVERSION --Limitations on Purchases of
Shares." In the event of an
oversubscription, shares will be
allocated in accordance with the Plan of
Conversion. See "THE CONVERSION -- The
Subscription, Direct Community and
Syndicated Community Offerings." THE
INTERPRETATION BY THE HOLDING COMPANY
AND THE SAVINGS BANK OF THE TERMS AND
CONDITIONS OF THE PLAN OF CONVERSION AND
OF THE ORDER FORM WILL BE FINAL.
(iii)
<PAGE>
CONDITIONS TO CLOSING OF THE OFFERINGS Consummation of the Offerings is subject
to, among other things (i) consummation
of the Conversion, which is conditioned
on, among other things, approval of the
Plan of Conversion by the eligible
voting members of the Savings Bank, (ii)
receipt by the Administrator of Baxter
Fentriss' updated appraisal of the pro
forma market value of the Holding
Company and the Savings Bank, and
authorization of the Administrator to
sell the Common Stock within the
estimated valuation range set forth in
such updated appraisal, (iii) the
non-objection of the FDIC to the
Conversion, and (iv) the Board of
Governors of the Federal Reserve
System's ("Federal Reserve") approval of
the Holding Company's acquisition of the
Savings Bank. There can be no assurances
that all such conditions will be
satisfied. See "RISK FACTORS -- Risk of
Delayed Offering" and "THE CONVERSION --
General."
USE OF PROCEEDS The net proceeds from the sale of the
Common Stock are estimated to range from
$8.4 million to $11.4 million, or to
$13.2 million if the Estimated Valuation
Range is increased by 15%, depending
upon the number of shares sold and the
expenses of the Conversion. The Holding
Company plans to contribute to the
Savings Bank 50% of the net proceeds and
retain the remaining net proceeds. This
will result in the Holding Company
retaining approximately $4.2 million to
$5.7 million of the net proceeds, or up
to $6.6 million if the Estimated
Valuation Range is increased by 15%, and
the Savings Bank receiving an equal
amount. See "USE OF PROCEEDS."
MARKET FOR COMMON STOCK The Holding Company has never issued
capital stock to the public and,
consequently, there is no existing
market for the Common Stock. The Holding
Company has filed an application to have
the Common Stock listed for quotation on
The Nasdaq SmallCap Market upon
consummation of the Conversion. There
can be no assurance, however, that such
application will be approved or that the
Common Stock will be quoted on The
Nasdaq SmallCap Market. In the event the
Common Stock does not qualify for
quotation on The Nasdaq SmallCap Market,
the Holding Company intends to list the
Common Stock over-the-counter through
the National Daily Quotation System
"Pink Sheets" published by the National
Quotation Bureau, Inc., and the Holding
Company will request that Trident
Securities undertake to match offers to
buy and offers to sell the Common Stock.
Trident Securities intends to be a
market maker for the Common Stock. There
can be no assurance that timely or
accurate quotations will be available in
the "Pink Sheets." In addition, the
existence of a public trading market
will depend upon the presence in the
market of both willing buyers and
willing sellers at any given time. It is
unlikely that an established and liquid
trading market for the Common Stock will
develop and be
(iv)
<PAGE>
maintained. Further, no assurance can be
given that purchasers will be able to
sell their shares at or above the
Purchase Price after the Conversion. See
"RISK FACTORS -- Absence of Prior Market
for Common Stock" and "MARKET FOR COMMON
STOCK."
DIVIDENDS The Board of Directors of the Holding
Company anticipates the declaration and
payment of a regular cash dividend at an
initial rate of 4%, or $0.40 per share
per year based on the $10.00 per share
Purchase Price, with the first
semi-annual portion of such annual
dividend payable upon completion of the
first full semi-annual fiscal period
following the close of the Conversion.
Declarations and payments of dividends,
regular or special, by the Board of
Directors will depend upon a number of
factors. See "DIVIDEND POLICY -- Current
Regulatory Restrictions" and "REGULATION
-- The Savings Bank -- Dividends." No
assurances can be given that any
dividends will be declared or, if
declared, what the amount of dividends
will be or whether such dividends, once
declared, will continue.
BENEFITS OF THE CONVERSION TO
MANAGEMENT ESOP. In connection with the Conversion,
the Savings Bank will adopt the ESOP, a
tax-qualified employee benefit plan for
officers and employees of the Holding
Company and the Savings Bank, which
intends to purchase 8% of the shares of
Common Stock issued in the Offerings
(97,520 shares, or 112,148 shares, of
Common Stock, based on the issuance of
the maximum, or the adjusted maximum,
respectively, of the Estimated Valuation
Range). See "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Employee Stock
Ownership Plan."
MRP. The Holding Company intends to seek
approval of the Management Recognition
and Development Plan ("MRP") at a
meeting of stockholders occurring no
earlier than six months following
consummation of the Conversion. The MRP,
which will be funded with a number of
shares equal to 4% of the number of
shares issued in the Conversion (48,760
shares, or 56,074 shares, based on the
issuance of the maximum, or the adjusted
maximum, respectively, of the Estimated
Valuation Range), is a non-tax-
qualified restricted stock plan intended
for the benefit of key employees and
directors of the Holding Company and the
Savings Bank. If stockholder approval of
the MRP is obtained, it is expected that
shares of Common Stock of the Holding
Company will be awarded pursuant to such
plan to key employees and directors of
the Holding Company and the Savings Bank
(which shares will be awarded at no cost
to such recipients). See "MANAGEMENT OF
THE SAVINGS BANK --Benefits --
Management Recognition Plan."
(v)
<PAGE>
STOCK OPTION PLAN. The Holding Company
intends to seek stockholder approval of
the 1996 Stock Option Plan ("Stock
Option Plan"), which will reserve a
number of shares equal to 10% of the
number of shares issued in the
Conversion, at a meeting of stockholders
occurring no earlier than six months
following consummation of the
Conversion. If stockholder approval of
the Stock Option Plan is obtained, it is
expected that options to acquire up to
121,900 shares, or 140,185 shares, of
Common Stock of the Holding Company will
be awarded to key employees and
directors of the Holding Company and the
Savings Bank (based on the issuance of
the maximum, or the adjusted maximum,
respectively, of the Estimated Valuation
Range). The exercise price of such
options will be 100% of the fair market
value of the Common Stock on the date
the option is granted. See "MANAGEMENT
OF THE SAVINGS BANK -- Benefits -- 1996
Stock Option Plan."
EMPLOYMENT AGREEMENTS. Effective
December 31, 1995, the Savings Bank
entered into three-year employment
agreements with Edward Ballew, Jr.,
Executive Vice President and Chief
Executive Officer of the Savings Bank,
and Emma Lee M. Wilson, Assistant
Managing Officer, Treasurer and
Secretary of the Savings Bank. See
"MANAGEMENT OF THE SAVINGS BANK --
Executive Compensation -- Employment
Agreements."
For information concerning the possible
voting control of officers, directors
and employees following the Conversion,
see "RISK FACTORS -- Anti-takeover
Considerations -- Voting Control by
Insiders."
OFFICERS' AND DIRECTORS' COMMON STOCK
PURCHASES AND BENEFICIAL OWNERSHIP Officers and directors of the Savings
Bank (five persons) are expected to
subscribe for an aggregate of
approximately $285,000 of Common Stock,
or 3.16% or 2.34%, of the shares based
on the minimum or the maximum,
respectively, of the Estimated Valuation
Range. See "THE CONVERSION -- Shares to
be Purchased by Management Pursuant to
Subscription Rights." In addition,
purchases by the ESOP and subsequent
purchases by the MRP, and the exercise
of stock options issued under the Stock
Option Plan, will increase the number of
shares beneficially owned by officers,
directors and employees. See "RISK
FACTORS -- Anti-takeover Considerations
-- Voting Control by Insiders." The MRP
and Stock Option Plan are subject to
approval by the stockholders of the
Holding Company at a meeting to be held
no earlier than six months following
consummation of the Conversion.
RISK FACTORS See "RISK FACTORS" for a discussion of
certain risks related to the Offerings
that should be considered by all
prospective investors.
(vi)
<PAGE>
THE SECURITIES OFFERED HEREBY ARE NOT DEPOSITS OR ACCOUNTS AND WILL NOT BE
INSURED OR GUARANTEED BY THE FDIC, THE SAIF OR ANY OTHER GOVERNMENT AGENCY, NOR
ARE SUCH SHARES GUARANTEED BY THE HOLDING COMPANY OR THE SAVINGS BANK AND THERE
CAN BE NO ASSURANCE THAT PURCHASERS WILL BE ABLE TO SELL THEIR SHARES AT OR
ABOVE THE PURCHASE PRICE AFTER THE CONVERSION.
PROSPECTUS SUMMARY
THE INFORMATION SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH AND
IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) PRESENTED ELSEWHERE IN THIS
PROSPECTUS. THE PURCHASE OF COMMON STOCK IS SUBJECT TO CERTAIN RISKS. SEE "RISK
FACTORS."
MITCHELL BANCORP, INC.
The Holding Company is a North Carolina corporation organized in
February 1996 at the direction of the Savings Bank to acquire all of the capital
stock that the Savings Bank will issue upon its conversion from the mutual to
stock form of ownership. The Holding Company has not engaged in any significant
business to date. Upon completion of the Conversion, the Holding Company will be
regulated by the Federal Reserve. The Holding Company has filed an application
with the Federal Reserve and the Administrator to become a bank holding company
and for approval to acquire the Savings Bank. Immediately following the
Conversion, the only significant assets of the Holding Company will be the
capital stock of the Savings Bank, that portion of the net proceeds of the
Offerings permitted by the Administrator to be retained by the Holding Company
and a note receivable from the ESOP evidencing a loan from the Holding Company
to fund the Savings Bank's ESOP. See "USE OF PROCEEDS." Management believes that
the holding company structure and retention of proceeds may, should it decide to
do so, facilitate the repurchase of its stock without adverse tax consequences.
There are no present plans, arrangements, agreements, or understandings, written
or oral, regarding any such repurchases.
The office of the Holding Company is located at 210 Oak Avenue, Spruce
Pine, North Carolina 28777, and its telephone number is (704) 765-7324.
MITCHELL SAVINGS BANK, SSB
The Savings Bank was established in 1924 as "Mitchell County Building
and Loan Association," a North Carolina-chartered mutual savings and loan
association, located in Spruce Pine, North Carolina, approximately 50 miles
Northeast of Asheville, North Carolina. In 1992, the Savings Bank converted to a
North Carolina-chartered savings bank and adopted its current title. In
connection with the mutual to stock conversion, the Savings Bank will convert to
a North Carolina-chartered capital stock savings bank and will become a
subsidiary of the Holding Company. The Savings Bank is regulated by the
Administrator, its primary regulator, and the FDIC, the insurer of its deposits.
The Savings Bank's deposits are federally insured by the FDIC under the SAIF.
The Savings Bank is a member of the Federal Home Loan Bank ("FHLB") System. At
December 31, 1995, the Savings Bank had total assets of $28.2 million, total
deposits of $21.3 million and total equity of $6.1 million, or 21.1% of adjusted
total assets, on a consolidated basis.
The Savings Bank is a traditional, community oriented financial
institution that is engaged primarily in the business of attracting deposits
from the general public and using these funds to originate fixed-rate one- to
four- family residential mortgage loans within the Savings Bank's market area,
and, to a significantly lesser extent, loans secured by multi-family properties,
land, churches, and selected commercial properties, and consumer loans. The
(vii)
<PAGE>
Savings Bank originates loans for its portfolio. At December 31, 1995, one- to
four-family residential mortgage loans totalled $19.0 million, which represented
81.8% of the Savings Bank's total gross loans at that date.
Because the Savings Bank depends primarily on its net interest margin
(interest income from loans and investments minus interest expense on deposit
accounts) for income, the focus of the Savings Bank's planning has been to
devise and employ strategies that provide a stable, positive spread between the
yield on interest-earning assets and the cost of interest-bearing liabilities in
order to maximize the dollar amount of net interest income. Unlike most other
savings associations, however, the Savings Bank holds substantially all of its
assets in fixed rate loans that do not reprice in response to changes in
interest rates. As a result, a material and prolonged increase in interest rates
generally would adversely affect net interest income. The Savings Bank's
one-year interest rate sensitivity gap to total rate sensitive assets percentage
was a negative 55% at December 31, 1995. See "RISK FACTORS -- Above Average
Interest Rate Risk Associated With Fixed-Rate Loan Portfolio," "-- Potential
Adverse Impact of Changes in Interest Rates" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management and Interest Rate Risk."
As illustrated by the Savings Bank's one-year interest rate sensitivity
gap to total assets percentage at December 31, 1995, the Savings Bank has a high
level of interest rate risk, primarily as a result of its policy of originating
only fixed rate loans for its portfolio. The historical emphasis on fixed rate
lending secured by residential properties reflects management's decision to
accept the interest rate risk associated with fixed rate lending.
The Savings Bank's primary market area is comprised of Mitchell and
Yancey counties, North Carolina. Occasionally, the Savings Bank originates loans
in adjoining Avery and McDowell counties, North Carolina. The Savings Bank is
located at 210 Oak Avenue, Spruce Pine, North Carolina 28777, and its telephone
number is (704) 765-7324.
THE CONVERSION
The Savings Bank is in the process of converting from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered capital
stock savings bank and, in connection with the Conversion, has formed the
Holding Company. As part of the Conversion, the Savings Bank will issue all of
its capital stock to the Holding Company in exchange for 50% of the net proceeds
from the sale of the Common Stock. Simultaneously, the Holding Company will sell
its Common Stock in the Offerings. ORDERS SUBMITTED ARE IRREVOCABLE UNTIL THE
COMPLETION OF THE CONVERSION. The Conversion is subject to the approval of the
Administrator and the non-objection of the FDIC, as well as the approval of the
Savings Bank's members at a special meeting to be held on June 13, 1996.
The Plan of Conversion requires that the aggregate purchase price of
the Common Stock to be issued in the Conversion be based upon an independent
appraisal of the estimated pro forma market value of the Holding Company and the
Savings Bank. Baxter Fentriss has advised the Savings Bank that in its opinion,
at April 10, 1996, the aggregate estimated pro forma market value of the Holding
Company and the Savings Bank ranged from $9.01 million to $12.19 million or from
901,000 shares to 1,219,000 shares, assuming a $10.00 per share Purchase Price.
The appraisal of the pro forma market value of the Holding Company and the
Savings Bank is based on a number of factors and should not be considered a
recommendation to buy shares of the Common Stock or any assurance that after the
Conversion shares of Common Stock will be able to be resold at or above the
Purchase Price. The appraisal will be updated or confirmed prior to the
completion of the Conversion.
The Board of Directors and management of the Savings Bank believe that
the stock form of organization is preferable to the mutual form, especially in
light of the competitive and heavily regulated environments within which the
Savings Bank operates. As discussed under "RISK FACTORS -- Management Succession
and Future Prospects," the Savings Bank evaluated its strategic options and
subsequently adopted the Plan of Conversion. The Board of Directors and
management believe that the Conversion is in the best interests of the Savings
Bank's members and its community. The Conversion is intended to: (i) support
possible future expansion, merger and diversification of operations (currently,
there are no specific plans, arrangements or understandings, written or oral,
(viii)
<PAGE>
regarding any such activities); (ii) afford members of the Savings Bank and
others the opportunity to become stockholders of the Holding Company and thereby
participate more directly in, and contribute to, any future growth of the
Holding Company and the Savings Bank; and (iii) provide future access to capital
markets. See "THE CONVERSION."
The Conversion will significantly increase the consolidated capital of
the Savings Bank and the newly formed Holding Company and as a result the pro
forma return on equity will be significantly less than the Savings Bank's
pre-Conversion return on equity. See "RISK FACTORS -- Declining Interest Rate
Spread and Return on Equity After Conversion."
THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
The Holding Company is offering up to 1,219,000 shares of Common Stock
at $10.00 per share to holders of Subscription Rights in the following order of
priority: (i) Eligible Account Holders; (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders; and (iv) Other Members. Concurrently, and
subject to the prior rights of holders of Subscription Rights, any shares of
Common Stock not subscribed for in the Subscription Offering are being offered
in the Direct Community Offering to natural persons and trusts of natural
persons who are permanent residents of the Local Community. If any shares remain
available on the expiration date of the Direct Community Offering, in the
discretion of the Holding Company and the Savings Bank, the Direct Community
Offering may be expanded to include other members of the general public. NO
ORDERS WILL BE ACCEPTED IN THE DIRECT COMMUNITY OFFERING FROM NATURAL PERSONS OR
TRUSTS OF NATURAL PERSONS RESIDING OUTSIDE THE LOCAL COMMUNITY UNLESS THE DIRECT
COMMUNITY OFFERING IS EXPANDED TO INCLUDE SUCH PERSONS. The Savings Bank has
engaged Trident Securities to consult with and advise the Holding Company and
the Savings Bank in the Offerings, and Trident Securities has agreed to use its
best efforts to assist the Holding Company with the solicitation of
subscriptions and purchase orders for shares of Common Stock in the Offerings.
Trident Securities is not obligated to take or purchase any shares of Common
Stock in the Offerings. If all shares of Common Stock to be issued in the
Conversion are not sold through the Subscription and Direct Community Offering,
then the Holding Company expects to offer the remaining shares in a Syndicated
Community Offering managed by Trident Securities, which would occur as soon as
practicable following the close of the Subscription and Direct Community
Offering but may commence during the Subscription and Direct Community Offering,
subject to the prior rights of subscribers in the Subscription and Direct
Community Offering and to the right of the Holding Company to accept or reject
these orders in whole or in part. All shares of Common Stock will be sold at the
same price per share in the Syndicated Community Offering as in the Subscription
and Direct Community Offering. See "USE OF PROCEEDS," "PRO FORMA DATA" and "THE
CONVERSION -- Stock Pricing and Number of Shares to be Issued." The Subscription
Offering will expire at Noon, Eastern Time, on June 12, 1996, unless extended by
the Savings Bank and the Holding Company for up to 16 days. The Direct Community
Offering and Syndicated Community Offering, if any, are also expected to
terminate on June 12, 1996, and may terminate on any date thereafter, however,
in no event later than August 12, 1996.
SUBSCRIPTION RIGHTS ARE NON-TRANSFERRABLE. PERSONS FOUND TO BE
TRANSFERRING SUBSCRIPTION RIGHTS OR ATTEMPTING TO PURCHASE SHARES OF COMMON
STOCK ON BEHALF OF OTHER PERSONS WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS
AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE ADMINISTRATOR.
BENEFITS OF THE CONVERSION TO MANAGEMENT
ESOP. In connection with the Conversion, the Savings Bank will adopt
the ESOP, a tax-qualified employee benefit plan for officers and employees of
the Holding Company and the Savings Bank, which intends to purchase 8% of the
shares of Common Stock issued in the Offerings (97,520 shares, or 112,148
shares, of Common Stock based on the issuance of the maximum, or the adjusted
maximum, respectively, of the Estimated Valuation Range). In the event that the
ESOP's subscription is not filled in its entirety, the ESOP may purchase
additional shares in the open market with cash contributed to it by the Savings
Bank. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Employee Stock
Ownership Plan."
(ix)
<PAGE>
MRP. The Holding Company intends to seek approval of the MRP at a
meeting of stockholders occurring no earlier than six months following
consummation of the Conversion. The MRP, which will be funded with a number of
shares equal to 4% of the number of shares issued in the Conversion (48,760
shares, or 56,074 shares, based on the issuance of the maximum, or the adjusted
maximum, respectively, of the Estimated Valuation Range), is a non-tax-qualified
restricted stock plan intended for the benefit of key employees and directors of
the Holding Company and the Savings Bank. If stockholder approval of the MRP is
obtained, it is expected that shares of Common Stock of the Holding Company will
be awarded pursuant to such plan to key employees and directors of the Holding
Company and the Savings Bank (which shares will be awarded at no cost to such
recipients). Subject to approval by stockholders and vesting provisions, key
employees and directors are initially intended to be granted 43,884 restricted
shares, or 50,469 restricted shares, of Common Stock under the MRP (based on the
issuance of the maximum, or the adjusted maximum, respectively, of the Estimated
Valuation Range), with an aggregate respective value of $438,840 or $504,690
based on the Purchase Price of $10.00 per share. It is presently intended that
Mr. Ballew will receive an award of restricted stock equal to 1.0% of the number
of shares of Common Stock issued in the Conversion, or 12,190 shares or 14,019
shares (based on the issuance of the maximum, or the adjusted maximum,
respectively, of the Estimated Valuation Range), with a respective aggregate
value of $121,900, or $140,190, based on the Purchase Price. Other officers and
employees (five persons) will be awarded a number of shares equal to 1.6% of the
shares of Common Stock issued in the Conversion, or 19,504 shares, or 22,430
shares, at the maximum, or the adjusted maximum, respectively, of the Estimated
Valuation Range. Each nonemployee director, including directors emeritus (five
persons), will receive an award equal to 0.2% of the number of shares issued in
the Conversion, or 2,438 shares, or 2,804 shares, at the maximum, or the
adjusted maximum, respectively, of the Estimated Valuation Range. The remaining
4,876 shares, or 5,605 shares based on the maximum or the adjusted maximum,
respectively, of the Estimated Valuation Range, will be reserved for future
issuance under the MRP. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits --
Management Recognition Plan."
STOCK OPTION PLAN. The Holding Company intends to seek stockholder
approval of the Stock Option Plan, which will reserve a number of shares equal
to 10% of the number of shares issued in the Conversion, at a meeting of
stockholders occurring no earlier than six months following consummation of the
Conversion. If stockholder approval of the Stock Option Plan is obtained, it is
expected that options to acquire up to 121,900 shares of Common Stock of the
Holding Company will be awarded to key employees and directors of the Holding
Company and the Savings Bank (based on the issuance of the maximum of the
Estimated Valuation Range). The exercise price of such options will be 100% of
the fair market value of the Common Stock on the date the option is granted. It
is presently intended that Mr. Ballew will be granted options to purchase a
number of shares equal to 2.5% of the number of shares of Common Stock sold in
the Offerings, or 30,475 shares, or 35,046 shares, based upon the maximum or the
adjusted maximum, respectively, of the Estimated Valuation Range. Other officers
and employees (five persons) will be granted options covering 3% of the number
of shares of Common Stock issued in the Conversion, or 36,570 shares, or 42,056
shares, at the maximum or the adjusted maximum, respectively, of the Estimated
Valuation Range. Each nonemployee director (three persons) will receive an
option for 0.5% of the shares of Common Stock issued in the Conversion, or 6,095
shares, or 7,009 shares, at the maximum or the adjusted maximum, respectively,
of the Estimated Valuation Range. Options granted to officers and directors are
valuable only to the extent that such options are exercisable and the market
price for the underlying share of capital stock is in excess of the exercise
price. An option effectively eliminates the market risk of holding the
underlying security since no consideration is paid for the option until it is
exercised and, therefore, the recipient may, within the limits of the term of
the option, wait to exercise the option until the market price exceeds the
exercise price. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock
Option Plan."
EMPLOYMENT AGREEMENTS. Effective December 31, 1995, the Savings Bank
entered into three-year employment agreements with Mr. Ballew and Mrs. Wilson.
In connection with the Conversion, the agreements will be amended to provide for
severance payments and continuation of other employee benefits in the event of
Mr. Ballew's or Mrs. Wilson's involuntary termination of employment in
connection with a change in control of the Savings Bank or the Holding Company.
Severance payments also will be provided on a similar basis in connection with a
voluntary termination of employment where, subsequent to a change in control,
Mr. Ballew and Mrs. Wilson are assigned duties inconsistent with their
positions, duties, responsibilities and status immediately prior to such
(x)
<PAGE>
change in control. The severance payments from the Savings Bank will equal 2.99
times each executive's average annual compensation during the five-year period
preceding the change in control. Assuming that a change in control had occurred
at December 31, 1995, Mr. Ballew and Mrs. Wilson would be entitled to severance
payments of approximately $197,000 and $150,000, respectively. See "MANAGEMENT
OF THE SAVINGS BANK -- Executive Compensation -- Employment Agreements."
For information concerning the possible voting control of officers,
directors and employees following the Conversion, see "RISK FACTORS --
Anti-takeover Considerations -- Voting Control by Insiders."
PURCHASE LIMITATIONS
With the exception of the ESOP, which is expected to subscribe for 8%
of the shares of Common Stock issued in the Conversion, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may purchase in
their capacity as such in the Subscription Offering more than 12,190 shares of
Common Stock offered in the Conversion; no person, together with associates of
and persons acting in concert with such person, may purchase in the Direct
Community Offering and the Syndicated Community Offering more than 12,190 shares
of Common Stock issued in the Conversion; and no person, together with
associates and persons acting in concert with such person, may purchase in the
aggregate more than 12,190 shares of Common Stock issued in the Conversion. THIS
MAXIMUM PURCHASE LIMITATION MAY BE INCREASED CONSISTENT WITH NORTH CAROLINA
REGULATIONS IN THE SOLE DISCRETION OF THE HOLDING COMPANY AND THE SAVINGS BANK
SUBJECT TO ANY REQUIRED REGULATORY APPROVAL. The minimum purchase is 50 shares.
In addition, stock orders received either through the Direct Community Offering
or the Syndicated Community Offering may be accepted or rejected, in whole or in
part, at the discretion of the Holding Company and the Savings Bank. See "THE
CONVERSION -- Limitations on Purchases of Shares." In the event of an
oversubscription, shares will be allocated in accordance with the Plan of
Conversion. See "THE CONVERSION -- The Subscription, Direct Community and
Syndicated Community Offerings." THE INTERPRETATION BY THE HOLDING COMPANY AND
THE SAVINGS BANK OF THE TERMS AND CONDITIONS OF THE PLAN OF CONVERSION AND OF
THE ORDER FORM WILL BE FINAL.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
The Purchase Price in the Subscription and Direct Community Offering is
a uniform, fixed price for all subscribers, including the Savings Bank's Board
of Directors, its management and tax-qualified employee plans, and was set by
the Board of Directors. The number of shares to be offered at the Purchase Price
is based upon an independent appraisal of the aggregate pro forma market value
of the Holding Company and the Savings Bank as converted. The aggregate pro
forma market value was estimated by Baxter Fentriss to range from $9.01 million
to $12.19 million as of April 10, 1996, or from 901,000 to 1,219,000 shares
based on the Purchase Price. See "THE CONVERSION -- Stock Pricing and Number of
Shares to be Issued." The appraisal of the pro forma value of the Holding
Company and the Savings Bank as converted will be updated or confirmed at the
completion of the Offerings. The maximum of the Estimated Valuation Range may be
increased by up to 15% and the number of shares of Common Stock to be issued in
the Conversion may be increased to 1,401,850 shares due to regulatory
considerations, material changes in the financial condition or performance of
the Savings Bank, changes in market conditions or general financial and economic
conditions. No resolicitation of subscribers will be made and subscribers will
not be permitted to modify or cancel their subscriptions unless the gross
proceeds from the sale of the Common Stock are more than 15% above the maximum
of the current Estimated Valuation Range, or below the minimum of the Estimated
Valuation Range. The appraisal of the Common Stock is not intended and should
not be construed as a recommendation of any kind as to the advisability of
purchasing such stock nor can assurance be given that purchasers of the Common
Stock in the Conversion will be able to sell such shares after the Conversion at
a price that is equal to or above the Purchase Price. Further, the pro forma
stockholders' equity is not intended to represent the fair market value of the
Common Stock and may be greater than amounts that would be available for
distribution to stockholders in the event of liquidation.
(xi)
<PAGE>
CONDITIONS TO CLOSING OF THE OFFERINGS
Consummation of the Offerings is subject to, among other things (i)
consummation of the Conversion, which is conditioned on, among other things,
approval of the Plan of Conversion by the eligible voting members of the Savings
Bank, (ii) receipt by the Administrator of Baxter Fentriss' updated appraisal of
the pro forma market value of the Holding Company and the Savings Bank, and
authorization of the Administrator to sell the Common Stock within the estimated
valuation range set forth in such updated appraisal, (iii) the non-objection of
the FDIC to the Conversion, and (iv) Federal Reserve approval of the Holding
Company's acquisition of the Savings Bank. There can be no assurances that all
such conditions will be satisfied. See "RISK FACTORS -- Risk of Delayed
Offering" and "THE CONVERSION -- General."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock are estimated to
range from $8.4 million to $11.4 million, or to $13.2 million if the Estimated
Valuation Range is increased by 15%, depending upon the number of shares sold
and the expenses of the Conversion. The Holding Company plans to contribute to
the Savings Bank 50% of the net proceeds and retain the remaining net proceeds.
This will result in the Holding Company retaining approximately $4.2 million to
$5.7 million of the net proceeds, or up to $6.6 million if the Estimated
Valuation Range is increased by 15%, and the Savings Bank receiving an equal
amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Savings Bank's capital and as a result its pro forma return on
equity will be significantly less than its pre-Conversion return on equity. See
RISK FACTORS -- Declining Interest Rate Spread and Return on Equity After
Conversion." The Savings Bank will use the funds contributed to it for general
corporate purposes, including, initially, local lending and investment in
certificates of deposit and short term U.S. government and agency obligations.
Shares of Common Stock may be purchased with funds on deposit at the Savings
Bank, which will reduce deposits by the amounts of such purchases. The net
amount of funds available to the Savings Bank for investment following receipt
of the Conversion proceeds will be reduced to the extent shares are purchased
with funds on deposit.
A portion of the net proceeds retained by the Holding Company will be
used for a loan by the Holding Company to the Savings Bank's ESOP to enable it
to purchase 8% of the shares of Common Stock issued in the Conversion. Such loan
would fund the entire purchase price of the ESOP shares ($975,200 at the maximum
of the Estimated Valuation Range) and would be repaid principally from the
Savings Bank's contributions to the ESOP and from dividends payable on the
Common Stock held by the ESOP. The remaining proceeds retained by the Holding
Company initially will be invested primarily in certificates of deposit and
short term U.S. government and agency obligations. Such proceeds will be
available for additional contributions to the Savings Bank in the form of debt
or equity, to support future growth and diversification activities, as a source
of dividends to the stockholders of the Holding Company and for future
repurchases of Common Stock (including possible repurchases to fund the MRP) to
the extent permitted under North Carolina law and regulations, and as a source
of funds for the Holding Company to make tax-free distributions to stockholders
in the form of returns of capital. Currently, as discussed below under "USE OF
PROCEEDS," there are no specific plans, arrangements, agreements or
understandings, written or oral, regarding any of such activities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock to the public and,
consequently, there is no existing market for the Common Stock. The Holding
Company has filed an application to have the Common Stock listed for quotation
on The Nasdaq SmallCap Market upon consummation of the Conversion. There can be
no assurance, however, that such application will be approved or that the Common
Stock will be quoted on The Nasdaq SmallCap Market. In the event the Common
Stock does not qualify for quotation on The Nasdaq SmallCap Market, the Holding
Company intends to list the Common Stock over-the-counter through the National
Daily Quotation System "Pink Sheets" published by the National Quotation Bureau,
Inc., and the Holding Company will request that Trident
(xii)
<PAGE>
Securities undertake to match offers to buy and offers to sell the Common Stock.
Trident Securities intends to be a market maker for the Common Stock. There can
be no assurance that timely or accurate quotations will be available in the
"Pink Sheets." In addition, the existence of a public trading market will depend
upon the presence in the market of both willing buyers and willing sellers at
any given time. It is unlikely that an established and liquid trading market for
the Common Stock will develop and be maintained. Further, no assurance can be
given that purchasers will be able to sell their shares at or above the Purchase
Price after the Conversion. See "RISK FACTORS -- Absence of Prior Market for
Common Stock" and "MARKET FOR COMMON STOCK."
DIVIDENDS
The Board of Directors of the Holding Company anticipates the
declaration and payment of a regular cash dividend at an initial rate of 4%, or
$0.40 per share per year based on the $10.00 per share Purchase Price, with the
first semi-annual portion of such annual dividend payable upon completion of the
first full semi-annual fiscal period following the close of the Conversion.
Declarations and payments of dividends, regular or special, by the Board of
Directors will depend upon a number of factors, including the amount of the net
proceeds retained by the Holding Company, capital requirements, regulatory
limitations, the Savings Bank's and the Holding Company's financial condition
and results of operations, tax considerations and general economic conditions.
In order to pay such cash dividends, however, the Holding Company must have
available cash either from the net proceeds raised in the Conversion and
retained by the Holding Company, dividends received from the Savings Bank or
earnings on Holding Company assets. There are certain limitations on the payment
of dividends from the Savings Bank to the Holding Company. See "DIVIDEND POLICY
-- Current Regulatory Restrictions" and "REGULATION -- The Savings Bank --
Dividends." No assurances can be given that any dividends will be declared or,
if declared, what the amount of dividends will be or whether such dividends,
once declared, will continue.
OFFICERS' AND DIRECTORS' COMMON STOCK PURCHASES AND BENEFICIAL OWNERSHIP
Officers and directors of the Savings Bank (five persons) are expected
to subscribe for an aggregate of approximately $285,000 of Common Stock, or
3.16%, or 2.34%, of the shares based on the minimum or the maximum,
respectively, of the Estimated Valuation Range. See "THE CONVERSION -- Shares to
be Purchased by Management Pursuant to Subscription Rights." In addition,
purchases by the ESOP and subsequent purchases by the MRP, and the exercise of
stock options issued under the Stock Option Plan, will increase the number of
shares beneficially owned by officers, directors and employees. See "RISK
FACTORS -- Anti-takeover Considerations -- Voting Control by Insiders." The MRP
and Stock Option Plan are subject to approval by the stockholders of the Holding
Company at a meeting to be held no earlier than six months following
consummation of the Conversion.
RISK FACTORS
See "RISK FACTORS" for a discussion of certain risks related to the
Offerings that should be considered by all prospective investors.
(xiii)
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
THE FOLLOWING TABLES SET FORTH CERTAIN INFORMATION CONCERNING THE
CONSOLIDATED FINANCIAL POSITION AND RESULTS OF OPERATIONS OF THE SAVINGS BANK
AND ITS SUBSIDIARY AT THE DATES AND FOR THE PERIODS INDICATED. INFORMATION AT
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995 IS UNAUDITED, BUT, IN
THE OPINION OF MANAGEMENT, CONTAINS ALL ADJUSTMENTS (NONE OF WHICH WERE OTHER
THAN NORMAL RECURRING ENTRIES) NECESSARY FOR A FAIR STATEMENT OF THE RESULTS OF
SUCH PERIODS. THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION CONTAINED IN THE CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO PRESENTED ELSEWHERE IN THIS PROSPECTUS.
<TABLE>
<CAPTION>
At
At June 30, December 31,
1991 1992 1993 1994 1995 1995
------ ---- ---- ---- ---- -----
(In thousands)
FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C> <C>
Total assets............................ $24,479 $23,843 $26,399 $28,109 $27,596 $28,222
Loans receivable, net................... 21,197 21,765 20,785 21,843 22,463 22,925
Cash, interest-earning deposits
and investment securities.............. 2,938 1,651 4,945 5,710 4,254 4,440
FHLB stock.............................. 246 264 280 291 291 291
Deposits................................ 20,122 19,039 21,050 22,195 20,940 21,325
Total equity(1)......................... 4,139 4,597 5,182 5,694 6,078 6,054
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended June 30, December 31,
1991 1992 1993 1994 1995 1994 1995
---- ---- ---- ---- ---- ---- ----
(In thousands)
OPERATING DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income......................... $2,380 $2,374 $2,331 $2,193 $2,259 $1,124 $1,136
Interest expense........................ 1,480 1,226 962 903 962 454 585
------ ------ ------ ------ ------ ------ ------
Net interest income .................... 900 1,148 1,369 1,290 1,297 670 551
Provision for loan losses............... 8 6 12 24 24 12 48
-------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for loan losses....................... 892 1,142 1,357 1,266 1,273 658 503
Non-interest income..................... 3 4 20 5 45 42 4
Non-interest expenses................... 366 386 417 452 953 682 593
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
cumulative effect adjustments.......... 529 760 960 819 365 18 (86)
Income tax expense (benefit)............ 197 302 375 317 112 (1) (31)
------- ------- ------- ------- ------- ------- -------
Income (loss) before cumulative
effect adjustment...................... 332 458 585 502 253 19 (55)
Cumulative effect on prior years
for accounting change.................. -- -- -- 11 -- -- --
-------- --------- --------- --------- --------- -------- --------
Net income (loss)....................... $ 332 $ 458 $ 585 $ 513 $ 253 $ 19 $ (55)
====== ======= ======= ======= ======= ====== =======
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
(xiv)
<PAGE>
<TABLE>
<CAPTION>
At
At June 30, December 31,
1991 1992 1993 1994 1995 1995
------ ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Number of:
Real estate loans outstanding(2)....... 779 746 675 639 656 650
Deposit accounts....................... 1,696 1,603 1,601 1,603 1,584 1,604
Full service offices................... 1 1 1 1 1 1
</TABLE>
<TABLE>
<CAPTION>
At or For The
At or for the Six Months Ended
Year Ended June 30, December 31, (3)
---------------------------------------------------------------- ----------------
1991 1992 1993 1994 1995 1994 1995
------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
KEY FINANCIAL RATIOS:
Return on assets (net income (loss)
divided by average assets)............ 1.38% 1.86% 2.26% 1.89% .92% .14% (.40)%
Return on average equity ((net) income
(loss) divided by average equity)..... 8.29 10.46 11.89 9.39 4.24 .65 (1.86)
Average equity to average assets........ 16.63 17.80 19.00 20.17 21.71 20.96 21.63
Interest rate spread (difference
between average yield on interest-
earning assets and average cost of
interest-bearing liabilities).......... 2.51 3.59 4.50 3.97 3.79 3.99 2.80
Net interest margin (net interest
income as a percentage of average
interest-earning assets)............... 3.77 4.70 5.37 4.82 4.77 4.88 4.04
Non-interest expense to average
assets................................. 1.52 1.57 1.61 1.67 3.45 4.91 4.26
Average interest-earning assets to
interest-bearing liabilities........... 120.37 122.23 123.10 125.02 127.87 126.78 128.79
Allowance for loan losses to total
loans at end of period................. .12 .15 .21 .31 .40 .36 .60
Net charge offs to average out-
standing loans during the period....... -- -- -- -- -- -- --
Ratio of nonperforming assets to
total assets at period end............. 1.52 1.87 1.19 1.12 1.43 1.20 2.48
</TABLE>
(1) Consists of retained earnings, substantially restricted, and also
includes at June 30, 1995 and December 31, 1995, unrealized gain on
securities available for sale, net.
(2) All real estate loans have fixed-rates of interest.
(3) Annualized where appropriate.
(xv)
<PAGE>
RISK FACTORS
BEFORE INVESTING IN SHARES OF THE COMMON STOCK OFFERED HEREBY,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS PRESENTED BELOW, IN
ADDITION TO MATTERS DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
ABOVE AVERAGE INTEREST RATE RISK ASSOCIATED WITH FIXED-RATE LOAN PORTFOLIO
The Savings Bank is subject to above average interest rate risk
because of its practice of only originating fixed-rate loans, which, unlike
adjustable rate loans, do not reprice in response to changes in interest rates.
This risk is exacerbated because all of the Savings Bank's one- to four-family
mortgage loans are originated with the intent of retaining them in the Savings
Bank's portfolio. Consequently, virtually all such loans do not conform to
secondary market guidelines and are not readily saleable in the secondary
market. See "-- Risks Associated With Nonconforming Loans." Accordingly, a
material and prolonged increase in interest rates could be expected to have a
greater adverse effect on the net interest income of the Savings Bank relative
to that of other savings institutions that hold a materially larger portion of
their assets in adjustable rate loans or in fixed-rate one- to four-family
mortgage loans that are originated for committed sale in the secondary market,
or in a combination thereof. See "-- Potential Adverse Impact of Changes in
Interest Rates."
POTENTIAL ADVERSE IMPACT OF CHANGES IN INTEREST RATES
The financial condition and operations of the Savings Bank, and of
savings institutions in general, are influenced significantly by general
economic conditions, by the related monetary and fiscal policies of the federal
government and by the regulations of the Administrator, the FDIC and the Federal
Reserve. Deposit flows and the cost of funds are influenced by interest rates of
competing investments and general market rates of interest. Lending activities
are affected by the demand for mortgage financing and for consumer and other
types of loans, which in turn is affected by the interest rates at which such
financing may be offered and by other factors affecting the supply of housing
and the availability of funds.
The Savings Bank's profitability is substantially dependent on its net
interest income, which is the difference between the interest income received
from its interest-earning assets and the interest expense incurred in connection
with its interest-bearing liabilities. When an institution's interest-bearing
liabilities exceed its interest-earning assets which mature within a given
period of time, material and prolonged increases in interest rates generally
would adversely affect net interest income, while material and prolonged
decreases in interest rates generally would have a favorable effect on net
interest income. Like most of the savings industry, the interest-earning assets
of the Savings Bank have longer effective maturities than its deposits, which
largely mature or are subject to repricing within a shorter period of time.
Unlike many savings institutions, however, the Savings Bank holds substantially
all its assets in fixed-rate loans that do not reprice in response to changes in
interest rates. All of the Savings Bank's residential mortgage loans are
fixed-rate with maturities of 16 years and are retained in the Savings Bank's
loan portfolio. As a result, a material and prolonged increase in interest rates
generally would adversely affect net interest income, while material and
prolonged decreases in interest rates generally would have a more favorable
effect on net interest income.
The mismatch between maturities and interest rate sensitivities of
balance sheet items results in interest rate risk. The extent of interest rate
risk to which the Savings Bank is subject is monitored by management through an
analysis of the institution's interest sensitivity gap (the difference between
the amounts of interest-earning assets and interest-bearing liabilities
repricing during a given time) and by modeling the change in net portfolio value
("NPV") over a variety of interest rate scenarios. NPV is the present value of
expected cash flows from assets, liabilities and off-balance sheet contracts.
The calculation is intended to illustrate the change in NPV that will occur in
the event of an immediate change in interest rates of at least 200 basis points
with no effect given to any steps which management might take to counter the
effect of that interest rate movement. At December 31, 1995, the Savings Bank's
interest-bearing liabilities that were estimated to mature or reprice within one
year exceeded its interest-earning assets with the same characteristics by $4.8
million for a cumulative one-year negative gap to total rate
1
<PAGE>
sensitive assets of 55%. Of the $11.7 million of certificates of deposit that
repriced within one year of December 31, 1995, $3.3 million (or approximately
28.2%) were jumbo certificates of deposits. The Savings Bank does not solicit
brokered deposits and as a result, based on historical experience, believes that
its jumbo certificates of deposit, which represented 24.4% of total deposits at
December 31, 1995, present similar interest rate risk to its other deposit
products. Also, at December 31, 1995, there was a $1.1 million, or 17%, decrease
in the Savings Bank's NPV as a percent of the present value of assets, assuming
a 200 basis point increase in interest rates. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset and Liability
Management and Interest Rate Risk" for a discussion of the gap and NPV methods
of analyzing interest rate risk and for an illustration of the effect of an
increase in interest rates on the Savings Bank's earnings.
Changes in interest rates can affect the amount of loans originated by
an institution, as well as the value of its loans and other interest-earning
assets and the resultant ability to realize gains on the sale of such assets.
Changes in interest rates also can result in disintermediation, which is the
flow of funds away from savings associations into direct investments, such as
U.S. Government and corporate securities, and other investment vehicles which,
because of the absence of federal insurance premiums and reserve requirements,
generally can pay higher rates of return than financial intermediaries such as
commercial banks and thrift institutions.
DECLINING INTEREST RATE SPREAD AND RETURN ON EQUITY AFTER CONVERSION
Return on equity (net income for a given period divided by average
equity during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The Holding
Company's post-Conversion pro forma return on equity will be less than the
Savings Bank's pre-Conversion return on equity because of the increase in
consolidated equity of the Holding Company that will result from the net
proceeds of the Offerings. See "SELECTED CONSOLIDATED FINANCIAL INFORMATION" for
numerical information regarding the Savings Bank's historical returns on equity
and "CAPITALIZATION" for a discussion of the Holding Company's estimated pro
forma consolidated capitalization as a result of the Conversion.
For the three years ended June 30, 1993, 1994 and 1995 and the six
months ended December 31, 1995 the Savings Bank had a return (loss) on average
equity of 11.89%, 9.39%, 4.24% and (1.86%). In order for the Holding Company to
achieve a return on equity comparable to the historical levels achieved by the
Savings Bank prior to the Conversion, the Holding Company would have to either
increase net income or reduce stockholders' equity, or both, commensurate with
the increase in equity as a result of the Conversion. Reductions in equity could
be achieved by, among other things, the payment of regular cash dividends or
periodic special dividends (although no assurances can be given as to whether
any dividends will be paid or, if paid, their amount and frequency), the
repurchase of shares of Common Stock subject to regulatory restrictions, the
acquisition of other financial institutions (neither the Holding Company nor the
Savings Bank has any present plans, arrangements, or understandings, written or
oral, regarding any repurchase or acquisitions), or tax-free distributions to
stockholders in the form of returns of capital (neither the Holding Company nor
the Savings Bank has any current plans regarding such distributions). See
"DIVIDEND POLICY" and "USE OF PROCEEDS."
Achievement of increased net income levels will depend on several
important factors outside the control of management, such as general economic
conditions, including the level of market interest rates, competition and
related factors, among others. See "-- Dependence on Local Economy" and "--
Potential Adverse Impact of Changes in Interest Rates." The Savings Bank has
experienced a decrease in its interest rate spread as the weighted average yield
on its loan portfolio has decreased while the weighted average rate paid on its
interest-bearing liabilities has increased. In addition to the contraction in
net interest rate spread that the Savings Bank has experienced in recent
periods, and which can be expected to continue, the expenses associated with the
ESOP and the MRP (see "PRO FORMA DATA") and other employee benefit plans (see
"MANAGEMENT OF THE SAVINGS BANK -- Directors' Compensation" and "-- Benefits --
Supplemental Executive Retirement/Medical Care Agreements"), along with other
post-Conversion expenses, are expected to contribute initially to reduced
earnings levels. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Comparison
2
<PAGE>
of Operating Results for the Six Months Ended December 31, 1994 and 1995 --
Non-Interest Expense." The Savings Bank intends to deploy the net proceeds of
the Offerings to increase earnings per share and book value per share without
assuming undue risk, with the goal of maximizing its return on equity. This goal
will likely take a number of years to achieve and no assurances can be given
that this goal can or will be attained.
RISKS ASSOCIATED WITH NONCONFORMING LOANS
Historically, the Savings Bank has not originated one- to four-family
loans for sale in the secondary market. Generally, the Savings Bank originates
loans satisfying its underwriting requirements which are tailored to its local
community. As a result, such loans are not readily saleable in the secondary
market, therefore, the Savings Bank's loan portfolio is less liquid than would
be the case if it was composed of loans originated in conformity with secondary
market requirements. In addition, loans which are not originated in conformity
with the purchase requirements of the Federal Home Loan Mortgage Corporation
("FHLMC") and the Federal National Mortgage Association ("FNMA"), or
nonconforming loans, are generally thought to have greater risks of default and
nonperformance.
CERTAIN RISKS INHERENT IN RESIDENTIAL MORTGAGE LENDING
The Savings Bank is subject to certain federal and state laws as an
originator and servicer of residential mortgage loans. Among other things,
federal laws require certain disclosures be made to borrowers by the Savings
Bank, prohibit discrimination in the extension of credit, regulate the use and
reporting of information relating to a borrower's credit experience and, in
certain instances, restrict the Savings Bank's ability to declare a default or
suspend or reduce a borrower's credit limit. Applicable state laws generally
regulate interest rates and other charges and require certain disclosures be
made to borrowers. In addition, many states have other laws, such as consumer
protection laws, unfair and deceptive practices acts, and debt collection
statutes, that may apply to the Savings Bank. Violations of certain provisions
of these and other laws could limit the ability of the Savings Bank to collect
all or part of the principal or interest on residential mortgage loans and
subject the Savings Bank to legal damages and administrative enforcement
proceedings and penalties.
DEPENDENCE ON LOCAL ECONOMY
Spruce Pine, North Carolina is a community of approximately 2,000
people located in Mitchell County, approximately 50 miles Northeast of
Asheville, North Carolina. The Savings Bank has been and intends to continue as
a community oriented financial institution, with a focus on serving customers in
Mitchell and Yancey counties, North Carolina, and to a lesser extent, Avery and
McDowell counties. The population within the zip code encompassing Spruce Pine,
which covers much of the Savings Bank's primary market area, is currently
approximately 15,000. At December 31, 1995, most of the Savings Bank's loan
portfolio consisted of loans collateralized by properties located in this market
area. Most of the Savings Bank's depositors also reside in Mitchell and Yancey
counties.
Mitchell County is located in the Appalachian Mountain Region of
western North Carolina, a popular outdoor recreation and tourist destination.
The revenues generated by such activities are a material segment of the local
economy. A downturn in tourism and recreational activities as a result of a
national recession or otherwise could be expected to have an adverse effect on
the local economy. Any downturn in the economy of the Savings Bank's market area
could have an adverse effect on the quality of the Savings Bank's loan
portfolio. In addition, because the Savings Bank operates in a market area with
a small population and limited growth prospects, the Savings Bank's ability to
achieve loan and deposit growth is limited.
3
<PAGE>
MANAGEMENT SUCCESSION AND FUTURE PROSPECTS
The Savings Bank believes that its success in serving the needs of its
community has been due largely to the local ties established by the directors
and management over the Savings Bank's 72-year history. The current members of
the Board of Directors and management of the Savings Bank have been affiliated
with the institution for an average of 34 years. Neither the Holding Company nor
the Savings Bank has obtained, or expects to obtain, "key man" life insurance
for any member of the Board or management. See "MANAGEMENT OF THE HOLDING
COMPANY" and "MANAGEMENT OF THE SAVINGS BANK -- Directors and Executive
Officers."
Unless the Savings Bank pursues a business combination with another
financial institution, the Savings Bank believes that its future success will
depend significantly upon the ability of its current Board and executive
management to establish and implement an acceptable long term business strategy,
or to locate and attract qualified personnel at both the Board and executive
management levels to undertake such action. At this time, however, the Savings
Bank has no plans, arrangements or understandings, written or oral, to merge
with, be acquired by, or otherwise combine with another financial institution.
Furthermore, there can be no assurance that existing management will be able to
establish and implement an acceptable long term business strategy, or that the
Savings Bank will be able to locate and attract qualified personnel that can
undertake such action successfully.
ABSENCE OF PRIOR MARKET FOR THE COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there has not been a market for the Common Stock. The Holding Company has filed
an application to have the Common Stock listed for quotation on The Nasdaq
SmallCap Market upon consummation of the Conversion. There can be no assurance,
however, that such application will be approved or that the Common Stock will be
quoted on The Nasdaq SmallCap Market. In the event the Common Stock does not
qualify for quotation on The Nasdaq SmallCap Market, the Holding Company intends
to list the Common Stock over-the-counter through the National Daily Quotation
System "Pink Sheets" published by the National Quotation Bureau, Inc., and the
Holding Company will request that Trident Securities undertake to match offers
to buy and offers to sell the Common Stock. Trident Securities intends to be a
market maker for the Common Stock. There can be no assurance that timely or
accurate quotations will be available in the "Pink Sheets." In addition, the
existence of a public trading market will depend upon the presence in the market
of both willing buyers and willing sellers at any given time. IT IS UNLIKELY
THAT AN ACTIVE AND LIQUID TRADING MARKET FOR THE COMMON STOCK WILL DEVELOP AND
BE MAINTAINED DUE TO THE RELATIVELY SMALL SIZE OF THE OFFERINGS AND THE SMALL
NUMBER OF STOCKHOLDERS EXPECTED FOLLOWING THE CONVERSION. Furthermore, there can
be no assurance that purchasers will be able to sell their shares at or above
the Purchase Price after the Conversion. See "MARKET FOR COMMON STOCK."
ANTI-TAKEOVER CONSIDERATIONS
PROVISIONS IN THE HOLDING COMPANY'S GOVERNING INSTRUMENTS AND NORTH
CAROLINA LAW. Certain provisions included in the Holding Company's Articles of
Incorporation might discourage potential takeover attempts, particularly those
which have not been negotiated with the Board of Directors. These provisions may
result in the Holding Company being less attractive to a potential acquiror and
may result in stockholders receiving less for their shares than otherwise might
be available in the event of a takeover attempt. In addition, these provisions
may have the effect of discouraging takeover attempts that some stockholders
might deem to be in their best interests, including takeover proposals in which
stockholders might receive a premium for their shares over the then-current
market price, as well as making it more difficult for individual stockholders or
a group of stockholders to elect directors or to remove incumbent management.
