<PAGE> 1
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
MITCHELL BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
(2) Aggregate number of securities to which transactions applies: 974,693
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $20.00 cash for 486,372, and
securities @ $16.00 per share for 488,321.
(4) Proposed maximum aggregate value of transaction: $17,540,576
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11 (a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
N/A
(2) Form, schedule or registration statement no.:
N/A
(3) Filing party:
N/A
(4) Date filed:
N/A
<PAGE> 2
November 16, 1998
Dear Mitchell Shareholder:
You are cordially invited to attend the Annual Meeting of the
Shareholders of Mitchell Bancorp, Inc. ("Mitchell").
-- Tuesday, December 22, 1998.
-- 2:00 p.m. local time.
-- The Pinebridge Inn, 101 Pinebridge Avenue
Spruce Pine (Mitchell County), North Carolina
-- Primary purposes:
(1) Election of directors.
(2) To vote on the Agreement and Plan of Merger.
In addition to the routine matter of electing directors, you will
be asked to consider and vote on a proposal to approve an Agreement and Plan of
Merger ("Agreement"), dated August 13, 1998, by and between Mitchell and First
Western Bank, Burnsville, North Carolina ("First Western"). The Agreement
provides that Mitchell Savings and Mitchell will be merged with First Western,
with First Western surviving the merger. Following consummation of the merger,
First Western intends to operate Mitchell Savings' present office as a branch of
First Western.
The Notice of Annual Meeting of Shareholders and the Joint Proxy
Statement and Offering Circular appearing on the following pages describe the
proposed merger, the election of directors, and other business to be transacted
at the meeting.
Please read the Joint Proxy Statement and Offering Circular
carefully. Directors and officers of Mitchell, as well as representatives of
Crisp Hughes Evans LLP, Mitchell's independent auditors, will be present at the
meeting to answer questions.
The Agreement also provides that upon consummation of the merger,
each outstanding share of common stock of Mitchell will be converted, at the
election of the shareholder, into 1.6 shares of newly issued common stock of
First Western, the right to receive a cash payment of $20.00 per share, or a
combination of both. To preserve the tax-free nature of the merger, Mitchell
conversion rights are subject to the provision that the overall consideration
paid by First Western in connection with the
<PAGE> 3
merger must be comprised of no less than 50.1% First Western common stock and no
more than 49.9% cash.
The Board of Directors of Mitchell has unanimously approved the
Agreement, and it recommends that the shareholders vote FOR the approval of the
Agreement. Mitchell's financial advisor, RP Financial LC, has issued an opinion
to the effect that, as of the date of this letter and based on the factors and
assumptions described in that opinion, the consideration to be paid by First
Western pursuant to the Agreement is fair to Mitchell shareholders from a
financial point of view.
Approval of the Agreement requires the affirmative vote of a
majority of the outstanding shares of Mitchell common stock. This means that
your vote is important, regardless of how many or how few shares you own. If you
do not vote -- that is, if you do not either send in your properly signed and
dated proxy card or come to the meeting and vote in person, this will have the
effect of a vote against the merger.
To assure that your shares are represented on this very important
matter:
-- Send back the enclosed proxy card: Sign and date the
enclosed proxy card and return it in the enclosed
postage-prepaid envelope --- whether or not you plan to
attend the meeting.
-- Or attend the meeting: If you send in the proxy card and
later decide to attend, you may, if you wish, revoke your
proxy and vote your shares in person at the meeting.
-- If you have questions: If you have questions or need help in
voting your shares, please call Emma Lee M. Wilson at (828)
765-7324.
Before the annual meeting on December 22, 1998, you must also
make an election to receive either First Western common stock or cash for your
Mitchell shares. Please read carefully the section in the enclosed Joint Proxy
Statement and Offering Circular entitled "PROPOSAL 1 -- APPROVAL OF THE MERGER
- -- Election Procedures." Keep these important points in mind:
-- Send back the enclosed Election Form. Mark on the Election
Form whether you wish to receive First Western common stock
or cash for your shares, and return it in the enclosed
envelope, along with your stock certificates.
-- Be sure to return the Election Form so that it will be
received by the Exchange Agent on or before the Annual
Meeting on December 22, 1998.
-- If we do not receive your Election Form by the deadline: You
will be considered to have chosen not to elect the
consideration you will receive, and the consideration will
be chosen for you.
-- The merger consideration you receive may be different than
the choice you make on your Election Form. Remember that in
order to preserve the tax-free nature of the merger,
Mitchell shareholders may receive no more than 49.9% cash,
and thus allocations may be made other than those indicated
on your Election Form.
<PAGE> 4
-- PLEASE DO NOT SUBMIT YOUR STOCK CERTIFICATES WITH THE PROXY CARD. --
The merger is an important step, both for Mitchell, and for you,
its shareholders. On behalf of the Board of Directors, I urge you to vote.
Sincerely,
Edward Ballew, Jr.
Executive Vice President
- --------------------------------------------------------------------------------
IMPORTANT: If your Mitchell shares are held in the name of a brokerage firm or
nominee, only that firm or nominee can vote your shares. To ensure that your
shares are voted, follow the voting instructions provided to you by such firm or
nominee with this proxy statement or telephone the person responsible for your
account today to obtain instructions on how to direct him or her to execute a
proxy on your behalf.
- --------------------------------------------------------------------------------
<PAGE> 5
November 16, 1998
Dear First Western Shareholder:
You are cordially invited to attend a Special Meeting of the
Shareholders of First Western Bank:
-- Tuesday, December 22, 1998.
-- 10 a.m. local time.
-- The Pinebridge Inn, 101 Pinebridge Avenue
Spruce Pine (Mitchell County), North Carolina.
-- Primary purpose: To consider a merger with Mitchell Bancorp,
Inc., the parent company of Mitchell Savings Bank, Inc.,
SSB.
You will be asked to consider and vote on a proposal to approve
an Agreement and Plan of Merger, dated August 13, 1998, by and between First
Western Bank and Mitchell Bancorp, Inc. The Agreement provides that Mitchell
Savings and Mitchell Bancorp will be merged with and into First Western Bank.
First Western will survive the merger and operate Mitchell Savings' present
office as a branch of First Western.
A complete description of the proposed merger is included in the
attached Joint Proxy Statement and Offering Circular. Please read it carefully.
Directors and officers of First Western, as well as representatives of Deloitte
& Touche LLP, First Western's independent auditors, will be present at the
meeting to answer questions.
The Agreement provides that upon consummation of the merger, each
outstanding share of common stock of Mitchell Bancorp will be converted, at the
election of the holder, into 1.6 shares of newly issued common stock of First
Western, the right to receive a cash payment of $20.00 per share, or a
combination of both. To preserve the tax-free nature of the merger, Mitchell
conversion rights are subject to the provision that the overall consideration
paid by First Western in connection with the merger must be comprised of no less
than 50.1% First Western common stock and no more than 49.9% cash.
The Board of Directors of First Western has unanimously approved
the Agreement, and it recommends that the shareholders vote FOR the approval of
the Agreement and the merger. First Western's financial advisor, The Carson
Medlin Company, has issued an opinion to the effect that, as of the date of this
letter and based on the factors and assumptions described in that opinion, the
<PAGE> 6
consideration to be paid by First Western pursuant to the Agreement is fair to
unaffiliated First Western shareholders from a financial point of view.
Approval of the Agreement requires the affirmative vote of two
thirds of the outstanding shares of First Western common stock. This means that
your vote is important, regardless of how many or how few shares you own. If you
do not vote -- that is, if you do not either send in your proxy card (properly
signed and dated) or come to the meeting and vote in person, this will have the
effect of a vote against the Agreement and the merger.
To assure that your shares are represented on this very important
matter:
-- Send back the enclosed proxy card: Sign and date the
enclosed proxy card and return it in the enclosed
postage-prepaid envelope --- whether or not you plan to
attend the meeting.
-- Or attend the meeting: If you send in the proxy card and
later decide to attend, you may, if you wish, revoke your
proxy and vote your shares in person at the meeting.
-- If you have questions: If you have questions or need help in
voting your shares, please call Charles Ownbey at (828)
682-1115.
The merger is an important step for First Western, for its
long-term business strategy, and for you, its shareholders. On behalf of the
Board of Directors, I urge you to vote.
Sincerely,
Ronnie E. Deyton
President
- --------------------------------------------------------------------------------
IMPORTANT: If your First Western shares are held in the name of a brokerage firm
or nominee, only that firm or nominee can vote your shares. To ensure that your
shares are voted, follow the voting instructions provided to you by such firm or
nominee with this proxy statement or telephone the person responsible for your
account today to obtain instructions on how to direct him or her to execute a
proxy on your behalf.
- --------------------------------------------------------------------------------
<PAGE> 7
MITCHELL BANCORP, INC.
210 OAK AVENUE
SPRUCE PINE, NORTH CAROLINA 28777
(828) 765-7324
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 22, 1998
- --------------------------------------------------------------------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Mitchell Bancorp, Inc. ("Mitchell") will be held at the Pinebridge Inn, 101
Pinebridge Avenue, Spruce Pine, North Carolina, on Tuesday, December 22, 1998,
at 2:00 p.m. local time, for the following purposes:
(1) To consider and vote on a proposal to approve the
Agreement and Plan of Merger, dated August 13,
1998 ("Agreement"), between Mitchell and First
Western Bank ("First Western"), a copy of which is
attached as Exhibit C to the Joint Proxy Statement
accompanying this Notice, and to approve the
transactions described therein, including, without
limitation, the merger of Mitchell and Mitchell
Savings with and into First Western (the "Merger")
and providing for the conversion of the
outstanding shares of Mitchell's common stock into
either shares of First Western common stock or the
right to receive a cash payment;
(2) To elect six directors to serve until the earlier
of the closing of the Merger or the 1999 Annual
Meeting of Shareholders; and
(3) To consider and act upon such other matters as may
properly come before the meeting or any
adjournments thereof.
NOTE: The Board of Directors is not aware of any other business
to come before the meeting.
Any action may be taken on the foregoing proposals at the meeting
on the date specified above or on any date or dates to which, by original or
later adjournment, the meeting may be adjourned. Shareholders of record at the
close of business on November 2, 1998 are entitled to notice of the meeting and
to vote at the meeting and any adjournments or postponements thereof.
SHAREHOLDERS HAVE THE RIGHT TO DISSENT FROM THE MERGER AND TO
OBTAIN CASH PAYMENT FOR THE SHARES OF COMMON STOCK OF MITCHELL UNDER THE
PROVISIONS OF ARTICLE 13 OF THE NORTH CAROLINA BUSINESS CORPORATION ACT
("ARTICLE 13"), WHICH IS SET FORTH AS EXHIBIT F TO THE ACCOMPANYING JOINT PROXY
STATEMENT. SEE "PROPOSAL 1: APPROVAL OF THE MERGER -- RIGHTS OF DISSENTING
SHAREHOLDERS" AND EXHIBIT F FOR A MORE COMPLETE DESCRIPTION OF DISSENTERS'
RIGHTS. A SHAREHOLDER'S FAILURE TO FOLLOW EXACTLY THE PROCEDURES SPECIFIED WILL
RESULT IN THE LOSS OF THAT SHAREHOLDER'S DISSENTERS' RIGHTS.
You are requested to complete and sign the enclosed form of
proxy, which is solicited by the Board of Directors, and to mail it promptly in
the enclosed envelope. The proxy will not be used if you attend the meeting,
revoke the proxy, and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS
EMMA LEE M. WILSON
SECRETARY
Spruce Pine, North Carolina
November 16, 1998
- --------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE MITCHELL THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
- --------------------------------------------------------------------------------
<PAGE> 8
FIRST WESTERN BANK
321 WEST MAIN STREET
BURNSVILLE, NORTH CAROLINA 28714
TELEPHONE: (828) 682-1115
- --------------------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 22, 1998
- --------------------------------------------------------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
First Western Bank ("First Western") will be held at the Pinebridge Inn, 101
Pinebridge Avenue, Spruce Pine, Mitchell County, North Carolina on Tuesday,
December 22, 1998, at 10:00 a.m. local time, for the following purposes:
(1) To consider and vote on a proposal to approve the
Agreement and Plan of Merger, dated August 13, 1998
("Agreement"), between Mitchell Bancorp, Inc.
("Mitchell') and First Western, a copy of which is
attached as Exhibit C to the Joint Proxy Statement
accompanying this Notice, and to approve the
transactions described therein, including, without
limitation, the Merger of Mitchell and its wholly
owned subsidiary Mitchell Savings Bank, Inc., SSB
with and into First Western, providing for the
conversion of the outstanding shares of Mitchell's
common stock into either shares of First Western
common stock or the right to receive a cash
payment; and
(2) To consider and act upon such other matters as may
properly come before the meeting or any
adjournments thereof.
NOTE: The Board of Directors is not aware of any other business
to come before the meeting.
Any action may be taken on the foregoing proposals at the meeting
on the date specified above or on any date or dates to which, by original or
later adjournment, the meeting may be adjourned. Shareholders of record at the
close of business on November 2, 1998 are entitled to notice of the meeting and
to vote at the meeting and any adjournments or postponements thereof.
SHAREHOLDERS HAVE THE RIGHT TO DISSENT FROM THE MERGER AND TO
OBTAIN CASH PAYMENT FOR THE SHARES OF COMMON STOCK OF FIRST WESTERN UNDER THE
PROVISIONS OF ARTICLE 13 OF THE NORTH CAROLINA BUSINESS CORPORATION ACT
("ARTICLE 13"), WHICH IS SET FORTH AS EXHIBIT F TO THE ACCOMPANYING JOINT PROXY
STATEMENT. SEE "PROPOSAL 1: APPROVAL OF THE MERGER -- RIGHTS OF DISSENTING
SHAREHOLDERS" AND EXHIBIT F FOR A MORE COMPLETE DESCRIPTION OF DISSENTERS'
RIGHTS. A SHAREHOLDER'S FAILURE TO FOLLOW EXACTLY THE PROCEDURES SPECIFIED WILL
RESULT IN THE LOSS OF THAT SHAREHOLDER'S DISSENTERS' RIGHTS.
You are requested to complete and sign the enclosed form of
proxy, which is solicited by the Board of Directors, and to mail it promptly in
the enclosed envelope. The proxy will not be used if you attend the meeting,
revoke the proxy, and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS
RONNIE E. DEYTON
PRESIDENT
Burnsville, North Carolina
November 16, 1998
- --------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE FIRST WESTERN THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
- --------------------------------------------------------------------------------
<PAGE> 9
- --------------------------------------------------------------------------------
Q&A
- --------------------------------------------------------------------------------
FOR SHAREHOLDERS OF MITCHELL BANCORP, INC.
- --------------------------------------------------------------------------------
ON THE PROPOSED MERGER WITH FIRST WESTERN BANK
- --------------------------------------------------------------------------------
Q. WHAT AM I BEING ASKED TO VOTE ON?
A. First Western Bank is proposing to buy Mitchell Savings Bank, Inc.,
SSB, and its holding company, Mitchell Bancorp, Inc. Both Mitchell
Savings and Mitchell Bancorp will cease to exist as corporate entities
when the merger is complete. First Western will continue Mitchell's
business and operate the present office of Mitchell Savings as a branch
of First Western. The purchase is structured as a merger, and so
Mitchell shareholders must vote to approve it.
On August 13, 1998, the Mitchell Bancorp Board of Directors approved an
"Agreement and Plan of Merger," which describes the terms of the
transaction. The text of the entire agreement is in Exhibit C at the
back of the Joint Proxy Statement and Offering Circular.
You are invited to the annual meeting of Mitchell shareholders on
December 22, 1998, at 2 p.m., at the Pinebridge Inn in Spruce Pine. You
will be asked to vote on two specific items: (1) approval of the August
13 Agreement and the merger, and (2) election of directors.
Q. WHAT IS FIRST WESTERN BANK?
A. First Western Bank is a state-chartered bank headquartered in
Burnsville, North Carolina, and it has an office in Spruce Pine. It was
organized in December 1997.
Q. WHY SHOULD I VOTE FOR THE MERGER?
A. The merger will mean a new direction for Mitchell Savings. The merger
poses a risk that is higher than normal, primarily because First
Western is barely a year old and still very much in the developmental
stage. The Joint Proxy Statement contains a section entitled "Risk
Factors," and you should read it carefully.
But the merger is also the best opportunity to move Mitchell's business
forward without abandoning its ability to serve the local community.
The world of financial institutions is changing dramatically. More and
more, community savings banks must compete with super-regional banks,
and these banks have moved into Western North Carolina. The larger
banks offer efficiency and flexibility of services, in contrast to
Mitchell's narrow focus, and to survive, Mitchell must compete in their
world. The First Western merger offers the best way to make this
transition for several reasons.
First, while Mitchell is a small institution concentrating almost
solely on mortgage lending, First Western is a commercial bank offering
more diversified services. Mitchell's management will also face issues
of succession in the near future. First Western's management offers
both experience in modern banking and the desire to maintain Mitchell's
tradition of community service.
Finally, Mitchell's small size, single office, and limited products and
staff mean that it has limited ability to increase shareholder returns.
While the returns to you as a shareholder of First Western may be
limited during the next two years or more, the potential long-range
return to you -- as a shareholder of First Western after the merger --
should be greater than if Mitchell remained an independent institution.
<PAGE> 10
Q. WHAT IS THE POSITION OF THE MITCHELL BOARD OF DIRECTORS?
A. The Board of Directors of Mitchell Bancorp, Inc., the holding company
that owns Mitchell Savings, has voted unanimously to approve the
merger.
Q. WHAT WILL I RECEIVE FOR MY SHARES OF MITCHELL STOCK?
A. You will receive either 1.6 shares of First Western common stock for
every share of Mitchell stock, a cash payment of $20 per share, or a
combination of both. You will be asked to choose which you prefer. To
do so, use the Election Form in Exhibit G at the back of the Joint
Proxy Statement and the return envelope included in this package.
However, there is a possibility that you may not receive exactly the
proportion you request. The reason is that the total paid by First
Western to Mitchell shareholders must be exactly 50.1% stock and 49.9%
cash. This is necessary so that the merger will be a tax-free
transaction for both First Western Bank and some Mitchell shareholders.
(The next question deals specifically with tax consequences for
shareholders.) If total requests by Mitchell shareholders do not add up
to these percentages, First Western will make adjustments to each
shareholder's request, proportionately. Please pay careful attention to
the section in the Proxy Statement entitled "Allocation Procedures." Be
sure to fill out the Election Form and return it to the Exchange Agent
listed on the form itself. Read the instructions carefully.
Q. WHAT ARE THE FEDERAL TAX CONSEQUENCES FOR SHAREHOLDERS?
A. You should consult your individual tax advisor to determine your tax
consequences. In general, however, if you receive First Western stock,
you will not recognize any gain on this transaction, and the basis for
your First Western stock will be the same as the basis for the Mitchell
stock. (You may have taxable gain if you later sell the stock.) If you
receive cash, you cannot recognize a loss, and you may have to
recognize a gain. This will depend on when you bought your Mitchell
stock, how much you paid for it, and so forth.
Q. WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A. If you receive First Western stock for your Mitchell stock, you will
become a shareholder of First Western, and subject to its dividend
policy. North Carolina banking laws prohibit new banks from paying
dividends for their first three years, so you will receive no dividends
for at least two more years. Also, because First Western is still
developing its business, it will probably invest its earnings in its
business in the near future. As a result, you may not receive
dividends for several years.
Q. MY SHARES ARE HELD IN MY BROKER'S NAME. WILL MY BROKER VOTE MY SHARES
FOR ME?
A. Yes, you will instruct your broker on how to vote, and the broker will
actually cast the vote. The broker will provide instructions.
Q. HOW MANY VOTES ARE NEEDED TO APPROVE THE MERGER?
A. A majority of the number of shares entitled to vote at the Mitchell
Annual Meeting must approve the merger. Note that this is not a
majority of those present and voting, but a majority of the shares
entitled to vote, whether they are represented at the meeting or not.
This is why it is important that shareholders who do not plan to attend
the meeting send in their proxy cards.
Q. WHAT WILL HAPPEN IF I DON'T VOTE?
A. Your shares will count as votes against the merger.
<PAGE> 11
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. Send your stock certificates with the Election Form. Do not send these
to Mitchell, and do not send them with the proxy card. Send them, with
the completed Election Form, to the Exchange Agent (Register and
Transfer Company in Cranford, New Jersey). Be sure to send them in time
for them to be received in New Jersey by December 16, 1998, at 5 p.m.
The risk of loss during delivery is yours. The safest way to send them
is by overnight delivery, properly insured.
Q. WILL FIRST WESTERN'S SHARES BE LISTED ON A STOCK EXCHANGE AFTER THE
MERGER?
A. First Western has applied for listing on the Nasdaq SmallCap Market,
where Mitchell stock is currently listed.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. If the shareholders of both Mitchell and First Western approve the
mergers on December 22, the merger should be closed in late December.
Q. WHAT DO I NEED TO DO NOW?
A. Several important things.
-- Read the Joint Proxy Statement carefully. Then decide whether
you want to attend the shareholders' meeting.
-- If you would like to attend the meeting, make plans to come to
Spruce Pine on Wednesday, December 16, 1998, at 2 p.m. at the
Pinebridge Inn in Spruce Pine. However, even if you plan to
attend, be sure to sign your proxy card and send it in, so that
your vote will be counted in the event you are not able to
attend. When you get to the meeting, notify the Mitchell
secretary that you wish to cancel the proxy card.
-- If you cannot attend the meeting, send in the Proxy Card included
in this package. This will enable the proxies (two Mitchell
officials) to vote your shares at the meeting.
-- Decide whether you would like to receive First Western common
stock or a cash payment (or some of each) for your Mitchell
stock. Then fill out the Election Form, which is also included in
this package. Be sure to read the instructions carefully, and if
you have questions, call the 800 number listed on the form.
Q. WHERE CAN I GET MORE INFORMATION?
A. Contact Emma Lee M. Wilson, Corporate Secretary, Mitchell Bancorp,
Inc., by mail at 210 Oak Avenue, Spruce Pine, NC 28777, or by phone at
(828) 765-7324.
<PAGE> 12
- --------------------------------------------------------------------------------
Q&A
- --------------------------------------------------------------------------------
FOR SHAREHOLDERS OF FIRST WESTERN BANK
- --------------------------------------------------------------------------------
ON THE PROPOSED MERGER WITH MITCHELL SAVINGS
- --------------------------------------------------------------------------------
Q. WHAT AM I BEING ASKED TO VOTE ON?
A. First Western Bank is proposing to buy Mitchell Savings Bank, Inc.,
SSB, and its holding company, Mitchell Bancorp, Inc. Both Mitchell
Savings and Mitchell Bancorp will cease to exist as corporate entities
when the merger is complete. First Western will continue Mitchell's
business and operate the present office of Mitchell Savings as a branch
of First Western. The purchase is structured as a merger, and First
Western shareholders must vote to approve it.
On August 13, 1998, the First Western Board of Directors approved an
"Agreement and Plan of Merger," which describes the terms of the
transaction. The text of the entire agreement is in Exhibit C at the
back of the Joint Proxy Statement.
To approve the merger, the First Western Board of Directors has called
a special meeting of shareholders for Tuesday, December 22, 1998, at 10
a.m., at the Pinebridge Inn in Spruce Pine. You are invited to that
meeting. You will be asked to vote on one item -- approval of the
August 13 Agreement and the merger.
Q. WHAT ARE MITCHELL SAVINGS AND MITCHELL BANCORP?
A. Mitchell Savings, Inc., SSB, is a state savings bank with its office in
Spruce Pine. It was chartered in 1924 as a mutual savings and loan
association, and it converted to a savings bank in 1992. Mitchell
Bancorp, Inc., is a holding company, with Mitchell Savings as its
wholly owned subsidiary.
Q. WHY SHOULD I VOTE FOR THE MERGER?
A. The merger is the best and most economical way for First Western to
achieve the size needed to achieve its goal of being the leading
community-based financial institution in Mitchell and Yancey Counties.
First Western was chartered a year ago, in December 1997, in the belief
that Mitchell and Yancey Counties needed a financial institution that
could have the resources to offer a wide range of banking services --
and still remain responsive to local families and small businesses. It
is intended to be a community-based alternative to the growing
domination by the super-regional banks that are moving into Western
North Carolina, but with their primary loyalties elsewhere.
Yet some gaps remain. First Western needs additional presence,
especially in downtown Spruce Pine, and it needs more mortgage
expertise, in order to serve that important market. Mitchell offers
both. Mitchell's office in downtown Spruce Pine will become a branch of
First Western, and First Western will acquire Mitchell's mortgage
expertise and experience in the community to provide better service to
present customers of both First Western and Mitchell, and future
customers as well.
The merger will allow First Western to achieve economies of scale as it
manages its current business and the business of Mitchell. The merger
will also allow the bank to achieve the necessary growth more quickly
than it could by independent expansion.
<PAGE> 13
Q. WHAT IS THE POSITION OF THE FIRST WESTERN BOARD OF DIRECTORS?
A. The Board of Directors of First Western Bank has voted unanimously to
approve the merger.
Q. MY SHARES ARE HELD IN MY BROKER'S NAME. WILL MY BROKER VOTE MY SHARES
FOR ME?
A. Yes, you will instruct your broker on how to vote, and the broker will
actually cast the vote. The broker will provide instructions.
Q. HOW MANY VOTES ARE NEEDED TO APPROVE THE MERGER?
A. Two thirds of the number of shares entitled to vote at the special
meeting if First Western shareholders must approve the merger. Note
that this is not two thirds of those present and voting, but two thirds
of the shares entitled to vote, whether they are represented at the
meeting or not. This is why it is important that shareholders who do
not plan to attend the meeting send in their proxy cards.
Q. WHAT WILL HAPPEN IF I DON'T VOTE?
A. Your shares will count as votes against the merger.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. If the shareholders of both Mitchell and First Western approve the
mergers on December 22, the merger should be closed in late December.
Q. WHAT DO I NEED TO DO NOW?
A. Read the Joint Proxy Statement carefully. Then decide whether you want
to attend the shareholders' meeting.
-- If you would like to attend the meeting, make plans to come to
Spruce Pine on Wednesday, December 16, 1998, at 10 a.m. at the
Pinebridge Inn in Spruce Pine. However, even if you do plan to
attend, be sure to sign your proxy card and send it in, so that
your vote will be counted in the event you are not able to
attend. When you get to the meeting, notify the bank secretary
that you wish to cancel the proxy card.
-- If you cannot attend the meeting, send in the Proxy Card included
in this package. This will enable the proxies (two bank
officials) to vote your shares at the meeting.
Q. WHERE CAN I GET MORE INFORMATION?
A. Contact Charles Ownbey, Corporate Secretary, First Western Bank, by
mail at 321 West Main Street, Burnsville, NC 28714, or by phone at
(828) 682-1115.
<PAGE> 14
JOINT PROXY STATEMENT
MITCHELL BANCORP, INC.
FOR THE ANNUAL MEETING TO BE HELD ON DECEMBER 22, 1998
AND
FIRST WESTERN BANK
FOR A SPECIAL MEETING TO BE HELD ON DECEMBER 22, 1998
FIRST WESTERN BANK
OFFERING CIRCULAR
SHARES OF COMMON STOCK $5.00 PER SHARE PAR VALUE
This Joint Proxy Statement and Offering Circular ("Joint Proxy
Statement") is being furnished to the shareholders of Mitchell Bancorp, Inc.
("Mitchell Shareholders" and "Mitchell") in connection with the solicitation of
proxies by the Mitchell Board of Directors ("Mitchell Board") for use at the
Annual Meeting of Shareholders to be held on December 22, 1998, and at any
adjournments or postponements thereof ("Annual Meeting"). This Joint Proxy
Statement is first being mailed to Mitchell Shareholders on or about November
20, 1998.
This Joint Proxy Statement is also being furnished to the
shareholders of First Western Bank ("First Western Shareholders" and "First
Western," respectively) in connection with the solicitation of proxies by the
First Western Board of Directors ("First Western Board") for use at a Special
Meeting of Shareholders to be held on December 22, 1998 and at any adjournments
or postponements thereof ("Special Meeting," and together with the Annual
Meeting of Mitchell, the "Meetings"). This Joint Proxy Statement is first being
mailed to First Western Shareholders on or about November 20, 1998.
At the Meetings, Mitchell Shareholders and First Western
Shareholders will vote upon a proposal to approve and adopt the Agreement and
Plan of Merger, dated as of August 13, 1998 (the "Agreement"), by and between
Mitchell and First Western, pursuant to which, among other things, Mitchell and
its operating subsidiary, Mitchell Savings Bank, Inc., SSB, would be merged with
and into First Western (the "Merger"). The Agreement also provides that upon
consummation of the Merger all outstanding shares of Mitchell common stock,
$0.01 par value per share ("Mitchell Shares") will be converted, at the election
of the holders, into shares of common stock, $5.00 par value per share, of First
Western ("First Western Shares") or the right to receive a cash payment, or a
combination thereof, as further described in this Joint Proxy Statement. The
election of cash or stock by Mitchell Shareholders will be subject to the
limitation that no more than 49.9% of the aggregate Merger Consideration may be
paid in cash and no less than 50.1% of the aggregate Merger Consideration may be
paid in First Western Shares, in order to preserve the tax-free nature of the
Merger to First Western Bank. FOR A DETAILED DESCRIPTION OF THE TERMS OF THE
MERGER, SEE "PROPOSAL 1: APPROVAL OF THE MERGER."
This Joint Proxy Statement also constitutes an Offering Circular
for First Western's common stock, $5.00 par value per share ("First Western
Shares") to be issued to Mitchell Shareholders in the Merger.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE NORTH CAROLINA
COMMISSIONER OF BANKS OR THE NORTH CAROLINA SAVINGS INSTITUTION DIVISION. NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR THE NORTH CAROLINA COMMISSIONER OF
BANKS PASSED THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF STOCK OFFERED HEREBY ARE NOT BANK DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY OR
INSTRUMENTALITY. THESE SECURITIES ARE BEING OFFERED PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE NOT
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE SECURITIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL INVESTED.
The date of this Joint Proxy Statement is November 16, 1998.
<PAGE> 15
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFER OF ANY SECURITIES MADE
HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST WESTERN OR MITCHELL.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT NOR ANY DISTRIBUTION
OF SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST WESTERN OR
MITCHELL SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
Mitchell is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In accordance
therewith, Mitchell files reports, proxy statements and other information with
the United States Securities and Exchange Commission (the "SEC"). Reports, proxy
statements and other information filed by Mitchell may be inspected and copied
at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at the SEC's regional
offices located at 7 World Trade Center, New York, New York 10048; and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and copies of such materials may be obtained from the Public
Reference Section of the SEC, Washington, D.C. 20549, at prescribed rates.
Copies of such materials may also be obtained from the SEC web site,
http://www.sec.gov, which contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
Quotations relating to the Mitchell Shares appear on the Nasdaq SmallCap Market
under the symbol "MBSP" and such reports, proxy and information statements and
other information concerning Mitchell also can be inspected and copied at the
offices of The Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C.
20006-1506.
First Western is subject to the informational requirements of the
Exchange Act as administered by the Federal Deposit Insurance Corporation
("FDIC"). In accordance therewith, First Western files reports, proxy statements
and other information with the FDIC. Reports, proxy statements and other
information filed by First Western may be inspected and copied at the office of
the FDIC at 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429,
telephone (202) 898-8911or 898-8913, and telefax (202) 898-3909.
First Western Shares are not subject to the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act").
Quotations relating to the First Western Shares appear on the National
Association of Securities Dealers, Inc. ("NASD") Electronic Bulletin Board under
the symbol "FWNB".
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement may contain or have incorporated by
reference, in addition to historical information, various "forward-looking
statements" within the meaning of Section 21E of the Exchange Act, that
represent each company's judgment concerning the future. These forward-looking
statements are subject to risks and uncertainties that could cause that
company's actual operating results and financial position to differ materially
from those projected in the statements. Such forward-looking statements can be
identified by the use of forward- looking terminology, such as "may," "will,"
"expect," "anticipate," "estimate," or "continue" or the negative or other
variations thereof, or comparable terminology. Each company cautions that any
such forward-looking statements are further qualified by important factors that
could cause that company's actual operating results and financial position to
differ materially from the forward-looking statements. Neither company
undertakes any obligation to release publicly the results of any revisions to
these forward-looking statements to reflect events or circumstances arising
after the date of this Joint Proxy Statement.
-2-
<PAGE> 16
TABLE OF CONTENTS
Available Information ..................................................... 2
Forward-Looking Statements ................................................ 2
Summary ................................................................... 4
The Parties to the Merger .................................. 4
The Meetings ............................................... 5
The Merger ................................................. 6
Risk Factors............................................................... 9
Selected Financial Data ...................................................12
Pro Forma Combined Financial Statements ...................................16
Comparative Per Share Data ................................................22
Comparative Market Price Data .............................................23
Risk Factors ..............................................................24
Annual Meeting of Mitchell ................................................25
Special Meeting of First Western ..........................................27
Proposal 1: Approval of the Merger .......................................27
General ....................................................27
Conversion of Mitchell Shares and Mitchell Options;
the Merger Consideration..................................27
Election by Mitchell Shareholders ..........................28
Election Procedures ........................................29
Method of Payment of Merger Consideration ..................29
Allocation Procedures ......................................30
Treatment of Fractional Shares .............................31
Background of and Reasons for the Merger ...................31
Opinions of Financial Advisors .............................35
Required Shareholder Approval ..............................42
Required Regulatory Approvals ..............................42
Business Pending the Merger ................................43
Dividends ..................................................43
Prohibition on Solicitation ................................43
Accounting Treatment .......................................44
Federal Income Tax Consequences ............................44
Conditions to the Merger ...................................46
Waiver; Amendment of Agreement .............................46
Termination of Agreement ...................................47
Closing Date and Effective Time ............................47
Interests of Certain Persons With Respect to the Merger ....47
Board of Directors of Resulting Institution.................49
Expenses ...................................................49
Rights of Dissenting Shareholders ..........................49
Representations and Warranties .............................51
First Western .............................................................51
Mitchell ..................................................................59
Description of First Western Shares .......................................59
Comparison of Shareholders' Rights ........................................61
Resulting Capital Structure ................................61
Governing Law ..............................................61
Directors ..................................................62
Voting Rights and Director Terms ...........................62
Special Shareholder Meetings ...............................62
Business Combinations ......................................62
Limitations on Director Liability ..........................63
Assessability of Shares ....................................63
Statutory Restrictions on Acquisition of the Common Stock ..63
Proposal 2 -- Election of Mitchell Directors ..............................63
Security Ownership of Mitchell ............................................65
Opinions ..................................................................65
Independent Certified Public Accountants ..................................65
Shareholder Proposals .....................................................66
-3-
<PAGE> 17
Other Matters ................................................................66
Information on Mitchell................................................Exhibit A
Mitchell's Annual Report on Form 10-KSB for the
Year Ended June 30, 1998
Report on Form 10-QSB for the Three Months Ended
September 30, 1998
Information on First Western ........................................Exhibit B
Annual Report for the Period from December 1, 1997
(Date of Incorporation) to December 31, 1997
Report on Form 10-Q for the Nine Months Ended
September 30, 1998
Business of First Western
Agreement and Plan of Merger ..........................................Exhibit C
Opinion of RP Financial, LC ...........................................Exhibit D
Opinion of the Carson Medlin Company ..................................Exhibit E
North Carolina Business Corporation Act, Article 13....................Exhibit F
Election Form .........................................................Exhibit G
SUMMARY
The following summary information is qualified by reference to,
and should be read in conjunction with, the more detailed information appearing
elsewhere in this Joint Proxy Statement, including the Exhibits, the documents
accompanying this Joint Proxy Statement.
THE PARTIES TO THE MERGER
MITCHELL
Mitchell was organized on February 28, 1996, for the purpose of
becoming the holding company for Mitchell Savings upon Mitchell Savings'
conversion from mutual to stock form (the "Conversion"). The Conversion was
completed on July 12, 1996. At September 30, 1998, Mitchell had consolidated
assets of $37.4 million, consolidated deposits of $21.8 million, and
consolidated shareholders' equity of $14.6 million. Mitchell has not engaged in
any significant activity other than holding the stock of the Mitchell Savings.
The office of Mitchell is located at 210 Oak Avenue, Spruce Pine, Mitchell
County, North Carolina 28777. The telephone number is (828)765-7324.
Mitchell Savings was established in 1924 as "Mitchell County
Building & Loan Association," a North Carolina-chartered mutual savings and loan
association, in Spruce Pine, North Carolina, approximately 50 miles northeast of
Asheville. In 1992, the Savings Bank converted to a North Carolina-chartered
savings bank and adopted its current title. Mitchell Savings is regulated by the
Administrator, Savings Institutions Division, North Carolina Department of
Commerce ("Administrator"), its primary regulator, and by the Federal Deposit
Insurance Corporation ("FDIC"), the insurer of its deposits. Mitchell Savings'
deposits are federally insured by the FDIC under the Savings Association
Insurance Fund ("SAIF") and it is a member of the Federal Home Loan Bank System
("FHLB").
FIRST WESTERN
First Western is a commercial bank, which opened offices in
Burnsville and Spruce Pine in December 1997. First Western is regulated by the
North Carolina Banking Commissioner (the "Commissioner"), its primary regulator,
and the FDIC, the insurer of its deposits. First Western's deposits are
federally insured by the FDIC under the Bank Insurance Fund ("BIF"). At
September 30, 1998, First Western had assets of $22.8 million, deposits of $15.6
million, and shareholders' equity of $7.0 million. The principal office of First
Western is located at 321 West Main Street, Burnsville, Yancey County, North
Carolina 28714. The telephone number is (828) 682- 1115.
First Western offers a wide range of commercial banking services
including checking and savings accounts; commercial, installment, mortgage,and
personal loans; safe deposit boxes; and other associated services. See Exhibit B
for further information regarding the business of First Western.
-4-
<PAGE> 18
THE MEETINGS
MITCHELL ANNUAL MEETING
Place, Time and Date; Purpose. The Annual Meeting of Mitchell
Shareholders will be held on Tuesday, December 22, 1998, at 2:00 p.m. local
time, at the Pinebridge Inn, 101 Pinebridge Avenue, Spruce Pine (Mitchell
County), North Carolina. The purpose of the Annual Meeting is to consider and
vote upon the approval of the Agreement attached as Exhibit C and to elect six
directors to serve until completion of the Merger or, if the Merger is not then
completed, until their successors have been elected and qualified. For more
details, see "ANNUAL MEETING OF MITCHELL -- Place, Time, and Date."
Record Date; Shares Entitled to Vote. The Mitchell Board has
fixed the close of business on November 2, 1998 as the record date ("Mitchell
Record Date") for the determination of the Mitchell Shareholders entitled to
notice of and to vote at the Annual Meeting. Only Mitchell Shareholders on the
Mitchell Record Date will be entitled to notice of and to vote at the Annual
Meeting. Each Mitchell Share will be entitled to one vote. Mitchell Shareholders
who execute proxies retain the right to revoke them at any time prior to being
voted at the Annual Meeting. At the Mitchell Record Date, 937,174 Mitchell
Shares were outstanding. For more details, see "ANNUAL MEETING OF MITCHELL --
Record Date; Shares Entitled to Vote."
Vote Required. The affirmative vote of the holders of a majority
of the outstanding Mitchell Shares is required for approval of the Agreement. A
plurality of the votes cast at the Annual Meeting by the holders of Mitchell
Shares entitled to vote is required for the election of persons nominated to
serve as directors. At the Mitchell Record Date, the directors and executive
officers of Mitchell and their affiliates beneficially owned 13.7% of the
outstanding Mitchell Shares. All of the directors and executive officers of
Mitchell have indicated their intention to vote their shares for the approval of
the Agreement. At the Mitchell Record Date, First Western directors, executive
officers and their affiliates beneficially owned 7.16% of the outstanding
Mitchell Shares entitled to vote at the Annual Meeting, and they have stated
their intention to vote in favor of the merger. For more details, see "ANNUAL
MEETING OF MITCHELL -- Votes Required."
FIRST WESTERN SPECIAL MEETING
Place, Time and Date; Purpose. The Special Meeting of First
Western Shareholders will be held on Tuesday, December 22, 1998, at 10:00 a.m.
local time, at the Pinebridge Inn, 101 Pinebridge Avenue, Spruce Pine (Mitchell
County), North Carolina. The purpose of the Special Meeting is to consider and
vote upon approval and adoption of the Agreement attached as Exhibit C. For more
details, see "SPECIAL MEETING OF FIRST WESTERN -- Place, Time, and Date."
Record Date; Shares Entitled to Vote. The First Western Board has
fixed the close of business on November 2, 1998 as the record date ("First
Western Record Date") for the determination of First Western Shareholders
entitled to notice of and to vote at the Special Meeting. Only holders of First
Western Shares of record on the First Western Record Date will be entitled to
notice of and to vote at the Special Meeting. Each First Western Share will be
entitled to one vote. First Western Shareholders who execute proxies retain the
right to revoke them at any time prior to being voted at the Annual Meeting. At
the First Western Record Date, 726,419 First Western Shares were outstanding.
For more details, see "SPECIAL MEETING OF FIRST WESTERN -- Record Date; Shares
Entitled to Vote."
Votes Required. The affirmative vote of the holders of two thirds
of the outstanding First Western Shares is required for approval and adoption of
the Agreement. At the First Western Record Date, the directors and executive
officers of First Western and their affiliates beneficially owned 91,376 shares,
or 12.6% of the outstanding First Western Shares. All of the directors and
executive officers of First Western have indicated their intention to vote their
shares for approval of the Agreement. At the First Western Record Date, Mitchell
directors, executive officers and their affiliates beneficially owned less than
1% of the outstanding First Western Shares entitled to vote at the Annual
Meeting. For more information, see "SPECIAL MEETING OF FIRST WESTERN -- Votes
Required."
-5-
<PAGE> 19
THE MERGER
GENERAL
The Agreement provides for the merger of Mitchell Bancorp into
and with First Western, and immediately thereafter, the merger of Mitchell
Savings with and into First Western, with First Western as the surviving entity.
At the time the Merger becomes effective (the "Effective Time"), each of the
Mitchell Shares will be converted into First Western Shares, the right to
receive a cash payment, or a combination of both. As a result of the Merger,
Mitchell Savings and Mitchell will cease to exist, and First Western will
succeed to all of the assets and liabilities of Mitchell Savings and Mitchell.
Upon the completion of the Merger, Mitchell Shareholders will no longer own any
stock in Mitchell. See "PROPOSAL 1: APPROVAL OF THE MERGER."
MERGER CONSIDERATION
Pursuant to the Agreement, each issued and outstanding Mitchell
share will be converted into 1.6 First Western Shares, the right to receive a
cash payment, or a combination of both (collectively, the "Merger
Consideration"). The aggregate value of the Merger Consideration to be paid by
First Western, based on the only sale of First Western Shares in October, was
approximately $17.5 million (including shares attributable to the repayment of
the ESOP loan). The per share value of the Merger Consideration will range from
$16.00 (based on the current market value of the First Western Shares) to $20.00
depending on whether Mitchell Shareholders elect First Western Shares or cash.
Mitchell Shareholders should note that the value of the Merger Consideration
they receive for their Mitchell Shares will be the same whether they elect to
receive First Western Shares or cash, but that the market price of the First
Western Shares they receive will continue to be subject to changes in market
value and may therefore have a market value as of the date they receive
certificates for their shares (or the date such shares are otherwise made
available to them) that may be greater than or less than the value of the Merger
Consideration. Market price information on the First Western Shares and the
Mitchell Shares can be found in the section, "COMPARATIVE MARKET PRICE DATA," on
page 23 below.
For a detailed discussion of the calculation of the number of
shares of First Western Shares or the amount of cash to be received in exchange
for Mitchell Shares, see "PROPOSAL 1: APPROVAL OF THE MERGER -- Conversion of
Mitchell Shares and Mitchell Options; the Merger Consideration."
STOCK OR CASH ELECTION
Each Mitchell Shareholder will be given the opportunity to
indicate whether he or she prefers to receive First Western Shares or cash in
exchange for his or her Mitchell Shares. All such elections, however, will be
subject to the requirement that the aggregate value of the consideration paid by
First Western in connection with the Merger must be comprised of no less than
50.1% First Western Shares and no more than 49.9% cash.
An Election Form, attached as Exhibit G, is to be used by
Mitchell Shareholders to indicate whether they wish to receive First Western
Shares, cash, or a combination. If the elections made by Mitchell Shareholders
do not result in the required percentages of stock and cash, the Agreement
provides an allocation method to reach the required result.
The election procedures are intended to permit each Mitchell
Shareholder to choose to receive First Western Shares, cash, or a combination,
for their Mitchell Shares while at the same time permitting the Merger to
constitute a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), to the corporate
entities and to Mitchell Shareholders who receive First Western Shares for their
Mitchell Shares. For complete information, see "PROPOSAL 1: APPROVAL OF THE
MERGER -- Election by Mitchell Shareholders."
TO MAKE AN EFFECTIVE ELECTION, A MITCHELL SHAREHOLDER WILL BE
REQUIRED TO RETURN A PROPERLY COMPLETED ELECTION FORM BY THE "ELECTION DEADLINE"
(AS DEFINED BELOW). AN ELECTION FORM WILL BE CONSIDERED PROPERLY COMPLETED ONLY
IF IT IS ACCOMPANIED BY CERTIFICATES REPRESENTING ALL MITCHELL SHARES COVERED
THEREBY. IT IS CURRENTLY EXPECTED THAT THE "ELECTION DEADLINE" WILL BE 5:00 P.M.
LOCAL TIME, ON THE CLOSE OF BUSINESS OF THE DATE OF THE ANNUAL MEETING. THE RISK
OF LOSS OF CERTIFICATES IN TRANSIT IS ON THE HOLDER, AND MITCHELL SHAREHOLDERS
ARE ENCOURAGED TO TRANSMIT THEIR CERTIFICATES BY OVERNIGHT DELIVERY, PROPERLY
INSURED. MORE INFORMATION ON TRANSMITTING CERTIFICATES CAN BE FOUND IN THE
ELECTION FORM ATTACHED AS EXHIBIT G.
-6-
<PAGE> 20
Mitchell Shareholders whose certificates have been lost or
destroyed must contact the Exchange Agent, Register and Transfer Company, by
mail at 10 Commerce Drive, Cranford, N.J. (Reorganization Department), or by
phone at (800) 368-5948 before December 22, 1998, the Election Deadline. They
must also complete an election form, and they should check the "Lost
Certificates" box on the form. The Exchange Agent will provide instructions on
providing evidence of authority to enable these shareholders to make an
election.
For Mitchell Shares held in the name of a brokerage firm or
nominee, the brokerage firm or nominee will provide shareholders with
instructions on how to make an election. Shareholders should follow the
instructions provided by such firm or nominee with this proxy statement or, if
instructions are not provided or are unclear, telephone the person responsible
for their account as soon as possible.
RECOMMENDATION OF THE MITCHELL BOARD
THE MITCHELL BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AS
ADVISABLE AND IN THE BEST INTERESTS OF MITCHELL AND THE MITCHELL SHAREHOLDERS,
AND IT RECOMMENDS THAT MITCHELL SHAREHOLDERS VOTE FOR THE APPROVAL OF THE
AGREEMENT.
For a discussion of the circumstances surrounding the Merger and
the factors considered by the Mitchell Board in making its recommendation, see
"PROPOSAL 1: APPROVAL OF THE MERGER -- The Merger -- Background of and Reasons
for the Merger -- Mitchell Reasons for the Merger." Approval of the Agreement by
Mitchell Shareholders is required by law and is a condition to consummation of
the Merger. For more information, see "PROPOSAL 1: APPROVAL OF THE MERGER --
Conditions to the Merger."
RECOMMENDATION OF THE FIRST WESTERN BOARD
THE FIRST WESTERN BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AS
ADVISABLE AND IN THE BEST INTERESTS OF FIRST WESTERN AND THE FIRST WESTERN
SHAREHOLDERS, AND IT RECOMMENDS THAT FIRST WESTERN SHAREHOLDERS VOTE FOR THE
APPROVAL AND ADOPTION OF THE AGREEMENT.
For a discussion of the circumstances surrounding the Merger and
the factors considered by the First Western Board in making its recommendation,
see "PROPOSAL 1: APPROVAL OF THE MERGER -- The Merger -- Background of and
Reasons for the Merger -- First Western Reasons for the Merger." Approval of the
Agreement by First Western Shareholders is required by law and is a condition to
consummation of the Merger. See "PROPOSAL 1: APPROVAL OF THE MERGER --
Conditions to the Merger." For a description of certain economic interests
directors of First Western may be deemed to have in the Merger, see "PROPOSAL 1:
APPROVAL OF THE MERGER -- Interests of Certain Persons with Respect to the
Merger."
OPINIONS OF FINANCIAL ADVISORS
Mitchell. RP Financial, LC ("RP Financial"), Mitchell's financial
advisor, has delivered a written opinion to the Mitchell Board, dated August 13,
1998, to the effect that the terms of the Merger are fair to Mitchell
Shareholders from a financial point of view. RP Financial has also delivered a
letter to the Mitchell Board dated the date of this Joint Proxy Statement
indicating that nothing has come to its attention since August 13, 1998, that
would cause it to withdraw such opinion. A copy of RP Financial's opinion
setting forth the assumptions made, matters considered, procedures followed and
limits of its review, is attached as Exhibit D, and this opinion should be read
by Mitchell Shareholders in its entirety. See "PROPOSAL 1: APPROVAL OF THE
MERGER -- Opinions of Financial Advisors -- Opinion of Financial Advisor to
Mitchell."
First Western. The Carson Medlin Company ("Carson Medlin"), First
Western's financial advisor, has delivered a written opinion to the First
Western Board, dated November 16, 1998, to the effect that the consideration to
be paid by First Western pursuant to the Agreement is fair to the unaffiliated
shareholders of First Western from a financial point of view. A copy of Carson
Medlin's opinion dated November 16, 1998, setting forth the assumptions made,
matters considered, procedures followed and limits of its review, is attached as
Exhibit E, and this opinion should be read by First Western Shareholders in its
entirety. See "PROPOSAL 1: APPROVAL OF THE MERGER -- Opinions of Financial
Advisors -- Opinion of Financial Advisor to First Western."
-7-
<PAGE> 21
CONDITIONS TO THE MERGER
The obligations of both Mitchell and First Western to consummate
the Merger are subject to the fulfillment or waiver of certain conditions
specified in the Agreement, including the approval of the Agreement by the
Mitchell Shareholders and First Western Shareholders; all requisite approvals of
the Commissioner, the FDIC, and the Administrator and any other governmental
entity whose approval is necessary, without conditions deemed adverse by First
Western; the performance of the covenants given in the Agreement and the
continued accuracy of representations and warranties made by Mitchell and First
Western to each other; the absence of material adverse changes in the business
of either party; the absence of litigation or other proceedings presenting a
substantial risk of restraint or prohibition of the transactions contemplated by
the Agreement or obtaining material damages or other relief in connection
therewith; the receipt of opinions of tax counsel to both Mitchell and First
Western that the Merger will be treated for federal income tax purposes as a
tax-free reorganization to First Western Bank; and the receipt of other legal
opinions. For more information, see "PROPOSAL 1: APPROVAL OF THE MERGER --
Conditions to the Merger."
REGULATORY REQUIREMENTS
As a bank holding company, Mitchell is subject to the supervision
of the Administrator and the Federal Reserve. Mitchell Savings, as a
state-chartered savings bank, is subject to the supervision of the Administrator
and the FDIC. First Western, as a state-chartered bank, is subject to the
supervision of the Commissioner and the FDIC. Accordingly, the Merger requires
the approval of the Commissioner, the Administrator, and the FDIC. First Western
has filed applications to obtain such regulatory approvals. There can be no
assurance that such approvals will be obtained, and, if obtained, that they will
not impose conditions that are deemed materially burdensome or that would so
adversely impact the economic and business benefits of the Merger to First
Western as to render it inadvisable in the judgment of First Western to proceed
with the Merger. See "PROPOSAL 1: APPROVAL OF THE MERGER -- Required Regulatory
Approvals."
FEDERAL INCOME TAX CONSEQUENCES
The Merger is conditioned upon the receipt by Mitchell and First
Western of an opinion of First Western's tax counsel to the effect that (i) the
Merger will be treated for federal income tax purposes as a reorganization under
Section 368(a) of the Code (the "Section"), and that Mitchell and First Western
each will be a party to that reorganization under the Section; and (ii) the
merger of Mitchell and First Western will be treated for federal income tax
purposes as a reorganization within the meaning of the Section; and (iv)
Mitchell and First Western Bank each will be a party to that reorganization
within the meaning of the Section. Assuming the mergers qualify, no gain or loss
will be recognized by Mitchell, Mitchell Savings, or First Western as a result
of the mergers. The federal income tax consequences to each Mitchell Shareholder
(including whether or not the transaction is taxable to such shareholder) will
depend on whether the shareholder receives stock, cash, or a combination thereof
and certain other facts. Mitchell Shareholders should read in detail the
section, "PROPOSAL 1: APPROVAL OF THE MERGER -- Federal Income Tax
Consequences."
ALL MITCHELL SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
LAWS.
DISSENTERS' APPRAISAL RIGHTS
Both Mitchell Shareholders and First Western Shareholders will
have dissenters' appraisal rights in the Merger. For a description of rights of
shareholders under North Carolina law to dissent from the Merger and to seek a
judicial determination, and payment in cash, of the fair value of their shares,
which, for Mitchell Shareholders, may be less than, or more than, the value of
the Merger Consideration provided for in the Agreement, see "PROPOSAL 1:
APPROVAL OF THE MERGER -- Rights of Dissenting Shareholders." A shareholder who
wishes to exercise his or her appraisal rights must deliver a written demand to
his or her institution for appraisal before the vote on the Merger is taken and
must not vote in favor of the Merger.
Mitchell Shareholders should address demands for appraisal to:
Corporate Secretary, Mitchell Bancorp, Inc., 210 Oak Avenue, Spruce Pine, North
Carolina 28777. First Western Shareholders should address demands for appraisal
to: Corporate Secretary, First Western Bank, 321 West Main Street, Burnsville,
North Carolina 27814.
-8-
<PAGE> 22
COMPARISON OF SHAREHOLDERS' RIGHTS
Mitchell Shareholders who receive First Western Shares in
exchange for their Mitchell Shares will be governed, with respect to their
rights as such shareholders, by First Western's Articles of Incorporation and
Bylaws and by the North Carolina General Statutes. See "COMPARISON OF
SHAREHOLDER RIGHTS."
RISK FACTORS
Each Mitchell Shareholder, before making an election to receive
First Western Shares, should consider certain risks and speculative features
inherent in and affecting the business of First Western. Before electing to
receive First Western Shares, each Mitchell Shareholder should carefully
consider the risk factors set forth below. Also see "FIRST WESTERN," below.
LACK OF OPERATING HISTORY
First Western has been in operation for less than one year and
therefore has a limited operating history. As a consequence, Mitchell
Shareholders necessarily have limited financial information on which to base a
decision to elect to receive First Western Shares. First Western's operations
will be subject to other risks inherent in the establishment of a new business
and, specifically, of a new financial institution.
DEPENDENCE ON KEY PERSONNEL
First Western is, and for the foreseeable future will be,
dependent on the services of Ronnie E. Deyton, who is a director and the
President and Chief Executive Officer of First Western; Charles Ownbey, Senior
Executive Vice President for Credit Administration; and Martin Shuford,
Executive Vice President for Business Development. No senior officers of
Mitchell will remain in permanent positions with First Western. The failure of
First Western's officers to perform satisfactorily, or a failure to find a
satisfactory replacement for any officer who leaves the employment of First
Western, could have a material adverse effect on First Western. SEE "FIRST
WESTERN -- Executive Officers."
LIMITED TRADING MARKET
The First Western Shares are currently traded on the National
Association of Securities Dealers, Inc. ("NASD") Bulletin Board (the electronic
pink sheets) under the symbol "FWNB." The Agreement provides that the First
Western Shares must be qualified for listing on the Nasdaq SmallCap Market upon
consummation of the Merger, and First Western has filed an application for this
listing. However, there is no assurance that holders of Mitchell Shares who
elect to receive First Western Shares will be able to resell their shares in the
future for a price per share that is equal to or more than the current price of
the Mitchell Shares. Subscribers should consider the limited trading market for
the First Western Shares.
DIVIDEND POLICY
The payment of cash dividends by a newly organized bank is
generally prohibited by the Commissioner and the FDIC for three years. In
addition, First Western expects that it will need to direct any earnings
generated during the first three years in the development of its business.
Subject to these restrictions, the payment of dividends in either cash or stock
will be considered by the First Western Board when it is deemed prudent to do
so. Further, First Western's ability to declare and pay future cash dividends
will be dependent upon, among other things, restrictions imposed by the reserve
and capital requirements of North Carolina and federal law, its income and
fiscal condition, tax considerations, and general business conditions. See
"PROPOSAL 1: APPROVAL OF THE MERGER -- Dividends."
COMPETITION
First Western encounters strong competition from other commercial
banks, including the largest North Carolina banks, that operate in Yancey and
Mitchell Counties, North Carolina, and the surrounding area. In the conduct of
certain aspects of its business, First Western also competes with credit unions,
insurance companies, money market mutual funds, and other non-bank financial
institutions; some of which are not subject to the same degree of regulation as
First Western. Many of these competitors have substantially greater resources
and lending abilities than First Western, and they offer certain services that
First Western will not provide. While the First
-9-
<PAGE> 23
Western Board believes that there is a need and a demand for First Western's
services, there is no assurance that First Western will be an effective
competitor.
POSSIBLE NEED FOR ADDITIONAL CAPITAL
The First Western Board believes that the consummation of the
Merger will provide adequate capital for First Western for the foreseeable
future. First Western has no present intention to issue additional equity
securities. However, the financial success of First Western depends on a number
of factors over which First Western has no control, such as regulatory policy,
economic conditions, and government fiscal policies. No assurance can be given
that First Western will not have to seek additional capital. If it becomes
necessary to raise additional capital, there can be no assurance of the
availability of additional capital or any estimate of the terms on which First
Western may be able to obtain such capital. The effect on existing shareholders
of First Western if it were to require additional capital cannot presently be
determined, but such efforts could dilute the interests of existing
shareholders.
FIRST WESTERN INSIDERS; POSSIBLE CONFLICT OF INTEREST; POSSIBLE ADVERSE EFFECT
ON FIRST WESTERN SHARE PRICES.
Several of First Western's officers and directors are
shareholders of Mitchell and will be eligible to receive First Western Shares in
the Merger. Assuming that the First Western officers and directors who own
Mitchell Shares convert all of their shares to First Western Shares, they would
receive 107,376 First Western Shares (worth approximately $1,073,760, based on
the current market price for First Western Shares) and management's beneficial
ownership would be 14.38% of the First Western Shares following completion of
the Merger. If they convert their Mitchell Shares to cash, the value would be
$1,342,200. Assuming he converts all of his Mitchell Shares to First Western
Shares, Van Phillips, the Chairman of First Western, would own in excess of five
percent of the outstanding First Western Shares. It is Mr. Phillips' intent to
convert sufficient Mitchell Shares to cash to lower his ownership of the
resulting institution to less than five percent. Mr. Phillips' ability to reduce
his ownership to less than five percent depends on the application of the
allocation rules set forth in the Agreement. Ownership of the Mitchell Shares
could affect the voting interests of these First Western officers and directors.
Sales of First Western Shares by shareholders, including officers
and directors, could adversely affect the market value and marketability of
First Western Shares. See "FIRST WESTERN -- Beneficial Ownership of Securities."
As of the First Western Record Date, officers and directors of First Western
owned 91,376 shares, or 12.6 percent of the shares entitled to vote at the
meeting. They also hold unexercised options relating to another 21,120 shares,
although these options cannot be voted at the annual meeting. All officers and
directors have indicated that they will vote their shares in favor of the
Merger.
The number of shares and percentage of ownership for each officer
and director are listed in the section, "FIRST WESTERN -- Beneficial Ownership
of Securities." The method by which Mitchell Shares will be distributed as part
of the merger consideration is described in detail in the section, "PROPOSAL 1:
APPROVAL OF THE MERGERS -- Allocation Procedures."
STOCK OPTION PLANS
First Western Shareholders approved stock option plans for
directors and employees in 1998 under which 145,484 First Western Shares may be
granted. First Western has granted options under these plans pursuant to which
127,892 First Western Shares may be issued. The stock option plans may be deemed
an anti-takeover measure. Options under the plans may be issued only to
employees or directors of First Western. If the options are exercised, the
persons exercising them will hold additional First Western Shares and the voting
rights that accompany them. Unless additional shares are sold in a public or
private offering or issued pursuant to a stock dividend, the shares issued
pursuant to the stock option plans will be the only newly-issued shares. As a
result, the voting power of all other shareholders may be diluted as the number
of shares held by management increases and the number of shares held by other
shareholders remains constant. The increased voting power held by management
could help management defeat shareholder proposals unfavorable to management,
shareholder nominees for directors unacceptable to management, and mergers,
tender offers or other transactions requiring shareholder approval that are
unfavorable to management, even though such shareholder proposal, shareholder
nominee for director, merger, tender offer or other transaction may be
considered by others to be favorable to the shareholders and to First Western.
See "FIRST WESTERN -- Stock Option Plans."
-10-
<PAGE> 24
ASSESSMENT OF SHARES
While the First Western Shares are generally not assessable, if
First Western's capital becomes impaired from losses or any other causes and the
Commissioner orders such assessment, under the banking laws of North Carolina,
First Western may assess shareholders for the amount of any impairment. Failure
to pay such an assessment could result in a forced sale of First Western Shares.
ECONOMIC CONDITIONS
First Western is a community bank and the majority of its
customers are located in and doing business within Mitchell and Yancey Counties,
and First Western has loaned and will lend a substantial portion of its capital
and deposits to individual and commercial borrowers in this market area. Any
factors adversely affecting the economy of Mitchell and Yancey Counties could,
in turn, adversely affect the ability of First Western to attract deposits, the
local demand for loans, the value of collateral securing loans, the repayment of
loans, and First Western's efforts to collect, liquidate or restructure problem
loans. Unfavorable economic conditions in Mitchell and Yancey Counties could
therefore have a material adverse effect on the profitability of First Western.
GOVERNMENT REGULATION AND MONETARY POLICY
First Western is subject to a significant degree of regulation
and supervision by various state and federal governmental agencies, such as the
Commission and the FDIC. The rates of interest payable on deposits and
chargeable on loans are affected by governmental regulation and fiscal policy as
well as by national, state and local economic conditions. Changes in
governmental economic and monetary policies may affect the ability of First
Western to attract deposits and make loans. Its operations will also be affected
by changes in state and federal law, regulatory policies and governmental
monetary and fiscal policies, any of which could have a detrimental effect on
the profitability of First Western. See "FIRST WESTERN -- Supervision and
Regulation."
-11-
<PAGE> 25
SELECTED FINANCIAL DATA
The following tables present selected financial data for First
Western and Mitchell.
Financial data for First Western as of December 31, 1997, and for
the period December 1, 1997 (date of incorporation) to December 31, 1997, is
derived from the audited financial statements of First Western in the annual
report contained in Exhibit B. Financial data for First Western as of and for
the nine months ended September 30, 1998, have been derived from the unaudited
financial statements of First Western also contained in Exhibit B. In the
opinion of management, these interim financial statements include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation in accordance with generally accepted accounting principles.
Results of operations for the nine months ended September 30, 1998, are not
necessarily indicative of the results to be expected for the year ended December
31, 1998, or any other future period.
Results of operations for First Western for the period ended
December 31, 1997, do not reflect the financial activity of First Western from
April 20, 1997 (date of inception), to December 1, 1997 (date of organization).
During this period, First Western incurred start-up and organization costs, and
it conducted an offering of its common stock. Total costs incurred during this
period, which were not capitalized and were reflected as the beginning
accumulated deficit at December 1, 1997, consisted of salary and employee
benefit expenses of $111,329, occupancy expenses of $8,553, and advertising,
contract labor, office supplies, and other expenses totaling $41,697.
Financial data for Mitchell for each of the years ended June 30,
1998, and June 30, 1997, have been derived from the audited consolidated
financial statements of Mitchell included in Mitchell's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1998, attached as Exhibit A. Financial
data for Mitchell as of September 30, 1998, and for the three months ended
September 30, 1998 and 1997, have been derived from Mitchell's Form 10-QSB for
the period ended September 30, 1998, also found in Exhibit A. Financial data as
of and for the years ended June 30, 1996, 1995, and 1994, have been derived from
audited financial statements of Mitchell also in Exhibit A.
Historical results are not necessarily indicative of results to
be expected for any future period. In the opinion of the management of both
First Western and Mitchell, all adjustments necessary to arrive at a fair
statement of interim results of operations for each institution have been
included.
-12-
<PAGE> 26
MITCHELL BANCORP, INC., AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------------
09/30/98 1998 1997 1996 1995 1994
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Interest income $ 706 $ 2,773 $ 2,659 $ 2,271 $ 2,259 $ 2,193
Interest expense 290 1,064 975 1,161 962 903
------- ------- ------- ------- ------- -------
Net interest income 416 1,709 1,684 1,110 1,297 1,290
Provision for loan losses 6 24 24 60 24 24
------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 410 1,685 1,660 1,050 1,273 1,266
Noninterest income 1 4 7 6 45 5
Noninterest expense 343 947 907 930 953 452
------- ------- ------- ------- ------- -------
Income before income taxes 68 742 760 126 365 819
Income taxes 56 309 289 35 112 317
------- ------- ------- ------- ------- -------
Income prior to cumulative
effect adjustment 12 433 471 91 253 502
Cumulative effect of change
in accounting principle 0 0 0 0 0 11
------- ------- ------- ------- ------- -------
Net income 12 433 471 $ 91 $ 253 $ 513
======= ======= =======
Net unrealized gains on securities
available for sale, net of taxes 22 97 111
------- -------
Comprehensive income $ 34 $ 530 $ 582
======= ======= =======
PER SHARE DATA
Basic and diluted net income $ 0.01 $ 0.50 $ 0.53 N/A N/A N/A
Cash dividends declared 0.2 0.40 0.20 0 N/A N/A
Period-end book value 15.61 15.72 15.39 14.93 N/A N/A
BALANCE SHEET DATA (AT PERIOD END)
Total assets $37,440 $37,306 $33,059 $36,776 $27,596 $28,109
Loans, net 26,290 27,506 28,203 23,568 22,463 21,843
Allowance for loan losses 206 200 176 152 92 68
Deposits 21,792 21,564 17,672 20,346 20,940 22,195
Total shareholders' equity 14,631 14,632 14,325 14,634 6,078 5,694
PERFORMANCE RATIOS
Net income to average shareholders'
equity 0.33% 3.11% 3.21% 1.53% 4.24% 9.39%
Net income to average total
assets 0.13% 1.23% 1.37% 0.32% 0.92% 1.89%
Shareholders' equity to total assets 39.08% 39.22% 43.33% 39.79% 22.02% 20.26%
CAPITAL RATIOS
Tier 1 capital to risk-weighted assets 61.40% 59.80% 56.90% 71.60% 48.15% 46.10%
Total capital to risk-weighted assets 62.90% 60.90% 57.90% 72.70% 49.90% 46.70%
Tier 1 capital to average assets 32.30% 31.80% 34.50% 29.90% 21.50% 20.30%
ASSET QUALITY RATIOS
Loans to deposits 121.58% 128.48% 160.59% 116.58% 107.71% 98.72%
Allowance for loan losses as a
percentage of gross loans 0.78% 0.72% 0.61% 0.63% 0.40% 0.31%
Net loans charged off during period to
average loans - - - - 0 -
Problem assets as a percentage of
total assets 1.41% 1.54% 2.03% 2.54% 1.43% 1.12%
</TABLE>
-13-
<PAGE> 27
FIRST WESTERN BANK
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE PERIOD
MONTHS ENDED ENDED
09/30/98 12/31/97(1)
------------ ------------
INCOME STATEMENT DATA
<S> <C> <C>
Interest income $ 770 $ 30
Interest expense 298 0
-------- --------
Net interest income 472 30
Provision for loan losses 115 0
-------- --------
Net interest income after
provision for loan losses 357 30
Noninterest income 59 0
Noninterest expense 1,020 165
-------- --------
Income before income taxes (604) (135)
Income taxes 0 0
-------- --------
Net loss $ (604) $ (135)
======== ========
PER SHARE DATA
Basic $ (0.80) $ (0.19)
Cash dividends declared - -
Period-end book value 9.58 10.40
BALANCE SHEET DATA (AT PERIOD END)
Total assets $ 22,791 $ 8,076
Loans, net 7,521 29
Allowance for loan losses 115 -
Deposits 15,571 547
Total shareholders' equity 6,959 7,529
PERFORMANCE RATIOS
Net loss to average shareholders'
equity (8.33%) (1.79%)
Net loss to average total assets (3.91%) (1.67%)
Shareholders' equity to total assets 30.53% 93.23%
CAPITAL RATIOS
Tier 1 capital to risk-weighted assets 63% 358%
Total capital to risk-weighted assets 63% 358%
Tier 1 capital to average assets 45% 94%
ASSET QUALITY RATIOS
Loans to deposits 49.04% 5.30%
Allowance for loan losses as a
percentage of gross loans 1.51% 0.00%
</TABLE>
(1) Period from December 1, 1997 (date of incorporation) to December 31, 1997.
-14-
<PAGE> 28
MITCHELL REGULATORY CAPITAL RATIOS
Mitchell Savings Bank exceeded all capital requirements at
September 30, 1998. It had the following capital ratios at September 30, 1998
(dollars in thousands):
As of September 30, 1998: AMOUNT RATIO
------ -----
Tier I Capital
(To average assets) $ 10,998 32.3%
Tier I Capital
(To risk-weighted assets) $ 10,998 61.4%
Total Capital
(To risk-weighted assets) $ 11,204 62.9%
-15-
<PAGE> 29
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following tables contain unaudited pro forma consolidated financial
statements, including a consolidated balance sheet as of September 30, 1998, and
consolidated statements of operations for the nine months ended September 30,
1998, and the year ended December 31, 1997, for Mitchell, and for the period
from December 1, 1997 (date of incorporation) to December 31, 1997, for First
Western. These statements present, on a pro forma basis, historical results for
First Western and Mitchell as though the purchase had been consummated as of
January 1, 1997.
For purposes of preparing the Pro Forma Consolidated Financial
Information and pro forma per share data, for the period ended December 31,
1997, the historical operating results of Mitchell have been reported on a
calendar-year basis rather than on a June 30 fiscal year basis as they were
originally reported. Such calendar year financial statements and per share
information for Mitchell have not been audited.
The Merger is expected to be accounted for under the purchase method of
accounting, and pro forma data are derived in accordance with such method.
Given the operational and market overlap between First Western and
Mitchell, the pro forma data do not reflect any benefits from potential cost
savings or synergies expected to be achieved following the Merger. The pro forma
balance sheet data also reflect merger costs as a deduction from retained
earnings at September 30, 1998.
Pro Forma Consolidated Financial Information is presented for the
purpose of information only, and it is not necessarily indicative of the results
of operations or consolidated financial position that would have resulted had
the purchase been consummated at the dates or during the period indicated, nor
is it necessarily indicative of future results of operations or consolidated
financial position.
The Unaudited Pro Forma Consolidated Financial Statements should be
read in conjunction with the historical financial statements of First Western
and historical consolidated financial statements of Mitchell, which are
incorporated by reference to this Joint Proxy Statement. Pro forma results are
not necessarily indicative of future operating results.
-16-
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS
----------------------------- FOR THE
FIRST WESTERN(1) MITCHELL ACQUISITION TOTAL
---------------- -------- ----------- -----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ - $ 2,393 $ 2,393
Interest on deposits with other banks 30 250 280
Interest on federal funds sold - - --
Interest on securities - 25 25
----------- ----------- ---- -----------
Total interest Income 30 2,668 2,698
----------- ----------- ---- -----------
INTEREST EXPENSE
Deposits - 956 956
----------- ----------- ---- -----------
Mortgage --
----------- ----------- ---- -----------
Total interest expense - 956 956
----------- ----------- ---- -----------
NET INTEREST INCOME 30 1,712 1,742
PROVISION FOR POSSIBLE LOAN LOSSES - 24 24
----------- ----------- ---- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 30 1,688 1,718
OTHER INCOME - 11 11
OTHER EXPENSES
Salaries and wages 57 394 451
Employee benefits 4 145 149
Occupancy expense 7 26 33
Other 97 275 119 491
----------- ----------- ---- -----------
Total other expenses 165 840 119 1,124
----------- ----------- ---- -----------
INCOME (LOSS) BEFORE INCOME TAXES (135) 859 (119) 605
INCOME TAXES - 336 (94)(6) 242
----------- ----------- ---- -----------
NET INCOME (LOSS) $ (135) $ 523 (25) $ 363
=========== =========== ==== ===========
NET INCOME PER COMMON SHARE
Basic and diluted (0.19) 0.60 0.24
AVERAGE SHARES OUTSTANDING
Basic and diluted 711,847 873,201 1,504,000
</TABLE>
(1) Period from December 1, 1997 (date of incorporation) to December 31, 1997.
-17-
<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS FOR
FIRST WESTERN MITCHELL THE ACQUISITION TOTAL
------------- -------- --------------- -----
INTEREST INCOME
<S> <C> <C> <C> <C>
Interest and fees on loans $ 283 $ 1,797 $ 2,080
Interest on deposits with other banks 266 305 571
Interest on federal funds sold 161 - 161
Interest on securities 59 22 81
--------- --------- ---------
Total interest Income 770 2,124 2,894
--------- --------- ---------
INTEREST EXPENSE
Deposits 286 851 1,137
Mortgage 11 - 11
--------- --------- ---------
Total interest expense 298 851 1,149
--------- --------- ---------
--------- --------- ---------
NET INTEREST INCOME 472 1,273 1,745
--------- --------- ---------
PROVISION FOR POSSIBLE LOAN LOSSES 115 18 133
--------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 357 1,255 1,612
--------- --------- ---------
OTHER INCOME 59 2 61
OTHER EXPENSE
Salaries and wages 365 372 737
Employee benefits 63 127 190
Occupancy expense 240 20 260
Other 352 319 89 760
--------- --------- ------------------ ---------
Total other expenses 1,020 838 89 1,947
--------- --------- ------------------ ---------
INCOME (LOSS) BEFORE INCOME TAXES (604) 419 (89) (274)
INCOME TAXES - 208 (318) (110)
--------- --------- ------------------ ---------
NET INCOME (LOSS) $ (604) $ 211 $ 229 $ (164)
========= ========= ================== =========
NET INCOME PER COMMON SHARE
Basic and diluted $ (0.80) $ 0.24 $ (0.11)
AVERAGE SHARES OUTSTANDING
Basic and diluted 726,419 872,980 1,504,000
</TABLE>
-18-
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments
-------------------------- for
First Western Mitchell the Acquisition Total
------------- -------- --------------- -----
<S> <C> <C> <C> <C>
ASSETS
Cash and Cash Equivalents 11,331 9,504 (9,070) 11,765
Investment securities 2,501 662 3,163
Other Securities 491 291 782
Loans, net of allowance 7,521 26,290 727 {4} 34,538
Premises and equipment, net 631 53 684
Prepaid expenses and other assets 316 537 1,531 {4} 2,384
Deferred Tax Asset - 103 155 {2} 258
----------- ---------- ---------- ----------
TOTAL ASSETS $ 22,791 $ 37,440 $ (6,657) $ 53,574
=========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 7,466 $ 1,225 $ (34){4} $ 8,657
Savings 633 2,087 (38){4} 2,682
Time 7,472 18,480 94 {4} 26,046
----------- ---------- ---------- ----------
Total Deposits 15,571 21,792 22 37,385
Mortgage Payable 148 148
Accrued interest and other liabilities 113 1,017 477 {3} 1,570
(24){2}
----------- ---------- ---------- ----------
TOTAL LIABILITIES 15,819 22,809 475 39,116
----------- ---------- ---------- ----------
Shareholders' equity
Common stock 3,632 10 - {2} 7,538
(11){4}
3,907 {4}
Additional paid-in-capital 4,228 9,289 411 {2} 8,135
(10,336){4}
3,907 {4}
636 {1}
Retained earnings (901) 6,256 (232){2} 1,215
(477){3}
(5,246){4}
(615){1}
Treasury Stock, at cost (42,723 shares) (684) 684 {4} -
Accumulated other comprehensive income 396 (396){4} -
Unearned compensation: ESOP (636) 636 {1} -
----------- ---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 6,959 14,631 (7,132) 14,458
----------- ---------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,791 $ 37,440 $ (6,657) $ 53,574
=========== ========== ========== ==========
</TABLE>
-19-
<PAGE> 33
Notes to the September 30, 1998 Pro Forma Consolidated Financial Information
The unaudited First Western and Mitchell Pro Forma Consolidated
Financial Information is based on the following adjustments, reflecting the
consummation of the Merger using the purchase method of accounting. Actual
amounts may differ from those reflected in the Pro Forma Consolidated Financial
Information. Amounts other than share data are expressed in thousands.
NOTE 1: Upon consummation of the Acquisition, Mitchell will
terminate the Mitchell Savings Employee Stock Ownership Plan ("ESOP"). This
adjustment reflects the cash proceeds received from the ESOP with respect to the
unallocated shares of Mitchell stock held by the ESOP as of September 30, 1998,
for the repayment in full of the outstanding ESOP indebtedness to Mitchell as of
September 30, 1998.
At September 30, 1998, the Mitchell ESOP had 63,617 shares of
stock, or $636 not allocated to employees' individual accounts. Mitchell will
receive from the ESOP plan cash of approximately $657 to pay off the ESOP note
receivable. The following adjusting entry was made to the Unaudited Pro Forma
Consolidated Balance Sheet to reflect this transaction:
Retained earnings - MBI 615
Cash - MBI 657
Unearned Compensation-ESOP - MBI 636
Additional paid-in capital 636
NOTE 2: Upon consummation of the Acquisition, approximately
25,086 shares of unvested restricted stock grants will vest immediately under
the Mitchell Management Recognition and Development Plan ("MRDP"). This
accelerated vesting will result in a one-time charge to Mitchell's income
statement, upon consummation, based on the fair market value at the date of
grant, which was $16.375, less the expense which has already been accrued,
approximately $24, which is reflected in the Unaudited Pro Forma Consolidated
Balance Sheet as a reduction of retained earnings of $232, net of tax. The
holders of the MRDP shares will participate in the conversion of Mitchell
Shares.
All ungranted shares will be retired.
The following entry was made to the Unaudited Pro Forma Consolidated Balance
Sheet to reflect this transaction:
Retained Earnings - MBI 232
Income Tax Receivable - MBI 155
Accrued Expenses - MBI 24
Additional Paid-In Capital - MBI 411
NOTE 3: First Western and Mitchell anticipate incurring
professional fees associated with the transaction (fixed financial advisor fees
as well as attorneys' and accountants' fees are expected to represent the
largest portion of the expenses and charges) as well as estimated expenses
associated with various severance-related obligations. The impact of these
adjustments has been reflected in the Unaudited Pro Forma Consolidated Balance
Sheet as of September 30, 1998, but it has not been reflected in the Unaudited
Pro Forma Consolidated Statement of Earnings.
NOTE 4: First Western will purchase the outstanding shares of
Mitchell for cash and common stock totaling approximately $17,500 (including
ESOP shares attributable to the repayment of the ESOP loan). The consideration
will be comprised of 49.9% cash and 50.1% First Western Shares.
-20-
<PAGE> 34
Shares of Mitchell Stock Outstanding 937,174
Accelerated vesting of MRDP Shares 25,086
Stock Option Shares 12,433
Total Shares 974,693
Stock Conversion (974,693 x 50.1% x 1.6 x $10) $ 7,814
Cash Consideration (974,693 x 49.9% x $20) 9,727
Total Consideration $ 17,541
========
In accordance with the purchase method of accounting for a
business combination, the assets and liabilities of Mitchell will be adjusted to
their estimated fair-market value. Based on current estimates, the loans will be
increased $727 and deposits increased $22. The estimated purchase price
allocation will be as follows:
Total Consideration $ 17,541
Less estimated fair value of net assets acquired 16,010
Excess purchase price over fair value of net
assets acquired $ 1,531
========
The amount of goodwill and the corresponding amortization
actually recorded may ultimately differ from this amount, depending upon the
actual fair value of net assets acquired upon consummation of the Merger.
The following adjusting entry was made to the Unaudited Pro Forma
Consolidated Balance Sheet to reflect this transaction:
Loans Receivable 727
Common stock-MBI 11
Additional paid-in capital-MBI 10,336
Retained earnings -MBI 5,246
Accumulated other comprehensive income-MBI 396
Goodwill 1,531
Deposits 22
Treasury stock-MBI 684
Cash-FWB 9,727
Common Stock-FWB 3,907
Additional paid-in capital-FWB 3,907
NOTE 5: An adjustment was made to record the pro forma income tax
provision at an estimated effective rate of 40%.
NOTE 6: Goodwill is amortized over an estimated useful life of
twelve years. Goodwill is comprised of the excess purchase price over the fair
value of the assets purchased.
NOTE 7: The following are the Pro Forma Combined capital ratios:
Tier 1 capital to risk-weighted assets 57%
Total capital to risk-weighted assets 56%
Tier 1 capital to average assets 27%
-21-
<PAGE> 35
COMPARATIVE PER SHARE DATA
The following table sets forth comparative unaudited per share
data of Mitchell on both a historical and pro forma equivalent basis and per
share data of First Western on both a historical and pro forma consolidated
basis. These tables should be read in conjunction with the consolidated
financial statements and notes thereto of Mitchell contained in the Mitchell
Annual Report on Form 10-KSB for the year ended June 30, 1998, and the Mitchell
Report on Form 10-QSB for the period ending September 30, 1998, attached to this
Joint Proxy Statement as Exhibit A, with the consolidated financial statements
and notes thereto of First Western contained in the First Western financial
statements attached as Exhibit B, and with the pro forma consolidated financial
statements and notes contained in "PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS"
above. Also see "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." The following
information is not necessarily indicative of the results of operations or
consolidated financial position that would have resulted had the Merger been
consummated at the beginning of the periods indicated, nor is it necessarily
indicative of the results of operations of future periods or future consolidated
financial position.
At or For the At or For the
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ ---------------
BOOK VALUE PER SHARE
Mitchell $ 15.61 $ 15.56
First Western 9.58 10.40
Pro forma combined 9.59 (3)
Mitchell pro forma equivalent (1) 15.34 (3)
CASH DIVIDENDS PER SHARE
Mitchell $ 0.40 $ 0.40
First Western -- --
Pro forma combined(2) -- --
Mitchell pro forma equivalent -- --
BASIC NET INCOME (LOSS) PER SHARE
Mitchell $ 0.24 $ 0.60
First Western (0.83) (0.19)
Pro forma combined (0.11) 0.24
Mitchell pro forma equivalent (1) (0.17) 0.38
(1) The pro forma equivalent per share data for Mitchell is computed by
multiplying First Western's pro forma per share information by 1.6,
which represents the number of First Western Shares into which each
share of the Mitchell Shares may be converted. See "Proposal 1: Approval
of the Merger -- Merger Consideration."
(2) First Western pro forma combined cash dividends per share amounts
reflect First Western's historical per share dividend.
(3) Information not available.
-22-
<PAGE> 36
COMPARATIVE MARKET PRICE DATA
First Western Shares are traded on the NASD Electronic Bulletin
Board (the electronic pink sheets) under the symbol "FWNB." First Western has
been in operation for less than one year and became eligible for trading during
the second quarter of 1998. Accordingly, information regarding the trading
history of First Western is limited. There were no trades of First Western
Shares in the second quarter of 1998. Based on the information obtained by JC
Bradford from the NASD Electronic Bulletin Board, the high trade during the
third quarter of 1998 was $12.50, and the low was $10.00. First Western is not
permitted to pay a cash dividend during its first three years of operation under
applicable banking regulations. Mitchell Shares are quoted on the Nasdaq
Smallcap Market under the symbol "MBSP." The table below sets forth, for the
calendar quarters indicated, the high and low sales prices of Mitchell Shares,
as reported on the Nasdaq Smallcap Market as published in the Asheville
Citizens-Times, and the dividends per share declared on First Western Shares and
Mitchell Shares in each such quarter.
MITCHELL
COMMON STOCK
---------------------------------------------------
HIGH LOW DIVIDENDS
---- --- ---------
1996
First Quarter - - -
Second Quarter (IPO) 10.00 10.00 -
Third Quarter 12.75 10.125 -
Fourth Quarter 14.25 12.125 -
1997
First Quarter 16.00 13.75 0.20
Second Quarter 16.75 15.25 -
Third Quarter 17.375 16.375 0.20
Fourth Quarter 18.00 17.00 -
1998
First Quarter 17.50 16.625 0.20
Second Quarter 17.50 16.50 -
Third Quarter 18.00 14.00 0.20
The following table sets forth the closing price per share for
First Western Shares, based on the most recent trade known by management, and
Mitchell Shares, as reported on the Nasdaq Smallcap Market, and the equivalent
per share price for Mitchell Shares on August 13, 1998, the last full trading
day prior to the public announcement of the execution of the Agreement, and on
November 10, 1998, the most recent date for which it was practicable to obtain
market price data prior to the printing of this Joint Proxy Statement. HOLDERS
OF MITCHELL SHARES ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR SHARES OF
MITCHELL SHARES. COMMON STOCK.
-23-
<PAGE> 37
Bid per share August 13, 1998 November 10, 1998
- ------------- --------------- ------------------
First Western $10.50 $10.00
Mitchell $17.25 $15.75
Mitchell pro forma $16.80 $16.00
equivalent (1)
- ------------
(1) Computed by multiplying the price per share of First Western Shares by 1.6.
ANNUAL MEETING OF MITCHELL
Place, Time, and Date. The Annual Meeting will be held on
TUESDAY, DECEMBER 22, 1998, AT 2 P.M. local time ("Annual Meeting Date"), at the
Pinebridge Inn, 101 Pinebridge Avenue, Spruce Pine (Mitchell County), North
Carolina, or at any adjournment thereof.
PURPOSE. The purpose of the Annual Meeting is (i) to consider and
vote on approval of the Agreement attached as Exhibit C, providing for, among
other things, the merger of Mitchell with and into First Western, with First
Western surviving the Merger, and the conversion of Mitchell Shares into First
Western Shares, the right to receive a cash payment, or a combination; (ii) to
elect six directors to serve until the completion of the Merger or, in the event
the Merger is not completed, until their successors have been elected and
qualified; and (iii) to act upon such other matters, if any, as may properly
come before the Annual Meeting.
Record Date; Shares Entitled to Vote. The Mitchell Board has
fixed the close of business on November 2, 1998 as the Mitchell Record Date for
the determination of shareholders entitled to notice of and to vote at the
Annual Meeting. Only holders of Mitchell Shares on the Mitchell Record Date will
be entitled to notice of and to vote at the Annual Meeting. Each Mitchell Share
will be entitled to one vote on each matter presented for action at the Annual
Meeting. At the Mitchell Record Date, 937,174 Mitchell Shares were outstanding.
VOTES REQUIRED. As provided in Mitchell's bylaws, the holders of
a majority of the shares entitled to vote, represented in person or by proxy,
will constitute a quorum for the transaction of business at the Mitchell Annual
Meeting. Abstentions and broker non-votes (i.e., proxies from brokers or
nominees indicating that such person has not received instructions from the
beneficial owners or other persons entitled to vote shares as to a matter with
respect to which the brokers or nominees do not have discretionary power to
vote) will be considered present for purposes of determining whether a quorum
exists. If there is no quorum present at the opening of the Annual Meeting, the
meeting may be adjourned from time to time by a vote of a majority of the shares
voting on the motion to adjourn.
The affirmative vote of the holders of a majority of the Mitchell
Shares entitled to vote at the Annual Meeting is required for approval and
adoption of the Agreement. Abstentions and broker non-votes will have the same
effect as votes cast against approval of the Agreement.
The six directors to be elected at the Annual Meeting will be
elected by a plurality of the votes cast by shareholders present in person or by
proxy and entitled to vote. Shareholders are not permitted to cumulate their
votes for the election of directors. With respect to the election of directors,
votes may be cast for or withheld from each nominee. Votes that are withheld and
broker non-votes will have no effect on the outcome of the election because
directors will be elected by a plurality of votes cast.
If a Mitchell Shareholder is a participant in the Mitchell
Savings Bank, Inc., SSB, Employee Stock Ownership Plan ("ESOP"), the proxy card
represents a voting instruction to the trustees of the ESOP as to the number of
shares in the participant's plan account. Each participant in the ESOP may
direct the trustees as to the
-24-
<PAGE> 38
manner in which the Mitchell Shares allocated to the participant's plan account
are to be voted. Unallocated Mitchell Shares held by the ESOP and allocated
shares for which no voting instructions are received will be voted by the
trustees in the same proportion as shares for which the trustees have received
voting instructions.
At the Mitchell Record Date, the directors and executive officers
of Mitchell and their affiliates beneficially owned an aggregate of 128,648
Mitchell Shares, representing 13.7% of the outstanding Mitchell Shares,
including 58,796 shares subject to unexercised options held by such persons at
that date, which cannot be voted at the Mitchell Annual Meeting. All directors
and executive officers of Mitchell have indicated their intention to vote their
shares for the approval of the Agreement. See Item 11 of the Mitchell Annual
Report on Form 10-KSB, attached as Exhibit A, for information regarding the
beneficial ownership of the directors and named executive officers of Mitchell.
At the Mitchell Record Date, First Western directors, executive officers and
their affiliates beneficially owned less than 7.16% of the outstanding Mitchell
Shares entitled to vote at the Annual Meeting.
Proxies. Holders of Mitchell Shares may vote either in person or
by properly executed proxy. Mitchell Shares represented by a properly executed
proxy received prior to or at the Annual Meeting will, unless such proxy is
revoked, be voted in accordance with the instructions indicated on such proxy.
If no instructions are indicated on a properly executed proxy, the shares
covered thereby will be voted FOR the proposal to approve the Agreement and FOR
the director nominees. FAILURE TO RETURN THE PROXY CARD OR TO VOTE IN PERSON AT
THE ANNUAL MEETING WILL HAVE THE EFFECT OF A VOTE CAST AGAINST THE PROPOSALS. If
any other matters are properly presented at the Annual Meeting for
consideration, including, among other things, a motion to adjourn the Annual
Meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies), the persons named in the proxy and
acting thereunder will have discretion to vote on such matters in accordance
with their best judgment. As of the date hereof, the Mitchell Board knows of no
such other matters that will be presented.
Any proxy given pursuant to this solicitation or otherwise may be
revoked by the person giving it by delivering to the Secretary of Mitchell, on
or before the taking of the vote at the Annual Meeting, a written notice of
revocation bearing a later date than the proxy or a later dated proxy relating
to the same Mitchell Shares, or by attending the Annual Meeting, notifying the
Secretary before the vote, and voting in person. Attendance at the Annual
Meeting will not in itself constitute a revocation of a proxy.
The proxy for the Mitchell Annual Meeting is being solicited on
behalf of the Mitchell Board. The expense of soliciting proxies for the Annual
Meeting will be borne by Mitchell. The expense of printing this Joint Proxy
Statement is to be shared equally by Mitchell and First Western. All other costs
and expenses incurred in connection with the Agreement and the transactions
contemplated thereby are to be paid by the party incurring the expense. Proxies
will be solicited principally by mail, but they may also be solicited by the
directors, officers and other employees of Mitchell in person or by telephone,
facsimile or other means of communication. Such directors, officers and
employees will receive no additional compensation for such solicitations, but
they may be reimbursed for out-of-pocket expenses. Brokers and others who hold
Mitchell Shares on behalf of another will be asked to forward proxy materials
and related documents to the beneficial owners of such stock, and Mitchell will
reimburse them for their expenses in doing so.
SPECIAL MEETING OF FIRST WESTERN
Place, Time and Date. The Special Meeting of First Western
shareholders will be held on TUESDAY, DECEMBER 22, 1998, AT 10:00 A.M. local
time, at the Pinebridge Inn, 101 Pinebridge Avenue, Spruce Pine (Mitchell
County), North Carolina. This Joint Proxy Statement is being sent to holders of
First Western Shares and is accompanied by a form of proxy that is being
solicited by the First Western Board for use at the Special Meeting and any
adjournments or postponements thereof.
Purpose. The purpose of the Special Meeting is (i) to consider
and vote upon the approval of the Agreement attached as Exhibit C, providing
for, among other things, the merger of Mitchell Savings and Mitchell
-25-
<PAGE> 39
into First Western, with First Western surviving the Merger, and the issuance of
shares of First Western Shares and payment of cash to the Mitchell Shareholders;
and (ii) to act upon such other matters, if any, as may properly come before the
Special Meeting.
Record Date; Shares Entitled to Vote. The First Western Board has
fixed the close of business on November 2, 1998 as the First Western Record Date
for the determination of shareholders entitled to notice of and to vote at the
Special Meeting. Only holders of First Western Shares on the First Western
Record Date will be entitled to notice of and to vote at the Special Meeting.
Each First Western Share will be entitled to one vote. At the First Western
Record Date, 726,419 First Western Shares were outstanding.
Vote Required. As provided in First Western's bylaws, the holders
of a majority of the shares entitled to vote, represented in person or by proxy,
will constitute a quorum for the transaction of business at the First Western
Special Meeting. Abstentions and broker non-votes (i.e., proxies from brokers or
nominees indicating that such person has not received instructions from the
beneficial owners or other persons entitled to vote shares as to a matter with
respect to which the brokers or nominees do not have discretionary power to
vote) will be considered present for purposes of determining whether a quorum
exists. If there is no quorum present at the opening of the Special Meeting, the
meeting may be adjourned from time to time by a vote of a majority of the shares
voting on the motion to adjourn.
The affirmative vote of the holders of two thirds of the
outstanding First Western Shares is required for approval of the Agreement.
Abstentions and broker non-votes will have the same effect as votes cast against
approval of the Agreement.
At the First Western Record Date, the directors and executive
officers of First Western and their affiliates beneficially owned an aggregate
of 91,376 First Western Shares, representing 12.6% of the outstanding First
Western Shares. There are also 21,120 shares subject to unexercised options held
by such persons at that date, which cannot be voted at the First Western Special
Meeting. All directors and executive officers of First Western have indicated
their intention to vote their shares for the approval of the Agreement. See
"FIRST WESTERN -- Beneficial Ownership of Securities" for information regarding
the beneficial ownership of the directors and executive officers of First
Western. At the First Western Record Date, Mitchell directors, executive
officers and their affiliates beneficially owned less than 1% of the outstanding
First Western Shares entitled to vote at the Special Meeting.
Proxies. Holders of First Western Shares may vote either in
person or by properly executed proxy. First Western Shares represented by a
properly executed proxy received prior to or at the Special Meeting will, unless
such proxy is revoked, be voted in accordance with the instructions indicated on
such proxy. If no instructions are indicated on a properly executed proxy, the
shares covered thereby will be voted FOR the proposal to approve the Agreement.
FAILURE TO RETURN THE PROXY CARD OR TO VOTE IN PERSON AT THE SPECIAL MEETING
WILL HAVE THE EFFECT OF A VOTE CAST AGAINST THE PROPOSAL. If any other matters
are properly presented at the Special Meeting for consideration, including a
motion to adjourn the Special Meeting to another time and/or place (including,
without limitation, for the purpose of soliciting additional proxies), the
persons named in the proxy and acting thereunder will have discretion to vote on
such matters in accordance with their best judgment. As of the date hereof, the
First Western Board knows of no such other matters to be presented.
Any proxy given pursuant to this solicitation or otherwise may be
revoked by the person giving it at any time before it is voted by delivering to
the Secretary of First Western, on or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy or a later dated proxy relating to the same First Western Shares, or by
attending the Special Meeting, notifying the Secretary before the vote, and
voting in person. Attendance at the Special Meeting will not in itself
constitute revocation of a proxy.
-26-
<PAGE> 40
The proxy for the First Western Special Meeting is being
solicited on behalf of the First Western Board. The expense of soliciting
proxies for the Special Meeting will be borne by First Western. The expense of
printing this Joint Proxy Statement is to be shared equally by First Western and
Mitchell. All other costs and expenses incurred in connection with the Agreement
and the transactions contemplated thereby are to be paid by the party incurring
such expenses. Proxies will be solicited principally by mail, but they may also
be solicited by the directors, officers and other employees of First Western in
person or by telephone, facsimile or other means of communication. Such
directors, officers and employees will receive no additional compensation, but
they may be reimbursed for out-of-pocket expenses. Brokers and others who hold
First Western Shares on behalf of another will be asked to forward proxy
material and related documents to the beneficial owners of such stock, and First
Western will reimburse them for their expenses in doing so.
PROPOSAL 1: APPROVAL OF THE MERGER
The following is a summary of information about the Merger, the
material terms and conditions of the Agreement, and related matters. This
summary is subject to and qualified in all respects by reference to the
Agreement attached as Exhibit C, the statutes regarding Dissenters' Rights
attached as Exhibit F, and the other Exhibits (each of which is incorporated
herein by reference). EACH MITCHELL SHAREHOLDER AND FIRST WESTERN SHAREHOLDER IS
URGED TO READ THE AGREEMENT, THIS JOINT PROXY STATEMENT, AND THE OTHER EXHIBITS
IN THEIR ENTIRETY.
GENERAL
At the shareholder meetings, a proposal will be considered to
approve the Agreement and the Merger. The Agreement provides for the merger of
Mitchell and Mitchell Savings into First Western and the conversion and exchange
of the outstanding Mitchell Shares (other than shares held by Mitchell
Shareholders who exercise their Dissenters' Rights) into and for the Merger
Consideration.
At the Effective Time, (i) Mitchell and Mitchell Savings will be
merged into and their existence will be combined with that of First Western, and
Mitchell and Mitchell Savings will cease to exist as a separate entities; (ii)
Mitchell Shareholders (other than Mitchell Shareholders who exercise their
Dissenters' Rights or receive only cash as Merger Consideration) who receive
First Western Shares will become First Western shareholders; and (iii) First
Western will be the surviving corporation in the Merger and will continue to
exist under the management of its current officers and directors and to conduct
its business as a North Carolina banking corporation under the supervision and
regulation of the Commissioner and the FDIC. (See the subsections below,
"Conversion of Mitchell Shares and Mitchell Options; the Merger Consideration"
and "Rights of Dissenting Shareholders.") Mitchell's liquidation account will be
assumed by First Western. Mitchell's deposit accounts will become deposit
accounts of First Western and will continue to be insured by the FDIC up to the
maximum amount permitted by law.
CONVERSION OF MITCHELL SHARES AND MITCHELL OPTIONS; THE MERGER CONSIDERATION
Other than Mitchell Shares as to which a Mitchell Shareholder
properly exercises Dissenters' Rights (See "Rights of Dissenting Shareholders"),
at the Effective Time, each Mitchell Share held of record shall be converted
into and become, in accordance with the allocation procedures described herein:
(i) 1.6 First Western Shares; (ii) $20.00 in cash for each Mitchell Share that
is not exchanged for First Western Shares; or (iii) a combination of both,
provided that no more than 49.9% of the aggregate Merger Consideration may be
paid in cash and no less than 50.1% of the aggregate Merger Consideration may be
paid in First Western Shares.
Mitchell Shareholders who do not submit effective Election Forms
shall be treated as having elected to receive First Western Shares and/or cash
in the proportions necessary to ensure that no more than 49.9% of the aggregate
Merger Consideration is paid in cash and no less than 50.1% of the aggregate
Merger Consideration is paid in First Western Shares.
-27-
<PAGE> 41
Both Mitchell and First Western have agreed not to change the
number of outstanding shares of Mitchell Shares or First Western Shares prior to
the Effective Time, by means of a stock dividend, stock split, reclassification
or other subdivision or combination of outstanding shares.
At the Effective Time, all rights with respect to then
outstanding options held by certain employees of Mitchell Savings and directors
of Mitchell to purchase Mitchell Shares ("Mitchell Options"), which vest on a
change in control, will be converted into and will become rights to receive only
cash or only First Western Shares (See the subsection below, "Interests of
Certain Persons With Respect to the Merger").
ELECTION BY MITCHELL SHAREHOLDERS
Each Mitchell Shareholder will have the opportunity to submit an
Election Form, attached as Exhibit G, specifying the kind of consideration
sought to be received in exchange for his or her Mitchell Shares. An Election
Form and a copy of this Joint Proxy Statement also will be mailed to persons who
become shareholders of record of Mitchell after the Mitchell Record Date up to
one business day prior to the Annual Meeting. Election Forms also will be
available at Mitchell Savings' office and from the Exchange Agent (as defined
below) at all times through the date of the Annual Meeting.
The Election Form permits Mitchell Shareholders (i) to indicate
that they elect to receive in exchange for their Mitchell Shares (a) First
Western Shares ("Stock Election Shares"), (b) cash ("Cash Election Shares"), or
(c) a combination thereof, or (ii) to make no election ("Non-Electing Shares").
The Non-Electing Shares will be converted into First Western Shares, cash or a
combination thereof as necessary to ensure that (i) the aggregate amount of
consideration payable in cash is equal to 49.9% of the aggregate value of all of
the consideration issued or paid in connection with the Merger, and the total
number of First Western Shares to be issued in connection with the Merger shall
be that number of whole First Western Shares that is equal to 50.1% of the
aggregate value of all of the consideration issued or paid in connection with
the Merger; and (ii) the Merger will qualify as a tax-free reorganization. The
Election Form together with stock certificates representing all Mitchell Shares
covered thereby (or customary affidavits and indemnification regarding the loss
or destruction of such certificates or the guaranteed delivery of such
certificates), must be received by the exchange agent (the "Exchange Agent"), no
later than the close of business of the Exchange Agent on the date of the Annual
Meeting ("Election Deadline"). Mitchell Shares for which a properly completed
Election Form has not been received by the Exchange Agent by the Election
Deadline will be deemed Non-Electing Shares. Accordingly, persons who become
shareholders of Mitchell after the Election Deadline will be deemed to hold
Non-Electing Shares, because they could not have made an effective election with
respect to such shares.
Because the Agreement provides that the Merger must qualify as a
tax-free reorganization, the extent to which individual elections will be
accommodated will depend upon the number of Mitchell Shareholders who elect
cash, who elect stock, and who fail to make an election. Accordingly, a Mitchell
Shareholder who elects to receive cash may instead receive a combination of cash
and First Western Shares, a Mitchell Shareholder who elects to receive First
Western Shares (plus cash in lieu of fractional shares) may instead receive a
combination of cash and First Western Shares, and a Mitchell Shareholder who
elects to receive a specific combination of cash and First Western Shares may
instead receive a different combination of cash and First Western Shares.
Because the tax consequences of receiving cash or First Western
Shares will differ, Mitchell Shareholders are urged to read carefully the
subsection below, "Federal Income Tax Consequences" and consult their own tax
advisor to determine the particular tax consequences to them of the Merger.
ELECTION PROCEDURES
Attached to this Joint Proxy Statement as Exhibit G is the
Election Form. The Election Form must be properly completed, signed and
submitted to the Exchange Agent and must be accompanied by certificates
-28-
<PAGE> 42
representing the Mitchell Shares or the Mitchell Options as to which the
election is being made (or by an appropriate guaranty of delivery by a
commercial bank or trust company in the United States or a member of a
registered national security exchange or the NASD), or by evidence that such
certificates have been lost, stolen or destroyed, accompanied by such security
or indemnity as shall be reasonably requested by First Western or the Exchange
Agent. To be effective, a properly completed Election Form and accompanying
share certificates or Mitchell Options, as the case may be, must be received by
the Exchange Agent by the close of business on the date of the Annual Meeting.
An election may be changed or revoked, but only by written notice received by
the Exchange Agent prior to the Election Deadline including, in the case of a
change, a properly completed revised Election Form.
ANY MITCHELL SHAREHOLDER WHO DOES NOT SUBMIT AN EFFECTIVE
ELECTION FORM TO THE EXCHANGE AGENT PRIOR TO THE ELECTION DEADLINE SHALL BE
DEEMED TO HAVE MADE A NON-ELECTION AND WILL BE ALLOCATED MERGER CONSIDERATION AS
DESCRIBED HEREIN.
First Western has the discretion, which it may delegate in whole
or in part to the Exchange Agent, to determine whether the Election Forms have
been properly completed, signed and submitted or changed or revoked and to
disregard immaterial defects in Election Forms. The decision of First Western
(or the Exchange Agent) in such matters shall be conclusive and binding. Neither
First Western nor the Exchange Agent will be under any obligation to notify any
person of any defect in an Election Form submitted to the Exchange Agent.
TO MAKE AN EFFECTIVE ELECTION, A MITCHELL SHAREHOLDER WILL BE
REQUIRED TO RETURN A PROPERLY COMPLETED ELECTION FORM SUFFICIENTLY IN ADVANCE OF
THE ELECTION DEADLINE SO THAT IT IS ACTUALLY RECEIVED BY THE EXCHANGE AGENT AT
OR PRIOR TO THE ELECTION DEADLINE. AN ELECTION FORM WILL NOT BE CONSIDERED
PROPERLY COMPLETED IF IT IS NOT ACCOMPANIED BY CERTIFICATES REPRESENTING ALL THE
MITCHELL SHARES COVERED THEREBY (OR CUSTOMARY AFFIDAVITS AND INDEMNIFICATION
REGARDING THE LOSS OR DESTRUCTION OF SUCH CERTIFICATES OR THE GUARANTEED
DELIVERY OF SUCH CERTIFICATES). THE ELECTION DEADLINE IS THE CLOSE OF BUSINESS
OF THE EXCHANGE AGENT ON DATE OF THE ANNUAL MEETING.
In the event that the Agreement is terminated pursuant to the
provisions thereof and any Mitchell Shares or Mitchell Options have been
transmitted to the Exchange Agent pursuant to the provisions hereof, Mitchell
and First Western shall cause the Exchange Agent to promptly return such shares
to the person submitting the same.
METHOD OF PAYMENT OF MERGER CONSIDERATION
The conversion of Mitchell Shares into the right to receive cash
or First Western Shares will occur at the Effective Time.
As soon as practicable as of or after the Effective Time, any
Mitchell Shareholder who has not submitted an effective Election Form will
receive transmittal forms with instructions for forwarding his or her share
certificates or Mitchell Options for surrender to the Exchange Agent. Upon
proper surrender to the Exchange Agent of the share certificates or Mitchell
Options (together with properly completed transmittal forms), each Mitchell
Shareholder will be entitled to receive (i) the allocated Merger Consideration;
or (ii) in the case of a Mitchell Shareholder properly exercising his or her
Dissenters' Rights, the amount of cash determined as provided in Article 13.
(See the subsection below, "Rights of Dissenting Shareholders.").
EXCEPT FOR THE SHARE CERTIFICATES SURRENDERED WITH AN ELECTION
FORM AS DESCRIBED ABOVE UNDER "ELECTION PROCEDURES," MITCHELL SHAREHOLDERS
SHOULD NOT FORWARD SHARE CERTIFICATES TO THE EXCHANGE AGENT UNTIL THEY HAVE
RECEIVED THE LETTER OF TRANSMITTAL. NO SHARE CERTIFICATES SHOULD BE SUBMITTED
WITH THE PROXY CARD.
-29-
<PAGE> 43
As of the Effective Time, Mitchell's stock transfer books will be
closed and no further transfer of Mitchell Shares will be recognized or
registered on Mitchell's stock transfer records. Following the Effective Time
and until surrendered as described above, all share certificates formerly
evidencing Mitchell Shares will evidence only the right of the registered
holders thereof to receive the Merger Consideration. Such share certificates may
be exchanged for the Merger Consideration into which such holders' Mitchell
Shares have been converted.
After the Effective Time and regardless of whether they have
surrendered their share certificates, Mitchell Shareholders will be entitled to
vote and to receive any dividends or other distributions (for which the record
date is after the Effective Time) on the number of whole First Western Shares
into which their Mitchell Shares have been converted; provided, however, that no
such dividends or other distributions will be paid to the holders of Mitchell
Share certificates unless and until their share certificates are surrendered.
Each Mitchell Shareholder will be responsible for all federal,
state, local, and foreign taxes which may be incurred by him or her on account
of his or her receipt of the Merger Consideration. See the subsection below,
"Certain Federal Income Tax Consequences."
Any Mitchell Shareholders whose share certificates have been lost
or destroyed may nevertheless, subject to the provisions of the Agreement,
receive the Merger Consideration to which they are entitled, provided that they
deliver to the Exchange Agent: (i) a sworn statement certifying the loss or
destruction of the certificates and specifying the circumstances thereof; and
(ii) a lost instrument bond in form satisfactory to First Western and the
Exchange Agent which has been duly executed by a corporate surety satisfactory
to First Western and the Exchange Agent, indemnifying First Western and the
Exchange Agent (and their successors) to their satisfaction against any loss or
expense which any of them may incur as a result of the lost or destroyed share
certificates being thereafter presented. Any costs or expenses that may arise
from such replacement procedure, including the premium on the lost instrument
bond, shall be paid by the Mitchell Shareholder.
ALLOCATION PROCEDURES
Pursuant to the Agreement, the Employee Stock Ownership Plan of
Mitchell shall be deemed to have elected cash for purposes of all unallocated
shares, and such election shall take precedence over all other Cash Elections.
The elections of the holders of Mitchell Options shall take precedence over all
other Mitchell Shareholders' elections.
The payment of cash and the issuance of First Western Shares
shall be allocated to Mitchell Shareholders such that the number of Mitchell
Shares (outstanding or subject to Mitchell Options) as to which cash is paid
shall equal 49.9% of the aggregate number of Mitchell Shares outstanding plus
those subject to Mitchell Options (the "Aggregate Shares"), and the number of
shares of Mitchell Shares (outstanding or subject to Mitchell Options) as to
which First Western Shares are issued shall equal 50.1% of the Aggregate Shares,
as follows:
(i) If the number of Cash Election Shares is in
excess of 49.9% of the Aggregate Shares, then (A) Non-Electing
Shares shall be deemed to be Stock Election Shares, (B) Cash
Election Shares of Mitchell Option holders shall be treated as
Cash Election Shares without adjustment, and (B)(I) Cash Election
Shares of each Mitchell Shareholder shall be reduced pro rata by
multiplying the number of Cash Election Shares of such Mitchell
Shareholder by a fraction, the numerator of which is the number
of Mitchell Shares equal to 49.9% of the Aggregate Shares minus
the aggregate number of Cash Election Shares of Mitchell Option
holders, and the denominator of which is the aggregate number of
Cash Election Shares of all Mitchell Shareholders; and (II) the
shares of such Mitchell Shareholder representing the difference
between such Mitchell Shareholder's initial Cash Election and
such Mitchell Shareholder's reduced Cash Election, as described
in Clause (B)(I) above shall be converted into, and be deemed to
be, Stock Election Shares.
-30-
<PAGE> 44
(ii) If the number of Stock Election Shares is in
excess of 50.1% of the Aggregate Shares, then (A) Non-Electing
Shares shall be deemed to be Cash Election Shares and Stock
Election Shares of option holders shall be treated as Stock
Election Shares without adjustment; and (B)(I) Stock Election
Shares of each Mitchell Shareholder shall be reduced pro rata by
multiplying the number of Stock Election Shares of such Mitchell
Shareholder by a fraction, the numerator of which is the number
of Mitchell Shares equal to 50.1% of the Aggregate Shares, and
the denominator of which is the aggregate number of Stock
Election Shares of all Mitchell Shareholders; and (II) the shares
of such Mitchell Shareholder representing the difference between
such Mitchell Shareholder's initial Stock Election and such
Mitchell Shareholder's reduced Stock Election, as described in
Clause (B)(I) shall be converted into, and deemed to be, Cash
Election Shares.
(iii) If the number of Cash Election Shares is less
than or equal to 49.9% of the Aggregate Shares and the number of
Stock Election Shares is less than or equal to 50.1% of the
Aggregate Shares, then (A) there shall be no adjustment to the
elections made by electing Mitchell Shareholders, and (B)
Non-Electing Mitchell Shareholders shall receive First Western
Shares and/or cash in proportion to the respective amounts by
which the Cash Election Shares are more or less than 49.9% and
the Stock Election Shares are more or less than 50.1%.
After taking into account the adjustment provisions described
above, each Cash Election Share (including those deemed to be
Cash Election Shares) and each Stock Election Share (including
those deemed to be Stock Election Shares) shall receive in the
Merger the Merger Consideration.
Notwithstanding any other provision of the Agreement, if the
application of the proration provisions would result in receiving a number of
First Western Shares that would prevent the Merger Consideration from consisting
in the aggregate of 49.9% Cash Merger Consideration and 50.1% Stock Merger
Consideration, or otherwise prevent the satisfaction of any of the conditions
set forth in the Agreement, the number of shares otherwise allocable shall be
adjusted in an equitable manner as shall be necessary to enable the satisfaction
of all conditions.
TREATMENT OF FRACTIONAL SHARES
No fraction of a First Western Share, or any script or
certificate representing any such fractional share, will be issued in connection
with the Merger, and no right to vote or to receive any dividend or other
distribution shall attach to any such fractional share. At the Effective Time,
First Western will deliver cash to the Exchange Agent in an amount equal to the
aggregate market value of all such fractional shares. Each Mitchell Shareholder
who otherwise would be entitled to receive a fraction of a First Western Share
shall, upon the surrender and exchange of his or her Old Certificates, and in
lieu of such factional share, be entitled to receive cash (without interest)
from the Exchange Agent in an amount equal to that fraction multiplied by the
amount necessary to preserve the economic value of such share.
BACKGROUND OF AND REASONS FOR THE MERGER
Background of the Merger. Prior to Mitchell's mutual-to-stock
conversion in July 1997, several regional institutions had contacted Mitchell
regarding a mutual-to-mutual merger or a merger conversion transaction. In
November 1997, First Western first indicated its interest in a merger with
Mitchell, although that indication posed certain structural issues. In January
1998, Mitchell engaged RP Financial as its financial advisor, to assist the
Mitchell Board in evaluating strategic alternatives for enhancing shareholder
value. These alternatives included continuing to operate as an independent
institution and potential mergers with community banks and thrifts operating in
the local area.
-31-
<PAGE> 45
On February 9, 1998, RP Financial presented to Mitchell's
Executive Committee an evaluation of the pro forma impact of strategic
alternatives, including certain capital management and operating strategies and
a preliminary sale-of-control evaluation. The sale-of-control evaluation
indicated a target valuation range of $17.00 to $19.00 per share and an
identification of community banks and thrifts operating in the local area with
the perceived financial ability to, and potential interest to, acquire Mitchell,
including those who had previously contacted Mitchell regarding a potential
merger. Following such review, anticipating that the value to shareholders
pursuant to a merger would be greater than operating independently under
feasible alternative strategies, the Executive Committee authorized RP Financial
to contact eight potential acquirers identified in RP Financial's analysis
(subsequently expanded to ten) regarding their potential interest in an
acquisition of Mitchell. To facilitate this process, RP Financial was authorized
to provide interested parties with a confidential memorandum, under a
confidentiality agreement, describing Mitchell's background, financial
characteristics, market area, products and services offered, and organizational
and operational information.
Between mid-February and mid-April 1998, RP Financial contacted
the community banks and thrifts designated by the Mitchell Board regarding their
interest in a merger with Mitchell and the potential terms of such a merger.
Following a review of the confidential memorandum, two institutions, including
First Western, gave verbal indications of interest. By this time, First Western
had addressed some of the structural issues raised in its initial contact in
November 1997. The Mitchell Board met on April 21, 1998, to evaluate the
indications of interest. Since only First Western's indication of interest was
consistent with the targeted valuation range of $17.00 to $19.00 per share, the
Mitchell Board authorized management and Mitchell's financial, legal and
accounting advisors to commence due diligence of First Western and determine if
a merger agreement could be satisfactorily negotiated. In late April 1998, First
Western and Mitchell, including their advisors, conducted mutual due diligence
reviews. In early May, Mitchell advised First Western to begin negotiating a
definitive agreement, reflecting consideration of 49.9% cash and 50.1% stock.
In mid-May 1998, Mitchell received an unsolicited indication of
interest from an out-of-market institution, with which it had no previous
contact. The unsolicited party was provided the confidential memorandum.
Mitchell advised First Western of the unsolicited indication of interest and
Mitchell's intention to determine its merits. The indicated share price by this
out-of-market institution, in a share exchange, i.e., no cash consideration, was
initially higher than First Western's price. During June 1998, the out-of-market
institution and Mitchell, including their advisors, conducted mutual due
diligence. During July and early August 1998, as the merger terms of the
unsolicited party were being determined, the stock price of the out-of-market
institution declined. In late July 1998, First Western increased its price to a
level that was initially comparable to the unsolicited party. Subsequently that
level became higher as the unsolicited party's stock price declined further.
On August 10, 1998, the Mitchell Board met to review the two
merger proposals, which were set forth in draft merger agreements. The Mitchell
Board carefully reviewed the financial and other terms of both proposals with
its financial, legal and accounting advisors, and it determined additional
information was required before a decision could be made. The First Western
proposal featured a higher shareholder value, and the merger proposal from the
out-of-market institution contained conditions which the Mitchell Board believed
could not be met. On August 13, 1998, the Mitchell Board reconvened with its
advisors to consider the terms of both merger proposals, and unanimously voted
to enter into a merger agreement with First Western after RP Financial rendered
its opinion that the merger consideration from First Western was fair to
Mitchell Shareholders from a financial point of view and counsel reviewed the
Agreement, together with all exhibits. RP Financial rendered such opinion on
August 13, 1998. On August 13, 1998, the First Western Board voted unanimously
to approve the Agreement. Boards of both institutions authorized management to
execute the Agreement on August 13, 1998.
Mitchell Reasons for the Merger. Since its organization in 1924,
Mitchell has operated as a community- oriented financial institution serving
Mitchell and Yancey Counties, North Carolina. This community-oriented philosophy
has allowed it to compete effectively and profitably with the other banking
institutions in its market. During the last 10 years, however, competition has
dramatically increased, due to several factors: other types of
-32-
<PAGE> 46
financial institutions offering services traditionally offered only by banks; an
increase in public demand for a broader range of customer services from
community banking institutions, and additional banking regulations. These
changes forced the Mitchell Board regularly to evaluate its strategic
alternatives.
In reaching its determination that the Merger is fair and in the
best interests of Mitchell and its shareholders, the Mitchell Board considered a
number of factors, including, without limitation, the following:
(i) The Mitchell Board's familiarity with and review of
Mitchell's business, operations, financial condition, earnings
and prospects relative to other publicly-traded thrifts and
banks, and a comparison of such factors with the business,
operations, financial condition, earnings and prospects on a
merged basis with First Western. In this regard the Mitchell
Board noted the following:
(a) The Merger will result in Mitchell Shareholders
receiving stock in a substantially more diversified
commercial bank, which would be more competitive than
Mitchell as an independent institution;
(b) First Western's directors and management have an
excellent reputation in the local area, including Spruce
Pine;
(c) Mitchell's high equity position leads to a low return
on equity, but Mitchell's small size, single office,
limited products and services and human resources
constraints limits the ability to increase shareholder
returns as an independent institution;
(d) The cash portion of the Merger Consideration provides
an immediate return to Mitchell Shareholders. The stock
portion of the Merger Consideration provides ownership in
a locally based commercial bank serving the same market as
Mitchell but with more locations, greater customer
convenience and a broader array of products and services.
This will position the resulting institution to be
competitive with larger banking companies and other
financial intermediaries, and to provide greater services
to customers and the local community.
(ii) The current and prospective economic environment and
competitive and regulatory constraints facing financial
institutions, including Mitchell. In addition, the Mitchell Board
considered certain of the risks of remaining independent,
including, among other things, the limited potential to engage in
acquisitions to enhance shareholder value, as well as the cost
and operations risks associated with attracting new senior
management, product/service diversification, de novo branching,
and systems upgrades that would be necessary for Mitchell to
maintain its competitiveness.
(iii) Potential issues of management succession, particularly in
view of the imminent retirements of Mr. Ballew and Ms. Wilson,
meaning that a suitable Chief Executive Officer and a Chief
Operating Officer would have to be recruited.
(iv) The opinion of RP Financial that the Merger Consideration is
fair, from a financial point of view, to Mitchell Shareholders.
(v) The representation to the Mitchell Board by RP Financial with
respect to the relationship of the Merger Considerations to the
recent and then-current market values, book value, tangible book
value, and earnings per share of the Mitchell Shares, and the
prices and premiums paid in certain other similar transactions
involving financial institutions.
-33-
<PAGE> 47
(vi) The Mitchell Board's review of the alternative of continuing
to remain independent in the analysis provided by RP financial as
to the future amount and growth of earnings necessary to provide
Mitchell Shareholders with the same value, on a present value
basis, as presented by the Merger Consideration.
(vii) The compatibility of the respective business and operations
of First Western and Mitchell.
(viii) The effect of the Merger on the employees and customers of
Mitchell.
(ix) The tax-deferred nature of the Stock Merger Consideration to
Mitchell Shareholders, who generally will be able to defer
recognition of any gain or loss for income tax purposes until
such time as they sell the First Western Shares received upon the
consummation of the Merger.
The foregoing discussion of the information and factors
considered by the Mitchell Board is not intended to be exhaustive, but it
constitutes the material factors considered by the board. In reaching its
determination to approve and recommend the Merger Agreement, the Mitchell Board
did not assign any relative or specific weights to the foregoing factors, and
individual directors may have weighed factors differently.
For the reasons set forth above, the Mitchell Board unanimously
approved the Agreement as advisable and in the best interests of Mitchell and
its shareholders and recommends that the Mitchell Shareholders vote FOR the
APPROVAL OF THE MERGER.
First Western Reasons for the Merger. First Western is a newly
chartered commercial bank. The acquisition of Mitchell will provide it with a
significant loan portfolio and the opportunity to cross market its other deposit
and loan products to Mitchell's customers. This will expand the First Western's
presence and market share in its market area. With Mitchell's established
deposit and loan base, this expansion will be accomplished more quickly than
would be possible through normal increases in deposits and loans, and the
Acquisition may accelerate First Western's timetable to profitability. First
Western also wishes to acquire Mitchell's experience in mortgage loans in order
to expand its loan product offerings. In addition, First Western has been
attempting to locate a chief financial officer, and one of the employees of
Mitchell may be able to serve in this role. The downtown office location of
Mitchell is also desirable.
In summary, the First Western Board believes that the combined
institution should:
(i) achieve economies of scale that will improve efficiency and
enhance earnings;
(ii) permit more effective management of the combined assets;
(iii) be a better competitor in the market area than either
Mitchell or First Western separately;
(iv) be able to offer more services to, and respond better to the
needs of, the customers of First Western and former customers of
Mitchell; and
(v) allow the shareholders of both First Western and Mitchell to
participate in an institution with greater resources than either
institution has at the present time. The First Western Board also
received and relied on the opinion of Carson Medlin that the
terms of the Agreement are fair to unaffiliated First Western
Shareholders from a financial point of view.
-34-
<PAGE> 48
OPINIONS OF FINANCIAL ADVISORS
OPINION OF FINANCIAL ADVISOR TO MITCHELL. The Mitchell Board
retained RP Financial in January 1998 as its financial advisor to evaluate
strategic alternatives. Subsequently, if appropriate, RP Financial would
ascertain the interest in an acquisition of Mitchell by regional financial
institutions, including those that previously expressed interest in acquiring
Mitchell, negotiate financial terms with prospective acquirers, and render its
opinion with respect to the Merger Consideration from the financial point of
view of the Mitchell Shareholders in the event Mitchell entered into an
agreement to be acquired.
In requesting RP Financial's advice and opinion, the Mitchell
Board did not give any special instructions to RP Financial, nor did it impose
any limitations upon the scope of the investigation that RP Financial might wish
to conduct to enable it to give its opinion. RP Financial has delivered to
Mitchell its written opinion dated August 13, 1998, and its updated opinion as
of November 16, 1998, to the effect that, based upon and subject to the matters
set forth therein, as of the date thereof, the Merger Consideration is fair to
the Mitchell Shareholders from a financial point of view. The opinion of RP
Financial is directed toward the consideration to be received by Mitchell
Shareholders and does not constitute a recommendation to any Mitchell
Shareholder to vote in favor of approval of the Merger Agreement. A copy of the
RP Financial opinion is set forth as Exhibit D to this Joint Proxy Statement,
and Mitchell Shareholders should read it in its entirety. RP Financial has
consented to the inclusion and description of its written opinion in this Joint
Proxy Statement.
RP Financial was selected by Mitchell to act as its financial
advisor because of RP Financial's expertise in the valuation of businesses and
their securities for a variety of purposes, including its expertise in
connection with mergers and acquisitions of savings and loan associations,
savings banks, savings and loan holding companies, commercial banks and bank
holding companies. Pursuant to a letter agreement dated November 17, 1997, and
executed by Mitchell on January 9, 1998 (the "The Engagement Letter"), RP
Financial estimates that it will receive from Mitchell total professional fees
of approximately $40,000, of which $30,000 has been paid to date, plus
reimbursement of certain out-of-pocket expenses, for its services in connection
with the Merger. In addition, Mitchell has agreed to indemnify and hold harmless
RP Financial, any affiliates of RP Financial, and the respective directors,
officers, agents and employees of RP Financial or their successors and assigns
who act for or on behalf of RP Financial from and against any and all losses,
claims, damages and liabilities, joint or several, in connection with RP
Financial's services pursuant to the Engagement Letter attributable to: (i) any
untrue statement or alleged untrue statement of a material fact contained in the
financial statements or other information furnished or otherwise provided by
Mitchell to RP Financial, either orally or in writing; (ii) the omission or
alleged omission of a material fact from the financial statements or other
information furnished or otherwise made available by Mitchell to RP Financial,
or (iii) any action or omission to act by Mitchell, or Mitchell's respective
officers, directors, employees or agents, which action or omission is willful or
negligent. Mitchell will be under no obligation to indemnify RP Financial
hereunder if a court determines that RP 'Financial was negligent or acted in bad
faith with respect to any actions or omissions of R.P Financial related to a
matter for which indemnification is sought. In addition, if RP Financial is
entitled to indemnification from Mitchell under the engagement letter, and in
connection therewith incurs legal expenses in defending any legal action
challenging the opinion of RP Financial where RP Financial is not negligent or
otherwise at fault or is found by a court of law to be not negligent or
otherwise at fault, Mitchell will indemnify RP Financial for all reasonable
expenses.
In rendering this fairness opinion, RP Financial reviewed the
following material: (1) the Agreement, including exhibits; (2) financial and
other information for Mitchell, all with regard to balance and off-balance sheet
composition, profitability, interest rates, volumes, maturities, trends, credit
risk, interest rate risk, liquidity risk and operation, including: (a) audited
and unaudited financial statements for the fiscal years ended June 30, 1993
through 1998, (b) shareholder, regulatory and internal financial and other
reports through June 30, 1998, (c) the conversion prospectus, dated May 8, 1996,
(d) the most recent proxy statement for Mitchell, and (e) Mitchell's management
and Board comments regarding past and current business, operations, financial
condition, and future prospects; and (3) financial and other information for
First Western including: (a) audited financial statements for the fiscal year
ended December 31, 1997, incorporated in First Western's Annual Report to
Shareholders, (b) First Western's 1997 initial offering materials, including the
Offering Circular, and de novo charter application, (c) regulatory and
-35-
<PAGE> 49
internal financial and/or other reports through June 30, 1998, (d) the most
recent proxy statement for First Western and (e) First Western's management
comments regarding past and current business, operations, financial condition,
and future prospects.
In rendering its opinion, RP Financial relied, without
independent verification, on the accuracy and completeness of the information
concerning Mitchell and First Western furnished by each institution to RP
Financial for review, as well as publicly available information regarding other
financial institutions, and economic and demographic data. Mitchell and First
Western did not restrict RP Financial as to the material it was permitted to
review. RP Financial did not perform or obtain any independent appraisals or
evaluations of the assets and liabilities and potential and/or contingent
liabilities of Mitchell or First Western.
RP Financial expresses no opinion on matters of a legal,
regulatory, tax or accounting nature or the ability of the Merger as set forth
in the Agreement to be consummated. In rendering its opinion, RP Financial
assumed that, in the course of obtaining the necessary regulatory and
governmental approvals for the proposed Merger, no restriction will be imposed
on First Western that would have a material adverse effect on the ability of the
Merger to be consummated as set forth in the Agreement.
RP Financial's opinion was based solely upon the information
available to it and the economic, market and other circumstances as they existed
as of August 13, 1998 and November 16, 1998. Events occurring after the most
recent date could materially affect the assumptions used in preparing the
opinion.
In connection with rendering its opinion dated August 13, 1998,
and updated as of November 16, 1998, RP Financial performed a variety of
financial analyses that are summarized below. Although the evaluation of the
fairness, from a financial point of view, of the Merger Consideration was to
some extent subjective based on the experience and judgment of RP Financial, and
not merely the result of mathematical analyses of financial data, RP Financial
relied, in part, on the financial analyses summarized below in its
determinations. The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to partial analyses or summary description. RP
Financial believes its analyses must be considered as a whole and that selecting
portions of such analyses and factors considered by RP Financial without
considering all such analyses and factors could create an incomplete view of the
process underlying RP Financial's opinion. In its analyses, RP Financial took
into account its assessment of general business, market, monetary, financial and
economic conditions, industry performance and other matters, many of which are
beyond the control of Mitchell and First Western, as well as RP Financial's
experience in securities valuation, its knowledge of financial institutions, and
its experience in similar transactions. With respect to the comparable
transactions analysis described below, no public company utilized as a
comparison is identical to Mitchell and such analyses necessarily involve
complex considerations and judgments concerning the differences in financial and
operating characteristics of the companies and other factors that could affect
the acquisition values of the companies concerned. The analyses were prepared
solely for purposes of RP Financial providing its opinion as to the fairness of
the Merger Consideration, and they do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold. Any estimates contained in RP Financial's analyses are not necessarily
indicative of future results of values, which may be significantly more or less
favorable than such estimates. None of the analyses performed by RP Financial
was assigned a greater significance by RP Financial than any other.
Additionally, RP Financial considered other expressions of interest from
regional financial institutions with the perceived ability to consummate an
acquisition of Mitchell, including the amount, form and value of the potential
consideration
Comparable Transactions Analysis. RP Financial compared the
Merger on the basis of multiples or ratios of reported earnings, tangible book
value, assets and core deposit premium of Mitchell implied by the Merger
Consideration to be paid to the Mitchell Shareholders with the same multiples or
ratios in pending acquisitions and acquisitions completed since 1997 to date of:
(a) all publicly traded savings and loan associations, savings banks, and
savings and loan holding companies located in the Southeast (44 institutions);
(b) all savings and loan associations, savings banks, and savings and loan
holding companies located in the Southeast with less than $250 million in assets
-36-
<PAGE> 50
(24 institutions); and (c) financially comparable savings and loan associations,
savings banks, and savings and loan holding companies nationwide with assets
less than $250 million (12 institutions).
The acquisition pricing multiples or ratios of the all-Southeast
group were: (1) price/earnings ratios ranging from 9.14 to 58.07 times, with a
median of 25.15 times; (ii) price/tangible book ratios ranging from 102.09 to
401.30 percent, with a median of 184.48 percent; (iii) price/assets ratios
ranging from 5.60 to 37.16 percent with a median of 18.08 percent; and (iv) core
deposit premiums of 1.50 to 35.15 percent, with a median of 11.95 percent. The
acquisition pricing multiples or ratios of the Southeast group with assets under
S250 million were: (i) price/eamings ratios ranging from 9.14 to 58.07 times,
with a median of 25.30 times; (ii) price/tangible book ratios ranging from 102.9
to 319.74 percent, with a median of 151.56 percent; (iii) price/assets ratios
ranging from 5.60 to 37.16 percent, with a median of 15.30 percent; and (iv)
core deposit premiums of 1.50 to 21.86 percent, with a median of 7.39 percent.
The acquisition pricing multiples or ratios of the financially comparable group
nationwide with assets under $250 million were: (i) price/earnings ratios
ranging from 19.77 to 52.33 times, with a median of 39.03 times; (ii)
price/tangible book ratios ranging from 107.41 to 147.61 percent, with a median
of 126.28 percent; (iii) price/assets ratios ranging from 27.42 to 55.69 percent
with a median of 32.16 percent; and (iv) core deposit premiums of 5.61 to 18.18
percent, with a median of 10.75 percent.
In comparison to these groups, Mitchell was generally smaller,
more highly capitalized and more profitable, but it maintained a comparable to
lower return on equity. Mitchell's acquisition pricing multiples or ratios for
price/earnings, price/tangible book, price/assets and core deposits premium, as
of the November 16, 1998, fairness opinion update, based on financial statements
as of or for the 12 months ended September 30, 1998, were: 39.15 times earnings;
117.87 percent of tangible book value; 46.06 percent of assets; and 15.64
percent premium on core deposits.
Discounted Cash Flow Analysis. Using discounted cash flow
analyses, RP Financial estimated the present value of future dividends and the
terminal value based on alternative capital management and operating strategies
over a five-year period. Alternative strategies analyzed included a base case
scenario, a stock repurchase scenario, an increased regular dividend scenario, a
large special dividend scenario, an earnings improvement scenario and an
aggressive growth scenario. The terminal value multipliers incorporated in RP
Financial's analysis were derived from the comparable transaction analysis
discussed above pertaining to financially comparable transactions, specifically,
the price/tangible book ratio and price/earnings multiple. The dividend streams
and terminal values were then discounted to present value based on a discount
rate derived from the earnings capitalization rate of publicly traded thrifts,
the Treasury yield curve (i.e., the risk-free rate) and perceived investment
risks in the Mitchell Shares. The Merger Consideration exceeds the upper end of
the range of the sum of the present values of the future dividends and terminal
values derived from the individual strategic scenarios. For example, the present
values derived from the individual strategic scenarios ranged from roughly
$12.00 to $15.50 per share.
Pro Forma Impact Analysis. RP Financial's analysis considered the
financial condition and operations of First Western on a stand-alone basis at
June 30, 1998, versus the pro forma impact resulting from the Merger. RP
Financial considered that the Merger is estimated to be accretive to First
Western's pro forma earnings per share and cash earnings per share before
incorporating anticipated Merger adjustments and synergies and leveraging First
Western's tangible capital. RP Financial considered the impact of the Merger on
First Western's key financial characteristics, per share data and resulting
pricing ratios, as well as First Western's longer run strategic objectives. RF
Financial evaluated the estimated financial impact of the Merger on the
potential for increased liquidity of First Western Common Stock, the enhanced
ability to pursue growth and expanded market share.
As described above, RP Financial's opinion and presentation to
the Mitchell Board was one of many factors taken into consideration by the
Mitchell Board in making its determination to approve the Agreement. Although
the foregoing summary describes, the material components of the analyses
presented by RP Financial to the Mitchell Board on August 13, 1998, and updated
as of November 16, 1998, in connection with its opinion as of those dates, it
does not purport to be a complete description of all the analyses performed by
RP Financial and is qualified by
-37-
<PAGE> 51
reference to the written opinion of RP Financial set forth as Exhibit D, which
Mitchell Shareholders are urged to read in its entirety.
OPINION OF FINANCIAL ADVISOR TO FIRST WESTERN. First Western
retained Carson Medlin to serve as its financial advisor with respect to a
proposed transaction that would lead to the merger of First Western and
Mitchell. As part of its engagement, Carson Medlin agreed to render its opinion
as to the fairness, from a financial point of view, of the terms of the
Acquisition to the unaffiliated shareholders of First Western. Carson Medlin is
a NASD- member investment banking firm that specializes in the securities of
Southeastern United States financial institutions. As part of its investment
banking activities, Carson Medlin is regularly engaged in the valuation of
Southeastern United States financial institutions and transactions relating to
their securities, including mergers and acquisitions. For its services Carson
Medlin will receive $57,500 plus reimbursement for reasonable actual
out-of-pocket expenses. A significant portion of this consideration is
contingent upon completing of the Acquisition. No limitations have been placed
on Carson Medlin by the directors or management of First Western with respect to
the investigations made or procedures followed by Carson Medlin in rendering its
opinion.
On August 13, 1998, a representative of Carson Medlin delivered
its verbal opinion to the First Western Board that the terms of the Acquisition
are fair to the unaffiliated First Western Shareholders from a financial point
of view. Carson Medlin subsequently confirmed such opinion as of November 16,
1998. The full text of Carson Medlin's written opinion dated November 16, 1998,
is attached as Exhibit E to this Joint Proxy Statement and should be read in its
entirety with respect to the procedures followed, assumptions made, matters
considered and qualifications of and limitations on the review undertaken by
Carson Medlin in connection therewith. Carson Medlin's opinion is addressed to
the First Western Board only, and the opinion does not constitute a
recommendation to any First Western Shareholder as to how such shareholder
should vote at the First Western Special Meeting or as to any other matter. The
summary of the opinion of Carson Medlin set forth in this Joint Proxy Statement
is qualified in its entirety by reference to the full text of such opinion
attached as Exhibit E.
Carson Medlin has relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the purpose
of rendering its opinion. Carson Medlin did not undertake any independent
evaluation or appraisal of the assets and liabilities of First Western or
Mitchell, nor was it furnished with any such appraisals. Carson Medlin assumed
that the financial forecasts reviewed by it have been reasonably prepared on a
basis reflecting the best currently available judgments and estimates of the
managements of First Western and Mitchell, and that such projected financial
results will be realized in the amounts and at the times contemplated thereby.
Carson Medlin is not expert in the evaluation of loan portfolios,
underperforming or nonperforming assets, net charge-offs of such assets or the
adequacy of allowances for losses with respect thereto; it has not reviewed any
individual credit files; and it has assumed that the loan loss allowances for
each of First Western and Mitchell are in the aggregate adequate to cover such
losses. Carson Medlin is not expert in bank operations and has not examined the
data processing or other systems of either First Western or Mitchell with regard
to their readiness to satisfy requirements related to the year 2000 or to
similar issues. Carson Medlin assumed that the Merger will be recorded as a
purchase under generally accepted accounting principles. Carson Medlin's opinion
is necessarily based on economic, market and other conditions as in effect on
the date of its analysis, and on information made available to it as of various
earlier dates.