The Holding Company's Board of Directors believes, however, that these
provisions are in the best interests of the Holding Company and its stockholders
because such provisions encourage potential acquirors to negotiate directly with
the Board of Directors, which the Board of Directors believes is in the best
position to act on behalf of all stockholders.
4
<PAGE>
These provisions include, among others, that: (i) the Board of
Directors has the authority to change the number of directors within a range
from five to 15; (ii) stockholders who intend to nominate a candidate for
election to the Board of Directors must give advance notice to the Secretary of
the Holding Company; (iii) terms for directors will be staggered if there are
nine or more directors; (iv) certain merger, consolidation, or other business
combinations (as defined in the Articles of Incorporation) must receive the
requisite approval of the Holding Company's stockholders and the affirmative
vote of at least 75% of the Continuing Directors (as defined in the Articles of
Incorporation); and (v) special meetings of stockholders may be called only by
the Chairman of the Board, the Chief Executive Officer, the President or by the
Board of Directors.
The Holding Company's Articles of Incorporation provide that for a
period of five years from the effective date of the completion of the Conversion
of the Savings Bank from mutual to stock form, no person shall directly or
indirectly offer to acquire or acquire beneficial ownership of more than 10% of
any class of equity security of the Holding Company, unless such offer or
acquisition shall have been approved in advance by a 75% vote of the Continuing
Directors, as defined in the Articles of Incorporation. This provision does not
apply to any employee stock benefit plan of the Holding Company or the Savings
Bank, such as the ESOP or the MRP. In addition, for a period for five years from
the completion of the Conversion of the Savings Bank, and notwithstanding any
provision to the contrary in the Articles of Incorporation or in the Bylaws of
the Holding Company, where any person directly or indirectly acquires beneficial
ownership of more than 10% of any class of equity security of the Holding
Company in violation of the provisions of the Articles of Incorporation, the
securities beneficially owned in excess of 10% shall not be counted as shares
entitled to vote, shall not be voted by any person or counted as voting shares
in connection with any matter submitted to the stockholders for a vote, and
shall not be counted as outstanding for purposes of determining a quorum or the
affirmative vote necessary to approve any matter submitted to the stockholders
for a vote.
The Articles of Incorporation further provide that if, at any time
after five years from the effective date of the completion of the Conversion,
any person shall acquire the beneficial ownership of more than 10% of any class
of equity security of the Holding Company without the prior approval by a 75%
vote of the Continuing Directors, as defined in Articles of Incorporation, then,
with respect to each vote in excess of 10%, the record holders of voting stock
of the Holding Company beneficially owned by such person shall be entitled to
cast only one-hundredth of one vote with respect to each vote in excess of 10%
of the voting power of the outstanding shares of voting stock of the Holding
Company which such record holders would otherwise be entitled to cast without
giving effect to the provision and the aggregate voting power of such record
holders shall be allocated proportionately among such record holders. For a
further discussion of the provisions of the Holding Company's Articles of
Incorporation, see "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE
SAVINGS BANK."
In addition, the Articles of Incorporation do not provide for
cumulative voting for any purpose. As a result, a majority of stockholders will
be able to elect all members of the Holding Company's Board of Directors and
approve all other matters presented to the stockholders for consideration,
except such matters as require more than a majority vote for approval. The
Holding Company's Articles of Incorporation state that the Board of Directors,
without the approval of the stockholders, may authorize the issuance of shares
of preferred stock with such voting rights, designations, preferences,
limitations and relative rights as the Board of Directors may determine. As a
result, the Board of Directors has the power, to the extent consistent with its
fiduciary duties, to issue preferred stock to persons friendly to management or
otherwise in order to impede attempts by third parties to acquire voting control
of the Holding Company and to impede other transactions not favored by
management. The Amended and Restated Certificate of Incorporation and Bylaws of
the Savings Bank upon its conversion to stock form also contain certain
provisions that might discourage potential takeover attempts of the Savings
Bank. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE SAVINGS
BANK."
REGULATORY PROVISIONS. Regulations of the Administrator contain
provisions that, for a period of three years after the Conversion is
consummated, prohibit any person from directly or indirectly acquiring or
offering to acquire beneficial ownership of more than 10% of any class of equity
security of the Holding Company or the Savings Bank, with certain exceptions,
without the prior approval of the Administrator. If any person should acquire
beneficial
5
<PAGE>
ownership of more than 10% of any class of equity security without prior
approval, any shares beneficially owned in excess of 10% would not be counted as
shares entitled to vote and would not be voted in connection with any matter
submitted to stockholders for a vote. Regulations provide that the Administrator
will give his approval of such an acquisition during the first year after the
Conversion only to protect the safety and soundness of the Holding Company and
the Savings Bank. Approval will be given during the second and third years after
the Conversion upon a finding by the Administrator that (i) the acquisition is
necessary to protect the safety and soundness of the Holding Company and the
Savings Bank or the Board of Directors of the Holding Company supports the
acquisition and (ii) the acquiror is of good character and integrity and
possesses the satisfactory managerial skills, after the acquisition the acquiror
will be a source of financial strength to the Holding Company and the Savings
Bank, and the interest of the public will not be adversely affected by the
acquisition. Approval is not required for (i) any offer with a view toward
public resale made exclusively to the Holding Company or its underwriters or the
selling group acting on its behalf of (ii) any offer to acquire or acquisition
of beneficial ownership of more than 10% of the common stock of the Holding
Company by a corporation whose ownership is or will be substantially the same as
the ownership of the Holding Company, provided that the offer or acquisition is
made more than one year following the consummation of the Conversion. See
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE SAVINGS BANK."
The Change in Bank Control Act, together with the North Carolina
regulations, require that the consent of the Administrator and the Federal
Reserve be obtained prior to any person or company acquiring "control" of a
savings bank or a bank holding company. Control is conclusively presumed to
exist if, among other things, an individual or company acquires the power,
directly or indirectly, to direct the management or policies of the Holding
Company or the Savings Bank or to vote 25% or more of any class of voting stock.
Control is rebuttably presumed to exist under the Change in Bank Control Act,
if, among other things, a person acquires more than 10% of any class of voting
stock and (i) the issuer's securities are registered under Section 12 of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), as the Holding
Company's securities will be, or (ii) the person would be the single largest
stockholder. Restrictions applicable to the operations of bank holding companies
and conditions imposed by the Federal Reserve in connection with its approval of
such acquisitions may deter potential acquirors from seeking to obtain control
of the Holding Company. See "REGULATION -- The Holding Company."
VOTING CONTROL BY INSIDERS. Directors and officers of the Savings Bank
and the Holding Company expect to purchase 28,500 shares of Common Stock, or
2.34% of the shares issued in the Offerings at the maximum of the Estimated
Valuation Range. Directors and officers are also expected to indirectly control
the voting of approximately 16.3% of the shares of Common Stock issued in the
Conversion through the ESOP (assuming shares have been allocated under the
ESOP), taking into consideration the 28,500 shares of Common Stock purchased in
the Conversion, 36,570 shares issued under the MRP and 79,235 shares allocated
under the Stock Option Plan. Under the terms of the ESOP, the unallocated shares
will be voted by the independent ESOP trustee in the same proportion as the
votes cast by participants with respect to the allocated shares.
At a meeting of stockholders to be held no earlier than six months
following the consummation of the Conversion, the Holding Company intends to
seek approval of the Holding Company's MRP, which is a non-tax- qualified
restricted stock plan for the benefit of key employees and directors of the
Holding Company and the Savings Bank. Assuming the receipt of stockholder
approval, the Holding Company expects to acquire common stock of the Holding
Company on behalf of the MRP in an amount equal to 4% of the Common Stock issued
in the Conversion, or 48,760 shares at the maximum of the Estimated Valuation
Range. These shares will be acquired either through open market purchases or
from authorized but unissued Common Stock. Under the terms of the MRP, the MRP
committee or the MRP trustees will have the power to vote unallocated and
unvested shares. In addition, the Holding Company intends to reserve for future
issuance pursuant to the Stock Option Plan a number of authorized shares of
Common Stock equal to 10% of the Common Stock issued in the Conversion (121,900
shares at the maximum of the Estimated Valuation Range). The Holding Company
also intends to seek approval of the Stock Option Plan at a meeting of
stockholders to be held no earlier than six months following the consummation of
the Conversion.
6
<PAGE>
Assuming (i) the purchase of 28,500 shares of Common Stock by officers
and directors of the Savings Bank in the Conversion, (ii) the receipt of
stockholder approval for the MRP and the Stock Option Plan, (iii) the open
market purchase of shares on behalf of the MRP, (iv) the purchase by the ESOP of
8% of the Common Stock sold in the Offerings, and (v) the exercise of stock
options equal to 10% of the number of shares of Common Stock issued in the
Conversion (with the option shares issued from authorized but unissued shares),
directors, officers and employees of the Holding Company and the Savings Bank
would have voting control, on a fully diluted basis, of 22.4% of the Common
Stock, based on the issuance of the maximum of the Estimated Valuation Range.
Management's potential voting control could, together with additional
stockholder support, preclude or make more difficult takeover attempts that
certain stockholders deem to be in their best interest and may tend to
perpetuate existing management.
PROVISIONS OF EMPLOYMENT AGREEMENTS. The employment agreements with Mr.
Ballew and Mrs. Wilson provide for cash severance payments in the event of a
change in control of the Holding Company or the Savings Bank in an amount equal
to 2.99 times the executive's average annual compensation during the five-year
period preceding the change in control. Such amount will be paid in a lump sum
within 10 business days following the termination of employment. Assuming that a
change in control had occurred at December 31, 1995, Mr. Ballew and Mrs. Wilson
would be entitled to severance payments of approximately $197,000 and $150,000,
respectively. Such agreements also provide for the continuation of certain
insurance benefits for life. These provisions may have the effect of increasing
the cost of acquiring the Holding Company, thereby discouraging future attempts
to take over the Holding Company or the Savings Bank. See "MANAGEMENT OF THE
SAVINGS BANK -- Benefits," "DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
AND THE SAVINGS BANK" and "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
AND THE SAVINGS BANK."
NO OPINION OR RECOMMENDATION BY FINANCIAL ADVISER
The Savings Bank has engaged Trident Securities to consult with and
advise it with respect to the Conversion and to assist, on a best-efforts basis,
in connection with the solicitation of subscriptions and purchase orders for
shares of Common Stock in the Offerings. Trident Securities has not prepared or
delivered any opinion or recommendation with respect to the suitability of the
Common Stock or the appropriateness of the amount of Common Stock to be issued
in the Conversion. The engagement of Trident Securities by the Savings Bank and
the work performed thereunder should not be construed by purchasers of the
Common Stock as constituting an opinion or recommendation relating to such
investment and should not be construed as a verification of the accuracy or
completeness of the information contained in this Prospectus.
RECAPITALIZATION OF SAIF AND ITS IMPACT ON SAIF PREMIUMS
In August 1995, the FDIC substantially reduced deposit insurance
premiums for well-capitalized, well-managed financial institutions that are
members of the Bank Insurance Fund ("BIF"). Under the new assessment schedule,
approximately 92% of BIF members pay the statutory minimum annual assessment of
$2,000. With respect to SAIF member institutions, the FDIC has retained the
existing rate schedule of 23 to 31 basis points. The Savings Bank is, and after
the Conversion will remain, a member of SAIF rather than BIF. SAIF premiums may
not be reduced for several years because SAIF has lower reserves than BIF and is
responsible for more troubled financial institutions. Deposit insurance premiums
are often a significant component of non-interest expense for insured depository
institutions. The reduction in BIF premiums may place the Savings Bank at a
competitive disadvantage because BIF-insured institutions (such as most
commercial banks) may be able to offer more attractive loan rates, deposit
rates, or both. The magnitude of the competitive advantage of BIF-insured
institutions due to a disparity in deposit insurance premiums and its impact on
the Savings Bank's results of operations cannot be determined at this time.
Several alternatives to mitigate the effect of the BIF/SAIF premium
disparity have been suggested by the federal banking regulators, by members of
Congress, by industry groups and by the Clinton Administration, including a
merger of the funds and/or a payment by all SAIF-member institutions, including
the Savings Bank, of a one-time
7
<PAGE>
assessment to increase SAIF's reserves to $1.25 per $100 of deposits. Such
assessment is estimated to be approximately 85 basis points on the amount of
deposits held by a SAIF-member institution at March 31, 1995. The payment of a
one-time fee would have the effect of immediately reducing the capital and
earnings of SAIF-member institutions by the amount of the fee. Based on the
Savings Bank's assessable deposits of $21.0 million at March 31, 1995, a
one-time assessment of 85 basis points would equal approximately $179,000. This
assessment, if it occurred, would represent, on a pro forma basis at December
31, 1995, a decrease in book value per share of $.12 and $.09 based on the sale
of shares at the minimum and at the maximum of the Estimated Valuation Range,
respectively. Management cannot predict whether any legislation, including
legislation imposing such a fee, will be enacted, or, if enacted, the amount of
any one-time fee or whether ongoing SAIF premiums will be reduced to a level
equal to that of BIF premiums. See "REGULATION -- The Savings Bank -- Proposed
Federal Regulation Regarding SAIF Recapitalization, Recapture of Bad Debt
Reserves, and Other Matters."
PROPOSED RECAPTURE OF BAD DEBT RESERVES
Proposed federal legislation would eliminate future bad debt deductions
and would require thrifts to recapture into income over a six-year period their
post-1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. Under this proposal, a special provision suspends
recapture of post-1987 excess reserves for up to two years if, during those
years, the institution satisfies a "residential loan requirement." At December
31, 1995, the Savings Bank post-1987 excess reserves amounted to approximately
$55,000. It is uncertain when or if the proposed legislation will be passed,
and, if passed, in what form the legislation would be passed. See "REGULATION --
The Savings Bank -- Proposed Federal Regulation Regarding SAIF Recapitalization,
Recapture of Bad Debt Reserves, and Other Matters" and "TAXATION -- Federal
Taxation -- Tax Bad Debt Reserves."
POSSIBLE DILUTIVE EFFECT OF BENEFIT PROGRAMS
If the MRP is approved by stockholders at a meeting held no earlier
than six months following consummation of the Conversion, the MRP intends to
acquire an amount of Common Stock of the Holding Company equal to 4% of the
shares issued in the Conversion. Such shares of Common Stock of the Holding
Company may be acquired by the Holding Company in the open market or from
authorized but unissued shares of Common Stock of the Holding Company. In the
event that the MRP acquires authorized but unissued shares of Common Stock from
the Holding Company, the voting interests of existing stockholders will be
diluted and net income per share and stockholders' equity per share will be
decreased. See "PRO FORMA DATA" and "MANAGEMENT OF THE SAVINGS BANK -- Benefits
-- Management Recognition Plan."
If the Stock Option Plan is approved by stockholders at a meeting held
no earlier than six months following consummation of the Conversion, the Stock
Option Plan will provide for options for up to a number of shares of Common
Stock of the Holding Company equal to 10% of the shares issued in the
Conversion. Such shares may be authorized but unissued shares of Common Stock of
the Holding Company and, upon exercise of the options, will result in the
dilution of the voting interests of existing stockholders and will decrease net
income per share and stockholders' equity per share. See "MANAGEMENT OF THE
SAVINGS BANK -- Benefits -- 1996 Stock Option Plan."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Savings Bank are
deemed to have an ascertainable value, receipt of such rights may be a taxable
event (either as capital gain or ordinary income), which may be recognizable by
all or only by those Eligible Account Holders, Supplemental Eligible Account
Holders or Other Members who exercise the Subscription Rights (either as capital
gain or ordinary income) in an amount equal to such value. Additionally, the
Savings Bank could be required to recognize a gain for tax purposes on such
distribution. Whether Subscription Rights are considered to have ascertainable
value is an inherently factual determination. The Savings Bank has been advised
by Baxter Fentriss that such rights have no value; however, Baxter Fentriss'
conclusion is not binding on the Internal Revenue
8
<PAGE>
Service ("IRS"). See "THE CONVERSION -- Effects of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank -- Tax Effects."
RISK OF DELAYED OFFERING
The Holding Company and the Savings Bank expect to complete the
Conversion within the time periods indicated in this Prospectus. Nevertheless,
it is possible, although not anticipated, that there could be a significant
delay in the completion of the Conversion as a result of delays in receiving a
notice of non-objection to the Conversion from the FDIC or in receiving the
approval of the Federal Reserve of the Holding Company's acquisition of the
Savings Bank. In order to commence the Offering, the Savings Bank was required
to execute a Tolling Agreement extending the time period in which the FDIC can
review the Conversion to 30 days after the Savings Bank advises the FDIC of the
results of the Offering. In addition, the Tolling Agreement requires the Savings
Bank to deliver an appraisal that takes into account the results of the
Offerings, discusses any material occurrences during the Offerings, if any, and
explains any stock orders that may have been rejected in the Offerings. If the
Conversion is not completed by August 12, 1996 (45 days after the last day of
the fully extended Subscription Offering) and the Administrator consents to an
extension of time to complete the Conversion, subscribers will be given the
right to modify or rescind their subscriptions. In such event, unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, their funds will be returned promptly, together with
interest at the Savings Bank's passbook rate, or their withdrawal authorizations
will be terminated.
MITCHELL BANCORP, INC.
The Holding Company was organized as a North Carolina corporation at
the direction of the Savings Bank on February 28, 1996 to acquire all of the
outstanding capital stock of the Savings Bank to be issued upon its Conversion.
The Holding Company has filed an application with the Federal Reserve and the
Administrator to become a bank holding company and for approval to acquire the
Savings Bank. Prior to the Conversion, the Holding Company will not engage in
any material operations. After the Conversion, the Holding Company will be
classified as a one-bank holding company subject to regulation by the
Administrator and the Federal Reserve, and its principal business will be the
ownership of the Savings Bank. Immediately following the Conversion, the only
significant assets of the Holding Company will be the capital stock of the
Savings Bank, that portion of the net proceeds of the Offerings to be retained
by the Holding Company and a note receivable from the ESOP evidencing a loan
from the Holding Company to fund the Savings Bank's ESOP. See "BUSINESS OF THE
HOLDING COMPANY."
The holding company structure will permit the Holding Company to expand
the financial services currently offered through the Savings Bank. Management
believes that the holding company structure and retention of a portion of the
proceeds of the Offerings will, should it decide to do so, facilitate the
repurchase its stock without adverse tax consequences. There are no present
plans, arrangements, agreements, or understandings, written or oral, regarding
any such repurchases. See "REGULATION -- The Holding Company."
MITCHELL SAVINGS BANK, SSB
The Savings Bank was established in 1924 as "Mitchell County Building
and Loan Association," a North Carolina-chartered mutual savings and loan
association, located in Spruce Pine, North Carolina, approximately 50 miles
Northeast of Asheville, North Carolina. In 1992, the Savings Bank converted to a
North Carolina-chartered savings bank and adopted its current title. In
connection with the mutual to stock conversion, the Savings Bank will convert to
a North Carolina-chartered capital stock savings bank and will become a
subsidiary of the Holding Company. The Savings Bank is regulated by the
Administrator, its primary regulator, and the FDIC, the insurer of its deposits.
The Savings Bank's deposits are federally insured by the FDIC under the SAIF.
The Savings Bank is a member of the FHLB System. At December 31, 1995, the
Savings Bank had total assets of $28.2 million, total deposits of $21.3 million
and total equity of $6.1 million, or 21.1% of adjusted total assets, on a
consolidated basis.
9
<PAGE>
The Savings Bank is a traditional community-oriented financial
institution that is engaged primarily in the business of attracting deposits
from the general public and using these funds to originate fixed-rate one- to
four-family residential mortgage loans within the Savings Bank's market area,
and, to a significantly lesser extent, loans secured by multi-family properties,
land, churches, and selected commercial properties, and consumer loans.
Because the Savings Bank depends primarily on its net interest margin
(interest income from loans and investments minus interest expense on deposit
accounts) for income, the focus of the Savings Bank's planning has been to
devise and employ strategies that provide a stable, positive spread between the
yield on interest-earning assets and the cost of interest-bearing liabilities in
order to maximize the dollar amount of net interest income. At December 31,
1995, 81.8% of the Savings Bank's total loan portfolio was secured by fixed-rate
one- to four-family residential real estate located in the Savings Bank's
primary market area. The Savings Bank's one-year interest rate sensitivity gap
to total rate sensitive assets percentage was a negative 55% at December 31,
1995. See "RISK FACTORS -- Above Average Interest Rate Risk Associated With
Fixed-Rate Loan Portfolio," "-- Potential Adverse Impact of Changes in Interest
Rates" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Asset and Liability Management and Interest Rate Risk."
As illustrated by the Savings Bank's one-year interest rate sensitivity
gap to total assets percentage at December 31, 1995, the Savings Bank has a high
level of interest rate risk, primarily as a result of its policy of originating
only fixed rate loans for its portfolio. The historical emphasis on fixed rate
lending secured by residential properties reflects management's decision to
accept the interest rate risk associated with fixed rate lending.
The Savings Bank's primary market area is comprised of Mitchell and
Yancey counties, North Carolina, and portions of Avery and McDowell counties.
The Savings Bank is located at 210 Oak Avenue, Spruce Pine, North Carolina
28777, and its telephone number is (704) 765-7324. See "BUSINESS OF THE SAVINGS
BANK -- Market Area."
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to range from $8.4 million to $11.4 million, or up to $13.2 million if
the Estimated Valuation Range is increased by 15%. See "PRO FORMA DATA" for the
assumptions used to arrive at such amounts. The Holding Company plans to
contribute to the Savings Bank 50% of the net proceeds from the sale of the
Common Stock and retain the remaining net proceeds. This will result in the
Holding Company retaining approximately $4.2 million to $5.7 million of net
proceeds, or up to $6.6 million if the Estimated Valuation Range is increased by
15%, and the Savings Bank receiving an equal amount.
Receipt of 50% of the net proceeds of the sale of the Common Stock will
increase the Savings Bank's capital and will support the expansion of the
Savings Bank's existing business activities. The Savings Bank will use the funds
contributed to it for general corporate purposes, including, initially, local
lending.
In connection with the Conversion and the establishment of the ESOP,
the Holding Company intends to loan the ESOP the amount necessary to purchase 8%
of the shares sold in the Conversion. The Holding Company's loan to fund the
ESOP may range from $720,800 to $975,200 based on the sale of 72,080 shares to
the ESOP (at the minimum of the Estimated Valuation Range) and 97,520 shares (at
the maximum of the Estimated Valuation Range), respectively, at $10.00 per
share. If 15% above the maximum of the Estimated Valuation Range, or 1,401,850
shares, are sold in the Conversion, the Holding Company's loan to the ESOP would
be approximately $1,121,480. It is anticipated that the ESOP loan will have a
15-year term with interest payable at the prime rate as published in THE WALL
STREET JOURNAL on the closing date of the Conversion. The loan will be repaid
principally from the Savings Bank's contributions to the ESOP and, if
appropriate, from dividends payable on the Common Stock.
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<PAGE>
The remaining net proceeds retained by the Holding Company initially
will be invested primarily in certificates of deposit at other institutions and
short term U.S. government and agency obligations. Such proceeds will be
available for additional contributions to the Savings Bank in the form of debt
or equity, to support future diversification or acquisition activities, as a
source of dividends to the stockholders of the Holding Company and for future
repurchases of Common Stock to the extent permitted under North Carolina law and
federal regulations. Currently, there are no specific plans, arrangements,
agreements or understandings, written or oral, regarding any diversification
activities.
Upon completion of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Since the Holding Company has not yet issued stock, there is
currently insufficient information upon which an intention to repurchase stock
could be based. The facts and circumstances upon which the Board of Directors
may determine to repurchase stock in the future may include but are not limited
to: (i) market and economic factors such as the price at which the stock is
trading in the market, the volume of trading, the attractiveness of other
investment alternatives in terms of the rate of return and risk involved in the
investment, the ability to increase the book value and/or earnings per share of
the remaining outstanding shares, and the ability to improve the Holding
Company's return on equity; (ii) the avoidance of dilution to stockholders by
not having to issue additional shares to cover the exercise of stock options or
to fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Holding Company and its
stockholders. Any stock repurchases will be subject to a determination by the
Board of Directors that both the Holding Company and the Savings Bank will be
capitalized in excess of all applicable regulatory requirements after any such
repurchases and that capital will be adequate, taking into account, among other
things, the level of nonperforming and other risk assets, the Holding Company's
and the Savings Bank's current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. See "DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY AND THE
SAVINGS BANK -- The Holding Company -- Stock Repurchases."
The consolidated capital levels of the Holding Company will be
significant after the consummation of the Conversion as a result of the net
proceeds from the Offerings. See "RISK FACTORS -- Declining Interest Rate Spread
and Return on Equity after Conversion," "CAPITALIZATION," and "HISTORICAL AND
PRO FORMA CAPITAL COMPLIANCE." In light of such capital levels, the Holding
Company may consider a possible post- Conversion tax-free distribution to
stockholders in the form of a return of capital. However, there are no current
plans regarding such a distribution and the Holding Company has committed to the
FDIC not to make any such distribution within the first year following the
consummation of the Conversion.
DIVIDEND POLICY
GENERAL
The Board of Directors of the Holding Company anticipates the
declaration and payment of a regular cash dividend at an initial rate of 4%, or
$0.40 per share per year based on the $10.00 per share Purchase Price, with the
first semi-annual portion of such annual dividend payable upon completion of the
first full semi-annual fiscal period following the close of the Conversion.
Declarations or payments of dividends, regular or special, will be subject to
determination by the Holding Company's Board of Directors, which will take into
account the amount of the net proceeds retained by the Holding Company, the
Holding Company's financial condition, results of operations, tax
considerations, capital requirements, industry standards, economic conditions
and other factors, including the regulatory restrictions which affect the
payment of dividends by the Savings Bank to the Holding Company discussed below.
No assurances can be given that any dividends will be declared or, if declared,
what the amount of dividends will be or whether such dividends, once declared,
will continue.
CURRENT REGULATORY RESTRICTIONS
Dividends from the Holding Company will depend, in part, upon receipt
of dividends from the Savings Bank because the Holding Company initially will
have no source of income other than dividends from the Savings Bank
11
<PAGE>
and earnings from the investment of the net proceeds from the Conversion
retained by the Holding Company. Consequently, future declarations of cash
dividends by the Holding Company may depend upon dividend payments by the
Savings Bank to the Holding Company, which payments are subject to various
restrictions. Under current North Carolina regulations, the Savings Bank could
not declare or pay a cash dividend if the effect thereof would be to reduce its
net worth to an amount which is less than the minimum required by the FDIC and
the Administrator. In addition, for a period of five years after the
consummation of the Conversion, the Savings Bank will be required, under
existing regulations, to obtain the prior written approval of the Administrator
before it can declare and pay a cash dividend on its capital stock in an amount
in excess of one-half of the greater of (i) its net income for the most recent
fiscal year, or (ii) the average of its net income after dividends for the most
recent fiscal year and not more than two of the immediately preceding fiscal
years, if applicable. As a result of this limitation, if the Savings Bank had
been a stock institution at the end of fiscal 1995, it could not have paid a
dividend in excess of $225,000 without the approval of the Administrator. As a
converted institution, the Savings Bank also will be subject to the regulatory
restriction that it will not be permitted to declare or pay a dividend on or
repurchase any of its capital stock if the effect thereof would be to cause its
regulatory capital to be reduced below the amount required for the liquidation
account established in connection with the Conversion. See "REGULATION -- The
Savings Bank -- Dividends," "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Savings Bank -- Liquidation Account" and
Note 16 of Notes to the Consolidated Financial Statements included elsewhere
herein.
TAX CONSIDERATIONS
In addition to the foregoing, retained earnings of the Savings Bank
appropriated to bad debt reserves and deducted for federal income tax purposes
cannot be used by the Savings Bank to pay cash dividends to the Holding Company
without the payment of federal income taxes by the Savings Bank at the then
current income tax rate on the amount deemed distributed, which would include
the amount of any federal income taxes attributable to the distribution. See
"TAXATION -- Federal Taxation" and Note 6 of Notes to the Consolidated Financial
Statements included elsewhere herein. The Holding Company does not contemplate
any distribution by the Savings Bank that would result in a recapture of the
Savings Bank's bad debt reserve or create the above-mentioned federal tax
liabilities.
MARKET FOR COMMON STOCK
The Holding Company has never issued capital stock and, consequently,
there has not been a market for the Common Stock. The Holding Company has filed
an application to have the Common Stock listed for quotation on The Nasdaq
SmallCap Market upon consummation of the Conversion. There can be no assurance,
however, that such application will be approved or that the Common Stock will be
quoted on The Nasdaq SmallCap Market. In the event the Common Stock does not
qualify for quotation on The Nasdaq SmallCap Market, the Holding Company intends
to list the Common Stock over-the-counter through the National Daily Quotation
System "Pink Sheets" published by the National Quotation Bureau, Inc., and to
request that Trident Securities undertake to match offers to buy and offers to
sell the Common Stock. Trident Securities intends to be a market maker for the
Common Stock. There can be no assurance that timely or accurate quotations will
be available in the "Pink Sheets." In addition, the existence of a public
trading market will depend upon the presence in the market of both willing
buyers and willing sellers at any given time. The development of a liquid public
market depends on the existence of willing buyers and sellers, the presence of
which is not within the control of the Savings Bank, the Holding Company or any
market maker. It is unlikely that an active and liquid trading market for the
Common Stock will develop and be maintained due to the relatively small size of
the Offerings and the small number of stockholders expected following the
Conversion. Under such circumstances, investors in the Common Stock could have
difficulty disposing of their shares on short notice and should not view the
Common Stock as a short-term investment. Accordingly, purchasers should consider
the illiquid, long-term nature of any investment in the Common Stock.
Furthermore, there can be no assurance that purchasers will be able to sell
their shares at or above the Purchase Price after the Conversion.
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<PAGE>
CAPITALIZATION
The following table presents the historical deposits, borrowings and
capitalization of the Savings Bank at December 31, 1995, and the pro forma
consolidated capitalization of the Holding Company after giving effect to the
assumptions set forth under "PRO FORMA DATA," based on (i) the sale of the
number of shares of Common Stock set forth below in the Conversion at the
minimum, midpoint and maximum of the Estimated Valuation Range, and based on
(ii) the sale of 1,401,850 shares (representing the shares that would be issued
in the Conversion after giving effect to an additional 15% increase in the
maximum valuation in the Estimated Valuation Range, subject to receipt of an
updated appraisal confirming such valuation and Administrator approval). A
CHANGE IN THE NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION MAY MATERIALLY
AFFECT PRO FORMA CONSOLIDATED CAPITALIZATION.
<TABLE>
<CAPTION>
Holding Company
Pro Forma Consolidated Capitalization
Based Upon the Sale of
901,000 1,060,000 1,219,000 1,401,850
Shares at Shares at Shares at Shares at
Savings Bank $10.00 $10.00 $10.00 $10.00
Historical Per Share(1) Per Share(1) Per Share(1) Per Share(2)
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits(3).................................... $21,325 $21,325 $21,325 $21,325 $21,325
ESOP borrowings (4) ........................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total deposits and borrowings.................. $21,325 $21,325 $21,325 $21,325 $21,325
======= ======= ======= ======= =======
Capital Stock:
Preferred stock:
500,000 shares, $.01
par value per share,
authorized; none issued
or outstanding............................ $ -- -- -- -- --
Common Stock:
3,000,000 shares, $.01 par
value per share, authorized;
specified number of shares
assumed to be issued and
outstanding(5)............................ -- 9 11 12 14
Additional paid-in capital.................. -- 8,361 9,884 11,408 13,160
Less:
Common Stock acquired by ESOP(4).......... -- (721) (848) (975) (1,121)
Common Stock acquired by MRP(6)........... -- (360) (424) (488) (561)
Retained income(7)............................. 5,892 5,892 5,892 5,892 5,892
Unrealized gain on securities
available for sale, net....................... 162 162 162 162 162
------- --------- --------- --------- ---------
Total stockholders' equity..................... $6,054 $13,343 $14,677 $16,011 $17,546
====== ======= ======= ======= =======
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
13
<PAGE>
------------------
(1) Does not reflect the possible increase in the Estimated Valuation Range to
reflect changes in market or financial conditions or the issuance of
additional shares under the Stock Option Plan.
(2) This column represents the pro forma capitalization of the Holding Company
in the event the aggregate number of shares of Common Stock issued in the
Conversion is 15% above the maximum of the Estimated Valuation Range as a
result of changes in market or financial conditions. See "PRO FORMA DATA"
and Footnote 1 thereto.
(3) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Such withdrawals will reduce pro forma deposits by the amounts
thereof.
(4) Assumes that 8% of the Common Stock sold in the Conversion will be
acquired by the ESOP in the Conversion with funds borrowed from the
Holding Company. In accordance with generally accepted accounting
principles ("GAAP"), the amount of Common Stock to be purchased by the
ESOP represents unearned compensation and is, accordingly, reflected as a
reduction of capital. As shares are released to ESOP participant accounts,
a corresponding reduction in the charge against capital will occur.
Assuming shares of Common Stock appreciate in value over time, Statement
of Position ("SOP") 93-6 requires that compensation expense be recorded
based on the fair value of shares released with a corresponding increase
in paid in capital. The effect of SOP 93-6 on net income and book value
per share in future periods cannot be predicted due to the uncertainty of
the fair value of the shares of Common Stock subsequent to their issue.
Since the funds are borrowed from the Holding Company, the borrowing would
not be separately reflected in the consolidated financial statements of
the Holding Company. On an unconsolidated basis, however, the outstanding
principal balance of the ESOP loan will be reflected as a liability on the
balance sheet of the Savings Bank, offset by a contra equity account of
equal amount representing unearned compensation. See "MANAGEMENT OF THE
SAVINGS BANK -- Benefits -- Employee Stock Ownership Plan."
(5) The Savings Bank's authorized capital will consist solely of 1,000 shares
of common stock, $1.00 par value per share, all of which will be issued to
the Holding Company.
(6) Assumes the purchase in the open market, pursuant to the proposed MRP, of
a number of shares equal to 4% of the shares of Common Stock issued in the
Conversion at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range. The issuance of an additional 4% of the
shares of Common Stock for the MRP from authorized but unissued shares of
Holding Company Common Stock would dilute the ownership interest of
stockholders by 3.9%. The shares are reflected as a reduction of
stockholders' equity. See "RISK FACTORS -- Possible Dilutive Effect of
Benefit Programs," "PRO FORMA DATA" and "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Management Recognition Plan." The MRP is subject to
stockholder approval and is expected to be adopted by stockholders at a
meeting to be held no earlier than six months following consummation of
the Conversion.
(7) Retained earnings are substantially restricted by applicable regulatory
capital requirements. Additionally, the Savings Bank will be prohibited
from paying any dividend that would reduce its regulatory capital below
the amount in the liquidation account, which will be established for the
benefit of the Savings Bank's Eligible Account Holders and Supplemental
Eligible Account Holders at the time of the Conversion and adjusted
downward thereafter. See "THE CONVERSION -- Effects of Conversion to Stock
Form on Depositors and Borrowers of the Savings Bank -- Liquidation
Account."
14
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table presents the Savings Bank's historical and pro
forma capital position relative to its capital requirements at December 31,
1995. The amount of capital infused into the Savings Bank for purposes of the
following table is 50% of the net proceeds from the sale of the Common Stock.
For a discussion of the assumptions underlying the pro forma capital
calculations presented below, see "USE OF PROCEEDS," "CAPITALIZATION" and "PRO
FORMA DATA." The definitions of the terms used in the table are those provided
in the capital regulations issued by the Administrator. See "REGULATION - - The
Savings Bank -- Capital Requirements" and "REGULATION -- The Holding Company --
Capital Requirements."
<TABLE>
<CAPTION>
PRO FORMA AT DECEMBER 31, 1995
Minimum of Estimated Midpoint of Estimated
Valuation Range Valuation Range
901,000 Shares 1,060,000 Shares
December 31, 1995 at $10.00 Per Share at $10.00 Per Share
------------------------------- ---------------------- ------------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Total Total Total
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $ 5,892 21.08% $8,996 28.31% $9,568 30.10%
Tier 1 (leverage) capital
requirement............ 1,118 4.00 1,271 4.00 1,299 4.00
------- ----- ------- ------ ------- ------
Excess................... $ 4,774 17.08% $7,725 24.31% $8,268 26.10%
======= ====== ====== ====== ====== ======
Tier 1 risk adjusted capital $ 5,892 46.30% $8,996 62.22% $9,568 64.76%
Tier 1 risk adjusted capital
requirement............ 509 4.00 578 4.00 591 4.00
-------- ------- ------- ------ ------- ------
Excess................... $ 5,383 42.30% $8,418 58.22% $8,977 60.76%
======= ======= ====== ====== ====== ======
Total risk based capital. $ 6,032 47.40% $9,136 63.19% $9,708 65.70%
Total risk based
capital requirement.... 1,018 8.00 1,157 8.00 1,182 8.00
-------- ------ ------- ------ ------- ------ -
Excess................... $ 5,014 39.40% $7,979 55.19% $8,526 57.70%
======= ====== ====== ====== ====== ======
NC regulatory capital.... $ 6,032 21.58% $9,136 28.75% $9,708 29.89%
NC regulatory capital
requirement............ 1,398 5.00 1,589 5.00 1,624 5.00
-------- ------ ------ ----- ------ -----
Excess................... $ 4,634 16.58% $7,547 23.75% $8,084 24.89%
======= ====== ====== ====== ====== ======
<CAPTION>
15% above
Maximum of Estimated Maximum of Estimated
Valuation Range Valuation Range
1,219,000 Shares 1,401,850 Shares
at $10.00 Per Share at $10.00 Per Share
--------------------- --------------------------
Percent of Percent of
Adjusted Adjusted
Total Total
Amount Assets (1) Amount Assets (1)
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Tier 1 (leverage) capital $10,139 31.90% $10,797 33.97%
Tier 1 (leverage) capital
requirement............ 1,327 4.00 1,359 4.00
------- ------ ------- ------
Excess................... $ 8,812 27.90% $ 9,437 29.97%
======= ====== ======= ======
Tier 1 risk adjusted capital $10,139 67.18% $10,797 69.85%
Tier 1 risk adjusted capital
requirement............ 604 4.00 618 4.00
------- ------ -------- ------
Excess................... $ 9,536 63.18% $10,178 65.85%
======= ====== ======= ======
Total risk based capital. $10,279 68.11% $10,937 70.75%
Total risk based
capital requirement.... 1,207 8.00 1,237 8.00
------- ------ ------- ------
Excess................... $ 9,072 60.11% $9,700 62.75%
======= ====== ====== ======
NC regulatory capital.... $10,279 30.98% $10,937 32.18%
NC regulatory capital
requirement............ 1,659 5.00 1,699 5.00
------- ----- ------- -----
Excess................... $ 8,620 25.98% $ 9,238 27.18%
======= ====== ======= ======
</TABLE>
-------------------
(1) For the Tier 1 (leverage) capital and North Carolina regulatory capital
calculations, percent of total average assets. For the Tier 1 risk-based
capital and total risk-based capital calculations, percent of total
risk-weighted assets. Net proceeds (after ESOP and MRP) were assumed to be
invested in one- to four-family residential mortgage loans with a weighted
average risk-weight of 50%.
(2) As a North Carolina-chartered savings bank, the Savings Bank is subject to
the capital requirements of the FDIC and the Administrator. The FDIC
requires state-chartered savings banks, including the Savings Bank, to have
a minimum leverage ratio of Tier 1 capital to total assets of at least 3%,
provided, however, that all institutions, other than those (i) receiving
the highest rating during the examination process and (ii) not anticipating
any significant growth, are required to maintain a ratio of 1% to 2% above
the stated minimum, with an absolute total capital to risk-weighted assets
of at least 8%. The Savings Bank has not been notified by the FDIC of any
leverage capital requirement specifically applicable to it. However, for
the purposes of this table, the Savings Bank has assumed that its leverage
capital requirement is 4% of total average assets.
15
<PAGE>
PRO FORMA DATA
Under the Plan of Conversion, the Common Stock must be sold at a price
equal to the estimated pro forma market value of the Holding Company and the
Savings Bank, based upon an independent valuation. The Estimated Valuation Range
as of April 10, 1996 is from a minimum of $9.01 million to a maximum of $12.19
million with a midpoint of $10.60 million or, at a price per share of $10.00, a
minimum number of shares of 901,000, a maximum number of shares of 1,219,000 and
a midpoint number of shares of 1,060,000. The actual net proceeds from the sale
of the Common Stock cannot be determined until the Conversion is completed.
However, net proceeds set forth on the following table are based upon the
following assumptions: (i) Trident Securities will receive a management fee of
1% of the aggregate dollar amount of Common Stock sold in both the Subscription
and Direct Community Offerings; (ii) 8% and 4% of the Common Stock issued in the
Conversion will be sold to the ESOP and MRP, respectively, and 28,500 shares of
Common Stock will be sold to directors, executive officers and associates of
such persons, for which there is no fee; (iii) 55% of the shares will be sold in
the Subscription and Direct Community Offering (excluding shares purchased by
the Savings Bank's directors, executive officers and ESOP) for which Trident
Securities will receive a fee of 2.0%; (iv) the remaining 45% of the shares of
Common Stock issued in the Conversion will be sold in the Syndicated Community
Offering for which Trident Securities and participating brokers will receive
fees equal to 5.0% of the shares issued in the Syndicated Offering; and (v)
Conversion expenses, including the fees paid to Trident Securities, will be
approximately $640,000, $705,000, $770,000 and $845,000 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation Range,
respectively. Actual expenses may vary from this estimate, and the fees paid
will depend upon the percentages and total number of shares sold in the
Subscription, Direct Community and Syndicated Community Offerings and other
factors.
The pro forma consolidated net income of the Savings Bank for the year
ended June 30, 1995 and the six months ended December 31, 1995 has been
calculated as if the Conversion had been completed at the beginning of each
period and the estimated net proceeds received by the Holding Company and the
Savings Bank had been invested at the arithmetic average of the yield earned by
the Savings Bank on its interest-earning assets and the rates paid on its
deposits. As discussed under "USE OF PROCEEDS," the Holding Company expects to
retain 50% of the net proceeds of the Offerings from which it will fund the ESOP
loan. A pro forma after-tax return of 3.11% is used for both the Holding Company
and the Savings Bank for the six- and 12-month periods, after giving effect to a
combined incremental federal and state tax rate of 38.0%.
Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock. Per share amounts have been computed as if the Common Stock had
been outstanding at the beginning of the period or at the dates shown, but
without any adjustment of per share historical or pro forma stockholders' equity
to reflect the earnings on the estimated net proceeds.
The following tables summarize the historical net income and total
equity of the Savings Bank and the pro forma consolidated net income and
stockholders' equity of the Holding Company for the periods and at the dates
indicated, based on the minimum, midpoint and maximum of the Estimated Valuation
Range and based on a 15% increase in the maximum of the Estimated Valuation
Range. No effect has been given to (i) the shares to be reserved for issuance
under the Holding Company's Stock Option Plan, which is expected to be adopted
by stockholders at a meeting to be held no earlier than six months following
consummation of the Conversion; (ii) withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion; (iii) the issuance of
shares from authorized but unissued shares to the MRP, which is expected to be
adopted by stockholders at a meeting to be held no earlier than six months
following consummation of the Conversion; or (iv) the establishment of a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits --
1996 Stock Option Plan" and "THE CONVERSION -- Stock Pricing and Number of
Shares to be Issued." Shares of Common Stock may be purchased with funds on
deposit at the Savings Bank, which will reduce deposits by the amounts of such
purchases. Accordingly, the net amount of funds available for investment will be
reduced to the extent shares are purchased with funds on deposit.
THE FOLLOWING PRO FORMA INFORMATION MAY NOT BE REPRESENTATIVE OF THE
FINANCIAL EFFECTS OF THE CONVERSION AT THE DATE ON WHICH THE CONVERSION ACTUALLY
OCCURS AND SHOULD NOT BE TAKEN AS INDICATIVE OF FUTURE RESULTS OF OPERATIONS.
STOCKHOLDERS' EQUITY REPRESENTS THE DIFFERENCE BETWEEN THE STATED AMOUNTS OF
CONSOLIDATED ASSETS AND LIABILITIES OF THE HOLDING COMPANY COMPUTED IN
ACCORDANCE WITH GAAP. STOCKHOLDERS' EQUITY HAS NOT BEEN INCREASED OR DECREASED
TO REFLECT THE DIFFERENCE BETWEEN THE CARRYING VALUE OF LOANS AND OTHER ASSETS
AND MARKET VALUE. STOCKHOLDERS' EQUITY IS NOT INTENDED TO REPRESENT FAIR MARKET
VALUE NOR DOES IT REPRESENT AMOUNTS THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS IN THE EVENT OF LIQUIDATION.
16
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1995
----------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
--------- --------- --------- ---------------
901,000 1,060,000 1,219,000 1,401,850(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds........................... $9,010 $10,600 $12,190 $14,019
Less:
Estimated Offering expenses.............. 640 705 770 845
------ ------- ------- -------
Estimated net proceeds................... 8,370 9,895 11,420 13,174
Less:
ESOP shares.............................. (721) (848) (975) (1,121)
MRP shares............................... (360) (424) (488) (561)
------- ------- ------- --------
Estimated net cash proceeds
to the Holding Company................ $7,289 $8,623 $9,957 $11,492
====== ====== ====== =======
Consolidated net income:
Historical, before change in
accounting principle................... $253 $253 $253 $253
Pro forma income on net proceeds(2)..... 227 268 310 357
Pro forma ESOP adjustments(3)........... (30) (35) (40) (46)
Pro forma MRP adjustments(4)............ (45) (53) (60) (70)
----- ----- ----- -----
Pro forma............................. $405 $433 $463 $494
==== ==== ==== ====
Consolidated net income per share(5)(6):
Historical before change in
accounting principle................... $0.30 $0.26 $0.22 $0.20
Pro forma income on net proceeds........ 0.27 0.27 0.27 0.28
Pro forma ESOP adjustments(3)........... (0.04) (0.04) (0.04) (0.04)
Pro forma MRP adjustments(4)............ (0.05) (0.05) (0.05) (0.05)
------ ------ ------ ------
Pro forma............................. $0.48 $0.44 $0.40 $0.39
===== ===== ===== =====
Consolidated stockholders' equity (book value)(7):
Historical.............................. $6,078 $6,078 $6,078 $6,078
Estimated net proceeds.................. 8,370 9,895 11,420 13,174
Less:
Common Stock acquired by ESOP........... (721) (848) (975) (1,121)
Common Stock acquired by MRP(4)......... (360) (424) (488) (561)
-------- -------- -------- --------
Pro forma(7).......................... $13,367 $14,701 $16,035 $17,570
======= ======= ======= =======
Consolidated stockholders' equity per share(6)(8):
Historical(6)........................... $ 6.75 $ 5.73 $ 4.99 $ 4.34
Estimated net proceeds.................. 9.29 9.33 9.37 9.40
ESOP.................................... (0.80) (0.80) (0.80) (0.80)
MRP(4).................................. (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma(9) ......................... $14.84 $13.86 $13.16 $12.54
====== ====== ====== ======
Purchase Price as a percentage of pro forma
stockholders' equity per share.......... 67.41% 72.10% 76.02% 79.79%
===== ===== ===== =====
Purchase Price as a multiple of pro forma
net income per share.................... 20.6x 22.6x 24.4x 26.2x
17
<PAGE>
At or For the Six Months Ended December 31, 1995
-------------------------------------------------------------
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Valuation Valuation Valuation Estimated
Range Range Range Valuation Range
--------- --------- --------- ---------------
901,000 1,060,000 1,219,000 1,401,850(1)
Shares Shares Shares Shares
at $10.00 at $10.00 at $10.00 at $10.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands, except per share amounts)
Gross proceeds........................... $9,010 $10,600 $12,190 $14,019
Less:
Estimated Offering expenses.............. 640 705 770 845
------ ------- ------- -------
Estimated net proceeds................... 8,370 9,895 11,420 13,174
Less:
ESOP shares.............................. (721) (848) (975) (1,121)
MRP shares............................... (360) (424) (488) (561)
------- ------- ------- --------
Estimated net cash proceeds
to the Holding Company................ $7,289 $8,623 $9,957 $11,492
====== ====== ====== =======
Consolidated net income:
Historical, before change in
accounting principle annualized........ $(55) $(55) $(55) $(55)
Pro forma income on net proceeds(2)..... 113 134 155 179
Pro forma ESOP adjustments(3)........... (15) (18) (20) (23)
Pro forma MRP adjustments(4)............ (22) (26) (30) (35)
---- ---- ---- ----
Pro forma............................. $21 $35 $50 $66
=== === === ===
Consolidated net income per share(5)(6):
Historical before change in
accounting principle................... $(0.07) $(0.06) $(0.05) $(0.04)
Pro forma income on net proceeds........ 0.14 0.14 0.14 0.14
Pro forma ESOP adjustments(3)........... (0.02) (0.02) (0.02) (0.02)
Pro forma MRP adjustments(4)............ (0.03) (0.03) (0.03) (0.03)
------ ------ ------ ------
Pro forma............................. $0.02 $0.03 $0.04 $0.05
===== ===== ===== =====
Consolidated stockholders' equity (book value)(7):
Historical.............................. $6,054 $6,054 $6,054 $6,054
Estimated net proceeds.................. 8,370 9,895 11,420 13,174
Less:
Common Stock acquired by ESOP........... (721) (848) (975) (1,121)
Common Stock acquired by MRP(4)......... (360) (424) (488) (561)
-------- -------- -------- --------
Pro forma(7).......................... $13,343 $14,677 $16,011 $17,546
======= ======= ======= =======
Consolidated stockholders' equity per share(6)(8):
Historical(6)........................... $ 6.72 $ 5.71 $ 4.97 $ 4.32
Estimated net proceeds.................. 9.29 9.33 9.37 9.40
ESOP.................................... (0.80) (0.80) (0.80) (0.80)
MRP(4).................................. (0.40) (0.40) (0.40) (0.40)
------- ------- ------- -------
Pro forma(9) ......................... $14.81 $13.84 $13.14 $12.52
====== ====== ====== ======
Purchase Price as a percentage of pro forma
stockholders' equity per share(10)...... 67.53% 72.22% 76.13% 79.90%
===== ===== ===== =====
</TABLE>
18
<PAGE>
-------------------
(1) Gives effect to the sale of an additional 182,850 shares in the
Conversion, which may be issued to cover an increase in the appraised
value of the Common Stock or additional subscriptions, without the
resolicitation of subscribers or any right of cancellation. The issuance
of such additional shares will be conditioned on a determination of the
independent appraiser that such issuance is compatible with its
determination of the estimated pro forma market value of the Common Stock.
See "THE CONVERSION -- Stock Pricing and Number of Shares to be Issued."
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire such
shares will be borrowed by the ESOP (at an interest rate equal to the
prime rate as published in THE WALL STREET JOURNAL on the closing date of
the Conversion, which rate is currently 8.25%), from the net proceeds from
the Conversion retained by the Holding Company. The amount of this
borrowing has been reflected as a reduction from gross proceeds to
determine estimated net Conversion proceeds. The Savings Bank intends to
make contributions to the ESOP in amounts at least equal to the principal
and interest requirement of the debt. As the debt is paid down,
stockholders' equity will be increased. The Savings Bank's payment of the
ESOP debt is based upon equal installments of principal over a 15-year
period, assuming a federal and state tax rate of 38.0%. Interest income
earned by the Holding Company on the ESOP debt offsets the interest paid
by the Savings Bank on the ESOP loan. No reinvestment is assumed on
proceeds contributed to fund the ESOP. The ESOP expense reflects adoption
of SOP 93-6, which will require recognition of expense based upon shares
committed to be released and the exclusion of unallocated shares from
earnings per share computations. The valuation of shares committed to be
released would be based upon the average market value of the shares during
the year, which, for purposes of this calculation, was assumed to be equal
to the $10.00 per share Purchase Price. See "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Employee Stock Ownership Plan."
(4) In calculating the pro forma effect of the MRP, it is assumed that the
required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open
market purchases at the Purchase Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Common Stock instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 3.9% and pro forma net income per share would be $.47 and
$.02, $.42 and $.03, $.39 and $.04 and $.37 and $.05 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range for the year ended June 30, 1995 and for the six months ended
December 31, 1995, respectively, and pro forma stockholders' equity per
share would be $14.26 and $14.24, $13.34 and $13.31, $12.65 and $12.63 and
$12.05 and $12.03 at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range at June 30, 1995 and December 31,
1995, respectively. Shares issued under the MRP vest 20% per year and, for
purposes of this table, compensation expense is recognized on a
straight-line basis over each vesting period. In the event the fair market
value per share is greater than $10.00 per share on the date of
stockholder approval of the MRP, total MRP expense would increase. The
total estimated MRP expense was multiplied by 20% (the total percent of
shares for which expense is recognized in the first year) resulting in
pre-tax MRP expense of $72,000 and $36,000, $85,000 and $42,500, $98,000
and $49,000 and $112,000 and $56,000 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range for the year ended
June 30, 1995 and for the six months ended December 31, 1995,
respectively. No effect has been given to the shares reserved for issuance
under the proposed Stock Option Plan. If stockholders approve the Stock
Option Plan following the Conversion, the Holding Company will have
reserved for issuance under the Stock Option Plan authorized but unissued
shares of Common Stock representing an amount of shares equal to 10% of
the shares sold in the Conversion. If all of the options were to be
exercised utilizing these authorized but unissued shares rather than
treasury shares which could be acquired, the voting interests of existing
stockholders would be diluted by approximately 10%. The issuance of
authorized but unissued shares of the Common Stock assuming that all stock
options are issued and exercised on the closing date, the pro forma net
income per share would be $.44, $.02, $.40 and $.03; $.37, $.04, $.34 and
$.05, at the minimum, midpoint, maximum and 15% above the
19
<PAGE>
maximum of the Estimated Valuation Range for the year ending June 30, 1995
and for the six months ending December 31, 1995, respectively. See
"MANAGEMENT OF THE SAVINGS BANK -- Benefits -- 1996 Stock Option Plan" and
"-- Management Recognition Plan" and "RISK FACTORS -- Possible Dilutive
Effect of Benefit Programs."
(5) Per share amounts are based upon shares outstanding of 833,725 and 831,323
and 980,853 and 978,027, 1,127,981 and 1,124,731 and 1,297,179 and
1,293,440 at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range for the year ended June 30, 1995 and for the
six months ended December 31, 1995, respectively, which includes the
shares of Common Stock sold in the Conversion less the number of shares
assumed to be held by the ESOP not committed to be released within the
first year following the Conversion.
(6) Historical per share amounts have been computed as if the shares of Common
Stock expected to be issued in the Conversion had been outstanding at the
beginning of the period or on the date shown, but without any adjustment
of historical net income or historical retained earnings to reflect the
investment of the estimated net proceeds of the sale of shares in the
Conversion, the additional ESOP expense or the proposed MRP expense, as
described above.
(7) "Book value" represents the difference between the stated amounts of the
Savings Bank's assets and liabilities. The amounts shown do not reflect
the liquidation account which will be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in the
Conversion, or the federal income tax consequences of the restoration to
income of the Savings Bank's special bad debt reserves for income tax
purposes which would be required in the unlikely event of liquidation. See
"THE CONVERSION -- Effects of Conversion to Stock Form on Depositors and
Borrowers of the Savings Bank" and "TAXATION." The amounts shown for book
value do not represent fair market values or amounts distributable to
stockholders in the unlikely event of liquidation.
(8) Per share amounts are based upon shares outstanding of 901,000, 1,060,000,
1,219,000 and 1,401,850 at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range, respectively.
(9) Does not represent, nor intended to represent, possible future price
appreciation or depreciation of the Common Stock.
(10) Annualized.
20
<PAGE>
MITCHELL SAVINGS BANK, SSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
THE FOLLOWING CONSOLIDATED STATEMENTS OF INCOME OF MITCHELL SAVINGS BANK,
SSB AND SUBSIDIARY FOR THE FISCAL YEARS ENDED JUNE 30, 1994 AND 1995 HAVE BEEN
AUDITED BY CRISP HUGHES & CO., L.L.P., CPA'S, INDEPENDENT AUDITORS, WHOSE REPORT
THEREON APPEARS ELSEWHERE IN THIS PROSPECTUS. THE CONSOLIDATED STATEMENTS OF
INCOME (LOSS) FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 AND 1995, WERE NOT
AUDITED BY THE SAVINGS BANK'S INDEPENDENT AUDITORS BUT, IN THE OPINION OF
MANAGEMENT, REFLECT ALL ADJUSTMENTS NECESSARY FOR A FAIR PRESENTATION OF THE
RESULTS OF OPERATIONS FOR THOSE PERIODS. ALL SUCH ADJUSTMENTS ARE OF A NORMAL
RECURRING NATURE. THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER
31, 1995 ARE NOT NECESSARILY INDICATIVE OF THE RESULTS OF THE SAVINGS BANK WHICH
MAY BE EXPECTED FOR THE ENTIRE YEAR OR ANY OTHER SUBSEQUENT PERIOD. THESE
STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE SAVINGS BANK'S CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE HEREIN.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
--------------------- ------------------
1994 1995 1994 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Interest income:
Loans............................................... $2,007 $1,981 $ 985 $ 998
Investments......................................... 18 23 12 14
Interest-earning deposits........................... 168 255 127 124
------ ------ ----- -----
Total interest income........................ 2,193 2,259 1,124 1,136
Interest expense:
Deposits............................................ 903 962 454 585
------ ------ ----- -----
Net interest income.......................... 1,290 1,297 670 551
Provision for loan losses............................. 24 24 12 48
------ ------ ----- -----
Net interest income
after provision for loan losses........... 1,266 1,273 658 503
Non-interest income:
Gain on real estate owned........................... 1 41 41 2
Other............................................... 4 4 1 2
------ ------ ----- -----
Total non-interest income.................... 5 45 42 4
------ ------ ----- -----
Non-interest expenses:
Compensation........................................ 235 268 132 134
Other employee benefits............................. 41 486 447 346
Net occupancy expense............................... 27 27 14 14
Deposit insurance premiums.......................... 48 50 25 24
Data processing..................................... 23 26 11 14
Provision for real estate losses.................... -- 5 -- 5
Other............................................... 78 91 53 56
------ ------ ----- -----
Total non-interest expenses.................. 452 953 682 593
------ ------ ----- -----
Income (loss) before income taxes and
cumulative effect adjustment............... 819 365 18 (86)
Income tax expense (benefit).......................... 317 112 (1) (31)
------ ------ ----- -----
Income (loss) before cumulative effect
adjustment................................. 502 253 19 (55)
Cumulative effect on prior years for
accounting change................................... 11 -- -- --
------ ------ ----- -----
Net income (loss)............................ $ 513 $ 253 $ 19 $ (55)
====== ===== ===== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results
of operations is intended to assist in understanding the financial condition and
results of operations of the Savings Bank. The information contained in this
section should be read in conjunction with the Consolidated Financial Statements
and accompanying Notes thereto and the other sections contained in this
Prospectus.
OPERATING STRATEGY
The business of the Savings Bank consists principally of attracting
deposits from the general public and using such deposits to originate fixed-rate
mortgage loans secured primarily by one- to four-family residences. The Savings
Bank also invests in overnight deposits. The Savings Bank plans to continue to
fund its assets primarily with deposits.
The Savings Bank's profitability depends primarily on its net interest
income, which is the difference between the income it receives on its loan and
investment portfolio and its cost of funds, which consists of interest paid on
deposits. Net interest income is also affected by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets equal or exceed interest-bearing liabilities, any positive interest rate
spread will generate net interest income. The Savings Bank's profitability is
also affected by the level of other income and expenses. Other income consists
of service charges on loan charges and other fees, insurance commissions and net
real estate owned income (expense). Other expenses include compensation and
employee benefits, occupancy expenses, deposit insurance premiums, equipment and
data servicing expenses, professional fees and other operating costs. The
Savings Bank's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and policies concerning monetary and fiscal
affairs, housing and financial institutions and the attendant actions of the
regulatory authorities.
The Savings Bank strives to operate a conservative, well capitalized,
profitable thrift dedicated to financing home ownership and other consumer
needs, and to provide quality service to its customers. The Savings Bank
believes that it has established a market niche by serving moderate-income
borrowers and making smaller loans and loans that do not satisfy the standards
of the secondary market, which are considered less desirable by competing
lenders. The Savings Bank believes that it has successfully implemented its
strategy by: (i) maintaining a strong capital level; (ii) maintaining what
management believes are conservative underwriting standards; (iii) emphasizing
local loan origination; and (iv) emphasizing high quality customer service with
a competitive fee structure.
FINANCIAL CONDITION
Total assets decreased from $28.1 million at June 30, 1994 to $27.6
million at June 30, 1995 primarily as a result of a decrease in interest-earning
deposits in other banks in connection with a decrease in deposits at the Savings
Bank. Interest-earning deposits at other banks (primarily overnight deposits at
the FHLB-Atlanta ) decreased from $5.7 million at June 30, 1994 to $4.1 million
at June 30, 1995. Total assets increased from $27.6 million at June 30, 1995 to
$28.2 million at December 31, 1995. Net loans receivable increased from $21.8
million to $22.5 million to $22.9 million during these periods. Loan growth
between June 30, 1994 and 1995 was funded primarily by the reduction in
interest-earning deposits in other banks and cash flow provided by operations.
Management primarily attributes such loan growth during these periods to
increased demand for one- to four-family and land loans, including refinancings,
which were stimulated by lower market interest rates. Deposits decreased from
$22.2 million at June 30, 1994 to $20.9 million at June 30, 1995 as, management
believes, depositors withdrew funds to alternate higher yielding investment
vehicles. Deposits increased to $21.3 million at December 31, 1995 as,
management believes, customers returned to traditional deposit investments in
response to higher short-term interest
22
<PAGE>
rates. Historically, the Savings Bank has not relied on borrowings to fund loan
demand and had no borrowings outstanding at any of the periods presented. Total
equity increased from $5.7 million at June 30, 1994, to $6.1 million at June 30,
1995, and decreased to $6.0 million at December 31, 1995.
RESULTS OF OPERATIONS
The operating results of the Savings Bank depend primarily on its net interest
income. The Savings Bank's net interest income is determined by its interest
rate spread, which is the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing liabilities
and the degree of mismatch in the maturity and repricing characteristics of its
interest-earning assets and interest-bearing liabilities. Interest rates
declined generally until the third quarter of fiscal 1994 and then began to rise
substantially until the end of the first quarter of 1995 when interest rates
began to fall. Interest rates have continued to fall during 1996. The Savings
Bank's net earnings also is affected by the establishment of provisions for loan
losses and the level of its non-interest income, including deposit service
charges, as well as its non-interest expenses and income tax provisions.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 1994 AND
1995
GENERAL. There was a net loss of $55,000 for the six months ended December 31,
1995, compared to net income of $19,000 for the six months ended December 31,
1994. Increases in savings deposit interest expense and non-interest expense and
a decrease in non-interest income more than offset an increase in total interest
income. Net interest income was $551,000 for the six months ended December 31,
1995, compared to $670,000 for the earlier period, a 17.8% decline.
Between June 30, 1994 and December 31, 1995 interest rates generally decreased.
At June 30, 1994, the yields on the one-year U.S. Treasury Bill and the 30-year
U.S. Treasury Bond were 5.49% and 7.61%, respectively, and were 7.21% and 7.88%,
respectively, at December 31, 1994. Between June 30, 1995 and December 31, 1995,
interest rates also decreased. At June 30, 1995, the yields on the one-year U.S.
Treasury Bill and the 30-year U.S. Treasury Bond were 5.63% and 6.63%,
respectively, and were 5.14% and 5.96%, respectively, at December 31, 1995.
Given that the Savings Bank's loan portfolio consists entirely of fixed-rate
loans, any movement in interest rates will have a material effect on net
interest income. Generally, increases, rather than decreases, in interest rates
could be expected to have an material adverse effect on the Savings Bank's net
interest income. See "-- Asset and Liability Management and Interest Rate Risk"
and "RISK FACTORS -- Above Average Interest Rate Risk Associated With Fixed-Rate
Loan Portfolio" and "-- Potential Adverse Impact of Changes in Interest Rates."
INTEREST INCOME. Interest income for the six months ended December 31, 1995,
was $1,136,000 compared to $1,124,000 for the six months ended December 31,
1994, an increase of only $12,000. An increase in the average balance of loans
receivable during the six months ended December 31, 1995 more than offset a
decline in the weighted average yield earned on loans receivable from 8.97% to
8.79%. This decrease in the average yield was due to the high levels of
refinancings during the earlier period and to lower interest rates on new loan
volume during 1995.
The decrease in investment income of $1,000 between the periods was primarily
the result of a decrease in average balances on interest-bearing deposits offset
by an increase in rates from 4.88% during the six months ended December 31,
1994, to 5.77% during the six months ended December 31, 1995. The Savings Bank's
primary investment has been deposits in other banks. See "BUSINESS OF THE
SAVINGS BANK -- Investment Activities."
INTEREST EXPENSE. Savings deposit interest expense increased 28.9% from
$454,000 for the six months ended December 31, 1994, to $585,000 for the six
months ended December 31, 1995 as the Savings Bank raised deposit rates in
response to its competition. The weighted average rate paid on deposits
increased from 4.19% during the six months ended December 31, 1994 to 5.52%
during the six months ended December 31, 1995. The increase in deposit rates was
attributable primarily to an increase in rates paid on certificates of deposits,
which increased
23
<PAGE>
from 4.67% in 1994 to 6.13% in 1995, along with a corresponding increase in
average balances of certificates of deposit from $16.6 million to $17.4 million
between the periods. Despite paying higher deposit rates, the Savings Bank
experienced a net decrease in average deposits of $467,000 during the six months
ended December 31, 1995 as depositors sought higher yielding investment
alternatives.
PROVISION FOR LOAN LOSSES. During the six months ended December 31, 1995, the
Savings Bank's provision for loan losses was $48,000, compared to $12,000 for
the six months ended December 31, 1994, an increase of $36,000 attributable to
an increase in delinquent loans at December 31, 1995 and additional commercial
real estate lending. The allowance for loan losses to total loans was .36% and
.60% at December 31, 1994 and 1995, respectively. The amount of the provision
and allowance for loan losses is influenced by current economic conditions,
actual loss experience, industry trends, and other factors such as the adverse
economic conditions, including changes in real estate values in the Savings
Bank's market area. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Savings Bank's
allowance for loan losses. Such agencies may require the Savings Bank to provide
additions to the allowance based upon judgments different from management.
Although management uses the best information available, future adjustments to
the allowance may be necessary due to economic, operating, regulatory and other
conditions that may be beyond the Savings Bank's control.
NON-INTEREST INCOME. Non-interest income decreased 92.9% from $42,000 for the
six months ended December 31, 1994 to $4,000 for the six months ended December
31, 1995, primarily because of a $41,000 real estate gain recognized in 1994 and
no comparable provision in 1995.
NON-INTEREST EXPENSE. Non-interest expense decreased 13.0% from $682,000 to
$593,000 for the six months ended December 31, 1994 and 1995, respectively,
primarily as a result of a $101,000 decrease in other employee benefits. During
the six months ending December 31, 1994, the Savings Bank recognized $270,000
for the adoption of a Directors' Retirement Plan and $159,000 on the approval of
two new Supplemental Executive Retirement Plans ("SERP"). During the six months
ending December 31, 1995, the Savings Bank recognized $22,000 of continuing
expense for the Directors' Retirement Plan and $215,000 on the SERP of which
approximately $208,000 related to plan amendments. In 1995, the Savings Bank
also executed postretirement executive health care agreements with two executive
officers. The expense recognized upon the adoption of these agreements was
$71,500 and consisted entirely of unrecognized prior service cost. Non-interest
expense to average assets was 4.91% for the six months ended December 31, 1994
compared to 4.26% for the six months ended December 31, 1995. Management expects
that the Savings Bank will experience continued expense relating to the SERP and
the Directors' Retirement Plan as well as an increase in non-interest expense
relating to compliance with securities laws, ESOP and MRP expenses, and other
monetary consequences of the Conversion. With the exception of expenses
associated with the ESOP, the MRP, the SERP and the Directors' Retirement Plan,
such expenses cannot be quantified at this time, although management does not
expect that such expenses will have a material effect on non-interest expenses.
For a discussion of the assumed expenses associated with the ESOP and the MRP,
see "PRO FORMA DATA." For a discussion of the expected expenses associated with
the Directors' Retirement Plan and the SERP, see "MANAGEMENT OF THE SAVING BANK
-- Directors' Compensation -- Directors' Retirement Plan" and "-- Benefits --
Supplemental Executive Retirement/Medical Care Agreements."
PROVISION FOR INCOME TAX. The provision for income tax decreased from a benefit
of $1,000 for the six months ended December 31, 1994 to a benefit of $31,000 for
the same period in 1995 as a result of a $104,000 reduction in income (loss)
before income taxes.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED JUNE 30, 1994 AND 1995
GENERAL. Net income decreased $260,000, or 50.7%, from $513,000 for the year
ended June 30, 1994 to $253,000 for the year ended June 30, 1995. This decrease
was mainly attributable to a $501,000 increase in non-interest expenses as a
result of the increase in compensation and employee benefits attributable to
significant
24
<PAGE>
compensation expense recognized in 1995 for the addition of a Directors'
Retirement Plan and two additional SERP Plans.
INTEREST INCOME. The additional interest income generated by the $934,000
increase in average balance of loans receivable in 1995 over the prior year
slightly offset the 51 basis point decrease in yield on loans from the prior
year to produce a $26,000 decrease in interest income from loans. The increased
loan volume was primarily a result of lower interest rates and generally
improved market conditions, while the decrease in loan yield was primarily a
result of the decline in market rates of interest from the prior year.
The average balance of daily interest-earning deposits decreased by $550,000 in
fiscal 1995 compared with fiscal 1994. The decrease in 1995 was offset somewhat
by a 223 basis point increase in the yield on these deposits from the prior
year, resulting in a $87,000 increase in interest income from interest-earning
deposits.
INTEREST EXPENSE. Savings deposit interest expense increased $59,000 for the
year ended June 30, 1995 as compared to the comparable period in 1994. The
increase was attributable to an increase in the cost of these liabilities as the
weighted average rate paid on deposits increased 31 basis points from 4.22%
during the year ended June 30, 1994 to 4.53% during the year ended June 30,
1995. The increase in deposit rates was attributable primarily to an increase in
rates paid on certificates of deposits, which increased from 4.68% in 1994 to
5.04% in 1995, along with a corresponding increase in average balances of
certificates of deposit from $16.4 million to $16.7 million between the periods.
This was partially offset by a $174,000 decrease in the average balance of
deposits during this period. The Savings Bank did not have any FHLB-Atlanta
advances or other borrowings outstanding during this period.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $24,000 during the
years ended June 30, 1994 and 1995. At June 30, 1995, the allowance for loan
losses was equal to .40% of non-performing assets compared to .31% at June 30,
1994. See "-- Comparison of Operating Results for the Six Months Ended December
31, 1994 and 1995 -- Provision for Loan Losses" and "BUSINESS OF THE SAVINGS
BANK -- Allowance for Loan Losses."
NON-INTEREST INCOME. Non-interest income increased $40,000 from $5,000 for the
year ended June 30, 1994 to $45,000 for the year ended June 30, 1995. The
increase was mainly attributable to a $41,000 gain on the sale of real estate
owned.
NON-INTEREST EXPENSE. Non-interest expense increased $501,000 for the year
ended June 30, 1995, from a total of $452,000 for the prior year to $953,000 for
the year ended June 30, 1995. Of this increase, $478,000 was attributable to an
increase in compensation and benefit expense in 1995, primarily reflecting
adoption of the Directors' Retirement Plan and two additional SERP plans at a
pre-tax cost of $454,000. The remaining $23,000 of this increase was primarily
the result of a $5,000 increase in provision for real estate losses, a $6,000
increase in accounting services and a $7,000 increase in supervisory
examinations. The ratio of non-interest expense to average total assets was
1.67% and 3.45% for the years ended June 30, 1994 and 1995, respectively. See
also "-- Comparison of Operating Results for the Six Months Ended December 31,
1994 and 1995 -- Non-Interest Expense."
INCOME TAXES. The Savings Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 109 for the 1994 fiscal year which required a change from
the deferred method of accounting for income taxes of Accounting Pronouncements
Bulletin No. 11 to the asset and liability method of accounting for income
taxes. The implementation of SFAS No. 109 increased net income by $11,000 for
the year ended June 30, 1994. See the Notes to the Consolidated Financial
Statements for a further discussion of SFAS No. 109.
The provision for income taxes decreased $205,000 for the year ended June 30,
1995 compared with the prior year, primarily as a result of a $454,000 reduction
in income before income taxes.
25
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS/COST
The following table sets forth certain information for the periods indicated
regarding average balances of assets and liabilities as well as the total dollar
amounts of interest income from average interest-earning assets and interest
expense on average interest-bearing liabilities and average yields and costs.
Such yields and costs for the periods indicated are derived by dividing income
or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.
<TABLE>
<CAPTION>
Year Ended June 30, Six Months Ended December 31,
--------------------------------------------------------------- --------------------------------
1994 1995 1994
------------------------------ --------------------------------- -------------------------------
Interest Average Interest Average Interest Average
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans.................. $21,050 $1,994 9.47% $21,965 $1,968 8.96% $21,746 $ 978 8.99%
Consumer loans.................. 185 13 7.03 204 13 6.37 217 7 6.45
-------- ------- -------- ------- -------- -----
Total net loans............... 21,235 2,007 9.45 22,169 1,981 8.94 21,963 985 8.97
FHLMC stock(1)................... 13 3 23.08 13 3 23.08 13 2 30.77
Daily interest-bearing
deposits....................... 5,243 168 3.20 4,693 255 5.43 5,207 127 4.88
FHLB stock....................... 289 15 5.19 292 20 6.85 292 10 6.85
-------- ------- -------- ------- ------- ------
Total interest-earning
assets....................... 26,780 $2,193 8.19 27,167 $2,259 8.32 27,475 $1,124 8.18
===== ===== =====
Non-interest-earning assets:
Office properties and
equipment, net................. 83 80 84
Real estate, net................ 168 118 116
Non-interest-earning assets..... 63 110 116
-------- ------- -------
Total assets.................. $27,094 $27,473 $27,791
====== ====== ======
Interest-bearing liabilities:
Passbook accounts............... $ 2,491 $ 66 2.65 $ 2,332 $ 59 2.53 $ 2,490 $ 31 2.49
Money market accounts........... 2,575 72 2.80 2,251 63 2.80 2,607 36 2.76
Certificates of deposit......... 16,354 765 4.68 16,663 840 5.04 16,574 387 4.67
-------- ------- -------- ------- -------- ------
Total interest-bearing
liabilities.................. 21,420 903 4.22 21,246 962 4.53 21,671 454 4.19
-------- -------- --------
Non-interest-bearing liabilities. 208 262 294
------- ------- -------
Total liabilities............. 21,628 21,508 21,965
Retained earnings................ 5,466 5,965 5,826
------- ------- -------
Total liabilities and
retained earnings............ $ 27,094 $ 27,473 $ 27,791
====== ====== ======
<CAPTION>
Six Months Ended December 31,
------------------------------------
1995
-------------------------------
Interest Average
Average and Yield/
Balance Dividends Cost
(Annualized) (Annualized)
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans.................. $22,538 $ 992 8.80%
Consumer loans.................. 166 6 7.23
-------- -----
Total net loans............... 22,704 998 8.79
FHLMC stock(1)................... 13 3 46.15
Daily interest-bearing
deposits....................... 4,299 124 5.77
FHLB stock....................... 292 11 7.53
------- -----
Total interest-earning
assets....................... 27,308 $1,136 8.32
=====
Non-interest-earning assets:
Office properties and
equipment, net................. 72
Real estate, net................ 104
Non-interest-earning assets..... 360
-------
Total assets.................. $27,844
======
Interest-bearing liabilities:
Passbook accounts............... $ 2,113 $ 26 2.46
Money market accounts........... 1,669 25 3.00
Certificates of deposit......... 17,422 534 6.13
-------- ------
Total interest-bearing
liabilities.................. 21,204 585 5.52
--------
Non-interest-bearing liabilities. 617
--------
Total liabilities............. 21,821
Retained earnings................ 6,023
--------
Total liabilities and
retained earnings............ $ 27,844
======
</TABLE>
(table continued on next page)
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, Six Months Ended December 31,
---------------------------------------------------------------- -------------------------------
1994 1995 1994
------------------------------ --------------------------------- -------------------------------
Interest Interest Interest
Average and Yield/ Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
<S> <C> <C> <C>
Net interest income.............. $1,290 $1,297 $670
====== ====== ====
Interest rate spread (2)......... 3.97% 3.79% 3.99%
===== ===== =====
Net interest margin (3).......... 4.82% 4.77% 4.88%
===== ===== =====
Ratio of average interest-earning
assets to average interest-
bearing liabilities............. 125.02% 127.87% 126.78%
======= ======= =======
<CAPTION>
----------------------------------
1995
---------------------------------
Interest
Average and Yield/
Balance Dividends Cost
(Annualized) (Annualized)
<S> <C>
Net interest income.............. $551
====
Interest rate spread (2)......... 2.80%
=====
Net interest margin (3).......... 4.04%
=====
Ratio of average interest-earning
assets to average interest-
bearing liabilities............. 128.79%
=======
</TABLE>
(1) Stated at amortized cost.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
(3) Net yield in interest-earning assets represents net interest income divided
by average interest-earning assets.
27
<PAGE>
YIELDS EARNED AND RATES PAID
The following table sets forth (on a consolidated basis) for the periods and at
the dates indicated, the weighted average yields earned on the Savings Bank's
assets, the weighted average interest rates paid on the Savings Bank's
liabilities, together with the net yield on interest-earning assets.
<TABLE>
<CAPTION>
Six Months Ended At
Year Ended June 30, December 31, December 31,
1994 1995 1994 1995 1995
<S> <C> <C> <C> <C> <C>
Weighted average yield on loan
portfolio................................................... 9.45% 8.94% 8.97% 8.79% 8.65%
Weighted average yield on all
interest-earning assets..................................... 8.19 8.32 8.18 8.32 8.25
Weighted average rate paid on all
savings deposits............................................ 4.22 4.53 4.19 5.52 5.41
Weighted average rate paid on all
interest-bearing liabilities................................ 4.22 4.53 4.19 5.52 5.41
Interest rate spread (spread between
weighted average rate on all interest-
earning assets and all interest-
bearing liabilities)........................................ 3.97 3.79 3.99 2.80 2.84
Net interest margin (net interest income
(expense) as a percentage of average
interest-earning assets).................................... 4.82 4.77 4.88 4.04 --
</TABLE>
28
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net
interest income of the Savings Bank. Information is provided with respect to (i)
effects on interest income attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
Year Ended June 30, 1994 Year Ended June 30, 1995
Compared to June 30, 1993 Compared to June 30, 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans.................. $ (31) $ (171) $ 3 $ (199) $ 87 $ (107) $ (6) $ (26)
Consumer loans.................. (2) 1 (2) (3) 1 (1) -- --
------ ------ ----- ------- ----- ------- ---- -----
Total loans.................... (33) (170) 1 (202) 88 (108) (6) (26)
Investment securities............ -- -- -- -- -- -- --
Daily interest-earning
deposits....................... 46 12 6 64 (18) 117 (12) 87
FHLB stock...................... 1 (1) -- -- -- 5 -- 5
----- ------- ---- ------ ----- ------ ---- -----
Total interest-earning
assets...................... 14 (159) 7 (138) 70 14 (18) 66
----- ------- ---- ------- ----- ------ ----- -----
Interest expense:
Interest-bearing deposits........ 34 (90) (3) (59) 2 56 1 59
----- ------- ----- ------- ----- ------ ---- -----
Total interest-bearing
liabilities.................... 34 (90) (3) (59) 2 56 1 59
----- ------- ----- ------- ----- ------ ---- -----
Net change in net
interest income............... $ (20) $ (69) $ 10 $ (79) $ 68 $ (42) $(19) $ 7
====== ======= ==== ======= ===== ======= ===== =====
<CAPTION>
Six Months Ended December 31, 1995
Compared to December 31, 1994
Increase (Decrease)
Due to
Rate/
Rate Volume Volume Net
---- ------ ------ ---
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans.................. $ 36 $ (21) $ (1) $ 14
Consumer loans.................. (2) 1 -- (1)
----- ----- ---- -----
Total loans.................... 34 (20) (1) 13
Investment securities............ -- 1 -- 1
Daily interest-earning
deposits....................... (22) 23 (4) (3)
FHLB stock...................... -- 1 -- 1
---- ----- ---- ----
Total interest-earning
assets...................... 12 5 (5) 12
---- ----- ----- ----
Interest expense:
Interest-bearing deposits........ (2) 128 5 131
----- ----- ---- ----
Total interest-bearing
liabilities.................... (2) 128 5 131
----- ----- ---- ----
Net change in net
interest income............... $ 14 $(123) $(10) $(119)
==== ====== ===== ======
</TABLE>
29
<PAGE>
ASSET AND LIABILITY MANAGEMENT AND INTEREST RATE RISK
GENERAL. The ability to maximize net interest income depends largely
upon achieving a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would result in a decrease in net
interest income. Conversely, during a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income.
The Savings Bank has perceived its market niche to be that of a
traditional thrift lender that originates fixed rate residential loans for its
portfolio and uses its capital position to absorb the adverse consequences of
the increased interest rate risk associated with this strategy. As an integral
part of this strategy, the Savings Bank has historically concentrated its
lending activity on the origination of long-term, fixed-rate, residential one-
to four-family mortgage loans and commercial real estate and multi-family loans.
As of December 31, 1995, all of the Savings Bank's total loans, net of loans in
process and non-performing loans, were fixed rate loans.
The mismatch between maturities and interest rate sensitivities of
balance sheet items results in interest rate risk. The Savings Bank has a high
level of interest rate risk, compared to many similar sized thrift institutions,
as a result of its policies to make fixed-rate, residential one- to four-family
real estate loans, which are longer term in nature than the short-term
characteristics of its liabilities for customer deposit accounts. See "RISK
FACTORS -- Above Average Interest Rate Risk Associated With Fixed-Rate Loan
Portfolio" and "-- Potential Adverse Impact of Changes in Interest Rates."
The extent of interest rate risk to which the Savings Bank is subject
is monitored by management through an analysis of the institution's interest
sensitivity gap (the difference between the amounts of interest-earning assets
and interest-bearing liabilities repricing during a given time), as well as by
other means. At December 31, 1995, the Savings Bank's interest-bearing
liabilities that were estimated to mature or reprice within one year exceeded
its interest-earning assets with the same characteristics by $4.8 million for
cumulative one-year negative gap to total rate sensitive assets of 55%. An
institution with a significant negative gap, like the Savings Bank, could expect
adverse effects on liquidity, net interest margin and net interest income during
a period of rising interest rates. The Savings Bank has recently adopted a
strategy to extend the term of its liabilities in the form of longer term
certificate accounts and maintain adequate liquidity levels to address its
interest rate risk exposure, however, most of its liabilities are still short
term certificate accounts and as a result does not reflect the implementation of
this new strategy. The Savings Bank's one year interest sensitivity gap as a
percentage of total rate sensitive assets on December 31, 1995 was negative 55%.
At December 31, 1995, the Savings Bank's three year cumulative interest rate
sensitivity gap as a percentage of total interest-earning assets was negative
27% and its five year cumulative interest rate sensitivity gap as a percentage
of total interest-earning assets was negative 9%.
The following table sets forth certain information relating to the
Savings Bank's interest-earning assets and interest-bearing liabilities
estimated to mature or scheduled to reprice within one year at the dates
indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
1995 1995
(Dollars in thousands)
<S> <C> <C>
Interest-earning assets maturing or repricing within one year............... $8,113 $ 8,711
Interest-bearing liabilities maturing
or repricing within one year.............................................. 12,293 13,544
Deficiency of interest-earning assets over interest-bearing
liabilities as a percent of total rate sensitive assets.................... 51.52% 55.48%
Percent of assets to liabilities maturing or repricing
within one year............................................................ 66.00% 64.32%
</TABLE>
30
<PAGE>
The following table presents the Savings Bank's interest sensitivity
gap between interest-earning assets and interest-bearing liabilities at December
31, 1995.
<TABLE>
<CAPTION>
Within Over Over
Six 6 Months 1-3 3-5 5-10
Months to One Year Years Years Years Total
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Residential one- to four-family loans....... $ 2,263 $ 1,976 $ 5,740 $ 3,437 $ 4,947 $18,363
Commercial real estate...................... 73 77 342 407 1,880 2,779
Multi-family................................ -- -- -- -- 161 161
Land........................................ -- -- -- -- 1,095 1,095
Consumer loans.............................. 167 -- -- -- -- 167
Investment securities and interest-
bearing deposits........................... 4,155 -- -- -- -- 4,155
------- -------- -------- -------- -------- --------
Total rate sensitive assets............... $ 6,658 $ 2,053 $ 6,082 $ 3,844 $ 8,083 $26,720
======= ======= ======= ======= ======= =======
Interest-bearing liabilities:
Deposits:
Regular savings............................ $ 193 $ 176 $ 562 $ 366 $ 878 $ 2,175
Money market deposit accounts.............. 860 394 175 83 77 1,589
Certificates of deposit.................... 4,414 7,507 4,484 1,156 -- 17,561
------- ------- ------- ------- ------- -------
Total rate sensitive liabilities.......... $ 5,467 $ 8,077 $ 5,221 $ 1,605 $ 955 $21,325
======= ======= ======= ======= ======= =======
Excess (deficiency) of interest
sensitivity assets over interest
sensitivity liabilities..................... $ 1,191 $(6,024) $ 861 $ 2,239 $ 7,128 $ 5,395
======= ======== ====== ======= ======= =======
Cumulative excess (deficiency) of
interest sensitivity assets................. $ 1,191 $(4,833) $(3,972) $(1,733) $ 5,395 $ 5,395
======= ======== ======== ======== ======= =======
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities......................... 122% 64% 79% 91% 125% 125%
Interest sensitivity gap to
total assets................................ 4% (21)% 3% 8% 25% 19%
Ratio of interest-earning assets to
interest-bearing liabilities............... 122% 25% 116% 240% 846% 125%
Ratio of cumulative gap to
total assets............................... 4% (17)% (14)% (6)% 19% 19%
Interest sensitivity gap to
total rate sensitive assets................. 18% (293)% 14% 58% 88% 20%
Ratio of cumulative gap to
total rate sensitive assets................. 18% (55)% (27)% (9)% 20% 20%
</TABLE>
31
<PAGE>
The Savings Bank's analysis of its interest-rate sensitivity, as
illustrated in the preceding table, incorporates certain assumptions regarding
the amortization of loans and other interest-earning assets and the withdrawal
of deposits. The Savings Bank's interest-rate sensitivity analysis, as
illustrated in the foregoing table, could vary substantially if different
assumptions were used or if actual experience differs from the assumptions used.
The assumptions used in preparing the table are based on market loan prepayment
rates and market deposit decay rates observed by the FHLB-Atlanta on or about
December 31, 1995. The Savings Bank believes that the FHLB-Atlanta assumptions
are a realistic representation of its own portfolio.
NET PORTFOLIO VALUE AND NET INTEREST INCOME ANALYSIS. In addition to
the interest rate gap analysis as discussed above, management monitors the
Savings Bank's interest rate sensitivity through the use of a model which
estimates the change in NPV (net portfolio value) and net interest income in
response to a range of assumed changes in market interest rates. NPV is the
present value of expected cash flows from assets, liabilities, and off-balance
sheet items. The model estimates the effect on the Savings Bank's NPV and net
interest income of instantaneous and permanent 200 and 400 basis point increases
and decreases in market interest rates. The Savings Bank's Board of Directors
has established maximum acceptable decreases in NPV and net interest income for
the various rate scenarios. The following information is presented as of
December 31, 1995.
<TABLE>
<CAPTION>
Change in Net Portfolio Value
Interest Rates
in Basis Points Board
(Rate Shock) Amount $ Change % Change Limit
--------------- ------ -------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
+400 bp $4,230 $(2,508) (37)% (110)%
+200 bp 5,614 (1,124) (17)% (60)%
0 bp 6,738 -- -- --
-200 bp 7,450 712 11% 65%
-400 bp 8,272 1,534 23% 130%
</TABLE>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE. The table below
measures interest rate risk by estimating the change in market value of the
Savings Bank's assets, liabilities, and off-balance sheet contracts in response
to an instantaneous change in the general level of interest rates. The procedure
for measuring interest rate risk was developed to replace the "gap" analysis
(the difference between interest-earning assets and interest-bearing liabilities
that mature or reprice within a specific time period). The model first estimates
the level of the Savings Bank's NPV (market value of assets, less market value
of liabilities, plus or minus the market value of any off-balance sheet items)
under the current rate environment. In general, market values are estimated by
discounting the estimated cash flows of each instrument by appropriate discount
rates. The model then recalculates the Savings Bank's NPV under different
interest rate scenarios. The change in NPV under the different interest rate
scenarios provides a measure of the Savings Bank's exposure to interest rate
risk. The data presented is as of December 31, 1995.
32
<PAGE>
<TABLE>
<CAPTION>
-400 -200 +200 +400
Basis Basis No Basis Basis
Points Points Change Points Points
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Mortgage loans...................... $25,420 $24,201 $23,088 $21,495 $19,684
Non-mortgage loans.................. 167 167 167 166 166
Cash, deposits and
securities......................... 4,794 4,762 4,730 4,699 4,667
Nonperforming loans and
real estate........................ 638 611 586 551 510
Premises and
equipment.......................... 72 72 72 72 72
Other assets........................ 373 373 373 373 373
-------- -------- -------- -------- --------
TOTAL ASSETS........................ $31,464 $30,186 $29,016 $27,356 $25,472
======= ======= ======= ======= =======
LIABILITIES
Deposits............................ $22,419 $21,963 $21,505 $20,969 $20,469
Borrowings.......................... -- -- -- -- --
Other liabilities................... 773 773 773 773 773
-------- -------- -------- -------- --------
TOTAL LIABILITIES................... $23,192 $22,736 $22,278 $21,742 $21,242
------- ------- ------- ------- -------
Net portfolio value................. $ 8,272 $ 7,450 $ 6,738 $ 5,614 $ 4,230
======= ======= ======= ======= =======
Percent change ..................... 22.77% 10.57% --% (16.68)% (37.22)%
</TABLE>
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan repayments and deposit decay, and should not be relied upon
as indicative of actual results. Further, the computations do not reflect any
actions management may undertake in response to changes in interest rates.
In the event of a 200 basis point decrease in interest rates, the
Savings Bank would be expected to experience an 11.0% increase in NPV and a
2.02% decrease in net interest income. In the event of a 200 basis point
increase in interest rates, a 17.0% decrease in NPV and a 2.46% decrease in net
interest income would be expected. Based upon the modelling described above, the
Savings Bank's asset and liability structure results in increases in NPV and
decreases in net interest income in a declining interest rate scenario and
decreases in NPV and decreases in net interest income in a rising interest rate
scenario. However, the amount of change in value of specific assets and
liabilities due to changes in rates is not the same in a rising rate environment
as in a falling rate environment.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
33
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank's primary sources of funds are customer deposits and
proceeds from principal and interest payments on loans. While maturities and
scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The primary investing activity of the Savings Bank is the origination
of fixed-rate mortgage loans. During the year ended June 30, 1995 and the six
months ended December 31, 1995, the Savings Bank originated mortgage loans in
the amounts of $3.7 million and $2.6 million, respectively. Other investing
activities include the purchase of overnight deposits.
The Savings Bank must maintain an adequate level of liquidity to
ensure the availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. During fiscal years 1994 and 1995, the Savings Bank
used its liquidity primarily to fund deposit withdrawals.
From June 30, 1994 to June 30, 1995, deposits at the Savings Bank
decreased from $22.2 million to $21.0 million. Management believes that deposits
decreased during this period as customers withdrew deposits and invested in
non-traditional deposit vehicles, such as annuities, mutual funds and municipal
bonds in response to the low interest rate environment. In addition, in light of
its high liquidity and decreased loan demand, the Savings Bank has not
aggressively sought to attract deposits by increasing rates paid on deposits.
The Savings Bank believes that this strategy helps it to maintain a larger
interest rate spread. Because of its high level of liquidity, the Savings Bank
does not believe that a moderate decrease in deposits will have a significant
impact on its financial condition and results of operations. The Savings Bank
may determine to reduce the outflow of deposits in the future by matching or
exceeding rates offered by its competitors. From June 30, 1995 to December 31,
1995, deposits increased $385,000 to $21.3 million, as, management believes,
customers returned to traditional deposit vehicles in response to higher
short-term interest rates.
At December 31, 1995, certificates of deposit amounted to $17.6
million, or 82.3%, of the Savings Bank's total deposits, including $11.7 million
which were scheduled to mature by December 31, 1996. Historically, the Savings
Bank has been able to retain a significant amount of its maturing deposits.
Management of the Savings Bank believes it can adjust the interest rates of
savings certificates to retain deposits in changing interest rate environments.
The Savings Bank is subject to the Administrator's requirement that
the ratio of liquid assets to total assets equal at least 10%. At December 31,
1995, the Savings Bank's liquidity ratio calculated in accordance with North
Carolina regulations, was approximately 20.82%. The Savings Bank consistently
maintains liquidity levels in excess of regulatory requirements, and believes
this is an appropriate strategy for proper asset and liability management.
The Savings Bank is required to maintain specific amounts of capital
pursuant to FDIC requirements. As of December 31, 1995, the Savings Bank was in
compliance with all regulatory capital requirements which were effective as of
such date with a Tier 1 leverage capital ratio of 21.1%. For a detailed
discussion of regulatory capital requirements, see "HISTORICAL AND PRO FORMA
CAPITAL COMPLIANCE" and "REGULATION -- The Savings Bank -- Capital
Requirements."
34
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting
for Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans. Companies that elect to remain with the existing
accounting are required to disclose in a footnote to the financial statements
pro forma net income and, if presented, earnings per share, as if this statement
had been adopted. The accounting requirements of this statement are effective
for transactions entered into in fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management of the
Savings Bank has not completed an analysis of the potential effects of SFAS No.
123 on its financial condition or results of operations.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. In March 1995, the FASB has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In evaluating
recoverability, if estimated future cash flows, undiscounted and without
interest charges, are less than the carrying amount of the asset, an impairment
loss is recognized. SFAS No. 121 also requires that certain long-lived assets
and certain identifiable intangibles to be disposed of be reported at the lower
of carrying amount or fair value less cost to sell. SFAS No. 121 applies
prospectively for fiscal years beginning after December 15, 1995. Management
does not expect that adoption of SFAS No. 121 will have a material impact on the
Savings Bank's financial statements.
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. In
May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which is effective for fiscal years beginning after
December 31, 1993. SFAS No. 115 expands the required use of fair value
accounting for investments in debt and equity securities, and allows debt
securities to be classified as "held to maturity" and reported in financial
statements at amortized cost only if the reporting entity has the positive
intent and ability to hold those securities to maturity. Furthermore, SFAS No.
115 makes clear that securities that might be sold in response to changes in
market interest rates, changes in the security's prepayment risk, increases in
loan demand, or other similar factors cannot be classified as "held to
maturity." Debt and equity securities held for current resale are classified as
"trading securities." Such securities are reported at fair value, and unrealized
gains and losses on such securities would be included in earnings. Debt and
equity securities not classified as either "held to maturity" or "trading
securities" are classified as "securities available for sale." Such securities
are reported at fair value, and unrealized gains and losses on such securities
are excluded from earnings and reported as a net amount in a separate component
of stockholders' equity. The Savings Bank adopted SFAS No. 115 effective July 1,
1994.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN. In May 1993, the
FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan,"
which became effective for the Savings Bank for the fiscal year beginning July
1, 1995. This statement requires a lender to consider a loan to be impaired if
the lender believes it is probable that it will be unable to collect all
principal and interest due according to the contractual terms of the loan. If a
loan is impaired, the lender will be required to record a loan valuation
allowance equal to the present value of the estimated future cash flows
discounted at the loan's effective rate or at the loan's observable market price
or fair value of the collateral. This accounting change will significantly
change the accounting by lenders presently allowed under SFAS No. 15.
In October 1994, FASB issued SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," which amends
SFAS No. 114 to allow a creditor to use existing methods for
35
<PAGE>
recognizing interest income on impaired loans and eliminates the income
recognition provisions in SFAS No. 114. SFAS No. 118 also requires disclosure of
certain information about the recorded investment in impaired loans and how the
creditor recognizes interest income related to impaired loans. SFAS No. 118
became effective for the Savings Bank for the fiscal year beginning July 1,
1995. The adoption of these statements are not expected to have a material
effect on the Savings Bank's financial condition or results of operations.
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. In
December 1990, the FASB issued SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which was effective for the
Savings Bank for fiscal years beginning after June 30, 1995. At December 31,
1995, SFAS No. 106 had a $44,000 impact on the Savings Bank's financial
condition and results of operations. See "MANAGEMENT OF THE SAVINGS BANK --
Directors' Compensation" and "-- Benefits -- Supplemental Executive
Retirement/Medical Care
Agreements."
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS. In November 1992, FASB issued
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," which
requires accrual of the expected cost of providing post-employment benefits to
an employee and his beneficiaries and covered dependents during the years that
the employee renders the necessary services. Such benefits include salary
continuation, supplemental unemployment benefits, severance benefits, job
training and counseling, and continuation of health care benefits. The effective
date for this statement is for fiscal years beginning after December 15, 1993.
At December 31, 1995, SFAS No. 112 did not have a material impact on the Savings
Bank's financial condition or results of operations.
DISCLOSURES ABOUT FAIR VALUE FINANCIAL INSTRUMENTS. In December 1991,
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," was
issued, which requires disclosure of the fair value of financial instruments,
including assets and liabilities both on-and off-balance sheet, for which it is
practicable to estimate such fail value. Descriptive information pertinent to
estimating the value of financial instruments for which it is not practicable to
estimate fair value would also be required. SFAS No. 107 must be adopted by the
Savings Bank no later than June 30, 1996.
ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. In November 1993, the
American Institute of Certified Public Accountants issued SOP 93-6, which
requires an employer to record compensation expense in an amount equal to the
fair value of shares committed to be released to employees from an employee
stock ownership plan. Assuming shares of Common Stock appreciate in value over
time, the adoption of SOP 93-6 may increase compensation expense relating to the
ESOP to be established in connection with the Conversion as compared with prior
guidance which required the recognition of compensation expense based on the
cost of shares acquired by the ESOP. The effect of SOP 93-6 on net income and
book value per share in fiscal 1996 and future periods cannot be predicted due
to the uncertainty of the fair value of the shares of Common Stock subsequent to
their issuance.
DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES. In December
1994, the Accounting Standards Executive Committee issued SOP 94-6, "Disclosure
of Certain Significant Risks and Uncertainties." This SOP applies to financial
statements prepared in conformity with GAAP by all nongovernmental entities. The
disclosure requirements in SOP 94-6 focus primarily on risks and uncertainties
that could significantly affect the amounts reported in the financial statements
in the near-term functioning of the reporting entity. The risks and
uncertainties discussed in SOP 94-6 stem from the nature of the entity's
operations, from the necessary use of estimates in the preparation of the
entity's financial statements and from significant concentrations in certain
aspects of the entity's operations. SOP 94-6 is effective for financial
statements issued for fiscal years ending after December 15, 1995 and is not
expected to have any impact on the financial position or results of operations
of the Holding Company.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data
presented herein have been prepared in accordance with GAAP, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering the change in the relative purchasing power of
money over time due to
36
<PAGE>
inflation. The primary impact of inflation is reflected in the increased cost of
the Savings Bank's operations. Unlike most industrial companies, virtually all
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates generally have a more significant impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services. See "RISK FACTORS -- Potential Adverse Impact of Changes
in Interest Rates."
RECENT DEVELOPMENTS
THE FOLLOWING TABLES SET FORTH CERTAIN INFORMATION CONCERNING THE
CONSOLIDATED FINANCIAL POSITION AND RESULTS OF OPERATION OF THE SAVINGS BANK AT
THE DATES AND FOR THE PERIODS INDICATED. INFORMATION AT DECEMBER 31, 1995, AND
MARCH 31, 1996, AND FOR EACH OF THE THREE- AND NINE-MONTH PERIODS ENDED MARCH
31, 1995 AND 1996 ARE UNAUDITED, BUT, IN THE OPINION OF MANAGEMENT, CONTAIN ALL
ADJUSTMENTS (NONE OF WHICH WERE OTHER THAN NORMAL RECURRING ENTRIES) NECESSARY
FOR A FAIR PRESENTATION OF THE RESULTS OF SUCH PERIODS. THE SELECTED OPERATING
DATA FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 1996 ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS OF OPERATION FOR THE ENTIRE FISCAL YEAR.
THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO PRESENTED ELSEWHERE IN THIS PROSPECTUS.
<TABLE>
<CAPTION>
At At At
June 30, December 31, March 31,
1995 1995 1996
-------------- --------------- --------
(In thousands)
<S> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets............................................. $27,596 $28,222 $28,358
Loans receivable, net ................................... 22,463 22,925 23,180
Cash, interest-earning deposits
and investment securities............................... 4,254 4,440 4,165
FHLB stock............................................... 291 291 291
Deposits................................................. 20,940 21,325 21,300
Total equity(1).......................................... 6,078 6,054 6,130
Three Months Nine Months
Ended March 31, Ended March 31,
1995 1996 1995 1996
(In thousands)
OPERATING DATA:
Interest income.......................................... $565 $554 $1,689 $1,690
Interest expense on deposits............................. 238 286 692 871
---- ---- ------- -------
Net interest income...................................... 327 268 997 819
Provision for loan losses, net........................... 6 6 18 54
---- ---- ------- -------
Net interest income after provision for loan losses...... 321 262 979 765
Non-interest income...................................... 1 -- 43 4
Non-interest expenses.................................... 129 162 811 755
---- ---- ------- -------
Income before income taxes............................... 193 100 211 14
Income tax expense (benefit)............................. 71 27 70 (4)
---- ---- ------- ---------
Net income............................................... $122 $ 73 $ 141 $ 18
==== ==== ====== =======
37
<PAGE>
At or For the At or For the
Three Months Nine Months
Ended March 31, Ended March 31,
1995 1996 1995 1996
KEY FINANCIAL RATIOS(2):
Return on average assets (net income
divided by average assets)............................... 1.78% 1.04% .68% .13%
Return on average equity (net income
divided by average equity).............................. 8.45 4.92 3.23 .40
Average equity to average assets......................... 21.04 21.12 21.03 21.39
Interest rate spread (difference between average yield on interest-earning
assets and average cost of interest-
bearing liabilities).................................... 3.89 2.73 3.95 2.78
Net interest margin (net interest income
as a percentage of average
interest-earning assets)................................ 4.87 3.93 4.87 4.00
Non-interest expense to average assets................... 1.88 2.31 3.91 3.60
Average interest-earning assets to average
interest-bearing liabilities............................ 127.67 128.49 127.36 127.67
Allowance for loan losses to total
loans receivable at end of period....................... .38 .62 .38 .62
Net charge offs to average outstanding
loans during the period................................. -- -- -- --
Ratio of non-performing assets to
total assets at end of period........................... 2.20 3.40 2.20 3.40
</TABLE>
(1) Consists of retained earnings, substantially restricted, and also
included at December 31, 1995 and March 31, 1996, unrealized gain on
securities available for sale, net.
(2) Annualized where appropriate.
REGULATORY CAPITAL
The following table sets forth the Savings Bank's capital position relative to
its regulatory capital requirements at the date indicated. For a discussion of
the capital standards applicable to the Savings Bank, see "HISTORICAL AND PRO
FORMA CAPITAL COMPLIANCE" and "REGULATION -- The Savings Bank -- Capital
Requirements."