In connection with rendering its opinion, Carson Medlin performed
a variety of financial analyses. The preparation of a financial fairness opinion
of this nature involves various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances, and, therefore, such analysis is not readily
susceptible to partial analysis or summary description. Carson Medlin believes
that its analyses must be considered together as a whole and that selecting
portions of such analyses and the facts considered therein, without considering
all other factors and analyses, could create an incomplete view of the
-38-
<PAGE> 52
analyses and the process underlying Carson Medlin's opinion. In its analyses,
Carson Medlin made numerous assumptions with respect to industry performance,
business and economic conditions, and other matters, many of which are beyond
the control of First Western and Mitchell and which may not be realized. Any
estimates contained in Carson Medlin's analyses are not necessarily predictive
of future results or values, which may be significantly more or less favorable
than such estimates. Estimates of values of companies do not purport to be
appraisals or necessarily reflect the prices at which such companies or their
securities may actually be sold. None of the analyses performed by Carson Medlin
was assigned a greater significance by Carson Medlin than any other analysis.
In connection with rendering its opinion dated November 16, 1998,
Carson Medlin reviewed (i) the Agreement; (ii) the annual report to shareholders
of First Western, including audited financial statements for the year ended
December 31, 1997; (iii) the Proxy Statement of First Western dated March 18,
1998, for the annual meeting of shareholders held on April 28, 1998; (iv) the
Consolidated Report of Condition and Income for First Western as of June 30,
1998; (v) the Uniform Bank Performance Report for First Western as of June 30,
1998; (vi) the annual report to shareholders of Mitchell, including audited
financial statements for the fiscal year ended June 30, 1997; (vii) the annual
reports on Form 10-KSB of Mitchell for the three fiscal years ended June 30,
1996, 1997 and 1998; (viii) the Proxy Statement of Mitchell dated September 18,
1997, for the annual meeting of shareholders held on October 22, 1997; (ix) the
Uniform Bank Performance Report for Mitchell Savings Bank, SSB as of June 30,
1998; (x) a preliminary copy of this Joint Proxy Statement; and (xi) certain
other financial and operating information with respect to the business,
operations and prospects of First Western and Mitchell.
Carson Medlin also (i) held discussions with members of the
senior management of First Western and Mitchell; (ii) reviewed the historical
market prices and trading activity for the common stocks of First Western and
Mitchell to the extent available and compared them with those of certain
publicly traded companies it deemed to be relevant; (iii) compared the results
of operations of First Western and Mitchell with those of certain publicly
traded companies it deemed to be relevant; (iv) compared the proposed financial
terms of the Merger with the financial terms, to the extent publicly available,
of certain other recent business combinations of commercial banking
organizations and savings institutions; (v) analyzed the pro forma financial
impact of the Merger on First Western; and (vi) conducted such other studies,
analyses, inquiries and examinations as Carson Medlin deemed appropriate.
The following is a summary of the principal analyses performed by
Carson Medlin in connection with its opinion.
Summary of Transaction Consideration. Carson Medlin reviewed the
terms of the proposed transaction and the aggregate transaction value. Carson
Medlin reviewed the implied value of the consideration offered, which based upon
the closing price of First Western's Common Stock on October 2, 1998, was
approximately $16.9 million. Carson Medlin calculated that the value of the
consideration to Mitchell Shareholders, based on the closing price of First
Western's Common Stock on October 2, 1998, represented 115% of Mitchell's stated
book value at June 30, 1998, 154% of Mitchell's book value per share at June 30,
1998, adjusted to reflect equity capital equal to 11% of total assets, and 38.9
times Mitchell's earnings for the year ended June 30, 1998. Carson Medlin
calculated that the total transaction value represented a 19.3% premium on
Mitchell's June 30, 1998, core deposits (defined as the aggregate transaction
value minus stated book value, as a percentage of core deposits, defined as
total deposits less certificates of deposit greater than $100,000), and 45.2% of
the total assets of Mitchell at June 30, 1998.
Comparable Transaction Analysis. Carson Medlin reviewed certain
information relating to the mergers of 14 selected savings institutions
announced between January 1997 and August 1998 in which the acquired
institutions had total assets of from $27 million to $286 million (the
"Comparable Transactions"). The Comparable Transactions are (acquiree/acquiror):
First Savings Financial Corp./First Citizens BancShares, Inc.; ESB Bancorp,
Inc./Southern Bancshares, Inc.; United Federal Savings Bank/Triangle Bancorp,
Inc.; Scotland Bancorp, Inc./Centura Banks, Inc.; Home Savings Bank of Siler
City, Inc., SSB/Capital Bank; Elmore County Bancshares,
-39-
<PAGE> 53
Inc./Peoples BancTrust Co., Inc.; Reliance Federal Savings & Loan Association of
St. Louis County/Allegiant Bancorp, Inc.; Joachim Bancorp, Inc./First State
Bancshares, Inc.; GF Bancorp, Inc./Camco Financial Corporation; CitiSave
Financial Corporation/Deposit Guaranty Corporation; Gateway Bancorp,
Inc./Peoples Bancorp, Inc.; GF Bancshares, Inc./Regions Financial Corporation;
LowCountry Savings Bank,Inc./Carolina First Corporation; and Investors Savings
Bank of South Carolina, Inc./First Financial Holdings, Inc. Carson Medlin
considered, among other factors, the earnings, capital level, asset size and
quality of assets of the acquired financial institutions. Carson Medlin compared
the transaction prices to the then recently reported annual earnings, stated
book values, adjusted book values, total assets and core deposits.
Carson Medlin calculated a range of purchase prices as a
percentage of stated book value for the Comparable Transactions from a low of
102% to a high of 323%, with a mean of 168%. These transactions indicated a
range of values for Mitchell from $14.9 million to $47.3 million, with a mean of
$24.6 million (based on Mitchell's stated book value of $14,632,500 at June 30,
1998). The value of the transaction is an estimated $16.9 million (based on the
price of the First Western Shares on October 2, 1998), which is below the mean
for the Comparable Transactions.
Carson Medlin calculated a range of purchase prices as a
percentage of book value (adjusted to 11% of total assets) for the Comparable
Transactions from a low of 123% to a high of 382%, with a mean of 193%. These
transactions indicated a range of values from $9.2 million to $26.2 million,
with a mean of $18.4 million based on Mitchell's stated book value of $14.6
million at June 30, 1998 (core equity or equity adjusted to 11% of assets is
approximately $4.1 million of total stated book value at June 30, 1998). The
value of the transaction is an estimated $16.9 million (based on the price of
the First Western Shares on October 2, 1998), which is below the mean for the
Comparable Transactions.
Carson Medlin calculated a range of purchase prices as a multiple
of earnings for the Comparable Transactions from a low of 18.2 times to a high
of 81.6 times, with a mean of 41.4 times. These transactions indicated a range
of values for Mitchell from $7.9 million to $35.3 million, with a mean of $17.9
million (based on Mitchell's net income for the fiscal year ended June 30, 1998,
of $433,000). The value of the transaction is an estimated $16.9 million (based
on the price of the First Western Shares on October 2, 1998), which is below the
mean for the Comparable Transactions.
Carson Medlin calculated the core deposit premiums for the
Comparable Transactions and found a range of values from a low of 3.9% to a high
of 40.8%, with a mean of 14.0%. The premium on Mitchell's core deposits implied
by the terms of the Agreement is 19.3%, which is above the mean for the
Comparable Transactions.
Finally, Carson Medlin calculated a range of purchase prices as a
percentage of total assets for the Comparable Transactions from a low of 18.4%
to a high of 45.6%, with a mean of 27.0%. The aggregate consideration as a
percentage of total assets implied by the terms of the Merger is approximately
45.2%, which is near the high end of the range for the Comparable Transactions.
Industry Comparative Analysis. In connection with rendering its
opinion, Carson Medlin compared selected operating results of First Western to
those of 21publicly-traded recently-formed community commercial banks in
Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Virginia
and West Virginia (the "De Novo Banks") as contained in the Southeastern De Novo
Bank Review, a research publication prepared by Carson Medlin. For this
comparison, Carson Medlin primarily used the 8 De Novo Banks which have been
operating for less than 18 months. The De Novo Banks operating for less than 18
months range in asset size from approximately $15.6 million to $85.3 million and
in shareholders' equity from approximately $5.3 million to $24.4 million. Carson
Medlin considers this group of financial institutions to be more comparable to
First Western than larger more established institutions. Carson Medlin compared,
among other factors, the, asset size, loan-to-deposit ratio, average asset
yields, average deposit rates, growth in deposits and loans for the last three
months, and
-40-
<PAGE> 54
profitability for the De Novo Banks operating less than 18 months. Carson Medlin
noted that for the period ended June 30, 1998: (i) First Western had total
assets of $18.9 million compared to 40.4 million on average for the De Novo
Banks open less than 18 months; (ii) First Western had a loan to deposit ratio
of 48% compared to 75% on average for the De Novo Banks open less than 18
months; (iii) First Western had average asset yields for the three months ended
June 30, 1998, of 6.67% compared to 8.00% on average for the De Novo Banks open
less than 18 months; (iv) First Western had average deposit rates for the three
months ended June 30, 1998 of 4.13% compared to 4.71% on average for the De Novo
Banks open less than 18 months; (v) For the three months ended June 30, 1998,
First Western's deposits grew by $4.5 million, and its loans grew by $3.8
million, compared to $7.9 million in loans and $8.4 million in deposits on
average for the De Novo Banks open less than 18 months; (vi) First Western had
an annualized pre-tax return on average assets for the three months ended June
30, 1993 of (4.82%) compared to (1.30%) on average for the De Novo Banks open
less than 18 months.
Carson Medlin also compared selected operating results of
Mitchell to those of 15 publicly traded thrifts in Alabama, Florida, Georgia,
North Carolina, South Carolina and Virginia (the "STR Institutions") as
contained in the Southeastern Thrift Review, a research publication prepared by
Carson Medlin quarterly since 1994. The STR Institutions range in asset size
from approximately $152 million to $1.5 billion and in shareholders' equity from
approximately $18 million to $ 122 million. Carson Medlin considers this group
of financial institutions to be generally comparable to Mitchell. Carson Medlin
compared, among other factors, the profitability, capitalization, and asset
quality of Mitchell to those of the STR Institutions. Carson Medlin noted that
for the quarter ended June 30, 1998: (i) Mitchell had a return on average assets
(ROA) of 0.68% compared to 0.90% on average for the STR Institutions; (ii)
Mitchell had a return on average equity (ROE) of 1.73% compared to 9.4% on
average for the STR Institutions; (iii) Mitchell had common equity to total
assets of 39.2% compared to 10.5% on average for the STR Institutions; and (iv)
Mitchell's non-performing assets ratio (defined as loans 90 days past due,
nonaccrual loans and other real estate to total loans and other real estate) was
2.05% compared to 0.65% on average for the STR Institutions.
No company or transaction used in the preceding Industry
Comparative or Comparable Transaction Analyses is identical to First Western,
Mitchell or the Merger. Accordingly, evaluating the results of these analyses
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of First Western and Mitchell and
other factors that could affect the value of the companies to which they are
being compared. Mathematical analysis (such as determining the average or
median) is not, in itself, a meaningful method of using comparable industry or
transaction data.
Pro Forma Merger Analysis. Carson Medlin analyzed the impact on
First Western, on a pro forma basis, of consolidating the results of operations
of First Western and Mitchell in future periods. In particular, Carson Medlin
compared First Western's results of future operations on the basis of a
combination with Mitchell to the results of First Western's future operations on
a stand-alone basis. Carson Medlin estimated, based on the terms of the
Acquisition and consummation of the Merger in 1998, that the Merger would be
accretive to First Western's 1999 per share earnings and each year thereafter.
Carson Medlin estimated that the Merger would initially be dilutive to First
Western's stated book value per share and tangible book value per share.
Dilution to tangible book value per share would decline in the second year and
would continue to decrease in each subsequent year. Carson Medlin considers the
magnitude and duration of such impact on the results of First Western's
operations to be typical of, and within the range of acceptable industry
standards for transactions such as the Merger.
Discounted Cash Flow Analysis. Using a discounted cash flow
analysis, Carson Medlin calculated the present value of Mitchell assuming that
Mitchell remains an independent financial institution. For purposes of this
analysis, Carson Medlin used certain projections of Mitchell's future earnings
through the year 2003. The analysis assumes that Mitchell would continue to pay
a dividend approximately equal to 80% of net income and that Mitchell would be
acquired at the end of 2003 at a purchase price of 120% of projected book value.
The present value of the annual dividends plus the Merger Consideration at the
end of 2002 was then calculated using discount rates of 11% through 13% per
annum. These discount rates were selected to reflect the rates that investors in
-41-
<PAGE> 55
securities such as Mitchell's stock might be expected to require in order to be
competitive with alternative investments with similar characteristics. On the
basis of these assumptions, Carson Medlin calculated that the present value to
the Mitchell Shareholders ranged from 11.8 million to 12.8 million. As part of
its analysis, Carson Medlin assumed that the net present value of after-tax
estimated cost savings and revenue enhancements was added to the stand-alone
value of Mitchell. Based on estimated cost savings of approximately 70% of
Mitchell's projected stand-alone overhead, projected revenue enhancements of
from $50,000 in 1999 growing to $130,000 in 2003, Merger-related expenses of
approximately $1 million, an estimated terminal value of 13 times the estimated
after-tax savings and revenue enhancements, Carson Medlin calculated a present
value of from $4.0 million to $4.5 million, at discount rates from 11% to 13%.
Added to the stand-alone value of Mitchell, this produced a total implied
transaction value of from $15.8 million to $17.3 million. The consideration
implied by the terms of the Agreement is $16.9 million (based on the closing
price of First Western's Stock on October 2, 1998), which is within the range of
the calculated present values, were Mitchell to remain independent through 2003.
Carson Medlin considered the present value analysis because it is a widely used
valuation methodology, but noted that the results of such methodologies are
highly dependent upon the numerous assumptions that must be made, including
earnings growth rates, dividend payout rates, terminal values and discount
rates.
The opinion expressed by Carson Medlin was based upon market,
economic and other relevant considerations as they existed and were evaluated as
of the date of the opinion. Carson Medlin confirmed the appropriateness of its
reliance on the analyses used to render its opinion dated November 16, 1998, by
performing procedures to update certain of such analyses and by reviewing
assumptions on which such analyses were based and the factors considered in
connection with them. Events occurring after the date of issuance of the
opinion, including, but not limited to, changes affecting the securities
markets, the results of operations or material changes in the assets or
liabilities of First Western or Mitchell could materially affect the assumptions
used in preparing the opinion.
REQUIRED SHAREHOLDER APPROVAL
The Agreement must be approved by Mitchell Shareholders and First
Western Shareholders before the Merger may be consummated. Under North Carolina
law, the affirmative vote of the holders of at least a majority of the total
outstanding shares of Mitchell Shares and two thirds of the total outstanding
First Western Shares is required to approve the Agreement and the Merger.
REQUIRED REGULATORY APPROVALS
The Merger is subject to approval by the Commissioner (which is
reviewed by the North Carolina Banking Commission) and the FDIC. Additionally,
the Administrator of the North Carolina Savings Institutions Division must
approve First Western's acquisition of Mitchell. Under regulations issued by the
Administrator, no person may acquire beneficial ownership of more than 10% of
the Mitchell Shares until July 1999 without the prior written approval of the
Administrator. The Administrator will grant approval only upon a finding that
(i) the acquisition is supported by the Mitchell Board, (ii) the person
acquiring the Mitchell Shares is of good character and integrity, possesses
satisfactory managerial skills and will serve as a source of strength to the
resulting entity after the acquisition, and (iii) the interests of the public
will not be adversely affected. First Western has requested the Administrator's
approval for 100% of the Mitchell Shares to be acquired by First Western.
The Agreement provides that First Western's obligation to
consummate the Merger is conditioned on receipt of all requisite regulatory
approvals. In addition, such regulatory approvals may not contain any terms or
conditions that are reasonably considered by First Western to be materially
disadvantageous or burdensome to, or have a material adverse effect on, First
Western. Applications for approval of the Merger by the Commissioner and the
FDIC and for approval by the Administrator of First Western's acquisition of
Mitchell have been filed and are
-42-
<PAGE> 56
pending. Although no assurances are or can be given that such approvals will be
obtained, First Western and Mitchell have no reason to believe that any such
regulatory approvals will not be obtained.
Assuming final FDIC approval is received, a 15- or 30-day waiting
period is required prior to consummation of the Merger to allow the United
States Department of Justice ("Justice Department") to review the transaction
for antitrust considerations. The duration of the waiting period is determined
by the Justice Department.
BUSINESS PENDING THE MERGER
The Agreement provides that, during the period from the date of
the Agreement to the Effective Time, except as provided in the Agreement,
Mitchell will conduct business in the regular and usual course in substantially
the same manner as its business previously has been conducted and, to the extent
consistent with such business and within its ability to do so, Mitchell will,
among other things, preserve intact its business organization, retain the
services of its officers and employees, and preserve its business relationships.
The Agreement also provides that, prior to the Effective Time,
and except in the ordinary course of business or as otherwise permitted by the
Agreement or as required by applicable law or regulation, Mitchell will not,
among other prohibited actions, (i) incur indebtedness for borrowed money, (ii)
sell, transfer, mortgage, pledge or otherwise dispose of any of its properties
or assets, or acquire any significant assets, (iii) increase the compensation or
benefits of any of its employees, (iv) settle any claim, action or proceeding
against it involving monetary damages, (v) make any change in its capital stock,
or issue, sell, purchase, redeem or retire shares of stock, (vi) amend its
charter or bylaws, (vii) grant or issue any additional options, (viii) enter
into any new employment agreements or adopt any new employee benefit plans, (ix)
change its accounting practices, (x) acquire or open any new branch offices, or
(xi) enter into any contract other than in the ordinary course of its business.
The Agreement provides that, during the period from the date of
the Agreement to the Effective Time, except as provided in the Agreement, First
Western will continue to conduct its business consistent with its past
practices. The Agreement also provides that, prior to the Effective Time, and
except as otherwise permitted by the Agreement, First Western will not, among
other prohibited actions, (i) make any change in its capital stock, or issue,
sell, purchase, redeem or retire shares of stock, (ii) grant or issue any
additional options, (iii) pay any dividends, or (iv) change its accounting or
business practices.
DIVIDENDS
The Agreement provides that Mitchell will not declare or pay any
dividends or make any other distributions on its capital stock. However, if the
Merger is not consummated prior to the record date for Mitchell's regular
semi-annual cash dividend (which ordinarily would be paid in February 1999),
then prior to the Effective Time, Mitchell may declare and pay a cash dividend
of $0.20 per share on the outstanding Mitchell Shares. The Agreement provides
that First Western will not declare or pay any dividends or make any other
distributions on its capital stock. Under regulations applicable to newly
chartered banks, First Western will not be permitted to pay any dividends for
the first three years of operation.
PROHIBITION ON SOLICITATION
The Agreement provides that Mitchell will not, directly or
indirectly, encourage, solicit or attempt to initiate or procure discussions,
negotiations or offers with or from any person or entity other than First
Western relating to a merger or other acquisition of Mitchell or the purchase or
acquisition of any Mitchell Shares or any significant part of Mitchell's assets,
or provide assistance to any person in connection with any such offer. Further,
Mitchell will not disclose to any person or entity any information not customary
disclosed to the public concerning
-43-
<PAGE> 57
Mitchell or its business except as required in the reasonable opinion of
Mitchell by the fiduciary duties of the Mitchell Board under applicable law.
ACCOUNTING TREATMENT
It is anticipated that the Merger will be accounted for as a
purchase transaction by First Western. Under the purchase method of accounting,
the recorded amounts of the assets and liabilities of Mitchell will be recorded
at their fair value, not to exceed the total purchase price. The financial
statements of First Western will include Mitchell subsequent to the consummation
of the transaction.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax
consequences of the Merger. This summary is not a complete description of all of
the consequences of the Merger and, in particular, it may not address federal
income tax consequences that may be applicable to particular categories of
taxpayers such as broker-dealers, or to any Mitchell Shareholder who acquired
his or her Mitchell Shares through the exercise of an employee stock option
including a plan under Section 422 of the Code, or otherwise as compensation.
This discussion does not address the effect of any applicable foreign, state,
local or other tax laws. SHAREHOLDERS OF MITCHELL ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE APPLICABILITY OF AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX
LAWS.
Tax Treatment to First Western and Mitchell. No gain or loss will
be recognized by First Western and Mitchell solely as a result of the Merger.
Receipt of First Western Shares for Mitchell Shares. No gain or
loss will be recognized by a holder who receives solely First Western Shares
(except for cash received in lieu of fractional shares, as discussed below) in
exchange for all of his or her Mitchell Shares. The tax basis of the First
Western Shares received by a holder in such exchange will be equal (except for
the basis attributable to any fractional First Western Shares, as discussed
below) to the basis of the Mitchell Shares surrendered in exchange therefor. The
holding period of the First Western Shares received will include the holding
period of Mitchell Shares surrendered in exchange therefor, provided that such
shares were held as capital assets on the Effective Date of the Merger.
Option Holders. Mitchell Option holders will have ordinary income
on the conversion of their Mitchell Options into either cash or First Western
Shares.
Receipt of First Western Shares and Cash in Exchange for Mitchell
Shares. A holder who receives a combination of First Western Shares and cash in
exchange for his or her Mitchell Shares will not be permitted to recognize any
loss for federal income tax purposes. Such a holder will recognize gain, if any,
equal to the lesser of (i) the amount of cash received, or (ii) the amount of
gain "realized" in the transaction. The amount of gain a holder "realizes" will
equal the amount by which (i) the cash plus the fair market value, on the
Effective Time, of the First Western Shares received exceeds (ii) the holder's
basis in the Mitchell Shares to be surrendered in the exchange therefor. Any
recognized gain could be taxed as a capital gain or a dividend, as described
below. The aggregate tax basis of the First Western Shares received by such
holder will be the same as the aggregate basis of the Mitchell Shares
surrendered in exchange therefor, adjusted as provided in Section 358(a) of the
Code for the cash received in exchange for such Mitchell Shares. The holding
period for First Western Shares received in the Merger will be the same as the
holding period for Mitchell Shares surrendered in exchange for them, provided
that such shares were held as capital assets of the holder at the Effective
Time.
A holder's federal income tax consequences also will depend on
whether his or her Mitchell Shares were purchased at different times at
different prices. If they were, the holder could realize gain with respect to
some of
-44-
<PAGE> 58
the Mitchell Shares and loss with respect to others. Such a holder would have to
recognize such gain to the extent he or she receives cash with respect to those
shares in which the holder's adjusted tax basis is less than the amount of cash
plus the fair market value, at the Effective Time, of the First Western Shares
received, but the holder could not recognize loss with respect to those shares
in which the holder's adjusted tax basis is greater than the amount of cash plus
the fair market value, at the Effective Time, of the First Western Shares
received. Any disallowed loss would be included in the adjusted basis of the
First Western Shares. Such a holder is urged to consult his or her own tax
advisor regarding individual tax consequences of the Merger.
Possible Dividend Treatment. In certain circumstances, a holder
who receives cash or a combination of cash and First Western Shares in the
Merger may receive ordinary dividend, rather than capital gain, treatment on all
or a portion of the gain recognized by that holder. The determination of whether
a cash payment has the effect of a dividend distribution is made by treating a
Mitchell Shareholder as if such holder had received solely First Western Shares
in the Merger and First Western immediately thereafter redeemed a number of
First Western Shares equal in value to the cash consideration received.
This hypothetical redemption is then tested under the provisions
and limitations of Section 302 of the Code to determine whether the holder's
change in ownership in First Western results in a dividend distribution. For
purposes of this hypothetical Section 302 redemption analysis, First Western
Shares held by certain members of the holder's family or certain entities in
which the holder has an ownership or beneficial interest and certain stock
options may be aggregated with the holder's First Western Shares. The amount of
the cash payment that may be treated as a dividend is limited to the holder's
ratable share of the accumulated earnings and profits of Mitchell (or possibly
of the total earnings and profits of Mitchell and First Western) at the
Effective Time. Any gain that is not treated as a dividend will be taxed as a
capital gain, provided that the holder's shares were held as capital assets at
the Effective Time. BECAUSE THE DETERMINATION OF WHETHER A CASH PAYMENT WILL BE
TREATED AS HAVING THE EFFECT OF A DIVIDEND WILL DEPEND IN PART UPON THE FACTS
AND CIRCUMSTANCES OF EACH HOLDER, HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF CASH RECEIVED IN THE MERGER.
Receipt of Cash in Exchange for Mitchell Shares. A holder who
receives solely cash in exchange for all of his or her Mitchell Shares, and owns
no First Western Shares actually or constructively, will recognize gain or loss
for federal income tax purposes equal to the difference between the cash
received and such holder's tax basis in the Mitchell Shares surrendered in
exchange for them. Such gain or loss will be a capital gain or loss, provided
that such shares were held as capital assets of the holder at the Effective
Time. Such gain or loss will be long-term capital gain or loss if the holder's
holding period is more than twelve months at the Effective Time. The Code
contains limitations on the extent to which a holder may deduct capital losses
from ordinary income. It is not clear whether the above treatment would apply to
a holder who receives solely cash for his or her shares but who owns
constructively First Western Shares, or owns constructively Mitchell Shares that
are not exchanged solely for cash, or whether instead the treatment referred to
above under "Certain Federal Income Tax Consequences -- Possible Dividend
Treatment" would apply. A holder in this situation is advised to consult his or
her own tax advisor regarding the tax consequences.
Cash in Lieu of Fractional Shares. A holder who holds Mitchell
Shares as a capital asset and who receives in the Merger, in exchange for such
stock, solely First Western Shares and cash in lieu of a fractional share
interest in First Western Shares will be treated as having received such
fraction of a First Western Share and then as having received cash in redemption
by First Western of the fractional share interest.
Backup Withholding; Information Reporting. The cash payments due
a holder upon the exchange of such Mitchell Shares pursuant to the Merger (other
than certain exempt persons or entities) will be subject to "backup withholding"
for federal income tax purposes unless certain requirements are met. First
Western or a third-party paying agent, as the case may be, must withhold 31% of
the cash payments to a holder, unless such holder (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact, or (ii) provides First Western or a third-party paying agent, as the case
may be, with his or her taxpayer identification
-45-
<PAGE> 59
number and completes a form in which he or she certifies that he or she has not
been notified by the IRS that he or she is subject to backup withholding as a
result of a failure to report interest and dividends. The taxpayer
identification number of an individual is the Social Security number. Any amount
paid as backup withholding will be credited against the holder's federal income
tax liability. Holders who receive First Western Shares also must comply with
the information reporting requirements of the Treasury regulations under Section
368 of the Code. Appropriate documentation for the foregoing purposes will be
provided to holders with the Election Forms that will be sent to them by the
Exchange Agent.
Pursuant to the terms of the Reorganization Agreement, First
Western and Mitchell shall receive an opinion from Deloitte & Touche LLP to the
effect that the Merger will constitute a tax-free reorganization within the
meaning of Section 368 of the Code and that no gain or loss will be recognized
by Mitchell shareholders who receive solely First Western Shares in exchange for
their Mitchell Shares. No ruling has been or will be sought from the Internal
Revenue Service as to the federal income tax consequences of the Merger, and the
opinion of Deloitte & Touche LLP is not binding on the Internal Revenue Service
or any court.
CONDITIONS TO THE MERGER
Consummation of the Merger is subject to various conditions
described in the Agreement (attached as Exhibit C), including without
limitation: (i) approval of the Agreement by Mitchell Shareholders and First
Western Shareholders; (ii) receipt of all required regulatory approvals without
the imposition by any regulatory agency of a condition to any such approval that
is considered by First Western to be materially disadvantageous or burdensome
to, or have a material adverse effect on, First Western; (iii) receipt of the
Tax Opinion; (iv) receipt of the Fairness Opinions from RP Financial and Carson
Medlin, and confirmation of the Fairness Opinions within five days prior to the
Effective Time; (v) satisfaction of all requirements for the First Western
Shares to be listed on the Nasdaq SmallCap Market as of the Effective Time; and
(vi) execution of the consulting agreement with Emma Lee M.
Wilson as of the Effective Time.
The separate obligations of both Mitchell and First Western under
the Agreement are subject to various other conditions described in the
Agreement, including without limitation: (i) the absence of a material adverse
change in the financial condition, results of operations or business of the
party; (ii) compliance by the other party with all laws and regulations
applicable to the transactions described in the Agreement; (iii) the absence of
any violation or breach by the other party of any of its obligations, covenants,
agreements, representations or warranties under the Agreement; and (iv) the
receipt of certain certificates and opinions of the other party's senior
officers and legal counsel.
WAIVER; AMENDMENT OF AGREEMENT
Prior to the Effective Time, any provision of the Agreement
(other than provisions relating to regulatory approvals and other approvals
required by law) may be waived by the party entitled to the benefits of such
provision. Additionally, the Agreement may be amended, modified or supplemented
by Mitchell or First Western at any time prior to the Effective Time, and either
before or after approval by the Mitchell Shareholders, by an agreement in
writing approved by a majority of the members of the Board of Directors of First
Western and Mitchell. However, except as otherwise provided in the Agreement,
following approval of the Agreement by the Mitchell Shareholders, no such
amendment may change the Merger Consideration without approval of such change by
the Mitchell Shareholders.
TERMINATION OF AGREEMENT
The Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time, whether before or after approval by the
shareholders, upon the mutual agreement of Mitchell and First Western, and
-46-
<PAGE> 60
it may be terminated by either Mitchell or First Western if, among other things:
(i) the other party shall have violated or failed to perform fully any of its
obligations, covenants or agreements in any material respect; (ii) any of the
other party's representations or warranties shall have been false or misleading
in any material respect when made, or if there has occurred any event or
development, or there exists any condition or circumstance, that has caused or,
with the lapse of time or otherwise, may or could cause, any such
representations or warranties to become false or misleading; (iii) the
shareholders fail to ratify and approve the Agreement, or the shareholder
meetings are not held on or before January 31, 1999; (iv) any condition to the
obligations of the terminating party is not satisfied or is effectively waived,
or (v) the Merger has not become effective by March 31, 1999 (or such later date
as shall be mutually agreeable to Mitchell and First Western).
In the event of the termination and abandonment of the Merger
pursuant to the termination provisions thereof, the Agreement will become void
and have no effect, except that certain provisions of the Agreement relating to
expenses, indemnification and confidentiality of information obtained pursuant
to the Agreement or in connection with the negotiation thereof will survive any
such termination and abandonment. In the event the Agreement is terminated
following a breach or violation of the Agreement by one party, then that
breaching party will be obligated to pay the other party $250,000 in liquidated
damages.
Consummation of the Merger is subject to obtaining the prior
approval of the FDIC and the Administrator. First Western has submitted
applications with the Commissioner, the FDIC and the Administrator to acquire
Mitchell and Mitchell Savings through the Merger.
If Mitchell Shareholders fail to approve the Agreement, the
Merger will not be consummated. Mitchell will remain an independent entity and a
going concern. Mitchell will have incurred, and will be obligated to pay,
certain costs associated with accounting, financial advice, legal advice, and
the mailing and printing of proxy materials. The Mitchell Board will continue to
exercise its fiduciary duty to analyze any new acquisition offers.
See the subsection above, "Conditions to the Merger."
CLOSING DATE AND EFFECTIVE TIME
Following and subject to the fulfillment of all conditions
described in the Agreement, the closing of the Merger will be held on a date
specified by First Western (the "Closing Date") within 30 days after the
expiration of required waiting periods following receipt of regulatory
approvals. The Effective Time of the Merger will be the date and time specified
in Articles of Merger filed with the North Carolina Secretary of State (or, if a
time is not so specified, then at the time Articles of Merger are filed).
However, in no event may the Effective Time be more than 10 days following the
Closing Date. Although there is no assurance as to whether or when the Merger
will occur, it currently is expected that the Merger will become effective
during the fourth quarter of 1998.
INTERESTS OF CERTAIN PERSONS WITH RESPECT TO THE MERGER
Certain members of Mitchell's management and the Mitchell Board
have certain interests in the Merger in addition to their interests as
shareholders of Mitchell generally. A table showing the share ownership of
Mitchell's management and the Mitchell Board is contained on page 67 of
Mitchell's 1998 Annual Report on Form 10-KSB which is attached as Exhibit A. The
Mitchell Board was aware of these interests and considered them in adopting the
Agreement and recommending the proposed transaction.
INDEMNIFICATION. Pursuant to the Agreement, from and after the
Effective Time, First Western will indemnify the present and former officers and
directors of Mitchell and Mitchell Savings against liabilities arising from
actions or omissions in their official capacities as officers and directors
occurring on or prior to the Effective Time to the extent they would have had a
right to indemnification from Mitchell or Mitchell Savings. First Western
-47-
<PAGE> 61
further agreed to maintain Mitchell's existing directors' and officers'
liability insurance policy past the Effective Time for a period of six years.
CONSULTING AGREEMENT. In order to assure itself of the assistance
and continued service of Emma Lee M. Wilson, Corporate Secretary and a director
of Mitchell, during the transition period following the Effective Time, First
Western has agreed to enter into a consulting agreement with her. As currently
proposed, the consulting agreement would (i) provide for compensation equal to
her current salary; (ii) provide for a term of approximately six months; and
(iii) contain certain covenants generally prohibiting Ms. Wilson from competing
against First Western within Mitchell's former banking market for a period of
time following termination of her employment with First Western. The consulting
agreement with Ms. Wilson will supersede her employment agreement with Mitchell
currently in effect. The Mitchell Board has also agreed to certain covenants
generally prohibiting each of them from competing against First Western within
Mitchell's former banking market for five years following the Merger.
MITCHELL STOCK OPTIONS. There are outstanding Mitchell Options to
purchase up to an aggregate of 68,596 Mitchell Shares, which are held by certain
Mitchell employees and directors under Mitchell's Incentive Stock Option Plan
for Employees and Nonstatutory Stock Option Plan for Directors. At the Effective
Time, each Mitchell Option previously granted by Mitchell that was outstanding
on the date of the Agreement will be converted into either solely cash or solely
First Western Shares at the election of the holder of the Mitchell Option, with
an aggregate value of between $1,097,536 and $1,371,920 depending on whether the
option holder elects cash or First Western Shares. Under the Agreement, no
further options to acquire Mitchell Shares may be granted by Mitchell.
VESTING OF STOCK AWARDS. Certain officers, employees and
directors of Mitchell currently hold unvested awards covering an aggregate of
25,086 Mitchell Shares previously granted under the Mitchell Management
Recognition and Development Plan (the "MRDP"). Under the terms of the MRDP, a
recipient's rights in the shares covered by an award granted to him or her
become vested at the rate of 20% on the first anniversary of the date of grant
and 20% per year thereafter. However, upon the occurrence of certain "change in
control" events, all unvested shares covered by outstanding awards immediately
become vested. At the Effective Time, the rights of officers, employees and
directors in unvested Mitchell Shares under the MRDP will become vested and such
persons will be entitled to elect the Merger Consideration into which those
shares are converted, with an aggregate value of between $401,376 and $501,720
depending on whether the award holder elects cash or First Western Shares.
CHANGE-IN-CONTROL PAYMENTS. Mitchell is a party to employment
contracts with Edward Ballew, Jr., Executive Vice President and Chief Executive
Officer of Mitchell, and Ms. Wilson (the "Employment Agreements"). Among other
provisions, Mr. Ballew and Ms. Wilson are entitled under the Employment
Agreements to certain payments in the event of a change in control of Mitchell.
The Merger constitutes a change in control of Mitchell. Upon a change in
control, Mitchell has agreed to pay Mr. Ballew and Ms. Wilson an amount equal to
2.99 times their "base amount" as defined in Section 280G(b)(3) of the Code.
This compensation is payable, at each officer's option, either by lump sum or in
equal monthly installments. Mitchell has the right, under the Employment
Agreements, to reduce any such payments as necessary under the Code to avoid the
imposition of excise taxes on the officers or the disallowance of a deduction to
Mitchell. Mitchell is expected to exercise this right. This reduction is
necessary because the total payment to Mr. Ballew and Ms. Wilson, including the
payments due them under the accelerated vesting provisions of the ESOP and the
MRDP, would exceed the limit allowed under the "golden parachute" provisions of
Section 280G and would therefore trigger these tax penalties. Mr. Ballew and Ms.
Wilson have agreed to the reduction. With the reduction, the estimated payoff
under the employment contracts is $11,250 for Mr. Ballew and $9,250 for Ms.
Wilson.
-48-
<PAGE> 62
BOARD OF DIRECTORS OF RESULTING INSTITUTION
The First Western Board will serve as directors of the
institution after the Merger. No director of Mitchell will remain as directors
of the resulting institution. The First Western Board members are Robert L.
Bailey, William A. Banks, Ronnie E. Deyton, Jerry Duncan, F. Warren Hughes,
David R. McIntosh, Ray V. Miller, Ronnie C. Odom, Van F. Phillips, and Jack Dean
Pitman.
EXPENSES
The Agreement provides that Mitchell and First Western will each
pay its own legal, accounting and financial advisory fees and all its other
costs and expenses (including filing fee, printing costs and travel expenses)
incurred or to be incurred in connection with the performance of its obligations
under the Agreement or otherwise in connection with the Merger. Except under
certain circumstances involving a wrongful termination or breach of the
Agreement, the cost of soliciting proxies will be deemed to be incurred and
shall be paid 50% by Mitchell and 50% by First Western. However, in the event
the Agreement is terminated following a breach or violation of the Agreement by
one party, then that breaching party will be obligated to pay the other party
$250,000 in liquidated damages.
RIGHTS OF DISSENTING SHAREHOLDERS
The Merger will give rise to Dissenters' Rights under Article 13
of the North Carolina Business Corporation Act ("Article 13") for both Mitchell
Shareholders and First Western Shareholders. Pursuant to Article 13, any
Mitchell Shareholder or First Western Shareholder who objects to the Merger may
exercise Dissenters' Rights and become entitled to be paid the fair value of his
or her shares if the Merger is consummated. THE FOLLOWING IS MERELY A SUMMARY OF
THE DISSENTERS' RIGHTS OF SHAREHOLDERS. A COMPLETE COPY OF ARTICLE 13 IS
ATTACHED AS EXHIBIT F AND INCORPORATED BY REFERENCE INTO THIS JOINT PROXY
STATEMENT. ARTICLE 13 PROVIDES FOR SHAREHOLDERS' DISSENTERS' RIGHTS, AND IT
DESCRIBES THE DETAILED PROCEDURE FOR EXERCISING THOSE RIGHTS THAT MUST BE
FOLLOWED BY A DISSENTING SHAREHOLDER. ANY SHAREHOLDER WHO INTENDS TO EXERCISE
DISSENTERS' RIGHTS SHOULD REVIEW ARTICLE 13 CAREFULLY AND COMPLY EXACTLY WITH
ITS REQUIREMENTS IN CONSULTATION WITH HIS OR HER ATTORNEY. Except as provided
below, no further notices will be given to shareholders of Mitchell or First
Western regarding the existence of Dissenters' Rights or any time periods within
which those rights must be exercised. In summary, that procedure is as described
below.
Any shareholder asserting Dissenters' Rights MUST (I) give to the
institution and the institution must actually receive, BEFORE THE VOTE ON THE
MERGER IS TAKEN, written notice of the shareholder's intent to demand payment
for his or her shares if the Merger is consummated, and (II) NOT vote in favor
of the Merger. Failure by a shareholder to satisfy both requirements will mean
that the shareholder will not be entitled to assert Dissenters' Rights and will
therefore not be able to obtain payment for his or her shares under Article 13.
SHAREHOLDERS SHOULD NOTE THAT IF THEY SIGN, DATE AND RETURN A BLANK APPOINTMENT
OF PROXY WITH NO INSTRUCTIONS AS TO HOW THEIR SHARES SHOULD BE VOTED, THEY WILL
BE DEEMED TO HAVE VOTED IN FAVOR OF THE MERGER AND, THEREAFTER, THEY WILL NOT BE
ENTITLED TO ASSERT DISSENTERS' RIGHTS.
If the Agreement is approved by the shareholders of a dissenting
shareholder's institution, then, within 10 days of the Effective Time, the
institution must send a written notice (by registered or certified mail, return
receipt requested) to each shareholder who has taken the actions described above
and is entitled to exercise Dissenters' Rights. That notice will: (I) state
where the dissenting shareholder's payment demand must be sent, and where and
when share certificates must be deposited; (II) supply a form to be used to
demand payment; (III) set a date by which the institution must receive the
dissenting shareholder's demand for payment (which may not be fewer than 30 nor
more than 60 days after the date the dissenters' notice is mailed); and, (IV) be
accompanied by a copy of Article 13.
A shareholder who has been sent the dissenters' notice must
demand payment AND must deposit his or her share certificates by the set date
forth in and in accordance with the terms and conditions of the dissenters'
notice. Otherwise, such shareholder will not be entitled to payment for shares
under Article 13. A shareholder who demands payment and deposits share
certificates as required retains all other rights as a shareholder until such
rights are canceled or modified by consummation of the Merger.
As soon as the Merger is consummated or upon receipt of a payment
demand, the institution will pay each dissenter who made a timely demand for
payment and deposited share certificates the amount the institution estimates to
be the fair value of the shares, plus interest accrued to the date of payment.
This payment will be accompanied by: (I) certain of that institution's most
recent available financial statements; (II) an explanation of how
-49-
<PAGE> 63
the institution estimated the fair value of the shares; (III) an explanation of
how the interest was calculated; (IV) a statement of the dissenter's right to
demand payment if dissatisfied with the offer; and, (V) a copy of Article 13.
If the Merger is not consummated within 60 days after the date
set for demanding payment and depositing share certificates, the dissenting
shareholder's institution must return the deposited certificates, and if,
thereafter, the Merger is consummated, the institution must send a new
dissenters' notice and repeat the payment demand procedures.
If the dissenter believes the payment by the institution is less
than the dissenter's estimate of the fair value of the shares, or that interest
is not correctly calculated, the dissenter may notify the institution in
writing. The notification must include the dissenter's estimate of the fair
value and the amount of interest, and it must demand payment from the
institution for the fair value. This notification must be made within 30 days
after the corporation made the payment, or else the dissenter loses any further
rights under Article 13 and will be deemed to have withdrawn the demand for
payment.
If the institution fails to pay the dissenter its estimate of the
fair value of the shares, or if it fails to act and does not return the
dissenter's certificates or release any transfer restrictions on uncertificated
shares within 60 days after the date set for demanding payment, the dissenter
may notify the institution in writing. The notification must include the
dissenter's estimate of the fair value and the amount of interest, and it must
demand payment from the institution for the fair value. This notification must
be made within 30 days after the institution failed to take the required action,
or else the dissenter loses any further rights under Article 13 and will be
deemed to have withdrawn the demand for payment.
If a dissenter properly takes either of the actions described
above, and the demand for payment remains unsettled, the dissenter may file a
complaint in the Superior Court Division of the General Court of Justice of the
State of North Carolina, asking the court to determine the fair value of the
shares and the amount of accrued action. This action must be taken within 60
days of the earlier of the date the institution made the initial payment to the
dissenter or the date the dissenter demanded payment. If this court proceeding
is not initiated within this time period, the dissenter loses any further rights
under Article 13 and will be deemed to have withdrawn the demand for payment.
In the court proceeding, the court may appoint appraisers to
receive evidence and recommend a decision on the question of fair value, and it
also has discretion to make all dissenters whose demands remain unsettled
(whether or not they are North Carolina residents) parties to the proceeding.
Each dissenter made a party to the proceeding must be served with a copy of the
petition and is entitled to judgment for the amount, if any, by which the court
finds the fair value of the dissenter's shares, plus interest, exceed the amount
paid by the institution. Court costs and appraisal and counsel fees may be
assessed by the court as it deems equitable.
Article 13 contains certain additional provisions with respect to
dissent by nominees who hold shares for others, and by beneficial owners whose
shares are held in the name of other persons. The complete text of Article 13
can be found in Exhibit F.
REPRESENTATIONS AND WARRANTIES
In the Agreement, Mitchell, on the one hand, and First Western on
the other, have made certain representations and warranties to each other.
Mitchell has represented and warranted, among other things, as to its
organization and capitalization, its authority to enter into the Agreement and
to consummate the Merger, the accuracy of its financial statements and public
reports, legal proceedings against it, its properties, contractual rights and
duties, its tax returns and taxes, its employee benefit plans, and other matters
relating to its business, assets, liabilities and operations. First Western has
represented and warranted to Mitchell, among other things, as to its
organization, its authority to enter into the Agreement and to consummate the
Merger, the accuracy of its financial
-50-
<PAGE> 64
statements and public reports, legal proceedings against it, contractual rights
and duties, its tax returns and taxes, and other matters relating to its
businesses, assets, liabilities and operations.
FIRST WESTERN
First Western Bank is a state bank organized under the laws of
the State of North Carolina and headquartered in Burnsville, North Carolina. It
has two banking offices in two counties in western North Carolina. At September
30, 1998, First Western had total assets of approximately $22.8 million, total
deposits of approximately $15.6 million, and total shareholders' equity of
approximately $7.0 million. First Western employed approximately 19 full-time
employees as of September 30, 1998.
First Western began operations in December 1997. It is regulated
by the Commissioner, its chartering agency, and the FDIC, its insurer of deposit
accounts. It deposits are insured by the Bank Insurance Fund.
First Western is a community bank whose primary purpose is to
serve the banking needs of individuals and businesses in Yancey and Mitchell
Counties, North Carolina. It provides a variety of banking services including
the following: checking and NOW accounts; a variety of time deposits; business,
agricultural, real estate, home improvement, automobile, and other personal
loans; credit cards; letters of credit; home equity lines of credit; safe
deposit boxes; wire transfer facilities; and access to automated teller machines
through the "Honor" network.
Please refer to Exhibit B for further discussion of the business
of First Western.
PROPERTIES
First Western leases its executive office facilities located at
321 West Main Street, Burnsville, North Carolina. It owns land at 600 Highway
19E West, Burnsville, North Carolina, the current site of the Burnsville banking
office, which operates in a modular unit under a temporary lease. First Western
is planning the construction of a new building on the Highway 19E property, to
house both the branch in the mobile unit and the executive offices now located
in leased space.
First Western's reasons for considering new construction at this
time are to allow for significant growth and to provide space for expansion and
services to be provided in the future. Plans currently under consideration call
for a building of approximately 12,500 square feet, and cost estimates have
ranged from $1.5 million to $1.8 million. However, the only construction expense
First Western has presently incurred in relation to this property has been the
demolition of an existing structure. To date, no bids have been let and no
contracts awarded.
If the construction estimates continue to be in the expected
range, and adjusting for the savings from housing the administrative office and
the banking office in the same building, the effect on future annual occupancy
expense is expected to be between $9,800 and $19,800.
First Western leases its other branch office, located at 226
Spruce Pine Shopping Center, Spruce Pine, North Carolina, from a partnership in
which Van F. Phillips, the Chairman of the Board, has an interest. First Western
does not own or lease any other facilities.
LEGAL PROCEEDINGS
First Western is aware of no material legal proceedings to which
it is a party or of which any of its properties is subject.
-51-
<PAGE> 65
BENEFICIAL OWNERSHIP OF SECURITIES
To First Western's knowledge, as of the First Western Record
Date, no shareholder owned more than five percent of the First Western Shares.
The following table shows, as of the First Western Record Date, the number of
First Western Shares owned by each director and by all directors and executive
officers of First Western as a group:
Shares Percent of
Name of Currently Shares
Beneficial Owner Owned(1) Owned(2)
- ---------------- -------- --------
Robert L. Bailey 11,775 1.62
William A. Banks 5,945 *
Ronnie E. Deyton 9,720 1.33
Jerry Duncan 6,975 *
F. Warren Hughes 3,855 *
David R. McIntosh 4,276 *
Ray V. Miller 13,220 1.82
Ronnie C. Odom 11,320 1.56
Van F. Phillips 22,820 3.13
Jack Dean Pitman 11,820 1.62
All Directors and Principal
Officers as a Group
(12 persons) 112,496 15.05
- -------------------
* Owns less than one percent of the outstanding First Western Shares.
(1) This column includes the number of shares capable of being issued within
60 days upon the exercise of stock options held by the named individual.
To First Western's knowledge, each person has sole voting and investment
power over the securities shown as beneficially owned by such person,
except for the following First Western Shares, for which the individual
indicates that he shares voting and/or investment power: Bailey --
10,000; Miller -- 2,400; Phillips -- 19,100; Pitman -- 10,000; directors
and principal officers as a group -- 41,500.
(2) The ownership percentages were calculated based on the total of 726,419
First Western Shares that are currently issued and outstanding, plus the
number of First Western Shares capable of being issued to that
individual (if any) and to directors and principal officers as a group
within 60 days of the First Western Record Date upon the exercise of
stock options held by each of them (if any) and by the group,
respectively.
-52-
<PAGE> 66
DIRECTORS
Under the First Western's Articles of Incorporation and Bylaws,
the number of directors shall be such number as the First Western Board
determines from time to time prior to each annual meeting of First Western
Shareholders at which directors are to be elected, such number to be not less
than ten nor more than fifteen. First Western's Article of Incorporation and
Bylaws provide that the First Western Board shall be divided into three classes,
each containing as nearly equal a number of directors as possible, each elected
to staggered three-year terms of office and thereafter directors elected to
succeed those directors in each class shall be elected for a term of office of
three years.
The First Western Board, by resolution, fixed the number of
directors at ten. Four were elected at the 1998 Annual Meeting to serve a one
year term until the Annual Meeting of Shareholders in 1999 ("Class I
Directors"), three were elected to serve a two year term until the Annual
Meeting of Shareholders in 2000 ("Class II Directors"), and three were elected
to serve a three year term until the Annual Meeting of Shareholders in the year
2001 ("Class III Directors"), or until their successors are elected and
qualified. All First Western Board members have served as directors of First
Western since it's incorporation on December 1, 1997.
Listed below are the names of the Class I Directors, together
with their ages at December 31, 1997, and their principal occupations during the
past five years.
NAME AND AGE PRINCIPAL OCCUPATION OVER LAST FIVE YEARS
Ray V. Miller 64 President, "C" Cablevision, Inc.; President,
Cablevision Industries, Inc., both of Myrtle
Beach, South Carolina; and Vice President, Country
Cablevision, Inc., Burnsville, North Carolina.
Ronnie C. Odom 47 President and Chief Executive Officer, Industrial
Installations, Inc. (general mechanical
contractors), Green Mountain, North Carolina.
Van F. Phillips 45 Owner, Western Steer Steakhouse, Spruce Pine,
North Carolina until 1995; Vice President, Great
Meadows, Inc. (real estate development), Spruce
Pine, North Carolina.
Jack Dean Pitman 52 Co-Owner, Grassy Creek Hardware & Building Supply
Co., Spruce Pine, North Carolina since 1995; prior
to that, President, Yancey Mobile Home Sales,
Inc., Burnsville, North Carolina.
Listed below are the names of the Class II Directors, together
with their ages at December 31, 1997, and their principal occupations during the
past five years.
NAME AND AGE PRINCIPAL OCCUPATION OVER LAST FIVE YEARS
Jerry Duncan 54 President, Mayland Home Center, Inc. (retail sales
of manufactured homes), Spruce Pine, North
Carolina.
F. Warren Hughes 41 Clerk of Superior Court, Yancey County.
David R. McIntosh 51 Sole Proprietor, David's Limited (retail
clothing); Co-Owner, Heritage Lumber Co. (building
supplies); Owner, Seven Pines Townhomes; Partner,
RaMac (real estate development); all of
Burnsville, North Carolina.
-53-
<PAGE> 67
Listed below are the names of the Class III Directors, together
with their ages at December 31, 1997, and their principal occupations during the
past five years.
NAME AND AGE PRINCIPAL OCCUPATION OVER LAST FIVE YEARS
Robert L. Bailey 52 President, New Buck Corporation (manufacture and
sales of wood stoves), Spruce Pine, North
Carolina.
William A. Banks 73 President, BanCo Lumber, Inc. (logging and lumber
manufacturing), Burnsville, North Carolina.
Ronnie E. Deyton 51 President and Chief Executive Officer, First
Western Bank since February 1997; prior to that,
Senior Market Officer, Centura Bank since April
1996; prior to that, Vice President and Area
Executive for Mitchell and Yancey Counties, First
Commercial Bank, all in Burnsville, North
Carolina.
No director is a director for any company with a class of
securities registered pursuant to Section 12 of the Exchange Act.
EXECUTIVE OFFICERS
First Western's Bylaws provide that the First Western Board shall
elect the officers of First Western for a term of one year. Executive officers
are subject to election at the meeting of the First Western Board following
First Western's annual meeting of shareholders. The executive officers have
served in their present capacities since First Western's incorporation.
NAME AND AGE AT 12/31/97 PRINCIPAL OCCUPATION OVER LAST FIVE YEARS
Ronnie E. Deyton 51 President and Chief Executive Officer, First
Western Bank since February 1997; prior to that,
Senior Market Officer, Centura Bank since April
1996; prior to that, Vice President and Area
Executive for Mitchell and Yancey Counties, First
Commercial Bank, all in Burnsville, North
Carolina.
Charles Ownbey 64 Corporate Secretary and Senior Vice President of
Loan Administration, First Western Bank since
February 1997; prior to that, Vice President,
Regional Commercial Credit Support Manager,
Centura Bank, Asheville, North Carolina since
April 1997; prior to that, Senior Vice President
of Loan Administration, First Commercial Bank,
Asheville, North Carolina.
Martin Shuford 57 Senior Vice President for Business Development,
First Western Bank since February 1997; prior to
that, Area Manager for Burnsville, Bakersville and
Spruce Pine, First Commercial Bank until
retirement in 1995.
Other than Jerry Duncan and Jack Dean Pitman, who are uncle and
nephew, no executive officer or director is related to another executive officer
or director.
EXECUTIVE COMPENSATION. The cash and cash equivalent compensation
paid by First Western during the fiscal year ended December 31, 1997 to its
chief executive officer is as follows:
-54-
<PAGE> 68
ANNUAL COMPENSATION
OTHER ANNUAL
NAME AND SALARY BONUS COMPENSATION
PRINCIPAL POSITION YEAR (1) ($) ($) ($) (2)
Ronnie E. Deyton 1997 30,333 -0- -0-
President and
Chief Executive Officer
- -----------------
(1) From June 1, 1997 to December 31, 1997.
(2) The value of non-cash compensation paid to the chief executive officer of
First Western during the fiscal year disclosed did not exceed 10% of his cash
compensation.
No options to purchase First Western Shares were granted to Mr.
Deyton during 1997.
EMPLOYMENT AGREEMENT. First Western entered into an employment
contract with Ronnie E. Deyton, President and Chief Executive Officer of the
First Western, effective June 1, 1998 (the "Employment Agreement"). The term of
the Employment Agreement is three years. On each anniversary of the effective
date of the Employment Agreement, the term of the Employment Agreement shall
automatically be extended for an additional one-year period beyond the then
effective expiration date unless written notice from First Western or Mr. Deyton
is received 90 days prior to the anniversary date advising the other that the
Employment Agreement shall not be further extended. No such notice has been
given by either such party. In addition, Mr. Deyton has the option to terminate
the contract upon sixty days' written notice to First Western.
Under the Employment Agreement, Mr. Deyton receives an annual
cash salary, with annual adjustments and discretionary bonuses as determined by
the Board. Mr. Deyton's annual compensation pursuant to the contract is $83,200.
Under the Employment Agreement, Mr. Deyton also is entitled to term insurance
providing a death benefit of up to $250,000. Under the Employment Agreement, Mr.
Deyton is entitled to all fringe benefits which are generally provided by First
Western for its employees.
CHANGE OF CONTROL. The Employment Agreement provides for certain
payments to Mr. Deyton upon any change of "control" of First Western. "Control"
is defined, under the Employment Agreement, to mean any of the following events:
(i) After the effective date of the Employment Agreement,
any "person" (as such term is defined in Section 7(j)(8)(A) of
the Change in Bank Control Act of 1978), directly or indirectly,
acquires beneficial ownership of voting stock, or acquires
irrevocable proxies or any combination of voting stock and
irrevocable proxies, representing twenty-five percent (25%) or
more of any class of voting securities of First Western, or
acquires control of, in any manner, the election of a majority of
the directors of First Western; or
(ii) First Western consolidates or merges with or into
another corporation, association or entity, or is otherwise
reorganized, where First Western is not the surviving corporation
in such transaction; or
(iii) All or substantially all of the assets of First
Western are sold or otherwise transferred to or are acquired by
any other corporation, association or other person, entity or
group.
Upon any such change in control, Mr. Deyton has the right to
terminate his employment if he determines, in his sole discretion, that within
24 months after such change in control, he has not been assigned duties,
-55-
<PAGE> 69
responsibilities and status commensurate with his duties prior to such change of
control, his salary has been reduced below the amount he would have received
under the Employment Agreement, his benefits have been reduced or eliminated, or
he has been transferred to a location that is an unreasonable distance from his
then-current principal work location.
Upon his termination of employment following a change in control,
whether voluntary or involuntary, First Western has agreed to pay Mr. Deyton (1)
an amount equal to 2.99 times his "base amount" as defined in Section 280G(b)(3)
of the Code. This compensation is payable, at Mr. Deyton's option, either by
lump sum or in 36 equal monthly installments. First Western has the right, under
the Employment Agreement, to reduce any such payments as necessary under the
Code to avoid the imposition of excise taxes on Mr. Deyton or the disallowance
of a deduction to First Western.
FIRST WESTERN STOCK OPTION PLANS
In April 1998, First Western Shareholders adopted the 1998
Incentive Stock Option Plan (the "ISO Plan") and the 1998 Nonstatutory Stock
Option Plan (the "NSSO Plan"). An aggregate of 72,742 Shares has been reserved
for issuance by First Western upon exercise of stock options to be granted to
certain First Western employees from time to time under the ISO Plan. Options
granted under the ISO Plan are intended to qualify as "incentive stock options"
within the meaning of Section 422A of the Code. Under the Code, options afford
favorable tax treatment to recipients upon compliance with certain restrictions
but do not result in tax deductions to First Western. The purpose of the ISO
Plan is to increase the performance incentive for employees, to encourage the
continued employment of current employees and to attract new employees by
facilitating their purchase of a stock interest in First Western. First Western
has issued options to purchase 61,892 First Western Shares under the ISO at an
exercise price of $11.00.
The ISO Plan is administered by the Compensation Committee of the
First Western Board. No member of the Stock Option Committee is eligible to
receive options under the ISO Plan. Employees of First Western will be eligible
to receive options under the ISO Plan at no cost to them other than the option
exercise price. Generally, the exercise price for options granted pursuant to
the ISO Plan may not be less than 100% of the fair market value of the First
Western Shares on the date of the grant. No option will be exercisable more than
ten years after the date that it is granted.
An aggregate of 72,742 Shares has been reserved for issuance by
First Western upon exercise of stock options to be granted from time to time
under the NSSO Plan. Options granted under the NSSO Plan do not qualify as
"incentive stock options" within the meaning of Section 422A of the Code and do
not afford favorable tax treatment to recipients. Options granted under the NSSO
Plan do result in tax deductions to First Western. The purpose of the NSSO Plan
is to increase the performance incentives for eligible recipients, to encourage
the continued participation of current directors and employees of First Western
and to attract new directors and employees to First Western by facilitating
their purchase of a stock interest in First Western. First Western has issued
options to purchase 66,000 First Western Shares under the NSSO at an exercise
price of $11.00.
The NSSO Plan is administered by the Board. Directors and
employees of First Western will be eligible to receive options under the NSSO
Plan at no cost to them other than the option exercise price. The options must
be exercised within ten years from the date of grant.
Under North Carolina banking law, First Western may issue options
equal to ten percent of its outstanding shares under the ISO Plan and ten
percent of its outstanding shares under the NSSO Plan.
-56-
<PAGE> 70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
William A. Banks, a director, is one of the partners in the Banks
Family Partnership (the "Partnership"). The Partnership owns Deyton Farm Supply,
Inc., which sold First Western the land on which it is building its Burnsville
office and on which it now maintains a temporary facility. As a part of the
sales transaction, First Western gave a $150,000 deed of trust to the
Partnership, which is payable quarterly over five years.
First Western has had, and expects to have in the future, banking
transactions in the ordinary course of First Western's business with directors,
principal officers and their associates. All transactions with directors,
principal officers and their associates were made in the ordinary course of
First Western's business, on substantially the same terms, including (in the
case of loans) interest rates, collateral and repayment terms, as those
prevailing at the same time for other comparable transactions, and have not
involved more than normal risks of collectibility or presented other unfavorable
features. At September 30, 1998, the outstanding balance of loans to directors,
principal officers, and their associates totaled $318,216, and these loans were
made at substantially the same rates and terms available to all First Western
customers.
DIVIDENDS
The payment of cash dividends for the first three years of
operations of a bank is generally prohibited by the Commissioner and the FDIC.
Also, under federal banking law, no cash dividend may be paid if First Western
is undercapitalized or insolvent or if payment of the cash dividend would render
First Western undercapitalized or insolvent, and no cash dividend may be paid by
First Western if it is in default of any deposit insurance assessment due to the
FDIC. Subject to such restrictions, there can be no assurances as to when First
Western will be in a position to pay cash dividends on the First Western Shares.
The First Western Board anticipates that all or substantially all of First
Western's earnings in the foreseeable future will be required for use in the
development of First Western's business. The payment of future cash dividends
will be determined by the First Western Board and is dependent upon First
Western's earnings, financial condition, business projections, and other
pertinent factors.
In addition, North Carolina banking law will prohibit the payment
of cash or stock dividends if First Western's surplus is less than 50% of its
paid-in capital. Subject to these restrictions, the payment of stock dividends
will be considered by the First Western Board when it is deemed prudent to do
so.
SUPERVISION AND REGULATION
First Western is extensively regulated under both federal and
state law by various state and federal governmental agencies, such as the
Commissioner and the FDIC. The rates of interest payable on deposits and
chargeable on loans are affected by governmental regulation and fiscal policy as
well as by national, state and local economic conditions. Changes in
governmental economic and monetary policies may affect the ability of First
Western to attract deposits and make loans. Its operations are also affected by
changes in state and federal law, regulatory policies and governmental monetary
and fiscal policies, any of which could have a detrimental effect on the
profitability of First Western.
First Western is subject to examination and supervision by the
FDIC and the Commissioner. The FDIC monitors First Western's compliance with
several federal statutes such as the Community Reinvestment Act of 1977 and the
Depository Institution Management Interlocks Act. The FDIC has broad enforcement
authority to prevent the continuance or development of unsound and unsafe
banking practices, including the issuance of cease-and-desist orders and the
removal of officers and directors. The FDIC must approve the establishment of
branch offices, conversions, mergers, assumption of deposit liabilities between
insured banks and uninsured banks or institutions, and the acquisition or
establishment of certain subsidiary corporations. The FDIC can prevent capital
or surplus diminution in such transactions where the deposit accounts of the
resulting, continuing or assumed bank are insured by the FDIC.
-57-
<PAGE> 71
First Western is subject to capital requirements and limits on
activities established by the FDIC. Under the capital regulations, First Western
generally is required to maintain Tier 1 risk-based capital, as such term is
defined therein, of 4.0%, and total risk-based capital, as such term is defined
therein, of 8.0%. First Western is not permitted to engage in any activity not
permitted for a national bank unless (i) it is in compliance with its capital
requirements and (ii) the FDIC determines that the activity would not pose a
risk to the deposit insurance fund. With certain exceptions, First Western also
is not permitted to acquire equity investments of a type, or in an amount, not
permitted for a national bank.
First Western is required to pay deposit insurance assessments
set by the FDIC. Under the current assessment rate schedule, First Western's
assessment will range from no assessment to 0.27% of First Western's average
deposits base, with the exact assessment determined by First Western's capital
and the FDIC's supervisory opinion of First Western's operations. Only the
strongest banks are not required to pay an assessment. The insurance assessment
rate may change periodically over the next 15 years. Changes in the assessment
rate may have a material effect on First Western's operating results. The FDIC
has the authority to terminate deposit insurance.
The earnings of First Western are affected significantly by the
policies of the Federal Reserve Board, a federal agency that regulates the money
supply in order to mitigate recessionary and inflationary pressures. Among the
techniques used to implement these objectives are open market transactions in
United States government securities, changes in the rate paid by banks on bank
borrowings, and changes in reserve requirements against bank deposits. These
techniques are used in varying combinations to influence overall growth and
distribution of bank loans, investments, and deposits, and their use may also
affect interest rates charged on loans or paid-for deposits.
The monetary policies of the Federal Reserve Board have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. In view of changing conditions
in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand or the business and
earnings of First Western.
First Western is chartered by the State of North Carolina and is
subject to extensive supervision and regulation by the Commissioner. The
Commissioner enforces state laws that set specific requirements for bank
capital, the payment of dividends, loans to officers and directors, record
keeping, and types and amounts of loans and investments made by commercial
banks. Among other things, the approval of the Commissioner is generally
required before a North Carolina-chartered commercial bank may establish branch
offices. North Carolina banking law requires that any merger, liquidation or
sale of substantially all of the assets of First Western must be approved by the
Commissioner and the holders of two thirds of the First Western Shares.
Pursuant to North Carolina banking laws, no person may directly
or indirectly purchase or acquire voting stock of First Western that would
result in the change in control of First Western unless the Commissioner has
approved the acquisition. A person will be deemed to have acquired "control" of
First Western if that person directly or indirectly (i) owns, controls or has
power to vote 10% or more of the voting stock of First Western, or (ii)
otherwise possesses the power to direct or cause the direction of the management
and policy of First Western.
In its lending activities, First Western is subject to North
Carolina usury laws, which generally limit or restrict the rates of interest,
fees and charges and other terms and conditions in connection with various types
of loans.
North Carolina banking law requires that bank holding companies
register with the Commissioner. The Commissioner must also approve any
acquisition of control of a state-chartered bank by a bank holding company. The
First Western Board does not currently intend to create a bank holding company
for First Western.
-58-
<PAGE> 72
In 1994, Congress adopted legislation that generally permits an
adequately capitalized and managed bank holding company to acquire control of a
bank in any state, provided the target bank has been in existence for at least
five years. As of June 1997, this legislation generally permits a bank to merge
with a bank located in any other state if the target bank is at least five years
old. North Carolina banking law authorizes banking organizations in any state to
acquire North Carolina banking institutions on a reciprocal basis. Under the
legislation, a state could have prohibited interstate branching if it legislated
this prohibition prior to June 1997. North Carolina banking law authorizes North
Carolina banks to establish branches in other states and permits out-of-state
banks to establish branches in North Carolina on a reciprocal basis. The effects
of interstate acquisitions and branching can not be determined, but it will
likely increase competition in the banking industry in North Carolina.
First Western cannot predict what new legislation might be
enacted or what regulations might be adopted or amended, or if enacted, adopted
or amended, the effect they might have on First Western's operations. Any change
in applicable law or regulation may have a material effect on the business of
First Western.
MITCHELL
Mitchell was organized on February 28, 1996 for the purpose of
becoming the holding company for Mitchell Savings upon Mitchell Savings's
conversion from mutual to stock form ("Conversion"). The Conversion was
completed on July 12, 1996. At September 30, 1998, Mitchell had total assets of
$37.4 million, total deposits of $21.8 million, and shareholders' equity of
$14.6 million. Mitchell has not engaged in any significant activity other than
holding the stock of the Mitchell Savings.
Mitchell Savings was established in 1924 as "Mitchell County
Building & Loan Association," a North Carolina-chartered mutual savings and loan
association, located in Spruce Pine, North Carolina, approximately 50 miles
northeast of Asheville. In 1992, the Savings Bank converted to a North
Carolina-chartered savings bank and adopted its current name. Mitchell Savings
is regulated by the Administrator, its primary regulator, and the FDIC, the
insurer of its deposits. Mitchell Savings's deposits are federally insured by
the FDIC under the SAIF, and it is a member of the FHLB System. Mitchell Savings
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 for its portfolio 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.
Additional information concerning Mitchell is included in the
Mitchell Annual Report on Form 10-KSB for the year ended June 30, 1998, and the
Report on Form 10-QSB for the period ended September 30, 1998, which are
attached as Exhibit A to this Joint Proxy Statement and the Mitchell documents
filed with the Commission that are incorporated by reference herein. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
DESCRIPTION OF FIRST WESTERN SHARES
First Western is authorized to issue 5,000,000 shares of common
stock and 1,000,000 shares of preferred stock. The voting rights, privileges,
and preferences of the preferred stock are to be set by the First Western Board
at the time such stock is issued. No preferred stock is issued or outstanding.
There are 726,419 First Western Shares, par value $5.00 per share, issued and
outstanding. Each share of common stock has the same rights, privileges and
preferences as every other share.
Dividend Rights and Policy. Each holder of First Western Shares
is entitled to dividends paid by First Western when and if declared by the First
Western Board from funds legally available. The determination and declaration of
dividends is within the discretion of the First Western Board. The payment of
dividends by First Western, however, is subject to legal limitations, and it is
not likely that First Western will pay dividends in the
-59-
<PAGE> 73
foreseeable future. The payment of cash dividends for the first three years of
operations is generally prohibited by the Commissioner and the FDIC.
Voting Rights. Each holder of First Western Shares is entitled to
one vote per share on any issue submitted to a vote at any meeting of the
shareholders and, in the election of directors, on each director to be elected.