38
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1996
Percent of Adjusted Total
Amount or Risk-Weighted Assets
(In thousands)
<S> <C> <C>
Tier 1 (leverage) capital level.......................... $5,965 21.2%
Tier 1 (leverage) capital requirement.................... 1,123 4.0
----- ----
Excess................................................... $4,842 17.2%
===== ====
Tier 1 risk-adjusted capital level....................... $5,965 46.1%
Tier 1 risk-adjusted capital requirement................. 518 4.0
----- ----
Excess................................................... $5,447 42.1%
===== ====
Total risk-based capital level........................... $6,111 47.2%
Total risk-based capital requirement..................... 1,036 8.0
----- ----
Excess................................................... $5,075 39.2%
===== ====
North Carolina regulatory capital level.................. $6,111 21.8%
North Carolina regulatory capital requirement............ 1,404 5.00
----- ----
Excess................................................... $4,707 16.8%
===== ====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND MARCH 31, 1996
Total assets increased $136,000, from $28.2 million at December 31,
1995, to $28.4 million at March 31, 1996. This increase was primarily
attributable to net loans receivable increasing by $255,000 from $22.9 million
at December 31, 1995 to $23.2 million at March 31, 1996. The increase was
primarily the result of increased loan originations in excess of prepayments and
amortizations of existing loans. The increase in loans was offset by a decrease
in interest-earning deposits with the FHLB-Atlanta.
Total liabilities increased $60,000, or .3%, from December 31, 1995 to
March 31, 1996. The increase was comprised of a $25,000 increase in savings
deposits and a $35,000 increase in accrued expenses.
Total equity increased $76,000, or 1.3%, from $6.05 million at December
31, 1995 to $6.13 million at March 31, 1996. The increase in equity was due
primarily to net income of $73,000 for the three months ended March 31, 1996,
and also by a $3,000 increase in the appreciation in available-for-sale
securities.
NON-PERFORMING ASSETS AND DELINQUENCIES
At March 31, 1996, the Savings Bank had $880,000 of loans accounted for on a
non-accrual basis ($738,500 in residential one- to four-family loans, $9,500 in
commercial real estate loans, and $132,000 in land loans) compared to $618,000
at December 31, 1995. The increase in non-accrual loans was primarily the result
of the declaration of bankruptcy by a borrower of a residential one- to
four-family loan with an outstanding principal balance of $225,000 at March 31,
1996. The Savings Bank had no accruing loans contractually past due 90 days or
more at March 31, 1996. Classified assets at March 31, 1996 totalled $962,000
($49,000 classified as loss and $913,000 classified as substandard) compared to
$700,000 at December 31, 1995. Real estate owned at March 31, 1996 totalled
$82,000, which was unchanged from December 31, 1995. The Savings Bank had no
troubled debt restructurings at March 31, 1996.
The allowance for loan losses was $146,000 at March 31, 1996. There were no
charge offs for the three months and nine months ended March 31, 1996,
respectively.
39
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses
by category at March 31, 1996.
<TABLE>
<CAPTION>
Percent of
As a Percent Loans in Each
of Outstanding Category to
Amount Loans in Category Total Loans
(In thousands)
<S> <C> <C> <C>
Real estate mortgage:
Residential one- to four-family................ $ 92 .48% 82.08 %
Commercial..................................... 54 1.97 11.68
Multi-family................................... -- -- .68
Land........................................... -- -- 4.81
Consumer......................................... -- -- .75
------ -------
Total allowance for loan losses................ $146 100.00%
==== ======
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND
1996
GENERAL. Net income was $73,000 for the three months ended March 31,
1996, compared to $122,000 for the three months ended March 31, 1995. This was
the result of an increase in interest expense on deposits and non-interest
expense as well as a decline in total interest income. Net interest income was
$268,000 for the three months ended March 31, 1996, compared to $327,000 for the
comparable period in 1995, an 18.0% decline.
INTEREST INCOME. Interest income for the three months ended March 31,
1996, was $554,000 compared to $565,000 for the three months ended March 31,
1995, a decrease of $11,000. The decrease in interest income of $11,000 between
the periods was primarily the result of a decrease in the average balance on
interest-earning deposits of $515,000 along with a 37 basis point decrease in
average yield from 5.82% during the three months ended March 31, 1995, to 5.45%
during the three months ended March 31, 1996. The Savings Bank's primary
investment during this period was FHLB overnight deposits.
INTEREST EXPENSE. Interest expense on deposits increased 20.2% from
$238,000 for the three months ended March 31, 1995 to $286,000 for the three
months ended March 31, 1996, as the Savings Bank increased deposit rates on its
certificates of deposit in response to its competition. The increase in interest
expense was primarily attributable to a 99 basis point increase in average cost
of certificates of deposit along with a $806,000 increase in the average
balance.
PROVISION FOR LOAN LOSSES. During both the three months ended March 31,
1995 and 1996, the provision for loan losses was $6,000. The allowance for loan
losses to total loans was 0.38% and 0.62% at March 31, 1995 and 1996,
respectively. The amount of the provision and allowance for loan losses is
influenced by current economic conditions, actual loss experience, industry
trends and other factors such as the adverse economic conditions, including
changes in real estate values in the Savings Bank's market area. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Savings Bank's allowance for loan losses. Such agencies
may require the Savings Bank to provide additions to the allowance based upon
judgments different from management. Although management uses the best
information available, future adjustments to the allowance may be necessary due
to economic, operating, regulatory and other conditions that may be beyond the
Savings Bank's control.
NON-INTEREST INCOME. Non-interest income decreased from $1,000 for the
three months ended March 31, 1995 to $0 for the three months ended March 31,
1996, primarily because of a reduction in miscellaneous operating income.
40
<PAGE>
NON-INTEREST EXPENSE. Non-interest expense increased from $129,000 to
$162,000 for the three months ended March 31, 1995 and 1996, respectively,
primarily as a result of a $28,000 increase in accrued employee benefits.
PROVISION FOR INCOME TAX. The provision for income tax decreased from
$71,000 for the three months ended March 31, 1995 to $27,000 for the same period
in 1996 as a result of a $93,000 reduction in income before income taxes.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 1995 AND
1996
GENERAL. Net income was $18,000 for the nine months ended March 31,
1996, compared to $141,000 for the nine months ended March 31, 1995. This was
the result of an increase in interest expense on deposits. Net interest income
was $819,000 for the nine months ended March 31, 1996, compared to $997,000 for
the earlier period, a 17.9% decline.
INTEREST INCOME. Interest income for the nine months ended March 31,
1995 and 1996, was approximately $1.7 million for both periods.
INTEREST EXPENSE. Interest expense on deposits increased 25.9% from
$692,000 for the nine months ended March 31, 1995, to $871,000 for the nine
months ended March 31, 1996 as the Savings Bank raised its deposit rates on
certificates of deposit in response to competition. The increase in interest
expense was primarily attributable to a 116 basis point increase in average cost
of certificates of deposit as well as an $810,000 increase in the average
balance.
PROVISION FOR LOAN LOSSES. During the nine months ended March 31, 1996,
the provision for loan losses was $54,000, compared to $18,000 for the nine
months ended March 31, 1995, an increase of $36,000 which is attributable to an
increase in non-performing loans. The allowance for loan losses to total loans
was 0.38% and 0.62% at March 31, 1995 and 1996, respectively.
NON-INTEREST INCOME. Non-interest income decreased from $43,000 for the
nine months ended March 31, 1995 to $4,000 for the nine months ended March 31,
1996, primarily because of a gain on disposal of real estate owned in 1995 with
no comparable transaction in 1996.
NON-INTEREST EXPENSE. Non-interest expense decreased $56,000 from
$811,000 to $755,000 for the nine months ended March 31, 1995 and 1996,
respectively, primarily as a result of a $73,000 reduction in employee benefits
expense offset by minor increases in other non-interest expenses.
PROVISION FOR INCOME TAX. The provision for income tax was $70,000 for
the nine months ended March 31, 1995 and a benefit of $4,000 for the same period
in 1996 as a result of a $197,000 reduction in income before income taxes.
BUSINESS OF THE HOLDING COMPANY
GENERAL
The Holding Company was organized as a North Carolina business
corporation at the direction of the Savings Bank in February 1996 for the
purpose of becoming a holding company for the Savings Bank upon completion of
the Conversion. Upon completion of the Conversion, the Savings Bank will be a
wholly-owned subsidiary of the Holding Company.
41
<PAGE>
BUSINESS
Prior to the Conversion, the Holding Company will not engage in any
significant operations. Upon completion of the Conversion, the Holding Company's
sole business activity will be the ownership of all of the outstanding capital
stock of the Savings Bank. In the future, the Holding Company may acquire or
organize other operating subsidiaries, although there are no current plans,
arrangements, agreements or understandings, written or oral, to do so.
Initially, the Holding Company will neither own nor lease any property
but will instead use the premises, equipment and furniture of the Savings Bank
with the payment of appropriate rental fees, as required by applicable law.
As the holding company for the Savings Bank, the competitive
conditions applicable to the Holding Company will be the same as those
confronting the Savings Bank. See "BUSINESS OF THE SAVINGS BANK - -
Competition."
BUSINESS OF THE SAVINGS BANK
GENERAL
The Savings Bank operates as a community oriented financial institution
dedicated to serving the needs of its customers in its market area. The Savings
Bank's business consists primarily of attracting deposits from the general
public and using those funds to originate residential real estate loans.
MARKET AREA
Spruce Pine, North Carolina, is a community of approximately 2,000
people located in Mitchell County, approximately 50 miles northeast of
Asheville, North Carolina. The Savings Bank focuses primarily on serving
customers located in Mitchell and Yancey counties, North Carolina and to a
limited extent, customers in Avery and McDowell counties, North Carolina. The
population within the zip code encompassing Spruce Pine, which covers much of
the Savings Bank's primary market area, is approximately 15,000. Because it
operates in a relatively small market area, the Savings Bank's loan and deposit
growth prospects are limited. The major employers in the Savings Bank's market
area include the Mitchell County Board of Education, Mitchell County Government,
Blue Ridge Hospital System, Inc., Henredon Furniture, and Felspar Mining. The
Savings Bank faces intense competition from many financial institutions for
deposits and loan originations. See "-- Competition" and "RISK FACTORS --
Dependence on Local Economy."
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Savings Bank is the
origination of mortgage loans to enable borrowers to purchase existing one- to
four-family homes. To a significantly lesser extent, the Savings Bank also
originates loans secured by multi-family properties, land, churches, and
selected commercial properties, and consumer loans. The Savings Bank's net loans
receivable totalled approximately $22.9 million at December 31, 1995,
representing approximately 81.2% of consolidated total assets.
42
<PAGE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
----------------------------------------------------
1994 1995 1995
---------------------- ----------------------- --------------
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential one- to four-family....... $18,229 82.33% $18,600 81.86% $19,013 81.83%
Commercial real estate................ 2,681 12.11 2,666 11.73 2,789 12.00
Multi-family.......................... 173 .78 166 .73 161 .69
Land.................................. 871 3.93 1,143 5.03 1,105 4.76
-------- ------- -------- ------- --------- -------
Total mortgage loans................ 21,954 99.15 22,575 99.35 23,068 99.28
Consumer loans........................ 188 .85 148 .65 167 .72
-------- -------- -------- -------- -------- --------
Total loans....................... 22,142 100.00% 22,723 100.00% 23,235 100.00%
------- ====== ------- ====== ------- ======
Less:
Undisbursed portion
of loans in process................. 108 44 30
Unamortized loan origination
fees, net or direct costs........... 113 116 118
Allowance for loan losses............ 68 92 140
Allowance for uncollected interest... 10 8 22
--------- --------- ---------
Total loans receivable, net....... $21,843 $22,463 $22,925
======= ======= =======
</TABLE>
RESIDENTIAL ONE- TO FOUR-FAMILY LENDING. The primary lending activity
of the Savings Bank is the origination of mortgage loans to enable borrowers to
purchase existing one- to four-family homes. Management believes that this
policy of focusing on one- to four-family residential mortgage loans located in
its market area has been successful in contributing to interest income while
keeping delinquencies and losses to a minimum. At December 31, 1995, $19.0
million, or 81.8%, of the Savings Bank's total gross loan portfolio, consisted
of loans secured by one- to four-family residential real estate. As of such
date, the average balance of the Savings Bank's permanent residential one- to
four-family mortgage loans was approximately $33,500. The Savings Bank presently
originates for retention in its portfolio fixed-rate mortgage loans with terms
of 16 years. The Savings Bank charges a 1% origination fee on its residential
one- to four-family mortgage loans.
Virtually all of the Savings Bank's residential mortgage loans are not
readily saleable in the secondary market because they are not originated in
accordance with the purchase requirements of the FHLMC or the FNMA. Although
such loans satisfy the Savings Bank's underwriting requirements, they are
"non-conforming" because they do not satisfy minimum loan amount requirements,
acreage limits, or various other requirements imposed by the FHLMC and FNMA.
Accordingly, the Savings Bank's non-conforming loans could be sold only after
incurring certain costs and/or discounting the purchase price. The Savings Bank
currently does not intend to sell its loans. The Savings Bank has historically
found that its origination of non-conforming loans has not resulted in a
materially higher amount of nonperforming loans. In addition, the Savings Bank
believes that these loans satisfy a need in the Savings Bank's local community.
As a result, the Savings Bank intends to continue to originate such
non-conforming loans. See "RISK FACTORS -- Risks Associated With Nonconforming
Loans."
While fixed-rate, single-family residential real estate loans are
normally originated with 16 year terms, such loans typically remain outstanding
for substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all mortgage loans in the Savings
Bank's loan portfolio contain due-on-sale clauses providing that the Savings
Bank may declare the unpaid amount due and payable upon the sale of the property
securing the loan.
43
<PAGE>
Typically, the Savings Bank enforces these due-on-sale clauses to the extent
permitted by law and as business judgment dictates. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
The Savings Bank requires fire and extended coverage casualty
insurance be maintained on all of its real estate secured loans.
The Savings Bank's lending policies generally limit the maximum
loan-to-value ratio on mortgage loans secured by owner-occupied properties to
66-2/3% of the lesser of the appraised value or the purchase price. Loans
originated by the Savings Bank on new one- to four-family properties which are
less than five years old may have an increased loan-to-value ratio of 80% of the
lesser of the purchase price. The maximum loan-to-value ratio on mortgage loans
secured by non-owner-occupied properties is generally 66-2/3%.
COMMERCIAL REAL ESTATE LENDING. Historically, the Savings Bank has
engaged in limited amounts of commercial real estate lending in its primary
market area and expects to continue that practice upon consummation of the
Conversion. Commercial real estate loans are made for terms up to 15 years,
amortized monthly, and at fixed interest rates. Loan-to-value ratios generally
do not exceed 50% of appraised property value. At December 31, 1995, such loans
totalled $2.8 million, or 12.0%, of total gross loans.
At December 31, 1995, a commercial real estate loan relationship
aggregating $825,000 represented the Savings Bank's largest loan-to-one borrower
relationship at that date. The relationship consisted of five separate loans
made to the corporate owner and operator of a local commercial property. At
December 31, 1995, this aggregate loan relationship was performing according to
its terms.
At December 31, 1995, the second and third largest commercial real
estate loans had outstanding balances of $564,000 and $437,000, respectively,
and were secured by first mortgages on commercial properties located in the
Savings Bank's market area. Each loan was performing according to its terms at
December 31, 1995.
Loans secured by commercial real estate generally involve larger
principal balances and greater risks than one- to four-family residential
mortgage loans. Payments on such loans often depend on the successful operation
or management of the underlying properties and may be subject to a greater
extent to adverse conditions in the real estate market or the economy. The
Savings Bank seeks to minimize these risks in a variety of ways, including
limiting the size of such loans and the maximum loan-to-value ratio to 50%, and
strictly scrutinizing the financial condition of the borrower, the quality of
the collateral, and the management of the property securing the loan. The
Savings Bank also obtains loan guarantees from financially capable parties based
on a review of personal financial statements. All of the properties securing the
Savings Bank's commercial real estate loans are inspected by the Savings Bank's
lending personnel before origination. The Savings Bank also obtains appraisals
on each property in accordance with applicable regulations and, if applicable,
an environmental audit.
At December 31, 1995, the Savings Bank had two commercial real estate
loans outstanding secured by local properties used in petroleum-related
activities. Although the Savings Bank is unaware of any underground petroleum
contamination at such properties, no assurances can be given that such
contamination does not, in fact, exist or that it will not arise in the future.
Under current law, the Savings Bank could be liable for the cleanup costs
associated with such contamination should it have to foreclose on the properties
or take other actions in the event of borrower default. Such costs, if any,
often exceed the value of the collateral property. See "REGULATION -- The
Savings Bank -- Environmental Issues Associated With Real Estate Lending." Such
loans were performing according to their terms at December 31, 1995.
MULTI-FAMILY REAL ESTATE LENDING. The Savings Bank has historically
engaged in a limited amount of multi-family real estate lending. The Savings
Bank does not actively solicit multi-family real estate loans as there are a
limited number multi-family properties in its market area. At December 31, 1995,
the Savings Bank had three
44
<PAGE>
multi-family loans in the aggregate amount of $161,000. The risks associated
with multi-family lending are substantially the same as those associated with
commercial lending discussed above.
LAND LENDING. The Savings Bank originates loans secured by farm
residences and combinations of farm residences and farm real estate. The Savings
Bank also originates loans for the acquisition of land upon which the purchaser
can then build or upon which the purchaser makes improvements necessary to build
upon or to sell as improved lots. At December 31, 1995, the Savings Bank's land
loan portfolio totalled $1.1 million, or 4.8%, of total gross loans.
Loans secured by farm real estate generally involve greater risks than
one- to four-family residential mortgage loans. Payments on loans secured by
such properties, in some instances, may depend on farm income from the
properties. To address this risk, the Savings Bank does not consider farm income
when qualifying borrowers. In addition, such loans are more difficult to
evaluate. If the estimate of value proves to be inaccurate, in the event of
default and foreclosure, the Savings Bank may be confronted with a property the
value of which is insufficient to assure full repayment.
CONSUMER LENDING. Consumer lending has traditionally been a small part
of the Savings Bank's business. Consumer loans generally have shorter terms to
maturity and higher interest rates than mortgage loans. At December 31, 1995,
the Savings Bank's consumer loan portfolio consisted entirely of loans secured
by deposit accounts, which totalled $167,000, or 0.7%, of total gross loans. The
interest rate charged on such loans is generally 2% above the interest rate
earned on the underlying deposit account. Deposit account loans are payable in
monthly payments of principal and interest or in a single payment.
MATURITY OF LOAN PORTFOLIO. The following table sets forth certain
information at December 31, 1995 regarding the dollar amount of loans maturing
in the Savings Bank's portfolio based on their contractual terms to maturity,
but does not include scheduled payments or potential prepayments. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Loan balances do not include
undisbursed loan proceeds, unearned discounts, unearned income and allowance for
loan losses.
<TABLE>
<CAPTION>
After After After
3 Years 5 Years 10 Years
Due at December 31, Through Through Through
1996 1997 1998 5 Years 10 Years 15 Years Total
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Residential one- to
four-family.................. $ 7 $14 $53 $200 $2,613 $16,126 $19,013
Commercial real estate......... -- -- -- 12 523 2,254 2,789
Multi-family................... -- -- -- -- 22 139 161
Land loans..................... -- -- -- 4 91 1,010 1,105
Consumer loans................. 167 -- -- -- -- -- 167
---- ---- ---- ------ -------- --------- --------
Total loans............... $174 $14 $53 $216 $3,249 $19,529 $23,235
==== === === ==== ====== ======= =======
</TABLE>
45
<PAGE>
The following table sets forth the dollar amount of all loans due after
December 31, 1996, all of which have fixed interest rates. The Savings Bank does
not originate adjustable rate loans.
Fixed
Rates
(In thousands)
Residential one- to
four-family................... $19,006
Commercial real estate.......... 2,789
Multi-family.................... 161
Land loans...................... 1,105
Consumer loans.................. --
----------
Total...................... $23,061
=======
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans is substantially less than
their contractual terms because of prepayments. In addition, due-on-sale clauses
on loans generally give the Savings Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates.
LOAN SOLICITATION AND PROCESSING. Loan originations are obtained from a
variety of sources, including walk-in customers, and referrals from attorneys,
builders and realtors. Upon receipt of a loan application from a prospective
borrower, a credit report and other data are obtained to verify specific
information relating to the loan applicant's employment, income and credit
standing. An appraisal of the real estate offered as collateral generally is
undertaken by an appraiser retained by the Savings Bank and certified by the
State of North Carolina.
All loans are approved by the President, Calvin F. Hall, Mr. Ballew and
Mrs. Wilson, and subsequently reviewed and ratified by the Board of Directors.
Interest rates are subject to change if the approved loan is not closed within
the time of the commitment. Management of the Savings Bank believes its local
decision-making capabilities and the accessibility of its senior officers is an
attractive quality to customers within its market area. The Savings Bank's loan
approval process allows consumer loans to be approved in one or two days and
mortgage loans to be approved in approximately 14 days and closed in 30 days.
LOAN ORIGINATIONS. During the year ended June 30, 1995 and the six
months ended December 31, 1995, the Savings Bank's total gross mortgage loan
originations were $3.7 million and $2.6 million, respectively. Consistent with
its asset/liability management strategy, the Savings Bank's policy has been to
retain in its portfolio all of the loans that it originates. See "RISK FACTORS
-- Risks Associated with Nonconforming Loans."
46
<PAGE>
The following table shows total loans originated and repaid during the
periods indicated. No loans were purchased or sold during the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
------------------- ------------------
1994 1995 1994 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Total mortgage loans at beginning of period.......... $20,790 $21,954 $21,954 $22,575
Loans originated:
Residential one- to four-family.................... 8,455 3,033 1,221 2,324
Commercial real estate.............................. 1,193 223 93 213
Land loans.......................................... 347 394 290 21
-------- -------- ------- ---------
Total loans originated............................ 9,995 3,650 1,604 2,558
-------- -------- ------- --------
Mortgage loan principal repayments................... (8,831) (3,029) (1,466) (2,065)
Net loan activity.................................... 1,164 621 138 493
-------- -------- -------- --------
Total gross mortgage loans
at end of period.................................... $21,954 $22,575 $22,092 $23,068
======= ======= ======= =======
</TABLE>
LOAN ORIGINATION AND OTHER FEES. The Savings Bank, in some instances,
receives loan origination fees. Loan fees are a percentage of the principal
amount of the mortgage loan which are charged to the borrower for funding the
loan. The amount of fees charged by the Savings Bank is generally 1%, except on
loans made to churches for which the Savings Bank does not charge any loan
origination fees. Current accounting standards require fees received (net of
certain loan origination costs) for originating loans to be deferred and
amortized into interest income over the contractual life of the loan. Net
deferred fees or costs associated with loans that are prepaid are recognized as
income at the time of prepayment. The Savings Bank had $118,000 of net deferred
mortgage loan fees at December 31, 1995.
NONPERFORMING ASSETS AND DELINQUENCIES. The Savings Bank does not
assess late fees or penalty charges on delinquent loans. All loan payments are
due on the first day of the month; however, the borrower is given the entire
month to make the loan payment. When a mortgage loan borrower fails to make a
required payment when due, the Savings Bank institutes collection procedures.
The first notice is mailed to the borrower 30 days after the date the payment is
due and, if necessary, a second written notice follows within 30 days thereafter
giving the borrower 15 days to respond and correct the delinquency. Attempts to
contact the borrower by telephone generally begin soon after the first notice is
mailed to the borrower. If a satisfactory response is not obtained, continuous
follow-up contacts are attempted until the loan has been brought current. Before
the 90th day of delinquency, attempts to interview the borrower, preferably in
person, are made to establish (i) the cause of the delinquency, (ii) whether the
cause is temporary, (iii) the attitude of the borrower toward the debt, and (iv)
a mutually satisfactory arrangement for curing the default.
If by the 91st day of delinquency, or sooner if the borrower is
chronically delinquent and all reasonable means of obtaining payment on time
have been exhausted, foreclosure is initiated according to the terms of the
security instrument and applicable law. Interest income on loans is reduced by
the full amount of accrued and uncollected interest.
When a consumer loan borrower fails to make a required payment on a
consumer loan by the payment due date, the Savings Bank institutes the same
collection procedures as for its mortgage loan borrowers.
47
<PAGE>
The Savings Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent by more than 30
days, the status on all loans currently in foreclosure, and the status of all
foreclosed and repossessed property owned by the Savings Bank.
The following table sets forth information with respect to the Savings
Bank's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------------
1994 1995 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential one- to four-family............. $170 $258 $597
Commercial.................................. -- 10 9
Multi-family................................ -- -- --
Land........................................ 8 11 12
Consumer........................................ -- -- --
------ ------ ------
Total....................................... 178 279 618
----- ----- -----
Accruing loans which are contractually past
due 90 days or more.............................. -- -- --
------ ------ ------
Total of nonaccrual and 90 days
past due loans................................ 178 279 618
Real estate owned................................. 136 116 82
---- ---- -----
Total nonperforming assets..................... $314 $395 $700
==== ==== ====
Total loans delinquent 90 days or more to
net loans....................................... .81% 1.24% 2.70%
Total loans delinquent 90 days or more to
total assets.................................... .63 1.01 2.19
Total nonperforming assets to total assets........ 1.12 1.43 2.48
</TABLE>
Interest income, which would have been recorded for the year ended June
30, 1995 and the six months ended December 31, 1995 had nonaccruing loans been
current in accordance with their original terms, amounted to approximately
$8,000 and $22,000, respectively. The amount of interest included in the results
of operations on such loans for the year ended June 30, 1995 and the six months
ended December 31, 1995 amounted to approximately $37,000 and $18,000,
respectively.
REAL ESTATE OWNED. Real estate acquired by the Savings Bank as a result
of foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at the lower of its
cost, which is the unpaid principal balance of the related loan plus foreclosure
costs, or fair market value. Subsequent to foreclosure, the property is carried
at the lower of the foreclosed amount or fair value, less estimated selling
costs.
At December 31, 1995, the Savings Bank had $82,000 of real estate
owned, net of allowance for losses of $10,000, which consisted of a one- to
four-family property and a commercial property. The one- to four-family property
consists of approximately five undeveloped acres located in Bakersville, North
Carolina. This property was acquired in 1991 and at December 31, 1995 had a net
book value of $25,000. This property has been listed for sale
48
<PAGE>
since 1991. The commercial property is a vacant retail store, approximately
8,520 square feet in size, located in Spruce Pine, North Carolina. This property
was acquired in 1993 and at December 31, 1995 had a net book value of $47,000.
This property has been listed for sale since 1993.
ASSET CLASSIFICATION. Applicable regulations require that each insured
institution review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, regulatory examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. These allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities and the risks associated with particular
problem assets. When an insured institution classifies problem assets as loss,
it charges off the balances of the asset. The Savings Bank's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the FDIC and the Administrator which can order the
establishment of additional loss allowances.
The aggregate amounts of the Savings Bank's classified assets (as
determined by the Savings Bank), and of the Savings Bank's general and specific
loss allowances and charge-offs for the dates indicated, were as follows:
<TABLE>
<CAPTION>
At June 30, At December 31,
1994 1995 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loss........................................ $ 8 $ 13 $ 33
Doubtful.................................... -- -- --
Substandard assets(1)....................... 361 454 667
Special mention............................. -- -- --
General loss allowances..................... 68 92 140
Specific loss allowances (2)................ -- 5 10
Charge-offs................................. -- -- --
</TABLE>
(1) Management attributes the increase in substandard assets between June
30, 1994 and December 31, 1995 primarily to a borrower who declared
bankruptcy and had a loan from the Savings Bank secured by a single
family residence.
(2) Real estate owned.
ALLOWANCE FOR LOAN LOSSES. The Savings Bank has established a
systematic methodology for the determination of provisions for loan losses. The
methodology is set forth in a formal policy and takes into consideration the
need for an overall general valuation allowance as well as specific allowances
assigned to individual loans.
In originating loans, the Savings Bank recognizes that losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. The Savings Bank increases its allowance
for loan losses by charging provisions for loan losses against the Savings
Bank's income.
49
<PAGE>
The general valuation allowance is maintained to cover losses inherent
in the portfolio of performing loans and is generally based on mortgage loans
which consist primarily of single-family residences. Management reviews the
adequacy of the allowance at least quarterly based on management's assessment of
current economic conditions, past loss and collection experience, and risk
characteristics of the loan portfolio. Specific valuation allowances are
established to absorb losses on loans for which full collectibility may not be
reasonably assured. The amount of the allowance is based on the estimated value
of the collateral securing the loan and other analyses pertinent to each
situation. No allowance is maintained for consumer loans since the only
non-mortgage loans held by the Savings Bank are on savings accounts. Generally,
a provision for losses is charged against income quarterly to maintain the
allowances.
At December 31, 1995, the Savings Bank had an allowance for loan losses
of $140,000. Management believes that the amount maintained in the allowances
will be adequate to absorb losses inherent in the portfolio. Although management
believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations.
While the Savings Bank believes it has established its existing
allowance for loan losses in accordance with GAAP, there can be no assurance
that regulators, in reviewing the Savings Bank's loan portfolio, will not
request the Savings Bank to increase significantly its allowance for loan
losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing
allowance for loan losses is adequate or that substantial increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect the Savings Bank's financial condition and results of
operations.
The following table sets forth an analysis of the Savings Bank's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to current
income.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
----------------------- -----------------
1994 1995 1994 1995
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Allowance at beginning of period....... $44 $68 $68 $ 92
Provision for loan losses.............. 24 24 12 48
Recoveries............................. -- -- -- --
Charge-offs............................ -- -- -- --
---- ---- ---- ----
Balance at end of period........... $68 $92 $80 $140
=== === === ====
Ratio of allowance to total
loans outstanding at the end
of the period......................... .31% .40% .36% .60%
Ratio of net charge-offs to
average loans outstanding
during the period..................... -- -- -- --
Ratio of allowance to
non-performing loans.................. 38.20 32.97 36.87 22.65
</TABLE>
50
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At June 30,
1994 1995
------------------------------------ ------------------------------------------
As a % % of As a % % of
of Out- Loans in of Out- Loans in
standing Category standing Category
Loans in to Total Loans in to Total
Amount Category Loans Amount Category Loans
------ -------- -------- ------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate -- mortgage:
Residential one- to
four-family..................... $34 0.19% 82.33% $52 0.28% 81.86%
Commercial........................ 34 1.27 12.11 40 1.50 11.73
Multi-family...................... -- -- .78 -- -- 0.73
Land.............................. -- -- 3.93 -- -- 5.03
Consumer............................ -- -- 0.85 -- -- 0.65
--- ------- --- -------
Total allowance for loan
losses......................... $68 100.00% $92 100.00%
=== ====== === ======
<CAPTION>
At December 31,
1995
----------------------------------------
As a % % of
of Out- Loans in
standing Category
Loans in to Total
Amount Category Loans
------ -------- -----
<S> <C> <C> <C>
Real estate -- mortgage:
Residential one- to
four-family..................... $90 0.47% 81.83%
Commercial........................ 50 1.79 12.00
Multi-family...................... -- -- 0.69
Land.............................. -- -- 4.76
Consumer............................ -- -- 0.72
--- -------
Total allowance for loan
losses......................... $140 100.00%
==== ======
</TABLE>
51
<PAGE>
INVESTMENT ACTIVITIES
The Savings Bank is permitted under federal and state law to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and of state and municipal governments, deposits at
the FHLB-Atlanta, certificates of deposit of federally insured institutions,
certain bankers' acceptances and federal funds. Subject to various restrictions,
the Savings Bank may also invest a portion of its assets in commercial paper and
corporate debt securities. Savings institutions like the Savings Bank are also
required to maintain an investment in FHLB-Atlanta stock.
The Savings Bank is required under North Carolina regulations to
maintain a minimum amount of liquid assets. At December 31, 1995, the Savings
Bank's regulatory liquidity was 15.73%, which is significantly in excess of the
10% required by North Carolina regulations. See "REGULATION -- The Savings Bank
-- Liquidity," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
As of December 31, 1995, the Savings Bank's investment securities
portfolio consisted entirely of interest-earning deposits at other banks,
FHLB-Atlanta stock and FHLMC stock. At December 31, 1995, the Savings Bank's
investment in FHLMC stock and FHLB-Atlanta stock totalled $13,066 and $291,000,
respectively. The market value of the Savings Bank's investment portfolio
amounted to $493,000, $520,000 and $570,000 at June 30, 1994 and 1995 and
December 31, 1995, respectively.
The Holding Company and the Savings Bank may invest a portion of the
net proceeds from the Offerings in short term U.S. government and agency
obligations. See "USE OF PROCEEDS."
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and loan repayments are the major sources of the
Savings Bank's funds for lending and other investment purposes. Scheduled loan
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and money market conditions. Borrowings through the FHLB-Atlanta may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources; however, the Savings Bank has never borrowed any funds
from the FHLB-Atlanta.
DEPOSIT ACCOUNTS. Substantially all of the Savings Bank's depositors
are residents of North Carolina. Deposits are attracted from within the Savings
Bank's market area through the offering of a broad selection of deposit
instruments, including money market deposit accounts, regular savings accounts
and certificates of deposit. Deposit account terms vary, according to the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate, among other factors. In determining the terms of its deposit
accounts, the Savings Bank considers current market interest rates,
profitability to the Savings Bank, matching deposit and loan products and its
customer preferences and concerns.
The Savings Bank has recently adopted a strategy to extend the term of
its liabilities in the form of longer term certificate accounts and maintain
adequate liquidity levels to address its interest rate risk exposure. The
implementation of such strategy, however, is not reflected in the Savings Bank's
recent financial data as most of its liabilities are still in the form of short
term certificate accounts. See "RISK FACTORS -- Potential Adverse Impact of
Changes in Interest Rates."
At December 31, 1995 the Savings Bank had $17.6 million of
certificates of deposit. The Savings Bank does not solicit brokered deposits and
believes that its jumbo certificates of deposit, which represented 24.4% of
total deposits at December 31, 1995, present similar interest rate risk to its
other deposit products.
52
<PAGE>
In the unlikely event the Savings Bank is liquidated after the
Conversion, depositors will be entitled to full payment of their deposit
accounts prior to any payment being made to the Holding Company, as the sole
stockholder of the Savings Bank. See "THE CONVERSION -- Effects of Conversion to
Stock Form on Depositors and Borrowers of the Savings Bank -- Liquidation
Rights."
The following table sets forth information concerning the Savings
Bank's time deposits and other interest-bearing deposits at December 31, 1995.
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Term Checking and Savings Deposits Amount Balance Deposits
------------- ------ ----------------------------- ------- ------- --------
(In thousands)
<C> <C> <C> <C>
2.75% -- Money Market accounts $1,000 $1,589 7.45%
2.50 -- Savings accounts 25 2,175 10.20
Certificates of Deposit
6.50 -- Fixed-term, fixed-rate (1) -- 11 .05
7.50 -- Fixed-term, fixed-rate (1) -- 91 .43
8.00 -- Fixed-term, fixed-rate (1) -- 18 .08
4.50 6 months Fixed-term, fixed-rate 2,500 2,882 13.51
4.65 12 months Fixed-term, fixed-rate 2,500 3,663 17.18
4.75 18 months Fixed-term, fixed-rate 500 1,022 4.79
4.95 30 months Fixed-term, fixed-rate 500 1,065 4.99
5.05 48 months Fixed-term, fixed-rate 2,500 3,605 16.91
Negotiable Negotiable Fixed-term, fixed-rate 100,000 5,204 24.41
Total $21,325 100.00%
======= ======
</TABLE>
(1) No longer offered.
The following table indicates the amount of the Savings Bank's jumbo
certificates of deposit by time remaining until maturity as of December 31,
1995. Jumbo certificates of deposit require minimum deposits of $100,000, and
have negotiable interest rates.
Maturity Period Amount
(In thousands)
Less than three months $1,012
Three through six months 804
More than six through twelve months 1,546
Over twelve months 1,842
------
Total $5,204
53
<PAGE>
DEPOSIT FLOW
The following table sets forth the balances of savings deposits in the various
types of savings accounts offered by the Savings Bank at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
1994 1995 1995
-------------------- -------------------------------- ------------------------------
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
------ ------- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Regular savings accounts.................. $ 2,490 11.22% $ 2,066 9.87% $ (424) $ 2,175 10.20% $ 109
Money market deposit...................... 2,677 12.06 1,659 7.92 (1,018) 1,589 7.45 (70)
Fixed-rate certificates which
mature in the year ended in(1):
Within 1 year........................... 13,274 59.81 10,575 50.50 (2,699) 11,737 55.04 1,162
After 1 year, but within 2 years........ 2,094 9.43 3,211 15.33 1,117 3,042 14.26 (169)
After 2 years, but within 5 years....... 1,660 7.48 3,429 16.38 1,769 2,782 13.05 (647)
------- ------ ------- ------ -------- ------- ------ -------
Total................................ $22,195 100.00% $20,940 100.00% ($1,255) $21,325 100.00% $ 385
======= ====== ======= ====== ======== ======= ====== ======
</TABLE>
-------------
(1) At June 30, 1994 and 1995, and December 31, 1995, jumbo certificates
amounted to $6,001, $5,282 and $5,204, respectively.
54
<PAGE>
TIME DEPOSITS BY RATES AND MATURITIES
The following table sets forth the certificates of deposit in the
Savings Bank classified by rates at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
---------------------------------
1994 1995 1995
---- ---- ------------
(In thousands)
<S> <C> <C> <C> <C>
2.00 - 3.99%................ $ 150 $ 315 $ 53
4.00 - 5.99%................ 15,756 9,380 11,643
6.00 - 7.99%................ 975 7,233 5,544
8.00% and over.............. 147 287 321
--------- --------- ---------
Total...................... $17,028 $17,215 $17,561
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1995.
<TABLE>
<CAPTION>
Amount Due
More More More Percent
than One than Two than Three of Total
Less Than Year to Years to Years to After Certificate
One Year Two Years Three Years Four Years 4 Years Total Accounts
-------- --------- ----------- ---------- ------- ----- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
2.00 - 3.99%................ $ 27 $ 26 $ -- $ -- $ -- $ 53 0.30%
4.00 - 5.99%................ 9,827 1,641 146 29 -- 11,643 66.30
6.00 - 7.99%................ 1,883 1,375 1,419 781 86 5,544 31.57
8.00% and over.............. -- -- 61 -- 260 321 1.83
---------- -------- ------- ------ ----- -------- -------
Total..................... $11,737 $3,042 $1,626 $810 $346 $17,561 100.00%
======= ====== ====== ==== ==== ======= ======
</TABLE>
DEPOSIT ACTIVITIES
The following table sets forth the deposit activities of the Savings
Bank for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended June 30, December 31,
-------------------- -------------------
1994 1995 1994 1995
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Beginning balance........... $21,050 $22,195 $22,195 $20,940
------- ------- ------- -------
Net increase (decrease)
before interest credited.. 245 (2,211) (1,296) (217)
Interest credited........... 900 956 459 602
-------- ------ -------- --------
Net increase (decrease)
in savings deposits....... 1,145 (1,255) (837) 385
-------- -------- -------- --------
Ending balance.............. $22,195 $20,940 $21,358 $21,325
======= ======= ======= =======
</TABLE>
55
<PAGE>
BORROWINGS
Savings deposits are the primary source of funds for the Savings Bank's
lending and investment activities and for general business purposes. The Savings
Bank has the ability to use advances from the FHLB-Atlanta to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The
FHLB-Atlanta functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member of the FHLB-Atlanta, the Savings Bank is required to own capital stock in
the FHLB- Atlanta and is authorized to apply for advances on the security of
such stock and certain of its mortgage loans and other assets (principally
securities which are obligations of, or guaranteed by, the U.S. Government)
provided certain creditworthiness standards have been met. Advances are made
pursuant to several different credit programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations on
the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit. At
December 31, 1995, and during the two years ended June 30, 1995 and the six
months ended December 31, 1995, the Savings Bank had no borrowings from the
FHLB-Atlanta.
COMPETITION
The Savings Bank operates in an intensely competitive market for the
attraction of savings deposits (its primary source of lendable funds) and in the
origination of loans. Historically, its most direct competition for savings
deposits has come from three large commercial banks in its market area.
Particularly in times of high interest rates, the Savings Bank has faced
additional significant competition for investors' funds from short-term money
market securities and other corporate and government securities. The Savings
Bank's competition for loans comes principally from mortgage bankers and
commercial banks. Such competition for deposits and the origination of loans may
limit the Savings Bank's future growth and earnings prospects.
SUBSIDIARY ACTIVITIES
The Savings Bank has one wholly-owned subsidiary, Mitchell Mortgage and
Investment Co., Inc., which was formed to hold stock in the Savings Bank's
electronic data processing servicer. This subsidiary has been inactive for the
past five years. At December 31, 1995, the Savings Bank's investment in the
subsidiary was $15,000.
PROPERTIES
The Savings Bank has no branch offices. The Savings Bank owns its main
office located at 210 Oak Avenue, Spruce Pine, North Carolina 28777. The office
was opened in 1957 and the square footage is approximately 5,400 feet. At
December 31, 1995, the net book value of the property (including land and
building) and the Savings Bank's fixtures, furniture and equipment was $71,600.
PERSONNEL
As of December 31, 1995, the Savings Bank had six full-time employees
and one part-time employee. The employees are not represented by a collective
bargaining unit and the Savings Bank believes its relationship with its
employees is good.
LEGAL PROCEEDINGS
Periodically, there have been various claims and lawsuits involving the
Savings Bank, such as claims to enforce liens, condemnation proceedings on
properties in which the Savings Bank holds security interests, claims involving
the making and servicing of real property loans and other issues incident to the
Savings Bank's business. The Savings Bank is not a party to any pending legal
proceedings that it believes would have a material adverse effect on the
financial condition or operations of the Savings Bank.
56
<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
Currently, the Board of Directors of the Holding Company consists of
five directors: Calvin F. Hall, Edward Ballew, Jr., Emma Lee M. Wilson, Baxter
D. Johnson and Lloyd Hise, Jr. Each of these persons is also a director of the
Savings Bank. The Articles of Incorporation and Bylaws of the Holding Company
provide for staggered elections (so long as the number of directors is nine or
more) so that approximately one-third of the directors will each be initially
elected to one, two and three-year terms, respectively, and thereafter, all
directors will be elected to terms of three years each. The executive officers
of the Holding Company are elected annually and hold office until their
respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors.
The following individuals are the executive officers of the Holding
Company.
<TABLE>
<CAPTION>
Name Position Held with Holding Company
<S> <C>
Calvin F. Hall President
Edward Ballew, Jr. Executive Vice President and Chief Executive Officer
Emma Lee M. Wilson Assistant Managing Officer, Secretary and Treasurer
</TABLE>
Since the formation of the Holding Company, none of the executive
officers, directors or other personnel has received remuneration from the
Holding Company. Information concerning the principal occupations, employment
and compensation of the directors and officers of the Holding Company during the
past five years is set forth under "MANAGEMENT OF THE SAVINGS BANK --
Biographical Information."
MANAGEMENT OF THE SAVINGS BANK
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Savings Bank is presently composed of
five members, who are elected for a term of one year in accordance with the
Bylaws of the Savings Bank, and two Directors Emeritus. The executive officers
of the Savings Bank are elected annually by the Board of Directors and serve at
the Board's discretion. The following table sets forth information with respect
to the Directors and executive officers of the Savings Bank.
<TABLE>
<CAPTION>
Current
Director Term
Name Age (1) Position with Savings Bank Since Expires
---- ------- -------------------------- ------- -------
<S> <C> <C> <C>
Calvin F. Hall 67 President and Director 1974 1996
Edward Ballew, Jr. 74 Executive Vice President, Chief
Executive Officer and Director 1948 1996
Emma Lee M. Wilson 60 Assistant Managing Officer,
Treasurer, Secretary and 1983 1996
Director
Baxter D. Johnson 86 Director 1952 1996
Lloyd Hise, Jr. 51 Director 1988 1996
S. W. Enloe 94 Director Emeritus -- --
Frank H. Watson 81 Director Emeritus -- --
</TABLE>
----------------------
(1) Age as of December 31, 1995.
57
<PAGE>
BIOGRAPHICAL INFORMATION
Set forth below is certain information regarding the Directors and
executive officers of the Savings Bank. Unless otherwise stated, each Director
and executive officer has held his or her current occupation for the last five
years. All Directors and executive officers reside in Spruce Pine, North
Carolina, unless otherwise indicated. There are no family relationships among or
between the directors or executive officers.
CALVIN F. HALL is President and an agent of Fortner Insurance Agency,
Inc., with which he has been affiliated with for over 37 years. Mr. Hall was
appointed President of the Savings Bank in January 1995 to succeed the retiring
President S.W. Enloe. Mr. Hall is a member of the Spruce Pine Rotary Club.
EDWARD BALLEW, JR. has been employed as an executive officer by the
Savings Bank since 1947 and serves as Executive Vice President and Chief
Executive Officer.
EMMA LEE M. WILSON has been employed by the Savings Bank since 1958
and has served in various capacities during that time. Mrs. Wilson is the
Assistant Managing Officer, Secretary and Treasurer of the Savings Bank.
FRANK H. WATSON has been a practicing attorney in Spruce Pine, North
Carolina since 1969. Mr. Watson became a Director Emeritus in February 1996. Mr.
Watson has been active in the Kiwanis Club and the March of Dimes.
BAXTER D. JOHNSON has been the owner of Johnson Electric in Spruce
Pine, North Carolina for 66 years.
LLOYD HISE, JR. has been a practicing attorney in Spruce Pine, North
Carolina since 1969.
S. W. ENLOE is retired, after serving as President of the Savings Bank
from 1966 to 1995. Mr. Enloe became a Director Emeritus in February 1996.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The business of the Savings Bank is conducted through meetings and
activities of the Board of Directors and its committees. During the fiscal year
ended June 30, 1995, the Board of Directors held 12 meetings. No director
attended fewer than 75% of the total meetings of the Board of Directors and of
committees on which such director served.
The Audit Committee, consisting of Directors Hise, Hall and Johnson, is
responsible for meeting with the Savings Bank's outside auditor to discuss the
results of the annual audit and any related matters. The Audit Committee is also
responsible for the Savings Bank's employee compliance issues. The Board also
receives and reviews the reports and findings and other information presented to
them by the Savings Bank's outside auditor. The Audit Committee meets as needed
and met one time during the fiscal year ended June 30, 1995.
The Loan Committee, consisting of Messrs. Hall, Ballew and Mrs. Wilson,
meets as needed and is responsible for reviewing and approving the Savings
Bank's loans. The Compensation Committee, consisting of Directors Ballew, Hise
and Wilson, makes recommendations to the full Board of Directors concerning
employee compensation. The Compensation Committee meets as needed and met three
times during the fiscal year ended June 30, 1995.
58
<PAGE>
DIRECTORS' COMPENSATION
BOARD FEES. Except for the President who receives a monthly fee of
$1,000, directors received a fee of $500 per month during the year ended June
30, 1995. Director fees totalled $48,000 for the year ended June 30, 1995.
Directors do not receive any additional compensation for serving on the Savings
Bank's committees. It is currently anticipated that, after completion of the
Conversion, directors' fees will be paid by the Holding Company and no separate
fees will be paid for service on the Board of Directors of the Savings Bank.
DIRECTORS' RETIREMENT PLAN. The Savings Bank established a retirement
plan for incumbent directors in 1994. The intent of the plan is to compensate
directors for their past services to the Savings Bank and to provide incentives
for continued service to the Savings Bank to ensure the continued success of the
Savings Bank and to provide management of the Savings Bank with the benefits of
the expertise and experience of its directors. Normal retirement age under the
plan is age 62. The plan provides a normal retirement benefit equal to $500 per
month for a period of 120 months following retirement. However, the Savings Bank
may elect to pay the normal retirement benefit in a lump sum at any time
following a director's retirement. The plan also provides for the payment of
benefits equal to the normal retirement benefit in the case of a director who
dies or becomes disabled prior to retirement. Directors who participate in the
plan are subject to a noncompetition restriction during the benefit payment
period. In addition, a retired director is obligated to provide consulting
services to the Savings Bank during such period. Expenses associated with the
plan totalled $278,000 for the fiscal year ended June 30, 1995.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following information is furnished for
the Chief Executive Officer of the Savings Bank for the year ended June 30,
1995. No executive officers of the Savings Bank received salary and bonus in
excess of $100,000 during the year ended June 30, 1995.
<TABLE>
<CAPTION>
===============================================================================================================
SUMMARY COMPENSATION TABLE(1)
---------------------------------------------------------------------------------------------------------------
Annual Compensation
---------------------------------------------------------------------------------------------------------------
Other Annual
Name and Salary Bonus Compensation
Position Year ($) ($) ($)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward Ballew, Jr. 1995 68,250(2) 8,100 $--(3)
Executive Vice President,
Chief Executive Officer
and Director
===============================================================================================================
</TABLE>
(1) Compensation information for fiscal years ended June 30, 1994 and 1993
has been omitted as the Savings Bank was not a public company, nor a
subsidiary thereof, at such times.
(2) Includes Board of Directors fees of $6,000.
(3) Does not include perquisites which, in the aggregate, did not exceed
the lesser of $50,000 or 10% of salary and bonus.
EMPLOYMENT AGREEMENTS. Effective December 31, 1995, the Savings Bank
entered into three-year employment agreements with Mr. Ballew and Mrs. Wilson
(individually, the "Executive"). The agreements provide for the extension of the
term of the agreement for an additional year annually unless the Savings Bank
provides the Executive with prior notice that the current term will not be
extended. The agreements provide for an initial salary
59
<PAGE>
level for Mr. Ballew and Mrs. Wilson of $72,000 and $58,000, respectively. Under
the agreements, the compensation of each Executive is subject to annual review.
In addition, each Executive is eligible to participate in all employee benefit
plans or arrangements which the Savings Bank makes available to its senior
executive officers. The agreements provide that upon the Executive's termination
of employment without cause or the Executive's resignation following the
occurrence of certain events, including a material change in the Executive's
functions, duties or responsibilities, the Savings Bank will make a severance
payment equal to the greater of the payments due to the Executive over the
remaining term of the agreement or three times the average of the Executive's
base salary over the preceding three years. In addition, the Savings Bank is
obligated to continue the Executive's life, dental and disability coverage
through the expiration of the current term of the agreement. The agreements also
restrict the Executive's right to compete against the Savings Bank for a period
of two years from the date of the Executive's termination without cause or
resignation in the circumstances described above.
In connection with the Conversion, the agreements will be amended to
provide for severance payments and continuation of other employee benefits in
the event of the Executive's involuntary termination of employment in connection
with any change in control of the Savings Bank or the Holding Company. Severance
payments also will be provided on a similar basis in connection with voluntary
termination of employment where, subsequent to a change in control, Mr. Ballew
and Mrs. Wilson are assigned duties inconsistent with their positions, duties,
responsibilities and status immediately prior to such change in control. The
term "change in control" will be defined as having occurred when, among other
things, (i) a person other than the Holding Company purchases shares of Common
Stock pursuant to a tender or exchange offer for such shares, (ii) any person
(as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or
becomes the beneficial owner, directly or indirectly, of securities of the
Holding Company representing 25% or more of the combined voting power of the
Holding Company's then outstanding securities, (iii) the membership of the Board
of Directors changes as the result of a contested election, or (iv) stockholders
of the Holding Company approve a merger, consolidation, sale or disposition of
all or substantially all of the Holding Company's assets, or a plan of partial
or complete liquidation.
The severance payments from the Savings Bank will equal 2.99 times each
Executive's average annual compensation during the five-year period preceding
the change in control. Such amount will be paid in a lump sum within 10 business
days following the termination of employment. Assuming that a change in control
had occurred at December 31, 1995, Mr. Ballew and Mrs. Wilson would be entitled
to severance payments of approximately $197,000 and $150,000, respectively.
Section 280G of the Internal Revenue Code of 1986, as amended ("Code"), states
that severance payments that equal or exceed three times the base compensation
of the individual are deemed to be "excess parachute payments" if they are
contingent upon a change in control. Individuals receiving excess parachute
payments are subject to a 20% excise tax on the amount of such excess payments,
and the Executives would not be entitled to deduct the amount of such excess
payments.
The Board of Directors of the Holding Company or the Savings Bank may,
from time to time, also extend employment agreements to other senior executive
officers.
BENEFITS
GENERAL. The Savings Bank currently provides health, dental, life and
disability insurance for full-time employees, subject to certain deductibles.
SUPPLEMENTAL EXECUTIVE RETIREMENT/MEDICAL CARE AGREEMENTS. The Savings
Bank has entered into supplemental retirement agreements with Mr. Ballew and
Mrs. Wilson to provide them with additional income at retirement and to
encourage their retention as executives of the Savings Bank. The agreements
provide that, commencing at retirement, Mr. Ballew and Mrs. Wilson will receive
120 monthly payments equal to 60% of their respective average compensation for
the three years immediately before retirement. The expected payouts for Mr.
Ballew and Mrs. Wilson based on their average compensation at December 31, 1995
would be $414,000 and $325,000, respectively. The agreements also provide for
payment of benefits equal to the normal retirement benefit if either executive
dies or becomes disabled while still employed by the Savings Bank. The
agreements contain
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forfeiture provisions, which (i) restrict the executives from competing with the
Savings Bank during the payment of benefits under the agreements, and (ii)
require the executives to render consulting services to the Savings Bank during
any period when benefits are payable under the agreements. The expense
associated with the agreements totalled $176,000 and $215,000 for the year ended
June 30, 1995 and the six months ended December 31, 1995, respectively.
The Savings Bank has also entered into agreements with Mr. Ballew and
Mrs. Wilson which provide that, at retirement or in the event of disability, the
executives will receive health insurance benefits for life. Such benefits shall
initially be continued under the Savings Bank's then current health insurance
plan at the Savings Bank's expense for as long as retiree coverage is allowed in
such plan by the plan provider. In the event retiree coverage under the Savings
Bank's plan is discontinued, or the plan terminated, the Savings Bank has agreed
to provide the executives with health insurance benefits under a separate plan.
In the event of an executive's death prior to retirement, the Savings Bank is
obligated to continue coverage for the executive's surviving spouse. The expense
associated with the plans totalled $71,500 for the six months ended December 31,
1995.
RETIREMENT PLAN. The Savings Bank has established a defined benefit
pension plan ("Retirement Plan") for the benefit of all full-time employees
except Mr. Ballew. The following table illustrates the annual retirement
benefits that would be payable under the Retirement Plan upon retirement at age
65 to a participant electing to receive his or her retirement benefits in the
normal form of benefit distribution, a life annuity with 10-years certain,
assuming various specified levels of compensation and credited service. Under
the Code, the maximum annual benefits under the Retirement Plan are limited to
$120,000 for the 1996 calendar year.
<TABLE>
<CAPTION>
Highest Five-Year
Average Annual Years of Service
------------------------------------------------------------------
Compensation 5 10 15 25 35
--------------- ----- ------ ------ ------ ----
<S> <C> <C> <C> <C> <C>
$ 10,000 ..................$ 440 $ 880 $ 1,320 $ 2,200 $ 3,075
20,000 ..................1,100 2,200 3,300 5,550 7,750
30,000 ..................1,775 3,550 5,325 8,900 12,425
40,000 ..................2,450 4,900 7,350 12,250 17,100
60,000 ..................3,800 7,600 11,400 18,900 26,450
80,000 ..................5,125 10,250 15,375 25,600 35,800
</TABLE>
Newly-hired full-time employees are eligible to participate in the
Retirement Plan after the completion of six months of service and the attainment
of age 21. Benefits are based upon years of service up to 35 years and total
salary. Participants begin to vest in their benefits after three years of
service and are fully vested after completing seven years of service. Benefits
under the Retirement Plan are offset in part by a participant's anticipated
social security benefits.
EMPLOYEE STOCK OWNERSHIP PLAN. The Board of Directors has authorized
the adoption by the Savings Bank of an ESOP for employees of the Savings Bank to
become effective upon the completion of the Conversion. The ESOP is intended to
satisfy the requirements for an employee stock ownership plan under the Code and
the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Full-time employees of the Holding Company and the Savings Bank who have been
credited with at least 500 hours of service during a 12-month period and who
have attained age 21 are eligible to participate in the ESOP.
In order to fund the purchase of up to 8% of the Common Stock to be
issued in the Conversion, it is anticipated that the ESOP will borrow funds from
the Holding Company. Such loan will equal 100% of the aggregate purchase price
of the Common Stock. The loan to the ESOP will be repaid principally from the
Savings Bank's contributions to the ESOP and dividends payable on Common Stock
held by the ESOP over the anticipated 15-year term of the loan. The interest
rate for the ESOP loan is expected to be the prime rate as published in THE
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WALL STREET JOURNAL on the closing date of the Conversion. See "PRO FORMA DATA."
In any plan year, the Savings Bank may make additional discretionary
contributions to the ESOP for the benefit of plan participants in either cash or
shares of Common Stock, which may be acquired through the purchase of
outstanding shares in the market, or from individual stockholders, or which
constitute authorized but unissued shares, or shares held in treasury by the
Holding Company. The timing, amount, and manner of such discretionary
contributions will be affected by several factors, including applicable
regulatory policies, the requirements of applicable laws and regulations, and
market conditions. In addition, following repayment of the initial ESOP loan
described above, the ESOP may incur debt to acquire additional shares of Common
Stock.
Shares purchased by the ESOP with the proceeds of the loan will be held
in a suspense account and released on a pro rata basis as the loan is repaid.
Discretionary contributions to the ESOP and shares released from the suspense
account will be allocated among participants on the basis of each participant's
proportional share of total compensation. Forfeitures will be reallocated among
the remaining plan participants.
Participants will fully vest in their accrued benefits under the ESOP
upon the completion of seven years of service. All years of service with the
Savings Bank, including years of service prior to the effective date of the
ESOP, will be counted for vesting purposes. Benefits may be payable upon a
participant's retirement, early retirement, death, disability, or termination of
employment. The Savings Bank's contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated.
It is anticipated that members of the Board of Directors will be
appointed by the Board to serve as trustees of the ESOP. Under the ESOP, the
trustees must vote all allocated shares held in the ESOP in accordance with the
instructions of plan participants and allocated shares for which no instructions
are received must be voted in the same ratio on any matter as those shares for
which instructions are given.
Pursuant to SOP 93-6, compensation expense for a leveraged ESOP is
recorded at the fair market value of the ESOP shares when allocated to
participants' accounts. See "MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Impact of New Accounting Pronouncements
-- Accounting for Employee Stock Ownership Plans."
To the extent that the ESOP's intended purchase of 8% of the shares of
Common Stock issued in the Conversion is not filled, the remaining shares up to
that percentage would be acquired through open market purchases subject to
availability and other market conditions.
The ESOP will be subject to the requirements of ERISA and the
regulations of the Internal Revenue Service ("IRS") and the Department of Labor
issued thereunder. The Savings Bank intends to request a determination letter
from the IRS regarding the tax-qualified status of the ESOP. Although no
assurance can be given that a favorable determination letter will be issued, the
Savings Bank expects that a favorable determination letter will be received by
the ESOP.
1996 STOCK OPTION PLAN. The Board of Directors of the Holding Company
intends to adopt the Stock Option Plan and to submit the Stock Option Plan to
the stockholders for approval at a meeting held no earlier than six months
following consummation of the Conversion. The approval of a majority vote of the
Holding Company's outstanding shares is required prior to the implementation of
the Stock Option Plan. The Stock Option Plan will comply with all applicable
regulatory requirements.
The Stock Option Plan will be designed to attract and retain qualified
management personnel and nonemployee directors, to provide such officers, key
employees and nonemployee directors with a proprietary interest in the Holding
Company as an incentive to contribute to the success of the Holding Company and
the Savings Bank, and to reward officers and key employees for outstanding
performance. The Stock Option Plan will provide for the grant of incentive stock
options ("ISOs") intended to comply with the requirements of Section 422 of the
Code and
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nonqualified stock options ("NQOs"). Upon receipt of stockholder approval of the
Stock Option Plan, stock options may be granted to key employees of the Holding
Company and its subsidiaries, including the Savings Bank. Nonemployee directors
will receive stock option awards in accordance with a formula set forth in the
Stock Option Plan. The Stock Option Plan will be administered and interpreted by
a committee of the Board of Directors ("Committee") which is "disinterested"
pursuant to applicable regulations under the federal securities laws. Unless
sooner terminated, the Stock Option Plan will continue in effect for a period of
ten years from the date the Stock Option Plan is adopted by the Board of
Directors.
A number of authorized shares of Common Stock equal to 10% of the
number of shares of Common Stock issued in connection with the Conversion will
be reserved for future issuance under the Stock Option Plan (121,900 shares, or
140,185 shares, based on the issuance of 1,219,000 shares at the maximum, or
1,401,850 shares at the adjusted maximum, respectively, of the Estimated
Valuation Range). Such shares will be authorized but unissued shares or treasury
shares. In the event of a stock split, reverse stock split, stock dividend, or
similar event, the number of shares of Common Stock under the Stock Option Plan,
the number of shares to which any award relates and the exercise price per share
under any option may be adjusted by the Committee to reflect the increase or
decrease in the total number of shares of Common Stock outstanding.
Under the Stock Option Plan, the Committee will determine which
officers and key employees will be granted options, whether such options will be
ISOs or NQOs, the number of shares subject to each option, and the
exercisability of such options. The per share exercise price of an option will
at least equal 100% of the fair market value of a share of Common Stock on the
date the option is granted.
The number of options granted to nonemployee directors and the terms
thereof will be determined under a formula set forth in the Stock Option Plan.
The formula will provide that no individual nonemployee director may be awarded
an option covering in excess of 5% of the number of shares of Common Stock
reserved under the Stock Option Plan (6,095 shares or 7,009 shares, based upon
the maximum or the adjusted maximum, respectively, of the Estimated Valuation
Range). All options granted to nonemployee directors will be NQOs and such
options will be granted at an exercise price equal to 100% of the fair market
value of the Common Stock on the date the option is granted. Options granted
upon the effective date of the Stock Option Plan will become exercisable ratably
over a five-year period following the date of grant. Unvested options will be
immediately exercisable in the event of the recipient's death or disability. In
addition, unvested options will be immediately exercisable in the event of a
change in control of the Savings Bank or the Holding Company (as defined in the
Stock Option Plan), to the extent authorized or not prohibited by applicable law
or regulations.
Each stock option that is awarded to an officer or key employee will
remain exercisable at any time on or after the date it vests through the earlier
to occur of the tenth anniversary of the date of grant or six months after the
date on which the optionee terminates employment (one year in the event of the
optionee's termination by reason of death or disability), unless such period is
extended by the Committee. Each stock option that is awarded to a nonemployee
director will remain exercisable through the earlier to occur of the tenth
anniversary of the date of grant or one year (two years in the event of a
nonemployee director's death or disability) following the termination of a
nonemployee director's service on the Board. All stock options are
nontransferable except by will or the laws of descent or distribution.
Under current provisions of the Code, the federal tax treatment of ISOs
and NQOs is different. With respect to ISOs, an optionee who satisfies certain
holding period requirements will not recognize income at the time the option is
granted or at the time the option is exercised. If the holding period
requirements are satisfied, the optionee will generally recognize capital gain
or loss upon a subsequent disposition of the shares of Common Stock received
upon the exercise of a stock option. If the holding period requirements are not
satisfied, the difference between the fair market value of the Common Stock on
the date of grant and the option exercise price, if any, will be taxable to the
optionee at ordinary income tax rates. A federal income tax deduction generally
will not be available to the Holding Company as a result of the grant or
exercise of an ISO, unless the optionee fails to satisfy the holding period
requirements. With respect to NQOs, the grant of an NQO is generally not a
taxable event for the optionee and no
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tax deduction will be available to the Holding Company. However, upon the
exercise of an NQO, the difference between the fair market value of the Common
Stock on the date of exercise and the option exercise price will generally be
treated as compensation to the optionee upon exercise, and the Holding Company
will be entitled to a compensation expense deduction in the amount of income
realized by the optionee.
Subject to stockholder approval of the Stock Option Plan, the Committee
intends to grant awards under the Stock Option Plan equal to the following
percentages of shares issued in the Offerings: Mr. Ballew -- 2.5% (30,475
shares, or 35,046 shares of Common Stock, based upon the maximum or the adjusted
maximum, respectively, of the Estimated Valuation Range); other officers and
employees (five persons) -- 3% (36,570 shares, or 42,056 shares, based upon the
maximum or the adjusted maximum, respectively, of the Estimated Valuation
Range). In addition, each current nonemployee director (three persons), is
intended to receive an award equal to 0.5% of the number of shares issued in the
Offerings (6,095 shares, or 7,009 shares, based upon the maximum or the adjusted
maximum, respectively, of the Estimated Valuation Range). The balance of the
shares reserved under the Stock Option Plan, or a number of shares equal to 3.0%
of the number of shares of Common Stock issued in the Offerings, are expected to
be allocated in the future to current and prospective officers and employees.
See "RISK FACTORS -- Possible Dilutive Effect of Benefit Programs" for
information regarding dilution of the voting interests of stockholders.
MANAGEMENT RECOGNITION PLAN. Following the Conversion, the Board of
Directors of the Holding Company intends to adopt an MRP for officers,
employees, and nonemployee directors of the Holding Company and the Savings
Bank. The MRP will enable the Holding Company and the Savings Bank to provide
participants with a proprietary interest in the Holding Company as an incentive
to contribute to the success of the Holding Company and the Savings Bank.
The MRP will be submitted to stockholders for approval at a meeting to
be held no earlier than six months following consummation of the Conversion. The
approval of a majority vote of the Holding Company's stockholders is required
prior to implementation of the MRP. The MRP will comply with all applicable
regulatory requirements. The MRP expects to acquire a number of shares of Common
Stock equal to 4% of the Common Stock issued in connection with the Conversion
(48,760 shares, or 56,074 shares based on the issuance of 1,219,000 shares, or
1,401,850 shares, in the Conversion at the maximum, or the adjusted maximum,
respectively, of the Estimated Valuation Range). Such shares will be acquired on
the open market, if available, with funds contributed by the Holding Company to
a trust which the Holding Company may establish in conjunction with the MRP
("MRP Trust") or from authorized but unissued or treasury shares of the Holding
Company.
A committee of the Board of Directors of the Holding Company will
administer the MRP, the members of which will also serve as trustees of the MRP
Trust, if formed. The trustees will be responsible for the investment of all
funds contributed by the Holding Company to the MRP Trust. Shares of Common
Stock granted pursuant to the MRP will be in the form of restricted stock
vesting ratably over a five-year period following the date of grant. During the
period of restriction, all shares will be held in escrow by the Holding Company
or by the MRP Trust. If a recipient terminates employment for reasons other than
death or disability, the recipient will forfeit all rights to allocated shares
which are then subject to restriction. In the event of the recipient's death or
disability, all restrictions will expire and all allocated shares will become
unrestricted. In addition, all restrictions on allocated shares will expire in
the event of a change in control of the Savings Bank or the Holding Company (as
defined in the MRP), to the extent authorized or not prohibited by applicable
law or regulations.
The Board of Directors of the Holding Company may terminate the MRP at
any time and, upon termination, all unallocated shares of Common Stock will
revert to the Holding Company.
A recipient of an MRP award in the form of restricted stock will
generally not recognize income upon an award of shares of Common Stock, and the
Holding Company will not be entitled to a federal income tax deduction, until
the termination of the restrictions. Upon such termination, the recipient will
recognize ordinary income in an amount equal to the fair market value of the
Common Stock at the time and the Holding Company will be entitled to a deduction
in the same amount after satisfying federal income tax withholding requirements.
However, the
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recipient may elect to recognize ordinary income in the year the restricted
stock is granted in an amount equal to the fair market value of the shares at
that time, determined without regard to the restrictions. In that event, the
Holding Company will be entitled to a deduction in such year and in the same
amount. Any gain or loss recognized by the recipient upon subsequent disposition
of the stock will be either a capital gain or capital loss.
Subject to stockholder approval of the MRP, the Committee intends to
grant awards under the MRP equal to the following percentages of shares of
Common Stock issued in the Offerings: Mr. Ballew -- 1% (12,190 shares, or 14,019
shares, based upon the maximum or the adjusted maximum, respectively, of the
Estimated Valuation Range); other officers and employee (five persons) -- 1.6%
(19,504 shares, or 22,430 shares, based upon the maximum or the adjusted
maximum, respectively, of the Estimated Valuation Range). In addition, each
nonemployee director, including directors emeritus (five persons), will receive
an award equal to 0.2% of the number of shares of Common Stock issued in the
Offerings (2,438 shares, or 2,804 shares, based upon the maximum or the adjusted
maximum, respectively, of the Estimated Valuation Range). See "RISK FACTORS --
Possible Dilutive Effect of Benefit Programs" for information regarding dilution
of the voting interests of stockholders.
TRANSACTIONS WITH THE SAVINGS BANK
Current law requires that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features. The Savings Bank
is therefore prohibited from making any new loans or extensions of credit to the
Savings Bank's executive officers and directors and at different rates or terms
than those offered to the general public and has adopted a policy to this
effect. The aggregate amount of loans by the Savings Bank to its executive
officers and directors was $103,000 at December 31, 1995, or approximately 0.64%
of pro forma stockholders' equity (based on the issuance of the maximum of the
Estimated Valuation Range). Such loans (i) were made in the ordinary course of
business, (ii) were made on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the Savings Bank's other customers, and (iii) did
not involve more than the normal risk of collectibility or present other
unfavorable features when made.
REGULATION
THE SAVINGS BANK
GENERAL. As a state-chartered, federally insured savings bank, the
Savings Bank is subject to extensive regulation. Lending activities and other
investments must comply with various statutory and regulatory requirements,
including prescribed minimum capital standards. The Savings Bank is regularly
examined by the FDIC and the Administrator and files periodic reports concerning
the Savings Bank's activities and financial condition with its regulators. The
Savings Bank's relationship with depositors and borrowers also is regulated to a
great extent by both federal law and the laws of North Carolina, especially in
such matters as the ownership of savings accounts and the form and content of
mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of the Savings Bank, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks and bank holding companies if such
payments should be deemed to constitute an unsafe and unsound practice. The
respective primary federal regulators of the Holding Company and the Savings
Bank have authority to impose penalties, initiate civil and administrative
actions and take other steps intended to prevent banks from engaging in unsafe
or unsound practices.
STATE REGULATION AND SUPERVISION. As a North Carolina-chartered savings
bank, the Savings Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North
Carolina-chartered savings banks under his
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jurisdiction and for the protection of the public investing in such
institutions. The regulatory authority of the Administrator includes, but is not
limited to: the establishment of reserve requirements; the regulation of the
payment of dividends; the regulation of stock repurchases, the regulation of
incorporators, stockholders, directors, officers and employees; the
establishment of permitted types of withdrawable accounts and types of contracts
for savings programs, loans and investments; and the regulation of the conduct
and management of savings banks, chartering and branching of institutions,
mergers, conversions and conflicts of interest. North Carolina law requires that
the Savings Bank maintain federal deposit insurance as a condition of doing
business. Under state law, savings banks in North Carolina with deposits insured
by the SAIF are generally subject to restrictions with respect to activities and
investments, transactions with affiliates and loans to one borrower similar to
those applicable to SAIF- insured savings associations.
The Administrator conducts regular examinations of North
Carolina-chartered savings banks. The purpose of such examinations is to assure
that institutions are being operated in compliance with applicable North
Carolina law and regulations and in a safe and sound manner. These examinations
are usually conducted on a joint basis with the FDIC. In addition, the
Administrator is required to conduct an examination of any institution when he
has good reason to believe that the standing and responsibility of the
institution is of doubtful character or when he otherwise deems it prudent. The
Administrator is empowered to order the revocation of the license of an
institution if he finds that it has violated or is in violation of any North
Carolina law or regulation and that revocation is necessary in order to preserve
the assets of the institution and protect the interests of its depositors. The
Administrator has the power to issue cease and desist orders if any person or
institution is engaging in, or has engaged in, any unsafe or unsound practice or
unfair and discriminatory practice in the conduct of its business or in
violation of any other law, rule or regulation.
A North Carolina-chartered savings bank must maintain net worth,
computed in accordance with the Administrator's requirements, of 5% of total
assets, and liquidity of 10% of total assets. See "-- Capital Requirements" and
"-- Liquidity." Additionally, a North Carolina-chartered savings bank is
required to maintain general valuation allowances and specific loss reserves in
the same amounts as required by the FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North
Carolina-chartered savings bank cannot invest more than 15% of its total assets
in business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject to approval of the Administrator. The approval
is conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
PROPOSED FEDERAL LEGISLATION REGARDING SAIF RECAPITALIZATION, RECAPTURE
OF BAD DEBT RESERVES, AND OTHER MATTERS. Legislation currently pending before
the U.S. Congress contains a provision calling for a one-time assessment on all
SAIF-insured deposits for the purpose of recapitalizing the SAIF. As currently
proposed, the one-time assessment would be approximately 0.85% of SAIF-insured
deposits as of March 31, 1995. Based on the Savings Bank's assessable deposits
of $21.0 million at March 31, 1995, such assessment would amount to $179,000.
The assessment would be tax deductible and would have the effect of immediately
reducing the capital of the Savings Bank by the amount of the assessment, net of
applicable taxes. Management cannot predict whether the legislation
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providing for such assessment will be enacted, or, if enacted, the final amount
of such assessment or whether ongoing SAIF premiums will be reduced to a level
equal to that of BIF premiums.
In addition, separate legislation proposing a comprehensive reform of
the banking and thrift industries is under consideration by the U.S. Congress to
(i) merge the BIF and the SAIF on January 1, 1998, at which time banks and
thrifts would pay the same deposit insurance premiums and (ii) require federal
savings associations to convert to a national bank or a state-chartered thrift
by January 1, 1998. Management cannot predict whether such legislation will be
enacted, or, if enacted, the final form of such legislation and its ultimate
impact on the Savings Bank.
DEPOSIT INSURANCE. The FDIC insures deposits at the Savings Bank to the
maximum extent permitted by law. The Savings Bank currently pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups which are
based solely on the level of an institution's capital --"well capitalized,"
"adequately capitalized," and "undercapitalized" -- which are defined in the
same manner as the regulations establishing the prompt corrective action system
under Section 38 of the Federal Deposit Insurance Act ("FDIA"), as discussed
below. These three groups are then divided into three subgroups which reflect
varying levels of supervisory concern, from those which are considered to be
healthy to those which are considered to be of substantial supervisory concern.
The matrix so created results in nine assessment risk classifications, with
rates currently ranging from .23% for well capitalized, financially sound
institutions with only a few minor weaknesses to .31% for undercapitalized
institutions that pose a substantial risk of loss to the SAIF unless effective
corrective action is taken. The FDIC is authorized to raise assessment rates in
certain circumstances. The Savings Bank's assessments expensed for the year
ended June 30, 1995, equaled $50,000.
On August 8, 1995, the FDIC revised the premium schedule for
BIF-insured banks to provide a range of .04% to .31% of deposits (as compared to
the current range of .23% to .31% of deposits for SAIF-insured institutions). On
November 14, 1995, the FDIC again revised the premium schedule for BIF-insured
banks to eliminate premiums for all well-capitalized banks (except for the
statutory minimum annual assessment of $2,000) and to provide a range of .03% to
.27% of deposits for all other banks. Approximately 92% of all BIF-insured banks
are categorized as "well-capitalized." It is anticipated that SAIF will not be
adequately recapitalized until 2002, absent a substantial increase in premium
rates or the imposition of special assessments or other significant
developments, such as a merger of SAIF and BIF. Implementation of the proposed
one-time SAIF-recapitalization assessment discussed above may reduce SAIF
premiums to a level at or near BIF premiums.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances which could result in termination of the
deposit insurance of the Savings Bank.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as added by the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), each
federal banking agency is required to implement a system of prompt corrective
action for institutions which it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to be:
(i) "well capitalized" if it has a total risk-based capital ratio of 10.0% or
more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I
leverage capital ratio of 5.0% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any capital
measure; (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a
Tier I leverage capital ratio of 4.0% or more (3.0% under certain circumstances)
and does not meet the definition of "well capitalized;" (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less
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than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Section 38 of the FDIA and the implementing regulations also provide
that a federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized and
may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or engaging in
an unsafe or unsound practice. (The FDIC may not, however, reclassify a
significantly undercapitalized institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to the provisions of
Section 38 of the FDIA, which sets forth various mandatory and discretionary
restrictions on its operations.
At December 31, 1995, the Savings Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the FDIC.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The federal banking agencies recently adopted
final regulations and Interagency Guidelines Prescribing Standards for Safety
and Soundness ("Guidelines") to implement safety and soundness standards
required by the FDIA. The Guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes impaired. The agencies
also proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. Under the final regulations, if the FDIC
determines that the Savings Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Savings Bank to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
CAPITAL REQUIREMENTS. The FDIC's minimum capital standards applicable
to FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of total
assets. Tier 1 (or "core capital") consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in consolidated
subsidiaries minus all intangible assets other than limited amounts of purchased
mortgage servicing rights and certain other accounting adjustments. All other
banks must have a Tier 1 leverage ratio of at least 100-200 basis points above
the 3% minimum. The FDIC capital regulations establish a minimum leverage ratio
of not less than 4% for banks that are not the most highly rated or are
anticipating or experiencing significant growth.
The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital be
maintained. Any insured bank with a Tier 1 capital to total assets ratio of less
than 2% is deemed to be operating in an unsafe and unsound condition pursuant to
Section 8(a) of the FDIA unless the insured bank enters into a written
agreement, to which the FDIC is a party, to correct its capital deficiency.
Insured banks operating with Tier 1 capital levels below 2% (and which have not
entered into a written agreement) are subject to an insurance removal action.
Insured banks operating with lower than the prescribed minimum capital levels
generally will not receive
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approval of applications submitted to the FDIC. Also, inadequately capitalized
state nonmember banks will be subject to such administrative action as the FDIC
deems necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital)
to risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%.
In determining the amount of risk- weighted assets, all assets, plus certain off
balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the
risks the FDIC believes are inherent in the type of asset or item. The
components of Tier 1 capital are equivalent to those discussed above under the
3% leverage requirement. The components of supplementary capital currently
include cumulative perpetual preferred stock, adjustable-rate perpetual
preferred stock, mandatory convertible securities, term subordinated debt,
intermediate-term preferred stock and allowance for possible loan and lease
losses. Allowance for possible loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100% of
Tier 1 capital. Beginning in September 1995, the FDIC will include in its
evaluation of a bank's capital adequacy an assessment of the exposure to
declines in the economic value of the bank's capital due to changes in interest
rates. However, no measurement framework for assessing the level of a bank's
interest rate risk exposure has been codified. In the future, the FDIC will
issue a proposed rule that would establish an explicit minimum capital charge
for interest rate risk, based on the level of a bank's measured interest rate
risk exposure.
An undercapitalized, significantly undercapitalized, or critically
undercapitalized institution is required to submit an acceptable capital
restoration plan to its appropriate federal banking agency. The plan must
specify (i) the steps the institution will take to become adequately
capitalized, (ii) the capital levels to be attained each year, (iii) how the
institution will comply with any regulatory sanctions then in effect against the
institution and (iv) the types and levels of activities in which the institution
will engage. The banking agency may not accept a capital restoration plan unless
the agency determines, among other things, that the plan "is based on realistic
assumptions, and is likely to succeed in restoring the institution's capital"
and "would not appreciably increase the risk...to which the institution is
exposed." Under the FDIA, a bank holding company must guarantee that a
subsidiary depository institution meet its capital restoration plan, subject to
certain limitations. The obligation of a controlling bank holding company under
the FDIA to fund a capital restoration plan is limited to the lesser of 5.0% of
an undercapitalized subsidiary's assets and the amount required to meet
regulatory capital requirements.
The FDIA provides that the appropriate federal regulatory agency must
require an insured depository institution that is significantly undercapitalized
or its undercapitalized and either fails to submit an acceptable capital
restoration plan within the time period allowed or fails in any material respect
to implement a capital restoration plan accepted by the appropriate federal
banking agency to take one or more of the following actions: (i) sell enough
shares, including voting shares, to become adequately capitalized; (ii) merge
with (or be sold to) another institution (or holding company), but only if
grounds exist for appointing a conservator or receiver; (iii) restrict certain
transactions with banking affiliates as if the "sister bank" requirements of
Section 23A of the Federal Reserve Act ("FRA") did not exist; (iv) otherwise
restrict transactions with bank or non-bank affiliates; (v) restrict interest
rates that the institution pays on deposits to "prevailing rates" in the
institution's region; (vi) restrict asset growth or reduce total assets; (vii)
alter, reduce or terminate activities; (viii) hold a new election of directors;
(ix) dismiss any director or senior executive officer who held office for more
than 180 days immediately before the institution became undercapitalized; (x)
employ "qualified" senior executive officers; (xi) cease accepting deposits from
correspondent depository institutions; (xii) divest certain non-depository
affiliates which pose a danger to the institution; (xiii) be divested by a
parent holding company; and (xiv) take any other action which the agency
determines would better carry out the purposes of the Prompt Corrective Action
provisions. See "-- Prompt Corrective Action."
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement. At December 31, 1995, the Savings
Bank had a Tier 1 leverage capital ratio of 21.1% and net worth of 21.5% of
total assets. For a complete description of the Savings Bank's required and
actual capital levels on December 31, 1995, see "HISTORICAL AND PRO FORMA
CAPITAL COMPLIANCE."
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The FDIC has adopted the Federal Financial Institutions Examination
Council's recommendation regarding the adoption of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Specifically, the agencies
determined that net unrealized holding gains or losses on available for sale
debt and equity securities should not be included when calculating core and
risk-based capital ratios.
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial weaknesses.
The FDIC capital regulations state that, where the FDIC determines that the
financial history or condition, including off-balance sheet risk, managerial
resources and/or the future earnings prospects of a bank are not adequate and/or
a bank has a significant volume of assets classified substandard, doubtful or
loss or otherwise criticized, the FDIC may determine that the minimum adequate
amount of capital for that bank is greater than the minimum standards
established in the regulation.
The Savings Bank's management believes that, under the current
regulations, the Savings Bank will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control of
the Savings Bank, such as a downturn in the economy in areas where the Savings
Bank has most of its loans, could adversely affect future earnings and,
consequently, the ability of the Savings Bank to meet its capital requirements.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. Section 24
of the FDIA, as amended by the FDICIA, generally limits the activities and
equity investments of FDIC-insured, state-chartered banks to those that are
permissible for national banks. Under regulations dealing with equity
investments, an insured state bank generally may not directly or indirectly
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, (i) acquiring or retaining a majority interest in a
subsidiary, (ii) investing as a limited partner in a partnership the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing project, provided that
such limited partnership investments may not exceed 2% of the bank's total
assets, (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
In addition, an insured state bank (i) that is located in a state which
authorized as of September 30, 1991 investment in common or preferred stock
listed on a national securities exchange ("listed stock") or shares of a
registered investment company ("registered shares"), and (ii) which during the
period beginning September 30, 1990 through November 26, 1991 ("measurement
period") made or maintained investments in listed stocks and registered shares,
may retain whatever shares that were lawfully acquired or held prior to December
19, 1991 and continue to acquire listed stock and registered shares, provided
that the bank does not convert its charter to another form or undergo a change
in control. In order to acquire or retain any listed stock or registered shares,
however, the bank must file a one-time notice with the FDIC which meets
specified requirements and which sets forth the bank's intention to acquire and
retain stocks or shares, and the FDIC must determine that acquiring or retaining
the listed stocks or registered shares will not pose a significant risk to the
deposit insurance fund of which the bank is a member.
FDIC regulations implementing Section 24 of the FDIA provide that an
insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements. Any insured state-chartered
bank directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.
LOANS-TO-ONE-BORROWER. The Savings Bank is subject to the
Administrator's loan-to-one-borrower limits. Under these limits, no loans and
extensions of credit to any borrower outstanding at one time and not fully
secured
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by readily marketable collateral shall exceed 15% of the net worth of the
savings bank. Loans and extensions of credit fully secured by readily marketable
collateral may comprise an additional 10% of net worth. These limits also
authorize savings banks to make loans-to-one-borrower, for any purpose, in an
amount not to exceed $500,000. A savings institution also is authorized to make
loans to one borrower to develop domestic residential housing units, not to
exceed the lesser of $30 million, or 30% of the savings institution's net worth,
provided that (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements; (iv) the aggregate amount of loans
made under this authority does not exceed 150% of net worth; and (v) the
institution's regulator issued an order permitting the savings institution to
use this higher limit. These limits also authorize a savings bank to make
loans-to-one-borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
At December 31, 1995 the Savings Bank's loans-to-one-borrower limit was
approximately $908,000. At December 31, 1995, the largest aggregate amount of
loans by the Savings Bank to any one borrower was approximately $825,000, which
was composed of five separate loans made to the corporate owner and operator of
a local commercial property. See "BUSINESS OF THE SAVINGS BANK -- Lending
Activities -- Commercial Real Estate Lending."
ENVIRONMENTAL ISSUES ASSOCIATED WITH REAL ESTATE LENDING. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
a federal statute, generally imposes strict liability on, among other things,
all prior and present "owners and operators" of hazardous waste sites. However,
the U.S. Congress created a safe harbor provision for secured creditors by
providing that the term "owner and operator" excludes a person who, without
participating in the management of the site, holds indicia of ownership
primarily to protect its security interest in the site. Since the enactment of
the CERCLA, this "secured creditor exemption" has been the subject of judicial
interpretations which have left open the possibility that lenders could be
liable for cleanup costs on contaminated property that the hold as collateral
for a loan.
In response to the uncertainty created by judicial interpretations, in
April 1992, the United States Environmental Protection Agency ("EPA"), an agency
within the Executive Branch of the government, promulgated a regulation
clarifying when and how secured creditors could be liable for cleanup costs
under the CERCLA. Generally, the regulation protected a secured creditor that
acquired full title to collateral property through foreclosure as long as the
creditor did not participate in the property's management before foreclosure and
undertook certain due diligence efforts to divest itself of the property.
However, in February 1994, the U.S. Court of Appeals for the District of
Columbia Circuit held that the EPA lacked authority to promulgate such
regulation on the grounds that Congress meant for decisions on liability under
the CERCLA to be made by the courts and not the Executive Branch. In January
1995, the U.S. Supreme Court denied to review the U.S. Court of Appeal's
decision. In light of this adverse court ruling, in October 1995 the EPA issued
a statement entitled "Policy on CERCLA Enforcement Against Lenders and
Government Entities that Acquire Property Involuntarily" explaining that as an
enforcement policy, the EPA intended to apply as guidance the provisions of the
EPA lender liability rule promulgated in 1992.
To the extent that legal uncertainty exists in this area, all
creditors, including the Savings Bank, that have made loans secured by
properties with potential hazardous waste contamination (such as petroleum
contamination) could be subject to liability for cleanup costs, which costs
often substantially exceed the value of the collateral property.
FEDERAL RESERVE SYSTEM. In 1980, Congress enacted legislation which
imposed Federal Reserve requirements (under "Regulation D") on all depository
institutions that maintain transaction accounts or nonpersonal time deposits.
These reserves may be in the form of cash or non-interest-bearing deposits with
the regional Federal Reserve Bank. NOW accounts and other types of accounts that
permit payments or transfers to third parties fall within the definition of
transaction accounts and are subject to Regulation D reserve requirements, as
are any nonpersonal time deposits at a bank. Under Regulation D, a bank must
establish reserves equal to 3% of the first $54.0 million of transaction
accounts, of which the first $4.2 million is exempt, and 10% on the remainder.
The
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reserve requirement on nonpersonal time deposits with original maturities of
less than 1-1/2 years is 0%. As of December 31, 1995, the Savings Bank met its
reserve requirements.
LIQUIDITY. The Savings Bank is subject to the Administrator's
requirement that the ratio of liquid assets to total assets equal at least 10%.
The computation of liquidity under North Carolina regulation allows the
inclusion of mortgage-backed securities and investments which, in the judgment
of the Administrator, have a readily marketable value, including investment with
maturities in excess of five years. At December 31, 1995, the Savings Bank's
liquidity ratio calculated in accordance with North Carolina regulations, was
approximately 15.73%.
AFFILIATE TRANSACTIONS. The Holding Company and the Savings Bank will
be legal entities separate and distinct. Various legal limitations restrict the
Savings Bank from lending or otherwise supplying funds to the Holding Company
(an "affiliate"), generally limiting such transactions with the affiliate to 10%
of the bank's capital and surplus and limiting all such transactions to 20% of
the bank's capital and surplus. Such transactions, including extensions of
credit, sales of securities or assets and provision of services, also must be on
terms and conditions consistent with safe and sound banking practices, including
credit standards, that are substantially the same or at least as favorable to
the bank as those prevailing at the time for transactions with unaffiliated
companies.
Federally insured banks are subject, with certain exceptions, to
certain restrictions on extensions of credit to their parent holding companies
or other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or the providing of any
property or service.
COMMUNITY REINVESTMENT ACT. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977 ("CRA"), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
serviced by the bank, including low and moderate income neighborhoods. The
regulatory agency's assessment of the bank's record is made available to the
public. Further, such assessment is required of any bank which has applied,
among other things, to establish a new branch office that will accept deposits,
relocate an existing office or merge or consolidate with, or acquire the assets
or assume the liabilities of, a federally regulated financial institution. The
Savings Bank received a "satisfactory" rating during its most recent CRA
examination.
DIVIDENDS. Dividends from the Savings Bank will constitute the major
source of funds for dividends which may be paid by the Holding Company. The
amount of dividends payable by the Savings Bank to the Holding Company will
depend upon the Savings Bank's earnings and capital position, and is limited by
federal and state laws, regulations and policies. According to North Carolina
law, the Savings Bank may not declare or pay a cash dividend on its capital
stock if it would cause its net worth to be reduced below (i) the amount
required for the liquidation account established in connection with the
Conversion and (ii) the minimum amount required by applicable federal and state
regulations. In addition, a North Carolina-chartered stock savings bank, for a
period of five years after its conversion from mutual to stock form, must obtain
the written approval from the Administrator before declaring or paying a cash
dividend on its capital stock in an amount in excess of one-half of the greater
of (i) the institution's net income for the most recent fiscal year end, or (ii)
the average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable.
The amount of dividends actually paid during any one period will be
strongly affected by the Savings Bank's management policy of maintaining a
strong capital position. Federal law further provides that no insured depository
institution may make any capital distribution (which would include a cash
dividend) if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
Moreover, the federal bank regulatory agencies also have the general authority
to limit the dividends paid by insured banks if such payments should be deemed
to constitute an unsafe and unsound practice.
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THE HOLDING COMPANY
GENERAL. The Holding Company, as the sole shareholder of the Savings
Bank, will become a bank holding company and will register as such with the
Federal Reserve. Bank holding companies are subject to comprehensive regulation
by the Federal Reserve under the Bank Holding Company Act of 1956, as amended
("BHCA") and the regulations of the Federal Reserve. As a bank holding company,
the Holding Company will be required to file with the Federal Reserve annual
reports and such additional information as the Federal Reserve may require and
will be subject to regular examinations by the Federal Reserve. The Federal
Reserve also has extensive enforcement authority over bank holding companies,
including, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to require that a holding company
divest subsidiaries (including its bank subsidiaries). In general, enforcement
actions may be initiated for violations of law and regulations and unsafe or
unsound practices.
Under the BHCA, a bank holding company must obtain Federal Reserve
approval before: (1) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (2) acquiring all or
substantially all of the assets of another bank or bank holding company; or (3)
merging or consolidating with another bank holding company.
Any direct or indirect acquisition by a bank holding company or its
subsidiaries of more than 5% of the voting shares of, or substantially all of
the assets of, any bank located outside of the state in which the operations of
the bank holding company's banking subsidiaries are principally conducted, may
not be approved by the Federal Reserve unless the laws of the state in which the
bank to be acquired is located specifically authorize such an acquisition. Most
states have authorized interstate bank acquisitions by out-of-state bank holding
companies on either a regional or a national basis, and most such statutes
require the home state of the acquiring bank holding company to have enacted a
reciprocal statute. North Carolina law permits out-of-state bank holding
companies to acquire banks or bank holding companies located in North Carolina
so long as the laws of the state in which the acquiring bank holding company is
located permit bank holding companies located in North Carolina to acquire banks
or bank holding companies in the acquiror's state and the North Carolina bank
sought to be acquired has been in existence for at least three years. Beginning
September 30, 1995, federal law permits well capitalized and well managed bank
holding companies to acquire control of an existing bank in any state.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. Under the BHCA, the Federal Reserve is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve has determined to be so closely related to the
business of banking or managing or controlling banks as to be a proper incident
thereto. The list of activities determined by regulation to be closely related
to banking within the meaning of the BHCA includes, among other things:
operating a savings institution, mortgage company, finance company, credit card
company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing property
on a full-payout, non-operating basis; selling money orders, travelers' checks
and U.S. Savings Bonds; real estate and personal property appraising; providing
tax planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers.
INTERSTATE BANKING. In September 1994, Congress passed the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Banking
Act"). The Interstate Banking Act permits adequately capitalized bank and
savings bank holding companies to acquire control of banks and savings banks in
any state beginning on September 29, 1995, one year after the effectiveness of
the Interstate Banking Act. North Carolina adopted nationwide reciprocal
interstate acquisition legislation in 1994.
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Such interstate acquisitions are subject to certain restrictions.
States may require the bank or savings bank being acquired to have been in
existence for a certain length of time but not in excess of five years. In
addition, no bank or savings bank may acquire more than 10% of the insured
deposits in the United States or more than 30% of the insured deposits in any
one state, unless the state specifically legislated a higher deposit cap. States
are free to legislate stricter deposit caps and, at present, 18 states have
deposit caps lower than 30%.
The Interstate Banking Act also provides for interstate branching. The
McFadden Act of 1927 established state lines as the ultimate barrier to
geographic expansion of a banking network by branching. The Interstate Banking
Act withdraws these barriers, effective June 1, 1997, allowing interstate
branching in all states, provided that a particular state has not specifically
prohibited interstate branching by legislation prior to such time. Unlike
interstate acquisitions, a state may prohibit interstate branching if it
specifically elects to do so by June 1, 1997. States may choose to allow
interstate branching prior to June 1, 1997 by opting-in to a group of states
that permits these transactions. These states generally allow interstate
branching via a merger of an out-of-state bank with an in-state bank, or on a de
novo basis. North Carolina has enacted legislation permitting interstate
branching transactions.
It is anticipated that the Interstate Banking Act will increase
competition within the market in which the Holding Company and the Savings Bank
operate, although the extent to which such competition will increase in such
market or the timing of such increase cannot be predicted. In addition, there
can be no assurance as to whether, or in what form, legislation may be enacted
in North Carolina in reaction to the Interstate Banking Act or what impact such
legislation or the Interstate Banking Act might have upon the Holding Company
and the Savings Bank.
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in Section 39 of the 1991 Banking Law which
required the banking regulatory agencies to promulgate regulations governing
such topics as internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation and fees and other matters
those agencies determine to be appropriate. The legislation exempts bank holding
companies from these provisions and requires the agencies to prepare guidelines,
as opposed to regulations, dealing with these areas. It also gives more
discretion to the banking regulatory agencies in prescribing standards for
banks' asset quality, earnings and stock valuation.
The Interstate Banking Act also expanded exemptions from the
requirement that banks be examined on a 12-month cycle. Exempted banks are
inspected every 18 months. Other provisions address paperwork reduction and
regulatory improvements, small business and commercial real estate loan
securitization, truth-in-lending amendments regarding high cost mortgages,
strengthening of the independence of certain financial regulatory agencies,
money laundering, flood insurance reform and extension of certain statutes of
limitations.
DIVIDENDS. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve's view that a bank holding company should pay cash dividends only to the
extent that the company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earning retention that is consistent with
the company's capital needs, asset quality and overall financial condition. The
Federal Reserve also indicated that it would be inappropriate for a company
experiencing serious financial problems to borrow funds to pay dividends.
Furthermore, under the prompt corrective action regulations adopted by the
Federal Reserve pursuant to FDICIA, the Federal Reserve may prohibit a bank
holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized" under the prompt corrective
action regulations.
Bank holding companies, except for certain "well-capitalized" bank
holding companies, are required to give the Federal Reserve prior written notice
of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The Federal
Reserve may disapprove such a purchase or redemption of it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, Federal Reserve order, or any condition imposed by, or written
agreement with, the Federal Reserve.
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CAPITAL REQUIREMENTS. The Federal Reserve has established capital
adequacy guidelines for bank holding companies that generally parallel the
capital requirements of the FDIC for the Savings Bank. The Federal Reserve
regulations provide that capital standards will be applied on a consolidated
basis in the case of a bank holding company with $150 million or more in total
consolidated assets. For bank holding companies with less than $150 million in
consolidated assets, such as the Savings Bank, the guidelines are applied on a
bank-only basis unless the parent bank holding company (i) is engaged in nonbank
activity involving significant leverage or (ii) has a significant amount of
outstanding debt that is held by the general public.
Bank holding companies subject to the Federal Reserve's capital
adequacy guidelines are required to comply with the Federal Reserve's risk-based
capital regulations. Under these regulations, the minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is required
to be Tier 1 capital, principally consisting of common stockholders' equity,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder, Tier II
capital, may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum Tier I (leverage)
capital ratio, under which a bank holding company must maintain a minimum level
of Tier 1 capital to average total consolidated assets of at least 3% in the
case of a bank holding company which has the highest regulatory examination
rating and is not contemplating significant growth or expansion. All other bank
holding companies are expected to maintain a Tier 1 (leverage) capital ratio of
at least 1% to 2% above the state minimum.
FEDERAL SECURITIES LAWS
The Holding Company has filed a registration statement on Form SB-2
("Registration Statement") with the SEC under the Securities Act for the
registration of the Common Stock to be issued in the Conversion. See "ADDITIONAL
INFORMATION." Upon completion of the Conversion, the Common Stock will be
registered with the SEC under the Exchange Act and generally may not be
deregistered for at least three years thereafter. The Holding Company will then
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements of the Exchange Act.
The registration under the Securities Act of the Common Stock to be
issued in the Conversion does not cover the resale of such shares. Shares of the
Common Stock purchased by persons who are not affiliates of the Holding Company
may be resold without registration. Shares purchased by an affiliate of the
Holding Company may comply with the resale restrictions of Rule 144 under the
Securities Act. If the Holding Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the Holding
Company who complies with the other conditions of Rule 144 (including those that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Holding Company or (ii) the average weekly
volume of trading in such shares during the preceding four calendar weeks.
Provision may be made in the future by the Holding Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Holding Company, at some future time, determines to
issue additional shares from its authorized but unissued shares, the Holding
Company might offer registration rights to certain of its affiliates who want to
sell their shares.
TAXATION
FEDERAL TAXATION
GENERAL. The Holding Company and the Savings Bank will report their
income on a fiscal year basis using the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations with
some exceptions, including particularly the Savings Bank's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive
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description of the tax rules applicable to the Savings Bank or the Holding
Company. The Savings Bank has not been audited by the IRS or by the State of
North Carolina during the past five years.
TAX BAD DEBT RESERVES. Savings institutions such as the Savings Bank
which meet certain definitional tests primarily relating to their assets and the
nature of their business ("qualifying thrifts") are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. The Savings Bank's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, may be
computed using an amount based on the Savings Bank's actual loss experience, or
a percentage equal to 8% of the Savings Bank's taxable income, computed with
certain modifications and reduced by the amount of any permitted additions to
the nonqualifying reserve. The Savings Bank's deduction with respect to
non-qualifying loans must be computed under the experience method which
essentially allows a deduction based on the Savings Bank's actual loss
experience over a period of several years. Each year the Savings Bank selects
the most favorable way to calculate the deduction attributable to an addition to
the tax bad debt reserve.
The Savings Bank presently satisfies the qualifying thrift definitional
tests. If the Savings Bank failed to satisfy such tests in any taxable year, it
would be unable to make additions to its bad debt reserve. Instead, the Savings
Bank would be required to deduct bad debts as they occur and would additionally
be required to recapture its bad debt reserve deductions ratably over a
multi-year period. Among other things, the qualifying thrift definitional tests
require the Savings Bank to hold at least 60% of its assets as "qualifying
assets." Qualifying assets generally include cash, obligations of the United
States or any agency or instrumentality thereof, certain obligations of a state
or political subdivision thereof, loans secured by interests in improved
residential real property or by savings accounts, student loans and property
used by the Savings Bank in the conduct of its banking business. The Savings
Bank's ratio of qualifying assets to total assets exceeded 60% through June 30,
1995. Although there can be no assurance that the Savings Bank will continue to
satisfy the 60% test, management believes that this level of qualifying assets
can be maintained by the Savings Bank.
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method cannot exceed the
amount necessary to increase the balance of the reserve for losses on qualifying
real property loans at the close of the taxable year to 6% of the balance of the
qualifying real property loans outstanding. Also, if the qualifying thrift uses
the percentage of taxable income method, then the qualifying thrift's aggregate
addition to its reserve for losses on qualifying real property loans cannot,
when added to the addition to the reserve for losses on nonqualifying loans,
exceed the amount by which: (i) 12% of the amount that the total deposits or
withdrawable accounts of depositors of the qualifying thrift at the close of the
taxable year exceeds (ii) the sum of the qualifying thrift's surplus, undivided
profits and reserves at the beginning of such year. As of June 30, 1995, this
overall limitation has restricted the Savings Bank's deduction for additions to
its bad debt reserve. At June 30, 1995, the Savings Bank's total bad debt
reserve for tax purposes was approximately $1.2 million.
Legislation currently pending before the U.S. Congress contains a
provision that repeals the reserve method of accounting for thrift bad debt
reserves (including the percentage-of-taxable-income) for tax years beginning
after December 31, 1995. This would require the Savings Bank to account for bad
debts using the specific charge-off method. Under the proposed legislation, the
change in accounting method that eliminates the reserve method would trigger bad
debt reserve recapture for post-1987 excess reserves over a six-year period. At
December 31, 1995, the Savings Bank's post-1987 excess reserves amounted to
approximately $55,000. A special provision suspends recapture of post-1987
excess reserves for up to two years if, during those years, the institution
satisfies a "residential loan requirement." This requirement would be met if the
principal amount of the institution's residential loans exceeds a base year
amount, which is determined by reference to the average of the institution's
loans during the six taxable years ending before January 1, 1996. However,
notwithstanding this special provision, recapture would be required to begin no
later than the first taxable year beginning after December 31, 1997. Management
cannot predict whether the legislation providing for the recapture of bad debt
reserves will be enacted, or, if enacted, the final form of such legislation and
its ultimate impact on the Savings Bank. See "RISK FACTORS -- Proposed Recapture
of Bad Debt Reserves."
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DISTRIBUTIONS. To the extent that the Savings Bank makes "nondividend
distributions" to the Holding Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the reserve
for such losses exceeds the amount that would have been allowed under the
experience method; or (ii) from the supplemental reserve for losses on loans
("Excess Distributions"), then an amount based on the amount distributed will be
included in the Savings Bank's taxable income. Nondividend distributions include
distributions in excess of the Savings Bank's current and accumulated earnings
and profits, distributions in redemption of stock, and distributions in partial
or complete liquidation. However, dividends paid out of the Savings Bank's
current or accumulated earnings and profits, as calculated for federal income
tax purposes, will not be considered to result in a distribution from the
Savings Bank's bad debt reserve. Thus, any dividends to the Holding Company that
would reduce amounts appropriated to the Savings Bank's bad debt reserve and
deducted for federal income tax purposes would create a tax liability for the
Savings Bank. The amount of additional taxable income attributable to an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Savings Bank makes a "nondividend distribution," then
approximately one and one-half times the amount so used would be includable in
gross income for federal income tax purposes, assuming a 35% corporate income
tax rate (exclusive of state and local taxes). See "REGULATION -- The Savings
Bank -- Dividends" and "DIVIDEND POLICY" for limits on the payments of dividends
by the Savings Bank. The Savings Bank does not intend to pay dividends that
would result in a recapture of any portion of its tax bad debt reserve.
CORPORATE ALTERNATIVE MINIMUM TAX. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Savings Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable years
beginning after December 31, 1986, and before January 1, 1996, an environmental
tax of .12% of the excess of AMTI (with certain modification) over $2.0 million
is imposed on corporation, including the Savings Bank, whether or not an
Alternative Minimum Tax ("AMT") is paid.
DIVIDENDS-RECEIVED DEDUCTION AND OTHER MATTERS. The Holding Company may
exclude from its income 100% of dividends received from the Savings Bank as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends received
from unaffiliated corporations with which the Holding Company and the Savings
Bank will not file a consolidated tax return, except that if the Holding Company
or the Savings Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
STATE AND LOCAL TAXATION
The North Carolina corporate income tax is 7.75% of federal taxable
income as computed under the Code, subject to certain prescribed adjustments. In
addition, for tax years beginning in 1991, 1992, 1993 and 1994, corporate
taxpayers were required to pay a surtax equal to 4%, 3%, 2% and 1%,
respectively, of the state income tax otherwise payable by it. An annual state
franchise tax is imposed a rate of 0.15% applied to the greater of the
institution's (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) appraised valuation of property
in North Carolina.