The First Western Shares do not have cumulative voting rights in the election of
directors. Consequently, the holders of the majority of the outstanding First
Western Shares represented at a meeting at which a quorum is present or
represented may elect all of the directors. In general, North Carolina banking
law requires that any merger, voluntary liquidation, or transfer of
substantially all the assets and liabilities of First Western be approved by the
affirmative vote of at least two thirds of all outstanding First Western Shares.
Classification of Directors. The Articles of Incorporation of
First Western provide that the directors of First Western will serve terms that
are staggered so that, following the initial meeting of shareholders, no more
than approximately one third of the directors will be eligible for election at
any subsequent meeting of the shareholders.
Liquidation Rights. Holders of First Western Shares will be
entitled, upon dissolution or liquidation of First Western, to participate
ratably in the distribution of assets legally available for distribution to
shareholders after payment of debts, including obligations to depositors.
No Preemptive Rights. Holders of the First Western Shares do not
have preemptive rights to subscribe for additional shares on a pro rata basis
when additional shares are offered for sale by First Western.
Assessability of Shares. First Western Shares generally will not
be assessable. However, under North Carolina banking law (N.C. Gen. Stat. ss.
53-42), in the event of an impairment in the capital of First Western due to
losses or any other cause, then the Commissioner may require the First Western
Board to assess the holders of the First Western Shares for the amount of the
impairment. If a shareholder fails to pay such assessment, First Western may
sell the shareholder's First Western Shares.
Preferred Stock. No shares of preferred stock have been issued.
Preferred stock may be issued in one or more series with such rights,
preferences and designations as the First Western Board may determine. If and
when preferred stock is issued, holders of such stock may have certain
preferences, powers and rights (including voting rights) senior to the holders
of the First Western Shares. The First Western Board can issue preferred stock
without a vote of the holders of the First Western Shares. Preferred stock is a
means of raising additional capital, but it also may be used to assist
management in impeding an unfriendly change in control of First Western that
certain shareholders may consider to be in their best interests. First Western
has no current plans to issue preferred stock.
Restrictions on Acquisition of the First Western Shares. The
Articles of Incorporation of First Western provide that when any matter is
presented for the consideration of the First Western Board, the Board may
consider the social and economic effects on the communities in which First
Western operates and that it may consider the business and financial condition
of a proposed acquiror, the experience and integrity of its management, and the
prospects of a successful conclusion of the transaction when evaluating any
business combination.
First Western is subject to the North Carolina Control Share
Acquisition Act (the "Control Share Act"), which generally provides that First
Western Shares that are "Control Shares" will not have certain voting rights
unless the remaining shareholders grant voting rights. Control Shares are shares
acquired by a person under certain circumstances that, when added to other
shares owned by that person, would entitle that person (except for the
application of the statute) to (i) one fifth, (ii) one third, or (iii) a
majority, of all voting power in the election of First Western's directors.
Voting rights may be restored to Control Shares, however, by the affirmative
vote of the holders of a majority of the First Western Shares (other than shares
held by the owner of the Control Shares, officers of First Western, and any
director of First Western who also is an employee of First Western). If voting
rights are restored to Control Shares and those rights give the holder a
majority of all voting power in the election of
-60-
<PAGE> 74
First Western's directors, then the other shareholders may require First Western
to redeem their shares at their fair value as of a date prior to the date on
which the vote was taken that restored voting rights to the Control Shares.
First Western is also subject to the North Carolina Shareholder
Protection Act (the "Shareholder Protection Act"), which generally requires that
unless certain "fair price" and procedural requirements are satisfied, the
affirmative vote of the holders of 95% of the outstanding First Western Shares
(excluding shares owned by an "Interested Shareholder" as defined in the
Shareholder Protection Act) is required to approve certain business combinations
with other entities that are the beneficial owners of more than 20% of the First
Western Shares or which are affiliates of First Western and previously had been
20% beneficial holders of the First Western Shares.
Both the Control Share Act and the Shareholder Protection Act may
have the effect of discouraging a change of control of First Western by allowing
minority shareholders to prevent a transaction favored by a majority of the
shareholders. The primary purpose of these provisions is to encourage
negotiations with Bank management by persons interested in acquiring control of
First Western.
COMPARISON OF SHAREHOLDER RIGHTS
Upon consummation of the Merger, Mitchell Shareholders who
receive First Western Shares will become shareholders of First Western and their
rights as shareholders will be determined by First Western's Articles of
Incorporation and bylaws and by North Carolina banking laws. The following is a
discussion of the material changes in the rights of Mitchell Shareholders that
will occur as a result of the Merger. This discussion is qualified in its
entirety by reference to the articles of incorporation and bylaws of both First
Western and Mitchell and North Carolina law.
RESULTING CAPITAL STRUCTURE
First Western is authorized to issue 5,000,000 shares of common
stock and 1,000,000 shares of preferred stock. The voting rights, privileges,
and preferences of the preferred stock are to be set by the First Western Board
at the time such stock is issued. No preferred stock is issued or outstanding.
There are 726,419 First Western Shares, par value $5.00 per share, issued and
outstanding. Each First Western Share has the same rights, privileges and
preferences as every other share. Upon consummation of the Merger, and assuming
only 50.1% of the Merger Consideration is paid in First Western Shares, there
will be 1,507,733 First Western Shares issued and outstanding.
GOVERNING LAW
Mitchell is a corporation chartered under the laws of the State
of North Carolina and is subject to the North Carolina Business Corporation Act
(the "Business Corporation Act"),which is Chapter 55 of the North Carolina
General Statutes. First Western is a banking corporation organized under the
laws of the State of North Carolina and is subject to the Business Corporation
Act only to the extent that it is not inconsistent with Chapter 53, the banking
laws of North Carolina.
DIRECTORS
Mitchell's Articles of Incorporation provide for between five and
fifteen directors. First Western's bylaws provide for between five and fifteen
directors. In addition, the shareholders of First Western may authorize not more
than two additional directors at any meeting. The effective of this provision is
to require two annual meetings of First Western shareholders to change a
majority of the members of the First Western Board, which would delay any change
in control of First Western. These provisions may have the effect of
discouraging a change of control of First Western that might be favored by a
majority of the shareholders.
-61-
<PAGE> 75
Mitchell's Articles of Incorporation provide that a director may
be removed by the shareholders only for cause and only by the affirmative vote
of 75% of the votes entitled to be cast at an election of directors. First
Western's bylaws provide that a director may only be removed by the shareholders
with or without cause whenever the votes cast for removal exceed the number cast
against removal.
Mitchell's Articles of Incorporation provide that director
vacancies, including a vacancy caused by an increase in the number of directors,
may be filled only by the directors. First Western's bylaws provide that only a
vote of the shareholders may fill a vacancy caused by an increase in the number
of directors.
VOTING RIGHTS AND DIRECTOR TERMS
As is true under Mitchell's Articles of Incorporation, First
Western Shares do not have cumulative voting rights in the election of
directors. Consequently, the holders of the majority of the outstanding First
Western Shares represented at a meeting at which a quorum is present or
represented may elect all of the directors. Mitchell's directors are elected for
one-year terms of office. The bylaws of First Western provide that the directors
of First Western will serve terms that are staggered so that, following the
initial meeting of shareholders, no more than approximately one third of the
directors will be eligible for election at any subsequent meeting of the
shareholders. The effective of this provision is to require two annual meetings
of First Western shareholders to change a majority of the members of the First
Western Board, which would delay any change in control of First Western. This
provisions may have the effect of discouraging a change of control of First
Western that might be favored by a majority of the shareholders.
SPECIAL SHAREHOLDER MEETINGS
Mitchell's Articles of Incorporation provide that a special
meeting of the shareholders may only be called by the Mitchell Board or by a
committee of the Mitchell Board with designated authority to call a special
meeting. First Western's bylaws provide that a special meeting of the
shareholders may only be called by the First Western Board, the President or
Secretary of First Western, or by the Chairman of the First Western Board.
BUSINESS COMBINATIONS
Under the Business Corporation Act, a majority of the Mitchell
Shareholders may approve corporate transactions. In general, North Carolina
banking law requires that any merger, voluntary liquidation, or transfer of
substantially all the assets and liabilities of First Western must be approved
by the affirmative vote of at least two thirds of all outstanding First Western
Shares.
Mitchell Shareholders are eligible to receive cash dividends on
their Mitchell Shares when declared by the Mitchell Board. The payment of
dividends by First Western, however, is prohibited by the banking regulators for
the first three years of its operations. See "FIRST WESTERN -- Dividends."
LIMITATIONS ON DIRECTOR LIABILITY
The Articles of Incorporation of Mitchell and First Western
contain a provision that the directors shall generally not be liable to the
corporation or any of its shareholders for monetary damages for breach of duty
as a director to the fullest extent permitted by the Business Corporation Act.
This provision will eliminate such liability except for (i) acts and omissions
that the director knew or believed to be clearly in conflict with the best
interest of the institution at the time of the act or omission, (ii) liability
for distributions and dividends in violation of the Business Corporation Act,
(iii) any transaction from which the director derived an improper personal
benefit. First Western's Articles of Incorporation have an additional exception
for acts or omissions as to which the elimination of personal liability would be
inconsistent with North Carolina banking laws or the business of banking.
-62-
<PAGE> 76
ASSESSABILITY OF SHARES
Mitchell Shares are not assessable. First Western Shares
generally are not assessable. However, under North Carolina banking law (N.C.
Gen. Stat. ss. 53-42), in the event of an impairment in the capital of First
Western due to losses or any other cause, then the Commissioner may require the
First Western Board to assess the holders of First Western Shares for the amount
of First Western's impairment. If a shareholder fails to pay such assessment,
First Western may sell the shareholder's First Western Shares.
STATUTORY RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK
Mitchell's Articles of Incorporation provide that it is not
subject to the Control Share Act or the Shareholder Protection Act. First
Western's Articles of Incorporation provide that it is subject to the Control
Share Act and the Shareholder Protection Act. The Control Share Act generally
provides that First Western Shares that are "Control Shares" will not have
certain voting rights unless the remaining shareholders grant voting rights.
Control Shares are shares acquired by a person under certain circumstances
which, when added to other shares owned by that person, would entitle that
person (except for the application of the statute) to (i) one fifth, (ii) one
third, or (iii) a majority, of all voting power in the election of First
Western's directors. Voting rights may be restored to Control Shares, however,
by the affirmative vote of the holders of a majority of First Western Shares
(other than shares held by the owner of the Control Shares, officers of First
Western, and any director of First Western who also is an employee of First
Western). If voting rights are restored to Control Shares that give the holder a
majority of all voting power in the election of First Western's directors, then
the other shareholders may require First Western to redeem their shares at their
fair value as of a date prior to the date on which the vote was taken that
restored voting rights to the Control Shares.
The Shareholder Protection Act generally requires that unless
certain "fair price" and procedural requirements are satisfied, the affirmative
vote of the holders of 95% of the outstanding First Western Shares (excluding
shares owned by an "Interested Shareholder") is required to approve certain
business combinations with other entities that are the beneficial owners of more
than 20% of the First Western Shares or that are affiliates of First Western and
previously had been 20% beneficial holders of First Western Shares.
Both the Control Share Act and the Shareholder Protection Act may
have the effect of discouraging a change of control of First Western by allowing
minority shareholders to prevent a transaction favored by a majority of the
shareholders. The primary purpose of these provisions is to encourage
negotiations with First Western's management by persons interested in acquiring
control of First Western.
PROPOSAL 2: ELECTION OF MITCHELL DIRECTORS
The Mitchell Board consists of six members. Pursuant to
Mitchell's Bylaws, all six of Mitchell's directors are standing for election at
the Annual Meeting. The following table sets forth the names of the Mitchell
Board's nominees for election as directors. All nominees are current members of
the Mitchell Board. If elected, each member of the Mitchell Board will serve
until the earlier of the Effective Time or until his or her successors are
elected and qualified.
If any nominee is unable to serve, the shares represented by all
valid proxies will be voted for the election of such substitute as the Mitchell
Board may recommend or the Mitchell Board may adopt a resolution to amend the
Bylaws and reduce the size of the Mitchell Board. At this time the Mitchell
Board knows of no reason why any nominee might be unavailable to serve.
THE MITCHELL BOARD RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES
NAMED IN THE FOLLOWING TABLE AS DIRECTORS OF MITCHELL.
-63-
<PAGE> 77
Year First
Elected
or Appointed Term to
Name Age (1) Director (2) Expire (3)
- ---- ------- ------------ ----------
Calvin F. Hall 69 1974 1999
Edward Ballew, Jr. 76 1948 1999
Emma Lee M. Wilson 62 1983 1999
Baxter D. Johnson 88 1952 1999
Lloyd Hise, Jr. 53 1988 1999
Michael B. Thomas 43 1997 1999
- --------------
(1) As of June 30, 1998.
(2) Includes prior service on the Board of Directors of Mitchell Savings, if
any.
(3) Assuming the individual is elected or re-elected at the Annual Meeting.
The present principal occupation and other business experience
during the last five years of each nominee for election and each director
continuing in office is set forth below:
Calvin F. Hall is President and an agent of Fortner Insurance
Agency, Inc., with which he has been affiliated with for over 39 years. Mr. Hall
was appointed President of Mitchell Savings in January 1995. Mr. Hall is a
member of the Spruce Pine Rotary Club.
Edward Ballew, Jr. has been employed as an executive officer by
Mitchell Savings since 1947 and serves as its Executive Vice President and Chief
Executive Officer.
Emma Lee M. Wilson has been employed by Mitchell Savings since
1958 and has served in various capacities since that time. Mrs. Wilson is the
Assistant Managing Officer, and the Secretary and Treasurer of Mitchell Savings.
Baxter D. Johnson has been the owner of Johnson Electric, Spruce
Pine, North Carolina, for 68 years.
Lloyd Hise, Jr. has been a practicing attorney in Spruce Pine,
North Carolina since 1969.
Michael B. Thomas is a salesman for Buck Stove, Inc., Spruce
Pine, North Carolina. He is a past president of the Mitchell County Chamber of
Commerce and has served on the Town of Spruce Pine Board of Alderman.
For information regarding the Mitchell Board, executive
compensation and transactions with management for the year ended June 30, 1998,
see Part III of the Mitchell Annual Report on Form 10-KSB for the year ended
June 30, 1998, which is attached as Exhibit A to this Joint Proxy Statement.
SECURITY OWNERSHIP OF MITCHELL
For information regarding the beneficial ownership of Mitchell's
directors and its named executive officer, for the year ended June 30, 1998, see
Part III, Item 11 of the Mitchell Annual Report on Form 10-KSB for the year
ended June 30, 1998, which is attached as Exhibit A.
-64-
<PAGE> 78
OPINIONS
The Sanford Holshouser Law Firm PLLC, Raleigh, North Carolina,
counsel to First Western, will deliver an opinion to the effect that the First
Western Shares to be issued to Mitchell Shareholders in the Merger, when issued
as contemplated in the Agreement, will be validly issued, fully paid, and
non-assessable, except as provided under North Carolina law. Certain other legal
matters in connection with the Merger will be passed upon for Mitchell by its
special counsel, Breyer & Aguggia LLP, Washington, D.C.
Deloitte & Touche LLP independent public accountants, will
deliver an opinion at the Effective Time concerning certain federal income tax
consequences of the Merger as required by the Agreement. See "PROPOSAL 1:
APPROVAL OF THE MERGER -- Federal Income Tax Consequences."
Carson Medlin has consented to being named as an expert herein
and to the summary herein of its fairness opinion. See "PROPOSAL 1: APPROVAL OF
THE MERGER -- Opinion of Financial Advisors -- Opinion of Financial Advisor to
First Western."
RP Financial has consented to being named as an expert herein and
to the summary herein of its fairness opinion. "PROPOSAL 1: APPROVAL OF THE
MERGER -- Opinion of Financial Advisors -- Opinion of Financial Advisor to
Mitchell."
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Mitchell. The Consolidated Financial Statements of Mitchell and
its subsidiary as of June 30, 1997 and 1998, and for each of the two years in
the period ended June 30, 1998, contained in Mitchell's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1998, attached as Exhibit A, have been
audited by Crisp Hughes Evans LLP and have been so included in reliance upon
their report given upon the authority of that firm as experts in accounting and
auditing.
The Mitchell Board has appointed Crisp Hughes Evans LLP,
independent public accountants, to serve as Mitchell's auditors for the fiscal
year ending June 30, 1999. A representative of Crisp Hughes Evans LLP is
expected to be present at the Annual Meeting to respond to appropriate questions
from shareholders and will have the opportunity to make a statement if he or she
so desires.
First Western. The Financial Statements of First Western for the
year ended December 31, 1997 attached as Exhibit B have been audited by Deloitte
& Touche LLP as stated in their report appearing herein.
Deloitte & Touche LLP independent auditors, serves as First
Western's auditors for the fiscal year ending December 31, 1998. A
representative of Deloitte & Touche LLP is expected to be present at the Special
Meeting to respond to appropriate questions from shareholders and will have the
opportunity to make a statement if he or she so desires.
SHAREHOLDER PROPOSALS
If the Merger is consummated, there will be no further annual
meetings of Mitchell and Mitchell Shareholders who receive First Western Shares
will become First Western shareholders. If the Merger is not consummated,
proposals of Mitchell Shareholders intended to be presented at Mitchell's annual
meeting to be held in October 1999 must be received by Mitchell no later than
May 21, 1999, to be considered for inclusion in the proxy solicitation materials
and form of proxy relating to such meeting. Any such proposals shall be subject
to the requirements of the proxy solicitation rules adopted under the Exchange
Act. Mitchell's Bylaws provide that, in order for a shareholder to make
nominations for the election of directors at the annual meeting, a shareholder
must
-65-
<PAGE> 79
deliver written notice of such nominations to the Secretary not less than 50 nor
more than 90 days prior to the date of the Annual Meeting; provided that if less
than 21 days' notice of the annual meeting is given to shareholders, such notice
must be delivered to the Mitchell's Secretary not later than the close of
business on the seventh day following the day on which notice of the annual
meeting was mailed to shareholders.
For shareholder proposals to be considered for inclusion in the
proxy materials for First Western's next annual meeting, any such proposals must
be received at First Western's principal office (currently 321 West Main Street,
Burnsville, North Carolina 28714) not later than November 18, 1998. It is not
expected that the Merger will close prior to this date. Under the Exchange Act
proxy rules, a shareholder, among other things, must have held First Western
Shares for at least one year in order to be eligible to submit proposals for
inclusion in the First Western proxy statement for the 1998 annual meeting.
Therefore, Mitchell Shareholders who become First Western shareholders as a
result of the Merger will not be eligible to submit proposals for consideration
at the 1998 annual meeting unless they otherwise owned First Western Shares for
at least one year and satisfied the other proxy rules under the Exchange Act.
OTHER MATTERS
At the date of this Joint Proxy Statement, neither the management
of Mitchell or First Western knows of any other matters that will be brought for
consideration before the Mitchell Annual Meeting or the First Western Special
Meeting other than as described in this Joint Proxy Statement. If any such
matter is properly presented at either meeting or any adjournment thereof, the
persons named in the enclosed form of appointment of proxy will vote in
accordance with their best judgement.
By order of the Mitchell Board.
EMMA LEE M. WILSON
Secretary
By order of the First Western Board.
RONNIE E. DEYTON
President
-66-
<PAGE> 80
EXHIBIT A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-28446
MITCHELL BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1966011
- --------------------------------------------- ------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) I.D. Number)
210 Oak Avenue, Spruce Pine, North Carolina 28777
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (704) 765-7324
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
--------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-KSB. YES X NO
--- ---
The Registrant's revenues for the fiscal year ended June 30, 1998 were
$2,777,000.
As of September 14, 1998, there were issued and outstanding 937,174
shares of the Registrant's Common Stock. The Registrant's voting stock is
traded over-the-counter and is listed on the Nasdaq SmallCap Market under the
symbol "MBSP." Based on the closing price for the Common Stock on September
14, 1998, the aggregate value of the Common Stock outstanding held by
nonaffiliates of the registrant was $13.3 million (858,782 shares at $15.50
per share). For purposes of this calculation, officers and directors of the
Registrant are considered nonaffiliates of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 81
PART I
Item 1. Business
- -----------------
General
Mitchell Bancorp, Inc. ("Corporation"), a North Carolina corporation, was
organized on February 28, 1996 for the purpose of becoming the holding company
for Mitchell Savings Bank, Inc., SSB ("Savings Bank") upon the Savings Bank's
conversion from a North Carolina-chartered mutual to a North
Carolina-chartered stock savings bank ("Conversion"). The Conversion was
completed on July 12, 1996. The Corporation has not engaged in any
significant activity other than holding the stock of the Savings Bank.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the Savings Bank and its
subsidiary.
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. The
Savings Bank is regulated by the Administrator, Savings Institutions Division,
North Carolina Department of Commerce ("Administrator"), its primary
regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer
of its deposits. The Savings Bank's deposits are federally insured by the
FDIC under the Savings Association Insurance Fund ("SAIF"). The Savings Bank
is a member of the Federal Home Loan Bank ("FHLB") System.
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 for its portfolio
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.
Proposed Merger With First Western Bank
As previously disclosed, on August 13, 1998, the Corporation entered into
a definitive Agreement and Plan of Merger ("Agreement") with First Western
Bank, Burnsville, North Carolina ("First Western") pursuant to which the
Corporation and the Savings Bank will be merged into First Western. The
surviving entity will be First Western, a commercial bank chartered by the
State of North Carolina. The Agreement provides that each share of
Corporation's common stock will be exchanged for 1.60 shares of First Western
common stock, $20.00 in cash, or a combination thereof, subject to the
requirement that no more than 49.9% of the total merger consideration may be
paid in cash. Mitchell Savings' Employee Stock Ownership Plan ("ESOP") will
have first preference to the cash consideration in order to retire the loan
incurred by it (outstanding balance of approximately $679,000 at June 30,
1998) to acquire shares of the Corporation's common stock issued in the
Savings bank's mutual-to-stock conversion. The merger is intended to
constitute a tax-free reorganization and to be accounted for as a purchase.
Consummation of the merger is subject to several conditions, including receipt
of applicable regulatory approvals and approval by both the Corporation's and
First Western's stockholders.
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, Spruce Pine Community
2
<PAGE> 82
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."
Selected Financial Data
The following tables set forth certain information concerning the
consolidated financial position and results of operations of the Corporation
and its subsidiary at the dates and for the periods indicated.
At June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
FINANCIAL CONDITION DATA:
Total assets..................... $28,109 $27,596 $36,776 $33,059 $37,306
Loans receivable, net............ 21,843 22,463 23,568 28,203 27,506
Cash, interest-earning deposits
and investment securities....... 5,710 4,254 12,414 4,073 8,787
FHLB stock....................... 291 291 291 291 291
Deposits......................... 22,195 20,940 20,346 17,672 21,564
Total stockholders' equity....... 5,694 6,078 14,634 14,325 14,632
For the Years Ended June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
OPERATING DATA:
Interest income.................. $2,193 $2,259 $2,271 $2,659 $2,773
Interest expense................. 903 962 1,161 975 1,064
------ ------ ------ ------ ------
Net interest income ............. 1,290 1,297 1,110 1,684 1,709
Provision for loan losses........ 24 24 60 24 24
------ ------ ------ ------ ------
Net interest income after provision
for loan losses ............... 1,266 1,273 1,050 1,660 1,685
Non-interest income.............. 5 45 6 7 4
Non-interest expenses............ 452 953 930 907 947
------ ------ ------ ------ ------
Income before income taxes and
cumulative effect adjustments .. 819 365 126 760 742
Income tax expense............... 317 112 35 289 309
------ ------ ------ ------ ------
Income before cumulative
effect adjustment............... 502 253 91 471 433
Cumulative effect on prior years
for accounting change........... -- 11 -- -- --
------ ------ ------ ------ ------
Net income....................... $ 513 $ 253 $ 91 $ 471 $ 433
====== ====== ===== ====== ======
3
<PAGE> 83
At June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
OTHER DATA:
Number of:
Real estate loans out-
standing(1).................... 639 656 660 718 704
Deposit accounts................ 1,603 1,584 1,603 1,444 1,472
Full service offices............ 1 1 1 1 1
At or for the Year Ended June 30,
-----------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
KEY FINANCIAL RATIOS:
Return on average assets (net
income divided by average
assets)........................ 1.89% 0.92% 0.32% 1.37% 1.23%
Return on average equity (net
income divided by average
equity)........................ 9.39 4.24 1.53 3.21 3.11
Average equity to average assets. 20.17 21.71 20.73 42.59 39.48
Interest rate spread (difference
between average yield on
interest-earning assets and
average cost of interest-
bearing liabilities)............ 3.97 3.79 2.81 2.73 2.74
Net interest margin (net interest
income as a percentage of average
interest-earning assets)........ 4.82 4.77 3.96 5.05 4.94
Non-interest expense to average
assets.......................... 1.67 3.45 3.23 2.64 2.69
Average interest-earning assets
to interest-bearing
liabilities.....................125.02 127.87 127.83 179.46 171.78
Allowance for loan losses to
total loans at end of period.... 0.31 0.40 0.63 0.61 0.72
Net charge offs to average out-
standing loans during the
period.......................... -- -- -- -- --
Ratio of nonperforming assets to
total assets at period end...... 1.12 1.43 2.54 2.03 1.54
- -------------
(1) All real estate loans have fixed-rates of interest.
4
<PAGE> 84
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, selected
commercial properties, and consumer loans. The Savings Bank's net loans
receivable totaled approximately $27.5 million at June 30, 1998, representing
approximately 73.7% of consolidated total assets.
Loan Portfolio Analysis. The following table sets forth the composition
of the Savings Bank's loan portfolio at the dates indicated.
At June 30,
----------------------------------------
1997 1998
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Residential one- to four-family..... 23,909 83.22% $23,214 83.08%
Commercial real estate.............. 3,661 12.74 3,522 12.60
Multi-family........................ 20 0.07 18 0.06
Land................................ 1,013 3.53 1,010 3.61
------ ------ ------- ------
Total mortgage loans.............. 28,603 99.56% 27,764 99.35
Consumer loans...................... 126 0.44 181 0.65
------ ------ ------- ------
Total loans....................... 28,729 100.00% $27,945 100.00%
------ ====== ------- ======
Less:
Undisbursed portion
of loans in process............... 135 69
Unamortized loan origination
fees, net or direct costs......... 160 158
Allowance for loan losses.......... 176 200
Allowance for uncollected interest. 55 12
------- -------
Total loans receivable, net..... $28,203 $27,506
======= =======
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 June 30, 1998, $23.2
million, or 83.08%, 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 $36,400. 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 Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("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
5
<PAGE> 85
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.
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 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. 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. 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 June 30, 1998, such loans totaled $3.5 million, or 12.60%,
of total gross loans.
At June 30, 1998, a commercial real estate loan relationship of $1.2
million represented the Savings Bank's largest loan-to-one borrower
relationship at that date. The relationship consisted of a loan made to the
corporate owner and operator of a local commercial property. At June 30,
1998, this loan relationship was performing according to its terms.
At June 30, 1998, the second and third largest commercial real estate
loans had outstanding balances of $525,000 and $403,000, 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 June 30, 1998.
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 June 30, 1998, 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
6
<PAGE> 86
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 June 30, 1998.
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 June 30, 1998,
the Savings Bank had one multi-family loans in the amount of $18,000. 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 June 30, 1998, the
Savings Bank's land loan portfolio totaled $1.0 million, or 3.61%, 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 June 30, 1998,
the Savings Bank's consumer loan portfolio consisted entirely of loans secured
by deposit accounts, which totaled $181,000, or 0.65%, of total gross loans.
The interest rate charged on such loans is generally 2% above the interest
rate earned on the underlying deposit account. Deposit account loans are
payable in monthly payments of principal and interest or in a single payment.
Maturity of Loan Portfolio. The following table sets forth certain
information at June 30, 1998 regarding the dollar amount of loans maturing in
the Savings Bank's portfolio based on their contractual terms to maturity.
Demand loans, loans having no stated schedule of repayments and no stated
maturity, and overdrafts are reported as due in one year or less. Loan
balances do not include undisbursed loan proceeds, unearned discounts,
unearned income and allowance for loan losses.
After After After
Due at June 30, 3 Years 5 Years 10 Years
----------------- Through Through Through
1999 2000 2001 5 Years 10 Years 15 Years Total
---- ---- ---- ------- -------- -------- -----
(In thousands)
Residential one-
to four-family...$ 12 $ 32 $ 58 $399 $2,686 $20,027 $23,214
Commercial real
estate............ -- 3 4 111 857 2,547 3,522
Multi-family....... -- -- -- -- 18 -- 18
Land loans......... -- -- -- 11 122 877 1,010
Consumer loans..... 181 -- -- -- -- -- 181
---- ---- ---- ---- ------ ------- -------
Total loans... $193 $ 35 $ 62 $521 $3,683 $23,451 $27,945
==== ==== ==== ==== ====== ======= =======
7
<PAGE> 87
The following table sets forth the dollar amount of all loans due after
June 30, 1999, 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.................... $23,202
Commercial real estate........... 3,522
Multi-family..................... 18
Land loans....................... 1,010
Consumer loans................... --
-------
Total....................... $27,752
=======
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 are
attractive qualities 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. 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.
8
<PAGE> 88
The following table sets forth total loans originated and repaid during
the periods indicated. No loans were purchased or sold during the periods
indicated.
Year Ended June 30,
-------------------
1997 1998
---- ----
(In thousands)
Total mortgage loans at beginning of period......... $23,796 $28,603
Loans originated:
Residential one- to four-family.................... 8,677 4,535
Commercial real estate............................. 1,353 220
Land loans......................................... 401 165
------- -------
Total loans originated........................... 10,431 4,920
------- -------
Mortgage loan principal repayments.................. (5,572) (5,324)
Other............................................... (52) (254)
Net loan activity................................... 4,807 (658)
------- -------
Total gross mortgage loans
at end of period................................... $28,603 $27,945
======= =======
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 $158,000 of net
deferred mortgage loan fees at June 30, 1998.
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.
9
<PAGE> 89
The Savings Bank's Board of Directors is informed monthly as to the
status of all mortgage and consumer loans that are delinquent 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.
At June 30,
---------------
1997 1998
---- ----
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Real estate:
Residential one- to four-family.......... $561 $211
Commercial............................... 9 9
Multi-family............................. -- --
Land..................................... 11 11
Consumer..................................... -- --
---- ----
Total.................................... 581 231
---- ----
Accruing loans which are contractually past
due 90 days or more........................... -- --
---- ----
Total of nonaccrual and 90 days
past due loans............................. 581 231
Real estate owned.............................. 91 345
---- ----
Total nonperforming assets.................. $672 $576
==== ====
Total loans delinquent 90 days or more to
net loans.................................... 2.06% 0.84%
Total loans delinquent 90 days or more to
total assets................................. 1.76% 0.62%
Total nonperforming assets to total assets..... 2.03% 1.54%
Interest income, which would have been recorded for the year ended June
30, 1998 had nonaccruing loans been current in accordance with their original
terms, amounted to approximately $10,000. The amount of interest included in
the results of operations on such loans for the year ended June 30, 1998
amounted to approximately $8,000.
Real Estate Owned. Real estate acquired by 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 June 30, 1998, the Savings Bank had $345,000 of real estate owned,
with no allowance for losses, consisting of three one- to four-family
residences and a tract of raw land. Subsequent to year end, the Savings Bank
has been able to sell three of the real estate owned properties.
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
10
<PAGE> 90
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:
At June 30,
--------------
1997 1998
---- ----
(In thousands)
Loss............................. $ 55 $ 12
Doubtful......................... -- --
Substandard assets............... 617 564
Special mention.................. -- --
General loss allowances.......... 176 200
Specific loss allowances(1)...... -- --
Charge-offs(1)................... 15 --
- -----------
(1) 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
income.
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.
11
<PAGE> 91
At June 30, 1998, the Savings Bank had an allowance for loan losses of
$200,000. 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 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.
Year Ended June 30,
-------------------
1997 1998
---- ----
(Dollars in thousands)
Allowance at beginning of period.......... $152 $176
Provision for loan losses ................ 24 24
Recoveries................................ -- --
Charge-offs............................... -- --
---- ----
Balance at end of period.............. $176 $200
==== ====
Ratio of allowance to total
loans outstanding at the end
of the period............................ 0.61% 0.72%
Ratio of net charge-offs to
average loans outstanding
during the period........................ -- --
Ratio of allowance to
non-performing loans.....................30.29 86.58
12
<PAGE> 92
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates 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.
At June 30,
-----------------------------------------------------
1997 1998
-------------------------- --------------------------
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)
Real estate -- mortgage:
Residential one- to-
four family........... $100 0.42% 83.22% $120 0.45% 83.08%
Commercial............. 76 2.08 12.74 80 2.27 12.60
Multi-family........... -- -- 0.07 -- -- 0.06
Land................... -- -- 3.53 -- -- 3.61
Consumer................. -- -- 0.44 -- -- 0.65
---- ------ ---- ------
Total allowance
for loan losses........ $176 100.00% $200 100.00%
==== ====== ==== ======
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 June 30, 1998, the Savings Bank's
regulatory liquidity was 15.8%. See "REGULATION -- The Savings Bank --
Liquidity." The Corporation's consolidated liquidity was 21.9% at June 30,
1998.
As of June 30, 1998, the Savings Bank's investment securities portfolio
consisted entirely of interest-earning deposits at other banks, FHLB-Atlanta
stock and FHLMC stock. At June 30, 1998, the Savings Bank's investment in
FHLMC stock and FHLB-Atlanta stock totaled $628,000 and $291,000,
respectively. The market value of the Savings Bank's investment portfolio
amounted to $758,000 and $919,000 at June 30, 1997 and 1998, respectively.
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.
13
<PAGE> 93
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.
At June 30, 1998 the Savings Bank had $18.2 million of certificates of
deposit. The Savings Bank does not solicit brokered deposits and believes
that its jumbo certificates of deposit, which represented 28.1% of total
deposits at June 30, 1998, present similar interest rate risk to its other
deposit products.
In the unlikely event the Savings Bank is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the Corporation, as the sole stockholder of the Savings Bank.
The following table sets forth information concerning the Savings Bank's
time deposits and other interest-bearing deposits at June 30, 1998.
Weighted
Average Percentage
Interest Checking and Minimum of Total
Rate Term Savings Deposits Amount Balance Deposits
- ------ ---- ------------------------- ------- ------- ---------
(In thousands)
2.96% -- Money market accounts $1,000 $ 1,137 5.27%
2.25 -- Savings accounts 25 2,220 10.30
Certificates of Deposit
-----------------------
6.50 -- Fixed-term, fixed rate(1) -- 12 0.06
7.50 -- Fixed-term, fixed rate(1) -- 29 0.13
8.00 -- Fixed-term, fixed rate(1) -- 22 0.10
5.20 6 months Fixed-term, fixed-rate 2,500 3,820 17.71
5.60 12 months Fixed-term, fixed-rate 2,500 3,677 17.05
5.70 18 months Fixed-term, fixed-rate 500 1,336 6.20
5.96 30 months Fixed-term, fixed-rate 500 1,103 5.12
6.47 48 months Fixed-term, fixed-rate 2,500 2,156 9.99
Negotiable Fixed-term, fixed-rate 100,000 6,052 28.07
------- ------
$21,564 100.00%
======= ======
_________
(1) No longer offered.
14
<PAGE> 94
The following table indicates the amount of jumbo certificates of deposit
by time remaining until maturity as of June 30, 1998. Jumbo certificates of
deposit require minimum deposits of $100,000, and have negotiable interest
rates.
Maturity Period Amount
--------------- ------
(In thousands)
Less than three months................ $1,727
Three through six months.............. 1,574
More than six through twelve months... 1,221
Over twelve months.................... 1,530
------
Total............................ $6,052
======
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.
At June 30,
---------------------------------------------
1997 1998
---------------- ---------------------------
Percent Percent
of of Increase
Amount Total Amount Total (Decrease)
------ ------- ------ ------- ----------
(Dollars in thousands)
Regular savings accounts $ 2,117 11.98% $2,220 10.30% $ 103
Money market deposit 1,443 8.17 1,137 5.27 (306)
Fixed-rate certificates which
mature in the year ended in(1):
Within 1 year 10,917 61.78 13,802 64.00 2,885
After 1 year, but within
2 years 1,947 11.02 2,251 10.44 304
After 2 years, but within
5 years 1,248 7.05 2,154 9.99 906
------- ------ ------- ------ ------
Total $17,672 100.00% $21,564 100.00% $3,892
======= ====== ======= ====== ======
_____________
(1) At June 30, 1997 and 1998, jumbo certificates amounted to $3.8 million
and $6.1 million, respectively.
15
<PAGE> 95
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.
At June 30,
------------------
1997 1998
---- ----
(In thousands)
2.00 - 3.99% ...................... $ 6 $ --
4.00 - 5.99% ...................... 10,202 12,888
6.00 - 7.99% ...................... 3,566 4,965
8.00% and over..................... 338 354
------- -------
Total............................. $14,112 $18,207
======= =======
The following table sets forth the amount and maturities of certificates
of deposit at June 30, 1998.
Amount Due
-----------------------------------------------------------
More More More
than than than
One Two Three Percent
Less Year Years Years Of Total
Than to to to After Certi-
One Two Three Four 4 ficate
Year Year Years Years Years Total Accounts
---- ---- ----- ----- ----- ----- --------
(In thousands)
4.00 - 5.99%... $11,242 $1,431 $ 161 $ 54 $ -- $12,888 70.79%
6.00 - 7.99%... 2,559 725 943 530 208 4,965 27.27
8.00% and over. -- 94 260 -- -- 354 1.94
------- ------ ------ ----- ---- ------- ------
Total...... $13,801 $2,250 $1,364 $ 584 $208 $18,207 100.00%
======= ====== ====== ===== ==== ======= ======
Deposit Activities
The following table sets forth the deposit activities of the Savings Bank
for the periods indicated.
Year Ended June 30,
-------------------
1997 1998
(In thousands)
Beginning balance. . . . $20,346 $17,672
------- -------
Net increase (decrease)
before interest credited . (3,639) 2,897
Interest credited. . . 965 995
_______ _____
Net increase (decrease) in
savings deposits. . . (2,674) 3,892
------- -----
Ending balance . . . . $17,672 $21,564
======= =======
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
16
<PAGE> 96
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 June 30, 1998, and during the two years ended June 30, 1998, 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
data processing servicer. This subsidiary has been inactive for the past five
years. At June 30, 1998, the Savings Bank's investment in the subsidiary was
$15,000.
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 Corporation 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 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
17
<PAGE> 97
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.
Deposit Insurance. The FDIC insures deposits at the Savings Bank to the
maximum extent permitted by law. The Savings Bank pays deposit insurance
premiums based on a risk-based assessment system established by the FDIC.
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, 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 that until
September 30, 1996 ranged from 0.23% for well capitalized, financially sound
institutions with only a few minor weaknesses to 0.31% for undercapitalized
institutions that pose a substantial risk of loss to the SAIF unless effective
corrective action is taken. The Savings Bank's assessments expensed for the
year ended June 30, 1998 equaled $12,000.
18
<PAGE> 98
Pursuant to the Deposit Insurance Fund ("DIF") Act, which was enacted on
September 30, 1996, the FDIC imposed a special assessment on each depository
institution with SAIF-assessable deposits which resulted in the SAIF achieving
its designated reserve ratio. In connection therewith, the FDIC reduced the
assessment schedule for SAIF members, effective January 1, 1997, to a range of
0% to 0.27%, with most institutions, including the Savings Bank, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for
the purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates
the development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter
may take and what effect, if any, the adoption of a new charter would have on
the operation of the Savings Bank.
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. 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 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%.
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,
19
<PAGE> 99
significantly undercapitalized or critically undercapitalized. Immediately
upon becoming undercapitalized, an institution shall become subject to
mandatory and discretionary restrictions on its operations.
At June 30, 1998, the Savings Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the FDIC.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, 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; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). 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. 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. FDIC 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 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 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. The FDIC includes
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.
20
<PAGE> 100
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 June 30, 1998, the Savings
Bank had a Tier 1 leverage capital ratio of 31.8% and net worth of 32.5% of
total assets.
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.
21
<PAGE> 101
Activities and Investments of Insured State-Chartered Banks. The FDIA
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.
Subject to certain regulatory exceptions, FDIC regulations 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 or for which the FDIC has granted and
exception 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 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 debt in an amount up to
50% of net worth.
At June 30, 1998 the Savings Bank's loans-to-one-borrower limit was
approximately $1.7 million. At June 30, 1998, the largest aggregate amount of
loans by the Savings Bank to any one borrower was approximately $1.2 million,
which was a loan made to the corporate owner and operator of a local
commercial property. See "-- 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
22
<PAGE> 102
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. All depository institutions that maintain
transaction accounts or nonpersonal time deposits must maintain reserve
requirements (under "Regulation D") imposed by the Federal Reserve. 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 reserve requirement on nonpersonal time deposits with original maturities
of less than 1-1/2 years is 0%. As of June 30, 1998, 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 June 30, 1998, the Savings Bank's
liquidity ratio calculated in accordance with North Carolina regulations, was
approximately 15.8%.
Affiliate Transactions. The Corporation and the Savings Bank are legal
entities separate and distinct. Various legal limitations restrict the
Savings Bank from lending or otherwise supplying funds to the Corporation (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.
23
<PAGE> 103
Dividends. Dividends from the Savings Bank constitute the major source
of funds for dividends which may be paid by the Corporation. The amount of
dividends payable by the Savings Bank to the Corporation 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 are 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.
The Corporation
General. The Corporation, as the sole shareholder of the Savings Bank,
is a bank holding company and is registered as such with the Board of
Governors of the Federal Reserve System ("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 Corporation 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.
24
<PAGE> 104
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. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("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.
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.
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in 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
25
<PAGE> 105
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.
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.
TAXATION
Federal Taxation
General. The Corporation and the Savings Bank report their income on a
calendar year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax
rules applicable to the Savings Bank or the Corporation.
Tax Bad Debt Reserves. Historically, savings institutions such as the
Savings Bank which met certain definitional tests primarily related to their
assets and the nature of their business ("qualifying thrift") were permitted
to establish a reserve for bad debts and to make annual additions thereto,
which may have been deducted in arriving at their taxable income. The Savings
Bank's deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were 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
26
<PAGE> 106
and reduced by the amount of any permitted additions to the non-qualifying
reserve. Due to the Savings Bank's loss experience, the Savings Bank
generally recognized a bad debt deduction equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the percentage of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also required that all institutions
recapture all or a portion of their bad debt reserves added since the base
year (last taxable year beginning before January 1, 1988). For taxable years
beginning after December 31, 1995, the Savings Bank's bad debt deduction must
be determined under the experience method using a formula based on actual bad
debt experience over a period of years or, if the Savings Bank is a "large"
association (assets in excess of $500 million) on the basis of net charge-offs
during the taxable year. The new rules allowed an institution to suspend bad
debt reserve recapture for the 1996 and 1997 tax years if the institution's
lending activity for those years is equal to or greater than the institutions
average mortgage lending activity for the six taxable years preceding 1996
adjusted for inflation. For this purpose, only home purchase or home
improvement loans are included and the institution can elect to have the tax
years with the highest and lowest lending activity removed from the average
calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax
year. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continues to be
subject to provisions of present law referred to below that require recapture
of the pre-1988 bad debt reserve in the case of certain excess distributions
to shareholders.
Distributions. To the extent that the Savings Bank makes "nondividend
distributions" to the Corporation 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 Corporation 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 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" 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 Internal Revenue Code of 1986, as
amended ("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
corporations, including the Savings Bank, whether or not an Alternative
Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Corporation 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
27
<PAGE> 107
which the Corporation and the Savings Bank will not file a consolidated tax
return, except that if the Corporation 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.
Audits. The Corporation's and the Savings Bank's Federal income tax
returns have not been audited during the last five years.
State and Local Taxation
The North Carolina corporate income tax is 7.5% 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.
The Corporation's and the Savings Bank's North Carolina income tax
returns have not been audited during the last five years.
Personnel
As of June 30, 1998, 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.
Item 2. Description of Property
- --------------------------------
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 June 30,1998, the net book value of the property (including land and
building) and the Savings Bank's fixtures, furniture and equipment was
$56,000.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1998.
28
<PAGE> 108
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The common stock of Mitchell Bancorp is traded in the over-the counter
market as reported on The Nasdaq SmallCap Market under the symbol "MBSP." As
of September 14, 1998, there were approximately 302 shareholders of record.
Declarations or payments of dividends will be subject to determination by
the Corporation's Board of Directors, which will take into account the
Corporation'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 Corporation. Under current North
Carolina regulations, the Corporation 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 Corporation 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. No
assurances can be given that dividends will continue.
The stock prices shown below reflect the initial public offering ("IPO")
price and the high and low prices by quarter as reported by The Nasdaq Stock
Market from July 12, 1996, the initial offering date, through the year ended
June 30, 1998.
Market Price Cash
------------ Dividends Paid
High Low Per Share
---- --- ---------
IPO.....................$10.00 $10.00 $ --
September 30, 1996...... 12.75 10.125 --
December 31, 1996....... 14.25 12.125 --
March 31, 1997.......... 16.00 13.75 .20
June 30, 1997........... 16.75 15.25 --
September 30, 1997......17.375 16.375 .20
December 31, 1997....... 18.00 17.00 --
March 31, 1998.......... 17.50 16.625 .20
June 30, 1998........... 17.50 16.50 --
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
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 Company. Since the operations of the Savings
Bank significantly impact those of the Company, the following discussion will
include references to both the Company and the Savings Bank. The information
contained in this section should be read in conjunction with the Consolidated
Financial Statements and accompanying Notes thereto.
29
<PAGE> 109
Proposed Merger with First Western Bank
As previously announced, on August 13, 1998, the Company entered into a
definitive Agreement and Plan of Merger ("Agreement") with First Western Bank,
Burnsville, North Carolina ("First Western") pursuant to which the Company and
the Savings Bank will be merged into First Western. The surviving entity will
be First Western, a commercial bank chartered by the State of North Carolina.
The Agreement provides that each share of the Company's common stock will be
exchanged for 1.60 shares of First Western common stock, $20.00 in cash, or a
combination thereof, subject to the requirement that no more than 49.9% of the
total merger consideration may be paid in cash. The Savings Bank's Employee
Stock Ownership Plan ("ESOP") will have first preference to the cash
consideration in order to retire the loan incurred by it (outstanding balance
of approximately $679,000 at June 30, 1998) to acquire shares of the Company's
common stock issued in the Savings Bank's mutual-to-stock conversion. The
merger is intended to constitute a tax-free reorganization and to be accounted
for as a purchase. Consummation of the merger is subject to several
conditions, including receipt of applicable regulatory approvals and approval
by both the Company's and First Western's stockholders.
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.
Comparison of Financial Condition at June 30, 1997 and June 30, 1998
The Company's total consolidated assets increased by approximately $4.2
million, or 12.8% from $33.1 million at June 30, 1997 to $37.3 million at June
30, 1998. The increase in assets for the year was primarily attributable to
the increase in deposits, appreciation in investments and retained net income
from operations for the year.
The composition of the Company's balance sheet has not been materially
affected by market conditions between June 30, 1997 and June 30, 1998. Net
loans decreased $443,000 after considering the $254,000 increase in real
estate owned which was acquired in satisfaction of mortgage loans.
30
<PAGE> 110
Consistent with its historical lending practices, virtually all of the
Company's loan portfolio at June 30, 1998 consisted of fixed rate loans with
maturities up to 16 years. Consequently, the Company is exposed to a high
degree of interest rate risk in a rising interest rate environment. The
Company has historically accepted this risk in light of its relatively high
capital levels. See "-- Liquidity and Capital Resources" discussion below.
Deposits increased $3.9 million, or 22.0%, from $17.7 million at June 30,
1997 to $21.6 million at June 30, 1998. The increase in deposits was
primarily attributable to the Company's ability to attract new certificate
accounts of which $2.3 million was in jumbo certificates. The Company has
concentrated its efforts on the competitive pricing and advertisement of its
certificate products.
Results of Operations
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, primarily loans, and interest expense on interest-bearing liabilities,
primarily deposits. The Company's net income is also affected by the
establishment of provisions for loan losses and the level of its non-interest
expenses and income tax provisions.
Comparison of Results of Operations for the Year June 30, 1997 and 1998
Net Income. Net income decreased $38,000 from net income of $471,000 for
the year ended June 30, 1997 to $433,000 for the year ended June 30, 1998.
The decrease was primarily attributable to an overall increase in compensation
and employee benefits of $154,000 offset by a decrease in deposit insurance
premiums of $143,000. Additional compensation and benefits resulted from a
$98,000 accrual of expense for the MRP plan awards granted in 1998, normal
salary increases and the addition of one new director during 1998. The return
on average assets was 1.23% for the year ended June 30, 1998 compared to 1.37%
for 1997.
Net Interest Income. Net interest income increased $25,000 to $1.7
million for the year ended June 30, 1998. The improvement in net interest
income primarily reflects additional interest earned on a $1.9 million
increase in the balance of average loans outstanding for 1998 as compared to
1997, offset by higher interest expense for an increase in average deposits
outstanding and lower interest income derived from interest-earning deposits.
The interest rate spread remained relatively constant for the two years. The
interest rate spread was 2.74% for 1998 and the net interest margin decreased
11 basis points from 5.05% in 1997 to 4.94% in 1998.
Interest Income. Total interest income increased $114,000 from $2.7
million for the year ended June 30, 1997 to $2.8 million for the year ended
June 30, 1998. Interest on loans increased $185,000 as a result of a $1.9
million increase in average loans outstanding and an 8 basis point increase in
the average yield. Interest on overnight funds decreased by $71,000 as the
average invested balance for 1998 decreased by approximately $655,000 and the
average yield decreased by 57 basis points.
Interest Expense. Interest expense increased $89,000 from $975,000 for
the year ended June 30, 1997 to approximately $1.1 million for the year ended
June 30, 1998. The increase for 1998 was the result of a $1.6 million
increase in average deposits outstanding, principally certificates of deposits
which have the highest cost of funds. Of the total increase of $89,000,
$59,000 was attributable to an increase in average jumbo certificates of
deposits outstanding during 1998.
Provision for Loan Losses. The provision for loan losses for 1997 and
1998 was $24,000. Historically, management has emphasized the Company's loss
experience over other factors in establishing provisions for loan losses.
However, management has reviewed the allowance for loan losses in relating to
the Company's composition of its loan portfolio and observations of the
general economic climate and loan loss expectations. The ratio of the loss
allowance to non-performing loans at June 30, 1988 was 86.58% and
nonperforming assets to total assets was 1.54%.
31
<PAGE> 111
Non-Interest Income. Non-interest income continues to be an
insignificant source of income for the Company.
Non-Interest Expense. Non-interest expense increased by $40,000 from
$907,000 for the year ending June 30, 1997 to $947,00 for 1998. This increase
was the result of additional compensation and employee benefits offset by
reduced deposit insurance premiums as previously discussed. Other
non-interest expense includes in 1998 cost association with the Company's
strategic planning and ultimate announcement of a definitive agreement for
merger on August 13, 1998. Expenses for net occupancy and data processing
remained unchanged in comparison to 1997.
Income Taxes. Income tax expense for the year ending June 30, 1998 was
$309,000 compared to income tax expense of $289,000 for the same period in
1997. The effective tax rate for 1998 was 41.6% compared to 38.0% for 1997.
Income tax expense is the product of taxable income less deductible expenses.
In 1998, there were additional expenses which are not deductible for income
tax purposes. These expenses related to the merger activity and additional
expense recognized for the fair value of ESOP shares released in excess of
cost.
32
<PAGE> 112
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, At
----------------------------------------------------------- June 30,
1996 1997 1997
--------------------------- ---------------------------- ----
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
------- --------- ---- ------- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans............... $26,470 $2,248 8.49% $28,376 $2,433 8.57% 8.33%
Consumer loans............... 143 9 6.29 145 9 6.21 6.18
------- ------ ------- ------
Total net loans............ 26,613 2,257 8.48 28,521 2,442 8.56 8.28
FHLMC stock(1)................ 13 6 46.15 13 6 46.15 46.15
Daily interest-bearing
deposits ................... 6,419 375 5.84 5,764 304 5.27 5.25
FHLB stock.................... 292 21 7.19 292 21 7.19 7.20
------- ------ ------- ------
Total interest-earning
assets................... 33,337 $2,659 7.98 34,590 $2,773 8.02 7.64
====== ======
Non-interest-earning assets:
Office properties and
equipment, net.............. 67 60
Real estate, net............. 72 180
Non-interest-earning assets.. 939 434
------- -------
Total assets............... $34,415 $35,264
======= =======
Interest-bearing liabilities:
Passbook accounts............ $ 2,129 60 2.82 $ 2,161 49 2.27 2.25
Money market accounts........ 1,544 46 2.98 1,283 38 2.96 2.96
Certificates of deposit...... 14,903 869 5.83 16,692 977 5.85 5.90
------- ------ ------- ------
Total interest-bearing
liabilities.............. 18,576 975 5.25 20,136 1,064 5.28 5.37
Non-interest-bearing
liabilities................. 1,181 1,206
------- -------
Total liabilities.......... 19,757 21,342
Stockholders' equity.......... 14,658 13,922
------- -------
Total liabilities and
stockholders' equity..... $34,415 $35,264
======= =======
Net interest income........... $1,684 $1,709
====== ======
Interest rate spread (2)...... 2.73% 2.74% 2.27%
==== ==== ====
Net interest margin (3)....... 5.05% 4.94%
==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities.......... 179.46% 171.78%
====== ======
</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 interest margin represents net interest income divided by average
interest-earning assets.
33
<PAGE> 113
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);
(iii) changes in rate/volume (change in rate multiplied by change in volume);
and (iv) the net change (the sum of the prior columns).
<TABLE>
<CAPTION>
Year Ended June 30, 1997 Year Ended June 30, 1998
Compared to June 30, 1996 Compared to June 30, 1997
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............. $ (54) $315 $ (7) $254 $ 21 $162 $ 2 $ 185
Consumer loans............. (1) (2) -- (3) -- -- -- --
----- ---- ---- ---- ---- ---- --- ----
Total loans............... (55) 313 (7) 251 21 162 2 185
Investment securities....... 2 -- -- 2 -- -- -- --
Daily interest-earning
deposits ................. 35 87 13 135 (37) (38) 4 (71)
FHLB stock................. -- -- -- -- -- -- -- --
----- ---- ---- ---- ---- ---- --- ----
Total interest-earning
assets.................... (18) 400 6 388 (16) 124 6 114
----- ---- ---- ---- ---- ---- --- ----
Interest expense:
Interest-bearing deposits... (36) (144) (6) (186) (9) 97 1 89
----- ---- ---- ---- ---- ---- --- ----
Total interest-bearing
liabilities............... (36) (144) (6) (186) (9) 97 1 89
----- ---- ---- ---- ---- ---- --- ----
Net change in net
interest income.......... $ 18 $544 $ 12 $574 $ (7) $ 27 $ 5 $ 25
===== ==== ==== ==== ==== ==== === ====
</TABLE>
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
34
<PAGE> 114
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 June
30, 1998, 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.
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 June 30, 1998, 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 $3.5 million for
a cumulative one-year negative gap to total rate sensitive assets of 30%. 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 June 30,
1998 was negative 30%. At June 30, 1998, the Savings Bank's three year
cumulative interest rate sensitivity gap as a percentage of total
interest-earning assets was positive 1% and its five year cumulative interest
rate sensitivity gap as a percentage of total interest-earning assets was
positive 16%.
35
<PAGE> 115
The following table presents the Savings Bank's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities at June 30,
1998.
<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)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Residential one- to four-family
loans........................... $3,095 $2,690 $7,679 $4,388 $ 5,059 $22,911
Commercial real estate........... 93 98 434 512 2,392 3,529
Multi-family..................... -- -- -- -- 18 18
Land............................. -- -- -- -- 1,010 1,010
Consumer loans................... 181 -- -- -- -- 181
Investment securities and
interest-bearing deposits....... 5,448 -- -- -- -- 5,448
------ ------- ------ ------ ------- -------
Total rate sensitive assets.... $8,817 $2,788 $8,113 $4,900 $ 8,479 $33,097
====== ======= ====== ====== ======= =======
Interest-bearing liabilities:
Deposits:
Regular savings................. $ 197 $ 180 $ 573 $ 374 $ 896 $ 2,220
Money market deposit accounts... 616 282 125 60 54 1,137
Certificates of deposit......... 5,977 7,840 3,618 772 -- 18,207
Other borrowings................ 9 -- 111 -- 559 679
------ ------- ------ ------ ------- -------
Total rate sensitive
liabilities.................. $6,799 $8,302 $4,427 $1,206 $ 1,509 $22,243
====== ======= ====== ====== ======= =======
Excess (deficiency) of interest
sensitivity assets over interest
sensitivity liabilities ......... $2,018 $(5,514) $3,686 $3,694 $ 6,970 $10,854
====== ======= ====== ====== ======= =======
Cumulative excess (deficiency) of
interest sensitivity assets...... $2,018 $(3,496) $ 190 $3,884 $10,854 $10,854
====== ======= ====== ====== ======= =======
Cumulative ratio of interest-
earning assets to interest-
bearing liabilities ............. 130% 77% 101% 119% 149% 149%
Interest sensitivity gap to total
assets.......................... 6% (16)% 11% 11% 20% 31%
Ratio of interest-earning assets to
interest-bearing liabilities.... 130% 34% 183% 406% 562% 149%
Ratio of cumulative gap to total
assets.......................... 6% (10)% 1% 11% 31% 31%
Interest sensitivity gap to
total rate sensitive assets...... 23% (198)% 45% 75% 82% 33%
Ratio of cumulative gap to
total rate sensitive assets...... 23% (30)% 1% 16% 33% 33%
</TABLE>
36
<PAGE> 116
Rate/Volume Analysis
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 June 30, 1998. 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 June
30, 1998.
Change in Net Portfolio Value
Interest Rates -----------------------------------------------
in Basis Points Board
(Rate Shock) Amount $ Change % Change Limit
------------ ------ --------- -------- -----
(Dollars in thousands)
400 $ 8,984 $(3,039) (25)% 110%
200 10,697 (1,326) (11) 60
0 12,023 -- -- --
(200) 12,947 924 8 60
(400) 14,231 2,208 18 130
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 June 30, 1998.
37
<PAGE> 117
-400 -200 +200 +400
Basis Basis No Basis Basis
Points Points Change Points Points
------ ------ ------ ------ ------
(Dollars in thousands)
ASSETS
Mortgage loans............ $31,217 $29,508 $28,167 $26,356 $24,201
Non-mortgage loans........ 181 181 181 180 180
Cash, deposits and
securities.............. 6,212 6,147 6,081 6,015 5,950
Nonperforming loans and
real estate ............. 393 390 388 385 382
Premises and equipment.... 56 56 56 56 56
Other assets.............. 606 605 604 602 599
------- ------- ------- ------- -------
TOTAL ASSETS.............. 38,665 36,887 35,477 33,594 31,368
------- ------- ------- ------- -------
LIABILITIES
Deposits ................. 22,363 21,978 21,586 21,110 20,667
Other liabilities......... 2,071 1,962 1,868 1,787 1,717
------- ------- ------- ------- -------
TOTAL LIABILITIES......... 24,434 23,940 23,454 22,897 22,384
------- ------- ------- ------- -------
Net portfolio value....... 14,231 12,947 12,023 10,697 8,984
Percent change ........... 18% 8% --% (11)% (25)%
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 7.7% increase in NPV and a 2.4%
increase in net interest income. In the event of a 200 basis point increase
in interest rates, a 11.1% decrease in NPV and a .88% decrease in net interest
income would be expected. Based upon the modeling described above, the
Savings Bank's asset and liability structure results in increases in NPV and
in net interest income in a declining interest rate scenario and decreases in
NPV and 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.
38
<PAGE> 118
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 years ended June 30, 1997 and 1998 and
the Savings Bank originated mortgage loans in the amounts of $10.4 million and
$4.9 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 1997 and 1998, the Savings Bank
used its liquidity primarily to fund deposit withdrawals and loan
originations.
From June 30, 1997 to June 30, 1998, deposits at the Savings Bank
increased from $17.7 million to $21.6 million. The increase during this
period is a result of new certificate of deposits, primarily jumbo
certificates, attracted by the Savings Bank. 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. However, the Savings Bank plans to develop strategies to
continue attracting new deposits.
At June 30, 1998, certificates of deposit amounted to $18.2 million, or
84.43%, of the Savings Bank's total deposits, including $13.8 million which
were scheduled to mature by June 30, 1999. 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 required to maintain specific amounts of capital
pursuant to FDIC requirements. As of June 30, 1998, 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 31.8%.
Impact of New Accounting Pronouncements
Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income,"
issued in July 1997, establishes standards for reporting and presentation of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. It requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is presented with the same prominence as other financial statements.
SFAS No. 130 requires that companies (i) classify items of other comprehensive
income by their nature in a financial statement and (ii) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of the statement
of financial condition. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Comparative financial statements are required to be
reclassified to reflect the provisions of this statement. SFAS 130 was
adopted for the June 30, 1998 financial statements.
Employers' Disclosures about Pensions and Other Postretirement Benefits.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," issued in February 1998, standardizes disclosure requirements for
pensions and other postretirement benefits and requires additional disclosure
on changes in benefit obligations and fair values of plan assets in order to
facilitate financial analysis. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997, with earlier application encouraged.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement establishes accounting and
39
<PAGE> 119
reporting standards for derivative instruments and requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position. Under this standard, all derivative instruments should be
measured at fair value. At the date of initial application, an entity may
transfer any held-to-maturity securities into the available-for-sale category
or the trading category, although the Company has no intention of doing so.
An entity will then be able in the future to designate a security transferred
into the available-for-sale category as a hedged item. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Because the Company and the Savings Bank do not invest in derivative
instruments or enter into hedging transactions, adoption of this statement is
not anticipated to have a significant effect on the Company's financial
position or results of operations.
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 inflation. The primary impact of inflation is
reflected in the increased cost of the Company'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.
Year 2000 Compliance
The Company has established a plan to address Year 2000 issues.
Successful implementation of this plan will eliminate any extraordinary
expenses related to the Year 2000 issue. The Company has received
confirmation from its sole data processing company regarding their Year 2000
plans and compliance. The Company has requested from its data processing
company information that would enable it to test all critical systems by mid
1998 in order to ensure compliance by December 31, 1998. The Company has a
reasonable basis to conclude that the Year 2000 issue will not materially
affect future financial results, or cause reported financial information not
to be necessarily indicative of future operating results or future financial
condition.
Item 7. Financial Statements
- -----------------------------
Index to Financial Statements
Independent Auditors Report
Consolidated Balance Sheets, June 30, 1997 and 1998
Consolidated Statements of Comprehensive Income For the Years Ended
June 30, 1997 and 1998
Consolidated Statements of Stockholders' Equity For the Years Ended
June 30, 1997 and 1998
Consolidated Statements of Cash Flows For the Years Ended June 30,
1997 and 1998
Notes to Consolidated Financial Statements
40
<PAGE> 120
[Letterhead of Crisp Hughes and Evans LLP]
Independent Auditors' Report
Board of Directors
Mitchell Bancorp, Inc. and Subsidiary
Spruce Pine, North Carolina
We have audited the accompanying consolidated balance sheets of Mitchell
Bancorp, Inc. and Subsidiary as of June 30, 1997 and 1998, and the related
consolidated statements of comprehensive income, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mitchell Bancorp, Inc. and
Subsidiary as of June 30, 1997 and 1998, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/Crisp Hughes and Evans LLP
Asheville, North Carolina
July 23, 1998, except for
Note 19, as to which the
date is August 17, 1998
41
<PAGE> 121
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(in thousands, except share data)
June 30,
---------------------------
Assets 1997 1998
------ ---- ----
Cash and due from banks $ 211 $ 44
Interest earning deposits 3,395 8,115
Investment securities:
Available for sale (amortized cost
of $13 in 1997 and 1998) 467 628
Loans receivable, net 28,203 27,506
Real estate owned 91 345
Premises and equipment, net 65 56
Federal Home Loan Bank stock 291 291
Accrued interest receivable 7 5
Deferred income taxes 164 142
Prepaid expenses and other assets 165 174
--------- ---------
Total assets $ 33,059 $ 37,306
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $ 17,672 $ 21,564
Accrued interest payable 63 76
Accrued expenses and other liabilities 845 992
Current income taxes payable 154 42
--------- ---------
Total liabilities 18,734 22,674
--------- ---------
Stockholders' equity:
Common stock ($.01 par value,
3,000,000 shares authorized;
979,897 issued; 930,902 shares
outstanding at June 30, 1997
and 1998) 10 10
Paid in capital 9,225 9,274
Retained earnings, substantially
restricted 6,329 6,419
Treasury stock, at cost (48,995
shares at June 30,1997 and 1998) (784) (784)
Accumulated other comprehensive
income 277 374
Unearned compensation:
Employee stock ownership plan (732) (661)
--------- ---------
Total stockholders' equity 14,325 14,632
--------- ---------
Total liabilities and stock-
holders' equity $ 33,059 $ 37,306
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE> 122
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
For Years Ended June 30,
------------------------
1997 1998
---- ----
Interest income:
Loans $ 2,257 $ 2,442
Investments 27 27
Interest earning deposits 375 304
--------- ---------
Total interest income 2,659 2,773
Interest expense:
Deposits 975 1,064
--------- ---------
Net interest income 1,684 1,709
Provision for loan losses 24 24
--------- ---------
Net interest income after
provision for loan losses 1,660 1,685
Non-interest income:
Gain on real estate owned 3 -
Other 4 4
--------- ---------
Total non interest income 7 4
--------- ---------
Non interest expenses:
Compensation 318 498
Other employee benefits 159 133
Net occupancy expense 27 27
Deposit insurance premiums 155 12
Data processing 27 27
Other 221 250
--------- ---------
Total non interest expenses 907 947
--------- ---------
Income before income taxes 760 742
Income tax expense 289 309
--------- ---------
Net income 471 433
Other comprehensive income:
Net unrealized gains on securities
available for sale, net of income
taxes of $71 and $64, respectively 111 97
--------- ---------
Comprehensive income $ 582 $ 530
========= =========
Basic and diluted net income per share $ .53 $ .50
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE> 123
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Compre- Unearned
Common Paid-in Retained Treasury hensive Compensation
Stock Capital Earnings Stock Income For ESOP Total
----- ------- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 $ 10 $ 9,204 $ 6,038 $ - $ 166 $ (784) $ 14,634
Comprehensive income:
Net income - - 471 - - - 471
Other comprehensive income:
Unrealized gain on
securities available
for sale, net of income
taxes - - - - 111 - 111
------- -------- -------- ------- ------- ------- --------
Comprehensive income - - 471 - 111 - 582
------- -------- -------- ------- ------- ------- --------
Dividends paid ($.20 per
share) - - (180) - - - (180)
Earned compensation ESOP - 21 - - - 52 73
Repurchase of common stock
(48,995 shares) - - - (784) - - (784)
------- -------- -------- ------- ------- ------- --------
Balance at June 30, 1997 10 9,225 6,329 (784) 277 (732) 14,325
Comprehensive income:
Net income - - 433 - - - 433
Other comprehensive income:
Unrealized gain on
securities available for
sale, net of income
taxes - - - - 97 - 97
------- -------- -------- ------- ------- ------- --------
Comprehensive income - - 433 - 97 - 530
------- -------- -------- ------- ------- ------- --------
Dividends paid ($.40 per share) - - (343) - - - (343)
Earned compensation ESOP - 49 - - - 71 120
------- -------- -------- ------- ------- ------- --------
Balance at June 30, 1998 $ 10 $ 9,274 $ 6,419 $ (784) $ 374 $ (661) $ 14,632
======= ======== ======== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE> 124
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(in thousands)
Years Ended June 30,
---------------------
1997 1998
---- ----
Operating activities:
Net income $ 471 $ 433
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 11 10
Provision for loan losses 24 24
Amortization of ESOP compensation 73 120
Increase (decrease) in reserve for
uncollected interest 11 (43)
Deferred income taxes (benefit) (5) (42)
Net increase (decrease) in
deferred loan fees 36 (2)
Gain on real estate owned (3) -
(Increase) decrease in accrued
interest receivable 2 2
(Increase) decrease in prepaid
expenses and other assets (27) 16
Increase in accrued interest
payable 3 13
Increase in accrued expenses and
other liabilities 133 35
-------- --------
Net cash provided by operating
activities 729 566
-------- --------
Investing activities:
Net (increase) decrease in loans (4,714) 464
Purchase of premises and equipment (6) (1)
Investment in life insurance cash
surrender value (24) (25)
-------- --------
Net cash provided (used) by
investing activities (4,744) 438
-------- --------
Financing activities:
Net increase (decrease) in deposits (2,674) 3,892
Repurchase of common stock (784) -
Dividends paid (180) (343)
Repayment from stock oversubscriptions (523) -
Paid conversion cost (347) -
-------- --------
Net cash provided (used) by
financing activities (4,508) 3,549
-------- --------
Increase (decrease) in cash and
cash equivalents (8,523) 4,553
Cash and cash equivalents at beginning
of year 12,129 3,606
-------- --------
Cash and cash equivalents at end of year $ 3,606 $ 8,159
======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 972 $ 1,051
Income taxes 196 463
======== ========
Noncash transactions:
Real estate acquired in satisfac-
tion of mortgage loans $ 74 $ (254)
Loans to facilitate sale of real
estate owned 70 -
Unrealized gain on securities avail-
able for sale, net of deferred tax
liability of $71 and $64 in 1997
and 1998, respectively 111 97
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
45
<PAGE> 125
MITCHELL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
June 30, 1997 and 1998
(tabular amounts in thousands)
1. Organization
------------
Mitchell Bancorp, Inc. ("Bancorp") is a bank holding company organized in
February 1996 to become the holding company for Mitchell Savings Bank, Inc.
S.S.B. ("Savings Bank"). Bancorp became the holding company of the Savings
Bank upon the conversion of the Savings Bank from a North Carolina-chartered
mutual savings bank to a North Carolina chartered stock savings bank (see Note
15).
Mitchell Mortgage and Investment Co., Inc. ("MMI") is wholly owned by the
Savings Bank. MMI was organized in September of 1980 and has had no
significant business activity.
Bancorp, Savings Bank, and MMI are herein collectively referred to as the
"Company".
2. Summary of Significant Accounting Policies
------------------------------------------
The following is a description of the more significant accounting and
reporting policies which the Company follows in preparing and presenting its
consolidated financial statements.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Bancorp, Savings Bank, and MMI. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Estimates - 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, undisbursed funds, net deferred loan fees, and
allowance for 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 is discontinued when a
loan becomes 90 days delinquent unless, in management's opinion,
46
<PAGE> 126
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
the loan is well secured and in process of collection. Interest income on
impaired loans is subsequently recognized on a cash basis, until such time
that, in management's opinion, the borrower will be able to meet payments as
they become due.
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 80% of
the appraised value of the property securing the loan.
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.
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 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 - All of the Company's investments which consist solely
of FHLMC stock have been identified as available for sale and recorded at
market value. The unrealized gains are reported as a component of
stockholders' equity. 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 estimated useful lives. 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
47
<PAGE> 127
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
cash. Deferred gains are taken into income in the same ratio as the loan
balances are reduced.
Income Taxes - The Company utilizes the liability method of computing income
taxes. Under the liability method, deferred tax liabilities and assets 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. The focus is on accruing the appropriate balance sheet
deferred tax amount, with the statement of earnings 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.
Cash Flow Information - As presented in the consolidated statements of cash
flows, cash and cash equivalents include cash and due from banks and interest-
earning deposits.
Impact of New Accounting Pronouncement - During 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). SFAS 130 provides accounting and
reporting standards for displaying comprehensive income and components of
comprehensive income in a complete set of financial statements. SFAS 130
addresses reporting and display only and is effective for fiscal years
beginning after December 15, 1997. The provisions of SFAS 130 have been
reflected in the accompanying financial statements.
2. Earnings Per Share
------------------
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS 128) in 1998. SFAS 128 establishes standards for
computing earnings per share and requires the presentation of basic and
diluted earnings per share amounts. Net income per share amounts for all
periods presented have been restated to conform with SFAS 128.
For the years ending June 30, 1997 and 1998, net income available to the
common stockholders for both basic and diluted earnings per share was equal to
net income. The weighted average shares outstanding for basic and diluted
earnings per share for 1997 and 1998 are as follows:
1997 1998
---- ----
Weighted average common shares outstanding 894,871 862,163
Dilutive effects:
Stock options and MRP shares granted - 3,675
------- -------
Weighted average common shares outstanding,
diluted 894,871 865,838
======= =======
48
<PAGE> 128
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
3. Loans Receivable
----------------
Loans receivable are summarized as follows:
June 30,
-------------------
1997 1998
---- ----
Real estate mortgage loans:
One-to-four family residential $ 23,909 $ 23,214
Commercial real estate 3,661 3,522
Multi-family residential 20 18
Land 1,013 1,010
-------- --------
Total real estate loans 28,603 27,764
Consumer loans:
Loans secured by deposit accounts 126 181
-------- --------
Total loans 28,729 27,945
-------- --------
Less:
Undisbursed portion of loans in
process (135) (69)
Allowance for loan losses (176) (200)
Deferred loan fees (160) (158)
Reserve for uncollected interest (55) (12)
-------- --------
(526) (439)
-------- --------
$ 28,203 $ 27,506
======== ========
At June 30, 1997 and 1998 loans which were contractually past due ninety days
or more totaled approximately $581,000 and $231,000, respectively. All of
these loans would be categorized as homogeneous loans and therefore excluded
from consideration for impairment in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114. The Savings Bank had no loans considered
impaired as defined under SFAS No. 114 for 1997 and 1998. A summary of the
activity in the allowance for loan losses is summarized as follows:
Years Ended June 30,
--------------------
1997 1998
---- ----
Beginning balance $ 152 $ 176
Provision for losses charged to income 24 24
-------- --------
Ending balance $ 176 $ 200
======== ========
49
<PAGE> 129
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
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.
4. Real Estate Owned
-----------------
Real estate owned is summarized as follows:
June 30,
----------------------
1997 1998
---- ----
One-to-four family residential $ 91 $ 345
======== ========
A summary of activity in the valuation allowance for losses on real estate is
summarized as follows:
Years Ended June 30,
----------------------
1997 1998
---- ----
Beginning balance $ 15 $ -
Chargeoffs (15) -
Provision for losses charged to income - -
-------- --------
Ending balance $ - $ -
======== ========
5. Premises and Equipment
----------------------
Premises and equipment is summarized as follows:
June 30,
----------------------
1997 1998
---- ----
Land $ 16 $ 16
Office building and improvements 84 84
Furniture and equipment 191 192
-------- --------
291 292
Less accumulated depreciation 226 236
-------- --------
$ 65 $ 56
======== ========
50
<PAGE> 130
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
6. Deposits
--------
Deposits are summarized as follows:
June 30,
----------------------------------------
1997 1998
------------------- ------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
Passbook 2.25% $ 2,117 2.25% $ 2,220
Money market 2.87% 1,443 2.96% 1,137
Certificates of deposit 5.78% 14,112 5.90% 18,207
-------- --------
Total deposits
$ 17,672 $ 21,564
======== ========
Weighted average cost of deposits 5.12% 5.37%
==== ====
Contractual maturities of certificates of deposit are as follows:
June 30,
----------------
1997 1998
---- ----
12 months or less $ 10,917 $ 13,801
1-2 years 1,947 2,251
2-3 years 738 1,362
3-5 years 510 793
-------- --------
$ 14,112 $ 18,207
======== ========
Interest expense on deposits is summarized as follows:
Years Ended June 30,
--------------------
1997 1998
---- ----
Passbook $ 60 $ 49
Money market 46 38
Certificates of deposit 869 977
-------- --------
$ 975 $ 1,064
======== ========
Certificates of deposit with balances of $100,000 or more totaled
approximately $3,891,000 and $6,052,000 at June 30, 1997 and 1998,
respectively.
51
<PAGE> 131
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
7. Income Taxes
------------
The components of income tax expense (benefit) are as follows:
Years Ended June 30,
--------------------
1997 1998
---- ----
Current $ 294 $ 351
Deferred (benefit) (5) (42)
-------- --------
Total $ 289 $ 309
======== ========
The differences between actual income tax expense and the amount computed by
applying the federal statutory income tax rate of 34% to income before income
taxes are reconciled as follows:
Years Ended June 30,
--------------------
1997 1998
---- ----
Computed income tax expense $ 259 $ 253
Increase (decrease) resulting from:
State income tax net of federal
tax benefits 22 26
Other 8 30
-------- --------
Actual income tax expense $ 289 $ 309
======== ========
The components of the net deferred income tax assets are as follows:
June 30,
--------------------
1997 1998
---- ----
Deferred tax assets, principally deferred
compensation expenses $ 402 $ 485
Valuation allowance - -
-------- --------
402 485
Deferred tax liabilities, principally
unrealized gain on securities available
for sale 238 343
-------- --------
Net deferred income tax asset $ 164 $ 142
======== ========
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
52
<PAGE> 132
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
June 30, 1997 and 1998, includes approximately $1.1 million representing such
bad debt deductions for which no deferred income taxes have been provided.
8. Pension Plan
------------
The Company 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:
Years Ended June 30,
---------------------
1997 1998
---- ----
Service cost-benefits earned during
the year $ 16 $ 12
Interest cost on projected benefit
obligation 14 11
Actual return on plan assets (10) (12)
Net amortization of initial transition
liability and deferral of subsequent
gains under SFAS No. 87 1 1
Net amortization of loss not reflected
in market related value 3 -
-------- --------
$ 24 $ 12
======== ========
A summary of the plan's funding status is as follows:
June 30,
---------------------
1997 1998
---- ----
Actuarial present value of benefit
obligations:
Vested benefits $ 138 $ 154
Non-vested benefits 1 1
-------- --------
Accumulated benefit obligation $ 139 $ 155
======== ========
Projected benefit obligations for
services rendered to date $ 207 $ 163
Plan assets at fair value, primarily
cash and contracts with insurance
companies 135 160
-------- --------
Deficit of plan assets over projected
benefit obligations 72 3
Unrecognized transition asset (19) (18)
Minimum liability adjustment 25 -
Unrecognized net loss (74) (11)
-------- --------
Accrued (prepaid) pension expense $ 4 $ (26)
======== ========
53
<PAGE> 133
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
The weighted average discount rate and rate of increase in future compensation
levels in determining the actuarial present value of the projected benefit
obligation for 1997 and 1998 was 8% and 5%, respectively. The expected long
term rate of return on assets was 8%.
9. Compensation Benefit Agreements
-------------------------------
The Savings Bank has established 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 $17,000 for the years ending June 30, 1997 and 1998.
The Savings Bank also has established nonqualified compensation agreements
with certain key executives providing for benefits payable monthly over a ten
year period beginning at retirement and to their designated beneficiary in the
event of death. The expense before income tax effect recognized on these
agreements was approximately $84,000 and $50,000 for the years ending June 30,
1997 and 1998, respectively.
The Company has purchased life insurance contracts with respect to directors
and key executives covered by these agreements. The Company is the owner and
beneficiary of the insurance contracts. The directors and key executives are
general creditors of the Company with respect to these benefits. The cash
surrender value of the Company-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.
10. Postretirement Benefits Other Than Pensions
-------------------------------------------
Effective December 31, 1995, the Company adopted an unfunded postretirement
health care benefit plan covering certain executive officers and their spouses
for life beginning at their date of retirement. The Company 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 Company 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 Company has accrued the
expected postretirement benefit obligation of approximately $73,000 and
$78,000 at June 30, 1997 and 1998, respectively. This liability consists
entirely of unrecognized prior service cost.
54
<PAGE> 134
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
11. Employment and Change of Control Agreements
-------------------------------------------
The Company entered into three year employment agreements with certain key
officers which may be extended by the Board for an additional year at each
anniversary date so that the remaining terms shall be three years. The
agreements provide for severance payments and other benefits in the event of
involuntary termination of employment in connection with any change in control
of the employers. The severance payments will equal 2.99 times the executive
officer's average annual compensation during the preceding five years. The
employment agreements provide for termination by the Company for just cause at
any time. The Company has not accrued any benefits under these postemployment
agreements.
12. Regulatory Matters
------------------
The Savings Bank is subject to various regulatory capital requirements
administered by the Federal Deposit Insurance Company ("FDIC"). Failure to
meet minimum capital requirements can initiate certain mandatory, and possible
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Savings Bank must meet specific capital guidelines that involve
quantitative measures of the Savings Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Savings Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors. In addition, the Savings Bank is subject to a North Carolina
Savings Institution (State) capital requirement of at least 5% of total
assets.
Quantitative measures established by regulation to ensure capital adequacy
require the Savings Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the regulations)
to risk weighted assets (as defined), and of Tier I capital to average assets
( as defined). Management believes, as of June 30, 1998, that the Savings Bank
meet all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the FDIC categorized
the Savings Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Savings Bank must
maintain minimum total risked-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the following table. There are no conditions or event
since the notification that management believes have changed the Savings
Bank's category.
55
<PAGE> 135
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
Following are the required and actual capital amounts and ratios for the
Savings Bank:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Tier 1 Capital (to greater or greater or
average assets) $ 10,869 31.8% $ 1,368 less than 4% $ 1,710 less than 5%
Tier 1 Capital (to
risk-weighted greater or greater or
assets) $ 10,869 59.8% $ 727 less than 4% $ 1,091 less than 6%
Total Capital (to
risk-weighted greater or greater or
assets) $ 11,069 60.9% $ 1,459 less than 8% $ 1,819 less than 10%
As of June 30, 1997:
Tier 1 Capital (to greater or greater or
average assets) $ 10,328 34.5% $ 1,198 less than 4% $ 1,497 less than 5%
Tier 1 Capital (to
risk-weighted greater or greater or
assets) $ 10,328 56.9% $ 726 less than 4% $ 907 less than 6%
Total Capital (to
risk-weighted greater or greater or
assets) $ 10,504 57.9% $ 1,451 less than 8% $ 1,814 less than 10%
</TABLE>
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
13. Financial Instruments with Off Balance Sheet Risk
-------------------------------------------------
The Company 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 Company's involvement in particular classes of financial
instruments.
The Company'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
Company uses the same credit policies in making commitments as it does for on-
balance-sheet instruments.
The Company had outstanding commitments to originate fixed rate mortgage loans
of approximately $563,000 and $228,000 at June 30, 1997 and 1998,
respectively. The commitments to originate loans at June 30, 1997, had
interest rates ranging from 8.00% to 8.50% with terms ranging from 15 to 16
years. The commitments to originate loans at June 30, 1998, had interest rates
of 8.5% with terms of 16 years.
56
<PAGE> 136
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
14. Deposit Insurance Premiums
---------------------------
The Savings Bank recorded an expense in 1997 for the one-time industry-wide
special assessment levied by the omnibus appropriation bill to recapitalize
the Savings Association Insurance Fund (SAIF). The special assessment for
deposit insurance premiums of approximately $137,000 has been reflected in
income for the year ending June 30, 1997, with an after tax impact on net
income of approximately $87,000. Effective January 1, 1997, the Savings Bank
began paying reduced premium assessments in accordance with the new SAIF
assessment schedule.
15. Stockholders' Equity
--------------------
Bancorp was incorporated under North Carolina law in February 1996 to acquire
and hold all the outstanding common stock of the Savings Bank, as part of the
Savings Bank's conversion from a North Carolina-chartered mutual savings bank
to a North Carolina-chartered stock savings bank. In connection with the
conversion which was consummated on July 12, 1996, Bancorp issued and sold
979,897 shares of common stock at a price of $10.00 per share for total net
proceeds of approximately $9.2 million after conversion expenses of
approximately $585,000. Bancorp retained one-half of the net proceeds and used
the remaining net proceeds to purchase the newly issued capital stock of the
Savings Bank. Since, the conversion was essentially consummated prior June 30,
1996, the conversion was accounted for as being effective as of June 30, 1996,
with the net conversion offering proceeds of approximately $9.2 million shown
on the statements of stockholders' equity as proceeds from the sale of common
stock.
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 established a liquidation account
in an amount equal to its retained earnings 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.
57
<PAGE> 137
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
16. Employee Stock Plans
--------------------
Employee Stock Ownership Plan - As part of the conversion discussed in Note
15, an Employee Stock Ownership Plan (ESOP) was established and the ESOP
borrowed approximately $784,000 from Bancorp to purchase 78,391 shares of
common stock issued by Bancorp. The loan will be repaid principally from the
Savings Bank's discretionary contributions to the ESOP over a period of 15
years. On June 30, 1998, the loan had an outstanding balance of approximately
$679,000 and an interest rate of 8.25%. The unearned compensation for
unallocated shares is recorded as a reduction of the Company's stockholders'
equity. Contributions to the ESOP and shares released from the suspense
account are allocated to the participants on the basis of compensation in the
year of allocation. Benefits become fully vested at the end of seven years of
service. Since Savings Bank's annual contributions are discretionary, benefits
payable under the ESOP cannot be estimated. Compensation expense is recognized
to the extent of the fair value of shares committed to be released. In 1997
and 1998, compensation expense of approximately $73,000 and $120,000 was
recorded for the release of shares. At June 30, 1997 and 1998, there remained
approximately 73,000 and 66,000 shares in suspense, respectively. The value of
the unreleased shares at June 30, 1998, was approximately $1.1 million.
Management Recognition and Retention Plan - The Company 1996 Management
Recognition and Development Plan ("MRP") reserved 39,160 shares of common
stock for issuance. Shares totaling 31,358 were granted to directors, officers
and employees of the Company on July 13, 1997. The awards will vest ratably
over a five year period with acceleration of vesting as defined by the Plan.
Compensation expense, in the amount of the fair value of the common stock at
the date of grant, will be recognized during the periods the participants
become vested. For the year ended June 30, 1998, compensation expense of
approximately $98,000 has been accrued. It is management's intent to fund
vested MRP shares out of shares held in treasury.
Stock Option Plan - The Company 1996 Stock Option Plan reserved 97,990 shares
for the benefit of directors, officers, and other key employees of the
Company. The Plan provides for incentive options for officers and employees
and nonincentive options for directors. The Plan is administered by a
committee of at least three directors of the Company. The option exercise
price cannot be less than the fair value of the underlying common stock at the
date of the option grant, and the maximum option term cannot exceed ten years.
The following table summarizes the non-incentive stock options that have been
granted to directors and the incentive stock options granted to officers and
other key employees. No options grants were exercisable at June 30, 1998.
58
<PAGE> 138
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
Option
Nonincentive Incentive Total Price
------------ --------- ----- -----
Shares under options:
Outstanding at July 1,
1997 - - - $ -
Granted--July 13 14,700 53,896 68,596 16.375
------- ------- ------- -------
Outstanding at June 30,
1998 14,700 53,896 68,596 16.375
------- ------- ------- -------
Options available to grant
at June 30, 1998 29,384
The Company applies APB Opinion 25 and related interpretations in accounting
for its stock option plan. Accordingly, no compensation cost has been
recognized for its stock option plan. Had compensation cost for the Company's
plan been determined based on the fair value at the grant dates for awards
under the Plan consistent with methods under FASB Statement 123 (SFAS 123),
the Company's net income and earnings per share would not have been materially
reduced and therefore no proforma disclosure has been presented.
17. Financial Instruments
---------------------
The approximate stated and estimated fair value of certain financial
instruments are summarized below:
1997 1998
---------------------- ---------------------
Stated Estimated Stated Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Loans receivable, net $ 28,203 $ 27,950 $ 27,506 $ 28,606
Investments 758 758 919 919
Cash and cash
equivalents 3,606 3,606 8,159 8,159
Financial liabilities:
Deposits:
Demand deposits 3,560 3,560 3,357 3,357
Certificates of
deposit 14,112 14,130 18,207 18,300
59
<PAGE> 139
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
. Fair value approximates book value for the following financial
instruments due to the short-term nature of the instruments: Cash,
interest earning deposits, accrued interest receivable and accrued
expenses.
. Fair values for loans held for investment are estimated by segregating
the portfolio by type of loan and discounting scheduled cash flows using
interest rates currently being offered for loans with similar terms,
reduced by an estimate of credit losses inherent in the portfolio. A
prepayment assumption is used as an estimate of the portion of loans that
will be repaid prior to their scheduled maturity.
. Fair values for demand deposits with no fixed maturity date is equal to
the carrying value. The fair value of certificates of deposit are
estimated by discounting the amounts payable at the certificate rates
using the rates currently offered for deposits of similar remaining
maturities.
. Fair value estimates are made at a specific point of time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale the Company's entire holdings of a
particular financial instrument. Because no active market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss
experience, current economic conditions, current interest rates and
prepayment trends, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in any of these assumptions used in
calculating fair value also would affect significantly the estimates.
Further, the fair value estimates were calculated as of June 30, 1997 and
1998. Changes in market interest rates and prepayment assumptions could
change significantly the estimated fair value.
. Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise value, loan servicing
portfolio, real estate, deferred tax assets, and premises and equipment.
In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates.
60
<PAGE> 140
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
18. Condensed Parent Company Financial Information
----------------------------------------------
The following condensed balance sheets as of June 30, 1997 and 1998, and
condensed statements of income and cash flows for the years then ended for
Mitchell Bancorp, Inc. should be read in conjunction with the consolidated
financial statements and the notes thereto.
Parent Company Only June 30, June 30,
Balance Sheets (in thousands) 1997 1998
----------------------------- ---- ----
Assets:
Cash and cash equivalents $ 1,965 $ 2,705
Equity in net assets of bank subsidiary 10,607 11,242
Loans receivable 1,740 679
Prepaid expenses and other assets 20 8
-------- --------
Total assets $ 14,332 $ 14,634
======== ========
Liabilities 7 2
Stockholders' equity 14,325 14,632
-------- --------
Total liabilities and stockholders'
equity $ 14,332 $ 14,634
======== ========
For the Years Ended
June 30,
Parent Company Only -------------------
Statements of Income (in thousands) 1997 1998
----------------------------------- ---- ----
Interest income $ 228 $ 185
Expenses (109) (145)
Income taxes (42) (27)
Undistributed equity earnings 394 420
-------- --------
Net income $ 471 $ 433
======== ========
No dividends have been paid from the Savings Bank to the parent for the years
ending June 30, 1997 and 1998.
61
<PAGE> 141
Notes to
MITCHELL BANCORP, INC. AND SUBSIDIARY Consolidated Financial Statements
- ------------------------------------------------------------------------------
For the Years Ended
June 30,
Parent Company Only -------------------
Statements of Cash Flow (in thousands) 1997 1998
-------------------------------------- ---- ----
Operating activities:
Net income $ 471 $ 433
Undistributed equity earnings of
Savings Bank (394) (420)
Other, net (15) 9
-------- --------
62 22
-------- --------
Investing activities:
Loan to savings bank (1,000) -
Repayments on loans receivable 44 1,061
-------- --------
Net cash provided (used) by investing
activities (956) 1,061
-------- --------
Financing activities:
Repurchase of common stock (784) -
Dividends paid (180) (343)
Repayment of stock oversubscription (523) -
Payment of conversion cost (347) -
-------- --------
Net cash provided by financing activities (1,834) (343)
-------- --------
Net increase in cash and cash equivalents (2,728) 740
Cash and cash equivalents at beginning of year 4,693 1,965
-------- --------
Cash and cash equivalents at end of year $ 1,965 $ 2,705
======== ========
19. Subsequent Event
----------------
The Company announced on August 13, 1998, its signing of a definitive
agreement by which the Company will merge with a commercial bank. Under the
agreement, the Company's shareholders will receive cash and/or shares of the
commercial bank's common stock subject to an exchange ratio as defined in the
merger agreement. The completion of the transaction is subject to regulatory
and shareholder approval of the reorganization agreement.
The pending change in control, when approved and consummated, will result in
the payment of certain employee severance benefits, the payment of employment
contract settlements, and the acceleration of certain benefit payments from
qualified and nonqualified retirement plans. At June 30, 1998, the Company has
not accrued any liabilities with regard to these potential benefit payments
that would only result upon approval and completion of the merger.
62
<PAGE> 142
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- -----------------------------------------------------------------------
The Board of Directors of the Corporation is presently composed of six
members, each of who are elected for a term of one year. The executive
officers of the Corporation and the Savings Bank 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
tables sets forth information with respect to the Directors and executive
officers of the Corporation and the Savings Bank.
Directors of the Corporation and the Savings Bank
Age at Year First Elected Current
Name June 30, 1998 (1) or Appointed Director (2) Term Expires
---- ----------------- ------------------------- ------------
Calvin F. Hall 69 1974 1999
Edward Ballew, Jr. 76 1948 1999
Emma Lee M. Wilson 62 1983 1999
Baxter D. Johnson 88 1952 1999
Lloyd Hise, Jr. 53 1988 1999
Michael B. Thomas 43 1997 1999
___________
(1) As of June 30, 1998.
(2) Includes prior service on the Board of Directors of the Savings Bank,
if any.
Executive Officers of the Corporation and Savings Bank
Age at
June 30,
Name 1998 Position
---- ------------------------------------------------
Corporation Savings Bank
------------------- -------------------------
- ----
Calvin F. Hall 69 President President
Edward Ballew, Jr 76 Executive Vice Executive Vice President
President and Chief and Chief Executive
Executive Officer Officer
Emma Lee M. Wilson 62 Assistant Managing Assistant Managing
Officer, Secretary Officer, Secretary
and Treasurer and Treasurer
Biographical Information
Set forth below is certain information regarding the Directors and
executive officers of the Corporation and the Savings Bank. All of the
directors and officers listed above have held positions with or been employed
by the Corporation for five years unless otherwise stated. There are no
family relationships among or between the directors or executive officers.
63
<PAGE> 143
Calvin F. Hall is President and an agent of Fortner Insurance Agency,
Inc., with which he has been affiliated with for over 39 years. Mr. Hall was
appointed President of the Savings Bank in January 1995. 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 its 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 since that time. Mrs. Wilson is the
Assistant Managing Officer, Secretary and Treasurer of the Savings Bank.
Baxter D. Johnson has been the owner of Johnson Electric, Spruce Pine,
North Carolina, for 68 years.
Lloyd Hise, Jr. has been a practicing attorney in Spruce Pine, North
Carolina since 1969.
Michael B. Thomas is a salesman for Buck Stove, Inc., Spruce Pine, North
Carolina. He is a past president of the Mitchell County Chamber of Commerce
and has served on the Town of Spruce Pine Board of Alderman.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act") requires the Corporation's executive officers and directors,
and persons who own more than 10% of any registered class of the Corporation's
equity securities, to file reports of ownership and changes in ownership with
the SEC. Executive officers, directors and greater than 10% shareholders are
required by regulation to furnish the Corporation with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to the Corporation by the above
referenced persons, the Corporation believes that all filing requirements
applicable to its reporting officers, directors and greater than 10%
shareholders were properly and timely complied with for the fiscal year ended
June 30, 1998.
Item 10. Executive Compensation
- --------------------------------
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term Compensation
Annual Compensation(1) Awards
----------------------- -------------------------
Restricted Number All
Name and Stock of Other Annual
Position Year Salary(2) Bonus Awards(3) Options(4) Compensation(5)
- -------- ---- --------- ----- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edward Ballew, Jr. 1998 $83,868 $ -- $160,459 24,498 $38,319
Executive Vice President 1997 73,800 -- -- -- 31,647
and Chief Executive Officer 1996 74,000 6,200 -- -- --
</TABLE>
_______________
(1) All compensation is paid by the Savings Bank. Excludes certain
additional benefits received by each individual, the aggregate amounts
of which do not exceed 10% of the particular individual's total annual
salary and bonus.
(2) Includes Board of Directors fees of $6,000.
(footnotes continued on following page)
64
<PAGE> 144
(3) Represents the value of restricted stock awards at July 13, 1997, the
date of grant, pursuant to the Management Recognition Plan ("MRDP").
Dividends are paid on such awards if and when declared and paid by the
Corporation on the Common Stock. At June 30, 1998, the value of the
unvested awards (which vest pro rata over a five-year period with the
first 20% installment vesting on July 13, 1998) for Mr. Ballew was
$161,684 (9,799 shares at $16.50 per share).
(4) Subject to pro rata vesting over a five year period with the first 20%
installment vesting on July 13, 1998.
(5) Represents contribution made to the ESOP.
Options Grants Table. The following information is provided for Mr.
Ballew.
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Expiration
Name Granted (1) Fiscal Year Price Date
- ---- ----------- ----------- -------- ----------
Edward Ballew, Jr. 24,498 55% $16.375 07/13/07
_____________
(1) Subject to pro rata vesting over a five year period with the first 20%
installment vesting on July 13, 1998.
Option Exercise/Value Table. The following information is provided for
Mr. Ballew.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at Fiscal Year End(#) at Fiscal Year End($)
Acquired on Value --------------------------- -------------------------
Name Exercise (#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward Ballew, Jr. -- -- -- 24,498 -- $3,062
</TABLE>
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 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 Savings Bank's mutual to stock conversion, the
agreements were 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 Corporation. Severance
65
<PAGE> 145
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 Corporation 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
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities, (iii) the membership of the Board
of Directors changes as the result of a contested election, or (iv)
shareholders of the Corporation approve a merger, consolidation, sale or
disposition of all or substantially all of the Corporation'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 June 30, 1998, Mr. Ballew and Mrs. Wilson would be
entitled to severance payments of approximately $216,000 and $173,000,
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. If the proposed merger with First
Western is consummated, it would be deemed a change in control under the terms
of the agreements.
Compensation Committee Interlocks and Insider Participation.
Mr. Ballew, Executive Vice President and Chief Executive Officer of the
Corporation, serves as a member of the Compensation Committee. Although the
Chief Executive Officer recommends compensation to be paid to executive
officers, the entire Board of Directors of the Savings Bank reviews such
recommendations and sets the compensation for Mr. Ballew.
Directors' Compensation
Board Fees. Except for the President who receives a monthly fee of
$1,000, directors of the Savings Bank received a fee of $500 per month during
the year ended June 30, 1998. Director fees totaled $39,000 for the year
ended June 30, 1998. Directors do not receive any additional compensation for
serving on committees of the Board of Directors. No separate fees are paid
for service on the Board of Directors of the Corporation.
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 its continued
success 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. Plan
expenses totaled $17,000 for the fiscal year ended June 30, 1998.
66
<PAGE> 146
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Persons and groups who beneficially own in excess of 5% of the
Corporation's Common Stock are required to file certain reports disclosing
such ownership pursuant to the Exchange Act. Based on such reports, the
following table sets forth, as of the close of business on the Voting Record
Date, certain information as to those persons who were beneficial owners of
more than 5% of the outstanding shares of Common Stock. Management knows of
no persons other than those set forth below who beneficially owned more than
5% of the outstanding shares of Common Stock at the close of business on the
Voting Record Date. The following table also sets forth, as of the close of
business on the Voting Record Date, information as to the shares of Common
Stock beneficially owned by each director, by the named executive officers of
the Corporation, and by all executive officers and directors of the
Corporation as a group.
Number of Shares Percent of Shares
Name Beneficially Owned (1) Outstanding
- ---- ---------------------- -----------
Beneficial Owners of More Than 5%
Mitchell Savings Bank, Inc., SSB
Employee Stock Ownership Plan Trust 78,392 8.36%
Jerome H. and Susan B. Davis (2) 93,000 9.92
Great Meadows, Inc. (3) 97,550 10.41
Samuel L. Phillips
Van F. Phillips
G. Byron Phillips
Gina A. Phillips
Jewel Phillips 48,502 5.18
Directors
Calvin F. Hall 12,582 1.34%
Emma Lee M. Wilson 12,568 1.34
Baxter D. Johnson 2,393 *
Lloyd Hise, Jr. 5,398 *
Michael B. Thomas 3,165 *
Named Executive Officers(4)
Edward Ballew, Jr. 14,150 1.51
All Executive Officers and
Directors as a Group (6 persons) 50,256 5.36
_______________
* Less than 1 percent of shares outstanding.
(1) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
to be the beneficial owner, for purposes of this table, of any shares of
Common Stock if he or she has voting or investment power with respect to
such security. The table includes shares owned by spouses, other
immediate family members in trust, shares
(footnotes continued on following page)
67
<PAGE> 147
held in retirement accounts or funds for the benefit of the named
individuals, and other forms of ownership, over which shares the persons
named in the table may possess voting and/or investment power.
(2) As disclosed in a Schedule 13D filed with the Securities and Exchange
Commission ("SEC") on July 19, 1996, as subsequently amended on November
19, 1996, May 5, 1997, September 24, 1997 and October 31, 1997.
(3) As disclosed in a Schedule 13D filed with the SEC on August 19, 1996.
(4) Under SEC regulations, the term "named executive officer" is defined to
include the chief executive officer, regardless of compensation level,
and the four most highly compensated executive officers, other than the
chief executive officer, whose total annual salary and bonus for the last
completed fiscal year exceeded $100,000. Edward Ballew, Jr. was the
Corporation's only "named executive officer" for the fiscal year ended
June 30, 1998. He is also a director of the Corporation.
(c) Changes In Control
The Corporation is not aware of any arrangements, including any pledge by
any person of securities of the Corporation, the operation of which may
at a subsequent date result in a change in control of the Corporation,
except for the following:
Jerome H. Davis and Susan B. Davis, Greenwich, Connecticut, have filed
with the SEC a Schedule 13D dated July 19, 1996, as subsequently amended
on November 19, 1996, May 5, 1997, September 24, 1997 and October 31,
1997, with respect to the Corporation's common stock. The Schedule 13D
discloses that Mr. Davis and Mrs. Davis beneficially own an aggregate of
93,000 shares of common stock, or 9.92% of the outstanding shares. Item
4 of the Schedule 13D, entitled "Purpose of Transaction," states, in
part, "Mr. and Mrs. Davis now believe that Mitchell must consider several
options which will enhance shareholder value, including a merger
transaction."
Item 12. Certain Relationships and Related Transactions
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
therefore is 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 approximately $58,000 at June 30, 1998.
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, (unless the loan or extension of credit is
made under a benefit program generally available to all other employees and
does not give preference to any insider over any other employee) and (iii) did
not involve more than the normal risk of collectibility or present other
unfavorable features when made.
PART IV
Item 13. Exhibits List and Reports on Form 8-K
- -----------------------------------------------
(a) Exhibits
3.1 Certificate of Incorporation of Mitchell Bancorp, Inc.*
3.2 Bylaws of Mitchell Bancorp, Inc.*
10.1 Employment Agreement with Emma Lee M. Wilson*
10.2 Employment Agreement with Edward Ballew, Jr.*
10.2 Mitchell Savings Bank, Inc., SSB 1996 Employee Stock Ownership
Plan*
68
<PAGE> 148
10.3 Mitchell Bancorp, Inc. 1996 Stock Option Plan**
10.4 Mitchell Bancorp, Inc. 1996 Management Recognition and
Development Plan**
21 Subsidiaries of Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule
(b) The Corporation did not file any Reports on Form 8-K during the
quarter ended June 30, 1998.
_________________
* Incorporated by reference to the Corporation's Registration Statement on
Form SB-2 (File No. 333-1888).
** Incorporated by reference to the Corporation's Annual Meeting Proxy
Statement dated December 16, 1996.
69
<PAGE> 149
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MITCHELL BANCORP, INC.
Date: September 25, 1998 By: /s/Edward Ballew, Jr.
------------------------------
Edward Ballew, Jr.
Executive Vice President and Chief
Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Edward Ballew, Jr. Executive Vice President, Chief September 25, 1998
- ------------------------- Executive Officer and
Edward Ballew, Jr. Director (Principal
Executive Officer)
/s/ Emma Lee M. Wilson Assistant Managing Officer, September 25, 1998
- ------------------------- Secretary, Treasurer and
Emma Lee M. Wilson Director (Principal Financial
and Accounting Officer)
/s/ Calvin F. Hall President and Director September 25, 1998
- -------------------------
Calvin F. Hall
/s/ Baxter D. Johnson Director September 25, 1998
- -------------------------
Baxter D. Johnson
- ------------------------- Director September 25, 1998
Lloyd Hise, Jr.
/s/ Michael B. Thomas Director September 25, 1998
- -------------------------
Michael B. Thomas
<PAGE> 150
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-28446
-------
MITCHELL BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
North Carolina 56-1966011
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
210 Oak Avenue, Spruce Pine, North Carolina 28777
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (828) 765-7324
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
---------------- ------------
As of September 30, 1998, there were 937,174 shares of the Registrant's common
stock, par value $0.01 per share, outstanding. The Registrant has no other
classes of common equity outstanding.
Transitional small business disclosure format:
Yes X No
---------------- ------------
1
<PAGE> 151
MITCHELL BANCORP, INC.
AND SUBSIDIARY
SPRUCE PINE, NORTH CAROLINA
Index
<TABLE>
<CAPTION>
PART I. PAGE(S)
- ------- -------
<S> <C>
FINANCIAL INFORMATION
ITEM 1.
Financial Statements
Consolidated Balance Sheets-(Unaudited) as of June 30, 1998 and September 30, 1998..............3
Consolidated Statements of Income - (Unaudited) for the three month periods
ended September 30, 1997 and 1998.............................................................4
Consolidated Statements of Stockholders' Equity (unaudited).....................................5
Consolidated Statements of Cash Flows - (Unaudited) for the three months
ended September 30, 1997 and 1998.............................................................6
Notes to (Unaudited) Consolidated Financial Statements........................................7-9
ITEM 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................10-13
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings....................................................................14
Item 2. Changes in Securities................................................................14
Item 3. Defaults Upon Senior Securities......................................................14
Item 4. Submission of Matters to a Vote of Security Holders..................................14
Item 5. Other Information....................................................................14
Item 6. Exhibits and Reports on Form 8-K..................................................14-15
Signatures.....................................................................................16
</TABLE>
2
<PAGE> 152
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------------------
ASSETS 1998 1998
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 44 $ 167
Interest earning deposits 8,115 9,337
Investment securities:
Available for sale (amortized cost of $13) 628 662
Loans receivable, net 27,506 26,290
Real estate owned 345 288
Premises and equipment, net 56 53
Federal Home Loan Bank stock 291 291
Accrued interest receivable 5 7
Deferred income taxes 142 103
Prepaid expenses and other assets 174 242
-------- --------
Total assets $ 37,306 $ 37,440
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 21,564 $ 21,792
Accrued interest payable 76 68
Accrued expenses and other liabilities 992 910
Current income taxes payable 42 39
-------- --------
Total liabilities 22,674 22,809
-------- --------
Stockholders' equity:
Preferred stock ($.01 par value, 500,000 shares authorized;
none outstanding) -- --
Common stock ($.01 par value, 3,000,000 shares authorized;
979,987 shares issued; 930,902 and 937,174 shares outstanding
June 30 and September 30, 1998, respectively) 10 10
Paid-in capital 9,274 9,289
Retained earnings, substantially restricted 6,419 6,256
Treasury stock, at cost (48,995 and 42,723 shares, respectively) (784) (684)
Accumulated other comprehensive income 374 396
Unearned compensation:
Employee stock ownership plan (661) (636)
-------- --------
Total stockholders' equity 14,632 14,631
-------- --------
Total liabilities and stockholders' equity $ 37,306 $ 37,440
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 153
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---- ----
<S> <C> <C>
Interest income:
Loans $608 $578
Investments 7 7
Interest earning deposits 48 121
---- ----
Total interest income 663 706
Interest expense:
Deposits 235 290
---- ----
Net interest income 428 416
Provision for loan losses 6 6
---- ----
Net interest income after provision
for loan losses 422 410
Non-interest income:
Other 1 1
---- ----
Total non-interest income 1 1
---- ----
Non-interest expenses:
Compensation 88 98
Other employee benefits 64 71
Net occupancy expense 6 6
Deposit insurance premiums 3 3
Data processing 7 7
Other 47 158
---- ----
Total non-interest expenses 215 343
---- ----
Income before income taxes 208 68
Income tax expense 83 56
---- ----
Net income 125 12
Other comprehensive income:
Net unrealized gains on securities available for sale,
net of income taxes of $1 and $12, respectively 1 22
---- ----
Comprehensive income $126 $ 34
==== ====
Basic and diluted net income per share $.15 $ 01
Weighted average shares 860 873
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 154
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
(Unaudited)
(in thousands except share data)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER UNEARNED
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE COMPENSATION
STOCK CAPITAL EARNINGS STOCK INCOME FOR ESOP TOTAL
----- ------- -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 10 $ 9,225 $ 6,329 $(784) $277 $(732) $ 14,325
Comprehensive income:
Net income -- -- 433 -- -- -- 433
Other comprehensive income:
Unrealized gain on securities
available for sale, net of
income taxes -- -- -- -- 97 -- 97
----- ------- ------- ----- ---- ----- --------
Comprehensive income -- -- 433 -- 97 -- 530
----- ------- ------- ----- ---- ----- --------
Dividends paid ($.40 per share) -- -- (343) -- -- -- (343)
Earned compensation--ESOP -- 49 -- -- -- 71 120
----- ------- ------- ----- ---- ----- --------
Balance at June 30, 1998 10 9,274 6,419 (784) 374 (661) 14,632
Comprehensive income:
Net income -- -- 12 -- -- -- 12
Other comprehensive income:
Unrealized gain on securities
available for sale, net of
income taxes -- -- -- -- 22 -- 22
----- ------- ------- ----- ---- ----- --------
Comprehensive income -- -- 12 -- 22 -- 34
----- ------- ------- ----- ---- ----- --------
Dividends paid ($.20 per share) (175) (175)
Funding for MRP vesting 100 100
Earned compensation--ESOP 15 25 40
----- ------- ------- ----- ---- ----- --------
Balance at September 30, 1998 $ 10 $ 9,289 $ 6,256 $(684) $396 $(636) $ 14,631
===== ======= ======= ===== ==== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 155
MITCHELL BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
---- ----
<S> <C> <C>
Operating activities:
Net income $ 125 $ 12
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 2 3
Provision for loan losses 6 6
Net loss on the sale of real estate -- 3
Increase (decrease) in reserve for uncollected interest 2 (7)
Deferred income taxes 21 27
Net increase (decrease) in deferred loan fees 4 (7)
Amortization of unearned compensation 22 40
Increase in accrued interest receivable -- (2)
Increase in prepaid expenses and other assets (25) (65)
Decrease in accrued interest payable (2) (8)
Increase in accrued expenses and other liabilities 56 3
-------- -------
Net cash provided by operating activities 211 5
-------- -------
Investing activities:
Net (increase) decrease in loans (600) 1,274
Proceeds from the sale of real estate -- 16
Investment in life insurance cash surrender value (2) (3)
-------- -------
Net cash provided (used) by investing activities (602) 1,287
-------- -------
Financing activities:
Net increase in deposits 1,500 228
Dividends paid (170) (175)
-------- -------
Net cash provided (used) by financing activities 1,330 53
-------- -------
Increase (decrease) in cash and cash equivalents 939 1,345
Cash and cash equivalents at beginning of period 3,606 8,159
-------- -------
Cash and cash equivalents at end of period $ 4,545 $ 9,504
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 276 $ 298
Income taxes 48 94
Noncash transactions:
Unrealized gain on securities available for sale, net of deferred tax liability $ 1 $ 22
Loans to facilitate the sale of real estate owned $ -- $ 111
Real estate acquired in satisfaction of mortgage loans $ -- $ 61
Treasury stock used to fund MRP vesting $ -- $ 100
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 156
MITCHELL BANCORP, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
1. Mitchell Bancorp, Inc.
Mitchell Bancorp, Inc. ("Bancorp") was incorporated under the laws of
the State of North Carolina for the purpose of becoming the savings and
loan holding company of Mitchell Savings Bank, Inc. SSB (the "Savings
Bank") in connection with the Savings Bank's conversion from a state
chartered mutual savings bank to a state chartered stock savings bank
(the "Conversion"), pursuant to its Plan of Conversion. Bancorp
commenced on May 8, 1996, a Subscription Offering of its shares in
connection with the Conversion. On July 12, 1996, the Conversion was
completed. The financial statements of the Savings Bank are presented on
a consolidated basis with those of the Bancorp.
The consolidated financial statements included herein are for the
Bancorp, the Savings Bank and the Savings Bank's wholly owned
subsidiary, Mitchell Mortgage and Investment Co. (MMI) herein
collectively referred to as the "Company". The impact of MMI on the
consolidated financial statements is insignificant. MMI has no operating
activity other than to own stock in a third-party service bureau used by
the Savings Bank.
2. Basis of Preparation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and, therefore,
do not include all disclosures necessary for a complete presentation of
the consolidated balance sheets, consolidated statements of income,
consolidated statements of stockholders' equity, and consolidated
statements of cash flows in conformity with generally accepted
accounting principles. However, all adjustments which are, in the
opinion of management, necessary for the fair presentation of the
interim financial statements have been included. All such adjustments
are of a normal recurring nature. The statement of comprehensive income
for the three month period ended September 30, 1998 is not necessarily
indicative of the results which may be expected for the entire year.
It is suggested that these unaudited consolidated financial statements
be read in conjunction with the audited consolidated financial
statements and notes thereto for the Company for the year ended June 30,
1998 which are included in the 10-KSB.
7
<PAGE> 157
3. Earnings Per Share
Basic and diluted earnings per share amounts have been computed in
accordance with Statement of Financial Accounting Standard No. 123 (SFAS
123). Per share amounts for the three month period ended September 30,
1997 have been restated in accordance with SFAS 123. Unallocated ESOP
shares are not considered as outstanding for purposes of the basic or
diluted calculation.
4. Stockholders' Equity
On January 29, 1997, the stockholders of the Company approved the
Company's Stock Option Plan and Management Recognition Plan (MRP) at the
Company's annual meeting. Shares granted 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. The Company had
previously announced and repurchased 5% of its outstanding common stock
to fund these plans. As of September 30, 1998, 48,995 shares of common
stock had been repurchased and 6,272 shares were used to fund the
vesting of the MRP in July 1998. The remaining 25,086 shares will be
moved from treasury stock and restricted for the remaining MRP awards
unvested.
5. Change in control
On August 13, 1998, the Company signed a definitive agreement under
which the Company will seek shareholder and regulatory approval to
merge with a commercial bank. Under the agreement, the shareholders will
receive cash and/or shares of the commercial bank's common stock subject
to an exchange ratio as defined in the merger agreement.
The pending change in control, if approved and consummated, will result
in the payment of certain employee benefits, the payment of employment
contract settlements, and the acceleration of certain benefit payments
from qualified and nonqualified retirement plans. As of September 30,
1998, the Company has not accrued any additional liabilities with regard
to these potential benefit payments that will result upon approval and
completion of the merger.
Unvested stock options of 54,877 and unvested MRP awards of 25,086 under
the terms of the individual plan documents will fully vest with the
change of control. The Company will recognize at that time additional
compensation expense for unvested MRP awards which have not been
recognized. It is also the intent under the merger agreement that the
ESOP plan will have first rights to cash consideration for its
unallocated shares. This will enable the ESOP to repay its outstanding
debt obligation to the Company and distribute the excess proceeds to
plan participants, which will in effect terminate the plan.
8
<PAGE> 158
6. Asset Quality
At September 30, 1998, the Company had total nonperforming loans (i.e.,
loans which are contractually past due 90 days or more) and real estate
owned of approximately $527,000. Of the $239,000 of nonperforming loans,
35.6%, or $85,000, were the result of loan customers filing
bankruptcy. The Company ability to take action on these loans and the
underlying collateral is dependent on the bankruptcy procedures. As a
percentage of net loans at September 30, 1998, nonperforming loans was
.91%. Total nonperforming assets as a percent of total assets at
September 30, 1998 was 1.41%.
9
<PAGE> 159
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis is intended to assist in understanding the
financial condition and the results of operations of the Company. References to
the "Company" include Mitchell Bancorp, Inc. and/or Mitchell Savings Bank, Inc.
SSB, as appropriate.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND SEPTEMBER 30, 1998
The Company's total consolidated assets remained constant from June 30, 1998 to
September 30, 1998. This was primarily attributable to the fact that the Company
did not experience any significant deposit growth during the three month period.
The composition of the Company's balance sheet has not been materially affected
by market conditions between June 30, 1998 and September 30, 1998. Net loans did
decreased by $1.2 million, or 4.42%. This decrease was the result of the Company
experienced scheduled repayments and payoffs of loans in the current interest
rate environment in excess of new loan originations.
Consistent with its historical lending practices, virtually all of the Company's
loan portfolio at September 30, 1998 consisted of fixed rate loans with
maturities up to sixteen (16) years. Consequently, the Company is exposed to a
high degree of interest rate risk in a rising interest rate environment. The
Company has historically accepted this risk in light of its relatively high
capital levels. See "Liquidity and Capital Resources" discussion below.
Deposits increased only $228,000 or 1.06%, from $21.6 million at June 30, 1998
to $21.8 million at September 30, 1998. The Company's experienced limited growth
in passbook savings and certificates of deposit during the three month period.
10
<PAGE> 160
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1997 AND 1998
NET INCOME. Net income decreased $113,000 or 90.4% from net income of $125,000
for the three months ended September 30, 1997 to net income of only $12,000 for
the three months ended September 30, 1998. The decrease was primarily the result
of additional non-interest expenses associated with the merger process. These
additional expenses along with the resulting fact that such reorganization
expenses are not tax deductible significantly reduced net income for the first
quarter.
NET INTEREST INCOME. Net interest income decreased $12,000 or 2.80% from
$428,000 for the three months ended September 30, 1997 to $416,000 for the three
months ended September 30, 1998. The decline in net interest income primarily
reflects a 22 basis point increase in the average cost of funds for the three
months ended September 30, 1998 as compared to 1997. Furthermore, the Savings
Bank's had approximately $3.3 million more in average deposits outstanding
during 1998 than in 1997. The interest rate spread also decreased from 2.85% for
three months ending September 30, 1997 to 2.38% for the three months ending
September 30, 1998.
INTEREST INCOME. Total interest income increased $43,000 from $663,000 for the
three months ended September 30, 1997 to $706,000 for the three months ended
September 30, 1998. Interest on loans decreased $30,000 as a result of a $2.2
million decrease in average loans outstanding, or 7.19%. Interest on overnight
funds increased by $73,000 as additional funds available from new deposits and
loan repayment were invested in overnight funds.
INTEREST EXPENSE. Interest expense increased $55,000 from $235,000 for the three
months ended September 30, 1997 to $290,000 for the three months ended September
30, 1998. The increase for the three months ending September 30, 1998 was the
result of a increase of approximately $3.4 million in the average balance of
certificates of deposits outstanding during 1998 as compared to the same period
in 1997. Certificates of deposit also carry the highest cost of funds.
PROVISION FOR LOAN LOSSES. The provision for loan losses for both three month
periods ended September 30 was $6,000. Historically, management has emphasized
the Company's loss experience over other factors in establishing provisions for
loan losses. However, management has reviewed the allowance for loan losses in
relation to the Company's composition of its loan portfolio and observations of
the general economic climate and loan loss expectations. The ratio of allowance
to non-performing loans at September 30, 1998 was 86.2%.
NON-INTEREST EXPENSE. Non-interest expense increased by $128,000 from $215,000
for the three months ending September 30, 1997 to $343,000 for 1998. This
increase was primarily the result of an increase in professional fees associated
with the Company's pending merger. The Company incurred legal and accounting
fees in connection with due diligence procedures, merger negotiations, and other
related activities during the three month period.
11
<PAGE> 161
INCOME TAXES. Income tax expense for the three months ending September 30, 1998
was $56,000 compared to income tax expense of $83,000 for the same period in
1997. Income tax expense for 1998 as a percentage of pretax income increased
because of the nondeductible reorganization expenses incurred during the period.
LIQUIDITY AND CAPITAL RESOURCES. The Company's primary sources of funds are new
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 Company's primary
investing activity is loan originations. The Company maintains liquidity levels
adequate to fund loan commitments, investment opportunities, deposit withdrawals
and other financial commitments. At September 30, 1998, there were no material
commitments for capital expenditures and the Company had unfunded loan
commitments of approximately $194,000. At September 30, 1998, management had no
knowledge of any trends, events or uncertainties that will have or are
reasonably likely to have material effects on the liquidity, capital resources
or operations of the Company. Further at September 30, 1998, management was not
aware of any current recommendations by the regulatory authorities which, if
implemented, would have such an effect.
The Savings Bank exceeded all of its capital requirements at September 30, 1998.
The Savings Bank had the following capital ratios at September 30, 1998:
<TABLE>
<CAPTION>
FOR CAPITAL CATEGORIZED AS
ACTUAL ADEQUACY PURPOSES "WELL CAPITALIZED"(1)
----------------------- --------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Tier I Capital
(To average assets) $ 10,998 32.3% $ 1,363 >4% $ 1,703 > 5%
- -
Tier I Capital
(To risk weighted assets) $ 10,998 61.4% $ 716 >4% $ 1,074 > 6%
- -
Total Capital
(To risk weighted assets) $ 11,204 32.9% $ 1,432 >8% $ 1,790 > 10%
- -
</TABLE>
1) As categorized under the Prompt Corrective Action Provisions.
YEAR 2000 ISSUES. The Company has formulated a Year 2000 Compliance Plan to
address this issue. The phases identified under the plan are awareness,
assessment, renovation, validation and implementation. The purpose of the plan
is to outline the procedures necessary for assuring that the Company is in a
state of readiness for the century date change. The Company is on hold currently
with regard to its contingency plan which would be designed to prepare a
operating alternative in the event that systems do not perform as planned either
before or after the century date change. The
12
<PAGE> 162
Company has sought and received regulatory approval to delay the development of
a contingency plan pending the outcome of its current merger. The acquiror has
notified the Company of its plans to migrate the data processing functions to
its system shortly after the effective date of the merger.
Substantially all of the Company's material data processing functions are
provided by a third party service bureau. The service bureau has advised the
Company in writing that it is Year 2000 compliant. Company personnel are
scheduled to perform testing on the system by the end of 1998. The Company has
also made written and oral inquiries of non-information technology providers as
to their year 2000 readiness. No significant issues have been raised at this
time based on these inquiries and responses.
The Company had scheduled and has replaced certain teller terminals which are
on-line with the third party service bureau. The equipment is compatible with
the teller equipment utilized by the acquiring company. The computer
upgrades were necessitated by the age and condition of the previous equipment
and the cost was not material to the Company's financial condition. The Company
has a reasonable basis to conclude that the Year 2000 issue will not materially
affect future financial results, or cause reported financial information not to
be necessarily indicative of future operating results or future financial
condition. However, no assurance can be given that the Year 2000 compliance plan
will be completed successfully by the Year 2000.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events.
These events are inherently uncertain, including the progress and results of
vendors, suppliers and customers Year 2000 readiness.
13
<PAGE> 163
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be a party to various legal
proceedings incident to its or their business. At September 30, 1998,
there were no legal proceedings to which the Bancorp or any subsidiary
was a party, or to which of any of their property was subject, which
were expected by management to result in a material loss.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
2 Agreement and Plan of Merger, dated August 13, 1998, between
the Company and First Western Bank (incorporated by
reference to the Company's current report on Form 8-K dated
August 18, 1998).
3(a) Company's Articles of Incorporation (incorporated by
reference to the Company's Registration Statement on Form
SB-2 File No. 333-1888).
3(b) Company's Bylaws (incorporated by reference to the Company's
Registration Statement on Form SB-2 File No. 333-1888).
10.1 Employment Agreement with Emma Lee M. Wilson (incorporated
by reference to the Company's Registration Statement on Form
SB-2 File No. 333-1888).
10.2 Employment Agreement with Edward Ballew, Jr. (incorporated
by reference to the Company's Registration Statement on Form
SB-2 File No. 333-1888).
14
<PAGE> 164
10.3 Mitchell Savings Bank, Inc., SSB 1996 Employee Stock
Ownership Plan (incorporated by reference to the Company's
Registration Statement on Form SB-2 File No. 333-1888).
10.4 Mitchell Bancorp, Inc. 1996 Stock Option Plan (incorporated
by reference to the Company's proxy statement for the 1996
Annual Meeting of Stockholders).
10.5 Mitchell Bancorp, Inc. 1996 Management Recognition and
Development Plan (incorporated by reference to the Company's
proxy statement for the 1996 Annual Meeting of
Stockholders).
27 Financial Data Schedule
A current report on Form 8-K was filed on August 19, 1998 to report
the signing of a definitive merger agreement with First Western Bank. The Form
8-K included as exhibits the Agreement and Plan of Merger and related press
release. No financial statements were filed.
15
<PAGE> 165
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITCHELL BANCORP, INC.
Date: November 13, 1998 By /s/ Edward Ballew, Jr.
----------------------
Edward Ballew Jr.
(Executive Vice President and Chief
Executive Officer)
MITCHELL BANCORP, INC.
Date: November 13, 1998 By /s/ Emma Lee Wilson
-------------------
Emma Lee Wilson
(Chief Financial Officer)
16
<PAGE> 166
EXHIBIT B
The President's Letter to Shareholders
The Management and Board of Directors of First Western Bank of North Carolina
are pleased to present to you our operating results for the period ended
December 31, 1997. The December 31, 1997 financial statements have been audited
by Deloitte & Touche, LLP, Certified Public Accountants.
Your Bank opened on December 15, 1997 with a two week soft opening to test the
systems. The grand opening was held in January 1998. As a result of being
operational for only a few days, "normal" financial measurements will
consequently be of little or no value.
The Bank's officers and directors anticipated that the Bank would operate at a
loss during the first year. The projected loss for the first twelve months of
operation was $619,292. Actual losses through December 31, 1997 were $135,251.
Property has been purchased for the future main office which should establish
itself as an outstanding location to attract new customers. Additionally,
functional and cosmetic improvements were made to the leased Spruce Pine branch.
It is our belief that in the long run, these investments will enhance our total
banking operation for many years to come.
I am sure each of you will join me in congratulating the employees, officers,
and directors for their dedication and hard work in "making it happen". I look
forward to 1998 as a great year for First Western Bank. I thank the community
and all of our shareholders for their support. Your comments, suggestions and
questions are always welcome.
Sincerely,
Ronald E. Deyton
President and Chief Executive Officer
- 1 -
<PAGE> 167
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The following discussion and analysis is intended to assist in understanding the
financial condition and the results of operations of First Western Bank (the
"Bank"). The Bank was formed and began operations in December 1997.
Financial Condition at December 31, 1997
The Bank's total assets at December 31, 1997 were approximately $8.1 million.
Since the Bank completed its initial stock offering in late 1997 and only began
operations on December 15th, the majority of the Bank's assets are in cash and
cash equivalents which totaled approximately $7.4 million and premises and
equipment of approximately $577,000. No significant loan portfolio has been
generated as of December 31, 1997.
The Bank raised approximately $7.9 million from the sale and subscription of
728,538 shares of common stock in its initial stock offering. The Bank had
common stock subscribed totaling approximately $53,000 at December 31, 1997
reflected in shareholders' equity. Additionally, the Bank attracted
approximately $547,000 in demand and time deposits since opening for operations.
The majority of the deposits at December 31, 1997 are demand and money market
accounts.
Results of Operations from December 1, 1997 (Date of Incorporation) through
December 31, 1997
Net Loss. Net loss for the period ending December 31, 1997 was $135,251 or $.19
per share. The net loss resulted from the initial operating expenses and
administrative salaries and benefits exceeding revenues generated from the
initial operations of the Bank. The only income generated for the period ending
December 31 was from interest income earned on the initial stock offering
proceeds invested in interest earning assets.
Net Interest Income. Net interest income for the period ending December 31, 1997
was $30,004. This net interest income consists of earnings on interest-earning
deposits and loans offset by the limited amount of interest expense recognized
on the deposit portfolio. The Bank began accepting deposit accounts on December
15, 1997.
Provision for Loan Losses. The Bank has not recorded any provision for loan
losses since lending activities had not significantly begun as of December 31,
1997. Management will review the need for loan loss allowances in the future as
the loan portfolio begins to grow. In 1998 management will consider the
composition of the loan portfolio and general economic trends in establishing
allowances.
Non-Interest Expense. Non-interest expense was $165,347 for the period ending
December 31, 1997. Compensation and employee benefits comprised $61,422 of the
total, as administrative and operational personnel were hired to begin banking
operations. The remainder of non-interest expenses included $7,447 for occupancy
expenses and $96,478 of other start-up and operating expenses.
- 2 -
<PAGE> 168
Income Taxes. Although the Bank incurred a net loss for the first month of
operations, no federal or state income tax benefit has been recognized. Until
the Bank can reasonably expect to realize taxable income to absorb the initial
operating losses, a valuation allowance will be provided for the deferred tax
asset.
Liquidity and Capital Resources. The Bank's primary sources of liquidity at this
point have been the proceeds from the initial stock offering and funds provided
by attracting the initial savings deposits. The Bank's primary investing
activity will be loan originations. The Bank will maintain liquidity levels
adequate to fund loan commitments, investment opportunities, deposit withdrawals
and other financial commitments. At December 31, 1997, there were no material
commitments for capital expenditures. However, the Bank is considering the
construction of a bank building in Burnsville, North Carolina of approximately
8,000 square feet.
At December 31, 1997, management had no knowledge of any trends, events or
uncertainties that will have or are reasonably likely to have material effects
on the liquidity, capital resources or operations of the Bank. Further, at
December 31, 1997, management was not aware of any current recommendations by
the regulatory authorities which, if implemented, would have such an effect.
The Bank was able to raise a significant amount of capital in its initial stock
offering to enable it to begin banking operations in Burnsville and Spruce Pine,
North Carolina.
Year 2000 Compliance. The "Year 2000 Problem" arose because many existing
computer programs use only the last two digits to refer to a year. If not
addressed, computer programs that are date sensitive may not have the ability to
properly recognize dates in year 2000 and beyond. The result could be a
temporary disruption of operations and the processing of transactions. First
Western Bank has developed a four-phase approach to addressing this problem.
Phase 1 has an analysis to identify the impact and costs relating to year 2000,
both in computer information systems and other equipment. Phase 2 was to create
a comprehensive plan to address and fix any problems identified. Phase 3 is the
actual implementation of the comprehensive plan and phase 4 is addressing any
unforeseen complications or issues not previously addressed. First Western Bank
has completed Phase 1 and Phase 2. Phase 3 is scheduled to be substantially
complete by the end of 1998, with continued testing of compliance throughout
1999. Additionally, as part of Phase 3, the Company has sent "Year 2000"
questionnaires to vendors and other entities with which the Company conducts
business in order to assess whether they are year 2000 compliant or have
adequately addressed their system conversion requirements. To date certain
vendors have provided positive responses to requests for year 2000
certifications. The Company cannot predict how many, if any, of the responses it
receives may prove later to be inaccurate or overly optimistic. The estimated
cost to complete Phase 3 is $25,000 to $35,000. As of June 30, 1998, the Company
is on schedule to complete Phase 3 as planned. The Company is continuing to
closely monitor adherence to the implementation plan and is currently satisfied
that it will be adequately completed in the scheduled time frame. If the Company
encounters unforeseen complications or issues not previously addressed in the
comprehensive plan (Phase 4), additional resources from internal and external
sources would be committed to complete the necessary conversions in the required
time frame. Since the use of these additional resources is considered unlikely,
no estimates as to the costs of them have been made at this time.
- 3 -
<PAGE> 169
- --------------------------------------------------------------------------------
First Western Bank
Financial Statements for the Period
From December 1, 1997 (Date of
Incorporation) to December 31, 1997
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of First Western Bank:
We have audited the accompanying balance sheet of First Western Bank (the
"Bank") as of December 31, 1997 and the related statements of operations,
changes in shareholders' equity, and cash flows for the period from December 1,
1997 (date of incorporation) to December 31, 1997. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Bank at December 31, 1997 and the
results of its operations and its cash flows for the period from December 1,
1997 (date of incorporation) to December 31, 1997, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Hickory, North Carolina
March 13, 1998
- 4 -
<PAGE> 170
FIRST WESTERN BANK
BALANCE SHEET
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Cash and cash equivalents (Note 1):
Cash and due from banks $ 506,268
Interest-bearing deposits 6,893,325
-----------
Total cash and cash equivalents 7,399,593
Loans (Note 2) 28,900
Premises and equipment, net (Notes 1 and 3) 576,776
Accrued interest receivable 2,561
Other assets 67,822
-----------
TOTAL $ 8,075,652
===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 4):
Demand $ 243,331
NOW accounts 124,385
Money market accounts 32,784
Savings 63,307
Time deposits of $100,000 or more --
Other time deposits 83,130
-----------
Total deposits 546,937
Accrued interest payable and other liabilities 138
-----------
Total liabilities 547,075
-----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Notes 1 and 7):
Common stock, $5.00 par value, authorized - 10,000,000 shares; issued and
outstanding - 723,689 shares 3,618,445
Common stock subscribed - 4,849 shares 53,339
Common stock subscriptions receivable (47,039)
Additional paid-in capital 4,200,661
Accumulated deficit (296,829)
-----------
Total shareholders' equity 7,528,577
-----------
TOTAL $ 8,075,652
===========
</TABLE>
See notes to financial statements.
- 5 -
<PAGE> 171
FIRST WESTERN BANK
STATEMENT OF OPERATIONS
PERIOD FROM DECEMBER 1, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INTEREST INCOME:
Interest and fees on loans $ 210
Interest on deposits with other banks 29,942
---------
Total interest income 30,152
INTEREST EXPENSE - Deposits 148
---------
NET INTEREST INCOME 30,004
PROVISION FOR POSSIBLE LOAN LOSSES --
---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 30,004
---------
OTHER INCOME - Service charges on deposit accounts 92
---------
OTHER EXPENSES:
Salaries and wages 57,083
Employee benefits 4,339
Occupancy expense 7,447
Other 96,478
---------
Total other expenses 165,347
---------
LOSS BEFORE INCOME TAXES (135,251)
INCOME TAXES (Notes 1 and 5) --
---------
NET LOSS $(135,251)
=========
BASIC AND DILUTED NET LOSS PER COMMON SHARE (Note 1) $ (.19)
=========
</TABLE>
See notes to financial statements.
- 6 -
<PAGE> 172
FIRST WESTERN BANK
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
PERIOD FROM DECEMBER 1, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Shareholders'
Common Stock Common Stock Additional Equity
Common Stock Subscribed Subscriptions Paid-in Accumulated (Notes 1
------------------- ----------------
Shares Amount Shares Amount Receivable Capital Deficit and 7)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 1, 1997 723,689 $3,618,445 5,404 $ 60,944 $(52,589) $4,200,661 $(161,578) $ 7,665,883
Net loss -- -- -- -- -- -- (135,251) (135,251)
Common stock subscription
refunds and
cancellations -- -- (555) (7,605) 5,550 -- -- (2,055)
------- ---------- ------ -------- -------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1997 723,689 $3,618,445 4,849 $ 53,339 $(47,039) $4,200,661 $(296,829) $ 7,528,577
======= ========== ====== ======== ======== ========== ========= ===========
</TABLE>
See notes to financial statements
- 7 -
<PAGE> 173
FIRST WESTERN BANK
STATEMENT OF CASH FLOWS
PERIOD FROM DECEMBER 1, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (135,251)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 7,929
Increase in accrued interest receivable (2,561)
Increase in other assets (11,667)
Increase in accrued interest payable and other liabilities 136
-----------
Net cash used by operating activities (141,414)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (28,900)
Additions to premise and equipment (330,724)
-----------
Net cash used by investing activities (359,624)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and savings accounts 463,807
Net increase in certificates of deposits 83,132
Refund of stock subscriptions (7,605)
Commissions paid on common stock sales (29,589)
-----------
Net cash provided by financing activities 509,745
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,707
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,390,886
-----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,399,593
===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ --
Income taxes --
</TABLE>
See notes to financial statements.
- 8 -
<PAGE> 174
FIRST WESTERN BANK
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM DECEMBER 1, 1997 (DATE OF INCORPORATION) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - First Western Bank is a state chartered commercial bank
headquartered in Burnsville, North Carolina and provides consumer and
commercial banking services in Mitchell and Yancey County and surrounding
areas. The Bank was incorporated in North Carolina on December 1, 1997
and began accepting deposits and making loans on December 15, 1997.
Prior to receiving a bank charter and articles of incorporation, the Bank
conducted a stock offering of its common stock. Net proceeds from the
public offering as of December 31, 1997 total $7,908,162, representing
728,538 shares of common stock sold at $11.00 per share net of issuance
costs. Operations prior to incorporation consisted only of organizational
and start-up activities and the sale of common stock.
Total costs incurred form April 20, 1997 (Date of Inception) through
November 30, 1997, which were not capitalized and accordingly included in
beginning accumulated deficit were ($161,578). Included in these costs
were salary and employee benefit expenses of $111,329, occupancy expenses
of $8,552, advertising, contract labor, office supplies and other
expenses totaling $41,697. The Bank also purchased office equipment
totaling $250,589 from April 20, 1997 through November 30, 1997.
The accompanying financial statements reflect operations from December 1,
1997 (date of incorporation) to December 31, 1997.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand, amounts due from banks, and interest-bearing deposits with banks.
Loans - Loans held for investment are recorded at cost. No loans were in
a nonaccrual status at December 31, 1997 nor were any loans restructured
during the period ended December 31, 1997.
Allowance for Loan Losses - The provision for loan losses charged to
operations is an amount sufficient to bring the allowance for loan losses
to an estimated balance considered adequate to absorb probable losses in
the portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, current economic
conditions, historical loan loss experience and other risk factors.
Recovery of the carrying value of loans is dependent to some extent on
future economic, operating and other conditions that may be beyond the
Bank's control. Unanticipated future adverse changes in such conditions
could result in material adjustments to the allowance for loan losses.
Loans that are deemed to be impaired (i.e., probable that the Bank will
be unable to collect all amounts due according to the terms of the loan
agreement) are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a
practical matter, at the loan's observable market value or fair value of
the collateral if the loan is collateral dependent. A valuation reserve
is established to record the difference between the stated loan amount
and the present value or market value of the impaired loan. Impaired
loans may be valued on a loan-by-loan basis (e.g., loans with similar
risk characteristics). The Bank's policy for recognition of interest
income on impaired loans is the same as its
- 9 -
<PAGE> 175
interest income recognition policy for non-impaired loans. As of December
31, 1997, there were no loans within the Bank's portfolio that were
considered to be impaired.