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THE CONVERSION
THE BOARD OF DIRECTORS HAS ADOPTED AND THE ADMINISTRATOR HAS GIVEN
APPROVAL TO THE PLAN OF CONVERSION SUBJECT TO ITS APPROVAL BY THE MEMBERS OF THE
SAVINGS BANK ENTITLED TO VOTE ON THE MATTER AND SUBJECT TO THE SATISFACTION OF
CERTAIN OTHER CONDITIONS IMPOSED BY THE ADMINISTRATOR IN ITS APPROVAL. APPROVAL
BY THE ADMINISTRATOR DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE
PLAN OF CONVERSION BY THE ADMINISTRATOR.
GENERAL
The Savings Bank's Board of Directors has been studying the Savings
Bank's strategic options on an ongoing basis. In 1995, as a result of its
analysis of the existing regulatory environment, the competition faced by the
Savings Bank and other factors, the Savings Bank's Board of Directors decided to
pursue the possibility of converting to stock form and forming a holding
company. See "RISK FACTORS -- Management Succession and Future Prospects." The
Savings Bank continued to evaluate its strategic options and, on January 23,
1996, the Savings Bank's Board of Directors adopted a Plan of Conversion, which
was subsequently amended on April 15, 1996 and May 2, 1996, pursuant to which
the Savings Bank will be converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank to be held by the
Holding Company, a newly formed North Carolina corporation. The Holding Company
and the Savings Bank intend to pursue the business strategy described in this
Prospectus with the goal of enhancing stockholder value after the Conversion
over the long term. Neither the Holding Company nor the Savings Bank has any
existing plan to pursue any possible business combination, and neither has any
agreement or understanding with respect to any possible business combination.
THE FOLLOWING DISCUSSION OF THE PLAN OF CONVERSION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PLAN OF CONVERSION, WHICH IS ATTACHED AS EXHIBIT A
TO THE SAVINGS BANK'S PROXY STATEMENT AND IS AVAILABLE FROM THE SAVINGS BANK
UPON REQUEST. By letter dated May 1, 1996, the Administrator has approved the
Plan of Conversion, subject to its approval by the members of the Savings Bank
entitled to vote on the matter at a special meeting called for that purpose to
be held on June 13, 1996, and subject to the satisfaction of certain other
conditions imposed by the Administrator in its approval. Consummation of the
Conversion is contingent also upon receipt of the approvals of the Federal
Reserve and the Administrator for the Holding Company to acquire the Savings
Bank. Finally, consummation of the Conversion is contingent upon receipt from
the FDIC of a final non-objection letter with respect to the transaction.
If the Board of Directors of the Savings Bank decides for any reason,
such as possible delays resulting from overlapping regulatory processing or
policies or conditions which could adversely affect the Savings Bank's or the
Holding Company's ability to consummate the Conversion and transact its business
as contemplated herein and in accordance with the Savings Bank's operating
policies, at any time prior to the issuance of the Common Stock, not to use the
holding company form of organization in implementing the Conversion, the Plan of
Conversion will be amended to not use the holding company form of organization
in the Conversion. In the event that such a decision is made, the Savings Bank
will promptly refund all subscriptions or orders received together with accrued
interest, withdraw the Holding Company's Registration Statement from the SEC and
will take all steps necessary to complete the Conversion and proceed with a new
offering without the Holding Company, including filing any necessary documents
with the Administrator. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Savings Bank
determines not to complete the Conversion, the Savings Bank will issue and sell
the common stock of the Savings Bank. There can be no assurance that the
Administrator would approve the Conversion if the Savings Bank decided to
proceed without the Holding Company. The following description of the Plan of
Conversion assumes that a holding company form of organization will be utilized
in the Conversion. In the event that a holding company form of organization is
not utilized, all other pertinent terms of the Plan of Conversion as described
below will apply to the Conversion of the Savings Bank from mutual to stock form
of organization and the sale of the Savings Bank's common stock.
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The Conversion will be accomplished through adoption of Amended and
Restated Certificate of Incorporation and Bylaws to authorize the issuance of
capital stock by the Savings Bank. Under the Plan of Conversion, 901,000 to
1,401,850 shares of Common Stock are being offered for sale by the Holding
Company at the Purchase Price of $10.00 per share. As part of the Conversion,
the Savings Bank will issue all of its newly issued common stock (1,000 shares)
to the Holding Company in exchange for 50% of the net proceeds from the sale of
Common Stock by the Holding Company.
The Plan of Conversion provides generally that (i) the Savings Bank
will convert from a North Carolina- chartered mutual savings bank to a North
Carolina-chartered stock savings bank; (ii) the Common Stock will be offered by
the Holding Company in the Subscription Offering to persons having Subscription
Rights and in the Direct Community Offering; (iii) if necessary, shares of
Common Stock not subscribed for in the Subscription and Direct Community
Offering will be offered to certain members of the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
pursuant to selected dealers agreements; and (iv) the Holding Company will
purchase all of the capital stock of the Savings Bank to be issued in connection
with the Conversion. The Conversion will be effected only upon completion of the
sale of at least $9.01 million of Common Stock to be issued pursuant to the Plan
of Conversion.
As part of the Conversion, the Holding Company is making a Subscription
Offering of its Common Stock to holders of Subscription Rights in the following
order of priority: (i) Eligible Account Holders (depositors with $50.00 or more
on deposit as of December 31, 1994); (ii) the Savings Bank's ESOP; (iii)
Supplemental Eligible Account Holders (depositors with $50.00 or more on deposit
as of March 31, 1996); and (iv) Other Members (depositors and borrowers of the
Savings Bank as of May 3, 1996). Concurrent with the Subscription Offering and
subject to the prior rights of holders of Subscription Rights, the Holding
Company is offering the Common Stock for sale in the Direct Community Offering
to natural persons and trusts of natural persons residing in the Local
Community. If any shares remain available on the expiration date of the Direct
Community Offering, in the discretion of the Holding Company and the Savings
Bank, the Direct Community Offering may be expanded to include other members of
the general public. NO ORDERS WILL BE ACCEPTED IN THE DIRECT COMMUNITY OFFERING
FROM NATURAL PERSONS OR TRUSTS OF NATURAL PERSONS RESIDING OUTSIDE THE LOCAL
COMMUNITY UNLESS THE DIRECT COMMUNITY OFFERING IS EXPANDED TO INCLUDE SUCH
PERSONS.
Shares of Common Stock not sold in the Subscription and Direct
Community Offering may be offered in the Syndicated Community Offering.
Regulations require that the Syndicated Community Offering be completed within
45 days after completion of the Subscription Offering unless extended by the
Savings Bank or the Holding Company with the approval of the regulatory
authorities. If the Syndicated Community Offering is determined not to be
feasible, the Board of Directors of the Savings Bank will consult with the
regulatory authorities to determine an appropriate alternative method for
selling the unsubscribed shares of Common Stock. The Plan of Conversion provides
that the Conversion must be completed within 24 months after the date of the
approval of the Plan of Conversion by the members of the Savings Bank.
No sales of Common Stock may be completed, either in the Subscription,
Direct Community or Syndicated Community Offerings, unless the Plan of
Conversion is approved by the members of the Savings Bank.
The completion of the Offerings, however, is subject to market
conditions and other factors beyond the Savings Bank's control. No assurance can
be given as to the length of time after approval of the Plan of Conversion at
the special meeting that will be required to complete the Syndicated Community
Offering or other sale of the Common Stock. If delays are experienced,
significant changes may occur in the estimated pro forma market value of the
Common Stock, together with corresponding changes in the net proceeds realized
by the Holding Company from the sale of the Common Stock. In the event the
Conversion is terminated, the Savings Bank would be required to charge all
Conversion expenses against current income.
Orders for shares of Common Stock will not be filled until at least
901,000 shares of Common Stock have been subscribed for or sold and the
Administrator approves and the FDIC does not object to the final valuation and
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the Conversion closes. If the Conversion is not completed by August 12, 1996 (45
days after the last day of the Subscription Offering) and the Administrator
consents to an extension of time to complete the Conversion, subscribers will be
given the right to increase, decrease or rescind their subscriptions. Unless an
affirmative indication is received from subscribers that they wish to continue
to subscribe for shares, the funds will be returned promptly, together with
accrued interest at the passbook rate from the date payment is received until
the funds are returned to the subscriber. If such period is not extended, all
withdrawal authorizations will be terminated and all funds held will be promptly
returned together with accrued interest at the Savings Bank's passbook rate from
the date payment is received until the Conversion is terminated.
PURPOSES OF CONVERSION
The Savings Bank's Board of Directors has formed the Holding Company to
serve upon consummation of the Conversion as a holding company with the Savings
Bank as its subsidiary. The Savings Bank, as a mutual savings association, does
not have stockholders and has no authority to issue capital stock. By converting
to the stock form of organization, the Holding Company and the Savings Bank will
be structured in the form used by holding companies of commercial banks and by a
growing number of savings institutions. Management of the Savings Bank believes
that the Conversion offers a number of advantages which will be important to the
future growth and performance of the Savings Bank in that it is intended: (i) to
improve the overall competitive position of the Savings Bank in its market area
and to support possible future expansion (currently there are no specific plans,
arrangements or understandings, written or oral, regarding any such activities);
(ii) to afford members of the Savings Bank and others the opportunity to become
stockholders of the Holding Company and thereby participate more directly in,
and contribute to, any future growth of the Savings Bank; and (iii) to provide
future access to capital markets.
Formation of the Holding Company will provide greater flexibility than
the Savings Bank would otherwise have to diversify its business activities
through existing or newly formed subsidiaries, or through acquisitions of, or
mergers with, both mutual and stock institutions, as well as other companies.
However, there are no current arrangements, understandings or agreements
regarding any such business combinations.
In addition, the Board of Directors has considered that the Savings
Bank may be better able to serve its customers and its market area as part of a
larger organization with greater resources, rather than as an independent
entity. Recognizing that the Savings Bank's strategic alternatives were limited
operating as a small, mutually owned institution in an increasingly competitive
and regulated environment, the Board of Directors evaluated the Savings Bank's
strategic alternatives, including the possibility of combining with other
financial institutions, prior to adopting the Plan of Conversion. This strategic
evaluation influenced the decision to adopt the Plan of Conversion. See "RISK
FACTORS -- Management Succession and Future Prospects."
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE SAVINGS
BANK
GENERAL. Upon the Savings Bank's conversion to stock form, its
Certificate of Incorporation will be amended to authorize the issuance of
permanent nonwithdrawable capital stock to represent the ownership of the
Savings Bank, including its net worth. THE CAPITAL STOCK WILL BE SEPARATE AND
APART FROM DEPOSIT ACCOUNTS AND WILL NOT BE INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AUTHORITY. Certificates will be issued to evidence ownership of the
capital stock. All of the outstanding capital stock of the Savings Bank will be
acquired by the Holding Company, which in turn will issue its Common Stock to
purchasers in the Conversion. The stock certificates issued by the Holding
Company will be transferable and, therefore, subject to applicable law, the
stock could be sold or traded if a purchaser is available with no effect on any
deposit account the seller may hold at the Savings Bank.
VOTING RIGHTS. Savings members and borrowers will have no voting rights
in the converted Savings Bank or the Holding Company and therefore will not be
able to elect directors of the Savings Bank or the Holding Company or to control
their affairs. Currently, these rights are accorded to savings members of the
Savings Bank.
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Subsequent to the Conversion, voting rights will be vested exclusively in the
Holding Company with respect to the Savings Bank and the holders of the Common
Stock as to matters pertaining to the Holding Company. Each holder of Common
Stock shall be entitled to vote on any matter to be considered by the
stockholders of the Holding Company. A stockholder will be entitled to one vote
for each share of Common Stock owned.
SAVINGS ACCOUNTS AND LOANS. The Savings Bank's savings accounts,
account balances and existing FDIC insurance coverage of savings accounts will
not be affected by the Conversion. Furthermore, the Conversion will not affect
the loan accounts, loan balances or obligations of borrowers under their
individual contractual arrangements with the Savings Bank.
CONTINUITY. The Savings Bank will continue without interruption, during
and after completion of the Conversion, to provide its services to depositors
and borrowers pursuant to existing policies and will maintain its office
operated by the existing management and employees of the Savings Bank.
TAX EFFECTS. The Savings Bank has received an opinion from Breyer &
Aguggia, Washington, D.C., that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Code. Among other things, the
opinion states that: (i) no gain or loss will be recognized to the Savings Bank
in its mutual or stock form by reason of its Conversion; (ii) no gain or loss
will be recognized to its account holders upon the issuance to them of accounts
in the Savings Bank immediately after the Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank in
its mutual form plus interest in the liquidation account; (iii) the tax basis of
account holders' accounts in the Savings Bank immediately after the Conversion
will be the same as the tax basis of their accounts immediately prior to
Conversion; (iv) the tax basis of each account holder's interest in the
liquidation account will be zero; (v) the tax basis of the Common Stock
purchased in the Conversion will be the amount paid and the holding period for
such stock will commence at the date of purchase; and (vi) no gain or loss will
be recognized to account holders upon the receipt or exercise of Subscription
Rights in the Conversion, except to the extent Subscription Rights are deemed to
have value as discussed below. Unlike a private letter ruling issued by the IRS,
an opinion of counsel is not binding on the IRS and the IRS could disagree with
the conclusions reached therein. In the event of such disagreement, no assurance
can be given that the conclusions reached in an opinion of counsel would be
sustained by a court if contested by the IRS.
Based upon past rulings issued by the IRS, the opinion provides that
the receipt of Subscription Rights by Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members under the Plan of Conversion will be
taxable to the extent, if any, that the Subscription Rights are deemed to have a
fair market value. Baxter Fentriss, a financial consulting firm retained by the
Savings Bank, whose findings are not binding on the IRS, has indicated that the
Subscription Rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration and afford the recipients the right only to purchase shares of the
Common Stock at a price equal to its estimated fair market value, which will be
the same price paid by purchasers in the Direct Community Offering for
unsubscribed shares of Common Stock. If the Subscription Rights are deemed to
have a fair market value, the receipt of such rights may only be taxable to
those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise their Subscription Rights. The Savings Bank could also
recognize a gain on the distribution of such Subscription Rights. Eligible
Account Holders, Supplemental Eligible Account Holders and Other Members are
encouraged to consult with their own tax advisers as to the tax consequences in
the event the Subscription Rights are deemed to have a fair market value.
The Savings Bank has also received an opinion from Crisp Hughes & Co.,
L.L.P., Asheville, North Carolina, that, assuming the Conversion does not result
in any federal income tax liability to the Savings Bank, its account holders, or
the Holding Company, implementation of the Plan of Conversion will not result in
any North Carolina income tax liability to such entities or persons.
The opinions of Breyer & Aguggia and Crisp Hughes & Co., L.L.P. and
the letter from Baxter Fentriss are filed as exhibits to the Registration
Statement. See "ADDITIONAL INFORMATION."
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PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
LIQUIDATION RIGHTS. In the unlikely event of a complete liquidation of
the Savings Bank, either before or after Conversion, account holders would have
claims for the amount of their deposit accounts, including accrued interest, and
would receive the protection of deposit insurance up to applicable limits. In
addition to deposit insurance coverage, depositor liquidation rights before and
after Conversion would be as follows:
Liquidation Rights Prior to the Conversion. Prior to the Conversion, in
the event of a complete liquidation of the Savings Bank, each holder of a
deposit account in the Savings Bank would receive such holder's pro rata share
of any assets of the Savings Bank remaining after payment of claims of all
creditors (including the claims of all depositors to the withdrawal value of
their accounts, including accrued interest). Such holder's pro rata share of
such remaining assets, if any, would be in the same proportion of such assets as
the value of such holder's deposit account was to the total value of all deposit
accounts in the Savings Bank at the time of liquidation.
Liquidation Rights After the Conversion. As required by North Carolina
conversion regulations, the Plan of Conversion provides that, upon completion of
the Conversion, a memorandum account (i.e., an account that does not appear on
the Savings Bank's balance sheet) called a "Liquidation Account" will be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. The amount of the Liquidation Account will be equal to
the net worth of the Savings Bank as of the date of its latest statement of
financial condition contained in the final prospectus relating to the sale of
shares of Common Stock in the Conversion. Under applicable regulations, the
Savings Bank will not be permitted to pay dividends on, or repurchase any of,
its capital stock if its net worth would thereby be reduced below the aggregate
amount then required for the Liquidation Account. See "DIVIDEND POLICY" and
"REGULATION -- The Savings Bank -- Dividends." After the Conversion, Eligible
Account Holders and Supplemental Eligible Account Holders will be entitled, in
the event of a liquidation of the Savings Bank, to receive liquidating
distributions of any assets remaining after payment of all creditors' claims
(including the claims of all depositors to the withdrawal values of their
deposit accounts, including accrued interest), before any distributions are made
on the Savings Bank's capital stock, equal to their proportionate interests at
that time in the Liquidation Account.
Each Eligible Account Holder and Supplemental Eligible Account Holder
will have an initial interest ("subaccount balance") in the Liquidation Account
for each deposit account held as of December 31, 1994 and March 31, 1996,
respectively. Each initial subaccount balance will be the amount determined by
multiplying the total opening balance in the Liquidation Account by the
"qualifying deposit" (a deposit of at least $50 as of December 31, 1994 or March
31, 1996, as applicable) of such deposit account divided by the total of all
qualifying deposits on that date. If the amount in the deposit account on any
subsequent annual closing date of the Savings Bank is less than the balance in
such deposit account on any other annual closing date or the balance in such an
account on the Eligibility Record Date or Supplemental Eligibility Record Date,
as the case may be, this interest in the Liquidation Account will be reduced by
an amount proportionate to any such reduction, and will not thereafter be
increased despite any subsequent increase in the related deposit account. An
Eligible Account Holder's or Supplemental Eligible Account Holder's interest in
the Liquidation Account will cease to exist if the deposit account is closed.
The Liquidation Account will never increase and will be correspondingly reduced
as the interests in the Liquidation Account are reduced or cease to exist. In
the event of a liquidation, any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied would be distributed to the Holding Company, as sole stockholder of
the Savings Bank.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with another FDIC-insured depository institution, whether or not the
Savings Bank is the surviving institution, would not be viewed as a complete
liquidation for purposes of distribution of the Liquidation Account. In any such
transaction, the Liquidation Account would be assumed by the surviving
institution to the full extent authorized by regulation of the Administrator as
then in effect.
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THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED COMMUNITY OFFERINGS
THE OFFERINGS (INCLUDING THE SYNDICATED COMMUNITY OFFERING) ARE
EXPECTED TO EXPIRE AT NOON, EASTERN TIME, ON THE EXPIRATION DATE, UNLESS
EXTENDED OR CONTINUED AS DESCRIBED ON THE COVER PAGE OF THIS PROSPECTUS.
SUBSCRIPTION OFFERING. In accordance with the Plan of Conversion and
North Carolina conversion regulations, nontransferable Subscription Rights to
purchase the Common Stock have been issued to all persons and entities entitled
to purchase the Common Stock in the Subscription Offering. The amount of the
Common Stock which these parties may purchase will be subject to the
availability of the Common Stock for purchase under the categories set forth in
the Plan of Conversion. Subscription priorities have been established for the
allocation of stock to the extent that the Common Stock is available. These
priorities are as follows:
CATEGORY 1: ELIGIBLE ACCOUNT HOLDERS. Each depositor with $50.00 or
more on deposit at the Savings Bank as of December 31, 1994 will receive
nontransferable Subscription Rights to subscribe for up to 12,190 shares of
Common Stock ($121,900 based on the Purchase Price). If the exercise of
Subscription Rights in this category results in an oversubscription, shares of
Common Stock will be allocated among subscribing Eligible Account Holders so as
to permit each Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his total allocation equal 100 shares or the
number of shares actually subscribed for, whichever is less. Thereafter,
unallocated shares will be allocated among subscribing Eligible Account Holders
proportionately, based on the amount of their respective qualifying deposits as
compared to total qualifying deposits of all Eligible Account Holders.
Subscription Rights received by officers and directors in this category based on
their increased deposits in the Savings Bank in the one year period preceding
December 31, 1994 are subordinated to the Subscription Rights of other Eligible
Account Holders.
CATEGORY 2: ESOP. The Plan of Conversion provides that the ESOP shall
receive nontransferable Subscription Rights to purchase up to 8% of the shares
of Common Stock issued in the Conversion. The ESOP intends to purchase 8% of the
shares of Common Stock issued in the Conversion. In the event the number of
shares offered in the Conversion is increased above the maximum of the Estimated
Valuation Range, the ESOP shall have a second priority right after Eligible
Account Holders to purchase any such shares exceeding the maximum of the
Estimated Valuation Range up to an aggregate of 8% of the Common Stock. In the
event of an oversubscription of shares of Common Stock and, as a result, the
ESOP is unable to purchase in the Conversion 8% of the total number of shares
offered in the Conversion, then the Board of Directors of the Holding Company
intends to approve the purchase by the ESOP in the open market after the
Conversion, of such shares as are necessary for the ESOP to acquire a number of
shares equal to 8% of the shares of Common Stock issued in the Conversion.
CATEGORY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Under the Plan of
Conversion, this Category provides for the issuance of Subscription Rights to
depositors of the Savings Bank with $50.00 or more on deposit as of March 31,
1996. If the exercise of Subscription Rights in this category results in an
oversubscription, shares of Common Stock will be allocated among Supplemental
Eligible Account Holders in the same fashion as shares will be allocated in the
event of an oversubscription by Eligible Account Holders. Officers, directors
and employees of the Savings Bank are not permitted to participate in this
category.
CATEGORY 4: OTHER MEMBERS. Each depositor and borrower of the Savings
Bank as of the Voting Record Date will receive nontransferable Subscription
Rights to purchase up to 12,190 shares of Common Stock ($121,900 based on the
Purchase Price) in the Conversion to the extent available following
subscriptions by Eligible Account Holders, the ESOP and Supplemental Eligible
Account Holders. In the event of an oversubscription, the available shares will
be allocated proportionately based on the number of votes eligible to be cast by
each Other Member to the total number of votes eligible to be cast at the
Special Meeting.
EACH SUBSCRIPTION RIGHT MAY BE EXERCISED ONLY BY THE PERSON TO WHOM IT
IS ISSUED AND ONLY FOR HIS OWN ACCOUNT. THE SUBSCRIPTION RIGHTS GRANTED UNDER
THE PLAN OF CONVERSION ARE NONTRANSFERABLE; PERSONS
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FOUND TO BE TRANSFERRING SUBSCRIPTION RIGHTS WILL BE SUBJECT TO FORFEITURE OF
SUCH RIGHTS AND POSSIBLE FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE
ADMINISTRATOR OR OTHER GOVERNMENT AGENCIES. EACH PERSON SUBSCRIBING FOR SHARES
IS REQUIRED TO REPRESENT THAT HE IS PURCHASING SUCH SHARES FOR HIS OWN ACCOUNT
AND THAT HE HAS NO AGREEMENT OR UNDERSTANDING WITH ANY OTHER PERSON FOR THE SALE
OR TRANSFER OF SUCH SHARES. ONCE TENDERED, SUBSCRIPTION ORDERS CANNOT BE REVOKED
WITHOUT THE CONSENT OF THE SAVINGS BANK AND THE HOLDING COMPANY.
The Subscription Offering and all Subscription Rights under the Plan of
Conversion will expire at Noon, Eastern Time, on June 12, 1996, whether or not
the Savings Bank has been able to locate each person entitled to such
Subscription Rights. Applicable regulations require that the Holding Company
complete the sale of Common Stock within 45 days after the close of the
Subscription Offering. If the Direct Community Offering and the Syndicated
Community Offerings are not completed by July 26, 1996 (or August 12, 1996), all
funds received will be promptly returned with interest at the passbook rate and
all withdrawal authorizations will be canceled or, if regulatory approval of an
extension of the time period has been granted, all subscribers and purchasers
will be given the right to increase, decrease or rescind their orders. If an
extension of time is obtained, all subscribers will be notified of such
extension and of the duration of any extension that has been granted, and will
be given the right to increase, decrease or rescind their orders. If an
affirmative response to any resolicitation is not received by the Holding
Company from a subscriber, the subscriber's order will be rescinded and all
funds received will be promptly returned with interest (or withdrawal
authorizations will be canceled). No single extension can exceed 90 days.
DIRECT COMMUNITY OFFERING. Concurrently with the Subscription Offering,
the Holding Company is offering shares of the Common Stock in the Direct
Community Offering to natural persons and trusts of natural persons residing in
the Local Community. If any shares remain available on the Expiration Date of
the Direct Community Offering, in the discretion of the Holding Company and the
Savings Bank, the Direct Community Offering may be expanded to include other
members of the general public. NO ORDERS WILL BE ACCEPTED IN THE DIRECT
COMMUNITY OFFERING FROM NATURAL PERSONS OR TRUSTS OF NATURAL PERSONS RESIDING
OUTSIDE THE LOCAL COMMUNITY UNLESS THE DIRECT COMMUNITY OFFERING IS EXPANDED TO
INCLUDE SUCH PERSONS. Purchasers in the Direct Community Offering, together with
their associates and groups acting in concert, are each eligible to purchase up
to 12,190 shares of Common Stock in the Conversion. In the event an insufficient
number of shares are available to fill orders in the Direct Community Offering,
the available shares will be allocated on a pro rata basis determined by the
amount of the respective orders. Orders for the Common Stock in the Direct
Community Offering will be filled to the extent such shares remain available
after satisfaction of all orders received in the Subscription Offering. The
Direct Community Offering may terminate at any time subsequent to the Expiration
Time, however, in no case later than August 12, 1996, unless extended with the
consent of the Administrator. Any extensions beyond August 12, 1996 would
require a resolicitation of orders, wherein subscribers would be given the
opportunity to continue their orders, in which case they will need to
affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest at the passbook rate, or be permitted to modify or cancel their
subscriptions. THE RIGHT OF ANY PERSON TO PURCHASE SHARES IN THE DIRECT
COMMUNITY OFFERING IS SUBJECT TO THE ABSOLUTE RIGHT OF THE HOLDING COMPANY AND
THE SAVINGS BANK TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE OR IN PART. THE
HOLDING COMPANY PRESENTLY INTENDS TO TERMINATE THE DIRECT COMMUNITY OFFERING AS
SOON AS IT HAS RECEIVED ORDERS FOR ALL SHARES AVAILABLE FOR PURCHASE IN THE
CONVERSION.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, no Common Stock will be available for purchase in the Direct
Community Offering and all funds submitted pursuant to the Direct Community
Offering will be refunded promptly with interest.
SYNDICATED COMMUNITY OFFERING. The Plan of Conversion provides that
shares of Common Stock not purchased in the Subscription and Direct Community
Offering, if any, may be offered for sale to certain members of the general
public in a Syndicated Community Offering through a syndicate of registered
broker-dealers to be formed and managed by Trident Securities acting as agent of
the Holding Company in the sale of the Common Stock. THE HOLDING COMPANY AND THE
SAVINGS BANK HAVE THE RIGHT TO REJECT ORDERS, IN WHOLE OR PART, IN THEIR SOLE
DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Trident Securities nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community
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Offering; however, Trident Securities has agreed to use its best efforts in the
sale of shares in the Syndicated Community Offering.
Stock sold in the Syndicated Community Offering will be sold at the
$10.00 per share Purchase Price, the same price as all other shares in the
Offering. See "-- Stock Pricing and Number of Shares to be Issued." No person,
together with any associate or group of persons acting in concert, will be
permitted to subscribe in the Syndicated Community Offering for shares of Common
Stock with an aggregate Purchase Price of more than $121,900. See "-- Plan of
Distribution for the Subscription, Community and Syndicated Community Offerings"
for a description of the commission to be paid to the selected dealers and to
Trident Securities.
Trident Securities may enter into agreements with selected dealers to
assist in the sale of shares in the Syndicated Community Offering. During the
Syndicated Community Offering, selected dealers may only solicit indications of
interest from their customers to place orders with the Holding Company as of a
certain date ("Order Date") for the purchase of shares of Conversion Stock. When
and if Trident Securities and the Holding Company believe that enough
indications of interest and orders have been received in the Subscription
Offering, the Direct Community Offering and the Syndicated Community Offering to
consummate the Conversion, Trident Securities will request, as of the Order
Date, selected dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected dealers will
send confirmations to such customers on the next business day after the Order
Date. Selected dealers may debit the accounts of their customers on a date which
will be three business days from the Order Date ("Settlement Date"). Customers
who authorize selected dealers to debit their brokerage accounts are required to
have the funds for payment in their account on but not before the Settlement
Date. On the Settlement Date, selected dealers will remit funds to the account
that the Holding Company established for each selected dealer. Each customer's
funds so forwarded to the Holding Company, along with all other accounts held in
the same title, will be insured by the FDIC up to the applicable $100,000 legal
limit. After payment has been received by the Holding Company from selected
dealers, funds will earn interest at the passbook rate until the completion of
the Subscription Offering, Direct Community Offering and the Syndicated
Community Offering. At the completion of the Conversion the funds received in
the Offerings will be used to purchase the shares of Common Stock ordered. The
shares issued in the Conversion cannot and will not be insured by the FDIC or
any other government agency. In the event the Conversion is not consummated as
described above, funds with interest will be returned promptly to the selected
dealers, who, in turn, will promptly credit their customers' brokerage accounts.
The Syndicated Community Offering may close any time after the
Expiration Date at the discretion of the Savings Bank and the Holding Company,
but in no case later than August 12, 1996. The Syndicated Community Offering may
run concurrent to the Subscription and Direct Community Offering or subsequent
to such offerings.
In the event the Savings Bank is unable to find purchasers from the
general public for all unsubscribed shares, other purchase arrangements will be
made by the Board of Directors of the Savings Bank, if feasible. Such other
arrangements will be subject to the approval of the Administrator.
PERSONS IN NON-QUALIFIED STATES. The Holding Company and the Savings
Bank will make reasonable efforts to comply with the securities laws of all
states in the United States in which persons entitled to subscribe for stock
pursuant to the Plan of Conversion reside. However, the Holding Company and the
Savings Bank are not required to offer stock in the Subscription Offering to any
person who resides in a foreign country or resides in a state of the United
States with respect to which (i) a small number of persons otherwise eligible to
subscribe for shares of Common Stock reside in such state; or (ii) the Holding
Company or the Savings Bank determines that compliance with the securities laws
of such state would be impracticable for reasons of cost or otherwise, including
but not limited to a request that the Holding Company and the Savings Bank or
their officers, directors or trustees register as a broker, dealer, salesman or
selling agent, under the securities laws of such state, or a request to register
or otherwise qualify the Subscription Rights or Common Stock for sale or submit
any filing with respect thereto in such state. Where the number of persons
eligible to subscribe for shares in one state is small, the Holding Company and
the Savings Bank will base their decision as to whether or not to offer the
Common Stock in such state on a number of factors, including the size of
accounts held by account holders in the state, the cost of registering or
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qualifying the shares or the need to register the Holding Company, its officers,
directors or employees as brokers, dealers or salesmen.
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION, DIRECT COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
The Savings Bank and the Holding Company have retained Trident
Securities to consult with and advise the Savings Bank and, to assist the
Savings Bank and the Holding Company, on a best efforts basis, in the
distribution of shares in the Offerings. Trident Securities is a broker-dealer
registered with the SEC and a member of the NASD. Trident Securities will assist
the Savings Bank in the Conversion as follows: (i) it will act as marketing
advisor with respect to the Subscription Offering and will represent the Savings
Bank as placement agent on a best efforts basis in the sale of the Common Stock
in the Direct Community Offering; (ii) it will conduct training sessions to
ensure that directors, officers and employees of the Savings Bank are
knowledgeable regarding the Conversion process; and (iii) it will provide
assistance in the establishment and supervision of the Stock Information Center,
including training the Savings Bank's staff to properly record and tabulate
orders for the purchase of Common Stock and to appropriately respond to customer
inquiries.
Based upon negotiations between Trident Securities on the one hand and
the Holding Company and the Savings Bank on the other hand concerning fee
structure, Trident Securities will receive a management fee in the amount of 1%
of the aggregate dollar amount of capital stock sold in both the Subscription
and Direct Community Offerings. Further, Trident Securities shall receive sales
commissions equal to (i) 2.0% of the aggregate dollar amount of Common Stock
sold in the Subscription Offering, excluding shares sold to the Savings Bank's
directors, executive officers and their associates and the ESOP and (ii) 2.0% of
the aggregate dollar amount of Common Stock sold in the Direct Community
Offering. Selected dealers participating in the Syndicated Community Offering
shall receive a commission in an amount to be agreed upon jointly by Trident
Securities and the Savings Bank to reflect market requirements at the time of
the stock allocation in the Syndicated Community Offering. Fees and commissions
paid to Trident Securities and to any other selected dealers may be deemed to be
underwriting fees, and Trident Securities and such selected dealers may be
deemed to be underwriters. Trident Securities will also be reimbursed for its
reasonable out-of-pocket expenses, including legal fees, not to exceed $40,000
in the aggregate. Trident Securities has received an advance of $10,000 towards
its reimbursable expenses. Total fees to and expenses of Trident Securities are
expected to be between $367,000 and $501,000 at the minimum and maximum of the
Estimated Valuation Range (and $578,000 at 15% above the maximum of the
Estimated Valuation Range). For additional information, see "-- Stock Pricing
and Number of Shares to be Issued" and "USE OF PROCEEDS."
The Holding Company and the Savings Bank have also agreed to indemnify
Trident Securities against liabilities and expenses (including legal fees)
incurred in connection with certain claims or litigation arising out of or based
upon untrue statements or omissions contained in the offering material for the
Common Stock or with regard to allocations of shares (in the event of
oversubscription) or determinations of eligibility to purchase shares.
DESCRIPTION OF SALES ACTIVITIES
The Common Stock will be offered in the Subscription and Direct
Community Offering principally by the distribution of this Prospectus and
through activities conducted at the Savings Bank's Stock Information Center at
its office facility. The Stock Information Center is expected to operate during
normal business hours throughout the Subscription and Direct Community Offering.
It is expected that at any particular time, one or more Trident Securities
employees will be working at the Stock Information Center. Such employees of
Trident Securities will be responsible for mailing materials relating to the
Subscription and Direct Community Offering, responding to questions regarding
the Conversion and the Subscription and Direct Community Offering and processing
stock orders.
Sales of Common Stock will be made by registered representatives
affiliated with Trident Securities or by the selected dealers managed by Trident
Securities. The management and employees of the Savings Bank may participate in
the Offerings in clerical capacities, providing administrative support in
effecting sales transactions or, when permitted by state securities laws,
answering questions of a mechanical nature relating to the proper execution
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of the Order Form. Management of the Savings Bank may answer questions regarding
the business of the Savings Bank when permitted by state securities laws. Other
questions of prospective purchasers, including questions as to the advisability
or nature of the investment, will be directed to registered representatives. The
management and employees of the Savings Bank have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock.
No officer, director or employee of the Savings Bank or the Holding
Company will be compensated, directly or indirectly, for any activities in
connection with the offer or sale of securities issued in the Conversion.
None of the Savings Bank's personnel participating in the Subscription
and Direct Community Offering is registered or licensed as a broker or dealer or
an agent of a broker or dealer. The Savings Bank's personnel will assist in the
above-described sales activities pursuant to an exemption from registration as a
broker or dealer provided by Rule 3a4-1 ("Rule 3a4-1") promulgated under the
Exchange Act. Rule 3a4-1 generally provides that an "associated person of an
issuer" of securities shall not be deemed a broker solely by reason of
participation in the sale of securities of such issuer if the associated person
meets certain conditions. Such conditions include, but are not limited to, that
the associated person participating in the sale of an issuer's securities not be
compensated in connection therewith at the time of participation, that such
person not be associated with a broker or dealer and that such person observe
certain limitations on his participation in the sale of securities. For purposes
of this exemption, "associated person of an issuer" is defined to include any
person who is a director, officer or employee of the issuer or a company that
controls, is controlled by or is under common control with the issuer.
PROCEDURE FOR PURCHASING SHARES IN THE SUBSCRIPTION AND DIRECT COMMUNITY
OFFERING
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no Prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
Order Form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order Forms will only be distributed with a Prospectus. The Savings Bank will
accept for processing only orders submitted on Order Forms.
To purchase shares in the Subscription and Direct Community Offering,
an executed Order Form with the required payment for each share subscribed for,
or with appropriate authorization for withdrawal from the subscriber's deposit
account with the Savings Bank (which may be given by completing the appropriate
blanks in the Order Form), must be received by the Savings Bank by Noon, Eastern
Time, on the Expiration Date. Order Forms which are not received by such time or
are executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted. In addition, the
Savings Bank is not obligated to accept orders submitted on photocopied or
telecopied Order Forms. The Holding Company and the Savings Bank have the right
to waive or permit the correction of incomplete or improperly executed Order
Forms, but do not represent that they will do so. PURSUANT TO THE PLAN OF
CONVERSION, THE INTERPRETATION BY THE HOLDING COMPANY AND THE SAVINGS BANK OF
THE TERMS AND CONDITIONS OF THE PLAN OF CONVERSION AND OF THE ORDER FORM WILL BE
FINAL. Once received, an executed Order Form may not be modified, amended or
rescinded without the consent of the Savings Bank unless the Conversion has not
been completed within 45 days after the end of the Subscription Offering, unless
such period has been extended.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (December 31,
1994) and/or the Supplemental Eligibility Record Date (March 31, 1996) and/or
the Voting Record Date (May 3, 1996) must list all accounts on the Order Form
giving all names in each account, the account number and the approximate account
balance as of such date.
Payment for subscriptions may be made (i) in cash if delivered in
person at the Savings Bank, (ii) by check, bank draft, or money order, or (iii)
by authorization of withdrawal from deposit accounts maintained with the Savings
Bank. Appropriate means by which such withdrawals may be authorized are provided
on the Order Form. No wire
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transfers will be accepted. Interest will be paid on payments made by cash,
check, bank draft or money order at the passbook rate from the date payment is
received until the completion or termination of the Conversion. Such interest
checks will be mailed at the completion of the Conversion in payment of interest
earned on subscription funds. If payment is made by authorization of withdrawal
from deposit accounts, the funds authorized to be withdrawn from a deposit
account will continue to accrue interest at the contractual rates until
completion or termination of the Conversion (unless the certificate matures
after the date of receipt of the Order Form but prior to closing, in which case
funds will earn interest at the passbook rate from the date of maturity until
consummation of the Conversion), but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or termination
of the Conversion. At the completion of the Conversion the funds received in the
Offerings will be used to purchase the shares of Common Stock ordered. THE
SHARES ISSUED IN THE CONVERSION CANNOT AND WILL NOT BE INSURED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY. In the event that the Conversion is not consummated
for any reason, all funds submitted will be promptly refunded with interest as
described above.
If a subscriber authorizes the Savings Bank to withdraw the amount of
the Purchase Price from his deposit account, the Savings Bank will do so as of
the effective date of Conversion. The Savings Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will earn interest at the Savings
Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the
ESOP will not be required to pay for the shares subscribed for at the time it
subscribes, but rather may pay for such shares of Common Stock subscribed for at
the Purchase Price upon consummation of the Conversion, provided that there is
in force from the time of its subscription until such time, a loan commitment
from an unrelated financial institution or the Holding Company to lend to the
ESOP, at such time, the aggregate Purchase Price of the shares for which it
subscribed.
Certificates representing shares of Common Stock purchased, and any
refund due, will be mailed to purchasers at such address as may be specified in
properly completed Order Forms to or the last address of such persons appearing
on the records of the Savings Bank as soon as practicable following consummation
of the sale of all shares of Common Stock. Any certificates returned as
undeliverable will be disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to subscribers and
purchasers, subscribers and purchasers may not be able to sell the shares of
Common Stock for which they subscribed or purchased.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Purchase Price of shares of the Common Stock sold in the
Subscription Offering, Community Offering and Syndicated Community Offering was
determined by the Boards of Directors of the Holding Company and the Savings
Bank in consultation with the Savings Bank's financial advisor and sales agent,
Trident Securities, and was based upon a number of factors, including the market
price per share of the stock of other financial institutions. The North Carolina
regulations governing conversion of North Carolina-chartered mutual savings
banks to stock form require that the aggregate purchase price of the shares of
Common Stock of the Holding Company sold in connection with the Conversion be
equal to not less than the minimum, nor more than the maximum, of the Estimated
Valuation Range which is established by an independent appraisal in the
Conversion and is described below; provided however, that with the consent of
the Administrator and the FDIC, the aggregate purchase price of the Common Stock
sold may be increased to up to 15% above the maximum of the Estimated Valuation
Range, without a resolicitation of subscribers or any right to cancel, rescind
or change subscription orders, to reflect changes in market and financial
conditions following commencement of the Subscription Offering.
FDIC rules with respect to appraisal require that the independent
appraisal must include a complete and detailed description of the elements of
the appraisal report, justification for the methodology employed and sufficient
support for the conclusions reached. The appraisal report must include a full
discussion of each peer group member
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and documented analytical evidence supporting variances from peer group
statistics. The appraisal report must also include a complete analysis of the
converting institution's pro forma earnings, which should include the
institution's full potential once it fully deploys the capital from the
conversion pursuant to its business plan.
The Savings Bank and the Holding Company have retained Baxter Fentriss
to prepare an appraisal of the pro forma market value of the common stock of the
Holding Company to be issued in connection with the Conversion, as well as a
business plan. Baxter Fentriss will receive a fee expected to total
approximately $28,000 for its appraisal services and preparation of a business
plan, plus reasonable out-of-pocket expenses incurred in connection with the
appraisal. The Savings Bank has agreed to indemnify Baxter Fentriss under
certain circumstances against liabilities and expenses (including legal fees)
arising out of, related to, or based upon the Conversion.
Baxter Fentriss has prepared an appraisal of the estimated pro forma
market value of the Savings Bank as converted taking into account the formation
of the Holding Company as the holding company for the Savings Bank. For its
analysis, Baxter Fentriss undertook substantial investigations to learn about
the Savings Bank's business and operations. Management supplied financial
information, including annual financial statements, information on the
composition of assets and liabilities, and other financial schedules. In
addition to this information, Baxter Fentriss reviewed the Savings Bank's
Application to Convert a Mutual Savings Bank to a Stock Owned Savings Bank and
the Holding Company's Form SB-2 Registration Statement. Further, Baxter Fentriss
visited the Savings Bank's facilities and had discussions with the Savings
Bank's management and its special conversion legal counsel, Breyer & Aguggia. No
detailed individual analysis of the separate components of the Holding Company's
or the Savings Bank's assets and liabilities was performed in connection with
the evaluation.
In estimating the pro forma market value of the Holding Company's
Common Stock, as required by applicable regulatory guidelines, Baxter Fentriss'
analysis utilized three selected valuation procedures, the Price/Book ("P/B")
method, the Price/Earnings ("P/E") method, and Price/Assets ("P/A") method, all
of which are described in its report. Baxter Fentriss placed the greatest
emphasis on the P/E and P/B methods in estimating pro forma market value. In
applying these procedures, Baxter Fentriss reviewed among other factors, the
economic make-up of the Savings Bank's primary market area, the Savings Bank's
financial performance and condition in relation to publicly-traded institutions
that Baxter Fentriss deemed comparable to the Savings Bank, the specific terms
of the offering of the Holding Company's Common Stock, the pro forma impact of
the additional capital raised in the Conversion, conditions of securities
markets in general, and the market for thrift institution common stock in
particular. Baxter Fentriss' analysis provides an approximation of the pro forma
market value of the Holding Company's Common Stock based on the valuation
methods applied and the assumptions outlined in its report. Included in its
report were certain assumptions as to the pro forma earnings of the Holding
Company after the Conversion that were utilized in determining the appraised
value. These assumptions included expenses of $705,000 at the midpoint of the
Estimated Valuation Range, an assumed after-tax rate of return on the net
conversion proceeds of 3.11%, purchases by the ESOP of 8% of the Common Stock
sold in the Conversion and purchases in the open market by the MRP of a number
of shares equal to 4% of the Common Stock sold in the Conversion at the Purchase
Price. See "PRO FORMA DATA" for additional information concerning these
assumptions. The use of different assumptions may yield somewhat different
results.
On the basis of the foregoing, Baxter Fentriss has advised the Holding
Company and the Savings Bank that, in its opinion, as of April 10, 1996, the
aggregate estimated pro forma market value of the Holding Company and,
therefore, the Common Stock was within the valuation range of $9.01 million to
$12.19 million with a midpoint of $10.60 million. After reviewing the
methodology and the assumptions used by Baxter Fentriss in the preparation of
the appraisal, the Board of Directors established the Estimated Valuation Range
which is equal to the valuation range of $9.01 million to $12.19 million with a
midpoint of $10.60 million. Assuming that the shares are sold at $10.00 per
share in the Conversion, the estimated number of shares would be between 901,000
and 1,219,000 with a midpoint of 1,060,000 shares. The Purchase Price of $10.00
was determined by discussion among the Boards of Directors of the Savings Bank
and the Holding Company and Trident Securities, taking into account, among other
factors (i) the requirement under North Carolina regulations that the Common
Stock be offered in a manner that will
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achieve the widest distribution of the stock and (ii) desired liquidity in the
Common Stock subsequent to the Conversion. Since the outcome of the Offerings
relate in large measure to market conditions at the time of sale, it is not
possible to determine the exact number of shares that will be issued by the
Holding Company at this time. The Estimated Valuation Range may be amended, with
the approval of the Administrator, if necessitated by developments following the
date of such appraisal in, among other things, market conditions, the financial
condition or operating results of the Savings Bank, regulatory guidelines or
national or local economic conditions.
If, upon completion of the Subscription and Direct Community Offering,
at least the minimum number of shares are subscribed for, Baxter Fentriss, after
taking into account factors similar to those involved in its prior appraisal,
will determine its estimate of the pro forma market value of the Savings Bank
and the Holding Company upon Conversion, as of the close of the Subscription and
Direct Community Offering.
No sale of the shares will take place unless prior thereto Baxter
Fentriss confirms to the Administrator and the FDIC that, to the best of Baxter
Fentriss' knowledge and judgment, nothing of a material nature has occurred
which would cause it to conclude that the actual total purchase price on an
aggregate basis was incompatible with its estimate of the total pro forma market
value of the Holding Company and the Savings Bank as converted at the time of
the sale. If, however, the facts do not justify such a statement, the
Subscription, Direct Community and Syndicated Community Offerings or other sale
may be canceled, a new Estimated Valuation Range and price per share set and new
Subscription, Direct Community and Syndicated Community Offerings held. Under
such circumstances, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced.
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares shown above. In
the event the total amount of shares issued is less than 901,000 or more than
1,401,850 (15% above the maximum of the Estimated Valuation Range), for
aggregate gross proceeds of less than $9.01 million or more than $14.02 million,
subscription funds will be returned promptly with interest to each subscriber
unless he indicates otherwise. In the event a new valuation range is established
by Baxter Fentriss, such new range will be subject to approval by the
Administrator.
If purchasers cannot be found for an insignificant residue of
unsubscribed shares from the general public, other purchase arrangements will be
made by the Boards of Directors of the Savings Bank and the Holding Company, if
possible. Such other purchase arrangements will be subject to the approval of
the Administrator and may provide for purchases for investment purposes by
directors, officers, their associates and other persons in excess of the
limitations provided in the Plan of Conversion and in excess of the proposed
director purchases set forth herein, although no such purchases are currently
intended. If such other purchase arrangements cannot be made, the Plan of
Conversion will terminate.
In formulating its appraisal, Baxter Fentriss relied upon the
truthfulness, accuracy and completeness of all documents the Savings Bank
furnished it. Baxter Fentriss also considered financial and other information
from regulatory agencies, other financial institutions, and other public
sources, as appropriate. While Baxter Fentriss believes this information to be
reliable, Baxter Fentriss does not guarantee the accuracy or completeness of
such information and did not independently verify the financial statements and
other data provided by the Savings Bank and the Holding Company or independently
value the assets or liabilities of the Holding Company and the Savings Bank. THE
APPRAISAL BY BAXTER FENTRISS IS NOT INTENDED TO BE, AND MUST NOT BE INTERPRETED
AS, A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
CONVERSION OR OF PURCHASING SHARES OF COMMON STOCK. MOREOVER, BECAUSE THE
APPRAISAL IS NECESSARILY BASED ON MANY FACTORS WHICH CHANGE FROM TIME TO TIME,
THERE IS NO ASSURANCE THAT PERSONS WHO PURCHASE SUCH SHARES IN THE CONVERSION
WILL LATER BE ABLE TO SELL SHARES THEREAFTER AT PRICES AT OR ABOVE THE PURCHASE
PRICE.
Baxter Fentriss' appraisal report is filed as an exhibit to the
Registration Statement. A copy of the appraisal is also available for inspection
at the Savings Bank. See "ADDITIONAL INFORMATION."
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LIMITATIONS ON PURCHASES OF SHARES
The Plan of Conversion provides for certain additional limitations to
be placed upon the purchase of Common Stock by eligible subscribers and others
in the Conversion. Each subscriber must subscribe for a minimum of 50 shares.
Additionally, no person by himself, or with any associate or group of persons
acting in concert, shall purchase shares of Common Stock with an aggregate
Purchase Price that exceeds $121,900 (12,190 shares based on the $10.00 per
share Purchase Price) in the Conversion. Officers, directors and their
associates may not purchase, individually, more than 12,190 shares of Common
Stock offered in the Conversion (or $121,900 based on the Purchase Price). For
purposes of the Plan of Conversion, the directors are not deemed to be acting in
concert solely by reason of their Board membership. Pro rata reductions within
each Subscription Rights category will be made in allocating shares to the
extent that the maximum purchase limitations are exceeded.
The Savings Bank's and the Holding Company's Boards of Directors may,
in their sole discretion, increase the maximum purchase limitation set forth
above up to 9.99% of the shares of Common Stock sold in the Conversion, provided
that orders for shares which exceed 5% of the shares of Common Stock sold in the
Conversion may not exceed, in the aggregate, 10% of the shares sold in the
Conversion. The Savings Bank and the Holding Company do not intend to increase
the maximum purchase limitation unless market conditions are such that an
increase in the maximum purchase limitation is necessary to sell a number of
shares in excess of the minimum of the Estimated Valuation Range. If the Boards
of Directors decide to increase the purchase limitation above 12,190 shares of
Common Stock, all persons who subscribed for the maximum number of shares will
be given the opportunity to increase their subscriptions accordingly, subject to
the rights and preferences of any person who has priority Subscription Rights.
The term "associate" of a person is defined in the Plan of Conversion
to mean (i) any corporation or organization (other than the Savings Bank or a
majority-owned subsidiary of the Savings Bank, or the Holding Company) of which
such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as trustee or in a similar fiduciary capacity
(excluding tax-qualified employee plans); and (iii) any relative or spouse of
such person, or any relative of such spouse, who either has the same home as
such person or who is a director or officer of the Savings Bank, its subsidiary,
or the Holding Company. For example, a corporation of which a person serves as
an officer would be an associate of such person, and, therefore, all shares
purchased by such corporation would be included with the number of shares which
such person could purchase individually under the above limitations.
The term "officer" is defined in the Plan of Conversion to mean an
executive officer of the Savings Bank, including its Chairman of the Board,
President, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents in
charge of principal business functions, the Secretary and Treasurer as well as
any other person performing similar functions.
Common Stock purchased pursuant to the Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Savings Bank and the Holding Company and by NASD members. See "-- Restrictions
on Transferability by Directors and Officers and NASD Members."
SHARES TO BE PURCHASED BY MANAGEMENT PURSUANT TO SUBSCRIPTION RIGHTS
Directors, officers and employees of the Savings Bank will be entitled
to subscribe for shares of Common Stock in the Subscription Offering to the
extent they qualify as Eligible Account Holders, Supplemental Eligible Account
Holders and Other Members. Shares purchased by such persons will be purchased at
the same price per share, $10.00, that will be paid by other purchasers in the
Offerings. They may also purchase Common Stock in the Direct Community Offering
or in the Syndicated Community Offering, if any, subject to the maximum purchase
limitations applicable to all purchasers of shares in the Conversion.
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The following table sets forth each of the executive officers and
directors of the Savings Bank who intends to purchase Common Stock, and for all
executive officers and directors as a group (including in each case all
"associates" of such persons) the aggregate dollar amount of Common Stock for
which such persons and group intends to subscribe assuming that 1,219,000 shares
of Common Stock will be issued and that sufficient shares will be available to
satisfy such subscriptions. The amounts reflected are estimates only and the
actual subscriptions may differ.