Premises and Equipment and Other Long-Lived Assets - Premises and
equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization, computed by the
straight-line method, are charged to operations over the properties'
estimated useful lives, 5 to 15 years for furniture and equipment or, in
the case of leasehold improvements, the term of the lease if shorter.
Maintenance and repairs are charged to operations in the year incurred.
Gains and losses on dispositions are included in current operations.
The Bank reviews long-lived assets and certain identifiable intangibles
to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows is less than the
stated amount of the asset, an impairment loss is recognized.
Income Taxes - Deferred taxes are computed using the asset and liability
approach. The tax effects of differences between the tax and financial
accounting bases of assets and liabilities are reflected in the balance
sheet at the tax rates expected to be in effect when the differences
reverse. A valuation allowance is provided as a reserve against deferred
tax assets whose realization is deemed not to be more likely than not. As
changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
Interest Income and Expense - The Bank utilizes the accrual method of
accounting, except for immaterial amounts of loan income and other fees
which are recorded as income when collected. Substantially all loans earn
interest on the level yield method based on the daily outstanding
balance. The accrual of interest is discontinued when, in management's
judgment, the interest may not be collected.
The Bank defers the immediate recognition of certain loan origination
fees and certain loan origination costs when new loans are originated and
amortizes these deferred amounts over the life of each related loan using
the effective interest method as an adjustment to interest income.
Net Loss Per Share - Basic net loss per common share was computed using
the weighted average number of shares of common stock outstanding during
the period (728,538 shares). Diluted net loss per share does not differ
from basic net loss per share as presented.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Impact of Newly Issued Accounting Standards - In June 1997, Statement of
Financial Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive
Income", was issued. SFAS No. 130 will require disclosure of
comprehensive income (which is defined as "the change in equity during a
period excluding changes resulting from investments by shareholders and
distributions to shareholders") and its components. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997, with
reclassification of comparative years required, and will be adopted by
the Bank in the year beginning January 1, 1998. Had the new standard been
applied in the period ended December 31, 1997, comprehensive income would
be equal to net income. Total shareholders' equity would not differ from
that shown.
- 10 -
<PAGE> 176
2. LOANS
Loans at December 31, 1997 classified by type, are as follows:
Commercial, financial and agricultural $ 6,050
Consumer 22,950
--------
Subtotal 29,000
Net deferred loan origination fees (100)
--------
Total $ 28,900
========
Directors and officers of the Bank and companies with which they are
affiliated may be customers of and borrowers from the Bank in the
ordinary course of business. At December 31, 1997, directors and
principal officers had no direct or indirect indebtedness to the Bank.
3. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 are as follows:
Land $284,831
Furniture and equipment 296,482
--------
Total 581,313
Less accumulated depreciation and amortization 4,537
--------
Total $576,776
========
4. DEPOSIT ACCOUNTS
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
1998 $54,500
1999 6,000
2000 22,630
-------
Total $83,130
=======
- 11 -
<PAGE> 177
5. INCOME TAXES
A reconciliation of reported income tax expense for the period ended
December 31, 1997 to the amount of tax expense computed by multiplying
the loss before income taxes by the statutory federal income tax rate of
34% follows:
Tax benefit at statutory rate $(45,985)
Increase (decrease) in income taxes resulting from:
State income tax benefit net of federal tax benefit (10,480)
Valuation allowance 57,986
Other, net (1,521)
--------
Income taxes reported $ --
========
The tax effect of the cumulative temporary differences and carryforwards
that gave rise to the deferred tax assets and liabilities at December 31,
1997 are as follows:
Assets Liabilities Total
Net operating loss carryforward $ 59,188 $ 59,188
Depreciation -- $ (1,202) (1,202)
Valuation allowance (57,986) -- (57,986)
-------- -------- --------
Total $ 1,202 $ (1,202) $ --
======== ======== ========
6. LEASES
The Bank leases the banking facility and real estate under operating
lease agreements. Future minimum rental payments are as follows:
1998 $ 56,400
1999 30,000
2000 30,000
--------
Total $116,400
========
7. REGULATION AND REGULATORY RESTRICTIONS
The Bank is regulated by the Federal Deposit Insurance Corporation
("FDIC") and the North Carolina State Banking Commission.
- 12 -
<PAGE> 178
The Bank is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). To date, the Bank has not
been notified of its capital adequacy category. Management believes, as
of December 31, 1997, that the Bank meets all capital adequacy
requirements to which it is subject. To be categorized as adequately
capitalized under the regulatory framework for prompt corrective action,
the Bank must maintain the minimum capital ratios as set forth in the
table below.
The Bank's actual capital amounts and ratios are also presented in the
table (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted
Assets) $7,529 358% $168 8% $210 10%
Tier I Capital (to Risk Weighted
Assets) $7,529 358% $ 82 4% $126 6%
Tier I Capital (to Average Assets) $7,529 94% $320 4% $400 5%
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Bank may have various financial instruments (outstanding commitments)
with off-balance sheet risk that are issued in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of
credit. Commitments to extend credit are legally binding agreements to
lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration
dates or other termination clauses. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
outstanding do not necessarily represent future cash requirements.
Standby letters of credit represent conditional commitments issued by the
Bank to assure the performance of a customer to a third party. There are
no commitments to extend credit at December 31, 1997.
- 13 -
<PAGE> 179
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Bank believes that the fair value of its cash and cash equivalents,
loans and deposits are not materially different from their carrying
values at December 31, 1997 due to their short maturities, variable
interest rates and the short period since their origination (December 15,
1997).
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1997. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
10. SUBSEQUENT EVENT (Unaudited)
On August 13, 1998, the Bank executed an Agreement and Plan of Merger
with Mitchell Bancorp. Each outstanding share of Mitchell Bancorp's
common stock will be converted into the right to receive 1.60 shares of
First Western Bank common stock or cash merger consideration of $20.00
per share. Per the terms of the merger agreement, cash merger
consideration shall not exceed 49.9% of the total consideration. The
merger is expected to be completed in December 1998. The completion of
the transaction is subject to regulatory and shareholder approvals.
- 14 -
<PAGE> 180
<TABLE>
<S> <C> <C>
Board of Directors
Robert L. Bailey Jerry Duncan Ronnie C. Odom
President President President
New Buck Corporation Mayland Home Center Industrial Installations Inc.
William A. Banks F. Warren Hughes Van F. Phillips
President Clerk of Superior Court Vice President
BanCo Lumber, Inc. Yancey County Great Meadows, Inc.
Ronnie E. Deyton David R. McIntosh Jack Dean Pitman
President and Chief Executive Officer Sole Proprietor Co-Owner
First Western Bank David's Limited Grassy Creek Hardware
& Bldg. Supply Co.
Ray V. Miller
President
"C" Cablevision, Inc.
Executive Officers
Ronnie E. Deyton Charles Ownbey Martin Shuford
President, Chief Executive Officer Sr. Exec. Vice President Exec. Vice President
And Director
Bank Officers
L. Jane Hensley Patti E. Peterson Judy B. Snyder
Asst. Vice President/ Vice President/ Vice President/
Operations Branch Manager Branch Manager
First Western Bank
Administrative Office:
321 West Main Street
P. O. Box 187
Burnsville, North Carolina 28714
(704) 682-1115
Branches:
603 West Main Street
Burnsville, North Carolina 28714
(704) 682-7744
226 Spruce Pine Shopping Center
Spruce Pine, North Carolina 28777
(704) 766-7744
</TABLE>
- 15 -
<PAGE> 181
Shareholder Information
Notice of Annual Meeting:
The annual meeting of the shareholders of First Western Bank will be held
on April 28, 1998 at 2:00 p.m., in the Executive Center Building
Auditorium of the PineBridge Inn, 101 PineBridge Avenue, Spruce Pine,
North Carolina.
Independent Auditors
Deloitte & Touche, L.L.P.
310 First Union Financial Center
Hickory, NC 28603
Special Counsel
The Sanford Holshouser Law Firm, PLLC
234 Fayetteville Street
Suite 100
Raleigh, NC 27602
Stock Transfer Agent
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
Market for the Common Stock, Stock Prices and Dividends
The Bank's common stock is traded in the over-the-counter market and is
listed on the Over-the-Counter "Bulletin Board". J. C. Bradford & Co.,
Hickory North Carolina (1-800-222-1082) is the market maker for the
Bank's common stock. As of December 31, 1997, the Bank had issued and
outstanding 723,689 shares of common stock. The stock is thinly traded.
The Bank's common stock was issued on December 15, 1997, at a price of
$11.00 per share.
To date, the Bank has not paid any cash dividends. The payment of cash
dividends during the first three years of the Bank's operations generally
will be prohibited by the North Carolina Banking Commissioner and the
FDIC. Further, the Bank may not pay a cash dividend unless the Bank's
undivided profits are at least 50% of its paid-in capital.
- 16 -
<PAGE> 182
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, DC 20429
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
FDIC Certificate NO. 34570
First Western Bank
(Exact name of registrant as specified in its charter)
North Carolina 56-2023677
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
321 West Main Street, Burnsville, NC 28714
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (828) 682-1115
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 12(b) or 12(g) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at September 30, 1998
--------------------- ---------------------------------
$5.00 par value 726,419 shares
<PAGE> 183
FIRST WESTERN BANK
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and
December 31, 1997 ........................................ 3
Consolidated Statements of Income
Quarter and Year to Date ended September 30, 1998 ........ 4
Consolidated Statement of Cash Flows
Nine Months ended September 30, 1998 ..................... 5
Notes to Consolidated Financial Statements ................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............ 7
PART II. OTHER INFORMATION
Item 5. Other Information ................................... 9
Item 6. Exhibits and Reports on Form 8-K .................... 9
2
<PAGE> 184
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST WESTERN BANK
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 December 31, 1997
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents
Cash and due from banks $ 847,426 $ 506,268
Interest-bearing deposits 6,063,748 6,893,325
Federal funds sold 4,420,000 --
------------ -----------
Total cash and cash equivalents 11,331,174 7,399,593
Investment securities market value $1,176,187 2,992,638
Loans, net of allowance for loan losses 7,521,080 28,900
Premises and equipment, net 630,920 576,776
Accrued interest receivable 115,273 2,561
Other assets 200,531 67,822
------------ -----------
TOTAL $ 22,791,616 $ 8,075,652
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Demand $ 3,274,797 $ 243,331
NOW accounts 1,709,498 124,385
Money market accounts 2,482,139 32,784
Savings 633,033 63,307
Time deposits of $100,000 or more 2,953,873 --
Other time deposits 4,518,509 83,130
------------ -----------
Total deposits 15,571,848 546,937
Mortgage Payable 148,142
Accrued interest payable and other liabilities 112,493 138
------------ -----------
Total liabilities 15,832,484 547,075
------------ -----------
SHAREHOLDERS' EQUITY
Common stock, $5.00 par value, authorized - 10,000,000 shares; issued and
outstanding ( 726,419 September 30, 1998 and 723,689 December 31, 1997 3,632,095 3,618,445
Common stock subscribed - 4,849 shares 53,339
Common stock subscriptions receivable (47,039)
Additional paid-in capital 4,228,057 4,200,661
Accumulated deficit (901,020) (296,829)
------------ -----------
Total shareholders' equity 6,959,132 7,528,577
------------ -----------
TOTAL $ 22,791,616 $ 8,075,652
============ ===========
</TABLE>
See notes to financial statements.
3
<PAGE> 185
FIRST WESTERN BANK
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS Nine Months
ENDED SEPTEMBER 30, Ended September 30,
1998 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 161,559 $ 282,538
Interest on deposits with other banks 116,697 266,246
Interest on federal funds sold 60,619 161,485
Interest on securities 22,106 59,486
--------- -----------
Total interest income 360,980 769,756
INTEREST EXPENSE
Deposits 135,963 286,471
Mortgage 3,719 11,204
--------- -----------
139,683 297,675
NET INTEREST INCOME 221,298 472,081
PROVISION FOR POSSIBLE LOAN LOSES 31,100 115,100
--------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 190,198 356,981
--------- -----------
OTHER INCOME - service charges on deposit accounts 31,075 58,613
--------- -----------
OTHER EXPENSES:
Salaries and wages 130,913 365,114
Employee benefits 42,698 62,908
Occupancy expense 139,769 240,162
Other 102,055 351,600
--------- -----------
Total other expenses 415,435 1,019,785
LOSS BEFORE INCOME TAXES (194,163) (604,191)
INCOME TAXES -- --
--------- -----------
NET LOSS $(194,163) $ (604,191)
========= ===========
BASIC NET LOSS PER COMMON SHARE $ (0.26) $ (0.80)
========= ===========
</TABLE>
See notes to financial statements.
4
<PAGE> 186
FIRST WESTERN BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, 1998
(UNAUDITED)
<S> <C>
Net Loss $ (604,191)
Adjustments to reconcile net loss to net cash used by operating activities:
Provision for loan loss 115,100
Depreciation 48,454
Amortization of premium on investment securities 1,083
Increase in accrued interest receivable (112,712)
Increase in other assets (132,709)
Increase in accrued interest payable and other liabilities 112,355
------------
Net cash used by operating activities (572,621)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans (7,607,280)
Net increase in investment securities (2,993,721)
Additions to premise and equipment (102,597)
------------
Net cash used by investing activities (10,703,598)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, and savings accounts 7,635,660
Net increase in certificates of deposits 7,389,251
Net increase in mortgage notes payable 148,142
Refund of stock subscriptions (6,300)
Issuance of common stock 41,046
------------
Net cash provided by financing activities 15,207,800
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,931,581
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,399,593
------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,331,174
============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest $ 242,396
</TABLE>
See notes to financial statements.
5
<PAGE> 187
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The financial statements of First Western Bank (the "Bank") at September 30,
1998 are unaudited; however, in the opinion of management, all adjustments
(consisting only of items of a normal recurring nature) necessary for a fair
presentation of the financial position at September 30, 1998 and the results of
operations for the three and nine month periods ended September 30, 1998 and
cash flows for the nine Months period then ended, have been included. The
results for the nine Months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the full year or any other
interim period.
These financial statements do not include all disclosures required by generally
accepted accounting principles and should be read in conjunction with the Bank's
annual financial statements and related notes for the period ended December 31,
1997.
NOTE 2
The Bank was incorporated in North Carolina on December 1, 1997 and began
accepting deposits and making loans on December 15, 1997. As a result of the
December 1997 opening, there is no comparative data for the three and nine month
periods ending September 1997.
NOTE 3
Changes in the components of equity capital are the result of receipt of
subscriptions receivable and in some few instances, refunds of amounts received
with Subscription offers not accepted.
NOTE 4
In January 1998, the Bank adopted Statement of Financial Accounting Standards
No. 130, " Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes
standards for reporting and disclosure of comprehensive income and its
components (revenues, expenses, gains, and losses). This statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income (including, for example, unrealized holding
gains and losses on available for sale securities) be reported in a financial
statement similar to the statement of income and retained income. SFAS 130 is
effective for fiscal years beginning after December 15, 1997, with
reclassification of comparative years. Applying the new standard to the three
and nine month periods ended September 30, 1998, comprehensive income would not
be different.
6
<PAGE> 188
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
The net loss for the three-month period ended September 30, 1998 was $194,163 or
$.26 per share compared to a net loss of $202,639 or $.28 per share for the
quarter ended June 30, 1998.
Net interest income increased $71,192 or 47.43% over the second quarter of 1998.
This increase is the result of continuing growth in the volume of interest
earning assets and the loan portfolio. Loans, net of the allowance for loan
loss, increased $1,954,529 or 35.21% during the third quarter of 1998. As a
result of the significant increase in loans, net yield on earning assets for the
quarter ended September 30 was 4.60%, an increase of 16.75% or .66% over the
previous quarter's net yield on earning assets of 3.94%.
The significant increase in loans also resulted in a provision for loan loss of
$31,100 in the third quarter as the Bank increases the general reserve. While
the collectibility and performance of the Bank's assets remain high, management
continues to focus on safety and soundness as evidenced in this provision.
Other income, primarily service charges on deposit accounts, increased 55.05% or
$11,033 over the second quarter of 1998. Other expense increased $98,648 or
31.14%. The increase in other expense was attributable to a non recurring charge
of approximately $96,000 to write off a building located on the site of the
Bank's proposed new Burnsville office following demolition of the structure.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
Net loss for the nine-month period ended September 30, 1998 was $604,191 or $.80
per share.
Net interest income through the first nine months was $472,081. Net yield on
earning assets during the same period was 4.19%.
Tier 1 capital (capital stock, surplus, and retained earning) to assets was
30.59% as of September 30, 1998 which exceeds the required regulatory level.
As of September 30, 1998 First Western Bank had no nonperforming assets.
However, during the nine-month period ending September 30, 1998 a provision for
possible loan loss in the amount of $115,100 was charged to operations. This
provision for loan losses is an amount sufficient to bring the allowance for
loan losses to an estimated balance considered by management adequate to absorb
potential losses in the portfolio. The allowance for loan losses was 1.51% of
total loans at September 30, 1998.
7
<PAGE> 189
YEAR 2000 COMPLIANCE ISSUES
All levels of the Bank's Management and its Board of Directors are aware of the
issues presented by the Year 2000 century change and the serious effects it may
have on the bank and its customers. The Bank has named a year 2000 project
coordinator who under the counsel of an independent consultant is guiding the
Bank through its action plan for addressing Year 2000 issues. The plan includes
steps to be taken by the Bank (1) to identify, assess, evaluate, test and
validate its own date sensitive systems, (2) to amend its loan underwriting
policies to include assessments, as appropriate, regarding Year 2000 readiness
by commercial loan applicants, (3) to inform the Bank's customers as to the
Bank's Year 2000 compliance process, and (4) to develop a contingency plan in
the event systems can not be certified as year 2000 compliant by established
"critical" dates. Although the Bank relies entirely upon outside vendors for its
computer software and hardware and its security and environmental equipment, all
date sensitive systems are being or will be evaluated for Year 2000 compliance.
As of September 10, 1998 the Bank's core processing software had been tested and
certified as Year 2000 compliant. Testing of ancillary systems and systems with
lower levels of priority than core systems will take place over the next fifteen
months. Systems not certified as Year 2000 compliant by the critical dates
established in the Year 2000 action plan will be replaced. The Bank estimates
that the total cost of Year 2000 compliance will be between $25,000 and $30,000
and the costs will be funded through operations.
8
<PAGE> 190
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K
On August 13, 1998 The Bank filed a report on Form 8-K regarding its entry into
a definitive Agreement and Plan of Merger with Mitchell Bancorp, Inc. and its
wholly owned subsidiary, Mitchell Savings Bank, Inc., both of Spruce Pine, North
Carolina (collectively, "Mitchell"). Pursuant to the agreement, Mitchell will be
merged into the Bank with the Bank as the surviving corporation. The full text
of the Agreement and Plan of Merger was attached as Exhibit 2 to this Form 8-K
filing.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST WESTERN BANK
(Registrant)
Dated November 12, 1998
-------------------------------
Ronnie Deyton, President
Dated November 12, 1998
-------------------------------
Robert L. Kirkman
(Chief Accounting Officer)
9
<PAGE> 191
BUSINESS OF FIRST WESTERN BANK
General
The focus of First Western for 1998 is expected to be solicitation of
retail deposits from consumers, principally in the form of Certificates of
Deposit and Money Market Accounts, and small businesses, principally in the form
of Demand Deposits and Money Market Accounts. First Western will actively seek
these deposits in order to provide funding for anticipated loan demand. The
primary source of loan demand is current the previous customer relationships
that First Western's management and loan officers developed while employed by
other financial institutions in the market. However, as First Western begins to
grow, opportunities for further increases in market share present themselves
through increased visibility in the community and the development of ongoing
customer relationships. First Western's management is committed to keeping its
focus on its stated marketing plan of developing relationships with small
businesses, residential builders, and consumers within the primary market area
of Mitchell and Yancey Counties, North Carolina.
Proposed Merger with Mitchell Bancorp, Inc.
First Western entered into an Agreement and Plan of Merger dated August
13, 1998, to acquire Mitchell Bancorp, Inc. ("Mitchell") and its wholly-owned
subsidiary, Mitchell Savings Bank, Inc., SSB ("Mitchell Savings") (the
"Merger"). First Western intends to service the current portfolio of Mitchell
Savings, and as it matures, First Western intends to redeploy those assets into
its current loan product offerings. First Western will operate the office of
Mitchell Savings as a bank branch. The Merger will expand First Western's market
share, Mitchell and Yancey Counties. In addition, while First Western's original
business plan did not contemplate profitability until the end of the second year
of operations, it is anticipated, although not assured, that the Merger will
accelerate its timetable to profitability. To ensure a smooth transition and
achieve these benefits, First Western currently intends to take the following
actions:
Prior to the Effective Time, First Western will install computer
hardware and data circuits at Mitchell Savings' office to provide a means of
providing service to First Western customers at the former Mitchell Savings
office as well as training for the Mitchell Savings staff, since, other than the
executive officers, all of the current staff will remain after the Merger. After
the Merger, all deposit accounts will be opened and maintained on the First
Western system. Mitchell Savings loan and deposit accounts in place prior to the
Merger will continue to be processed on Mitchell Savings' system until a
conversion to First Western's system can be scheduled. First Western is working
with its service center, FISERVE in Atlanta, to arrange for conversion of the
Mitchell Savings accounts, and the tentative conversion date is February 1999.
First Western is also working with its technology consultants, VITEX, Inc., to
install equipment and data links to provide for mortgage loan process systems.
The Merger will also provide First Western with Mitchell's mortgage
loan expertise and should allow First Western to expand its mortgage loan
product offerings. Because Mitchell is a traditional thrift institution, it
offers fixed rate mortgages that it retains in its own portfolio and that are
generally not eligible for the secondary market. Thus, as a result of the
Merger, First Western will acquire a significant fixed rate portfolio but it
will also continue to have adequate capital to address any interest rate risks
presented by that portfolio. See the section of the Joint Proxy Statement
entitled "PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS." Because it is a newly
chartered bank, First Western does not currently make fixed rate mortgage loans.
It currently originates variable rate loans for its portfolio. Emma Lee M.
Wilson, the current chief operating officer of Mitchell, will be retained under
a consulting agreement for six months to assist First Western in servicing the
current loan portfolio of Mitchell Savings. First Western also intends to
identify an experienced person for the permanent position of manager of the
mortgage loan operation, and it expects the new manager to develop and expand
its mortgage loan product offerings to include mortgages eligible for the
secondary market. In addition, First Western is currently attempting to identify
a person who is well versed in all areas of mortgage lending. Until this new
manager is in place, no decisions will be finalized relating to mortgage loan
processing systems, conversion of the existing mortgage portfolio, or expanding
the mortgage loan product offering. The present Mitchell Savings staff, to be
retained by First Western, has the ability to service existing loans and book
new loans on the mortgage loan processing system now in place.
<PAGE> 192
As a commercial bank, First Western offers deposit products and
services that are broader and more diverse than those offered by Mitchell
Savings. Following the Effective Time of the Merger, First Western will offer
the former customers of Mitchell Savings many financial products and services
Mitchell Savings currently does not offer, including without limitation the
following described services:
(a) Deposit Services. First Western offers a full line of personal
and corporate demand deposit accounts, NOW accounts for
individual and sole proprietorships, and MMDA accounts for
individuals and corporations. No such products are currently
available through Mitchell Savings.
(b) Credit Services. First Western offers a complete range of loan
products for both individuals and businesses. Other than
mortgage loans and share loans, no such products are currently
available through Mitchell Savings.
Mitchell Savings' customer base will also provide a market for the
wide range of consumer and commercial loans and deposit products offered by
First Western. Immediately following the Effective Time, First Western intends
to begin a marketing campaign directed to former Mitchell Savings customers.
This campaign is expected to stress the new deposit and loan products to be
available to these customers, and it is also expected to offer incentives to
attract new customers. First Western has engaged a marketing firm to develop
marketing materials and promotional offers for this new customer base. The cost
of this marketing campaign is not expected to have a material adverse effect on
First Western's results of operations.
In addition, both First Western staff and the former Mitchell Savings
staff will be cross trained, in existing bank products and in the
to-be-determined expanded mortgage products, which will be new to both staffs.
The opportunity to acquire Mitchell arose faster than First Western's
management had initially contemplated in its formative stage. Management
believes the Merger will significantly accelerate First Western's market
penetration and progress toward achieving profitable operations. See the section
below entitled "Results of Operations." The plan for implementing the Merger is
not static. First Western management will continue to review the status of the
process well beyond the Effective Time and make changes and updates as
circumstances require.
Market Area and Competition
The relevant market area for both First Western and Mitchell consists
of Yancey and Mitchell Counties, in the northern mountain region of North
Carolina. Burnsville is the only municipality in Yancey County, and Spruce Pine
is the largest town in Mitchell County. Yancey County's population is over
16,000 and Mitchell County's population is over 14,500. Although the area is
largely rural, it includes a number of diverse industries, for example, some of
the richest mineral mining in the United States, furniture manufacturing, and
textile production. The Penland School of the Arts attracts artisans from around
the nation.
First Western encounters significant competition in its markets from
commercial banks, thrift institutions, other financial institutions, and
financial intermediaries. It competes not only with other banks in its market,
but also with other types of financial institutions for deposits, loans, and
other financial services. First Western also competes for interest-bearing funds
with a number of other financial intermediaries and investment alternatives,
including brokerage firms and money market mutual funds.
2
<PAGE> 193
In addition, First Western competes not only with financial
institutions based in North Carolina, but also with out-of-state banks and bank
holding companies, and other out-of-state financial institutions that have an
established market presence in North Carolina, including Mitchell and Yancey
Counties. Many of the financial institutions operating in North Carolina are
engaged in local, regional, national, and international operations, and they
have more assets and personnel than First Western. In particular, First Western
competes in all its markets with the major super-regional bank holding companies
operating in the Southeast. Because of their greater resources, those
institutions are able to perform certain functions for their customers,
including trust and investment banking services, that First Western is not
equipped to offer directly, although it does offer some of those services
through its correspondent banks.
Results of Operations
The net loss for the three-month period ended September 30, 1998 was
$194,163 or $0.26 per share compared to a net loss of $202,639 or $0.28 per
share for the quarter ended June 30, 1998.
Net interest income increased $71,192 or 47.43% over the second quarter
of 1998. This increase is the result of continuing growth in the volume of
interest earning assets and the loan portfolio. Loans, net of the allowance for
loan loss, increased $1,954,529 or 35.21% during the third quarter of 1998. As a
result of the significant increase in loans, net yield on earning assets for the
quarter ended September 30 was 4.60%, an increase of 16.75% or 0.66% over the
previous quarter's net yield on earning assets of 3.94%.
The significant increase in loans also resulted in a provision for loan
loss of $31,100 in the third quarter as the Bank increases the general reserve.
While the collectibility and performance of the Bank's assets remain high,
management continues to focus on safety and soundness as evidenced in this
provision.
Other income, primarily service charges on deposit accounts, increased
55.05% or $11,033 over the second quarter of 1998. Other expense increased
$98,648 or 31.14%. The increase in other expense was attributable to a non
recurring charge of approximately $96,000 to write off a building located on the
site of the Bank's proposed new Burnsville office following demolition of the
structure.
Net loss for the nine-month period ended September 30, 1998 was
$604,191 or $.80 per share.
Tier 1 capital (capital stock, surplus, and retained earning) to assets
was 30.59% as of September 30, 1998 which exceeds the required regulatory
level.
As of September 30, 1998 First Western Bank had no nonperforming
assets. However, during the nine-month period ending September 30, 1998 a
provision for possible loan loss in the amount of $115,100 was charged to
operations. This provision for loan losses is an amount sufficient to bring the
allowance for loan losses to an estimated balance considered by management
adequate to absorb potential losses in the portfolio. The allowance for loan
losses was 1.51% of total loans at September 30, 1998.
Net Interest Income
Net interest income, the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities,
primarily deposits, represents the most significant portion of First Western's
earnings. It is management's ongoing policy of maximizing net interest income.
As of September 30, 1998, First Western's net yield on earning assets was 4.09%,
and its interest rate spread was 1.60%. First Western's strategy for the first
nine months was to increase deposits, and this was accomplished by aggressively
pricing deposits. The following table presents the daily average balances,
interest income/expense, and average rates paid and earned on interest-earning
assets and interest-bearing liabilities of First Western for the nine months
ended September 30, 1998.
3
<PAGE> 194
<TABLE>
<CAPTION>
(Dollars in thousands) 1998
--------------------------------------------------------
Average
Average Interest Income/
Balance Rate Expense (1)
<S> <C> <C> <C>
Assets
Loans $ 3,482 10.85% $ 378
Taxable Securities 1,395 5.70% 80
Federal Funds Sold 3,700 5.83% 215
Interest Bearing Balances
at Other Institutions 6,482 5.49% 356
---------------- -------------- ----------------
Total Interest-Earning Assets 15,059 6.83% $ 1,029
---------------- -------------- ----------------
Cash and Due from Banks 1,052
Other Assets 773
----------------
Total $ 16,884
================
Liabilities and Shareholder's Equity
Interest Bearing Deposits $ 7,743 4.95% $ 383
Other Borrowings 149 10.05% 15
Total Interest-bearing Liabilities $ 7,892 5.04% $ 398
Non interest bearing deposits 1,631
Other Liabilities 33
Shareholders equity 7,328
----------------
Total Liabilities and
Shareholder's Equity $ 16,884
================
Net Yield on Earning Assets
and Net Interest Income 4.19% $ 631
----------------
Interest Rate Spread 1.79%
Rate of Average Interest-earning Assets
to Average Interest-bearing liabilities 190.82
</TABLE>
- -----------------------------------------------
(1) Annualized
Capital Resources
Funding the future growth and expansion of First Western is dependent
upon earnings and new deposit growth. First Western management will consider a
secondary offering in the event additional capital is needed beyond earnings
growth, but none is currently contemplated. As of September 30, 1998, First
Western's ratio of total capital to risk adjusted assets was 63.05%. First
Western is strongly capitalized and fully expects to be able to meet future
capital needs caused by growth and expansion as well as regulatory capital
requirements. First Western is not aware of any current recommendation by
regulatory authorities that, if implemented, would materially affect its
liquidity, capital resources, or operations. There are no material seasonal
factors that would have an adverse effect, and it does not rely on foreign
sources of funds for income. First Western is not aware of
4
<PAGE> 195
any trends, events, uncertainties, or current recommendations by regulatory
authorities that, if implemented, would materially affect its capital resources
and liquidity.
First Western identified the opportunity to merge with Mitchell as a
means of fully using its capital and human resources. First Western's capital
will approximately double, based on the pro forma data for the Merger, set forth
in the section of the Joint Proxy Statement entitled "PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS." This additional capitalization, deposit base and expanded
customer base is expected to enable First Western to accelerate its business
plan as it relates to lending products, deposit base, market share, and
profitability. Profitability and an expanded deposit base will be the primary
means by which First Western can fully develop its current business plan.
First Western will be required to expend capital resources to
incorporate Mitchell into its commercial banking operations. These expenditures
will include data processing conversion, additional hardware and data linking
equipment, other infrastructure items, and marketing materials that will be
necessary to absorb the additional location and customer base after the merger.
However, given the operational and market overlap between First Western and
Mitchell, management expects the potential cost savings and synergies to
mitigate the burden on capital resources.
Management expects that existing First Western employees and those
employees of Mitchell who will be merged into First Western's operations will be
sufficient to meet First Western's current operating needs. Some additional
personnel are expected to be needed in mortgage lending as First Western expands
its mortgage lending products.
Liquidity and Interest Rate Sensitivity
First Western is very liquid, with $11.3 million of its $22.7 million
in assets in cash and cash equivalents or short-term investments at September
30, 1998. This liquidity enables First Western to meet its current liquidity
management policy and provide a means for the necessary merger consideration.
The objective of First Western's liquidity management policy include
providing adequate funds to meet the needs of depositors and borrowers at all
times, as well as providing funds to meet the basic needs for its ongoing
operations and regulatory requirements. Liquidity requirements of First Western
are met primarily through two categories of funds. The first is core deposits,
which include demand deposits, savings accounts, and certificates of deposits
less than $100,000. First Western considers these to be stable portion of its
liability mix, as the result of ongoing stable consumer and commercial banking
relationships. At September 30, 1998 core deposits totaled $12,671,975 or 81% of
First Western's total deposits.
First Western's other principal method of funding is large denomination
certificates of deposit. Its policy is to emphasize core deposit growth rather
than growth though purchased or brokered liabilities because the cost of
purchased or brokered liabilities is greater.
First Western has established lines of credit with correspondent banks
to cover short term liquidity requirements. It also uses Fed funds for
short-term funding. First Western also intends to apply for membership in the
Federal Home Loan Bank System after the Merger is consummated to assist in its
liquidity needs for mortgage lending.
Because First Western is a newly chartered institution,, it has not
been able to fully deploy all the liquid assets raised from its sale of capital
and initial deposit growth. Based on the pro forma data, upon the completion of
the Merger, the amount of liquid assets of First Western as the surviving entity
will remain unchanged. First Western does not expect to be required to liquidate
any of its investments in order to consummate the Merger and meet the subsequent
operating needs.
5
<PAGE> 196
First Western will be required to address its interest rate sensitivity
after the Merger. The acquisition of Mitchell's operations, which have
historically been highly interest rate-sensitive, is expected to affect First
Western until it can restructure Mitchell's loan portfolio, which is entirely
fixed rate. The resulting high capital level should enable First Western to
manage this interest rate sensitivity during the transition period. The
objectives of First Western's interest rate management policies are to (i)
establish limits on the sensitivity to changes in market interest rates of its
net interest income and the portfolio equity value; (ii) provide for accurate
and timely measurement and continuous monitoring of its exposure to interest
rate risk; and (iii) provide reports to and receive direction from the Board of
Directors as to interest rate exposure.
The following table presents the current interest rate sensitivity of
First Western's interest-earning assets and liabilities as of September 30,
1998.
<TABLE>
<CAPTION>
(Dollars in thousands) Interest-Sensitive Within
--------------------------------------
Non-
Sensitive or
Total Sensitive
1 to 91 to Within Beyond
90 days 365 days 1 Year 1 Year Total
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets
Interest-bearing Due from Banks $ 6,064 $ - $ 6,064 $ - $ 6,064
Federal Funds Sold 4,420 - 4,420 - 4,420
Securities
U.S. Government Agencies 2,993 - 2,993 - 2,993
Loans (Gross)
Real Estate 2,242 - 2,242 - 2,242
Commercial and Agricultural 2,611 371 2,982 1,035 4,017
Consumer 259 102 361 1,016 1,377
-----------------------------------------------------------------
Total Interest earning assets 18,589 473 19,062 2,051 21,113
Interest-Bearing Liabilities
Savings and Now accounts 2,073 - - - -
Money Market Accounts 2,482 - 2,482 - 2,482
Time Deposits of $100,000 or more 103 2,851 2,954 - 2,954
Other Time Deposits 465 3,945 4,410 212 4,622
Other Borrowings 2 4 6 142 148
-----------------------------------------------------------------
Total Interest-bearing Liabilities $ 5,125 $ 6,800 $ 9,852 $ 354 $ 10,206
=================================================================
Interest sensitivity gap $ 13,464 $(6,327) $ 9,210 $ 1,697 $ 10,907
Cumulative interest sensitivity gap $ 13,464 $ 7,137 $ 16,347
Interest-earning assets as
a percentage of interest-bearing
liabilities 362.71% 6.96% 193.48%
</TABLE>
6
<PAGE> 197
Loans
The following table sets for the composition of First Western's loan
portfolio by type as of September 30, 1998.
(Dollars in thousands) Percent of
Amount Total
Real Estate $ 2,243 29.37%
Commercial and Agricultural 4,016 52.59%
Consumer 1,377 18.03%
Total Loans 7,636 100.00%
At September 30, 1998, First Western Bank had one loan with an
outstanding balance of approximately $1.05 million. This loan is secured by
commercial real estate and the guarantee of twelve individuals. All of the
guarantors of this loan have substantial net worth and, in the opinion of
management, the loan does not expose First Western to excessive credit risk.
First Western's goal is to be primarily a retail and small business
lender. Accordingly, it intends to focus on consumer loans, commercial loans for
the small to mid-size businesses and home loan products. First Western intends
to develop lending programs under the Small Business Administration guidelines.
First Western has established correspondent relationships to allow it to lend in
excess of its legal limit and for loans where it does not have sufficient
expertise or resources to administer the credit. At September 30, 1998, First
Western's legal lending limit was $1,043,000. Assuming the Merger had been
consummated as of September 30, 1998, First Western's legal lending limit would
have been $2,170,000.
First Western does not have a specific minimum loan limit. However, it
attempts to meet its demands for smaller loans through revolving credit products
that require a minimum line of $500. The following table reflects First
Western's general policies with regard to maximum loan maturities and
loan-to-value ratios:
Commercial Loans Maximum Term Maximum L/T Ratio
Fixed rate real estate 5 years 80%
Variable rate real estate 15 years 80%
Farmland 10 years 65%
Construction/development 18 months 75%
Unsecured 2 years N/A
Vehicles 5 years 80%
Machinery/equipment 5 years 75%
Accounts receivable 1 year 75%
Inventory I year 50%
Crop production 1 year 100%
Direct Consumer Loans Maximum Term Maximum L/T Ratio
Vehicles (new) 5 years 80%
Vehicles (used) 4 years NADA Loan Value
Mobile homes 5 to 10 years 80%
Recreational vehicles 5 years 75%
Boats, motors and trailers 5 years 75%
Savings and CD's Negotiable 100%
1-to-4 family residential
(VA, FHA and conventional) 15 years 80%
Junior mortgage - residential 5 years 75%
Construction - residential I year 75%
Vacant lots 5 years 75%
Equity lines of credit 15 years 80%
Overdraft lines of credit Revolving N/A
Bank cards Revolving N/A
Unsecured 2 years N/A
7
<PAGE> 198
Interest rates on commercial loans are generally adjustable rates.
These rates are based on First Western's prime rate or U.S. Treasury obligation
plus a margin. Depending on market conditions, First Western may offer fixed
rate, but these rates may have interest rate call features depending on
maturity. Fixed rate loans with call features may be subject to First Western's
gap position and risk exposure.
First Western may make some in-house mortgage loans but they will have
call features of five to seven years. It will offer in-house construction loans
for primary and secondary residences with take-out commitments in place.
Commercial mortgages have been made and placed in the commercial loan portfolio.
Assigned loan limits are as follows: Customer Service Representatives,
$10,000; Branch Managers, $50,000; Executive Officers, $100,000; and Senior
Credit Officer, $601,000. Applications for loans above $601,000 (up to the
maximum legal lending limit) must be approved by the Loan Committee and/or the
Board of Directors. Cash flow coverage and proper underwriting are established
in the credit policy.
Loan Delinquencies and Non-performing Assets
At September 30, 1998, First Western Bank had no delinquent loans or
nonperforming assets.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio.
Management determines the allowance for loan losses based on a number of
factors, including a review and evaluation of First Western's loan portfolio to
identify potential problem loans, credit concentrations and other risk factors
connected to the loan portfolio, and current and projected economic conditions
locally and nationally. The allowance is monitored and analyzed in conjunction
with First Western's loan analysis and grading program, and provisions for loan
losses are made to maintain an adequate allowance of loan loss. The following
tables present the allocation of the allowance for loan losses by category and
activity in the allowance for loan loss.
Activity in Allowance for Loan Loss
(Dollars in thousands) 1998
---------
Balance at beginning of year $ -
Loans charged off -
Recoveries of loans previously charged off -
Additions charged to operations 115
---------
Balance at September 30, 1998 $ 115
=========
8
<PAGE> 199
Allocation of Allowance for Loan Loss
(Dollars in Thousands) 1998
---------
Real Estate $ 30
Commercial 50
Consumer 30
Unallocated 5
---------
$ 115
Year 2000 Issues
The Year 2000 problem arose because many computer programs use only the
last two digits to refer to a year. Thus programs that are date-sensitive may
not be able to properly recognize dates in the Year 2000 and beyond. The result
could be a temporary disruption of operations and the processing of
transactions.
First Western has developed a four-phase approach to this problem.
Phase 1 included an analysis of the impact and costs relating to the year 2000,
in computer information systems and other equipment. Phase 2 called for a
comprehensive plan to address any problems identified. Phase 3 was the
implementation of the plan, and Phase 4 involved addressing any unforeseen
complications or issues not previously addressed.
Phases 1 and 2 are complete. As of September 30, 1998, First Western is
on schedule to complete Phase 3 as planned, and this phase is scheduled to be
substantially complete by the end of 1998. Testing will continue through 1999.
As part of Phase 3, First Western has sent Year 2000 questionnaires to vendors
and other entities with which it conducts business, in order to assess whether
they are Year 2000-compliant or have adequately addressed the conversion
requirements of their systems. Some vendors have responded positively to
requests for Year 2000 certifications, although First Western cannot predict
whether any of these responses might later prove to be inadequate or overly
optimistic. The estimated cost of completing Phase 3 is between $25,000 and
$35,000.
First Western is continuing to closely monitor progress on the plan,
and it is currently satisfied that the plan will be adequately completed within
the scheduled timeframe. If Phase 4 becomes necessary, that is, if unforeseen
complications or new issues arise, additional resources from internal and
external sources will be committed to complete the necessary conversions in the
required time. Because the use of these additional resources is considered
unlikely, no estimates of costs for Phase 4 have been made at this time. It is
not contemplated that the Merger will have any effect on this process, because
First Western does not contemplate continued use of any Mitchell systems.
9
<PAGE> 200
EXHIBIT C
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of the 13th day of August, 1998
(this "Agreement"), by and between MITCHELL BANCORP, INC. ("Mitchell Bancorp")
and FIRST WESTERN BANK ("First Western").
WHEREAS, Mitchell Bancorp is a corporation organized under the laws of
the State of North Carolina, with its executive offices located in Spruce Pine,
North Carolina, and the parent corporation of Mitchell Savings Bank, Inc., SSB
("Mitchell Savings"); and
WHEREAS, First Western is a commercial bank organized under the laws of
the State of North Carolina, with its executive offices located in Burnsville,
North Carolina; and
WHEREAS, Mitchell Bancorp and First Western have agreed that it is in
their mutual best interests and in the best interests of their respective
shareholders for Mitchell Bancorp to be acquired by First Western with the
effect that each of the outstanding shares of Mitchell Bancorp will be converted
into newly issued shares of First Western and/or the right to receive cash in
the manner and upon the terms and conditions contained in this Agreement; and
WHEREAS, to effectuate the foregoing, Mitchell Bancorp and First
Western desire to adopt this Agreement as a plan of reorganization in accordance
with the provisions of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"); and
WHEREAS, the respective Boards of Directors of Mitchell Bancorp and
First Western have resolved that the transactions described in this Agreement
are in the best interests of the parties and their respective shareholders and
have approved the transactions described in this Agreement.
NOW THEREFORE, in consideration of the foregoing recitals, the mutual
covenants hereinafter contained, and other good and valuable consideration, the
parties hereto agree as follows:
ARTICLE I. AGREEMENT TO MERGE
1.01. NATURE OF TRANSACTION. At the Effective Time (as hereinafter
defined), Mitchell Bancorp shall be merged into Mitchell Savings and immediately
thereafter, Mitchell Savings will be merged into First Western pursuant to the
terms and conditions set forth herein, or such other method of effecting the
acquisition of Mitchell Bancorp as may be required, in the reasonable opinion of
First Western, in order for the acquisition of Mitchell Bancorp by First Western
(the "Acquisition") to be accomplished under North Carolina law and for the
Acquisition to constitute a reorganization within the meaning of Section 368(a)
of the Code (the "Mergers").
1.02. EFFECT OF MERGERS. At the Effective Time and as provided in N.C.
Gen. Stat. ss. 53-13, the separate corporate existence of Mitchell Bancorp and
Mitchell Savings (collectively "Mitchell") shall cease while the corporate
existence of First Western as the surviving corporation in the Mergers shall
continue with all of its purposes, objects, rights, privileges, powers and
franchises, all of which shall be unaffected and unimpaired by the Mergers.
Following the Mergers, First Western shall continue to operate as a North
Carolina banking corporation, and it will continue to conduct its business and
the business of Mitchell Savings at the then legally established branch and main
offices of First Western and Mitchell Savings. The duration of the corporate
existence of First Western, as the surviving corporation, shall be perpetual and
unlimited.
1.03. ASSETS AND LIABILITIES OF THE BANK. At the Effective Time and by
reason of the Mergers, and in accordance with N.C. Gen. Stat. ss.ss. 53-13,
53-17 and 55-11-06, all of Mitchell's property, assets and rights of every
<PAGE> 201
kind and character (including, without limitation, all real, personal or mixed
property, all debts due on whatever account, all other choses in action and
every other interest of or belonging to or due to Mitchell, whether tangible or
intangible) shall be transferred to and vest in First Western, and First Western
shall succeed to all the rights, privileges, immunities, powers, purposes and
franchises of a public or private nature (including all trust and fiduciary
properties, powers and rights) of Mitchell, all without any conveyance,
assignment or further act or deed. First Western shall be responsible for all of
the liabilities, duties and obligations of every kind, nature and description
(including duties as trustee or fiduciary) of Mitchell as of the Effective Time.
1.04. ARTICLES, BY-LAWS AND MANAGEMENT. The Articles of Incorporation
and By-Laws of First Western in effect at the Effective Time shall be the
Articles of Incorporation and By-Laws of First Western as the surviving
corporation. The officers and directors of First Western in office at the
Effective Time shall continue to hold such offices until the election or
appointment of their respective successors.
1.05. CLOSING; ARTICLES OF MERGER; EFFECTIVE TIME. The closing of the
transactions contemplated by this Agreement (the "Closing") shall take place at
such place as First Western shall designate, on a date specified by First
Western (the "Closing Date") after the expiration of any and all required
waiting periods following the effective date of required approvals of the
Mergers by governmental or regulatory authorities (but in no event more than
thirty (30) days following the expiration of all such required waiting periods).
At the Closing, First Western and Mitchell shall take such actions (including
without limitation the delivery of certain closing documents) as are required
herein and as shall otherwise be required by law to consummate the Mergers and
cause each of them to become effective, and they shall execute Articles of
Merger for each merger under North Carolina law. Subject to the terms and
conditions set forth herein (including without limitation the receipt of all
required approvals of government and regulatory authorities), the Mergers shall
be effective on the date and at the time (the "Effective Time") designated in
the respective Articles of Merger executed at the Closing and filed with the
North Carolina Secretary of State in accordance with law; provided, however,
that the date and time so specified as the Effective Time shall in no event be
more than ten (10) days following the Closing Date. If the Articles of Merger do
not designate a date or specific time as the Effective Time, then the Effective
Time shall be that date and time when the Articles of Merger are properly filed
with the North Carolina Secretary of State.
1.06. CONVERSION OF MITCHELL STOCK. (a) At the Effective Time, all
rights of Mitchell Bancorp's shareholders with respect to all then outstanding
shares of Mitchell Bancorp's common stock, par value $0.01 per share ("Mitchell
Stock"), shall cease to exist, and, as consideration for and to effectuate the
Mergers (and except as otherwise provided below), each such outstanding share of
Mitchell Stock (other than any shares held by Mitchell Bancorp as treasury
shares or shares held by First Western or as to which rights of dissent and
appraisal are properly exercised as provided below) shall be converted, without
any action on the part of the holder of such share, First Western, or Mitchell
Bancorp, into and represent the right to receive the cash and/or shares of stock
of First Western's $5.00 par value common stock ("First Western Stock")
constituting the Merger Consideration. As used in this Agreement, the term
"Merger Consideration" shall mean either the amount of cash set forth in clause
(i) below (the "Cash Merger Consideration") or that number of shares of First
Western Stock, as set forth in clause (ii) below (the "Stock Merger
Consideration"), at the election of the holder of each share of Mitchell Stock,
subject, however, to proration as set forth below:
(i) If Cash Merger Consideration is to be paid with respect to
a share of Mitchell Stock, the Merger Consideration with respect to
such share of Mitchell Stock shall be in the amount of Twenty Dollars
and No Cents ($20.00).
(ii) If Stock Merger Consideration is to be paid with respect
to a share of Mitchell Stock, the Merger Consideration with respect to
such shares of Mitchell Stock shall be 1.60 (the "Conversion Rate")
newly issued shares of First Western Common Stock.
2
<PAGE> 202
(b) At the Effective Time, and without any action by Mitchell Bancorp,
First Western, or any holder thereof, Mitchell Bancorp's stock transfer books
shall be closed as to holders of Mitchell Stock immediately prior to the
Effective Time and, thereafter, no transfer of Mitchell Stock by any such holder
may be made or registered. The holders of shares of Mitchell Stock shall cease
to be, and shall have no further rights as, stockholders of Mitchell Bancorp
other than as provided in this Agreement. Following the Effective Time,
certificates representing shares of Mitchell Stock outstanding at the Effective
Time (herein sometimes referred to as "Old Certificates") shall evidence only
the right of the registered holder thereof to receive, and may be exchanged for,
(i) the Merger Consideration to which such holders shall have become entitled on
the basis set forth above, plus cash for any fractional share interests as
provided herein, (ii) in the case of shares as to which rights of dissent and
appraisal are properly exercised (as provided below), cash as provided in
Article 13 of the North Carolina Business Corporation Act.
(c) The calculations of the respective amounts of Cash Merger
Consideration and Stock Merger Consideration payable and issuable pursuant to
the terms of the Agreement shall be prepared by First Western and agreed to by
Mitchell Bancorp and set forth in reasonable detail in a schedule that shall be
delivered to the transfer agent for First Western, or such other exchange agent
as First Western may determine with the approval of Mitchell Bancorp, which
approval shall not be unreasonably withheld (the "Exchange Agent"), prior to the
Closing Date.
1.07 ALLOCATION PROCEDURES. (a) Subject to and in accordance with the
allocation and election procedures set forth in this Agreement, each record
holder of a share of Mitchell Stock ("Shareholder") shall, prior to the Election
Deadline (as hereinafter defined), specify (i) the number of whole shares of
Mitchell Stock held by such Shareholder as to which such Shareholder shall
desire to receive the Cash Merger Consideration (which shall include any
Shareholder who properly exercises rights of dissent and appraisal as described
in Paragraph 1.13), and (ii) the number of whole shares of Mitchell Stock held
by such Shareholder as to which such Shareholder shall desire to receive the
Stock Merger Consideration.
(b) At the Effective Time of the Merger, each unexercised option for
Mitchell Stock ("Stock Option") shall be deemed canceled, and as consideration
therefor, at the election of each holder of a Stock Option (the "Option
Holders"), and together with the Shareholders, (the "Holders") shall be
converted into the right to receive either (i) solely a cash payment amount (the
"Cash Out") equal to the excess of (A) $20.00 over the exercise price per share
of Mitchell Stock covered by the Stock Option, multiplied by (B) the total
number of shares of Mitchell Stock covered by the Stock Option or (ii) solely a
number of shares (rounded to the nearest whole number) of First Western Stock
(the "Stock Exchange") equal to the excess of (A) $20.00 over the exercise price
per share of Mitchell Stock covered by the Stock Option, multiplied by (B) the
total number of shares of Mitchell Stock covered by the Stock Option and divided
by $20.00.
(c) An election as described in clause (i) of Paragraph (a) or clause
(i) of Paragraph (b) of this Section is herein referred to as a "Cash Election,"
and shares of Mitchell Stock as to which a Cash Election has been made are
herein referred to as "Cash Election Shares." An election as described in clause
(ii) of Paragraph (a) or clause (ii) of Paragraph (b) is herein referred to as a
"Stock Election," and shares as to which a Stock Election has been made are
herein referred to as "Stock Election Shares." A failure to indicate a
preference in accordance with this Paragraph is herein referred to as a
"Non-Election," and shares as to which there is a Non-Election are herein
referred to as "Non-Electing Shares." The Employee Stock Ownership Plan of
Mitchell shall be deemed to have elected Cash Merger Consideration for purposes
of all unallocated shares, and such election shall take precedence over all
other Cash Elections.
(d) Payment of cash pursuant to the Cash Merger Consideration and the
Cash Out, and issuance of First Western Stock pursuant to the Stock Merger
Consideration and the Stock Exchange, shall be allocated to Holders such that
the number of shares of Mitchell Stock (outstanding or subject to Stock Options)
as to which cash is paid shall equal 49.9% of the aggregate number of shares of
Mitchell Stock outstanding plus those subject to Stock Options (the
3
<PAGE> 203
"Aggregate Shares"), and the number of shares of Mitchell Stock (outstanding or
subject to Stock Options) as to which First Western Stock is issued shall equal
50.1% of the Aggregate Shares, as follows:
(i) If the number of Cash Election Shares is in excess of
49.9% of the Aggregate Shares, then (A) Non-Electing Shares shall be
deemed to be Stock Election Shares, (B) Cash Election Shares of Option
Holders shall be treated as Cash Election Shares without adjustment,
and (B)(I) Cash Election Shares of each Shareholder shall be reduced
pro rata by multiplying the number of Cash Election Shares of such
Shareholder by a fraction, the numerator of which is the number of
shares of Mitchell Stock equal to 49.9% of the Aggregate Shares minus
the aggregate number of Cash Election Shares of Option Holders, and the
denominator of which is the aggregate number of Cash Election Shares of
all Shareholders; and (II) the shares of such Shareholder representing
the difference between such Shareholder's initial Cash Election and
such Shareholder's reduced Cash Election pursuant to clause (I) shall
be converted into and be deemed to be Stock Election Shares.
(ii) If the number of Stock Election Shares is in excess of
50.1% of the Aggregate Shares, then (A) Non-Electing Shares shall be
deemed to be Cash Election Shares, and (B)(I) Stock Election Shares of
each Holder shall be reduced pro rata by multiplying the number of
Stock Election Shares of such Holder by a fraction, the numerator of
which is the number of shares of Mitchell Stock equal to 50.1% of the
Aggregate Shares, and the denominator of which is the aggregate number
of Stock Election Shares of all Holders; and (II) the shares of such
Holder representing the difference between such Holder's initial Stock
Election and such Holder's reduced Stock Election pursuant to clause
(I) shall be converted into and be deemed to be Cash Election Shares.
(iii) If the number of Cash Election Shares is less than or
equal to 49.9% of the Aggregate Shares and the number of Stock Election
Shares is less than or equal to 50.1% of the Aggregate Shares, then (A)
there shall be no adjustment to the elections made by electing Holders,
and (B) Non-Electing Shares of each Holder shall be treated as Stock
Elections Shares and/or as Cash Election Shares in proportion to the
respective amounts by which the Cash Election Shares and the Stock
Election Shares are less than the 49.9% and 50.1% limits, respectively.
(e) After taking into account the foregoing adjustment provisions, each
Cash Election Share (including those deemed to be Cash Election Shares) shall
receive in the Mergers the Cash Merger Consideration or the Cash Out, as
applicable, and each Stock Election Share (including those deemed to be Stock
Election Shares) shall receive in the Mergers the Stock Merger Consideration
(and cash in lieu of fractional shares) or the Stock Exchange, as applicable.
(f) Notwithstanding any other provision of this Agreement, if the
application of the provisions of this Section would result in Holders receiving
a number of shares of First Western Stock that would prevent the Merger
Consideration from consisting in the aggregate of 49.9% Cash Merger
Consideration and 50.1% Stock Merger Consideration or otherwise prevent the
satisfaction of any of the conditions set forth in Article 7 hereof, the number
of shares otherwise allocable to Holders pursuant to this Paragraph shall be
adjusted in an equitable manner as shall be necessary to enable the satisfaction
of all conditions.
1.08 ELECTION PROCEDURES. (a) First Western shall prepare a form for
purposes of making elections and containing instructions with respect thereto
(the "Election Form"). The Election Form shall be distributed to each Holder at
such time as the First Western shall determine and shall specify the date by
which all such elections must be made (the "Election Deadline"), which date
shall be the date of the meeting of Shareholders to approve the Agreement and
the Mergers or such other date determined by the First Western.
4
<PAGE> 204
(b) Elections shall be made by Holders by mailing to the Exchange Agent
a completed Election Form. To be effective, an Election Form must be properly
completed, signed and submitted to the Exchange Agent, accompanied by Old
Certificates or by the Stock Option as to which the election is being made (or
by an appropriate guaranty of delivery by a commercial bank or trust company in
the United States or a member of a registered national security exchange or the
National Association of Securities Dealers, Inc.("NASD")), or by evidence that
such certificates have been lost, stolen or destroyed, accompanied by such
security or indemnity as shall be reasonably requested by First Western, and
received by the Exchange Agent by the close of business on the Election
Deadline. An election may be changed or revoked, but only by written notice
received by the Exchange Agent prior to the Election Deadline including, in the
case of a change, a properly completed revised Election Form.
(c) First Western will have the discretion, which it may delegate in
whole or in part to the Exchange Agent, to determine whether the Election Forms
have been properly completed, signed and submitted or changed or revoked and to
disregard immaterial defects in Election Forms. The decision of First Western
(or the Exchange Agent) in such matters shall be conclusive and binding and
without any liability whatsoever to Mitchell Bancorp. Neither First Western nor
the Exchange Agent will be under any obligation to notify any person of any
defect in an Election Form submitted to the Exchange Agent.
(d) For the purposes hereof, a Holder who does not submit an effective
Election Form to the Exchange Agent prior to the Election Deadline shall be
deemed to have made a Non-Election.
(e) In the event that this Agreement is terminated pursuant to the
provisions hereof and any Old Certificates or Stock Options have been
transmitted to the Exchange Agent pursuant to the provisions hereof, First
Western and Mitchell Bancorp shall cause the Exchange Agent to promptly return
such Old Certificates or Stock Options to the person submitting the same.
1.09 EXCHANGE PROCEDURES. At the Effective Time, the Exchange Agent
shall issue and deliver to First Western certificates representing the aggregate
number of whole shares of First Western Stock into which the outstanding shares
of Mitchell Stock have been converted as provided above. Within five days
following the Effective Time, First Western shall send or cause to be sent to
each Shareholder who did not previously submit a properly completed Election
Form written instructions and transmittal materials (a "Transmittal Letter") for
use in surrendering Old Certificates to the Exchange Agent. Upon the proper
delivery to the Exchange Agent (in accordance with the above instructions, and
accompanied by a properly completed Transmittal Letter) by a former Shareholder
of his or her Old Certificates, the Exchange Agent shall deliver the Merger
Consideration to the Shareholder in exchange for the surrender and delivery to
the Exchange Agent by said Shareholder of his or her Old Certificates.
1.10 TREATMENT OF FRACTIONAL SHARES. No scrip or certificates
representing fractional shares of First Western Stock will be issued to any
former shareholder of Mitchell, and, except as provided below, no Shareholder
will have any right to vote or receive any dividend or other distribution on, or
any other right with respect to, any fraction of a share of First Western Stock
resulting from the above exchange. In the event the exchange of shares would
result in the creation of fractional shares, then, in lieu of the issuance of
fractional shares of First Western Stock, First Western shall deliver cash to
the Exchange Agent in an amount equal to the aggregate market value of all such
fractional shares, and the Exchange Agent shall divide such cash among and remit
it (without interest) to the former Shareholders in accordance with their
respective interests. For purposes of this Paragraph, the "aggregate market
value" of all fractional shares of First Western Stock shall be equal to the
total of such fractional shares multiplied by the amount necessary to preserve
the economic value of such shares.
1.11 SURRENDER OF CERTIFICATES. Subject to Paragraph 1.13 below, no
Merger Consideration, or cash for any fractional share of First Western Stock,
shall be delivered to any former Shareholder unless and until such Shareholder
shall have properly surrendered to the Exchange Agent the Old Certificate(s)
formerly representing his or her shares of Mitchell Stock, together with a
properly completed Election Form or Transmittal Letter in such form
5
<PAGE> 205
as shall be provided to the Shareholder by First Western for that purpose.
Further, until such Old Certificate(s) are so surrendered, no dividend or other
distribution payable to holders of record of First Western Stock as of any date
subsequent to the Effective Time shall be delivered to the holder of such Old
Certificate(s). However, upon the proper surrender of such Old Certificate(s),
the Exchange Agent shall pay to the registered holder of the shares of First
Western Stock represented by such Old Certificate(s) the amount of any such
cash, dividends or distributions that have accrued but remain unpaid with
respect to such shares. Neither First Western, Mitchell Bancorp, nor the
Exchange Agent shall have any obligation to pay any interest on any such cash,
dividends or distributions for any period prior to such payment. Further, and
notwithstanding any other provision of this Agreement, neither First Western,
Mitchell Bancorp, nor the Exchange Agent shall be liable to a former holder of
Mitchell Stock for any amount paid or property delivered in good faith to a
public official pursuant to any applicable abandoned property, escheat, or
similar law. Each Shareholder will be responsible for all federal, state and
local taxes that may be incurred by him or her on account of his or her receipt
of the Merger Consideration to be paid in the Merger.
1.12 ANTIDILUTIVE ADJUSTMENTS. If, following the date of this
Agreement, First Western shall change the number of outstanding shares of First
Western Stock as a result of a dividend payable in shares of First Western
Stock, a stock split, a reclassification or other subdivision or combination of
outstanding shares, and if the record date of such event occurs prior to the
Effective Time, then an appropriate and proportionate adjustment will be made to
increase or decrease the number of shares of First Western Stock to be issued in
exchange for each of the shares of Mitchell Stock.
1.13 DISSENTERS. Any Shareholder who has and properly exercises the
right of dissent and appraisal with respect to the Mergers as provided in
Article 13 of the North Carolina Business Corporation Act ("Dissenters Rights")
shall be entitled to receive payment of the fair value of his or her shares of
Mitchell Stock in the manner and pursuant to the procedures provided therein.
Shares of Mitchell Stock held by persons who exercise Dissenters Rights shall
not be converted as provided in Paragraph 1.06 above. However, if any
Shareholder who exercises Dissenters Rights shall fail to perfect his or her
right to receive cash as provided above, or effectively shall waive or lose such
right, then each of his or her shares of Mitchell Stock, at First Western's sole
option, shall be deemed to have been converted into the right to receive the
Merger Consideration as of the Effective Time as provided in Paragraph 1.06
above. Any shares of First Western Stock authorized to be issued pursuant to
this Agreement but not exchanged for shares of Mitchell Stock because of the
exercise of Dissenters Rights may be sold by the Exchange Agent at public
auction or by private sale, or through a dealer or by any other reasonable
method, at its election, for the best available price, and the net proceeds of
any such sale shall be retained by First Western.
1.14 LOST CERTIFICATES. Any Shareholder whose Old Certificate has been
lost, destroyed, stolen or otherwise is missing shall be entitled to receive a
certificate representing the shares of First Western Stock to which he or she is
entitled in accordance with and upon compliance with conditions imposed by the
Exchange Agent or First Western pursuant to the provisions of N.C. Gen. Stat.
ss. 25-8-405 and N.C. Gen. Stat. ss. 25-8-104 (including without limitation a
requirement that the Shareholder provide a lost instrument indemnity or surety
bond in form, substance and amount satisfactory to the Exchange Agent and First
Western).
1.15 OUTSTANDING FIRST WESTERN STOCK. The status of the shares of First
Western Stock that are outstanding immediately prior to the Effective Time shall
not be affected by the Merger.
ARTICLE II. REPRESENTATIONS AND WARRANTIES OF MITCHELL
Except as otherwise specifically provided herein or as "Previously
Disclosed" (as defined in Paragraph 10.01 below) to First Western, Mitchell
Bancorp hereby makes the following representations and warranties to First
Western:
6
<PAGE> 206
2.01. ORGANIZATION; STANDING; POWER. Mitchell Bancorp and Mitchell
Savings and Mitchell Mortgage & Investment Co. (the "Subsidiary") each (i) is
duly organized and incorporated, validly existing and in good standing (as a
business corporation, savings bank and a business corporation, respectively)
under the laws of North Carolina; (ii) has all requisite power and authority
(corporate and other) to own, lease and operate its properties and to carry on
its business as now being conducted; (iii) is duly qualified to do business and
is in good standing in each other jurisdiction in which the character of the
properties owned, leased or operated by it therein or in which the transaction
of its business makes such qualification necessary, except where failure so to
qualify would not have a material adverse effect on Mitchell Bancorp and its
subsidiaries considered as one enterprise; and, (iv) is not transacting business
or operating any properties owned or leased by it in violation of any provision
of federal or state law or any rule or regulation promulgated thereunder, which
violation would have a material adverse effect on Mitchell Bancorp and its
subsidiaries considered as one enterprise. Mitchell Savings is an "insured
depository institution" as defined in the Federal Deposit Insurance Act and
applicable regulations thereunder. Mitchell Savings is a member of the Federal
Home Loan Bank ("FHLB") of Atlanta.
2.02. CAPITAL STOCK. Mitchell Bancorp's authorized capital stock
consists of 3,000,000 shares of common stock, of $0.01 par value per share, and
500,000 shares of preferred stock, of $0.01 par value per share. As of the date
of this Agreement, 937,174 shares of Mitchell Stock are issued and outstanding
and no shares of preferred stock have been issued. As of the date of this
Agreement, Mitchell Bancorp has 97,990 shares of Mitchell Stock reserved for
issuance under employee and director stock option plans, pursuant to which
options covering 68,596 shares of Mitchell Stock are outstanding. As of the date
of this Agreement, Mitchell Bancorp has 39,196 shares of Mitchell Stock reserved
for issuance under its Management Recognition and Development Plan ("MRDP"),
pursuant to which shares 31,358 of Mitchell Stock have been granted.
As of the date of this Agreement, Mitchell Savings has 1,000 authorized
shares of common stock of $1.00 par value per share ("Mitchell Savings Stock")
(no other class of capital stock being authorized), of which 1,000 shares of
Mitchell Savings Stock are issued and outstanding. All of the issued and
outstanding shares of Mitchell Savings Stock are owned of record and
beneficially by Mitchell Bancorp.
The Subsidiary's authorized capital stock consists of 2,000 shares of
common stock, $100 par value per share ("Subsidiary Stock"), of which 160 shares
are issued and outstanding and constitute the Subsidiary's only outstanding
securities. All outstanding shares of Subsidiary Stock are owned of record and
beneficially by Mitchell Savings.
Each outstanding share of Mitchell Stock, Mitchell Savings Stock and
Subsidiary Stock, respectively, (i) has been duly authorized and is validly
issued and outstanding, and is fully paid and nonassessable, (ii) has not been
issued in violation of the preemptive rights of any shareholder, and (iii) has
been issued pursuant to and in compliance with the requirements under or an
applicable exemption from the registration requirements under the Securities Act
of 1933, as amended (the "Securities Act"). The shareholders of Mitchell Bancorp
do not have preemptive rights.
2.03. PRINCIPAL SHAREHOLDERS. Other than as Previously Disclosed, no
person or entity is known to Mitchell Bancorp to beneficially own, directly or
indirectly, more than 5% of the outstanding shares of Mitchell Stock.
2.04. SUBSIDIARIES. Mitchell Savings is the record and beneficial owner
of all of the issued and outstanding shares of Subsidiary Stock. The Subsidiary
is an inactive corporation. Other than as Previously Disclosed to First Western,
neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary has any subsidiary
(direct or indirect), or owns any stock or other equity interest in any
corporation, service corporation, joint venture, partnership or other entity.
2.05. CONVERTIBLE SECURITIES, OPTIONS, ETC.. With the exception of the
Stock Options listed under Paragraph 2.02, neither Mitchell Bancorp, Mitchell
Savings nor the Subsidiary has any outstanding (i) securities or other
obligations (including debentures or other debt instruments) that are
convertible into shares of Mitchell Stock,
7
<PAGE> 207
Mitchell Savings Stock or Subsidiary Stock, respectively, or any other
securities of Mitchell Bancorp, Mitchell Savings or the Subsidiary,
respectively; (ii) options, warrants, rights, calls or other commitments of any
nature that entitle any person to receive or acquire any shares of Mitchell
Stock, Mitchell Savings Stock or Subsidiary Stock, respectively, or any other
securities of Mitchell Bancorp, Mitchell Savings or the Subsidiary,
respectively; or (iii) plan, agreement or other arrangement pursuant to which
shares of Mitchell Stock, Mitchell Savings Stock or Subsidiary Stock,
respectively, or any other securities of Mitchell Bancorp, Mitchell Savings or
the Subsidiary, respectively, or options, warrants, rights, calls or other
commitments of any nature pertaining thereto, have been or may be issued.
2.06. AUTHORIZATION AND VALIDITY OF AGREEMENT. This Agreement has been
duly and validly approved by Mitchell Bancorp's Board of Directors and executed
and delivered on Mitchell Bancorp's behalf. Subject only to the approval of the
shareholders of Mitchell Bancorp as described in Paragraph 6.01 below and
required approvals of governmental or regulatory authorities described in
Paragraph 7.01(a) below in the manner required by law, (i) Mitchell Bancorp has
the corporate power and authority to execute and deliver this Agreement and to
perform its obligations and agreements and carry out the transactions described
herein, (ii) all corporate proceedings and approvals required to authorize
Mitchell Bancorp to enter into this Agreement and to perform its obligations and
agreements and carry out the transactions described herein have been duly and
properly completed or obtained, and (iii) this Agreement has been executed on
behalf of Mitchell Bancorp enforceable in accordance with its terms (except to
the extent enforceability may be limited by (A) applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to time in
effect that affect creditors' rights generally, (B) by legal and equitable
limitations on the availability of injunctive relief, specific performance and
other equitable remedies, and (C) general principles of equity and applicable
laws or court decisions limiting the enforceability of indemnification
provisions).
2.07. VALIDITY OF TRANSACTIONS; ABSENCE OF REQUIRED CONSENTS OR
WAIVERS. Except where the same would not have a material adverse effect on
Mitchell Bancorp and its subsidiaries considered as one enterprise, neither the
execution and delivery of this Agreement, nor the consummation of the
transactions described herein, nor compliance by Mitchell Bancorp with any of
its obligations or agreements contained herein, will: (i) conflict with or
result in a breach of the terms and conditions of, or constitute a default or
violation under any provision of, Mitchell Bancorp's Articles of Incorporation
or Bylaws, or any contract, agreement, lease, mortgage, note, bond, indenture,
license, or obligation or understanding (oral or written) to which Mitchell
Bancorp, Mitchell Savings or the Subsidiary is bound or by which it, its
business, capital stock or any of its properties or assets may be affected; (ii)
result in the creation or imposition of any lien, claim, interest, charge,
restriction or encumbrance upon any of Mitchell Bancorp's, Mitchell Savings' or
the Subsidiary's properties or assets; (iii) violate any applicable federal or
state statute, law, rule or regulation, or any judgment, order, writ, injunction
or decree of any court, administrative or regulatory agency or government body;
(iv) result in the acceleration of any obligation or indebtedness of Mitchell
Bancorp, Mitchell Savings or the Subsidiary; or, (v) interfere with or otherwise
adversely affect Mitchell Bancorp's or Mitchell Savings' ability to carry on its
business as presently conducted.
No consents, approvals or waivers are required to be obtained from any
person or entity in connection with Mitchell Bancorp's execution and delivery of
this Agreement, or the performance of its obligations or agreements or the
consummation of the transactions described herein, except for required approvals
of the Shareholders as described in Paragraph 7.01(c) below and of governmental
or regulatory authorities as described in Paragraph 7.01(a) below.
2.08. MITCHELL BOOKS AND RECORDS. Mitchell Bancorp's, Mitchell Savings'
and the Subsidiary's books of account and business records have been maintained
in substantial compliance with all applicable legal and accounting requirements
and in accordance with good business practices. Such books and records are
complete and reflect accurately in all material respects Mitchell Bancorp's,
Mitchell Savings' and the Subsidiary's respective items of income and expense
and all of their respective assets, liabilities and stockholders' equity. The
respective minute books of Mitchell Bancorp, Mitchell Savings and the Subsidiary
accurately reflect in all material respects the corporate actions which their
respective shareholders and board of directors, and all committees thereof, have
taken during the
8
<PAGE> 208
time periods covered by such minute books. All such minute books have been or
will be made available to First Western and its representatives.
2.09. MITCHELL REPORTS. Since January 1, 1993, and where the failure to
file has had or could have a material adverse effect on Mitchell Bancorp and its
subsidiaries considered as one enterprise, Mitchell has filed all reports,
registrations and statements, together with any amendments required to be made
with respect thereto, that were required to be filed with (i) the Federal
Deposit Insurance Corporation (the "FDIC"), (ii) the Administrator of the North
Carolina Savings Institutions Division (the "Administrator"), (iii) the Board of
Governors of the Federal Reserve (the "Federal Reserve"), (iv) the Securities
and Exchange Commission (the "SEC"), or (v) any other governmental or regulatory
authorities having jurisdiction over Mitchell Bancorp, Mitchell Savings or the
Subsidiary (the "Regulatory Authorities"). All such reports, registrations and
statements filed by Mitchell with the Regulatory Authorities are collectively
referred to herein as the "Mitchell Reports." As of their respective dates, each
Mitchell Report complied in all material respects with all the statutes, rules
and regulations enforced or promulgated by the Regulatory Authority with which
it was filed and did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Mitchell has not been notified that any such Mitchell Report was
deficient in any material respect as to form or content. Following the date of
this Agreement, Mitchell shall deliver to First Western, simultaneous with the
filling thereof, a copy of each report, registration, statement or other
regulatory filing made with any Regulatory Authority.
2.10. MITCHELL FINANCIAL STATEMENTS. Mitchell Bancorp has delivered to
First Western a copy of its consolidated balance sheets as of June 30, 1996 and
June 30, 1997, and its consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended June 30, 1996 and June
30, 1997, together with notes thereto (the "Mitchell Financial Statements").
Following the date of this Agreement, Mitchell promptly will deliver to First
Western all other annual or interim financial statements prepared by or for
Mitchell. The Mitchell Financial Statements (i) are in accordance with
Mitchell's books and records, and (ii) were prepared in accordance with
Generally Accepted Accounting Principles ("GAAP") applied on a consistent basis
throughout the periods indicated and present fairly Mitchell Bancorp's
consolidated financial condition, assets and liabilities, results of operations,
changes in stockholders' equity and cash flows as of the dates indicated and for
the periods specified therein. The Mitchell Financial Statements have been
audited and certified by Mitchell Bancorp's independent certified public
accountants, Crisp Hughes Evans LLP.
2.11. TAX RETURNS AND OTHER TAX MATTERS. Mitchell Bancorp, Mitchell
Savings and the Subsidiary each has timely filed or caused to be filed all
federal, state and local tax returns and reports that are required by law to
have been filed, and to the best knowledge and belief of management of Mitchell,
all such returns and reports were true, correct and complete and contained all
material information required to be contained therein. All federal, state and
local income, profits, franchise, sales, use, occupation, property, excise and
other taxes (including interest and penalties), charges and assessments that
have become due from or been assessed or levied against Mitchell Bancorp,
Mitchell Savings or the Subsidiary or their property have been fully paid, and,
with respect to any such taxes to become due from Mitchell Bancorp or Mitchell
Savings for any period or periods through and including June 30, 1997, adequate
provision has been made for the payment of all such taxes and such provision is
reflected in the Mitchell Financial Statements. Mitchell Bancorp's, Mitchell
Savings' and the Subsidiary's tax returns and reports have been examined or
closed by applicable statutes of limitations through the tax year ended December
31, 1994, and neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary has
received any indication of the pendency of any audit or examination in
connection with any tax return or report or has any knowledge that any such
return or report is subject to adjustment. Neither Mitchell Bancorp, Mitchell
Savings nor the Subsidiary has executed any waiver or extended a statute of
limitation with respect to any tax year, the audit of any tax return or report
or the assessment or collection of any tax. Any deferred taxes of Mitchell
Bancorp, Mitchell Savings or the Subsidiary have been provided for in the
Mitchell Financial Statements in all material respects.
9
<PAGE> 209
2.12. ABSENCE OF MATERIAL ADVERSE CHANGES OR CERTAIN OTHER EVENTS. (a)
Since June 30, 1997, Mitchell Bancorp, Mitchell Savings and the Subsidiary have
conducted their respective businesses only in the ordinary course, and there has
been no material adverse change, and there has occurred no event or development
and, to the best knowledge of management of Mitchell, there currently exists no
condition or circumstance that, with the lapse of time or otherwise, may or
could cause, create or result in a material adverse change, in or affecting the
financial condition, results of operations, prospects, business, assets, loan
portfolio, investments, properties or operations of Mitchell Bancorp and its
subsidiaries considered as one enterprise.
(b) Other than as Previously Disclosed, since June 30, 1997, and other
than in the ordinary course of its business, neither Mitchell Bancorp, Mitchell
Savings nor the Subsidiary has incurred any material liability or engaged in any
material transaction or entered into any material agreement, increased the
salaries, compensation or general benefits payable to its employees, suffered
any loss, destruction or damage to any of its properties or assets or entered
into any material contract or lease.
2.13. ABSENCE OF UNDISCLOSED LIABILITIES. To the best of the knowledge
of management of Mitchell, neither Mitchell Bancorp, Mitchell Savings nor the
Subsidiary has any liabilities or obligations, whether known or unknown, matured
or unmatured, accrued, absolute, contingent or otherwise, whether due or to
become due (including without limitation tax liabilities or unfunded liabilities
under employee benefit plans or arrangements), other than (i) those reflected in
Mitchell Financial Statements, or (ii) obligations or liabilities incurred in
the ordinary course of their business since June 30, 1997, and which are not,
individually or in the aggregate, material to Mitchell Bancorp and its
subsidiaries considered as one enterprise.
2.14. COMPLIANCE WITH EXISTING OBLIGATIONS. Mitchell Bancorp, Mitchell
Savings and the Subsidiary each has performed in all material respects all
obligations required to be performed by it under, and it is not in default in
any material respect under, or in violation in any material respect of, the
terms and conditions of its Articles of Incorporation or Bylaws, and/or any
contract, agreement, lease, mortgage, note, bond, indenture, license,
obligation, understanding or other undertaking (whether oral or written) to
which Mitchell Bancorp, Mitchell Savings or the Subsidiary is bound or by which
it, its business, capital stock, or any of its properties or assets may be
affected.
2.15. LITIGATION AND COMPLIANCE WITH LAW. (a) There are no actions,
suits, arbitrations, controversies or other proceedings or investigations (or,
to the best knowledge and belief of management of Mitchell, any facts or
circumstances that reasonably could result in such), including without
limitation any such action by any Regulatory Authority, which currently exists
or is ongoing, pending or, to the best knowledge and belief of management of
Mitchell, threatened, contemplated or probable of assertion, against, relating
to or otherwise affecting Mitchell Bancorp, Mitchell Savings or the Subsidiary
or any of their properties or assets that, if determined adversely, could result
in liability on the part of Mitchell Bancorp, Mitchell Savings or the Subsidiary
for, or subject it to, monetary damages, fines or penalties, an injunction, or
that could have a material adverse effect on the financial condition, results of
operations, prospects, business, assets, loan portfolio, investments, properties
or operations of Mitchell Bancorp and its subsidiaries considered as one
enterprise or on the ability of Mitchell Bancorp to consummate the Mergers.
(b) Mitchell Bancorp, Mitchell Savings and the Subsidiary each has all
licenses, permits, orders, authorizations or approvals ("Permits") of any
federal, state, local or foreign governmental or regulatory body that are
material to the conduct of its business or to own, lease and operate it
properties. All such Permits are in full force and effect in all material
respects. No violations are or have been recorded in respect of any such
Permits. No proceeding is pending or, to the best knowledge of management of
Mitchell, threatened or probable of assertion to suspend, cancel, revoke or
limit any Permit.
(c) Neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary has
been notified that it is subject to any supervisory agreement, enforcement
order, writ, injunction, capital directive, supervisory directive,
10
<PAGE> 210
memorandum of understanding or other similar agreement, order, directive,
memorandum or consent of, with or issued by any Regulatory Authority relating to
its financial condition, directors or officers, operations, capital, regulatory
compliance or otherwise. There are no judgments, orders, stipulations,
injunctions, decrees or awards against Mitchell Bancorp, Mitchell Savings or the
Subsidiary that in any manner limit, restrict, regulate, enjoin or prohibit any
present or past business or practice of Mitchell Bancorp, Mitchell Savings, or
the Subsidiary. Neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary
has been advised or has any reason to believe that any Regulatory Authority or
any court is contemplating, threatening or requesting the issuance of any such
agreement, order, injunction, directive, memorandum, judgment, stipulation,
decree or award.
(d) Neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary is in
violation or default in any material respect under, and each has complied in all
material respects with, all laws, statutes, ordinances, rules, regulations,
orders, writs, injunctions or decrees of any court or federal, state, municipal
or other Regulatory Authority having jurisdiction or authority over it or its
business operations, properties or assets (including without limitation all
provisions of North Carolina law relating to usury, the Consumer Credit
Protection Act, and all other laws and regulations applicable to extensions of
credit by Mitchell Savings) and there is no basis for any claim by any person or
authority for compensation, reimbursement or damages or otherwise for any
violation of any of the foregoing.
2.16. REAL PROPERTIES. Mitchell has Previously Disclosed to First
Western a listing of all real property owned or leased by Mitchell Bancorp,
Mitchell Savings, or the Subsidiary (including Mitchell Savings' banking
facility and all other real estate or foreclosed properties owned by Mitchell
Savings) (the "Mitchell Real Property"). There are no leases pertaining to any
such Mitchell Real Property to which Mitchell Bancorp, Mitchell Savings, or the
Subsidiary is a party. With respect to all Mitchell Real Property, Mitchell has
good and marketable fee simple title to such Mitchell Real Property and owns the
same free and clear of all mortgages, liens, leases, encumbrances, title defects
and exceptions to title other than (i) the lien of current taxes not yet due and
payable, and (ii) such imperfections of title and restrictions, covenants and
easements (including utility easements) that do not affect materially the value
of the Mitchell Real Property and that do not affect materially detract from,
interfere with or restrict the present or future use of the properties subject
thereto or affected thereby.
To the best of the knowledge and belief of management of Mitchell, the
Mitchell Real Property complies in all material respects with all applicable
federal, state and local laws, regulations, ordinances or orders of any
governmental authority, including those relating to zoning, building and use
permits, and the Mitchell Real Property may be used under applicable zoning
ordinances for commercial banking facilities as a matter of right rather than as
a conditional or nonconforming use.
All improvements and fixtures included in or on the Mitchell Real
Property are in good condition and repair, ordinary wear and tear excepted, and,
to the best of the knowledge of management of Mitchell, there does not exist any
condition that adversely affects the economic value thereof.
2.17. LOANS, ACCOUNTS, NOTES AND OTHER RECEIVABLES. (a) All loans,
accounts, notes, and other receivables reflected as assets on Mitchell Savings'
books and records (i) have resulted from bona fide business transactions in the
ordinary course of Mitchell Savings' operations, (ii) in all material respects
were made in accordance with Mitchell Savings' standard loan policies and
procedures, and (iii) are owned by Mitchell Savings free and clear of all liens,
encumbrances, assignments, participation or repurchase agreements or other
exceptions to title or to the ownership of collection rights of any other person
or entity.
(b) To the best knowledge of management of Mitchell, each loan
reflected as an asset on Mitchell Savings' books, and each guaranty therefor, is
the legal, valid and binding obligation of the obligor or guarantor thereon, and
no defense, offset or counterclaim as been asserted with respect to any such
loan or guaranty.
11
<PAGE> 211
(c) Mitchell has Previously Disclosed to First Western a listing of (i)
each loan, extension of credit or other asset of Mitchell Savings which, as of
June 30, 1998, is classified by the FDIC, the Administrator or by Mitchell
Savings as "Loss," "Doubtful," "Substandard," or "Special Mention" (or otherwise
by words of similar import), or which Mitchell Savings has designated as a
special asset or for special handling or placed on any "watch list" because of
concerns regarding the ultimate collectibility or deteriorating condition of
such asset or any obligor or loan collateral therefor, and (ii) each loan or
extension of credit of Mitchell Savings which, as of June 30, 1998, was past due
as to the payment of principal and/or interest, or as to which any obligor
thereon (including the borrower or any guarantor) otherwise was in default, is
the subject of a proceeding in bankruptcy, or otherwise has indicated any
inability or intention not to repay such loan or extension of credit. Each such
listing is accurate and complete as of the date indicated.
(d) To the best knowledge and belief of Mitchell's management, each of
Mitchell Savings' loans and other extensions of credit (with the exception of
those loans and extensions of credit specified in the written listings described
in Subparagraph (c) above) is collectible in the ordinary course of Mitchell
Savings' business in an amount that is not less than the amount at which it is
carried on Mitchell Savings' books and records.
(e) Mitchell's reserve for possible loan losses (the "Loan Loss
Reserve") shown in the Mitchell Financial Statements has been established in
conformity with GAAP and all applicable requirements of the FDIC and rules and
policies of the Administrator and, in the best judgment of Mitchell's
management, is reasonable in view of the size and character of Mitchell Savings'
loan portfolio, current economic conditions and other relevant factors, and is
adequate to provide for losses relating to or the risk of loss inherent in
Mitchell Savings' loan portfolio and other real estate owned.
2.18. SECURITIES PORTFOLIO AND INVESTMENTS. All securities owned by
Mitchell Bancorp or Mitchell Savings (whether owned of record or beneficially)
are held free and clear of all mortgages, liens, pledges, encumbrances or any
other restriction or rights of any other person or entity, whether contractual
or statutory, that would materially impair the ability of Mitchell Bancorp or
Mitchell Savings to dispose freely of any such security and/or otherwise to
realize the benefits of ownership thereof at any time (other than pledges of
securities in the ordinary course of Mitchell Savings' business to secure public
funds deposits). There are no voting trusts or other agreements or undertakings
to which Mitchell Bancorp or Mitchell Savings is a party with respect to the
voting of any such securities. There has been no material adverse change in the
quality, or any material decrease in the value, of Mitchell Bancorp's or
Mitchell Savings' securities portfolio.
2.19. PERSONAL PROPERTY AND OTHER ASSETS. All assets of Mitchell
Bancorp, Mitchell Savings and the Subsidiary (including without limitation all
banking equipment, data processing equipment, vehicles, and all other personal
property located in or used in the operation of the office of Mitchell Savings
or otherwise used by Mitchell Bancorp or Mitchell Savings in the operation of
its business) are owned by Mitchell Bancorp, Mitchell Savings or the Subsidiary,
respectively, free and clear of all material liens, leases, encumbrances, title
defects or exceptions to title. All Mitchell Savings' banking equipment is in
good operating condition and repair, ordinary wear and tear excepted.
2.20. ENVIRONMENTAL MATTERS. (a) Mitchell has Previously Disclosed to
First Western copies of all written reports, correspondence, notices or other
materials, if any, in its possession pertaining to environmental reports,
surveys, assessments, notices of violation, notices of regulatory requirements,
penalty assessments, claims, actions or proceedings, past or pending, of the
Mitchell Real Property or any of its loan collateral and any improvements
thereon, or to any violation of Environmental Laws (as defined below) on,
affecting or otherwise involving the Mitchell Real Property, any loan collateral
or otherwise involving Mitchell Bancorp, Mitchell Savings, or the Subsidiary.
(b) To the best of the knowledge of management of Mitchell, there has
been no presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, reporting, testing,
12
<PAGE> 212
processing, emission, discharge, release, threatened release, control or
clean-up in a reportable or regulated quantity of any hazardous, toxic or
otherwise regulated materials, substances or wastes, chemical substances or
mixtures, pesticides, pollutants, contaminants, toxic chemicals, oil or other
petroleum products or byproducts, asbestos, ploychlorinated biphenyls, or
radiation ("Hazardous Substances") by any person on, from or relating to any
parcel of the Mitchell Real Property since the date Mitchell first acquired or
occupied such parcel or, to the best of the knowledge and belief of management
of Mitchell, at any time prior thereto.
(c) To the best of the knowledge of management of Mitchell, neither
Mitchell Bancorp, Mitchell Savings nor the Subsidiary has violated any
Environmental Laws (as defined below), including, to the best knowledge of
management of Mitchell, any violation with respect to or relating to any loan
collateral, by any other person or entity for whose liability or obligation with
respect to any particular matter or violation Mitchell Bancorp, Mitchell Savings
or the Subsidiary is or may be responsible or liable.
(d) Neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary is
subject to any pending claims, demands, causes of action, suits, proceedings,
losses, damages, penalties, liabilities, obligations, costs or expenses of any
kind and nature that arise out of, under or in connection with, or which result
from or are based upon the presence, use, production, generation, handling,
transportation, treatment, storage, disposal, distribution, labeling, reporting,
testing, processing, emission, discharge, release, threatened release, control
or clean-up of any Hazardous Substances on, from or relating to the Mitchell
Real Property or, to the best knowledge or management of Mitchell, any loan
collateral, by Mitchell Bancorp, Mitchell Savings, or the Subsidiary or any
other person or entity.
(e) To the best of the knowledge of management of Mitchell, no facts,
events or conditions relating to the Mitchell Real Property or, to the best
knowledge of management of Mitchell, any loan collateral, or the operations of
Mitchell Bancorp or Mitchell Savings at any of its office locations, will
prevent, hinder or limit continued compliance with Environmental Laws, or give
rise to any investigatory, remedial or corrective actions, obligations or
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise)
pursuant to Environmental Laws.
2.22. ABSENCE OF BROKERAGE OR FINDERS COMMISSION. Other than as
Previously Disclosed to First Western, all negotiations relative to this
Agreement and the transactions described herein have been carried on by Mitchell
directly with First Western. Other than as Previously Disclosed to First
Western, no person or firm has been retained by or has acted on behalf of,
pursuant to any agreement, arrangement or understanding with, or under the
authority of, Mitchell or its Board of Directors, as a broker, finder, or agent
or has performed similar functions or otherwise is or may be entitled to receive
or claim a brokerage fee or other commission in connection with the transactions
described herein. Mitchell has not agreed to pay any brokerage fee or other
commission to any person or entity in connection with the transactions described
herein.
2.23. MATERIAL CONTRACTS AND COMMITMENTS. Other than as Previously
Disclosed to First Western, neither Mitchell Bancorp, Mitchell Savings nor the
Subsidiary is a party to or bound by any agreement (i) involving money or other
property in an amount or with a value in excess of $50,000; (ii) which is not to
be performed in full prior to December 31, 1998; (iii) which calls for the
provision of goods or services to Mitchell Bancorp, Mitchell Savings, or the
Subsidiary that cannot be terminated without material penalty upon written
notice to the other party thereto; (iv) which is material to Mitchell Bancorp or
Mitchell Savings and was not entered into in the ordinary course of business;
(v) which involves hedging, options or any similar trading activity, or interest
rate exchanges or swaps; (vi) which commits Mitchell Bancorp, Mitchell Savings,
or the Subsidiary to extend any loan or credit (with the exception of letters of
credit, lines of credit and loan commitments extended in the ordinary course of
Mitchell Savings' business); (vii) which involves the purchase or sale of any
assets of Mitchell Bancorp, Mitchell Savings, or the Subsidiary, or the
purchase, sale, issuance, redemption or transfer of any capital stock or other
securities of Mitchell Bancorp, Mitchell Savings, or the Subsidiary; or (viii)
with any director, officer or principal shareholder of Mitchell Bancorp,
Mitchell Savings, or the Subsidiary (including without limitation any employment
or consulting agreement, but not including any agreement relating to loans or
other banking services which were made in the
13
<PAGE> 213
ordinary course of Mitchell Savings' business and on substantially the same
terms and conditions as were prevailing at that time for similar agreements with
unrelated persons).
Neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary is in
default in any material respect, and there has not occurred any event that with
the lapse of time or the giving of notice, or both, would constitute such a
default, under any contract, lease, insurance policy, commitment or arrangement
to which it is a party or by which it or its property is or may be bound or
affected or under which it or its property receives benefits, where the
consequences of such default would have a material adverse effect on the
financial condition, results of operations, prospects business, assets, loan
portfolio, investments, properties or operations of Mitchell Bancorp and its
subsidiaries considered as one enterprise.
2.24. EMPLOYMENT MATTERS; EMPLOYEE RELATIONS. Mitchell Bancorp,
Mitchell Savings and the Subsidiary each (a) has paid in full to or accrued on
behalf of all its directors, officers and employees all wages, salaries,
commissions, bonuses, fees and other direct compensation for all services
performed by them to the date of this Agreement and (b) is in compliance with
all federal,state and local laws, statutes, rules regulations with regard to
employment and employment practices terms and conditions, and wages and hours
and other compensation matters. No person has, to the knowledge of management of
Mitchell, asserted that Mitchell Bancorp, Mitchell Savings, or the Subsidiary is
liable in any amount for any arrearages in wages or employment taxes or for any
penalties for failure to comply with any of the foregoing.
There is no action, suit or proceeding by any person pending or, to the
best knowledge of management of Mitchell, threatened, against Mitchell Bancorp,
Mitchell Savings, or the Subsidiary (or any of their respective employees),
involving employment discrimination, sexual harassment, wrongful discharge or
similar claims.
Neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary is a
party to or bound by any collective bargaining agreement with any of its
employees, any labor union or any other collective bargaining unit or
organization. There is no pending or, to the best of the knowledge of management
of Mitchell, threatened labor dispute, work stoppage or strike involving
Mitchell Bancorp, Mitchell Savings, or the Subsidiary and any of its employees,
or any pending or, to the best of the knowledge of management of Mitchell,
threatened proceeding in which it is asserted that Mitchell Bancorp, Mitchell
Savings, or the Subsidiary is aware of any activity involving it or any of its
employees seeking to certify a collective bargaining unit or engaging in any
other labor organization activity.
2.25. EMPLOYMENT AGREEMENTS; EMPLOYEE BENEFIT PLANS. (a) Other than as
Previously Disclosed to First Western, neither Mitchell Bancorp, Mitchell
Savings nor the Subsidiary is a party to or bound by any employment agreements
with any of its directors, officers or employees.
(b) Mitchell has Previously Disclosed to First Western a listing of all
bonus, deferred compensation, pension, retirement, profit-sharing, thrift,
savings, employee stock ownership, stock bonus, stock purchase, restricted stock
and stock option plans; all employment and severance contacts; all medical,
dental, health, and life insurance plans; all vacation, sickness, disability and
death benefit plans; and all other employee benefit plans, contracts, or
arrangements maintained or contributed to by Mitchell Bancorp, Mitchell Savings,
or the Subsidiary for the benefit of any employees, former employees, directors,
former directors or any of their beneficiaries (collectively, the "Plans"). True
and complete copies of all Plans, including, but not limited to, any trust
instruments and/or insurance contracts, if any, forming a part thereof, and all
amendments thereto, previously have been supplied to First Western. Except as
Previously Disclosed to First Western, neither Mitchell Bancorp, Mitchell
Savings nor the Subsidiary maintains, sponsors, contributes to or otherwise
participates in any "Employee Benefit Plan" within the meaning of ss. 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), any
"Multiemployer Plan" within the meaning of ss. 3(37) of ERISA, or any "Multiple
Employer Welfare Arrangement" within the meaning of ss. 3(40) of ERISA. Each
Plan that is an "employee pension benefit plan" within the meaning of ss. 3(2)
of ERISA and
14
<PAGE> 214
that is intended to be qualified under ss. 401(a) of the Code, has received a
favorable determination letter from the Internal Revenue Service, and neither
Mitchell Bancorp, Mitchell Savings nor the Subsidiary is aware of any
circumstances reasonably likely to result in the revocation or denial of any
such favorable determination letter. All reports and returns with respect to the
Plans (and any Plans previously maintained by Mitchell Bancorp, Mitchell
Savings, or the Subsidiary) required to be filed with any governmental
department, agency, service or other authority, including without limitation
Internal Revenue Service Form 5500 (Annual Report), have been properly and
timely filed.
(c) To the best of the knowledge of management of Mitchell, all
"Employee Benefit Plans" maintained by or otherwise covering employees or former
employees of Mitchell Bancorp, Mitchell Savings, or the Subsidiary, to the
extent subject to ERISA, currently are, and at all times have been, in
compliance with all material provisions and requirements of ERISA. There is no
pending, or, to the best of the knowledge of management of Mitchell, threatened
litigation relating to any Plan or any such Plan previously maintained by
Mitchell Bancorp, Mitchell Savings, or the Subsidiary. Neither Mitchell Bancorp,
Mitchell Savings nor the Subsidiary has engaged in a transaction with respect to
any Plan that could subject Mitchell Bancorp, Mitchell Savings, or the
Subsidiary to a tax or penalty imposed by either ss. 4975 of the Code, or ss.
502(i) of ERISA.
(d) To the best of the knowledge of management of Mitchell, no
liability under Subtitle C or D of Title IV of ERISA has been or, to the best of
the knowledge of management of Mitchell, is expected to be incurred by Mitchell
Bancorp, Mitchell Savings, or the Subsidiary with respect to any Plan or with
respect to any other ongoing, frozen or terminated defined benefit pension plan
currently or formerly maintained by Mitchell Bancorp, Mitchell Savings or the
Subsidiary. Neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary
presently contributes to a "Multiemployer Plan" or has contributed to such a
plan within the five years beginning July 1, 1993. All contributions required to
be made under the terms of each of the Plans (including without limitation any
other "pension plan" as defined in ss. 3(2) of ERISA) maintained by Mitchell
Bancorp, Mitchell Savings, or the Subsidiary) have been timely made. No Plan nor
any other "pension plan" maintained by Mitchell Bancorp, Mitchell Savings, or
the Subsidiary has an "accumulated funding deficiency" (whether or not waived)
within the meaning of ss. 412 of the Code or ss. 302 of ERISA. Neither Mitchell
Bancorp, Mitchell Savings nor the Subsidiary has provided, or is required to
provide, security to any "pension plan" or to any "single employer plan"
pursuant to ss. 401(a) (29) of the Code. Under the Plans and any other "pension
plan" maintained by Mitchell Bancorp, Mitchell Savings, or the Subsidiary, as of
the last day of the most recent plan year ended prior to the date hereof, the
actuarially determined present value of all "benefit liabilities," within the
meaning of ss. 4001(a)(16) of ERISA (as determined on the basis of the actuarial
assumptions contained in the Plan's most recent actuarial valuation) did not
exceed the then current value of the assets of such Plan, and there has been no
material change in the financial condition of any such Plan since the last day
of the most recent Plan year.
(e) Except as Previously Disclosed to First Western, neither the
execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (except as otherwise specifically provided
herein) (i) result in any payment to any person (including without limitation
any severance compensation or payment, unemployment compensation, "golden
parachute" or "change in control" payment, or otherwise) becoming due under any
Plan or agreement to any director, officer, employee or consultant, (ii)
increase any benefits otherwise payable under any Plan or agreement, or (iii)
result in any acceleration of the time of payment or vesting of any such
benefit.
(f) Mitchell Bancorp and Mitchell Savings have no obligations for
retiree health and life benefits under any Plan, except as Previously Disclosed
to First Western.
2.26. INSURANCE. Mitchell Bancorp, Mitchell Savings and the Subsidiary
have in effect a "banker's blanket bond" and such other policies of general
liability, casualty, directors and officers liability, employee fidelity, errors
and omissions and other property and liability insurance as have been Previously
Disclosed to First Western
15
<PAGE> 215
(the "Mitchell Policies"). The Mitchell Policies provide coverage in such
amounts and against such liabilities, casualties, losses, or risks as is
customary or reasonable for entities engaged in Mitchell's businesses or as is
required by applicable law or regulation. In the reasonable opinion of
management of Mitchell, the insurance coverage provided under the policies is
considered reasonable and adequate in all respects for Mitchell Bancorp,
Mitchell Savings, and the Subsidiary. Each of the Mitchell Policies is in full
force and effect and is valid and enforceable in accordance with its terms, and
is underwritten by an insurer of recognized financial responsibility and which
is qualified to transact business in North Carolina. Mitchell Bancorp, Mitchell
Savings and the Subsidiary each has taken all requisite actions (including the
giving of required notices) under each such Mitchell Policy in order to preserve
all rights thereunder with respect to all matters. Neither Mitchell Bancorp,
Mitchell Savings nor the Subsidiary is in default under the provisions of, has
not received notice of cancellation or nonrenewal of or any premium increase on,
or has any knowledge of any failure to pay any premium on or any inaccuracy in
any application for any Mitchell Policy. There are no pending claims with
respect to any Mitchell Policy (and neither Mitchell Bancorp, Mitchell Savings
nor the Subsidiary is aware of any facts that would form the basis of any such
claim), and neither Mitchell Bancorp, Mitchell Savings nor the Subsidiary has
any knowledge of any state of facts or of the occurrence of any event that is
reasonably likely to form the basis for any such claim.
2.27. INSURANCE OF DEPOSITS. All deposits of Mitchell Savings are
insured by the Savings Association Insurance Fund of the FDIC to the maximum
extent permitted by law, all deposit insurance premiums due from Mitchell
Savings to the FDIC have been paid in full in a timely fashion, and, to the best
of the knowledge and belief of Mitchell's executive officers, no proceedings
have been commenced or, to the best of the knowledge of management of Mitchell,
are contemplated by the FDIC or otherwise to terminate such insurance.
2.28. OBSTACLES TO REGULATORY APPROVAL, ACCOUNTING TREATMENT OR TAX
TREATMENT. To the best of the knowledge and belief of management of Mitchell,
there exists no fact or condition (including Mitchell Savings' record of
compliance with the Community Reinvestment Act) relating to Mitchell Bancorp,
Mitchell Savings or the Subsidiary that may reasonably be expected to (i)
prevent or materially impede or delay First Western or Mitchell Bancorp from
obtaining the regulatory approvals required in order to consummate the
transactions described herein; or (ii) prevent the Mergers from qualifying to be
a tax-free reorganization under Section 368(a) of the Code. If any such fact or
condition becomes known to Mitchell, Mitchell shall promptly (and in any event
within three days after obtaining such knowledge) communicate such fact or
condition to First Western in the manner set forth in Paragraph 10.05 hereof.
2.29. DISCLOSURE. To the best of the knowledge and belief of Mitchell,
no written statement, certificate, schedule, list or other written information
furnished by or on behalf of Mitchell Bancorp, Mitchell Savings, or the
Subsidiary at any time to First Western in connection with this Agreement
(including without limitation information "Previously Disclosed" by Mitchell),
when considered as a whole, contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact necessary in order
to make the statements herein or therein, in light of the circumstances under
which they were made, not misleading. Each document delivered or to be delivered
by Mitchell Bancorp, Mitchell Savings, or the Subsidiary to First Western is or
will be a true and complete copy of such document, unmodified except by another
document delivered by Mitchell.
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF FIRST WESTERN
Except as otherwise specifically described herein or as "Previously
Disclosed" (as defined in Paragraph 10.01 below) to Mitchell Bancorp, First
Western hereby makes the following representations and warranties to Mitchell:
3.01. ORGANIZATION; STANDING; POWER. First Western (i) is duly
organized and incorporated, validly existing and in good standing (as a banking
corporation) under the laws of North Carolina; (ii) has all requisite power and
authority (corporate and other) to own its properties and conduct its businesses
as now being conducted; (iii) is duly qualified to do business and is in good
standing in each other jurisdiction in which the character of the properties
16
<PAGE> 216
owned or leased by it therein or in which the transaction of its business makes
such qualification necessary, except where failure so to qualify would not have
a material adverse effect on First Western; and (iv) is not transacting
business, or operating any properties owned or leased by it, in violation of any
provision of federal or state law or any rule or regulation promulgated
thereunder, which violation would have a material adverse effect on First
Western. First Western is an "insured depository institution" as defined in the
Federal Deposit Insurance Act and applicable regulations thereunder. First
Western is not a member of the FHLB of Atlanta or the Federal Reserve Bank of
Richmond. First Western has no subsidiaries.
3.02. CAPITAL STOCK. First Western's authorized capital stock consists
of 5,000,000 shares of First Western Stock and 1,000,000 shares of preferred
stock. As of the date of this Agreement, an aggregate of 727,419 shares of First
Western Stock were issued and outstanding, and no shares of preferred stock were
issued or outstanding. First Western's outstanding capital stock has been duly
authorized and validly issued, and is fully paid and nonassessable, and the
shares of First Western Stock issued to Mitchell's shareholders pursuant to this
Agreement, when issued as described herein, will be duly authorized, validly
issued, fully paid and nonassessable. As of the date of this Agreement, First
Western has 145,484 shares of First Western Stock reserved for issuance under
employee and director stock option plans pursuant to which options covering
128,034 shares of First Western Stock are outstanding. There are no other shares
of capital stock or other equity securities of First Western outstanding and no
outstanding rights with respect thereto. No person or entity is known to First
Western to beneficially own, directly or indirectly, more than 5% of the
outstanding shares of First Western Stock. First Western Stock is listed on the
Electronic Bulletin Board of the NASD (the "Nasdaq Market") under the symbol
"FWBN."
3.03. AUTHORIZATION AND VALIDITY OF AGREEMENT. This Agreement has been
duly and validly approved by First Western's Board of Directors and executed and
delivered on First Western's behalf. Subject only to approval of this Agreement
by the shareholders of First Western as described in Paragraph 7.01(c) below and
required approvals of governmental or regulatory authorities described in
Paragraph 7.01(a) below in the manner required by law, (i) First Western has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations and agreements and carry out the transactions described
herein; (ii) all corporate proceedings required to be taken to authorized First
Western to enter into this Agreement and to perform its obligations and
agreements and carry out the transactions described herein have been duly and
properly taken; and (iii) this Agreement constitutes the valid and binding
agreement of First Western enforceable in accordance with its terms (except to
the extent enforceability may be limited by (A) applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to time in
effect which affect creditors' rights generally, (B) by legal and equitable
limitations on the availability of injunctive relief, specific performance and
other equitable remedies, and (C) general principles of equity and applicable
laws or court decisions limiting the enforceability of indemnification
provisions).
3.04. VALIDITY OF TRANSACTIONS; ABSENCE OF REQUIRED CONSENTS OR
WAIVERS. Except where the same would not have a material adverse effect on First
Western, neither the execution and delivery of this Agreement, nor the
consummation of the transactions described herein, nor compliance by First
Western with any of its obligations or agreements contained herein, will: (i)
conflict with or result in a breach of the terms and conditions of, or
constitute a default or violation under any provision of, First Western's
Articles of Incorporation or Bylaws, or any contract, agreement, lease,
mortgage, note, bond, indenture, license, or obligation or understanding (oral
or written) to which it, its business, capital stock or any of is properties or
assets may be affected; (ii) result in the creation or imposition of any lien,
claim, interest, charge, restriction or encumbrance upon any of First Western's
properties or assets; (iii) violate any applicable federal or state statute,
law, rule or regulation, or any order, writ, injunction or decree of any court,
administrative or regulatory agency or governmental body; (iv) result in the
acceleration of any obligation or indebtedness of First Western; or, (v)
interfere with or otherwise adversely affect First Western's ability to carry on
its business as presently conducted.
No consents, approvals or waivers are required to be obtained from any
person or entity in connection with First Western's execution and delivery of
this Agreement, or the performance of its obligations or agreements or the
17
<PAGE> 217
consummation of the transactions described herein, except for the approval of
the shareholders of First Western as described in Paragraph 7.01(c) below and
required approvals of governmental or regulatory authorities described in
Paragraph 7.01(a) below.
3.05. FIRST WESTERN BOOKS AND RECORDS. First Western's books of account
and business records have been maintained in substantial compliance with all
applicable legal and accounting requirements and in accordance with good
business practices. Such books and records are complete and reflect accurately
in all material respects ctive minute books of First Western accurately reflect
in all material respects the corporate actions which their respective
shareholders and board of directors, and all committees thereof, have taken
during the time periods covered by such minute books. All such minute books have
been or will be made available to Mitchell and its representatives.
3.06. FIRST WESTERN REPORTS. Since January 1, 1998, and where the
failure to file has had or could have a material adverse effect on First
Western, First Western has filed all reports, registrations and statements,
together with any amendments that were required to be made with respect thereto,
that were required to be filed with any Regulatory Authorities having
jurisdiction over First Western. All such reports and statements filed with the
any Regulatory Authority are collectively referred to herein as the "First
Western Reports." As of their respective dates, the First Western Reports
complied in all material respects with all the statutes, rules and regulations
enforced or promulgated by the Regulatory Authority with which they were filed
and did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. First Western has not been notified that any such First Western
Reports were deficient in any material respect as to form or content. Following
the date of this Agreement, First Western shall deliver to Mitchell Bancorp upon
its request a copy of any report, registration, statement or other regulatory
filing made by First Western with any Regulatory Authority.
3.07. FIRST WESTERN FINANCIAL STATEMENTS. First Western has delivered
to Mitchell Bancorp (i) a copy of First Western's balance sheet as of December
31, 1997, and its statement of income, changes in shareholders' equity, and cash
flows for the year ended December 31, 1997 (the First Western Financial
Statements"); and (ii) a copy of First Western's balance sheet as of June 30,
1998, and its statement of operations for the three months ended June 30, 1998
(the "First Western Interim Financial Statements"). The First Western Financial
Statements were prepared in accordance with GAAP applied on a consistent basis
throughout the periods indicated and have been audited and certified by First
Western's independent accountants, Deloitte & Touche, L.L.P., and both the First
Western Financial Statements and the First Western Interim Financial Statements
present fairly First Western's financial condition, assets and liabilities,
results of operations, changes in stockholders' equity and changes in cash flows
as of the dates and for the periods specified therein.
3.08. ABSENCE OF MATERIAL ADVERSE CHANGES. Since December 31, 1997,
there has been no material adverse change, and there has occurred no event or
development and, to the best knowledge of management of First Western, there
currently exists no condition or circumstances that, with the lapse of time or
otherwise, may or could cause, create or result in a material adverse change, in
or affecting First Western' financial condition or results of operations, or in
its prospects, business, assets, loan portfolio, investments, properties or
operations.
3.09. ABSENCE OF UNDISCLOSED LIABILITIES. To the best of the knowledge
of management of First Western, First Western does not have any liabilities or
obligations, whether known or unknown, matured or unmatured, accrued, absolute,
contingent or otherwise, whether due or to become due (including without
limitation tax liabilities or unfunded liabilities under employee benefit plans
or arrangements), other than (i) those reflected in First Western Interim
Financial Statements, or (ii) obligations or liabilities incurred in the
ordinary course of their business since June 30, 1998, and which are not,
individually or in the aggregate, material to First Western.
3.10. COMPLIANCE WITH EXISTING OBLIGATIONS. First Western has performed
in all material respects all obligations required to be performed by it under,
and it is not in default in any material respect under, or in violation
18
<PAGE> 218
in any material respect of, the terms and conditions of its Articles of
Incorporation or Bylaws, and/or any contract, agreement, lease, mortgage, note,
bond, indenture, license, obligation, understanding or other undertaking
(whether oral or written) to which First Western is bound or by which it, its
business, capital stock, or any of its properties or assets may be affected.
3.11. LITIGATION AND COMPLIANCE WITH LAW. (a) There are no actions,
suits, arbitrations, controversies or other proceedings or investigations (or,
to the best knowledge and belief of management of First Western, any facts or
circumstances that reasonably could result in such), including without
limitation any such action by any Regulatory Authority, which currently exists
or is ongoing, pending or, to the best knowledge and belief of management of
First Western, threatened, contemplated or probable of assertion, against,
relating to or otherwise affecting First Western or any of its properties or
assets that, if determined adversely, could result in liability on the part of
First Western for, or subject it to, monetary damages, fines or penalties, an
injunction, or that could have a material adverse change in or affecting First
Western's financial condition or results of operations, or in its prospects,
business, assets, loan portfolio, investments, properties or operations, or on
the ability of First Western to consummate the Merger.
(b) First Western has all licenses, permits, orders, authorizations or
approvals ("Permits") of any federal, state, local or foreign governmental or
regulatory body that are material to the conduct of its business or necessary to
own, lease and operate its properties. All such Permits are in full force and
effect. No violations are or have been recorded in respect of any such Permits.
No proceeding is pending or, to the best knowledge of management of First
Western, threatened or probable of assertion to suspend, cancel, revoke or limit
any Permit.
(c) First Western has not been notified that it is subject to any
supervisory agreement, enforcement order, writ, injunction, capital directive,
supervisory directive, memorandum of understanding or other similar agreement,
order, directive, memorandum or consent of, with or issued by any Regulatory
Authority relating to its financial condition, directors or officers,
operations, capital, regulatory compliance or otherwise. There are no judgments,
orders, stipulations, injunctions, decrees or awards against First Western that
in any manner limit, restrict, regulate, enjoin or prohibit any present or past
business or practice of First Western. First Western has not been advised or has
any reason to believe that any Regulatory Authority or any court is
contemplating, threatening or requesting the issuance of any such agreement,
order, injunction, directive, memorandum, judgment, stipulation, decree or
award.
3.12. REAL PROPERTIES. First Western has Previously Disclosed to
Mitchell a listing of all real property owned or leased by First Western
(including First Western's banking facility and all other real estate or
foreclosed properties owned by First Western) (the "First Western Real
Property"). There are no leases pertaining to any such First Western Real
Property to which First Western is a party. With respect to all First Western
Real Property, First Western has good and marketable fee simple title to such
First Western Real Property and owns the same free and clear of all mortgages,
liens, leases, encumbrances, title defects and exceptions to title other than
(I) the lien of current taxes not yet due and payable, and (II) such
imperfections of title and restrictions, covenants and easements (including
utility easements) that do not affect materially the value of the First Western
Real Property and that do not affect materially detract from, interfere with or
restrict the present or future use of the properties subject thereto or affected
thereby.
To the best of the knowledge and belief of management of First Western,
the First Western Real Property complies in all material respects with all
applicable federal, state and local laws, regulations, ordinances or orders of
any governmental authority, including those relating to zoning, building and use
permits, and the First Western Real Property may be used under applicable zoning
ordinances for commercial banking facilities as a matter of right rather than as
a conditional or nonconforming use.
19
<PAGE> 219
All improvements and fixtures included in or on the First Western Real
Property are in good condition and repair, ordinary wear and tear excepted, and,
to the best of the knowledge of management of First Western, there does not
exist any condition that adversely affects the economic value thereof.
3.13. LOANS, ACCOUNTS, NOTES AND OTHER RECEIVABLES. (a) All loans,
accounts, notes, and other receivables reflected as assets on First Western's
books and records (i) have resulted from bona fide business transactions in the
ordinary course of First Western's operations, (ii) in all material respects
were made in accordance with First Western's standard loan policies and
procedures, and (iii) are owned by First Western free and clear of all liens,
encumbrances, assignments, participation or repurchase agreements or other
exceptions to title or to the ownership of collection rights of any other person
or entity.
(b) To the best knowledge of management of First Western, each loan
reflected as an asset on First Western's books, and each guaranty therefor, is
the legal, valid and binding obligation of the obligor or guarantor thereon, and
no defense, offset or counterclaim as been asserted with respect to any such
loan or guaranty.
(c) To the best knowledge and belief of First Western's management,
each of First Western's loans and other extensions of credit is collectible in
the ordinary course of First Western's business in an amount that is not less
than the amount at which it is carried on First Western's books and records.
(d) First Western's reserve for possible loan losses (the "Loan Loss
Reserve") shown in the First Western Interim Financial Statements has been
established in conformity with GAAP and all applicable requirements of the FDIC
and rules and policies of the Commissioner and, in the best judgment of First
Western's management, is reasonable in view of the size and character of First
Western's loan portfolio, current economic conditions and other relevant
factors, and is adequate to provide for losses relating to or the risk of loss
inherent in First Western's loan portfolio and other real estate owned.
3.14. SECURITIES PORTFOLIO AND INVESTMENTS. All securities owned by
First Western (whether owned of record or beneficially) are held free and clear
of all mortgages, liens, pledges, encumbrances or any other restriction or
rights of any other person or entity, whether contractual or statutory, that
would materially impair the ability of First Western to dispose freely of any
such security and/or otherwise to realize the benefits of ownership thereof at
any time (other than pledges of securities in the ordinary course of First
Western's business to secure public funds deposits). There are no voting trusts
or other agreements or undertakings to which First Western is a party with
respect to the voting of any such securities. There has been no material adverse
change in the quality, or any material decrease in the value, of First Western's
securities portfolio.
3.15. PERSONAL PROPERTY AND OTHER ASSETS. All assets of First Western
(including without limitation all banking equipment, data processing equipment,
vehicles, and all other personal property located in or used in the operation of
the office of First Western or otherwise used by First Western in the operation
of its business) are owned by First Western free and clear of all material
liens, leases, encumbrances, title defects or exceptions to title. All First
Western's banking equipment is in good operating condition and repair, ordinary
wear and tear excepted.
3.16. ENVIRONMENTAL MATTERS. (a) First Western has Previously Disclosed
to all written reports, correspondence, notices or other materials, if any, in
its possession pertaining to environmental reports, surveys, assessments,
notices of violation, notices of regulatory requirements, penalty assessments,
claims, actions or proceedings, past or pending, of the First Western Real
Property or any of its loan collateral and any improvements thereon, or to any
violation of Environmental Laws (as defined below) on, affecting or otherwise
involving the First Western Real Property, any loan collateral or otherwise
involving First Western.
(b) To the best of the knowledge of management of First Western, there
has been no presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, reporting, testing,
20
<PAGE> 220
processing, emission, discharge, release, threatened release, control or
clean-up in a reportable or regulated quantity of any hazardous, toxic or
otherwise regulated materials, substances or wastes, chemical substances or
mixtures, pesticides, pollutants, contaminants, toxic chemicals, oil or other
petroleum products or byproducts, asbestos, ploychlorinated biphenyls, or
radiation ("Hazardous Substances") by any person on, from or relating to any
parcel of the First Western Real Property since the date First Western first
acquired or occupied such parcel or, to the best of the knowledge and belief of
management of First Western, at any time prior thereto.
(c) To the best of the knowledge of management of First Western, First
Western has not violated any Environmental Laws (as defined below), including,
to the best knowledge of management of First Western, any violation with respect
to or relating to any loan collateral, by any other person or entity for whose
liability or obligation with respect to any particular matter or violation First
Western is or may be responsible or liable.
(d) First Western is not subject to any pending claims, demands, causes
of action, suits, proceedings, losses, damages, penalties, liabilities,
obligations, costs or expenses of any kind and nature that arise out of, under
or in connection with, or which result from or are based upon the presence, use,
production, generation, handling, transportation, treatment, storage, disposal,
distribution, labeling, reporting, testing, processing, emission, discharge,
release, threatened release, control or clean-up of any Hazardous Substances on,
from or relating to the First Western Real Property or, to the best knowledge or
management of First Western, any loan collateral, by First Western or any other
person or entity.
(e) To the best of the knowledge of management of First Western, no
facts, events or conditions relating to the First Western Real Property or, to
the best knowledge of management of First Western, any loan collateral, or the
operations of First Western at any of its office locations, will prevent, hinder
or limit continued compliance with Environmental Laws, or give rise to any
investigatory, remedial or corrective actions, obligations or liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to
Environmental Laws.
3.17. ABSENCE OF BROKERAGE OR FINDERS COMMISSIONS. Other than as
Previously Disclosed to Mitchell, all negotiations relative to this Agreement
and the transactions described herein have been carried on by First Western
directly with Mitchell. Other than as Previously Disclosed to Mitchell, no
person or firm has been retained by or has acted on behalf of, pursuant to any
agreement, arrangement or understanding with, or under the authority of, First
Western, as a broker, finder or agent or has performed similar functions or
otherwise is or may be entitled to receive or claim a brokerage fee or other
commission in connection with the transactions described herein. First Western
has not agreed to pay any brokerage fee or other commission to any person or
entity in connection with the transactions described herein.
3.18. INSURANCE. First Western has in effect a "banker's blanket bond"
and such other policies of general liability, casualty, directors and officers
liability, employee fidelity, errors and omissions and other property and
liability insurance as have been Previously Disclosed to Mitchell (the "First
Western Policies"). The First Western Policies provide coverage in such amounts
and against such liabilities, casualties, losses, or risks as is customary or
reasonable for entities engaged in First Western's businesses or as is required
by applicable law or regulation. In the reasonable opinion of management of
First Western, the insurance coverage provided under the policies is considered
reasonable and adequate in all respects for First Western. Each of the First
Western Policies is in full force and effect and is valid and enforceable in
accordance with its terms, and is underwritten by an insurer of recognized
financial responsibility and which is qualified to transact business in North
Carolina. First Western has taken all requisite actions (including the giving of
required notices) under each such First Western Policy in order to preserve all
rights thereunder with respect to all matters. First Western is not in default
under the provisions of, has not received notice of cancellation or nonrenewal
of or any premium increase on, or has any knowledge of any failure to pay any
premium on or any inaccuracy in any application for any First Western Policy.
There are no pending claims with respect to any First Western Policy (and First
Western is not aware of any facts that would form the basis of any such
21
<PAGE> 221
claim), and First Western has no knowledge of any state of facts or of the
occurrence of any event that is reasonably likely to form the basis for any such
claim.
3.19. INSURANCE OF DEPOSITS. All deposits of First Western are insured
by the Bank Insurance Fund of the FDIC to the maximum extent permitted by law,
all deposit insurance premiums due from First Western to the FDIC have been paid
in full in a timely fashion, and, to the best of the knowledge and belief of
First Western's executive officers, no proceedings have been commenced or, to
the best of the knowledge of management of First Western, are contemplated by
the FDIC or otherwise to terminate such insurance.
3.20. OBSTACLES TO REGULATORY APPROVAL, ACCOUNTING TREATMENT OR TAX
TREATMENT. To the best of the knowledge and belief of the executive officers of
First Western, no fact or condition (including First Western's record of
compliance with the Community Reinvestment Act) relating to First Western exists
that may reasonably be expected to (i) prevent or materially impede or delay
First Western or Mitchell from obtaining the regulatory approvals required in
order to consummate the transactions described herein; or (ii) prevent the
Mergers from qualifying to be a tax-free reorganization under Section 368(a) of
the Code. If any such fact or condition becomes known to the executive officers
of First Western, it promptly (and in any event within three days after
obtaining such knowledge) shall communicate such fact or condition to Mitchell
Bancorp in the manner set forth in Paragraph 10.05 hereof.
3.21. DISCLOSURE. To the best of the knowledge and belief of First
Western, no written statement, certificate, schedule, list or other written
information furnished by or on behalf of First Western at any time to Mitchell
Bancorp in connection with this Agreement (including without limitation
information "Previously Disclosed" by First Western), when considered as a
whole, contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary in order to make the statements
herein or therein, in light of the circumstances under which they were made, not
misleading. Each document delivered or to be delivered by First Western to
Mitchell Bancorp is or will be a true and complete copy of such document,
unmodified except by another document delivered by First Western.
3.22 AVAILABLE FUNDS. First Western will have available funds as of the
Effective Time to satisfy its obligations under Article I of this Agreement.
ARTICLE IV. COVENANTS OF MITCHELL
4.01. AFFIRMATIVE COVENANTS OF MITCHELL. Mitchell Bancorp hereby
covenants and agrees as follows with First Western:
(a) CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME. While the parties
recognize that the operation of Mitchell Bancorp, Mitchell Savings and the
Subsidiary until the Effective Time is the responsibility of Mitchell Bancorp,
Mitchell Savings and the Subsidiary and their respective Boards of Directors and
officers, Mitchell Bancorp agrees that, between the date of this Agreement and
the Effective Time, Mitchell Bancorp will carry on its business, and it will
cause Mitchell Savings and the Subsidiary to each carry on its business, in and
only in the regular and usual course in substantially the same manner as such
business heretofore was conducted, and to the extent consistent with such
business and within its ability to do so, Mitchell agrees that it will:
(i) preserve intact its present business organization, keep
available its present officers and employees, and preserve its
relationships with customers, depositors, creditors, correspondents,
suppliers, and others having business relationships with it;
(ii) maintain all its properties and equipment in customary
repair, order and condition, ordinary wear and tear excepted;
22
<PAGE> 222
(iii) maintain its books of account and records in the usual,
regular and ordinary manner in accordance with sound business practices
applied on a consistent basis;
(iv) comply in all material respects with all laws, rules and
regulations applicable to it, its properties and to the conduct of its
business;
(v) continue to maintain in force insurance such as is
described in Paragraph 2.26 above; will not modify any bonds or
policies of insurance in effect as of the date hereof unless the same,
as modified, provides substantially equivalent coverage; and, will not
cancel, allow to be terminated or, to the extent available, fail to
renew, any such bond or policy of insurance unless the same is replaced
with a bond or policy providing substantially equivalent coverage; and,
(vi) promptly provide to First Western such information about
Mitchell Bancorp, Mitchell Savings and the Subsidiary and their
financial condition, results of operations, prospects, businesses,
assets, loan portfolio, investments, properties or operations, as they
reasonably shall request.
(b) PERIODIC INFORMATION REGARDING LOANS. All new extension of credit
in excess of $100,000 will be submitted by Mitchell Savings to First Western on
an after-the-fact basis for First Western's review within ten (10) business days
of the date of the extension of credit.
Additionally, Mitchell Savings agrees to make available and provide to
First Western the following information with respect to Mitchell Savings' loans
and other extensions of credit (such assets herein referred to as "Loans") as of
June 30, 1998, and each month thereafter until the Effective Time, such
information for each month to be in form and substance as is usual and customary
in the conduct of Mitchell Savings' business and to be furnished within twenty
(20) days of the end of each month ending after the date hereof:
(i) a list of Loans past due for sixty (60) days or more as
to principal or interest;
(ii) a list of Loans in non-accrual status;
(iii) a list of all foreclosed real property or other real
estate owned and all repossessed personal property;
(iv) a list of any actual or threatened litigation by or
against Mitchell Savings pertaining to any Loans or credits, which list
shall contain a description of the circumstance surrounding such
litigation, its present status and management's evaluation of such
litigation.
(c) NOTICE OF CERTAIN CHANGES OR EVENTS. Following the execution of
this Agreement and up to the Effective Time, Mitchell Bancorp promptly will
notify First Western in writing of and provide to it such information as it
shall request regarding (i) any material adverse change in its, Mitchell
Savings' or the Subsidiary's financial condition, results of operations,
prospects, business, assets, loan portfolio, investments, properties or
operations, or of the actual of prospective occurrence of any condition or event
that, with the lapse of time or otherwise, may or could cause, create or result
in any such material adverse change; or (ii) the actual or prospective existence
or occurrence of any condition or event that, with the lapse of time or
otherwise, has caused or may or could cause any statement, representation or
warranty of Mitchell Bancorp herein, or its Disclosure Schedule, to be or become
inaccurate, misleading or incomplete, or that has resulted or may or could
cause, create or result in the breach or violation of any of Mitchell Bancorp's
covenants or agreements contained herein or in the failure of any of the
conditions described in Paragraphs 7.01 or 7.03 below.
23
<PAGE> 223
(d) ACCRUALS FOR LOAN LOSS RESERVE AND EXPENSES. After receipt of
shareholder approval as contemplated by Paragraph 7.01(c), the receipt of the
approval of the Regulatory Authorities as contemplated by Paragraph 7.01(a), and
the receipt of written confirmation from First Western that it is not aware of
any fact or circumstance that would prevent consummation of the Mergers,
Mitchell Bancorp will cooperate with First Western and make such appropriate
accounting entries in its or Mitchell Savings' books and records and take such
other actions as First Western shall in its sole discretion, deem to be
necessary or desirable in anticipation of the Mergers, including without
limitation additional provisions to Mitchell Savings' Loan Loss Reserve or
accruals or the creation of reserves for employee benefit and Merger-related
expenses; provided, however, that such action is not prohibited by GAAP or any
applicable law or regulation; and, provided further, that such action by
Mitchell shall not be deemed a breach of any provision of this Agreement.
(e) FURTHER ACTION; INSTRUMENTS OF TRANSFER, ETC. Mitchell Bancorp
covenants and agrees with First Western that it and Mitchell Savings each (i)
will use its best efforts in good faith to take or cause to be taken all action
required of it hereunder as promptly as practicable so as to permit the
consummation of the transactions described herein at the earliest possible date;
(ii) shall perform all acts and execute and deliver to First Western all
documents or instruments required herein or as otherwise shall be reasonably
necessary or useful to or request by either of them in consummation such
transactions; and, (iii) will cooperate with First Western in every way in
carrying out, and will pursue diligently the expeditious completion of, such
transactions. Mitchell Bancorp further covenants that it will use its best
efforts in good faith to take or cause to be taken all action that may be
required of it for First Western to obtain approval for the First Western Stock
to be listed on the Nasdaq SmallCap Market pursuant to Nasdaq Marketplace Rule
4330(f) or otherwise ("First Western Listing") and will use its best efforts in
good faith to obtain commitments from its current market makers or other market
makers to support the First Western Listing.
4.02. NEGATIVE COVENANTS OF MITCHELL. Mitchell Bancorp hereby covenants
and agrees that, between the date hereof and the Effective Time, Mitchell
Bancorp will not do any of the following things or take any of the following
actions without the prior written consent and authorization of the President of
First Western:
(a) AMENDMENTS TO ARTICLES OF INCORPORATION OF BYLAWS. Neither Mitchell
Bancorp, Mitchell Savings nor the Subsidiary will amend its Articles of
Incorporation or Bylaws except as may be required by applicable law or
regulation.
(b) CHANGE IN CAPITAL STOCK. Neither Mitchell Bancorp, Mitchell Savings
nor the Subsidiary will (I) make any change in its authorized capital stock, or
create any other or additional authorized capital stock or other securities; or
(II) issue, sell, purchase, redeem, retire, other securities, other than the
issuance of shares upon the exercise of stock options that are outstanding as of
the date of this Agreement or upon the vesting of shares previously granted
under the MRDP (including securities convertible into capital stock), or enter
into any agreement or understanding with respect to any such action.
(c) OPTIONS, WARRANTS AND RIGHTS. Neither Mitchell Bancorp, Mitchell
Savings nor the Subsidiary will grant or issue any options, warrants, calls,
puts or other rights of any kind relating to the purchase, redemption or
conversion of shares of its capital stock or any other securities (including
securities convertible into captiously stock) or enter into any agreement or
understanding with respect to any such action.
(d) DIVIDENDS. Mitchell Bancorp will not declare or pay any dividends
or make any other distributions on or in respect of any shares of its capital
stock or otherwise to its shareholders. However, to the extent permitted by
applicable law and regulations, during August 1998, Mitchell Bancorp may pay its
customary semi-annual cash dividend of $0.20 per share on the outstanding shares
of Mitchell Stock. If the Mergers are not consummated prior to the February 1999
record date for Mitchell Bancorp's regular semi-annual cash dividend, then,
prior to the Effective Time, Mitchell shall be permitted to declare and pay a
cash dividend of $0.20 per share on the outstanding shares of Mitchell Stock.
24
<PAGE> 224
(e) EMPLOYMENT, BENEFIT OR RETIREMENT AGREEMENTS OR PLANS. Except as
required by law, neither Mitchell Bancorp nor Mitchell Savings will (i) enter
into or become bound by any contract, agreement or commitment for the employment
or compensation of any officer, employee or consultant that is not immediately
terminable by Mitchell Bancorp, Mitchell Savings, or the Subsidiary without cost
or other liability on no more than thirty (30) days' notice; (ii) adopt, enter
into or become bound by any new or additional profit-sharing, incentive, change
in control or "golden parachute," stock option, stock purchase, pensions,
retirement, insurance (hospitalization, life of other) or similar contract,
agreement, commitment, understanding, plan or arrangement (whether formal or
informal) with respect to or which provides for benefits for any of its current
or former directors, officers, employees or consultants; or (iii) enter into or
become bound by any contract with or commitment to any labor or trade union
association or any collective bargaining group.
(f) INCREASE IN COMPENSATION; ADDITIONAL COMPENSATION. Except as
otherwise provided herein, neither Mitchell Bancorp nor Mitchell Savings will
increase the compensation or benefits of, or pay any bonus or other special or
additional compensation to, any of its directors, officers, employees or
consultants. Notwithstanding anything contained herein to the contrary, this
Paragraph shall not prohibit annual merit increases in the salaries of its
employees or other payments made to employees or directors in connection with
existing compensation or benefit plans so long as such increases or payments are
effected at such times and in such manner and amounts as shall be consistent
with Mitchell Bancorp's and Mitchell Savings' past compensation policies and
practices, and in the case of payments made pursuant to compensation or benefit
plans, consistent with the terms of those plans.
(g) ACCOUNTING PRACTICES. Neither Mitchell Bancorp, Mitchell Savings
nor the Subsidiary will make any changes in its accounting methods, practices or
procedures or in depreciation or amortization policies, schedules or rates
heretofore applied (except as required by generally accepted accounting
principles or governmental regulations).
(h) ACQUISITIONS; ADDITIONAL BRANCH OFFICES. Neither Mitchell Bancorp,
Mitchell Savings nor the Subsidiary will directly or indirectly (i) acquire or
merge with, or acquire any branch or all or any significant part of the assets
of, any other person or entity, (ii) open any new branch office, or (iii) enter
into or become bound by any contract, agreement, commitment or letter of intent
relating to, or otherwise take or agree to take any action in furtherance of,
any such transaction or the opening of a new branch office.
(i) CHANGES IN BUSINESS PRACTICES. Except as may be required by any
Regulatory Authority or as shall be required by applicable law, regulation or
this Agreement, neither Mitchell Bancorp nor Mitchell Savings will (i) change in
any material respect the nature of its business or the manner in which it
conducts its business; (ii) discontinue any material portion or line of its
business; (iii) change in any material respect its lending, investment,
asset-liability management or other material banking or businesses policies
(except to the extent required by Paragraph 4.01(b) above); or (iv) take any
action to cause the Subsidiary to become an active corporation.
(j) EXCLUSIVE MERGER AGREEMENT. Neither Mitchell Bancorp, Mitchell
Savings nor the Subsidiary will, directly or indirectly, through any person (i)
encourage, solicit or attempt to initiate or procure discussions, negotiations
or offers with or from any person or entity (other than First Western) relating
to a merger or other acquisition of any Mitchell Stock, Mitchell Savings Stock,
or Subsidiary Stock, or the purchase or acquisition of any Mitchell Stock,
Mitchell Savings Stock, or Subsidiary Stock, any branch office of Mitchell
Savings or all or any significant part of Mitchell Bancorp's, Mitchell Savings'
or the Subsidiary's assets; or provide assistance to any person in connection
with any such offer; (ii) disclose to any person or entity any information not
customarily disclosed to the public concerning Mitchell Bancorp, Mitchell
Savings, or the Subsidiary, or their business, or afford to any other person or
entity access to its properties, facilities, books or records, except as
required in the reasonable opinion of Mitchell by the fiduciary duties of the
Board of Directors of Mitchell Bancorp and/or Mitchell Savings under applicable
law; (iii) sell or transfer any branch office of Mitchell Savings or all or any
significant part of Mitchell Bancorp's, Mitchell Savings' or the Subsidiary's
assets to any other person or entity; or (iv) enter into or become
25
<PAGE> 225
bound by any contract, agreement, commitment or letter of intent relating to, or
otherwise take or agree to take any action in furtherance of, any such
transaction First Western, except as required in the reasonable opinion of
Mitchell by the fiduciary duties of the Board of Directors of Mitchell Bancorp
and/or Mitchell Savings under applicable law. Mitchell Bancorp shall instruct
its officers, directors, agents, advisors and affiliates to refrain from doing
any of the foregoing. Mitchell Bancorp shall notify First Western immediately if
any such inquiries or proposals are received by, or any such negotiations or
discussions are sought to be initiated with it (including the identity of the
person making such inquiry or proposal) and advise First Western of any
developments with respect to such inquiry or proposal immediately upon the
occurrence thereof.
(k) ACQUISITION OR DISPOSITION OF ASSETS. Neither Mitchell Bancorp nor
Mitchell Savings will:
(i) sell or lease (as lessor), or enter into or become bound
by any contract, agreement, option or commitment relating to the sale,
lease (as lessor), or enter into or become bound by any contract,
agreement, option or commitment relating to the sale, lease (as lessor)
or other disposition of any equipment or any other fixed or capital
asset (other than real estate ) having a value on Mitchell Bancorp's or
Mitchell Savings' books or a fair market value, whichever is greater,
of more than $10,000 for any individual item or asset, or more than
$25,000 in the aggregate for all such items or assets;
(ii) purchase or lease (as lessee), or enter into or become
bound by any contract, agreement, option or commitment relating to the
purchase, lease ( as lessee) or other acquisition of any real property;
or purchase or lease (as lessee), or enter into or become bound by any
contract, agreement, option or commitment relating to the purchase,
lease (as lessee) or other acquisition of any equipment or any other
fixed assets (other than real estate) having a purchase price, or
involving aggregate lease payments, in excess of $10,000 for any
individual item or asset, or more than $25,000 in the aggregate for all
such items or assets;
(iii) enter into any purchase commitment for supplies or
services that calls for prices of goods or fees for services materially
higher than current market prices or fees for services materially
higher than current market prices or fees or that obligates Mitchell
Bancorp or Mitchell Savings for a period longer than 12 months;
(v) sell or dispose of, or enter into or become bound by any
contract, agreement, option or commitment relating to the sale or other
disposition of, any other asset of Mitchell Bancorp, Mitchell Savings,
or the Subsidiary (whether tangible or intangible, and including
without limitation any trade name, copyright, service mark or
intellectual property right or license) or assign its rights to or
otherwise give any other person its permission or consent to use of or
do business under Mitchell Bancorp's, Mitchell Savings' or the
Subsidiary's corporate name or any name similar thereto; or release,
transfer or waive any license or right granted to it by any other
person to use any trademark, trade name, copyright or intellectual
property right.
(l) DEBT; LIABILITIES. Except in the ordinary course of its business
consistent with its past practices, neither Mitchell Bancorp, Mitchell Savings
nor the Subsidiary will (i) enter into or become bound by any promissory notes,
loan agreement or other agreement or arrangement pertaining to its borrowing of
money; (ii) assume, guarantee, endorse or otherwise become responsible or liable
for any obligation of any other person or entity; or (iii) incur any other
liability or obligation (absolute or contingent).
(m) LIENS; ENCUMBRANCES. Neither Mitchell Bancorp, Mitchell Savings nor
the Subsidiary will mortgage, pledge or subject any of its assets to, or permit
any of its assets to become or (except as Previously Disclosed) remain subject
to, any lien or any other encumbrance (other than in the ordinary course of
business consistent with its past practices in connection with securing of
public funds deposits).