<TABLE>
<CAPTION>
Percent of
Shares at
Maximum of
Name and Anticipated Number of Anticipated Dollar Estimated
Position Shares Purchased Amount Purchased Valuation Range
<S> <C> <C> <C>
Calvin F. Hall 7,500 $75,000 0.62%
President and Director
Edward Ballew, Jr. 7,500 75,000 0.62
Executive Vice President,
Chief Executive Officer
and Director
Emma Lee M. Wilson 7,000 70,000 0.57
Assistant Managing Officer,
Treasurer, Secretary
and Director
Baxter D. Johnson 2,500 25,000 0.21
Director
Lloyd Hise, Jr. 4,000 40,000 0.32
------- --------- -----
Director
Total 28,500 $285,000 2.34%
====== ======== ====
</TABLE>
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan. For a description of
the number of shares to be purchased by the ESOP and expected awards
under the MRP and Stock Option Plan, see "MANAGEMENT OF THE SAVINGS
BANK -- Benefits -- Employee Stock Ownership Plan," "-- Benefits --
1996 Stock Option Plan" and "-- Benefits -- Management Recognition
Plan."
RESTRICTIONS ON TRANSFERABILITY BY DIRECTORS AND OFFICERS AND NASD MEMBERS
Shares of Common Stock purchased by directors and officers of the
Holding Company may not be sold for a period of one year following completion of
the Conversion, except in the event of the death of the stockholder or in any
exchange of the Common Stock in connection with a merger or acquisition of the
Holding Company. Shares of Common Stock received by directors or officers upon
exercise of options issued pursuant to the Stock Option Plan are not subject to
this restriction. Accordingly, shares of Common Stock issued by the Holding
Company to directors and officers shall bear a legend giving appropriate notice
of the restriction, and, in addition, the Holding Company will give appropriate
instructions to the transfer agent for the Holding Company's Common Stock with
respect to the restriction on transfers. Any shares issued to directors and
officers as a stock dividend, stock split or otherwise with respect to
restricted Common Stock shall be subject to the same restrictions.
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Purchases of outstanding shares of Common Stock of the Holding Company
by directors, executive officers (or any person who was an executive officer or
director of the Savings Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the Administrator. This restriction does not apply, however,
to negotiated transactions involving more than 1% of the Holding Company's
outstanding Common Stock or to the purchase of stock pursuant to the Stock
Option Plan.
The Holding Company has filed with the SEC a Registration Statement
under the Securities Act for the registration of the Common Stock to be issued
pursuant to the Conversion. The registration under the Securities Act of shares
of the Common Stock to be issued in the Conversion does not cover the resale of
such shares. Shares of Common Stock purchased by persons who are not affiliates
of the Holding Company may be resold without registration. Shares purchased by
an affiliate of the Holding Company will be subject to the resale restrictions
of Rule 144 under the Securities Act. If the Holding Company meets the current
public information requirements of Rule 144 under the Securities Act, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks. Provision may be made in the future by the Holding Company
to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.
In addition, under guidelines of the NASD, members of the NASD and
their associates are subject to certain restrictions on the transfer of
securities purchased in accordance with Subscription Rights and to certain
reporting requirements upon purchase of such securities.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE SAVINGS BANK
The following discussion is a summary of certain provisions of federal
law and regulations and North Carolina corporate law, as well as the Articles of
Incorporation and Bylaws of the Holding Company, relating to stock ownership and
transfers, the Board of Directors and business combinations, all of which may be
deemed to have "anti-takeover" effects. The description of these provisions is
necessarily general and reference should be made to the actual law and
regulations and to the Articles of Incorporation and Bylaws of the Holding
Company. See "ADDITIONAL INFORMATION" as to how to obtain a copy of these
documents.
THE HOLDING COMPANY
RESTRICTIONS IN ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and Bylaws of the Holding Company contain certain provisions that
are intended to encourage a potential acquiror to negotiate any proposed
acquisition of the Holding Company directly with the Holding Company's Board of
Directors. An unsolicited non-negotiated takeover proposal can seriously disrupt
the business and management of a corporation and cause it great expense.
Accordingly, the Board of Directors believes it is in the best interests of the
Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with management. The Board of Directors believes that these
provisions will encourage such negotiations and discourage hostile takeover
attempts. It is also the Board of Directors' view that these provisions should
not discourage persons from proposing a merger or transaction at prices
reflective of the true value of the Holding Company and that otherwise is in the
best interests of all stockholders. However, these provisions may have the
effect of discouraging offers to purchase the Holding Company or its securities
which are not approved by the Board of Directors but which certain of the
Holding Company's stockholders may deem to be in their best interests or
pursuant to which stockholders would receive a substantial premium for their
shares over the current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors and management more difficult. The Boards of Directors of the Savings
Bank and
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the Holding Company believe these provisions are in the best interests of the
stockholders because they will assist the Holding Company's Board of Directors
in managing the affairs of the Holding Company in the manner they believe to be
in the best interests of stockholders generally and because a company's board of
directors is often best able in terms of knowledge regarding the company's
business and prospects, as well as resources, to negotiate the best transaction
for its stockholders as a whole.
The following description of certain of the provisions of the Articles
of Incorporation and Bylaws of the Holding Company is necessarily general and
reference should be made in each instance to such Articles of Incorporation and
Bylaws. See "ADDITIONAL INFORMATION" regarding how to obtain a copy of these
documents.
Board of Directors. The Articles of Incorporation provide that the
number of directors shall not be less than five nor more than 15. The initial
number of directors is five, but such number may be changed by resolution of the
Board of Directors. These provisions have the effect of enabling the Board of
Directors to elect directors friendly to management in the event of a
non-negotiated takeover attempt and may make it more difficult for a person
seeking to acquire control of the Holding Company to gain majority
representation on the Board of Directors in a relatively short period of time.
The Holding Company believes these provisions to be important to continuity in
the composition and policies of the Board of Directors.
The Articles of Incorporation provide that, so long as the number of
directors is at least nine or more, there will be staggered elections of
directors so that the directors will each be initially elected to one, two or
three-year terms, and thereafter all directors will be elected to terms of three
years each. This provision also has the effect of making it more difficult for a
person seeking to acquire control of the Holding Company to gain majority
representation on the Board of Directors.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of the Holding Company's shares cannot be assured representation on the
Board of Directors, the absence of cumulative voting may discourage
accumulations of the Holding Company's shares or proxy contests that would
result in changes in the Holding Company's management. The Board of Directors
believes that (i) elimination of cumulative voting will help to assure
continuity and stability of management and policies; (ii) directors should be
elected by a majority of the stockholders to represent the interests of the
stockholders as a whole rather than be the special representatives of particular
minority interests; and (iii) efforts to elect directors representing specific
minority interests are potentially divisive and could impair the operations of
the Holding Company.
Special Meetings. The Bylaws of the Holding Company provide that
special meetings of stockholders of the Holding Company may be called by the
Chairman of the Board, the Chief Executive Officer, the President, or by the
Board of Directors. If a special meeting is not called by such persons or
entities, stockholder proposals cannot be presented to the stockholders for
action until the next annual meeting. Stockholders are not permitted to call
special meetings under the Holding Company's Bylaws.
Capital Stock. The Articles of Incorporation of the Holding Company
authorize the issuance of 3,000,000 shares of common stock and 500,000 shares of
preferred stock. The shares of common stock and preferred stock authorized in
addition to the number of shares of Common Stock to be issued pursuant to the
Conversion were authorized to provide the Holding Company's Board of Directors
with flexibility to issue additional shares, without further stockholder
approval, for proper corporate purposes, including financing, acquisitions,
stock dividends, stock splits, director and employee stock options, grants of
restricted stock to directors and employees and other appropriate purposes.
However, issuance of additional authorized shares may also have the effect of
impeding or deterring future attempts to gain control of the Holding Company.
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The Board of Directors also has sole authority to determine the terms
of any one or more series of preferred stock, including voting rights,
conversion rates, dividend rights, and liquidation preferences, which could
adversely affect the voting power of the holders of the Common Stock and
discourage an attempt to acquire control of the Holding Company. The Board of
Directors does not intend to issue any preferred stock, except on terms which it
deems to be in the best interests of the Holding Company and its stockholders.
However, the Board of Directors has the power, to the extent consistent with its
fiduciary duties, to issue preferred stock to persons friendly to management or
otherwise in order to impede attempts by third parties to acquire voting control
of the Holding Company and to impede other transactions not favored by
management. The Board of Directors currently has no plans for the issuance of
additional shares of Common Stock (except for such shares as may be necessary to
fund the MRP and the Stock Option Plan) or of shares of preferred stock.
Director Nominations. The Bylaws of the Holding Company require a
stockholder who intends to nominate a candidate for election to the Board of
Directors at a stockholders' meeting to give written notice to the Secretary of
the Holding Company at least 50 days (but not more than 90 days) in advance of
the date of the meeting at which such nominations will be made. The nomination
notice is also required to include specified information concerning the nominee
and the proposing stockholder. The Board of Directors of the Holding Company
believes that it is in the best interests of the Holding Company and its
stockholders to provide sufficient time for the Board of Directors to study all
nominations and to determine whether to recommend to the stockholders that such
nominees be considered.
SUPERMAJORITY VOTING PROVISIONS. The Holding Company's Articles of
Incorporation require the affirmative vote of 75% of the outstanding shares
entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least 75% of the number of the Continuing Directors (as defined in
the Articles of Incorporation) on the Holding Company's Board of Directors.
"Continuing Directors" generally includes all members of the Board of Directors
who are not affiliated with any individual, partnership, trust or other person
or entity (or the affiliates and associates of such person or entity) which is a
beneficial owner of 10% or more of the voting shares of the Holding Company.
This provision could tend to make the acquisition of the Holding Company more
difficult to accomplish without the cooperation or favorable recommendation of
the Holding Company's Board of Directors.
ANTI-TAKEOVER EFFECT OF BENEFIT PLANS. The existence of the ESOP may
tend to discourage takeover attempts because employees participating under the
ESOP and the trustees of the ESOP will effectively control the voting of the
large block of shares held by the ESOP. See "MANAGEMENT OF THE SAVINGS BANK --
Benefits -- Employee Stock Ownership Plan." Also, if approved by the
stockholders of the Holding Company at a meeting of stockholders following the
Conversion, the MRP and the Stock Option Plan will provide for the ownership of
additional shares of Common Stock by the employees and the directors of the
Savings Bank. See "MANAGEMENT OF THE SAVINGS BANK -- Benefits -- Management
Recognition Plan" and "-- 1996 Stock Option Plan."
If (i) the MRP and the Stock Option Plan are approved, (ii) all of the
options issuable under the Stock Option Plan are granted and exercised, (iii)
all of the shares issuable under the MRP are awarded and issued, and (iv) the
Holding Company did not issue any additional shares of its Common Stock, the
shares held by directors and executive officers and their affiliates as a group,
including shares expected to be purchased outright in the Conversion and shares
expected to be purchased by the ESOP, would give such persons effective control
over as much as 16.3% of the Common Stock issued and outstanding at the maximum
of the Estimated Valuation Range. Because the Holding Company's Articles of
Incorporation require the affirmative vote of 75% of the outstanding shares
entitled to vote in order to approve certain mergers, consolidations or other
business combinations, the officers and directors, as a group, could effectively
block such transactions. See "-- Supermajority Voting Provisions."
REGULATORY RESTRICTIONS. Applicable North Carolina regulations provide
that for a period of three years following the Conversion, the prior written
approval of the Administrator will be required before any person may, directly
or indirectly, acquire beneficial ownership of or make any offer to acquire any
stock or other equity security of the Holding Company if, after the acquisition
or consummation of such offer, such person would be the beneficial
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owner of more than 10% of such class of stock or other class of equity security
of the Holding Company. If any person were to so acquire the beneficial
ownership of more than 10% of any class of any equity security without prior
written approval, the securities beneficially owned in excess of 10% would not
be counted as shares entitled to vote and would not be voted or counted as
voting shares in connection with any matter submitted to stockholders for a
vote. Approval is not required for (i) any offer with a view toward public
resale made exclusively to the Holding Company or its underwriters or the
selling group acting on its behalf or (ii) any offer to acquire or acquisition
of beneficial ownership of more than 10% of the common stock of the Holding
Company by a corporation whose ownership is or will be substantially the same as
the ownership of the Holding Company, provided that the offer or acquisition is
made more than one year following the consummation of the Conversion. The
regulation provides that within one year following the Conversion, the
Administrator would approve the acquisition of more than 10% of beneficial
ownership only to protect the safety and soundness of the institution. During
the second and third years after the Conversion, the Administrator may approve
such an acquisition upon a finding that (i) the acquisition is necessary to
protect the safety and soundness of the Holding Company and the Savings Bank or
the Board of Directors of the Holding Company and the Savings Bank support the
acquisition and (ii) the acquiror is of good character and integrity and
possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to the Holding Company and the Savings Bank and the public
interests will not be adversely affected.
The Change in Bank Control Act, together with North Carolina
regulations, require that the consent of the Administrator and the Federal
Reserve be obtained prior to any person or company acquiring "control" of a
North Carolina-chartered savings bank or a North Carolina-chartered savings bank
holding company. Upon acquiring control, such acquiror will be deemed to be a
bank holding company. Control is conclusively presumed to exist if, among other
things, an individual or company acquires the power, directly or indirectly, to
direct the management or policies of the Holding Company or the Savings Bank or
to vote 25% or more of any class of voting stock. Control is rebuttably presumed
to exist under the Change in Bank Control Act if, among other things, a person
acquires more than 10% of any class of voting stock, and the issuer's securities
are registered under Section 12 of the Exchange Act or the person would be the
single largest stockholder. Restrictions applicable to the operations of bank
holding companies and conditions imposed by the Federal Reserve in connection
with its approval of such acquisitions may deter potential acquirors from
seeking to obtain control of the Holding Company. See "REGULATION -- The Holding
Company."
THE SAVINGS BANK
Upon consummation of the Conversion, the Savings Bank will become a
wholly-owned subsidiary of the Holding Company, and, consequently, restrictions
on the acquisition of the Savings Bank would have a more limited effect than if
the Savings Bank's common stock were held directly by the stockholders
purchasing in the Conversion. However, restrictions on the acquisition of the
Savings Bank may discourage takeover attempts of the Holding Company in order to
gain immediate control of the Savings Bank.
REGULATORY RESTRICTIONS. The Holding Company has applied to the
Administrator and the Federal Reserve for approval of the acquisition of all of
the stock of the Savings Bank issued in the Conversion. For three years
following completion of a conversion, North Carolina conversion regulations
require the prior written approval of the Administrator before any person may
directly or indirectly offer to acquire or acquire the beneficial ownership of
more than 10% of any class of an equity security of a converting state savings
bank such as the Savings Bank. If any person were to so acquire the beneficial
ownership of more than 10% of any class of any equity security without prior
written approval, the securities beneficially owned in excess of 10% would not
be counted as shares entitled to vote and would not be voted or counted as
voting shares in connection with any matter submitted to stockholders for a
vote. Approval is not required for (i) any offer with view toward public resale
made exclusively to the Savings Bank or its underwriters or the selling group
acting on its behalf or (ii) any offer to acquire or acquisition of beneficial
ownership of more than 10% of the common stock of the Savings Bank by a
corporation whose ownership is or will be substantially the same as the
ownership of the Savings Bank, provided, that the offer or acquisition is made
more than one year following the consummation of the Conversion. Similarly, the
Federal
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Reserve approval is required before any person or entity may acquire "control"
of the Savings Bank. See "-- The Holding Company -- Regulatory Restrictions."
BOARD OF DIRECTORS. The Amended and Restated Certificate of
Incorporation of the Savings Bank upon consummation of the Conversion will
provide that the number of directors may be no less than five. The initial
number of directors will be five, but such number may be changed by resolution
of the Board of Directors. This provision has the effect of enabling the Board
of Directors to elect directors friendly to management in the event of a
non-negotiated takeover attempt. The Savings Bank's Bylaws also provide for
staggered elections of directors so long as the total number of directors is at
least nine. These provisions are designed to make it more difficult for a person
seeking to acquire control of the Savings Bank to gain majority representation
on the Board of Directors in a relatively short period of time. The Savings Bank
believes these provisions to be important to continuity in the composition and
policies of its Board of Directors.
The cumulative effect of the restriction on acquisition of the Holding
Company contained in the Articles of Incorporation and Bylaws of the Holding
Company and in Federal and North Carolina law may be to discourage potential
takeover attempts and perpetuate incumbent management, even though certain
stockholders of the Holding Company may deem a potential acquisition to be in
their best interests, or deem existing management not to be acting in their best
interests.
INDEMNIFICATION AND LIMITATION OF DIRECTORS' LIABILITY
The Holding Company's Articles of Incorporation provide that, to the
fullest extent permitted by the North Carolina Business Corporation Act
("NCBCA"), no person who serves as a director shall be personally liable to the
Holding Company or any of its stockholders or otherwise for monetary damages for
breach of any duty as director. The Holding Company's Bylaws state that any
person who at any time serves or has served as a director, officer, employee or
agent of the Holding Company, or any such person who serves or has served at the
request of the Holding Company as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, or as a trustee or administrator under an employee benefit
plan, shall have a right to be indemnified by the Holding Company to the fullest
extent permitted by law against liability and litigation expense arising out of
such status or activities in such capacity. "Liability and litigation expense"
shall include costs and expenses of litigation (including reasonable attorneys'
fees), judgements, fines and amounts paid in settlement which are actually and
reasonably incurred in connection with or as a consequence of any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, including appeals.
DESCRIPTION OF CAPITAL STOCK
OF THE HOLDING COMPANY AND THE SAVINGS BANK
GENERAL
The Holding Company is authorized to issue 3,000,000 shares of Common
Stock having a par value of $.01 per share and 500,000 shares of preferred stock
having a par value of $.01 per share. The Holding Company currently expects to
issue up to 1,219,000 shares of Common Stock and no shares of preferred stock in
the Conversion. Each share of the Holding Company's Common Stock will have the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. Upon payment of the Purchase Price for the Common Stock,
in accordance with the Plan of Conversion, all such stock will be duly
authorized, fully paid and nonassessable.
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THE HOLDING COMPANY
COMMON STOCK. THE COMMON STOCK OF THE HOLDING COMPANY WILL REPRESENT
NONWITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL
NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
Dividends. The Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "DIVIDEND
POLICY" and "REGULATION." The holders of Common Stock of the Holding Company
will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Holding Company out of funds legally
available therefor, subject to applicable statutory and regulatory restrictions.
The ability of the Holding Company to pay dividends may be dependent on the
receipt of dividends from the Savings Bank. See "DIVIDEND POLICY," and
"REGULATION -- The Savings Bank -- Dividends." If the Holding Company issues
preferred stock, the holders thereof may have a priority over the holders of the
Common Stock with respect to dividends.
Stock Repurchases. The shares of Common Stock do not have any
redemption provisions. The Holding Company may not, for a period of at least one
year from the effective date of the Conversion, without the approval of the
Administrator, repurchase any of its capital stock. Such approval shall be given
only upon a showing that the proposed repurchase will not adversely affect the
safety and soundness of the Savings Bank. Stock repurchases are also subject to
North Carolina regulations regarding capital distributions.
Voting Rights. Upon Conversion, the holders of Common Stock of the
Holding Company will possess exclusive voting rights in the Holding Company.
They will elect the Holding Company's Board of Directors and act on such other
matters as are required to be presented to them under North Carolina law or as
are otherwise presented to them by the Board of Directors. Except as discussed
in "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE SAVINGS BANK,"
each holder of Common Stock will be entitled to one vote per share and will not
have any right to cumulate votes in the election of directors. As a result, the
holders of a majority of the shares of Common Stock will have the ability to
elect all of the directors on the Holding Company's Board of Directors.
Liquidation Rights. In the event of a liquidation, dissolution or
winding up of the Holding Company, the holders of Common Stock of the Holding
Company would be entitled to ratably receive, after payment of or making of
adequate provisions for, all debts and liabilities of the Holding Company and
after the rights, if any, of preferred stockholder of the Holding Company, all
remaining assets of the Holding Company available for distribution.
Other Characteristics. Holders of the Common Stock of the Holding
Company will not be entitled to preemptive rights with respect to any shares
which may be issued by the Holding Company. Therefore, the Board of Directors
may sell shares of capital stock of the Holding Company without first offering
such shares to existing stockholders of the Holding Company. The Common Stock is
not subject to call for redemption, and the outstanding shares of Common Stock
when issued and upon receipt by the Holding Company of the full purchase price
therefor will be fully paid and non-assessable.
Shares Owned by Directors and Executive Officers. All shares of Common
Stock issued in the Conversion to directors and executive officers of the
Holding Company and the Savings Bank will contain a restriction providing that
such shares may not be sold without the written permission of the Administrator
for a period of one year following the date of purchase, except in the event of
death of the director or the executive officer.
PREFERRED STOCK. None of the shares of the authorized Holding Company
preferred stock will be issued in the Conversion and there are no plans to issue
the preferred stock. Such stock may be issued with such designations, powers,
preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion
98
<PAGE>
rights which could dilute the voting strength of the holders of the Common Stock
and may assist management in impeding an unfriendly takeover or attempted change
in control.
RESTRICTIONS ON ACQUISITION. Acquisitions of the Holding Company are
restricted by provisions in its Articles of Incorporation and Bylaws and by the
rules and regulations of various regulatory agencies. See "REGULATION" and
"RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE SAVINGS BANK."
THE SAVINGS BANK
COMMON STOCK. After consummation of the Conversion, the Savings Bank
will be authorized to issue 1,000 shares of common stock, $1.00 par value
("Savings Bank Common Stock"). The Savings Bank Common Stock will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC or any other governmental entity.
DIVIDENDS. The payment of dividends by the Savings Bank is subject to
limitations which are imposed by North Carolina law and regulations. See
"DIVIDEND POLICY" and "REGULATION -- The Savings Bank -- Dividends." In
addition, federal income tax law considerations may affect the ability of the
Savings Bank to pay dividends and make other capital distributions. See
"TAXATION." The holders of the Savings Bank Common Stock will be entitled to
receive and share ratably in such dividends on the Savings Bank Common Stock as
may be declared by the Board of Directors of the Savings Bank out of funds
legally available therefor, subject to applicable statutory and regulatory
restrictions.
VOTING RIGHTS. As a mutual North Carolina-chartered savings bank, the
Savings Bank currently has no stockholders and voting rights in the Savings Bank
are currently held by the Savings Bank's members. Members elect the Savings
Bank's Board of Directors and vote on such other matters as are required to be
presented to them under North Carolina law.
Upon Conversion, the Holding Company, as sole stockholder of the
Savings Bank, will possess the exclusive voting rights with respect to the
Savings Bank Common Stock, will elect the Savings Bank's Board of Directors and
will act on such other matters as are required to be presented to stockholders
under North Carolina law or as are otherwise presented to stockholders by the
Savings Bank's Board of Directors. The holders of the Savings Bank Common Stock
will have no right to vote their shares cumulatively in the election of
directors of the Savings Bank.
LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Savings Bank, the Holding Company, as holder of the Savings
Bank's capital stock would be entitled to receive, after payment or provision
for payment of all debts and liabilities of the Savings Bank (including all
deposit accounts and accrued interest thereon) and after distribution of the
balance in the special liquidation account to Eligible Account Holders and
Supplemental Eligible Account Holders (see "THE CONVERSION"), all assets of the
Savings Bank available for distribution.
OTHER CHARACTERISTICS. Holders of the Savings Bank Common Stock will
not be entitled to preemptive rights with respect to any shares which may be
issued by the Savings Bank. The Common Stock is not subject to call for
redemption, and the outstanding shares of Common Stock when issued and upon
receipt by the Savings Bank of the full purchase price therefor will be fully
paid and non-assessable.
RESTRICTIONS ON ACQUISITION. Acquisition of the Savings Bank and
acquisitions of its capital stock are restricted by various federal and state
laws and regulations. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
AND THE SAVINGS BANK -- The Savings Bank."
99
<PAGE>
REGISTRATION REQUIREMENTS
The Holding Company will register the Common Stock with the SEC
pursuant to Section 12(g) of the Exchange Act upon the completion of the
Conversion and will not deregister its Common Stock for a period of at least
three years following the completion of the Conversion. Upon such registration
the proxy and tender offer rules, insider trading reporting requirements and
restrictions, annual and periodic reporting and other requirements of the
Exchange Act will be applicable to the Holding Company.
LEGAL AND TAX OPINIONS
The legality of the Common Stock has been passed upon for the Holding
Company by Breyer & Aguggia, Washington, D.C. The federal tax consequences of
the Offerings have been opined upon by Breyer & Aguggia and the North Carolina
tax consequences of the Offerings have been opined upon by Crisp, Hughes & Co.,
L.L.P., Asheville, North Carolina. Breyer & Aguggia and Crisp, Hughes & Co.,
L.L.P. have consented to the references herein to their opinions. Certain legal
matters will be passed upon for Trident Securities by Malizia, Spidi, Sloane &
Fisch, P.C., Washington, D.C.
EXPERTS
The consolidated financial statements of the Savings Bank as of June
30, 1994 and 1995 and for each of the two years in the period ended June 30,
1995 included in this Prospectus have been audited by Crisp Hughes & Co.,
L.L.P., independent auditors, as stated in its report appearing herein, and have
been so included in reliance upon the report of such firm given upon its
authority as experts in accounting and auditing.
Baxter Fentriss has consented to the publication herein of the summary
of its letter to the Savings Bank setting forth its opinion as to the estimated
pro forma market value of the Holding Company and the Savings Bank and to the
use of its name and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement on
Form SB-2 (File No. 333-1888) under the Securities Act with respect to the
Common Stock offered in the Conversion. This Prospectus does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. Such
information may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549; 500 West
Madison Street, Suite 1400, Room 1100, Chicago, Illinois 60661; and 75 Park
Place, New York, New York 10007. Copies may be obtained at prescribed rates from
the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549.
The Savings Bank has filed with the Administrator an Application to
Convert a Mutual Savings Bank to a Stock Owned Savings Bank. Pursuant to the
North Carolina conversion regulations, this Prospectus omits certain information
contained in such Application. The Application, which contains a copy of Baxter
Fentriss' appraisal, may be inspected at the office of the Administrator,
Savings Institution Division, North Carolina Department of Commerce, Tower
Building, Suite 301, 1110 Navaho Drive, Raleigh, North Carolina 27609. The
Savings Bank has also filed a copy of such Application with the FDIC. Copies of
the Plan of Conversion, which includes a copy of the Savings Bank's proposed
Amended and Restated Certificate of Incorporation and Stock Bylaws, and copies
of the Holding Company's Articles of Incorporation and Bylaws are available for
inspection at the Savings Bank's office and may be obtained by writing to the
Savings Bank at 210 Oak Avenue, Spruce Pine, North Carolina 28777; Attention:
Edward Ballew, Jr., Chief Executive Officer, or by telephoning the Savings Bank
at (704) 765-7324. A copy of Baxter Fentriss' independent appraisal is also
available for inspection at the Savings Bank.
100
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MITCHELL SAVINGS BANK, SSB
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors ........................................................................... F-1
Consolidated Balance Sheets as of June 30, 1994 and 1995
and December 31, 1995 (unaudited) ...................................................................... F-2
Consolidated Statements of Income for the Years Ended June 30, 1994 and 1995 and
for the Six Months Ended
December 31, 1994 and 1995 (unaudited) ................................................................. 21
Consolidated Statements of Equity for the Years
Ended June 30, 1994 and 1995 and for the Six
Months Ended December 31, 1994 and 1995 (unaudited)...................................................... F-3
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1994 and 1995 and for the Six
Months Ended December 31, 1994 and 1995 (unaudited)...................................................... F-4
Notes to Consolidated Financial Statements................................................................ F-5
</TABLE>
* * *
All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or related
Notes.
Separate financial statements on the Holding Company have not been
included since it will not engage in material transactions, if any, until after
the Conversion. The Holding Company, which has only engaged in organizational
activities to date, has no significant assets, liabilities, revenues, expenses
or contingent liabilities.
101
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Mitchell Savings Bank, S.S.B. and Subsidiary
Spruce Pine, North Carolina
We have audited the accompanying consolidated balance sheets of Mitchell Savings
Bank, S.S.B. and Subsidiary ("Savings Bank") as of June 30, 1994 and 1995, and
the related consolidated statements of income, equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Savings Bank's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated 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 Mitchell Savings
Bank, S.S.B. and Subsidiary as of June 30, 1994 and 1995, and the results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Savings
Bank changed its method of accounting for investments in 1995.
Asheville, North Carolina
July 14, 1995
CRISP HUGHES & CO., L.L.P.
F-1
<PAGE>
MITCHELL SAVINGS BANK, S.S.B. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1994 1995 1995
------ ---- ---- ----
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $ 6 $ 127 $ 35
Interest earning deposits 5,691 4,114 4,126
Investment securities:
Held to maturity (market value of $202,000 in 1994) 13 - -
Available for sale (amortized cost of $13,000) - 229 279
Loans receivable, net 21,843 22,463 22,925
Real estate owned, net 135 111 72
Premises and equipment, net 79 74 72
Federal Home Loan Bank stock 291 291 291
Accrued interest receivable 4 5 5
Deferred income taxes 13 98 211
Prepaid expenses and other assets 34 84 206
------- ------ -------
Total assets $28,109 $27,596 $28,222
====== ====== ======
LIABILITIES AND EQUITY
Deposits $22,195 $20,940 $21,325
Bank overdraft 47 - -
Accrued interest payable 66 73 55
Accrued expenses and other liabilities 74 497 752
Current income taxes payable 33 8 36
------- ------- -------
Total liabilities 22,415 21,518 22,168
------ ------ ------
Commitments - - -
Retained income, substantially restricted 5,694 5,947 5,892
Unrealized gain on securities available for sale,
net of income taxes of $85 and $104, respectively - 131 162
--------- ------ -------
Total equity 5,694 6,078 6,054
------ ------ ------
Total liabilities and equity $28,109 $27,596 $28,222
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
MITCHELL SAVINGS BANK, S.S.B. AND SUBSIDIARY
Consolidated Statements of Equity
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
--------------------- ----------------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Retained income, beginning $5,181 $5,694 $5,694 $5,947
Net income (loss) 513 253 19 (55)
----- ----- ------ ------
Retained income, ending 5,694 5,947 5,713 5,892
----- ----- ----- -----
Unrealized gains on securities
available for sale, net of
income taxes--beginning - - - 131
Current year appreciation, net
of income taxes - 131 95 31
------- ----- ------ ------
Unrealized gains on securities
available for sale, net of
income taxes--ending - 131 95 162
------- ----- ------ -----
Total equity $5,694 $6,078 $5,808 $6,054
===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
MITCHELL SAVINGS BANK, S.S.B. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
-------------------------- ------------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ 513 $ 253 $ 19 $ (55)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 14 15 7 5
Provision for loan losses 24 24 12 48
Provision for losses on real estate - 5 - 5
Increase (decrease) in reserve for uncollected interest 8 (2) (2) 14
Deferred income taxes (benefit) (16) (170) (164) (132)
Cumulative effect adjustment (11) - - -
Net increase in deferred loan fees 24 3 (1) 2
FHLB dividends received in stock (11) - - -
Gain on real estate owned (1) (41) (41) (2)
Increase in accrued interest receivable - (1) (1) -
Increase in prepaid expenses and other assets (4) (25) (61) (97)
Increase in accrued interest payable 3 7 (6) (18)
Increase in accrued expenses and other liabilities 3 398 397 283
------ ----- ----- -----
Net cash provided by operating activities 546 466 159 53
----- ----- ----- ------
Investing activities:
Net increase in loans (1,008) (645) (240) (490)
Purchase of premises and equipment (3) (10) (9) (3)
Investment in real estate owned (19) - - -
Proceeds from sale of real estate owned 61 60 60 -
Investment in life insurance cash surrender value (4) (25) - (25)
------ ------ ------- ------
Net cash used by investing activities (973) (620) (189) (518)
----- ----- ----- -----
Financing activities:
Increase (decrease) in bank overdraft 47 (47) (47) -
Net increase (decrease) in deposits 1,145 (1,255) (837) 385
----- ----- ----- -----
Net cash provided (used) by financing activities 1,192 (1,302) (884) 385
----- ----- ----- -----
Increase (decrease) in cash and cash equivalents 765 (1,456) (914) (80)
Cash and cash equivalents at beginning of period 4,932 5,697 5,697 4 241
----- ----- ----- -----
Cash and cash equivalents at end of period $5,697 $4,241 $4,783 $4,161
===== ===== ===== =====
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 900 $ 956 $ 460 $ 567
Income taxes 337 306 171 157
===== ===== ===== =====
Noncash transactions:
Real estate acquired in satisfaction of mortgage loans $ 61 $ - $ - $ -
Loans to facilitate sale of real estate owned 166 - - 36
Transfer of securities from held to maturity to
available for sale - 13 13 -
Unrealized gain on securities available for sale,
net of deferred income taxes - 131 95 31
======= ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MITCHELL SAVINGS BANK, S.S.B. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1994 and 1995
and
December 31, 1994 and 1995 (unaudited)
(tabular amounts in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Mitchell Savings Bank, S.S.B. and its
wholly-owned subsidiary, Mitchell Mortgage and Investment Co., Inc.
("Savings Bank"), and in consolidation all significant intercompany items
are eliminated. The Savings Bank's principal business activity is to
accept deposits from the general public and to make conventional first
mortgage loans for the purchase of real estate or for the refinancing of
loans secured by real estate. The subsidiary was organized in September,
1980 and has had no significant business activity.
The preparation of consolidated 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 disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
LOANS RECEIVABLE - Loans receivable are carried at their unpaid principal
balance less, where applicable, unearned income, net deferred loan fees,
and allowance for loan losses. Additions to the allowance for loan losses
are based on management's evaluation of the loan portfolio under current
economic conditions and such other factors which, in management's
judgment, deserve recognition in estimating loan losses. Interest accrual
on impaired loans is discontinued when a loan becomes 90 days delinquent
unless, in management's opinion, the loan is well secured and in process
of collection. Interest income is subsequently recognized only to the
extent cash payments are received, until such time that in management's
opinion, the borrower will be able to meet payments as they become due.
The Savings Bank adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures, an amendment of
SFAS No. 114," effective July 1, 1995. These statements address the
accounting by creditors for impairment of certain loans. They apply to all
creditors and to all loans, uncollateralized as well as collateralized,
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, loans measured at fair value or at
lower of cost or fair value, leases, and debt securities. The Savings Bank
considers all one-to-four family residential mortgage loans and all
consumer and other loans to be smaller homogeneous loans. These statements
apply to all loans that are restructured involving a modification of
terms. Loans within the scope of these statements are considered impaired
when, based on current information and events, it
F-5
<PAGE>
is probable that all principal and interest will not be collected in
accordance with the contractual terms of the loans. Management determines
the impairment of loans based on knowledge of the borrower's ability to
repay the loan according to the contractual agreement and the borrower's
repayment history. Pursuant to SFAS No. 114, paragraph 8, management does
not consider an insignificant delay or insignificant shortfall to impair a
loan. Management has determined that a delay less than 90 days will be
considered an insignificant delay and that an amount less than $25,000
will be considered an insignificant shortfall. The Savings Bank does not
apply SFAS No. 114 using major risk classifications, but applies SFAS No.
114 on a loan by loan basis. All nonaccrual loans are considered to be
impaired. Impaired loans are considered to be nonaccrual loans only if
they are 90 days or more past due. All loans are charged off when
management determines that principal and interest are not collectible. At
December 31, 1995 (unaudited), the Savings Bank had $618,000 of nonaccrual
loans which would be considered impaired. The total allowance for credit
loss on those impaired loans was $22,000 at December 31, 1995 (unaudited).
The average recorded investment in impaired loans during the six months
ending December 31, 1995 (unaudited) was approximately $400,000.
The Savings Bank's policy on single-family mortgage loans is to lend
within its primary market area which is defined as Mitchell County and the
surrounding counties in Western North Carolina. It is the Savings Bank's
general policy to limit an individual single-family mortgage loan to 67%
of the appraised value of the property securing the loan. However, it will
occasionally lend more than 67% of the appraised value of the property,
but generally will require that the borrower pay a higher interest rate
for the borrowed funds.
The Savings Bank's multi-family and commercial real estate loans consist
of properties located in its primary market. The general policy is to
limit loans on multi-family residential complexes and commercial real
estate to 50% of the appraised value of the property securing the loan.
Management of the Savings Bank believes that its allowances for losses on
its loan portfolio are adequate. However, the estimates used by management
in determining the adequacy of such allowances are susceptible to
significant changes due primarily to changes in economic and market
conditions. In addition, various regulatory agencies periodically review
the Savings Bank's allowance for losses as an integral part of their
examination processes. Such agencies may require the Savings Bank to
recognize additions to the allowances based on their judgments of
information available to them at the time of their examinations.
Any excess of the Savings Bank's recorded investment in the loans (unpaid
principal balance, adjusted for unamortized premium or discount and net
deferred loan origination fees or costs) over the measured value of the
loans in accordance with SFAS No. 114 are provided for in the allowance
for loan losses. The Savings Bank reviews its loans for impairment on a
quarterly basis.
LOAN ORIGINATION FEES - Loan fees result from the Savings Bank originating
mortgage loans. Such fees and certain direct incremental costs related to
origination of such loans are deferred ("net deferred loan fees") and
reflected as a reduction of the carrying value of mortgage loans. The net
deferred fees (or costs) are amortized using the interest method
F-6
<PAGE>
over the contractual lives of the loans. Unamortized net deferred loan
fees on loans sold prior to maturity are credited to income at the time of
sale.
INVESTMENT SECURITIES - The Savings Bank adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS 115) effective July 1, 1994. Under the
Statement, debt securities that the Savings Bank has the positive intent
and ability to hold to maturity are classified as "held-to- maturity"
securities and reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling in the near
term are classified as "trading" securities and reported at fair value
with unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity or trading securities
are classified as "available-for-sale" securities and reported at fair
value with unrealized gains and losses excluded from earnings and reported
as a separate component of equity. Transfers of securities between
classifications will be accounted for at fair value. No securities have
been classified as trading securities. The accounting change had no effect
on current year operations, nor did it require a restatement of any prior
periods. Gains or losses on sales of securities available for sale are
based on the specific identification method.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over the following useful lives of the respective assets:
Buildings 50 years
Building improvements 15 to 25 years
Office furniture and equipment 5 to 10 years
The cost of maintenance and repairs is charged to expense as incurred
while expenditures which materially increase property lives are
capitalized.
FEDERAL HOME LOAN BANK STOCK - Investment in stock of a Federal Home Loan
Bank is required by law of every federally insured savings and loan or
savings bank. The investment is carried at cost. No ready market exists
for the stock, and it has no quoted market value.
REAL ESTATE OWNED - Real estate acquired through, or in lieu of, loan
foreclosure is carried at the lower of fair value minus estimated costs to
sell or cost, which is redefined as the fair value at the time of
foreclosure. If fair value minus estimated costs to sell is less than
cost, a valuation allowance is recognized. If the fair value less
estimated costs to sell subsequently increases, the valuation allowance is
reduced, but not below zero. Increases or decreases in the valuation
allowance are charged or credited to income.
Gains on sales of real estate owned are deferred to the extent that gains
are not received in cash. Deferred gains are taken into income in the same
ratio as the loan balances are reduced.
INCOME TAXES - The Savings Bank utilizes the liability method of computing
income taxes in accordance with Statement of Financial Accounting Standard
No. 109, "Accounting for Income Taxes" (SFAS 109). Under the liability
method, deferred tax liabilities and assets
F-7
<PAGE>
are established for future tax return effects of temporary differences
between the stated value of assets and liabilities for financial reporting
purposes and their tax basis adjusted for tax rate changes. The focus is
on accruing the appropriate balance sheet deferred tax amount, with the
statement of income effect being the result of changes in balance sheet
amounts from period to period. Current income tax expense is provided
based upon the actual tax liability incurred for tax return purposes.
The Savings Bank adopted SFAS 109 on a prospective basis in 1994 and
reported the cumulative effect of the change in the method of accounting
for income taxes as of the beginning of the 1994 fiscal year in the
consolidated statement of earnings.
CASH FLOW INFORMATION - As presented in the consolidated statements of
cash flows, cash and cash equivalents include cash on hand and
interest-earning deposits in other banks.
UNAUDITED INTERIM FINANCIAL STATEMENTS - The accompanying unaudited
consolidated financial statements as of December 31, 1995, and for the six
months ended December 31, 1994 and 1995, reflect all adjustments which, in
the opinion of management, are necessary for the fair presentation of
financial position and operating results for the interim periods
presented. All such adjustments are of a normal and recurring nature. The
consolidated financial position at December 31, 1995, and consolidated
results of operations for the six months then ended are not necessarily
indicative of the consolidated financial position that may be expected at
June 30, 1996, or consolidated results of operations that may be expected
for the year ending June 30, 1996.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In December of 1991, the FASB issued SFAS No. 107, "Disclosures About Fair
Value of Financial Instruments." SFAS No. 107 requires disclosures in
financial statements of the fair value of all financial instruments,
including assets and liabilities both on-and off-balance sheet, for which
it is practicable to estimate such fair value. Descriptive information
pertinent to estimating the value of financial instruments for which it is
not practicable to estimate fair value would also be required. SFAS No.
107 must be adopted by the Savings Bank no later than June 30, 1996.
In November 1992, FASB issued SFAS No. 112 "Employers' Accounting for
Postemploy- ment Benefits." SFAS No. 112 requires recognition of the
obligations to provide postemployment benefits to former or inactive
employees after employment, but before retirement. The effective date for
this statement is for fiscal years beginning after December 15, 1993. At
June 30, 1995, the statement has no material impact on the consolidated
financial statements.
The FASB has issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS 121
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. In evaluating recoverability, if estimated future cash
flows, undiscounted and without interest charges, are less than the
carrying amount of the
F-8
<PAGE>
asset, an impairment loss is recognized. SFAS 121 also requires that
certain long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value less
cost to sell. SFAS 121 applies prospectively for fiscal years beginning
after December 15, 1995. Management does not expect that adoption of SFAS
121 will have a material impact on the Savings Bank's financial
statements.
2. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Real estate first mortgage loans:
One-to-four-family dwellings $18,229 $18,600 $19,013
Five or more dwelling units 173 166 161
Commercial real estate 2,681 2,666 2,789
Other real estate 871 1,143 1,105
------- ------ ------
Total real estate loans 21,954 22,575 23,068
------ ------ ------
Consumer loans:
Loans secured by deposit accounts 188 148 167
------- ------- --------
Total loans 22,142 22,723 23,235
------ ------ ------
Less:
Undisbursed portion of loans in process (108) (44) (30)
Allowance for loan losses (68) (92) (140)
Net deferred loan fees (113) (116) (118)
Allowance for uncollected interest (10) (8) (22)
-------- -------- --------
(299) (260) (310)
------- ------- -------
$21,843 $22,463 $22,925
====== ====== ======
</TABLE>
A summary of the activity in the allowance for loan losses is summarized
as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDING
JUNE 30, DECEMBER 31,
-------------------------- -----------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Beginning balance $ 44 $ 68 $ 68 $ 92
Provision for losses charged
to income 24 24 12 48
------- ------- ------- -------
Ending balance $ 68 $ 92 $ 80 $ 140
======= ======= ======= =======
F-9
<PAGE>
3. REAL ESTATE OWNED
Real estate owned is summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
One-to-four family dwellings $ 35 $ 35 $ 35
Commercial real estate 100 81 47
Allowance for losses on real estate - (5) (10)
--------- ------- -------
$ 135 $ 111 $ 72
======= ======= =======
</TABLE>
A summary of activity in the valuation allowance for losses on real estate
is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDING
JUNE 30, DECEMBER 31,
------------------------- -----------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Beginning balance $ - $ - $ - $ 5
Provision for losses charged
to income - 5 - 5
--------- ------- --------- -------
Ending balance $ - $ 5 $ - $ 10
========= ======= ========= ======
</TABLE>
4. PREMISES AND EQUIPMENT
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Land $ 16 $ 16 $ 16
Office building and improvements 80 80 83
Furniture and equipment 172 182 182
------ ------ ------
268 278 281
Less accumulated depreciation 189 204 209
------- ------- -------
$ 79 $ 74 $ 72
======= ======= =======
</TABLE>
F-10
<PAGE>
5. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Passbook 2.50% $ 2,490 2.50% $ 2,066 2.50% $ 2,175
Money market 2.76% 2,677 2.91% 1,659 2.75% 1,589
Certificates of deposit 4.56% 17,028 6.02% 17,215 6.07% 17,561
------ ------ ------
Total deposits $22,195 $20,940 $21,325
====== ====== ======
Weighted average cost of deposits 4.07% 4.60% 5.46%
====== ====== ======
</TABLE>
Contractual maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
12 months or less $13,274 $10,575 $11,737
1-2 years 2,094 3,211 3,042
2-3 years 1,317 2,239 1,626
3-5 years 343 1,190 1,156
------- ------ ------
$17,028 $17,215 $17,561
====== ====== ======
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDING
JUNE 30, DECEMBER 31,
------------------------ -----------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Passbook $ 66 $ 59 $ 31 $ 26
Money market 72 64 36 25
Certificates of deposit 765 839 387 534
------- ------- ------- -------
$ 903 $ 962 $ 454 $ 585
======= ======= ======= =======
</TABLE>
Certificates of deposit with balances of $100,000 or more totaled
approximately $6,001,000 and $5,282,000 at June 30, 1994 and 1995,
respectively. At December 31, 1995 (unaudited), they totaled approximately
$5,200,000.
F-11
<PAGE>
6. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDING
JUNE 30, DECEMBER 31,
-------------------------- -----------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Current $ 333 $ 282 $ 163 $ 101
Deferred (benefit) (16) (170) (164) (132)
------- ------- ------- -------
Total $ 317 $ 112 $ (1) $ (31)
======= ======= ======= =======
</TABLE>
The differences between actual income tax expense (benefit) and the amount
computed by applying the federal statutory income tax rate of 34% to
income (loss) before income taxes and cumulative effect adjustment are
reconciled as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDING
JUNE 30, DECEMBER 31,
-------------------------- -----------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Computed income tax expense
(benefit) $ 280 $ 124 $ 6 $ (29)
Increase (decrease) resulting from:
State income tax net of
federal benefit 32 (2) (9) (7)
Nondeductible expenses - - 1 5
Other 5 (10) 1 -
------- ------- ------ -------
Actual income tax expense
(benefit) $ 317 $ 112 $ (1) $ (31)
======= ======= ======= =======
</TABLE>
F-12
<PAGE>
The components of the net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDING
JUNE 30, DECEMBER 31,
-------------------------- -----------------
1994 1995 1994 1995
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Deferred tax assets:
Loan origination fees $ 39 $ 44 $ 45 $ 36
Bad debt reserve 17 17 12 34
Pension accrual under FASB 87 6 7 7 7
Reserve for uncollected interest 3 3 3 9
Deferred compensation - 168 165 284
Deferred gain REO - 4 4 4
Valuation allowance - - - -
--------- --------- --------- ------
65 243 236 374
------- ------- ------- -------
Deferred tax liabilities:
FHLB stock dividends 45 51 51 51
Excess tax depreciation 7 9 8 8
Unrealized gain on investments
available for sale - 85 61 104
--------- ------- ------- -------
52 145 120 163
------- ------- ------- -------
Net deferred income tax asset $ 13 $ 98 $ 116 $ 211
======= ======= ======= =======
</TABLE>
The Savings Bank's annual addition to its reserve for bad debts allowed
under the Internal Revenue Code may differ significantly from the bad debt
experience used for financial statement purposes. Such bad debt deductions
for income tax purposes are included in taxable income of later years only
if the bad debt reserves are used for purposes other than to absorb bad
debt losses. Since the Savings Bank does not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes have been
provided on the amount of bad debt reserves for tax purposes that arose in
tax years beginning before December 31, 1987, in accordance with SFAS No.
109. Therefore, retained earnings at June 30, 1995 and December 31, 1995
(unaudited) includes approximately $1,118,000, representing such bad debt
deductions for which no deferred income taxes have been provided.
7. RETAINED INCOME
Retained earnings represents the accumulated net income of the Savings
Bank since its origination date. In connection with the insurance of
savings accounts, the Federal Deposit Insurance Corporation (FDIC)
requires that certain minimum amounts be restricted to absorb certain
losses as specified in the insurance of accounts regulations. Because
restricted retained earnings is not related to amounts of losses actually
anticipated, the appropriations thereto have not been charged to income in
the accompanying consolidated financial statements. Furthermore, the use
of retained income by the Savings Bank is restricted by certain
requirements of the Internal Revenue Code as disclosed in Note 6.
F-13
<PAGE>
8. PENSION PLAN
The Savings Bank has a defined benefit pension plan covering all full-time
employees over the age of twenty and one-half who have completed six
months of continuous employment.
The following is a summary of the components of pension cost:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDING
JUNE 30, DECEMBER 31,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Service cost--benefits earned
during the period $ 5 $ 6 $ 3
Interest cost on projected
benefit obligation 7 8 4
Actual return on plan assets (4) (5) (3)
Net amortization of initial transition
liability and deferral of subsequent
gains under SFAS No. 87 1 1 1
Net amortization of loss not reflected
in market related value - 1 -
--------- ------- --------
$ 9 $ 11 $ 5
======== ======= ========
</TABLE>
A summary of the plan's funding status is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 76 $ 94 $ 101
Non-vested benefits - - -
--------- --------- ------
Accumulated benefit obligation $ 76 $ 94 $ 101
======= ======= ======
Projected benefit obligations
for services rendered to date $ 95 $ 109 $ 117
Plan assets at fair value,
primarily cash and contracts
with insurance companies 60 62 90
------- ------- -------
Deficit of plan assets over
projected benefit obligations 35 47 27
Unrecognized transition asset (23) (22) (21)
Minimum liability adjustment 24 28 21
Unrecognized net loss (19) (21) (10)
------- ------- -------
Accrued pension expense $ 17 $ 32 $ 17
======= ======= =======
</TABLE>
F-14
<PAGE>
The weighted average discount rate and rate of increase in future
compensation levels in determining the actuarial present value of the
projected benefit obligation were 8% and 5% for all periods presented. The
expected long-term rate of return on assets was 8% for all periods
presented.
9. INVESTMENT IN WHOLLY-OWNED SUBSIDIARY
The following are schedules of balance sheet data for Mitchell Mortgage
and Investment Co., Inc., which is inactive and has no income for the
following years ended June 30, 1994 and 1995, or for the six months ending
December 31, 1994 and 1995 (unaudited).
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1995 1995
---- ---- ----
(unaudited)
<S> <C> <C> <C>
Assets $ 15 $ 15 $ 15
------- ------- -------
Total assets $ 15 $ 15 $ 15
======= ======= =======
Stockholder's equity:
Capital stock $ 16 $ 16 $ 16
Deficit (1) (1) (1)
------- ------- -------
Total stockholder's equity $ 15 $ 15 $ 15
======= ======= =======
</TABLE>
10. COMMITMENTS
The Savings Bank had outstanding commitments to originate mortgage loans
of approximately $365,000 and $454,000 at June 30, 1995 and December 31,
1995 (unaudited), respectively. The commitments to originate loans at June
30, 1995, were composed of fixed rate loans having interest rates ranging
from 8.5% to 9.0% with terms ranging from 15 to 16 years. The commitments
to originate loans at December 31, 1995 (unaudited), were composed of
fixed rate loans having interest rates at 8% with terms of 16 years.
11. COMPENSATION BENEFIT AGREEMENTS
The Savings Bank established in the 1995 fiscal year nonqualified
compensation agreements with its directors providing for fixed benefits
payable monthly over a ten year period. The benefits are payable to those
directors beginning upon attainment of age 62 or, in the event of their
death, to their designated beneficiary. The expense before income tax
effect associated with these agreements was approximately $278,000 for the
year ending June 30, 1995 and $270,000 and $22,000 for the six months
ending December 31, 1994 and 1995 (unaudited), respectively.
The Savings Bank also has established nonqualified compensation agreements
with certain key executives providing for benefits payable monthly over a
specified period. One agreement was in place at June 30, 1994. Two
subsequent agreements were executed in the
F-15
<PAGE>
1995 fiscal year. On December 31, 1995, the three existing agreements were
amended and consolidated in order to provide for new benefit terms. The
current terms provide for the payment of a certain sum monthly for ten
years upon their attainment of age 62 or at their discretion thereafter,
or, in the event of their death, to their designated beneficiary. The
expense before income tax effect associated with these agreements was
approximately $3,600 and $176,000 for the years ending June 30, 1994 and
1995, respectively, and $159,000 and $215,000 for the six months ending
December 31, 1994 and 1995 (unaudited), respectively.
The Savings Bank has purchased life insurance contracts with respect to
directors and key executives covered by these agreements. The Savings Bank
is the owner and beneficiary of the insurance contracts. The directors and
key executives are general creditors of the Savings Bank with respect to
these benefits. The cash surrender value of the Savings Bank- owned life
insurance is reflected in other assets on the accompanying consolidated
balance sheets. The liability for the benefits have been accrued at the
balance sheet dates at the net present value of the expected benefits.
Annual expense is based on the increase in the present value of expected
future benefits.
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Effective December 31, 1995, the Savings Bank adopted an unfunded
postretirement health care benefit plan covering certain executive
officers and their spouses for life beginning at their date of retirement.
The Savings Bank plans to provide health insurance coverage under their
existing group plan for these retirees. The benefits are recorded in
accordance with SFAS No. 106, "Employers Accounting for Postretirement
Benefits Other Than Pensions". Under SFAS No. 106, the Savings Bank is
required to accrue the estimated cost of retiree benefit payments during
the employee's active service period. Based on the full eligibility of the
covered executive officers, the Savings Bank has accrued the expected
postretirement benefit obligation of approximately $71,500 at December 31,
1995 (unaudited), the date the plan was adopted. This liability consists
entirely of unrecognized prior service cost.
For measuring the expected postretirement benefit obligation, a 2% annual
rate of increase in the group insurance premiums was assumed. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7% at December 31, 1995. If the
assumed health care cost trend rate were increased 1%, the accumulated
postretirement benefit obligation as of December 31, 1995 (unaudited)
would have increased approximately 2%.
13. REGULATORY CAPITAL REQUIREMENTS
The Savings Bank must comply with certain capital requirements established
by the Federal Deposit Insurance Corporation (FDIC). The regulations
require the Savings Bank to have minimum Tier I capital equal to 4 percent
of total assets, Tier I capital equal to 4 percent of risk-based assets
(as defined by FDIC), and total capital equal to 8 percent of risk-based
assets. In addition, the Savings Bank is subject to a North Carolina
Savings Institution capital requirement of at least 5 percent of total
assets.
F-16
<PAGE>
At June 30, 1995 and December 31, 1995 (unaudited), the Savings Bank
exceeded all of its capital requirements, as defined by FDIC. The Savings
Bank had the following capital ratios at June 30, 1995 and December 31,
1995 (unaudited):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1995
---- ----
(unaudited)
<S> <C> <C>
Tier I capital to adjusted total assets 21.5% 21.1%
Tier I to risk-weighted assets 48.2% 46.3%
Total capital to risk-weighted assets 49.9% 47.4%
</TABLE>
The following is a reconciliation of the Savings Bank's retained income to
regulatory capital at June 30, 1995:
<TABLE>
<CAPTION>
TIER I TOTAL
TIER I RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
Retained income $ 5,947 $ 5,947 $ 5,947
Additional capital item:
General valuation allowances - - 92
--------- --------- -------
Regulatory capital computed 5,947 5,947 6,039
Minimum capital requirement 1,095 494 988
------ ------- -------
Regulatory capital excess $ 4,852 $ 5,453 $ 5,051
====== ====== ======
</TABLE>
The following is a reconciliation of the Savings Bank's retained income to
regulatory capital at December 31, 1995 (unaudited):
<TABLE>
<CAPTION>
TIER I TOTAL
TIER I RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL
<S> <C> <C> <C>
Retained income $ 5,892 $ 5,892 $ 5,892
Additional capital item:
General valuation allowances - - 140
--------- --------- -------
Regulatory capital computed 5,892 5,892 6,032
Minimum capital requirement 1,118 509 1,018
------ ------- ------
Regulatory capital excess $ 4,774 $ 5,383 $ 5,014
====== ====== ======
</TABLE>
F-17
<PAGE>
14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Savings 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. Those instruments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the accompanying consolidated balance sheet. The contract or
notional amounts of those instruments reflect the extent of the Savings
Bank's involvement in particular classes of financial instruments.
The Savings 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 notional amount of those
instruments. The Savings Bank uses the same credit policies in making
commitments 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 any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Savings
Bank evaluates each customer's creditworthiness. The amount of collateral
obtained, if it is deemed necessary by the Savings Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.
Collateral may include one to four family residences and nonresidential
properties.
The Savings Bank's only financial instruments with off-balance sheet risk
at June 30, 1995 and December 31, 1995 (unaudited), are outlined in Note
10.
15. DEPOSIT INSURANCE PREMIUMS
The Savings Bank currently pays an insurance premium to the Federal
Deposit Insurance Corporation (FDIC) equal to a percentage of its total
deposits as a member of the Savings Association Insurance Fund. In August
1995, the FDIC announced plans to lower the insurance premium rates for
members of the Bank Insurance Fund (BIF). The disparity in insurance
premiums between BIF and SAIF could create a competitive disadvantage for
SAIF members. A proposed alternative to mitigate the effect is the
assessment of a special premium of approximately .85% of deposits in order
to recapitalize the SAIF and a subsequent lowering of the SAIF insurance
premium rates.
If the proposal is realized, the Savings Bank would recognize an immediate
charge to income for the amount of the fee which would immediately reduce
its capital. After recapitalization, it is expected that the SAIF and BIF
premiums would initially be equal and therefore provide the Savings Bank
with reduced insurance premiums in the future. However, management of the
Savings Bank is unable to predict whether this proposal will be enacted or
whether ongoing SAIF premiums will be reduced to a level equal to that of
BIF premiums. It is anticipated that the ultimate effects of the proposed
insurance premium assessment will be recognized in early 1996.
F-18
<PAGE>
16. PLAN OF CONVERSION (UNAUDITED)
On January 23, 1996, the Savings Bank's Board of Directors formally
approved a plan ("Plan") to convert from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank subject to
approval by the Savings Bank's members as of a still-to-be determined
future voting record date. The Plan, which includes formation of a holding
company, is subject to approval by the Federal Deposit Insurance
Corporation (FDIC) and the Administrator of the North Carolina Savings
Institutions Division and includes the filing of a registration statement
with the Securities and Exchange Commission. As of December 31, 1995
(unaudited), the Savings Bank had not incurred any conversion costs. If
the conversion is ultimately successful, actual conversion costs will be
accounted for as a reduction in gross proceeds. If the conversion is
unsuccessful, the conversion costs will be expensed.
The Plan calls for the common stock of the Savings Bank to be purchased by
the holding company and for the common stock of the holding company to be
offered to various parties in a subscription offering at a price based on
an independent appraisal. It is anticipated that any shares not purchased
in the subscription offering will be offered in a direct community
offering, and then any remaining shares offered to the general public in a
solicited offering.
The stockholders of the holding company will be asked to approve a
proposed stock option plan and a proposed management recognition plan at a
meeting of the stockholders after the conversion. Shares issued to
directors and employees under these plans may be from authorized but
unissued shares of common stock or they may be purchased in the open
market. In the event that options or shares are issued under these plans
such issuances will be included in the earnings per share calculation,
thus, the interests of existing stockholders would be diluted.
The Savings Bank may not declare or pay a cash dividend if the effect
thereof would cause its net worth to be reduced below either the amounts
required for the liquidation account discussed below or the regulatory
capital requirements imposed by federal and state regulations.
At the time of conversion, the Savings Bank will establish a liquidation
account, which will be a memorandum account that does not appear on the
balance sheet, in an amount equal to its retained income as reflected in
the latest consolidated balance sheet used in the final conversion
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their deposit accounts
in the Savings Bank after conversion. In the event of a complete
liquidation of the Savings Bank (and only in such an event), eligible
depositors who continue to maintain accounts shall be entitled to receive
a distribution from the liquidation account before any liquidation may be
made with respect to common stock.
F-19
<PAGE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE HOLDING COMPANY, THE SAVINGS BANK OR TRIDENT SECURITIES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE HOLDING COMPANY, OR THE SAVINGS BANK SINCE ANY OF THE DATES AS OF
WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Capsule Summary........................................ (i)
Prospectus Summary..................................... (vii)
Selected Consolidated Financial Information............ (xiv)
Risk Factors........................................... 1
Mitchell Bancorp, Inc.................................. 9
Mitchell Savings Bank, SSB............................. 9
Use of Proceeds........................................ 10
Dividend Policy........................................ 11
Market for Common Stock................................ 12
Capitalization......................................... 13
Historical and Pro Forma Capital Compliance............ 15
Pro Forma Data......................................... 16
Mitchell Savings Bank, SSB and Subsidiary Consolidated
Statements of Income (Loss).......................... 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 22
Recent Developments.................................... 37
Business of the Holding Company........................ 41
Business of the Savings Bank........................... 42
Management of the Holding Company...................... 57
Management of the Savings Bank......................... 57
Regulation............................................. 65
Taxation............................................... 75
The Conversion......................................... 78
Restrictions on Acquisition of the Holding Company and
the Savings Bank..................................... 93
Indemnification and Limitation of Directors'
Liability............................................ 97
Description of Capital Stock of the Holding Company and
the Savings Bank..................................... 97
Registration Requirements.............................. 100
Legal and Tax Opinions................................. 100
Experts................................................ 100
Additional Information................................. 100
Index to Consolidated Financial Statements............. 101
</TABLE>
UNTIL THE LATER OF JUNE 10, 1996, OR 25 DAYS AFTER COMMENCEMENT OF THE
SYNDICATED COMMUNITY OFFERING OF COMMON STOCK, IF ANY, ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
901,000 TO 1,219,000 SHARES
MITCHELL BANCORP, INC.
(Proposed Holding Company for Mitchell
Savings Bank, Inc., SSB)
COMMON STOCK
PROSPECTUS
TRIDENT SECURITIES, INC.
MAY 8, 1996
<PAGE>
MITCHELL BANCORP, INC.
(PROPOSED HOLDING COMPANY
FOR MITCHELL SAVINGS BANK, SSB)
STOCK ORDER FORM
NOTE: Please read the Stock Order Form
Instructions and
Guide on the back as you complete this
form.
DEADLINE:
The Subscription Offering will expire at Noon, Eastern Time, on June 12, 1996
unless extended.
The Direct Community Offering is expected to terminate at Noon, Eastern Time, on
June 12, 1996, unless extended.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
(1) Number of Shares Purchase Price (2) Total Payment Due
X $10.00 =
The minimum number of shares that may be subscribed for is 50 shares. The maximum number of shares that may be
subscribed for in the Subscription Offering by any person is 12,190 shares. The maximum number of shares that
may be purchased by any person in the Subscription Offering together with his or her associates or groups
acting in concert is 12,190 shares. The maximum number of shares that may be purchased by any person in the
Direct Community Offering, together with any associate or group of persons acting in concert is 12,190 shares.
The maximum number of shares that may be purchased in the conversion by any person together with his or her
associates or groups acting in concert is 12,190 shares. Management has the authority to increase these limits.
</TABLE>
METHOD OF PAYMENT
(3) Enclosed is a check, bank draft or money order made payable to
Mitchell Bancorp, Inc.
$ Cash can be used only if
presented in person at
Mitchell Savings' office.
(4) The undersigned authorizes withdrawal from this (these) account(s) at
Mitchell Savings Bank, SSB.
Account number Amount
$
$
$
Total Withdrawal Amount $
There is no penalty for early withdrawals used for stock payment.
IMPORTANT PURCHASER INFORMATION
(5) a [ ] Eligible Account Holder -- Check here if you were a depositor of at
least $50.00 at Mitchell Savings on December 31, 1994. Enter
information below for all deposit accounts that you had on December
31, 1994.
(5) b [ ] Supplemental Eligible Account Holder -- Check here if you were a
depositor of at least $50.00 at Mitchell Savings on March 31, 1996,
but are not an Eligible Account Holder. Enter information below for
all deposit accounts that you had on March 31, 1996.
(5) c [ ] Other Member -- Check here if you held a deposit or were a loan
customer at Mitchell Savings on May 3, 1996, but are not an Eligible
Account Holder or Supplemental Eligible Account Holder.
(5) d [ ] Community Resident -- Check here if you do not have an account
relationship with Mitchell Savings.
Account Title Deposit Loan Account
(Names on Accounts) Account Account Number
STOCK REGISTRATION (See back under Stock Ownership Guide)
(6) Form of Stock Ownership:
<TABLE>
<S> <C> <C>
Individual Joint tenants Tenants in common
Fiduciary (I.E., trust, estate, etc.) Corporation or Partnership Other
Uniform Transfer to Minors Act
</TABLE>
<TABLE>
<CAPTION>
(7) Name(s) in which your stock is to be registered (Please Print Clearly) Social Security No. or Tax ID No.
<S> <C>
Name(s) (continued)
Street Address City County State Zip
Code
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(8) Telephone Information DAYTIME PHONE EVENING PHONE
( ) ( )
</TABLE>
NASD AFFILIATION
(9) [ ] Check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the
immediate family of any such person to whose support such person contributes,
directly or indirectly, or the holder of an account in which an NASD member or
person associated with an NASD member has a beneficial interest. To comply with
conditions under which an exemption from the NASD's Interpretation With Respect
to Free-Riding and Withholding is available, you agree, if you have checked the
NASD Affiliation box, (i) not to sell, transfer or hypothecate the stock for a
period of 90 days following issuance, and (ii) to report this subscription in
writing to the applicable NASD member within one day of payment therefor.
ACKNOWLEDGMENT
(10) To be effective, this fully completed Stock Order Form must be actually
received by Mitchell Savings, no later than Noon, Eastern Time, on June 12,
1996, unless extended; otherwise this Stock Order Form and all subscription
rights will be void. Completed Stock Order Forms, together with the required
payment or withdrawal authorization, may be delivered to the office of Mitchell
Savings or may be mailed to the Post Office Box indicated on the enclosed
business reply envelope. All rights exercisable hereunder are not transferable
and shares purchased upon exercise of such rights must be purchased for the
account of the person exercising such rights.
It is understood that this Stock Order Form will be accepted in accordance with,
and subject to, the terms and conditions of the Amended Plan of Holding Company
Conversion of Mitchell Savings described in the accompanying Prospectus. If the
Amended Plan of Holding Company Conversion is not approved by the voting members
of Mitchell Savings at a Special Meeting to be held on June 13, 1996, or any
adjournment thereof, all orders will be cancelled and funds received as payment,
with accrued interest, will be returned promptly.
The undersigned agrees that after receipt by Mitchell Savings, this Stock Order
Form may not be modified, withdrawn or cancelled (unless the Conversion is not
completed within 45 days after the completion of the Subscription Offering)
without Mitchell Savings' consent, and if authorization to withdraw from deposit
accounts at Mitchell Savings has been given as payment for shares, the amount
authorized for withdrawal shall not otherwise be available for withdrawal by the
undersigned.
Under penalty of perjury, I certify that the Social Security or Tax ID Number
and the other information provided under number 7 of this Stock Order Form are
true, correct and complete, that I am not subject to back-up withholding, and
that I am purchasing for my own account and that there is no agreement or
understanding regarding the transfer of my subscription rights or the sale or
transfer of these shares.
Applicable regulations prohibit any person from transferring or entering into
any agreement directly or indirectly to transfer, the legal or beneficial
ownership of conversion subscription rights, or the underlying securities to the
account of another. Mitchell Savings and Mitchell Bancorp, Inc. may pursue any
and all legal and equitable remedies in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve such transfer.
I acknowledge that the common stock offered is not a savings or deposit account
and is not federally insured or guaranteed.
I also acknowledge receipt of a Prospectus dated May 8, 1996.
(11) Signature Date Signature Date
FOR OFFICE USE ONLY
Date Rec'd
/ / Order #
Category Batch #
Deposit Date Input / /
STOCK INFORMATION CENTER
MITCHELL SAVINGS BANK, SSB
210 OAK AVENUE
SPRUCE PINE, NORTH CAROLINA 28777
(704) 765-1924
<PAGE>
MITCHELL BANCORP, INC.
SUBSCRIPTION AND
COMMUNITY OFFERING
STOCK ORDER FORM
INSTRUCTIONS AND GUIDE
STOCK OWNERSHIP GUIDE
INDIVIDUAL
Include the first name, middle initial and last name of the shareholder. Avoid
the use of two initials. Please omit words that do not affect ownership rights,
such as "Mrs.", "Mr.", "Dr.", "special account", "single person", etc.
JOINT TENANTS
Joint tenants with right of survivorship may be specified to identify two or
more owners. When stock is held by joint tenants with right of survivorship,
ownership is intended to pass automatically to the surviving joint tenant(s)
upon the death of any joint tenant. All parties must agree to the transfer or
sale of shares held by joint tenants.
TENANTS IN COMMON
Tenants in common may also be specified to identify two or more owners. When
stock is held by tenants in common, upon the death of one co-tenant, ownership
of the stock will be held by the surviving co-tenant(s) and by the heirs of the
deceased co-tenant. All parties must agree to the transfer or sale of shares
held by tenants in common.
UNIFORM TRANSFERS TO MINORS ACT ("UTMA")
Stock may be held in the name of a custodian for a minor under the Uniform
Transfers to Minors Act of each state. There may be only one custodian and one
minor designated on a stock certificate. The standard abbreviation for Custodian
is "CUST", while the Uniform Transfer to Minors Act is "Unif Tran Min Act".
Standard U.S. Postal Service state abbreviation should be used to describe the
appropriate state. For example, stock held by John Doe as custodian for Susan
Doe under the North Carolina Uniform Transfer to Minors Act will be abbreviated
John Doe, CUST Susan Doe Unif Tran Min Act, NC (use minor's social security
number).
FIDUCIARIES
Information provided with respect to stock to be held in a fiduciary capacity
must contain the following:
* The name(s) of the fiduciary. If an individual, list the first name, middle
initial and last name. If a corporation, list the full corporate title
(name). If an individual and a corporation, list the corporation's title
before the individual.
* The fiduciary capacity, such as administrator, executor, personal
representative, conservator, trustee, committee, etc.
* A description of the document governing the fiduciary relationship, such as
living trust agreement or court order. Without documentation establishing a
fiduciary relationship, your stock may not be registered in a fiduciary
capacity.
* The date of the document governing the relationship except that the date of a
trust created by a will need not be included in the description.
* The name of the maker, donor or testator and the name of the beneficiary.
An example of fiduciary ownership of stock in the case of a trust is: John Doe,
Trustee Under Agreement Dated 10-1-87 for Susan Doe.
You may mail your completed Stock Order From in the envelope that has been
provided, or you may deliver your Stock Order Form directly to Mitchell Savings.
Your Stock Order Form, properly completed, accompanied by a signed Certification
and payment in full (or withdrawal authorization), at the Purchase Price must be
received by Mitchell Savings no later than Noon, Eastern Time, on June 12, 1996,
or it will become void. Stock Order Forms shall be deemed received only upon
actual receipt at Mitchell Savings. If you need further assistance, please call
the Stock Information Center at (704) 765-1924. We will be pleased to help you
with the completion of your Stock Order Form or answer any questions you may
have.
Please note that "Totten Trust" and "Payable on Death" ownerships may not be
used in registering stock.
ITEM INSTRUCTIONS
ITEMS 1 AND 2 --
Fill in the number of shares that you wish to purchase and the total payment
due. The amount due is determined by multiplying the number of shares purchased
by the Purchase Price of $10.00 per share. The minimum purchase is 50 shares and
the maximum purchase in the Subscription Offering is 12,190 shares for an
individual and by any person together with associates or groups acting in
concert. The maximum purchase in the Direct Community Offering is 12,190 shares.
The maximum purchase in the Conversion by any person, together with associates
or groups acting in concert is 12,190 shares. Mitchell Bancorp, Inc. and
Mitchell Savings reserve the right to reject the subscription of any order
received in the Direct Community Offering, in whole or in part.
ITEM 3 --
Payment for shares may be made in cash (only if delivered by you in person) or
by check, bank draft or money order made payable to Mitchell Bancorp, Inc. Your
funds will earn interest at the passbook rate, currently at 2.50% per annum,
until the conversion is completed. DO NOT MAIL CASH TO PURCHASE STOCK! Please
check this box if your method of payment is by cash, check, bank draft or money
order.
ITEM 4 --
If you pay for your stock by a withdrawal from a Mitchell Savings deposit
account, insert the account number(s) and the amount of your withdrawal
authorization for each account. The total amount withdrawn should equal the
amount of your stock purchase. There will be no penalty assessed for early
withdrawals from certificate accounts used for stock purchases.
ITEM 5 --
Please check the appropriate box if you were:
(a) A depositor at Mitchell Savings on December 31, 1994 (the "Eligibility
Record Date") with at least $50.00 on deposit.
(b) A depositor at Mitchell Savings on March 31, 1996 (the "Supplemental
Eligibility Record Date") with at least $50.00 on deposit.
(c) A depositor or loan customer at Mitchell Savings on May 3, 1996 (the "Voting
Record Date").
(d) A permanent resident of Mitchell, Yancey, Avery or McDowell Counties, North
Carolina.
ITEMS 6, 7 AND 8 --
The stock transfer industry has developed a uniform system of shareholder
registrations that we will use in the issuance of your common stock. Please
complete Items 6, 7 and 8 as fully and accurately as possible, and be certain to
supply your social security number and your daytime and evening telephone
number(s). We will need to call you if we cannot execute your order as given. If
you have any questions or concerns regarding the registration of your stock,
please consult your legal advisor. Stock ownership must be registered in one of
the ways described under "Stock Ownership Guide."
ITEM 9 --
Please check this box if you are a member of the NASD or if this item otherwise
applies to you.
ITEMS 10 AND 11 --
Please sign and date the Stock Order Form where indicated. Review the Stock
Order Form carefully before you sign, including the acknowledgment. Normally,
one signature is required. An additional signature is required only when payment
is to be made by withdrawal from a deposit account that requires multiple
signatures to withdraw funds.
If you have any remaining questions, or if you would like assistance in
completing your Stock Order Form, you may call the Stock Information Center at
(704)765-1924. The Stock Information Center will be open Monday through Friday
during Mitchell Savings' normal banking hours.
<PAGE>
Mitchell Savings Bank, SSB
SINCE 1924
Mutual To Stock Conversion,
Stock Offering
Questions and Answers
and
Executive Officer and Director
Intended Purchases
<PAGE>
EXECUTIVE OFFICER AND DIRECTOR INTENDED PURCHASES
In connection with the Conversion of Mitchell Savings Bank, SSB from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank, Mitchell Bancorp, Inc., the proposed holding company of the
Savings Bank, is offering shares of its Common Stock for $10.00 per share. The
following table sets forth for each of the directors and executive officers of
Mitchell Savings Bank who intends to purchase Common Stock, and for all
directors as a group (including in each case all "associates" of such persons),
the aggregate dollar amount of Common Stock for which such persons have informed
the Savings Bank he or she intends to subscribe. The amounts reflected in the
table are estimates only and the shares of Common Stock actually subscribed for
by the listed individuals may differ from the amounts reflected in the table.
The following table assumes that 1,219,000 shares of Common Stock will be issued
in the Conversion and that sufficient shares will be available to satisfy such
intended subscriptions.
<TABLE>
<CAPTION>
ANTICIPATED
ANTICIPATED NUMBER
AMOUNT OF SHARES AS A PERCENT
TO BE PAID TO BE OF SHARES
NAME FOR SHARES (1) PURCHASED OFFERED
<S> <C> <C> <C>
Calvin F. Hall
President and Director $ 75,000 7,500 0.62%
Edward Ballew, Jr.
Executive Vice President,
Chief Executive Officer
and Director 75,000 7,500 0.62
Emma Lee M. Wilson
Assistant Managing Officer,
Treasurer, Secretary
and Director 70,000 7,000 0.57
Baxter D. Johnson
Director 25,000 2,500 0.21
Lloyd Hise, Jr.
Director 40,000 4,000 0.32
Total $285,000 28,500 2.34%
</TABLE>
(1) Excludes any shares awarded pursuant to the ESOP and MRP and options to
acquire shares pursuant to the Stock Option Plan.
THIS DOCUMENT IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS.
THE STOCK IS NOT INSURED BY THE FDIC OR ANY GOVERNMENT AGENCY.
<PAGE>
MITCHELL SAVINGS BANK, SSB
SPRUCE PINE, NORTH CAROLINA
QUESTIONS AND ANSWERS
REGARDING THE SUBSCRIPTION AND
DIRECT COMMUNITY OFFERING.
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE INFORMATION IN
THIS QUESTION AND ANSWER BROCHURE IS A SUMMARY. COMPLETE DETAILS OF THE
CONVERSION AND OFFERING ARE CONTAINED IN THE PROSPECTUS AND PROXY STATEMENT.
A Prospectus can be obtained from Mitchell Savings Bank, SSB ("Mitchell
Savings Bank") or by calling the Mitchell Savings Bank Stock Information Center
at (704) 765-1924. There shall be no sale of stock in any state in which any
offer, solicitation of an offer or sale of stock would be unlawful.
This brochure is provided to answer basic questions you might have about the
conversion.
MUTUAL TO STOCK CONVERSION
Mitchell Savings Bank's Board of Directors has voted to convert Mitchell
Savings Bank from its present mutual form to stock form, subject to approval of
the conversion by the members of Mitchell Savings Bank. Complete details of the
conversion, including reasons for conversion, are contained in the Prospectus
and Proxy Statement. We ask you to please read them.
1. Q. WHAT IS A "CONVERSION"?
A. A conversion is a change in the legal form of organization from a mutual
to a stock savings institution. Mitchell Savings Bank currently operates
as a North Carolina-chartered mutual savings bank with no stockholders.
Through its conversion, Mitchell Savings Bank will become a North
Carolina-chartered stock savings bank.
2. Q. WHAT IS MITCHELL BANCORP, INC.?
A. Mitchell Bancorp, Inc. ("Mitchell Bancorp") is a new North Carolina
corporation organized by Mitchell Savings Bank to serve as the holding
company of Mitchell Savings Bank. Following the conversion, Mitchell
Bancorp will own all of the outstanding stock of Mitchell Savings Bank.
Mitchell Bancorp will issue stock in the conversion, as described below,
and will be a publicly-owned company.
3. Q. WHY IS MITCHELL SAVINGS BANK, SSB CONVERTING?
A.The conversion and simultaneous issuance of stock by Mitchell Bancorp will
raise substantial capital, which will:
(Bullet) Further enhance Mitchell Savings Bank's capital position.
(Bullet) Facilitate future access to the capital markets.
(Bullet) Provide additional funds for increased lending
and investment opportunities.
(Bullet) Provide more strategic flexibility in
the future.
<PAGE>
4. Q. WILL THE CONVERSION HAVE ANY EFFECT ON SAVINGS
ACCOUNTS, CERTIFICATES OF DEPOSIT OR LOANS WITH
MITCHELL SAVINGS BANK?
A. No. The conversion will have no effect on the balance, interest rate,
maturity or withdrawal rights of existing deposits of Mitchell Savings
Bank and deposits will continue to be insured by the FDIC to the maximum
limits available under federal law. Similarly, the rights and obligations
of borrowers under their loan agreements with Mitchell Savings Bank will
not be affected.
5. Q. WILL THE CONVERSION CAUSE ANY CHANGES IN PERSONNEL OR
MANAGEMENT?
A. No. The conversion will not cause any changes in personnel or management.
The normal day-to-day operations will continue as before.
6. Q. DID THE BOARD OF DIRECTORS OF MITCHELL SAVINGS BANK
APPROVE THE CONVERSION?
A. Yes. The Board of Directors approved the Plan of Holding Company
Conversion ("Plan of Conversion") on January 23, 1996.
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
7. Q. AM I ELIGIBLE TO VOTE AT THE SPECIAL MEETING OF
MEMBERS TO BE HELD TO CONSIDER THE PLAN OF CONVERSION?
A. You are eligible to vote at Mitchell Savings Bank's Special Meeting
currently scheduled to be held on June 13, 1996, if you are a "Voting
Member." Voting Members are those persons who held deposit accounts at
Mitchell Savings Bank on the Voting Record Date (May 3, 1996) or were
obligated on a loan from Mitchell Savings Bank on the Voting Record Date.
If you are a Voting Member, you should have received a Prospectus and a
Proxy Statement explaining the conversion and related matters, and a
proxy card with which to vote. Please contact the Stock Information
Center if you are a Voting Member and did not receive a proxy card.
8. Q. HOW MANY VOTES DO I HAVE AS A VOTING MEMBER?
A. You are entitled to one vote for each $100 or fraction thereof on deposit
in your accounts on the Voting Record Date. If you are a borrower, you
are entitled to cast one vote in addition to the number of votes, if any,
you are entitled to vote as a deposit account holder. No member may cast
more than 1,000 votes. A deposit account or loan creates a single
membership for voting purposes, even though more than one person has an
interest in the deposit account or is obligated on the loan.
9. Q. IF I VOTE "AGAINST" THE PLAN OF CONVERSION AND IT IS
APPROVED, WILL I BE PROHIBITED FROM BUYING STOCK
DURING THE SUBSCRIPTION OFFERING?
A. No. Voting against the Plan of Conversion in no way restricts you from
purchasing stock in the subscription offering. Conversely, voting "For"
the Plan of Conversion in no way obligates you to buy stock.
<PAGE>
10. Q. WHAT HAPPENS IF MITCHELL SAVINGS BANK DOES NOT GET
ENOUGH VOTES TO APPROVE THE PLAN OF CONVERSION?
A. Mitchell Savings Bank's conversion would not take place and Mitchell
Savings Bank would remain a mutual savings bank. In addition, the stock
offerings would be terminated.
11. Q. AS A VOTING MEMBER OF MITCHELL SAVINGS BANK, AM I
REQUIRED TO VOTE?
A. No. However, you are encouraged to vote to assure that the conversion is
consummated on a timely basis. Failure to return your proxy card or to
vote in person will have the same effect as a vote "Against" the Plan of
Conversion.
12. Q. WHAT IS A PROXY CARD?
A. A proxy card gives you the ability to vote without attending the Special
Meeting in person. You may attend the meeting and vote in person, even if
you have returned your proxy card, if you choose to do so. However, if
you are unable to attend, but you have returned your proxy card, you
still will be represented by proxy. Your proxy is revocable if you decide
to vote in person at the Special Meeting and under other circumstances
described in the Prospectus and the Proxy Statement.
13. Q. HOW DOES THE CONVERSION AFFECT ME?
A. The conversion is intended, among other things, to assist Mitchell
Savings Bank in maintaining and expanding its many services to Mitchell
Savings Bank's customers and the community. You will also have the
opportunity to invest in Mitchell Savings Bank through purchasing the
common stock of Mitchell Bancorp. However, there is no obligation to do
so. Purchase of stock is strictly optional.
14. Q. HOW CAN I GET FURTHER INFORMATION CONCERNING THE STOCK
OFFERING?
A. You may call the Stock Information Center, collect at (704) 765-1924 for
further information or a copy of the Prospectus, Stock Order Form, if
applicable, Proxy Statement and Proxy Card.
THE SUBSCRIPTION OFFERING
15. Q. WHO IS ENTITLED TO BUY MITCHELL BANCORP, INC. COMMON
STOCK?
A. The shares are being offered pursuant to the Plan of Conversion on a
priority basis to: (i) Mitchell Savings Bank's depositors as of December
31, 1994 who had aggregate deposits at the close of business on such date
of at least $50 ("Eligible Account Holders"); (ii) Mitchell Savings
Bank's Employee Stock Ownership Plan ("ESOP"); (iii) Mitchell Savings
Bank's depositors as of March 31, 1996 who had aggregate deposits at the
close of business on such date of at least $50 ("Supplemental Eligible
Account Holders"); (iv) Mitchell Savings Bank's depositor and borrower
members as of May 3, 1996, who are not Eligible Account Holders or
Supplemental Eligible Account Holders ("Other Members").
Concurrently with the Subscription Offering, the Holding Company is
offering shares of the common stock in the Direct Community Offering to
residents of Mitchell, Yancey, Avery and McDowell counties of North
Carolina.
<PAGE>
16. Q. HOW DO I PURCHASE SHARES OF STOCK?
A. Eligible customers wishing to subscribe for or purchase Mitchell Bancorp
common stock must complete a Stock Order Form and return it to Mitchell
Savings Bank along with full payment or appropriate instructions
authorizing a withdrawal from a deposit account at Mitchell Savings Bank
on or prior to the close of the subscription offering which is 12:00
noon, Eastern time, on June 12, 1996.
17. Q. HOW CAN I PAY FOR THE SHARES?
A. First, you may pay for your stock by cash, check, bank draft, negotiable
order of withdrawal or money order. These funds will earn interest at
Mitchell Savings Bank's passbook rate from the day we receive them until
the completion or termination of the conversion. As of May 8, 1996, the
passbook rate was 2.5%. Stock orders accompanied by cash must be
delivered in person to Mitchell Savings Bank.
Second, you may authorize us to withdraw funds from your Mitchell
Savings Bank's savings account or certificate of deposit without early
withdrawal penalty. These funds will continue to earn interest at the
rate in effect for your account until completion of the offering at which
time your funds will be withdrawn for your purchase. Funds remaining in
your account (if any) will continue to earn interest at the contractual
rate unless the withdrawal reduces the account balance below the
applicable minimum in which case you will either receive interest at the
passbook rate, or receive a check for the balance. A hold will be placed
on your account for the purchase amount you specify on the Stock Order
Form. You will not have access to these funds from the day we receive
your order until the completion or termination of the conversion.
18. Q. WHEN MUST I PLACE MY ORDER FOR SHARES OF STOCK?
A. To exercise subscription rights in the subscription offering, a Stock
Order Form must be received by Mitchell Savings Bank with full payment
for all shares subscribed for not later than 12:00 noon, Eastern time, on
June 12, 1996.
19. Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED?
A. Mitchell Bancorp is offering between 901,000 shares and 1,219,000 shares
of common stock at a price of $10.00 per share. The number of shares sold
is subject to adjustment under certain circumstances as described in the
Prospectus in response to the independent appraiser's final determination
of the consolidated PRO FORMA market value of Mitchell Savings Bank and
Mitchell Bancorp at closing.
20. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF SHARES THAT
I CAN PURCHASE DURING THE OFFERING PERIOD?
A. The minimum number of shares that may be purchased is 50 shares (or an
aggregate dollar amount of $500). No Stock Order Form will be accepted
for less than 50 shares. The maximum number of shares that may be
purchased is 12,190 shares (or an aggregate dollar amount of $121,900),
for any person or entity (other than the ESOP) or persons acting in
concert. In addition, no person, together with associates, or group of
persons acting in concert shall purchase more than 12,190 shares.
<PAGE>
21. Q. HOW WAS IT DETERMINED THAT BETWEEN 901,000 SHARES AND
1,219,000 SHARES OF STOCK WOULD BE ISSUED AT $10.00
PER SHARE?
A. The aggregate offering amount was determined through an appraisal of
Mitchell Savings Bank by Baxter Fentriss and Company, an independent
appraisal firm. The number of shares and price per share were determined
by Mitchell Savings Bank with advice from their financial advisors.
22. Q. MUST I PAY A COMMISSION ON THE STOCK FOR WHICH I
SUBSCRIBE?
A. No. You will not pay a commission on stock purchased in the subscription
offering (or the community offering). Conversion expenses including
commissions will be paid for by Mitchell Savings Bank and will be
deducted from the proceeds of the offering upon completion of the
conversion.
23. Q. WILL I RECEIVE INTEREST ON FUNDS I SUBMIT FOR STOCK
PURCHASES?
A. Yes. If you subscribe for shares by sending in your payment (by cash,
check, money order, etc.), Mitchell Savings Bank will pay you interest on
those funds at its passbook rate from the date funds are received until
completion or termination of the conversion. If you subscribe for shares
by authorizing Mitchell Savings Bank to withdraw funds from an eligible
account, those funds will continue to earn interest at the contractual
rate for that account until completion or termination of the conversion.
24. Q. IF I HAVE MISPLACED MY STOCK ORDER FORM WHAT SHOULD I
DO?
A. Mitchell Savings Bank will mail you another order form or you may obtain
one from the Mitchell Savings Bank office. If you need assistance in
obtaining or completing a Stock Order Form, the Stock Information Center
at Mitchell Savings Bank will be happy to help you.
25. Q. WILL THERE BE ANY DIVIDENDS PAID ON THE STOCK?
A. Following the conversion, Mitchell Bancorp currently expects to pay
semi-annual cash dividends on the Common Stock at an initial annual rate
of $.40 per share, or approximately 4% based upon the initial offering
price of $10.00, with the first dividend being declared after the first
full semi-annual fiscal period following the close of the conversion.
Payment of dividends, regular or special, will be subject to
determination and declaration by Mitchell Bancorp's Board of Directors.
The Board of Directors will periodically review its dividend policy in
view of the operating results and financial condition of Mitchell Bancorp
and Mitchell Savings Bank, net worth and capital requirements, regulatory
restrictions, tax consequences, industry standards, and general economic
conditions, and it will authorize cash dividends to be paid if it deems
such payment appropriate and in compliance with applicable law. There can
be no assurance that any dividends will in fact be paid on the common
stock or that, if paid, any such dividends will not be reduced or
eliminated in future periods.
26. Q. HOW MUCH STOCK DO THE DIRECTORS AND EXECUTIVE OFFICERS
OF MITCHELL SAVINGS BANK INTEND TO PURCHASE THROUGH
THE SUBSCRIPTION OFFERING?
A. Directors of (5 persons) Mitchell Savings Bank and their associates
intend to purchase $285,000 of the stock to be offered in the conversion.
The purchase price paid by directors and executive
<PAGE>
officers will be the same as that paid by customers and the general
public.
27. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE TO ANOTHER
PARTY?
A. No. Subscription rights are non-transferable. Pursuant to state
regulations, subscription rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members may be exercised
only by the person(s) to whom they are granted. Any person found to be
transferring subscription rights will be subject to forfeiture of such
rights and possible legal action.
28. Q. I CLOSED MY ACCOUNT SEVERAL MONTHS AGO. SOMEONE TOLD
ME THAT I AM STILL ELIGIBLE TO BUY STOCK. IS THAT
TRUE?
A. If you were an account holder on the Eligibility Record Date (December
31, 1994) or the Supplemental Eligibility Record Date (March 31, 1996),
you are entitled to purchase stock without regard to whether you continue
to hold an account at Mitchell Savings Bank.
29. Q. MAY I OBTAIN A LOAN FROM MITCHELL SAVINGS BANK TO PAY
FOR MY SHARES?
A. No. North Carolina regulations do not allow Mitchell Savings Bank to make
loans to subscribers to purchase shares. Other financial institutions may
make a loan for this purpose.
30. Q. WILL THE FDIC INSURE THE SHARES OF STOCK?
A. No. The shares of Mitchell Bancorp are not and may not be insured by the
FDIC.
31. Q. WILL THERE BE A MARKET FOR THE STOCK FOLLOWING THE
CONVERSION?
A. Mitchell Bancorp, as a newly organized company, has never issued capital
stock, and consequently, there is no market for the Common Stock at this
time. Mitchell Bancorp has filed an application to have the common stock
listed for quotation on The Nasdaq SmallCap Market. There can be no
assurance that the Common Stock will in fact be listed, or will trade on
The Nasdaq SmallCap Market. A public market having the desirable
characteristics of depth, liquidity and orderliness will depend upon the
presence in the market place of both willing buyers and willing sellers
at any given time. No assurance can be given that an active trading
market will develop and be maintained or that purchasers will be able to
sell their stock at prices at or above the $10.00 per share initial
offering price after the conversion.
<PAGE>
FOR YOUR CONVENIENCE
In order to assist you during the stock offering period, we have established
a Stock Information Center to answer your questions. Please call collect:
(704) 765-1924
THE COMMON STOCK OF MITCHELL BANCORP, INC. IS NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENT AGENCY.
THIS BROCHURE IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO
BUY SECURITIES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. THE INFORMATION IN
THIS QUESTION AND ANSWER BROCHURE IS A SUMMARY. COMPLETE DETAILS OF THE
CONVERSION AND THE OFFERINGS ARE CONTAINED IN THE PROSPECTUS AND PROXY
STATEMENT.
Mitchell Savings Bank, SSB
SINCE 1924
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Mitchell Savings Bank, SSB (Mitchell Logo)
SINCE 1924 210 Oak Avenue
Spruce Pine, NC 28777
(704) 765-7324
FAX (704) 765-7326
May 16, 1996
Dear Valued Customer:
Mitchell Savings Bank, SSB is pleased to announce that we are proceeding
with our plan to convert to a North Carolina-chartered stock savings bank (the
"Conversion"). This Conversion is a significant event in the history of Mitchell
Savings Bank in that it allows customers, community members, directors and
employees an opportunity to own stock in Mitchell Bancorp, Inc., the proposed
holding company for Mitchell Savings Bank.
For over 72 years, Mitchell Savings Bank has successfully operated as a
mutual company. We want to assure you that the Conversion will not affect the
terms, balances, interest rates or existing FDIC insurance coverage on Mitchell
Savings Bank deposits, or the terms or conditions of any loans to existing
borrowers under their individual contract arrangements with Mitchell Savings
Bank. Let us also assure you that the Conversion will not result in any changes
in the management, personnel or the Board of Directors of Mitchell Savings Bank.
As one of our valued members, you have the opportunity to invest in
Mitchell Savings Bank's future by purchasing stock in Mitchell Bancorp, Inc.
during the subscription offering, without paying a sales commission.
If you decide to exercise your subscription rights to purchase shares, you
must return the properly completed stock order form together with full payment
for the subscribed shares so that it is received by Mitchell Savings Bank not
later than Noon, Eastern Time, on June 12, 1996.
Enclosed is a proxy card. Your Board of Directors solicits your vote "FOR"
Mitchell Savings Bank's Plan of Holding Company Conversion. A vote in favor of
the Plan does not obligate you to purchase stock. Please sign and return your
proxy card promptly; your vote is important to us.
We have also enclosed a Prospectus and Proxy Statement which fully describe
Mitchell Savings Bank, its management, board and financial strength and the Plan
of Holding Company Conversion. Please review them carefully before you vote or
invest. For your convenience we have established a Stock Information Center. If
you have any questions, please call the Stock Information Center collect at
(704) 765-1924.
We look forward to continuing to provide quality financial services to you
in the future.
Sincerely,
/s/ Edward Ballew, Jr.
Edward Ballew, Jr.
Executive Vice President
Enclosures
THIS LETTER DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE
CONVERSION, NOR DOES IT CONSTITUTE THE SOLICITATION OF A PROXY IN CONNECTION
WITH THE CONVERSION. SUCH OFFERS AND SOLICITATIONS OF PROXIES ARE MADE ONLY BY
MEANS OF THE PROSPECTUS AND PROXY STATEMENT. THERE SHALL BE NO SALE OF STOCK IN
ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD BE
UNLAWFUL.
THE SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE CONVERSION
ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
1
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Mitchell Savings Bank, SSB (Mitchell Logo)
SINCE 1924 210 Oak Avenue
Spruce Pine, NC 28777
(704) 765-7324
FAX (704) 765-7326
May 16, 1996
Dear Interested Investor:
Mitchell Savings Bank, SSB ("Mitchell Savings Bank") is pleased to announce
our conversion to a North Carolina-chartered stock savings bank (the
"Conversion"). This Conversion is a significant event in the history of Mitchell
Savings Bank in that it allows customers, community members, directors and
employees an opportunity to own stock in Mitchell Bancorp, Inc., the proposed
holding company for Mitchell Savings Bank.
For over 72 years, Mitchell Savings Bank has successfully operated as a
mutual company. We want to assure you that the Conversion will not affect the
terms, balances, interest rates or existing FDIC insurance coverage on Mitchell
Savings Bank deposits, or the terms or conditions of any loans to existing
borrowers under their individual contract arrangements with Mitchell Savings
Bank. Let us also assure you that the Conversion will not result in any changes
in the management, personnel or the Board of Directors of Mitchell Savings Bank.
Enclosed is a Prospectus and Proxy Statement which fully describe Mitchell
Savings Bank, its management, board and financial strength. Please review them
carefully before you make an investment decision. If you decide to invest,
please return to Mitchell Savings Bank a properly completed stock order form
together with full payment for shares at your earliest convenience but not later
than Noon, Eastern Time, on June 12, 1996. For your convenience we have
established a Stock Information Center. If you have any questions, please call
the Stock Information Center collect at (704) 765-1924.
We look forward to continuing to provide quality financial services to our
customers in the future.
Sincerely,
/s/ Edward Ballew, Jr.
Edward Ballew, Jr.
Executive Vice President
Enclosures
THIS LETTER DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE
CONVERSION, NOR DOES IT CONSTITUTE THE SOLICITATION OF A PROXY IN CONNECTION
WITH THE CONVERSION. SUCH OFFERS AND SOLICITATIONS OF PROXIES ARE MADE ONLY BY
MEANS OF THE PROSPECTUS AND PROXY STATEMENT. THERE SHALL BE NO SALE OF STOCK IN
ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD BE
UNLAWFUL.
THE SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE CONVERSION
ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
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Mitchell Savings Bank, SSB (Mitchell Logo)
SINCE 1924 210 Oak Avenue
Spruce Pine, NC 28777
(704) 765-7324
FAX (704) 765-7326
May 16, 1996
Dear Friend:
Mitchell Savings Bank, SSB ("Mitchell Savings Bank") is pleased to announce
that we are proceeding with our plan to convert to a North Carolina-chartered
stock savings bank (the "Conversion"). This Conversion is a significant event in
the history of Mitchell Savings Bank in that it allows customers, community
members, directors and employees an opportunity to own stock in Mitchell
Bancorp, Inc., the proposed holding company for the Bank.
For over 72 years, Mitchell Savings Bank has successfully operated as a
mutual company. We want to assure you that the Conversion will not affect the
terms, balances, interest rates or existing FDIC insurance coverage on Mitchell
Savings Bank deposits, or the terms or conditions of any loans to existing
borrowers under their individual contract arrangements with Mitchell Savings
Bank. Let us also assure you that the Conversion will not result in any changes
in the management, personnel or the Board of Directors of Mitchell Savings Bank.
Our records indicate that you were a depositor of Mitchell Savings Bank on
December 31, 1994 but that you were not a member on May 3, 1996. Therefore,
under applicable law, you are entitled to subscribe for Common Stock in Mitchell
Bancorp, Inc.'s subscription offering. Orders submitted by you and others in the
subscription offering are contingent upon the current members' approval of the
Plan of Holding Company Conversion at a special meeting of members to be held on
June 13, 1996 and upon receipt of all required regulatory approvals.
If you decide to exercise your subscription rights to purchase shares, you
must return the properly completed stock order form together with full payment
for the subscribed shares so that it is received at Mitchell Savings Bank not
later than Noon, Eastern Time, on June 12, 1996.
Enclosed is a Prospectus and Proxy Statement which fully describe Mitchell
Savings Bank, its management, board and financial strength. Please review them
carefully before you invest. For your convenience we have established a Stock
Information Center. If you have any questions, please call the Stock Information
Center collect at (704) 765-1924.
We look forward to continuing to provide quality financial services to you
in the future.
Sincerely,
/s/ Edward Ballew, Jr.
Edward Ballew, Jr.
Executive Vice President
Enclosures
THIS LETTER DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE
CONVERSION, NOR DOES IT CONSTITUTE THE SOLICITATION OF A PROXY IN CONNECTION
WITH THE CONVERSION. SUCH OFFERS AND SOLICITATIONS OF PROXIES ARE MADE ONLY BY
MEANS OF THE PROSPECTUS AND PROXY STATEMENT. THERE SHALL BE NO SALE OF STOCK IN
ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD BE
UNLAWFUL.
THE SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE CONVERSION
ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
3
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Mitchell Savings Bank, SSB (Mitchell Logo)
SINCE 1924 210 Oak Avenue
Spruce Pine, NC 28777
(704) 765-7324
FAX (704) 765-7326
May 16, 1996
Dear Member:
As a qualified member of Mitchell Savings Bank, SSB ("Mitchell Savings
Bank") you have the right to vote upon Mitchell Savings Bank's proposed Plan of
Holding Company Conversion and generally also have the right to subscribe for
shares of common stock of Mitchell Bancorp, Inc., the proposed holding company
for Mitchell Savings Bank. However, the proposed Plan of Holding Company
Conversion provides that Mitchell Bancorp, Inc. will not offer stock in any
state in which compliance with the securities laws would be impracticable for
reasons of cost or otherwise. Unfortunately, the securities laws of your state
would require Mitchell Bancorp, Inc. to register its common stock and/or its
employees in order to sell the common stock to you. Such registration would be
prohibitively expensive or otherwise impracticable in light of the few members
residing in your state.
You may vote on the proposed Plan of Holding Company Conversion and we urge
you to read the enclosed Proxy Statement and execute the enclosed Revocable
Proxy. Questions regarding the execution of the Revocable Proxy should be
directed to Mitchell Savings Bank's Stock Information Center at (704) 765-1924.
Sincerely,
/s/ Edward Ballew, Jr.
Edward Ballew, Jr.
Executive Vice President
Enclosure
THIS LETTER DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE
CONVERSION, NOR DOES IT CONSTITUTE THE SOLICITATION OF A PROXY IN CONNECTION
WITH THE CONVERSION. SUCH OFFERS AND SOLICITATIONS OF PROXIES ARE MADE ONLY BY
MEANS OF THE PROSPECTUS AND PROXY STATEMENT, RESPECTIVELY. THERE SHALL BE NO
SALE OF STOCK IN ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE
OF STOCK WOULD BE UNLAWFUL.
THE SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE CONVERSION
ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
4
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TRIDENT SECURITIES, INC.
TELECOPIER: 4601 SIX FORKS ROAD POST OFFICE BOX 19047
(919) 787-1670 RALEIGH, NORTH CAROLINA 27609 RALEIGH, NORTH CAROLINA 27619
(919) 7810-8900
May 16, 1996
To Members and Certain Former Members of Mitchell Savings Bank, SSB:
At the request of Mitchell Bancorp, Inc. (the "Holding Company") and
Mitchell Savings Bank, SSB ("Mitchell Savings Bank") we have enclosed materials
in connection with the conversion of Mitchell Savings Bank from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank and the formation of the Holding Company as the parent holding
company for Mitchell Savings Bank.
Among these materials are a Prospectus and Stock Order Form for your use
should you decide to subscribe for shares of common stock of the Holding
Company. If you decide to exercise your subscription rights to purchase shares,
you must return a properly completed Stock Order Form together with full payment
for the subscribed shares (or appropriate instruction authorizing withdrawal in
such amount from your authorized deposit account(s) at Mitchell Savings Bank) so
that it is received at Mitchell Savings Bank's office no later than Noon,
Eastern Time, on June 12, 1996.
The Holding Company has asked us to forward these documents to you in view
of certain requirements of the securities laws in your state. Should you have
any questions you may contact the Stock Information Center at (704) 765-1924.
Very truly yours,
TRIDENT SECURITIES, INC.
THIS LETTER DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN
OFFER TO BUY, SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE
CONVERSION, NOR DOES IT CONSTITUTE THE SOLICITATION OF A PROXY IN CONNECTION
WITH THE CONVERSION. SUCH OFFER AND SOLICITATIONS OF PROXIES ARE MADE ONLY BY
MEANS OF THE PROSPECTUS AND THE PROXY STATEMENT. THERE SHALL BE NO SALE OF STOCK
IN ANY STATE IN WHICH ANY OFFER, SOLICITATION OF AN OFFER OR SALE OF STOCK WOULD
BE UNLAWFUL. THE SHARES OF MITCHELL BANCORP, INC. COMMON STOCK OFFERED IN THE
CONVERSION ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY.
5
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THE DIRECTORS AND OFFICERS
OF
MITCHELL SAVINGS BANK, SSB
CORDIALLY INVITE YOU TO ATTEND A BRIEF
PRESENTATION REGARDING THE STOCK OFFERING OF
MITCHELL BANCORP, INC.
OUR PROPOSED HOLDING COMPANY
PLEASE JOIN US AT THE
PINEBRIDGE INN
101 PINEBRIDGE AVENUE
SPRUCE PINE, NORTH CAROLINA
JUNE 3, 1996
AT 7:00 P.M. FOR REFRESHMENTS
YOU MUST RESPOND BY
MAY 31, 1996 TO RESERVE A SEAT
R.S.V.P. (704) 765-1924
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THIS PROSPECTUS IS PROVIDED SOLELY AS AN ACCOMPANIMENT TO THE
ENCLOSED PROXY SOLICITATION MATERIALS AND IS NEITHER AN OFFER TO SELL
NOR THE SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK OF MITCHELL
BANCORP, INC.