26
<PAGE> 226
(n) WAIVER OF RIGHTS. Neither Mitchell Bancorp, Mitchell Savings nor
the Subsidiary will waive, release or compromise any material rights in its
favor (except in the ordinary course of business) except in good faith for fair
value in money or money's work, nor waive, release or compromise any rights
against or with respect to any of its officers, directors or shareholders or
members of families of officers, directors or shareholders.
(o) OTHER CONTRACTS. Neither Mitchell Bancorp, Mitchell Savings nor the
Subsidiary will enter into or become bound by any contracts, agreement,
commitments or understanding (other than those described elsewhere in this
Paragraph) (i) for or with respect to any charitable contributions; (ii) with
any governmental or regulatory agency or authority; (iii) pursuant to which
Mitchell Bancorp, Mitchell Savings, or the Subsidiary would assume, guarantee,
endorse or otherwise become liable for the debt, liability or obligation of any
other person; or (iv) which is entered into other than in the ordinary course of
business, and would obligate or commit Mitchell Bancorp, Mitchell Savings, or
the Subsidiary to make expenditures of more than $10,000 (other than contracts,
agreements, commitments of understanding entered into the ordinary course of
Mitchell's lending operations).
(p) ADVERSE ACTIONS. Mitchell Bancorp shall not (i) take any action
that would, or is reasonably likely to, prevent or impede the Mergers from
qualifying as a reorganization within the meaning of Section 368(a) of the Code;
or (ii) take any action that is intended or would be reasonably likely to result
in (A) any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect at any time prior to the
Effective Time, (B) any of the conditions to the Mergers set forth in the
Agreement not being satisfied or (C) a material violation of any provision of
this Agreement except, in every case, as may be required by applicable law.
4.03. NO RIGHTS TRIGGERED. Mitchell Bancorp shall take all necessary
steps to ensure that the entering into of this Agreement and the consummation of
the transactions contemplated hereby (including without limitation the Mergers)
and any other action or combination of actions, or any other transactions
contemplated hereby do not and will not (i) result in the grant of any rights to
any person under the Articles of Incorporation or Bylaws of the Mitchell
Bancorp, Mitchell Savings or the Subsidiary or under any agreement to which
Mitchell Bancorp, Mitchell Savings or the Subsidiary is a party, or (ii)
restrict or impair in any way the ability of First Western to exercise the
rights granted hereunder.
ARTICLE V. COVENANTS OF FIRST WESTERN
First Western hereby covenants to Mitchell Bancorp, that:
5.01. BEST EFFORTS. Subject to the terms and conditions of this
Agreement, it shall use its best efforts in good faith to take, or cause to be
taken, all actions, and to do, or cause to be done, all things necessary, proper
or desirable, or advisable under applicable laws, so as to permit consummation
of the Mergers on the Effective Date and to otherwise enable consummation of the
transactions contemplated hereby and shall cooperate fully with Mitchell Bancorp
to that end.
5.02 FILING OF APPLICATIONS. First Western shall promptly file all
applications for regulatory approval that are required in connection with this
transaction as soon as practicable after the date of this Agreement after giving
Mitchell and its counsel a reasonable opportunity to review and comment on such
applications.
5.03. SHARES. First Western shall take such corporate action as is
necessary to authorize the issuance of the additional shares of First Western
Stock to be issued as the Stock Consideration and use its best efforts to have
the Stock Consideration listed on the Nasdaq Market as of the Effective Time.
5.04. CONDUCT OF FIRST WESTERN PRIOR TO THE EFFECTIVE TIME. Except as
expressly provided in this Agreement, as agreed to by Mitchell Bancorp, or as
required by applicable law, rules or regulations, during the period
27
<PAGE> 227
from the date of this Agreement to the Effective Time, First Western shall (i)
take no action that would adversely affect or delay the ability of First Western
or Mitchell Bancorp to obtain any necessary approvals, consents or waivers of
any governmental authority required for the transactions contemplated hereby or
to perform its covenants and agreements on a timely basis under this Agreement;
(ii) take no action that could reasonably be expected to have a material adverse
effect on First Western; and (iii) continue to conduct its business consistent
with past practices.
5.05. NOTICE OF CERTAIN CHANGES OR EVENTS. Following the execution of
this Agreement and up to the Effective Time, First Western promptly will notify
Mitchell Bancorp in writing of and provide to it such information as it shall
reasonably request regarding (i) any material adverse change in its financial
condition, results of operations, prospects, business, assets, loan portfolio,
investments, properties or operations, or of the actual of prospective
occurrence of any condition or event that, with the lapse of time or otherwise,
may of could cause, create or result in any such material adverse change; or
(ii) the actual or prospective existence or occurrence of any condition or event
that, with the lapse of time or otherwise, has caused or may or could cause any
statement, representation or warranty of First Western herein, or its Disclosure
Schedule, to be or become inaccurate, misleading or incomplete, or that has
resulted or may or could cause, create or result in the breach or violation of
any of First Western's covenants or agreements contained herein or in the
failure of any of the conditions described in Paragraphs 7.01 or 7.02 below.
5.06 FURTHER ACTION. First Western covenants and agrees with Mitchell
that it (i) will use its best efforts in good faith to take or cause to be taken
all action required of it hereunder as promptly as practicable so as to permit
the consummation of the transactions described herein at the earliest possible
date; and, (ii) will cooperate with Mitchell in every way in carrying out, and
will pursue diligently the expeditious completion of, such transactions.
5.07. NEGATIVE COVENANTS OF FIRST WESTERN. First Western hereby
covenants and agrees that, between the date hereof and the Effective Time, First
Western will not do any of the following things or take any of the following
actions without the prior written consent and authorization of the President of
Mitchell Bancorp:
(a) AMENDMENTS TO ARTICLES OF INCORPORATION OF BYLAWS. First Western
will not amend its Articles of Incorporation or Bylaws except as may be required
by applicable law or regulation.
(b) CHANGE IN CAPITAL STOCK. First Western will not (i) make any change
in its authorized capital stock, or create any other or additional authorized
capital stock or other securities; or (ii) issue, sell, purchase, redeem,
retire, other securities, other than the issuance of shares upon the exercise of
stock options that are outstanding as of the date of this Agreement (including
securities convertible into capital stock), or enter into any agreement or
understanding with respect to any such action.
(c) OPTIONS, WARRANTS AND RIGHTS. First Western will not grant or issue
any options, warrants, calls, puts or other rights of any kind relating to the
purchase, redemption or conversion of shares of its capital stock or any other
securities (including securities convertible into captiously stock) or enter
into any agreement or understanding with respect to any such action.
(d) DIVIDENDS. First Western will not declare or pay any dividends or
make any other distributions on or in respect of any shares of its capital stock
or otherwise to its shareholders.
(e) ACCOUNTING PRACTICES. First Western will not make any changes in
its accounting methods, practices or procedures or in depreciation or
amortization policies, schedules or rates heretofore applied (except as required
by generally accepted accounting principles or governmental regulations).
(f) CHANGES IN BUSINESS PRACTICES. Except as may be required by any
Regulatory Authority or as shall be required by applicable law, regulation or
this Agreement, First Western will not (i) change in any material respect the
nature of its business or the manner in which it conducts its business; (ii)
discontinue any material portion or line
28
<PAGE> 228
of its business; or (iii) change in any material respect its lending,
investment, asset-liability management or other material banking or businesses
policies.
ARTICLE VI. MUTUAL AGREEMENTS
6.01. SHAREHOLDERS' MEETINGS; REGISTRATION STATEMENT; JOINT PROXY
STATEMENT.
(a) MEETINGS OF SHAREHOLDERS. Mitchell Bancorp and First Western shall
each cause a meeting of their respective shareholders (the "Mitchell Meeting"
and the "First Western Meeting," respectively, or the "Shareholder Meetings,"
collectively, which may be a regular annual meeting or a specially called
meeting) to be held as soon as reasonably possible following the mailing to
shareholders of the "Joint Proxy Statement" and the "Offering Circular"
described below or, without First Western's approval, no later than January 31,
1999) for the purpose of Mitchell Bancorp's and First Western 's shareholders
voting on the approval of the Agreement and the Mergers. In connection with the
call and conduct of and all other matters relating to the Shareholder Meetings
(including the solicitation of proxies), Mitchell Bancorp and First Western each
shall fully comply with all provisions of applicable law and regulations and
with its Articles of Incorporation and By-laws.
(b) PREPARATION AND DISTRIBUTION OF JOINT PROXY STATEMENT. First
Western and Mitchell Bancorp jointly will prepare a "Joint Proxy Statement" for
distribution to both First Western's and Mitchell Bancorp's shareholders as the
joint proxy statement relating to both corporations' solicitation of proxies for
use at the Shareholder Meetings. The Joint Proxy Statement shall be in such form
and shall contain or be accompanied by such information regarding the
Shareholder Meetings, this Agreement, the parties hereto, the Mergers and other
transactions described herein as is required by applicable law and regulations
and otherwise as shall be agreed upon by First Western and Mitchell Bancorp.
Each party hereto will cooperate with the other in good faith and will use its
best efforts to cause the Joint Proxy Statement to comply with any comments of
the SEC and FDIC thereon.
First Western and Mitchell Bancorp will mail the Joint Proxy Statement
to their shareholders, and the Offering Circular (as defined below) to the
Shareholders, not less than 20 days prior to the scheduled date of the
Shareholder Meetings; provided, however, that no such materials shall be mailed
to any shareholders unless and until First Western shall have determined to its
own satisfaction that the conditions specified in Paragraph 7.03(h) below have
been satisfied and shall have approved such mailing.
(c) REGISTRATION STATEMENT AND "BLUE SKY" APPROVALS. As soon as
practicable following the execution of this Agreement, First Western will
prepare an offering circular (the "Offering Circular") covering the First
Western Stock to be issued to the Shareholders pursuant to this Agreement.
Additionally, First Western shall take all such other actions, if any, as shall
be required by applicable state securities or "blue sky" laws (i) to cause the
First Western Stock to be issued upon consummation of the Mergers, at the time
of the issuance thereof, to be duly qualified or registered (unless exempt under
such laws); (ii) to cause all conditions to any exemptions from qualification or
registration under such laws to have been satisfied; and (iii) to obtain any and
all required approvals or consents to the issuance of such stock.
(d) RECOMMENDATION OF MITCHELL'S BOARD OF DIRECTORS. Unless, due to a
material change in circumstances or for any other reason, Mitchell Bancorp's
Board of Directors reasonably believes that such a recommendation would violate
the directors' duties or obligations as such to Mitchell Bancorp or to the
Shareholders, Mitchell Bancorp's Board of Directors will recommend to and
actively encourage the Shareholders that they vote their shares of Mitchell
Stock at the Mitchell Meeting to ratify and approve this Agreement and the
Mergers, and the Joint Proxy Statement mailed to the Shareholders will so
indicate and state that Mitchell Bancorp's Board of Directors considers the
Mergers to be advisable as in the best interests of Mitchell Bancorp and the
Shareholders.
29
<PAGE> 229
(e) INFORMATION FOR JOINT PROXY STATEMENT AND OFFERING CIRCULAR. First
Western and Mitchell Bancorp each agrees to respond promptly, and to use its
best efforts to cause its directors, officers, accountants and affiliates to
respond promptly to requests by the other party and its counsel for information
for inclusion in the various applications for regulatory approvals and in the
Joint Proxy Statement and the Offering Circular. First Western and Mitchell
Bancorp each hereby covenants with the other that none of the information
provided by it for inclusion in the Joint Proxy Statement and the Offering
Circular will, at the time of its mailing to their shareholders, contain any
untrue statement of a material fact or omit any material fact required to be
stated therein or necessary in order to make the statements contained therein,
in light of the circumstances under which they were made, not false or
misleading. At all times following such mailing up to and including the
Effective Time, none of such information contained in the Joint Proxy Statement
and the Offering Circular, as it may be amended or supplemented, will contain an
untrue statement of a material fact or omit any material fact required to be
stated therein or necessary in order to make the statements contained therein,
in light of the circumstances under which they were made, not false or
misleading.
6.02. SHARES. First Western and Mitchell shall use their best efforts
to have the First Western Stock listed on the Nasdaq SmallCap Market as of the
Effective Time.
6.03. ACCESS. Following the date of this Agreement and to and including
the Effective Time, Mitchell Bancorp shall provide First Western, and First
Western shall provide to Mitchell Bancorp, and their respective employees,
accountants, financial advisors, and counsel, access to all its books, records,
files and other information (whether maintained electronically or otherwise), to
all their respective properties and facilities, and to all their respective
employees, accountants, counsel and consultants, for purposes of the conduct of
such reasonable investigation and review as they shall, in their sole
discretion, consider to be necessary or appropriate; provided, however, that any
such review shall be performed in such manner as will not interfere unreasonably
with the other party's normal operations, or with the other party's
relationships with its customers or employees, and shall be conducted in
accordance with procedures established by the parties having due regard for the
foregoing. No investigation pursuant to this Paragraph shall affect or be deemed
to modify or waive any representation or warranty made or the conditions to the
obligations to consummate the transactions contemplated by this Agreement.
6.04. COSTS. Subject to the provisions of Paragraph 8.03 below, and
whether or not this Agreement shall be terminated or the Mergers shall be
consummated, Mitchell Bancorp and First Western each shall pay its own legal,
accounting and financial advisory fees and all its other costs and expenses
incurred or to be incurred in connection with the execution and performance of
its obligations under this Agreement or otherwise in connection with this
Agreement and the transactions described herein (including without limitation
all accounting fees, financial advisory fees, legal fees, filing fees, printing
costs, and travel expenses). However, subject to the provisions of Paragraph
8.03 below, all costs incurred in connection with the printing and mailing of
the Joint Proxy Statement and the Offering Circular shall be paid fifty percent
(50%) by Mitchell Bancorp and fifty percent (50%) by First Western.
6.05. ANNOUNCEMENTS. Mitchell Bancorp and First Western each agrees
that no person other than the parties to this Agreement is authorized to make
any public announcements or statements about this Agreement or any of the
transactions described herein, and that, without the prior review and consent of
the others (which consent shall not unreasonably be denied or delayed), no party
hereto may make any public announcement, statement or disclosure as to the terms
and conditions of this Agreement or the transactions described herein, except
for such disclosures as may be required incidental to obtaining the prior
approval of any Regulatory Authority to the consummation of the transactions
described herein. However, notwithstanding anything contained herein to the
contrary, prior review and consent shall not be required if in the good faith
opinion of either counsel to First Western or counsel to Mitchell, any such
disclosure by First Western or Mitchell, respectively, is required by law or
otherwise is prudent.
6.06. ENVIRONMENTAL STUDIES. At its option First Western may cause to
be conducted within sixty (60) days of the date of this Agreement a Phase I
environmental assessments of the Mitchell Real Property or the loan collateral,
or any portion thereof, together with such other studies, testing and intrusive
sampling and analyses as First
30
<PAGE> 230
Western shall deem necessary or desirable (collectively, the "Environmental
Survey"). The costs of the Environmental Survey shall be paid by exclusively
First Western.
6.07. EMPLOYEES; SEVERANCE PAYMENTS; EMPLOYEE BENEFITS. (a) EMPLOYMENT
AGREEMENTS. Provided she remains employed by Mitchell Bancorp at the Effective
Time in her current position, First Western shall enter into a consulting
agreement with Emma Lee M. Wilson as of the Effective Time which shall contain
substantially the same terms and conditions and be in substantially the same
form as is attached as Exhibit 6.07(a) to this Agreement.
(b) EMPLOYMENT OF OTHER MITCHELL EMPLOYEES. Provided they remain
employed by Mitchell Savings at the Effective Time, First Western will locate
suitable positions for and offer employment to all other employees of Mitchell
Savings ("Mitchell Employees") for at least one year at an office of First
Western located within a reasonable commuting distance from their respective job
locations at the Effective Time. Any employment so offered by First Western to a
Mitchell Employee shall be in such a position and at such location within First
Western's system as First Western shall determine in its sole discretion. The
employment so offered by First Western shall be at such compensation as that of
the Mitchell Employee at the Effective Time. Nothing in this Agreement shall be
deemed to constitute an employment agreement with any such person or to restrict
First Western's right to terminate the employment of any such person at any time
for cause. Cause shall mean the failure to observe the employment policies of
First Western in the sole determination of First Western. In the event that a
Mitchell Employee is terminated by First Western without such cause within
twelve months after the Effective Time, such Mitchell Employee shall be paid a
severance payment by the First Western equal to two weeks' compensation for each
full year of employment at Mitchell Savings and First Western, not to exceed a
maximum of 26 weeks' compensation.
(c) EMPLOYEE BENEFITS. Except as otherwise provided herein, all
Mitchell Employees shall be entitled to receive all employee benefits and to
participate in all benefit plans provided by First Western on the same basis
(including costs) and subject to the same eligibility and vesting requirements,
and to the same conditions, restrictions and limitations, as generally are in
effect and applicable to other newly hired employees of First Western. However,
each Mitchell Employee shall be given credit for his or her full years of
service with Mitchell Savings for purposes of entitlement to vacation and sick
leave and for purposes of eligibility and vesting under any First Western
employee benefit plans. There shall be no exclusion from coverage under the
First Western health insurance plan as a result of pre-existing conditions to
the extent such conditions were covered under any health insurance plan
maintained by Mitchell Savings prior to the Effective Time.
The number of days of vacation and sick leave, respectively, which
shall be available to any Mitchell Employee during 1998 as an employee of First
Western shall be reduced by the number of days of vacation or sick leave used by
such Mitchell Employee during 1998 prior to the Effective Time as an employee of
Mitchell, and, except as provide below, the Mitchell Employee shall not be
entitled to any credit with First Western for unused vacation leave, sick leave
or other paid leave from Mitchell for 1997 or years prior thereto.
(e) OTHER AGREEMENTS. Prior to the Effective Time, Mitchell Bancorp
will terminate the Mitchell Savings employment, supplemental executive
retirement and executive medical benefit agreements ("Benefit Agreements") and
pay the present value of such accrued benefits to the participants under the
Benefit Agreements in accordance with Exhibit 6.07(e) as adjusted at the Closing
Date by reason of Section 280G of the Code; provided, however, in no event shall
First Western be obligated to make any payment or provide any benefits
whatsoever to any officer or employee of Mitchell Savings under any circumstance
in which such payments or benefits, whether due under the Benefit Agreements or
otherwise, are or will not be deductible by First Western by reason of Section
280G of the Code. First Western further agrees that, prior to the Effective
Time, Section 4A(f) of the employment agreements between Mitchell Savings and
Edward Ballew, Jr. and Emma Lee M. Wilson, respectively, shall be amended to
provide that in the event, the payments and benefits to be provided to an
officer in the event of a change in control of Mitchell Savings shall, in the
aggregate, constitute a parachute payment within the meaning of Section
280G(b)(2) of the Code, the payments or and benefits to provided to the officer
under the employment agreement shall
31
<PAGE> 231
be reduced to the extent necessary to avoid treatment as a parachute payment.
First Western further agrees to pay the present value of the accrued benefits to
the participants under Mitchell's Directors Retirement Plan.
(f) EMPLOYEE STOCK OWNERSHIP PLAN. Prior to the Effective Time,
Mitchell Savings shall terminate the Mitchell Savings Bank Employee Stock
Ownership Plan ("ESOP") by proper action of the Board of Directors of Mitchell
Savings. At or as soon as administratively practicable after the Effective Time,
the ESOP shall apply such cash (or convert to cash a sufficient number of shares
of First Western Stock) as may be received by the ESOP with respect to
unallocated shares of Mitchell Stock held by the ESOP at the Effective Time to
the repayment in full of the outstanding ESOP indebtedness to Mitchell Bancorp
(or its successor in interest). Any surplus of cash and/or Mitchell Stock
remaining after repayment of such indebtedness shall be allocated to the
accounts of ESOP participants (and, if required, to the accounts of former
participants or their beneficiaries) in proportion to their account balances at
the Effective Time.
(g) PENSION PLAN. Prior to the Effective Time, Mitchell Savings shall,
at the election of First Western, either terminate or freeze benefits under the
Mitchell Savings Bank defined benefit pension plan ("Pension Plan") by proper
action of the Board of Directors of Mitchell Savings in accordance with the
terms of the Pension Plan and the requirements of ERISA and the Code.
(h) STOCK PLANS. First Western acknowledges that the Mergers constitute
a change in control for purposes of Mitchell Bancorp's MRDP and Stock Option
Plan and that all outstanding awards thereunder, totaling 25,086 shares of
Mitchell Stock under the MRDP and stock options for 54,877 shares of Mitchell
Stock shall be fully vested as a result of the Mergers and entitled to be
exchanged for the Merger Consideration.
6.08. CONFIDENTIALITY. First Western and Mitchell Bancorp each agrees
that it and their respective agents, attorneys and accountants will treat as
confidential and not disclose to any unauthorized person any documents or other
information obtained from or learned about the other during the course of the
negotiation of this Agreement and the carrying out of the events and
transactions described herein (including any information obtained during the
course of any due diligence investigation or review provided for herein or
otherwise) and which documents or other information relates in any way to the
business, operations, personnel, customers or financial condition of such other
party; and, that it will not use any such documents or other information for any
purpose except for the purposes for which such documents and information were
provided herein. However, the above obligations of confidentiality shall not
prohibit the disclosure of any such document or information by any party to this
Agreement to the extent (i) such document or information is then available
generally to the public or is already known to the person or entity to whom
disclosure is proposed to be made (other than through the previous actions of
such party in violation of this Paragraph); (ii) such document or information
was available to the disclosing party on a nonconfidential basis prior to the
same being obtained pursuant to this Agreement; (iii) disclosure is required by
subpoena or order of a court or regulatory authority of competent jurisdiction,
or by the SEC or Regulatory Authorities in connection with the transactions
described herein; or (iv) to the extent that, in the reasonable opinion of legal
counsel to such party, disclosure otherwise is required by law.
In the event this Agreement is terminated for any reason, then each of
the parties hereto immediately shall return to the other party all copies of any
and all documents or other written materials or information of or relating to
such other party that were obtained from them during the course of the
negotiation of this Agreement and the carrying out of the events and
transactions described herein (whether during the course of any due diligence
investigation or review provided for herein or otherwise) and which documents or
other information relates in any way to the business, operations, personnel,
customers or financial condition of such other party.
The parties' obligations of confidentiality under this Paragraph shall
survive and remain in effect following any termination of this Agreement.
32
<PAGE> 232
6.09. TAX-FREE REORGANIZATION. First Western and Mitchell Bancorp each
undertakes and agrees to use its best efforts to cause the Mergers to qualify as
a tax-free "reorganization" within the meaning of Section 368(a) of the Code,
and that it will not intentionally take any action that would cause the Mergers
to fail to so qualify.
6.10. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. First Western shall
use its best efforts to maintain Mitchell Bancorp's existing directors' and
officers' liability insurance policy (or a policy similar to Mitchell Bancorp's
existing policy providing comparable coverage on terms no less favorable) past
the Effective Time for a period of six years covering persons who are currently
covered by such policy; provided that First Western shall no make aggregate
payments in respect of such policy (or replacement policy) which exceeds
$30,000. Following the Closing Date, First Western shall take no action to
terminate prematurely such policy.
6.11 SURVIVAL. If First Western or any of its successors or assigns (a)
shall consolidate with or merge into any other corporation or entity and shall
not be the continuing or surviving corporation or entity in such consolidation
or merger or (b) shall transfer all or substantially all of its properties and
assets to any individual, corporation or other entity, then and in each such
case, proper provisions shall be made so that the successors and assigns or
First Western shall assume all of the obligations set forth in Sections 6.10 and
9.01.
ARTICLE VII. CONDITIONS PRECEDENT TO MERGER
7.01. CONDITIONS TO ALL PARTIES' OBLIGATIONS. Notwithstanding any other
provision of this Agreement to the contrary, the obligations of each of the
parties to this Agreement to consummate the transactions described herein shall
be conditioned upon the satisfaction of each of the following conditions
precedent on or prior to the Closing Date:
(a) APPROVAL BY GOVERNMENTAL OR REGULATORY AUTHORITIES. The Mergers and
other transactions described herein shall have been approved, to the extent
required by law, by the FDIC, the Commissioner and the North Carolina State
Banking Commission, the Administrator, and by all other Regulatory Authorities
having jurisdiction over such transactions. No governmental or regulatory agency
or authority shall have withdrawn its approval of such transactions or imposed
any condition on such transactions or conditioned its approval thereof, which
condition is reasonably deemed by First Western to be materially disadvantageous
or burdensome or to impact so adversely the economic or business benefits of
this Agreement to First Western as to render it inadvisable for it to consummate
the Mergers. All waiting periods required following necessary approvals by any
Regulatory Authorities shall have expired, and, in the case of the waiting
period following approval by the FDIC, no unwithdrawn objection to the Mergers
shall have been raised by the U.S. Department of Justice. All other consents,
approvals and permissions, and the satisfaction of all of the requirements
prescribed by law or regulation, necessary to the carrying out of the
transactions contemplated herein shall have been procured.
(b) ADVERSE PROCEEDINGS, INJUNCTIONS, ETC. There shall not be (i) any
order, decree or injunction of any court or agency of competent jurisdiction
that enjoins or prohibits the Mergers or any of the other transactions described
herein or any of the parties hereto from consummating any such transaction; (ii)
any pending or threatened investigation of the Mergers or any of such other
transactions by the U.S. Department of Justice, or any actual or threatened
litigation under federal antitrust laws relating to the Mergers or any other
such transaction; or (iii) any suit, action or proceeding by any person
(including any Regulatory Authority), pending or threatened before any court or
governmental agency, in which it is sought to restrain or prohibit Mitchell or
First Western from consummating the Mergers or carrying out any of the terms or
provisions of this Agreement; or (iv) any other suit, claim, action or
proceeding pending or threatened against Mitchell or First Western or any of
their officers or directors that shall reasonably be considered by Mitchell
Bancorp or First Western to be materially burdensome in relation to the proposed
Mergers or materially adverse in relation to the financial condition of either
such corporation, and that has not been dismissed, terminated or resolved to the
satisfaction of all parties hereto within ninety (90) days of the institution or
threat thereof.
33
<PAGE> 233
(c) APPROVAL BY BOARDS OF DIRECTORS AND SHAREHOLDERS. The Boards of
Directors of Mitchell Bancorp and First Western shall have duly approved and
adopted this Agreement by appropriate resolutions, and the shareholders of
Mitchell Bancorp and First Western shall have duly approved, ratified and
confirmed this Agreement, all to the extent required by and in accordance with
the provisions of this Agreement, applicable law, and applicable provisions of
their respective Articles of Incorporation and By-Laws.
(d) TAX OPINION. First Western and Mitchell Bancorp shall have
received, in form and substance satisfactory to them, an opinion of Deloitte &
Touche L.L.P. substantially to the effect that: (i) for federal income tax
purposes, consummation of the Mergers will constitute a "reorganization" as
defined in ss. 368(a)(1)(A) of the Code; and (ii) that no taxable gain will be
recognized by a shareholder of Mitchell Bancorp upon such shareholder's receipt
of the Merger Consideration in exchange for his or her Mitchell Stock, except to
the extent cash is received. In rendering its opinion, DeLoitte & Touche L.L.P.
may rely on representations contained in certificates of officers of First
Western and Mitchell Bancorp.
(e) NO TERMINATION. This Agreement shall not have been terminated by
any party hereto.
(f) CONSULTING AGREEMENT. The consulting agreement described in
Paragraph 6.07 above shall have been executed by the parties hereto.
(g) NASDAQ SMALLCAP LISTING. The First Western Stock shall have been
approved for listing on the Nasdaq SmallCap Market as of the Effective Time.
7.02. ADDITIONAL CONDITIONS TO MITCHELL'S OBLIGATIONS. Notwithstanding
any other provision of this Agreement to the contrary, Mitchell Bancorp's
separate obligation to consummate the transactions described herein shall be
conditioned upon the satisfaction of each of the following conditions precedent
on or prior to the Closing Date:
(a) MATERIAL ADVERSE CHANGE. There shall not have been any material
adverse change in the financial condition, results of operations, prospects,
businesses, assets, loan portfolio, investments, properties or operations of
First Western, and there shall not have occurred any event or development and
there shall not exist any condition or circumstance that, with the lapse of time
or otherwise, may or could cause, create or result in any such material adverse
change.
(b) COMPLIANCE WITH LAWS. First Western shall have complied in all
material respects with all federal and state laws and regulations applicable to
the transactions described herein and where the violation of or failure to
comply with any such law or regulation could or may have a material adverse
effect on the financial condition, results of operations, prospects, businesses,
assets, loan portfolio, investments, properties or operations of First Western.
(c) FIRST WESTERN'S REPRESENTATIONS AND WARRANTIES AND PERFORMANCE OF
AGREEMENTS; OFFICERS' CERTIFICATE. Unless waived in writing by Mitchell Bancorp
as provided in Paragraph 10.03 below, each of the representations and warranties
of First Western contained in this Agreement shall have been true and correct as
of the date hereof and shall remain true and correct on and as of the Effective
Time with the same force and effect as though made on and as of such date,
except (i) for changes that do not, in the aggregate, have a material adverse
effect on the financial condition, results of operations, prospects, businesses,
assets, loan portfolio, investments, properties or operations of First Western;
and (ii) as otherwise contemplated by this Agreement. First Western shall have
performed in all material respects all its obligations, covenants and agreements
hereunder to be performed by it on or before the Closing Date.
Mitchell Bancorp shall have received a certificate dated as of the
Closing Date and executed by First Western and its President and Chief Financial
Officer to the foregoing effect.
34
<PAGE> 234
(d) LEGAL OPINION OF FIRST WESTERN COUNSEL. Mitchell Bancorp shall have
received from The Sanford Holshouser Law Firm PLLC, General Counsel of First
Western, a written opinion dated as of the Closing Date and substantially in the
form of Exhibit 7.02 attached hereto or otherwise in form and substance
reasonably satisfactory to Mitchell Savings.
(e) OTHER DOCUMENTS AND INFORMATION FROM FIRST WESTERN. First Western
shall have provided to Mitchell Bancorp correct and complete copies of its
Bylaws, Articles of Incorporation and Board resolutions (all certified by its
Secretary), together with certificates of the incumbency of its officers and
such other closing documents and information as may be reasonably requested by
Mitchell Bancorp or its counsel.
(f) FAIRNESS OPINION. Mitchell Bancorp shall have received from RP
Financial a written opinion (the "Fairness Opinion"), dated as of a date
preceding the mailing of the Joint Proxy Statement to its shareholders in
connection with the Mitchell Meeting, to the effect that the terms of the
Mergers are fair, from a financial point of view, to Mitchell Bancorp and the
Shareholders. RP Financial shall have delivered a letter to Mitchell Bancorp,
dated as of a date within five days preceding the Closing Date, to the effect
that it remains RP Financial's opinion that the terms of the Mergers are fair,
from a financial point of view, to Mitchell Bancorp and the Shareholders.
(g) ARTICLES OF MERGER; OTHER ACTIONS. Articles of Merger in the form
described in Paragraph 1.05 above shall have been duly executed and delivered by
First Western as provided in that Paragraph.
(h) ACCEPTANCE BY MITCHELL'S COUNSEL. The form and substance of all
legal matters described herein or related to the transactions contemplated
herein shall be reasonably acceptable to Mitchell Bancorp's legal counsel.
(i) CASH MERGER CONSIDERATION. First Western shall have provided
Mitchell with satisfactory evidence of its ability to pay the Cash Merger
Consideration and that the Cash Merger Consideration has been deposited with the
Exchange Agent.
7.03. ADDITIONAL CONDITIONS TO FIRST WESTERN'S OBLIGATIONS.
Notwithstanding any other provision of this Agreement to the contrary, First
Western's separate obligations to consummate the transactions described herein
shall be conditioned upon the satisfaction of each of the following conditions
precedent on or prior to the Closing Date:
(a) MATERIAL ADVERSE CHANGE. There shall not have occurred any event or
development the effect of which would constitute a material adverse effect on
Mitchell.
(b) COMPLIANCE WITH LAWS; ADVERSE PROCEEDINGS, INJUNCTION, ETC.
Mitchell Bancorp and its subsidiaries shall have complied in all material
respects with all federal and state laws and regulations applicable to the
transactions described herein and where the violation of or failure to comply
with any such law or regulation could or may have a material adverse effect on
the financial condition, results of operations, prospects, businesses, assets,
loan portfolio, investments, properties or operations of Mitchell Bancorp and
its subsidiaries considered as one enterprise.
(c) MITCHELL'S REPRESENTATIONS AND WARRANTIES AND PERFORMANCE OF
AGREEMENTS; OFFICERS' CERTIFICATE. Unless waived in writing by First Western as
provided in Paragraph 10.03 below, each of the representations and warranties of
Mitchell Bancorp and its subsidiaries contained in this Agreement shall have
been true and correct as of the date hereof and shall remain true and correct on
and as of the Effective Time with the same force and effect as though made on
and as of such date, except (i) for changes that are not, in the aggregate,
materially adverse to the financial condition, results of operations, prospects,
businesses, assets, loan portfolio, investments, properties or operations of
Mitchell Bancorp and its subsidiaries considered as one enterprise, and (ii) as
otherwise
35
<PAGE> 235
contemplated by this Agreement. Mitchell Bancorp shall have performed in all
material respects all its obligations, covenants and agreements hereunder to be
performed by it on or before the Closing Date.
First Western shall have received a certificate dated as of the Closing
Date and executed by Mitchell Bancorp and its President and Chief Financial
Officer to the foregoing effect and as to such other matters as may be
reasonably requested by First Western.
(d) LEGAL OPINION OF MITCHELL COUNSEL. First Western shall have
received from Mitchell Bancorp's special counsel, Breyer & Aguggia LLP, a
written opinion, dated as of the Closing Date and substantially in the form of
Exhibit 7.03 attached hereto or otherwise in form and substance reasonably
satisfactory to First Western.
(e) OTHER DOCUMENTS AND INFORMATION FROM MITCHELL. Mitchell Bancorp
shall have provided to First Western correct and complete copies of Mitchell
Bancorp's Articles of Incorporation, Bylaws and board and shareholder
resolutions (all certified by Mitchell's Bancorp's Secretary), together with
certificates of the incumbency of Mitchell Bancorp's officers and such other
closing documents and information as may be reasonably requested by First
Western or its counsel.
(f) FAIRNESS OPINION. First Western shall have received from The Carson
Medlin Company ("Carson Medlin") a written opinion (the "Fairness Opinion"),
dated as of a date preceding the mailing of the Joint Proxy Statement to its
shareholders in connection with the First Western Meeting, to the effect that
the terms of the Mergers are fair, from a financial point of view, to First
Western and its shareholders; and, Carson Medlin shall have delivered a letter
to First Western, dated as of a date within five days preceding the Closing
Date, to the effect that it remains Carson Medlin's opinion that the terms of
the Mergers are fair, from a financial point of view, to First Western and its
shareholders.
(g) ACCEPTANCE BY FIRST WESTERN'S COUNSEL. The form and substance of
all legal matters described herein or related to the transactions contemplated
herein shall be reasonably acceptable to First Western's legal counsel.
(h) COMPLIANCE WITH SECURITIES AND OTHER "BLUE SKY" REQUIREMENTS. First
Western shall have taken all such other actions, if any, as it shall consider to
be required by applicable state securities laws (i) to cause the First Western
Stock to be issued upon consummation of the Mergers, at the time of the issuance
thereof, to be duly qualified or registered (unless exempt) under such laws,
(ii) to cause all conditions to any exemptions from qualification or
registration under such laws to have been satisfied, and (iii) to obtain any and
all required approvals or consents with respect to the issuance of such stock,
and any such required approvals or consents shall have been obtained and shall
remain in effect.
(i) ARTICLES OF MERGER; OTHER ACTIONS. Articles of Merger in the form
described in Paragraph 1.05. above shall have been duly executed and delivered
by Mitchell Bancorp as provided in that Paragraph.
ARTICLES VIII. TERMINATION; BREACH; REMEDIES
8.01. MUTUAL TERMINATION. At any time prior to the Effective Time (and
whether before or after approval hereof by the shareholders of Mitchell
Bancorp), this Agreement may be terminated by the mutual agreement of First
Western and Mitchell Bancorp. Upon any such mutual termination, all obligations
of Mitchell Bancorp and First Western hereunder shall terminate and each party
shall pay costs and expenses as provided in Paragraph 6.04 above.
36
<PAGE> 236
8.02 UNILATERAL TERMINATION. This Agreement may be terminated by either
First Western or Mitchell Bancorp (whether before or after approval hereof by
Mitchell Bancorp's shareholders) upon written notice to the other party and
under the circumstances described below.
(a) TERMINATION BY FIRST WESTERN. This Agreement may be terminated by
First Western by action of its Board of Directors:
(I) if Mitchell Bancorp shall have violated or failed to fully perform
any of its obligations, covenants or agreements contained in Articles IV or
VI herein in any material respect;
(II) if First Western determines at any time that any of Mitchell
Bancorp's or its subsidiaries' representations or warranties contained in
Article II or in any other certificate or writing delivered pursuant to
this Agreement shall have been false or misleading in any material respect
when made, or that there has occurred any event or development or that
there exists any condition or circumstance that has caused or, with the
lapse of time or otherwise, may or could cause any such representations or
warranties to become false or misleading in any material respect; or
(III) if any of the conditions of the obligations of First Western (as
set forth in Paragraph 7.01. or 7.03. above) shall not have been satisfied
or effectively waived in writing by First Western, of if the Mergers shall
not have become effective on or before March 31, 1999, unless such date is
extended as evidenced by the written mutual agreement of the parties
hereto.
However, before First Western may terminate this Agreement for any of the
reasons specified above in (i) or (ii) of this Paragraph, it shall give written
notice to Mitchell Bancorp as provided herein stating its intent to terminate
and a description of the specific breach, default, violation or other condition
giving rise to its right to so terminate, and, such termination by First Western
shall not become effective if, within thirty (30) days following the giving of
such notice, Mitchell Bancorp shall cure such breach, default or violation or
satisfy such condition to the reasonable satisfaction of First Western.
(b) TERMINATION BY MITCHELL BANCORP. This Agreement may be terminated by
Mitchell Bancorp by action of its Board of Directors:
(I) if First Western shall have violated or failed to fully perform any
of its respective obligations, covenants or agreements contained in Article
V or VI herein in any material respect;
(II) if Mitchell Bancorp determines that any of First Western's
representations and warranties contained in Article III herein or in any
other certificate or writing delivered pursuant to this Agreement shall
have been false or misleading in any material respect when made, or that
there has occurred any event or development or that there exists any
condition or circumstance that has caused or, with the lapse of time or
otherwise, may or could cause any such representations or warranties to
become false or misleading in any material respect;
(III) if any of the conditions of the obligations of Mitchell Bancorp
(as set forth in Paragraph 7.01. or 7.02. above) shall not have been
satisfied or effectively waived in writing by Mitchell Bancorp, or if the
Mergers shall not have become effective on or before March 31, 1999, unless
such date is extended as evidenced by the written mutual agreement of the
parties hereto.
However, before Mitchell Bancorp may terminate this Agreement for any of
the reasons specified above in clause (i) or (ii) of this Paragraph, it shall
give written notice to First Western as provided herein stating its intent to
terminate and a description of the specific breach, default, violation or other
condition giving rise to its right to so
37
<PAGE> 237
terminate, and, such termination by Mitchell Bancorp shall not become effective
if, within thirty (30) days following the giving of such notice, First Western
shall cure such breach, default or violation or satisfy such condition the
reasonable satisfaction of Mitchell Bancorp.
(c) EXTENSION OF EXPIRATION DATE. Except as otherwise shall be agreed
between the parties, in the event First Western and Mitchell Bancorp mutually
shall agree to extend the March 31, 1999 expiration date, then, notwithstanding
anything contained in this Agreement to the contrary and to the extent
permitted by applicable law and regulations, during the period beginning March
31, 1999, and ending at the Effective Time, Mitchell Bancorp shall be permitted
to declare and pay semi-annual cash dividends to its shareholders in amounts
not to exceed $0.20 per share on the outstanding shares of Mitchell Stock in
accordance with its past practices.
8.03 BREACH; REMEDIES. Except as otherwise provided below, in the event
of a breach by Mitchell Bancorp of any of its representations or warranties
contained in Article II of this Agreement, or in the event of its failure to
perform or violation of any of its obligations, agreements or covenants
contained in Articles IV or VI of this Agreement, then First Western's sole
right and remedy shall be to terminate this Agreement prior to the Effective
Time as provided in Paragraph 8.02 above, or, in the case of a failure to
perform or violation of any obligations, agreements or covenants, to seek
performance thereof. In the event of any such termination of this Agreement by
First Western, then Mitchell Bancorp shall be obligated to pay First Western
liquidated damages of $250,000.
Likewise, and except as otherwise provided below, in the event of a breach
by First Western of any of its representations or warranties contained in
Article III of this Agreement, or in the event of its failure to perform or
violation of any of its obligations, agreements or covenants contained in
Articles V or VI of this Agreement, then Mitchell Bancorp's sole right and
remedy shall be to terminate this Agreement prior to the Effective Time as
provided in Paragraph 8.02 above, or, in the case of a failure to perform or
violation of any obligations, agreements or covenants, to seek specific
performance thereof. In the event of any such termination of this Agreement by
Mitchell Bancorp, then First Western shall be obligated to pay Mitchell Bancorp
liquidated damages of $250,000.
Notwithstanding anything contained herein to the contrary, if any party to
this Agreement breaches this Agreement by wilfully or intentionally failing to
perform or violating any of its obligations, agreements or covenants contained
in Articles IV, V or VI of this Agreement, such party shall be obligated to
pay all expenses of the other party described in Paragraph 6.04, together with
other damages recoverable at law or in equity.
ARTICLE IX. INDEMNIFICATION
9.01. INDEMNIFICATION. First Western covenants and agrees that it will
cause each person who is an officer or director of Mitchell Bancorp or Mitchell
Savings (an "Indemnitee") at the Effective Time to be indemnified for any costs
and expenses (including reasonable attorney's fees), judgments, fines, losses,
claims, damages or liabilities (collectively, "Costs") arising out of such
person's services as an officer or director of Mitchell Bancorp or Mitchell
Savings to the fullest extent to which such Indemnitee is entitled under the
Article of Incorporation and Bylaws of Mitchell Bancorp and Mitchell Savings in
effect on the date hereof (except that this provision shall not be construed so
as to cause First Western to violate applicable law). First Western, upon
request of such Indemnitee, shall advance expenses in connection with such
indemnification. The provisions of this Paragraph 9.01 shall survive the
Closing and shall be enforceable directly by each officer and director of
Mitchell Bancorp or Mitchell Savings benefitted by this Paragraph 9.01.
9.02. PROCEDURE FOR CLAIMING INDEMNIFICATION. Any Indemnitee, upon
learning of such claims or liabilities, shall promptly notify First Western
thereof; provided, that the failure so to notify shall not affect the
obligations of First Western hereunder unless such failure materially increases
First Western's liability hereunder. In the event of any litigation giving rise
to a claim hereunder, (I) First Western shall have the right to assume the
38
<PAGE> 238
defense thereof, if it so elects, and First Western shall pay all reasonable
fees and expenses of counsel for the Indemnitees promptly as statements
therefor are received; provided, however, that First Western shall be obligated
pursuant to this Paragraph to pay for only one firm of counsel for all
Indemnitees in any jurisdiction for any single action, suit or proceeding or
any group of actions, suits or proceedings arising out of or related to a common
body of fact; (ii) the Indemnitees shall cooperate in the defense of any such
matter; (iii) First Western shall not be liable for any settlement effected
without its prior written consent; and (iv) First Western shall have no
obligation hereunder in the event a federal banking agency or a court of
competent jurisdiction shall ultimately determine, and such determination shall
have become final and nonappealable, that indemnification of an Indemnitee in
the manner contemplated hereby is prohibited by applicable law.
ARTICLE X. MISCELLANEOUS PROVISIONS
10.01. DEFINITIONS. Any term defined anywhere in this Agreement shall
have the meaning ascribed to it for all purposes of this Agreement (unless
expressly noted to the contrary). In addition:
(a) The term "material adverse effect," when applied to a party, shall
mean an event, effect, occurrence or circumstance that, alone or when taken
with other breaches, events, effects, occurrences or circumstances existing
concurrently therewith (including without limitation any breach of a
representation or warranty contained herein by such party), (i) has or is
reasonably expected to have a material adverse effect on the properties,
financial condition, results of operations, or business of such party and its
subsidiaries, if any, taken as a whole, or (ii) would materially prevent such
party's, or any affiliated party's, ability to perform its obligations under
this Agreement or the consummation of any of the transactions contemplated
hereby; provided, however, that in determining whether a material adverse
effect has occurred, there shall be excluded any effect the cause of which is
(A) any change in banking, tax and similar laws of general applicability or
interpretations thereof by courts or Regulatory Authorities; (B) any change in
GAAP or regulatory accounting requirements applicable to the parties hereto;
(C) any action or omission of Mitchell Bancorp or First Western or a
subsidiary thereof taken with the prior written consent of First Western or
Mitchell Bancorp, as applicable, in contemplation of the transaction
contemplated herein; or (D) any changes in general economic conditions
affecting financial institutions generally, including, but not limited to,
changes in interest rate.
(b) The term "Previously Disclosed" shall mean, as to Mitchell Bancorp
or as to First Western, the disclosure of information in a letter ("Disclosure
Letter") delivered by such party to the other prior to the date of this
Agreement and that specifically refers to this Agreement and is arranged in
paragraphs corresponding to the Paragraphs, subparagraphs and items of this
Agreement applicable thereto. Information disclosed in either party's
Disclosure Letter shall be deemed to have been Previously Disclosed by such
party for the purpose of any given Paragraph, subparagraph or item of this
Agreement only to the extent that information is expressly set forth in such
party's Disclosure Letter and that, in connection with such disclosures, a
specific reference is made in the Disclosure Letter to that Paragraph,
subparagraph or item.
(c) The term "Environmental Laws" shall include:
(i) all federal, state and local statutes, regulations,
ordinances, orders, decrees, and similar provisions having the force
or effect of law,
(ii) all contractual agreements, and
(iii) all common law concerning public health and safety,
worker health and safety, and pollution or protection of the environment,
including without limitation all standards of conduct and bases of
obligations relating to the presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution,
labeling, reporting, testing, processing, discharge, release, threatened
release,
39
<PAGE> 239
control or clean-up of any Hazardous Substances (including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act, the Superfund Amendment and Reauthorization Act, the Federal
Insecticide, Fungicide and Rodenticide Act, the Hazardous Material
Transportation Act, the Resource Conservation and Recovery Act, the Clean
Water Act, the Clean Air Act, the Toxic Substance Control Act, the Oil
Pollutant Act, the Coastal Area Management Act, any "Superfund" or
"Superlien" law, the North Carolina Oil Pollution and Hazardous Substance
Control Act, the North Carolina Water and Air Resources Act, and the North
Carolina Occupational Safety and Health Act, including any amendments
thereto from time to time).
10.02. SURVIVAL OF REPRESENTATIONS, WARRANTIES, INDEMNIFICATION AND OTHER
AGREEMENTS. (a) None of the representations, warranties or agreements herein
shall survive the effectiveness of the Mergers, and no party shall have any
right after the Effective Time to recover damages or any other relief from any
other party to this Agreement by reason of any breach of representation or
warranty, any nonfulfillment or nonperformance of any agreement contained
herein, or otherwise; provided, however, that the parties' agreements contained
in Paragraphs 6.07, 6.08, 6.10 and 6.11 above, and First Western's
representation and warranty contained in Paragraph 3.02 and First Western's
agreement to indemnify Mitchell Bancorp's and Mitchell Savings' officers and
directors contained in Article 9 above, shall survive the effectiveness of the
Mergers and shall be enforceable directly by each person benefitted or intended
to be benefitted by such section.
(b) INDEMNIFICATION. The parties' indemnification agreements and
obligations pursuant to Paragraph 9.01 above shall become effective only in the
event this Agreement is not terminated, and neither of the parties shall have
any obligations under that Paragraph in the event of or following termination
of the Mergers. First Western's indemnification agreements and obligations
pursuant to Paragraph 9.02. above shall become effective only at the Effective
Time, and First Western shall not have any obligation under that Paragraph
prior to the Effective Time or in the event of, or following termination of,
this Agreement.
10.03. WAIVER. Any term of condition of this Agreement may be waived
(except as to matters of regulatory approvals and approvals required by law),
either in whole or in part, at any time by the party that is, and whose
shareholders are, entitled to the benefits thereof; provided, however, that any
such waiver shall be effective only upon a determination by the waiving party
(through action of its Board of Directors) that such waiver would not adversely
affect the interests of the waiving party or its shareholders; and, provided
further, that no waiver of any term of condition of this Agreement by any party
shall be effective unless such waiver is in writing and signed by the waiving
party, or be construed to be a waiver of any succeeding breach of the same term
or condition. No failure or delay of any party to exercise any power, or to
insist upon a strict compliance by any other party of any obligation, and no
custom or practice at variance with any terms hereof, shall constitute a waiver
of the right of any party to demand a full and complete compliance with such
terms.
10.04. AMENDMENT. This Agreement may be amended, modified or
supplemented at any time or from time to time prior to the Effective Time, and
either before or after its approval by the shareholders of Mitchell Bancorp, by
an agreement in writing approved by a majority of the Board of Directors of
First Western and Mitchell Bancorp executed in the same manner as this
Agreement; provided however, following approval of this Agreement by the
shareholders of Mitchell Bancorp, no change may be made in the Merger
Consideration.
10.05. NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered personally
or by courier, by telegram or telex (confirmed in writing) or mailed by
certified mail, postage prepaid, as follows:
40
<PAGE> 240
If to Mitchell Bancorp, to: Mitchell Bancorp, Inc.
210 Oak Avenue
Spruce Pine, North Carolina 28777
Attn: Edward Ballew, Jr.
Copies to: John F. Breyer, Jr., Esq.
Breyer & Aguggia LLP
1300 I Street, N.W.
Suite 470 East
Washington, D.C. 20005
If to First Western, to: First Western Bank
Banks Professional Center
321 West Main Street
Burnsville, North Carolina 27814
Attn: Ronnie E. Deyton
Copies to: Ronald D. Raxter, Esq.
The Sanford Holshouser Law Firm PLLC
234 Fayetteville Street Mall
Suite 100
Raleigh, North Carolina 27601
10.06. FURTHER ASSURANCE. Mitchell Bancorp and First Western each agree
to furnish to the others such further assurances with respect to the matters
contemplated herein and their respective agreements, covenants, representations
and warranties contained herein, including the opinion of legal counsel, as
such other parties may reasonably request.
10.07. HEADINGS AND CAPTIONS. Headings and captions of the sections and
paragraphs of this Agreement have been inserted for convenience of reference
only and do not constitute a part hereof.
10.08. ENTIRE AGREEMENT. This Agreement (including all schedules and
exhibits attached hereto and all documents incorporated herein by reference)
contains the entire agreement of the parties with respect to the transactions
described herein and supersedes and all other oral or written agreement(s)
heretofore made, and there are no representations or inducements by or to, or
and agreements between, any of the parties hereto other than those contained
herein in writing.
10.09. SEVERABILITY OF PROVISIONS. The invalidity or unforceability of
any term, phrase, clause, paragraph, restriction, covenant, agreement or other
provision hereof shall in no way affect the validity or enforceability of any
other provision or part hereof.
10.10. ASSIGNMENT. This Agreement may not be assigned by any party
hereto except with the prior written consent of the other parties hereto.
10.11. COUNTERPARTS. Any number of counterparts of this Agreement may be
signed and delivered, each of which shall be considered an original and which
together shall constitute one agreement.
10.12. GOVERNING LAW. This Agreement is made in and shall be construed
and enforced in accordance with the laws of the State of North Carolina, except
as federal law may be applicable.
41
<PAGE> 241
IN WITNESS WHEREOF, Mitchell Bancorp and First Western each has caused
this Agreement to be executed in its name by its duly authorized officers as of
the date first above written.
MITCHELL BANCORP, INC.
By:
---------------------------
Edward Ballew, Jr.
Chief Executive Officer
ATTEST:
- ----------------------
Secretary
FIRST WESTERN BANK
By:
---------------------------
Ronnie E. Deyton
President and Chief Executive Officer
ATTEST:
- ----------------------
Secretary
42
<PAGE> 242
NON-COMPETITION AGREEMENT
With respect to the above Agreement and Plan of Merger (the "Agreement"),
each of the individuals signing below agrees that the capitalized terms herein
have the same meaning as in the Agreement and that:
1. As a director of Mitchell Bancorp, unless there has been a material
change in circumstances since the date of such Agreement or for any reason it
would, in my reasonable opinion, violate my duty or obligations as a director
to Mitchell Bancorp or to the Shareholders, I will:
(a) Recommend to the Shareholders that they vote their shares in
favor of ratification and approval of the Agreement and approval of the Mergers
described in the Agreement;
(b) Vote against any action on the part of Mitchell Bancorp that
would be in violation of the Agreement; and
(c) Vote in favor of any action on the part of Mitchell Bancorp that
is necessary or appropriate to carry out the intent and purposes or the
Agreement.
2. Further, in my individual capacity, I will:
(a) Vote all shares of Mitchell Stock that I have the power to vote
in favor of ratification and approval of the Agreement and approval of the
Mergers described in the Agreement; and
(b) During a period commencing on the date of this Agreement and
ending five (5) years following the Effective Time (the "Restriction Period"),
I will not "Compete" (as defined below), directly or indirectly, with Mitchell
Savings or First Western in the geographic area consisting of Mitchell,
McDowell, Yancey and Avery Counties, North Carolina (the "Relevant Market").
I hereby acknowledge and agree that the Relevant Market and Restriction
Period are limited in scope to the geographic territory and period of time
reasonably necessary to protect First Western's economic interest to be
acquired in connection with the Merger.
For the purposes of this Paragraph 2(b), the following terms shall have
the meanings set forth below.
COMPETE. The term "Compete" means: (i) soliciting deposits from any
Person residing in the Relevant Market for any Financial Institution; (ii)
soliciting any Person residing in the Relevant Market to become a borrower from
any Financial Institution, or assisting (other than through the performance of
ministerial or clerical duties) any Financial Institution in making loans to
any such Person; (iii) prior to the Effective Time, inducing or attempting to
induce any Person who is a Customer of Mitchell Savings to change any
depository, loan and/or other banking relationship of the Customer from
Mitchell to another Financial Institution; (iv) after the Effective Time,
inducing or attempting to induce any Person who was a Customer of Mitchell
Savings at the Effective Time or who is a Customer of First Western to change
any depository, loan and/or other banking relationship of the Customer from
First Western to another Financial Institution; (v) acting as a consultant,
officer, director (including an advisory or "local" director), independent
contractor, or employee of any Financial Institution that has an office in the
Relevant Market, or, in acting in any such capacity with any other Financial
Institution, to maintain an office or be employed at or assigned to or have any
direct involvement in the management, supervision, business or operation of any
office of such Financial Institution located in the Relevant Market; or (vi)
prior to the Effective Time, communicating to any Financial Institution the
names or addresses or any financial information concerning any Person who is a
Customer of Mitchell Savings; (vii) after the Effective Time, communicating to
any Financial Institution the names or addresses or any financial information
concerning any Person who was a Customer of Mitchell Savings at the Effective
Time or who is a Customer of First Western.
<PAGE> 243
CUSTOMER. The terms "Customer of Mitchell" and "Customer of First Western"
mean any Person with whom Mitchell Savings or First Western, respectively, has a
depository, loan, insurance and/or other banking or financial service
relationship.
FINANCIAL INSTITUTION. The term "Financial Institution" means any federal
or state chartered bank, savings bank, savings and loan association or credit
union, or any holding company for or corporation that owns or controls any such
entity, or any other Person engaged in the business of making loans of any type
or receiving deposits, other than Mitchell Savings, First Western or one of
their affiliated corporations.
PERSON. The term "Person" means any natural person or any corporation,
partnership, proprietorship, joint venture, trust, estate, governmental agency
or instrumentality, fiduciary, unincorporated association or other entity.
This Paragraph 2(b) shall not apply to Edward Ballew, Jr. or Emma Lee M.
Wilson who shall be subject to separate covenants regarding competition
contained in their employment agreements with Mitchell Savings.
WITNESS our hands and seals this the date first above written.
(Seal) (Seal)
- -------------------- --------------------
(Seal) (Seal)
- -------------------- --------------------
(Seal) (Seal)
- -------------------- --------------------
2
<PAGE> 244
EXHIBIT D
OPINION OF RP FINANCIAL
[RP FINANCIAL, LC. letterhead]
November 16, 1998
Board of Directors
Mitchell Bancorp, Inc.
210 Oak Avenue
Spruce Pine, North Carolina 28777
Members of the Board:
You have requested RP Financial, LC. ("RP Financial") to provide you
with its opinion as to the fairness from a financial point of view to the
stockholders of Mitchell Bancorp, Inc., Spruce Pine, North Carolina ("Mitchell
Bancorp"), the holding company for Mitchell Savings Bank, SSB ("Mitchell
Savings"), of the Agreement and Plan of Merger (the "Agreement"), by and between
First Western Bank, Burnsville, North Carolina ("First Western"), a North
Carolina banking corporation, and Mitchell Bancorp. Unless otherwise defined,
all capitalized terms incorporated herein have the meanings ascribed to them in
the Agreement, which is incorporated herein by reference.
Summary Description of Consideration
At the Effective Time, Mitchell Bancorp shall be merged into a newly
created subsidiary of First Western, which will then be merged into First
Western, and each share of common stock of Mitchell Bancorp, $0.01 par value per
share, issued and outstanding immediately prior to the Effective Time (except
for Dissenting Shares) shall cease to be outstanding and shall be converted into
and become the right to receive cash and/or shares of First Western's $5.00 par
value common stock (the "Merger Consideration") at the election of Mitchell
Bancorp shareholders subject to certain adjustments as set forth in the
Agreement. Such Merger Consideration is subject to the proration described
below: (1) if Cash Merger Consideration is to be paid, the amount shall be
$20.00 per share and (2) if Stock Merger Consideration is to be paid, each share
of Mitchell Bancorp stock shall be exchanged for 1.6 newly-issued shares of
First Western common stock, provided that the aggregate number of Mitchell
Bancorp shares elected to be exchanged for cash does not exceed 49.9 percent of
the aggregate number of Mitchell Bancorp common shares outstanding plus those
subject to stock options. At the Effective Time, each unexercised option will be
canceled, and as consideration therefor, at the election of the option holder,
can elect to receive either cash or stock equivalent to the difference between
the exercise price of such options and the Merger Consideration, subject to
proration. Cash will be paid in lieu of fractional shares. As of the date
hereof, Mitchell Bancorp had 937,174 shares of common stock issued and
outstanding, 68,596 granted stock options outstanding of which 54,877 are
unvested and vest immediately at the Effective Time and 31,358 shares granted
pursuant to the Management Recognition and Development Plan of which 25,086 are
unvested and also vest immediately at the Effective Time.
<PAGE> 245
Board of Directors
November 16, 1998
Page 2
RP Financial Background and Experience
RP Financial, as part of its financial institution valuation and
consulting practice, is regularly engaged in the valuation of financial
institution securities in connection with mergers and acquisitions of commercial
banks and thrift institutions, initial and secondary offerings, mutual-to-stock
conversions of thrift institutions, and business valuations for other corporate
purposes for financial institutions. As specialists in the securities of
financial institutions, RP Financial has experience in, and knowledge of, the
North Carolina and Southeast markets for thrift and bank securities and
financial institutions operating in North Carolina.
Materials Reviewed
In rendering this fairness opinion, RP Financial reviewed the following
material: (1) the Agreement including exhibits; (2) financial and other
information for Mitchell Bancorp, all with regard to balance and off-balance
sheet composition, profitability, interest rates, volumes, maturities, trends,
credit risk, interest rate risk, liquidity risk and operations: (a) audited and
unaudited financial statements for the fiscal years ended June 30, 1993 through
1998, (b) stockholder, regulatory and internal financial and other reports
through September 30, 1998, (c) the conversion prospectus, dated May 8, 1996,
(d) the most recent proxy statement for Mitchell Bancorp, and (e) Mitchell
Bancorp's management and Board comments regarding past and current business,
operations, financial condition, and future prospects; and (3) financial and
other information for First Western including: (a) audited financial statements
for the fiscal year ended December 31, 1997, incorporated in First Western's
Annual Report to Shareholders, (b) First Western's 1997 initial offering
materials, including the Offering Circular, and de novo charter application, (c)
regulatory and internal financial and/or other reports through September 30,
1998, (d) the most recent proxy statement for First Western and (e) First
Western's management comments regarding past and current business, operations,
financial condition, and future prospects.
RP Financial reviewed financial, operational, market area and stock
price and trading characteristics for Mitchell Bancorp and First Western
relative to publicly-traded savings institutions and commercial banking
institutions, respectively, with comparable resources, financial condition,
earnings, operations and markets. RP Financial also considered the economic and
demographic characteristics in the local market area, and the potential impact
of the regulatory, legislative and economic environments on operations for
Mitchell Bancorp and First Western and the public perception of the savings
institution and commercial banking industries. RP Financial also considered: (1)
the financial terms, financial and operating condition and market area of other
recently completed acquisitions of comparable savings institutions both
regionally and nationally; (2) discounted cash flow analyses incorporating
future prospects; (3) expressions of interest by third party financial
institutions seeking a business combination with Mitchell Bancorp; (4) the pro
forma impact on First Western of the acquisition of Mitchell Bancorp, which is
expected to be accounted for as a purchase; and (5) the market for First
Western's common stock.
<PAGE> 246
Board of Directors
November 16, 1998
Page 3
In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Mitchell Bancorp and First Western furnished by the respective institutions to
RP Financial for review, as well as publicly-available information regarding
other financial institutions and economic and demographic data. Mitchell Bancorp
and First Western did not restrict RP Financial as to the material it was
permitted to review. RP Financial did not perform or obtain any independent
appraisals or evaluations of the assets and liabilities and potential and/or
contingent liabilities of Mitchell Bancorp or First Western.
RP Financial expresses no opinion on matters of a legal, regulatory,
tax or accounting nature or the ability of the merger as set forth in the
Agreement to be consummated. In rendering its opinion, RP Financial assumed
that, in the course of obtaining the necessary regulatory and governmental
approvals for the proposed Merger, no restriction will be imposed on First
Western that would have a material adverse effect on the ability of the Merger
to be consummated as set forth in the Agreement.
0pinion
It is understood that this letter is directed to the Board of Directors
of Mitchell Bancorp in its consideration of the Agreement, and does not
constitute a recommendation to any stockholder of Mitchell Bancorp as to any
action that such stockholder should take in connection with the Agreement, or
otherwise.
It is understood that this opinion is based on market conditions and
other circumstances existing on the date hereof.
It is understood that this opinion may be included in its entirety in
any communication by Mitchell Bancorp or its Board of Directors to the
stockholders of Mitchell Bancorp. It is also understood that this opinion may be
included in its entirety in any regulatory filing by Mitchell Bancorp or First
Western, and that RP Financial consents to the summary of the opinion in the
proxy materials of Mitchell Bancorp, and any amendments thereto. Except as
described above, this opinion may not be summarized, excerpted from or otherwise
publicly referred to without RP Financial's prior written consent.
Based upon and subject to the foregoing, and other such matters
considered relevant, it is RP Financial's opinion that, as of the date hereof,
the Merger Consideration to be received by Mitchell Bancorp's stockholders, as
described in the Agreement, is fair to such stockholders from a financial point
of view.
Respectfully submitted,
RP FINANCIAL, LC.
/s/ RP FINANCIAL, LC.
<PAGE> 247
EXHIBIT E
OPINION OF THE CARSON MEDLIN COMPANY
[THE CARSON MEDLIN COMPANY letterhead]
November 16,1998
Board of Directors
First Western Bank
P.O. Box 187
Burnsville, NC 28714-0187
Members of the Board:
You have requested our opinion as to the fairness to the unaffiliated
shareholders of First Western Bank ("First Western"), from a financial point of
view, of the terms of a certain proposed Agreement and Plan of Merger, dated as
of August 13, 1998 (the "Agreement") by and between First Western and Mitchell
Bancorp, Inc. ("Mitchell") pursuant to which Mitchell will merge with and into
First Western, (the "Merger"). The foregoing summary of the Merger is qualified
in its entirety by reference to the Agreement.
The Carson Medlin Company is a National Association of Securities Dealers, Inc.
(NASD) member investment banking firm which specializes in the securities of
southeastern United States financial institutions. As part of our investment
banking activities, we are regularly engaged in the valuation of southeastern
United States financial institutions and transactions relating to their
securities. We regularly publish our research on independent community banks and
savings institutions regarding their financial and stock price performance. We
are familiar with the commercial banking industry in North Carolina and the
Southeast and the major commercial banks operating in that market. We have been
retained by First Western in a financial advisory capacity to render our opinion
hereunder, for which we will receive compensation.
In reaching our opinion, we have analyzed the respective financial positions,
both current and historical, of First Western and Mitchell. We have reviewed:
(i) the Agreement; (ii) the annual reports to shareholders of First Western,
including audited financial statements for the year ended December 31, 1997;
(iii) the Proxy Statement of First Western dated March 18, 1998 for the annual
meeting of shareholders held on April 28, 1998; (iv) the Consolidated Report of
Condition and Income for First Western as of June 30, 1998; (v) the Uniform Bank
Performance Report for First Western as of June 30, 1998; (vi) the annual report
to shareholders of Mitchell, including audited financial statements for the
fiscal year ended June 30, 1997; (vii) the annual reports on Form 10-KSB of
Mitchell for the fiscal years ended June 30, 1996, 1997 and 1998; (viii) the
Proxy Statement of Mitchell dated September 18, 1997 for the annual meeting of
<PAGE> 248
Board of Directors
First Western Bank
November 16,1998
Page 2
shareholders held on October 22, 1997; (ix) the Uniform Bank Performance Report
for Mitchell Savings Bank, SSB as of June 30, 1998; (x) a preliminary copy of
the Proxy Statement/Prospectus prepared for the meeting of First Western's
shareholders to consider the Merger; and (xi) certain other financial and
operating information with respect to the business, operations and prospects of
First Western and Mitchell. We also: (i) held discussions with members of the
senior management of First Western and Mitchell regarding their respective
historical and current business operations, financial condition and future
prospects; (ii) reviewed the historical market prices and trading activity for
the common stocks of First Western and Mitchell, to the extent available, and
compared them with those of certain publicly traded companies which we deemed to
be relevant; (iii) compared the results of operations of First Western and
Mitchell with those of certain banking and savings institutions which we deemed
to be relevant; (iv) compared the proposed financial terms of the Merger with
the financial terms, to the extent publicly available, of certain other recent
business combinations of commercial banking organizations and savings
institutions; (v) analyzed the pro forma financial impact of the Merger on First
Western; and (vi) conducted such other studies, analyses, inquiries and
examinations as we deemed appropriate.
We have relied upon and assumed, without independent verification, the accuracy
and completeness of all information provided to us. We have not performed or
considered any independent appraisal or evaluation of the assets of First
Western or Mitchell. The opinion we express herein is necessarily based upon
market, economic and other relevant considerations as they exist and can be
evaluated as of the date of this letter.
Based upon the foregoing, it is our opinion that the terms of the transaction,
as provided for in the Agreement, are fair, from a financial point of view, to
the unaffiliated shareholders of First Western Bank.
Very truly yours,
/s/ THE CARSON MEDLIN COMPANY
THE CARSON MEDLIN COMPANY
<PAGE> 249
EXHIBIT F
NORTH CAROLINA BUSINESS CORPORATION ACT
ARTICLE 13
------------------------
GENERAL STATUTES OF NORTH CAROLINA
CHAPTER 55. NORTH CAROLINA BUSINESS CORPORATION ACT
ARTICLE 13. DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
SS. 55-13-01. DEFINITIONS
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and in
the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value", with respect to a dissenter's shares, means the value
of the shares immediately before the effectuation of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under
all the circumstances, giving due consideration to the rate currently paid by
the corporation on its principal bank loans, if any, but not less than the rate
provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner
of shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
SS. 55-13-02. RIGHT TO DISSENT
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his shares in
the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other than
a parent corporation in a merger under G.S. 55-11-04) is a party unless (i)
approval by the shareholders of that corporation is not required under G.S.
55-11-03(g) or (ii) such shares are then redeemable by the corporation at a
price not greater than the cash to be received in exchange for such shares;
<PAGE> 250
(2) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired, unless such shares
are then redeemable by the corporation at a price not greater than the cash to
be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all, of
the property of the corporation other than as permitted by G.S. 55-12-01,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed in cash to the shareholders within one
year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it (i)
alters or abolishes a preferential right of the shares; (ii) creates, alters,
or abolishes a right in respect of redemption, including a provision respecting
a sinking fund for the redemption or repurchase, of the shares; (iii) alters or
abolishes a preemptive right of the holder of the shares to acquire shares or
other securities; (iv) excludes or limits the right of the shares to vote on
any matter, or to cumulate votes; (v) reduces the number of shares owned by the
shareholder to a fraction of a share if the fractional share so created is to
be acquired for cash under G.S. 55-6-04; or (vi) changes the corporation into a
nonprofit corporation or cooperative organization;
(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in exchange
for cash or other property, unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be no
right of dissent in favor of holders of shares of any class or series which, at
the record date fixed to determine the shareholders entitled to receive notice
of and to vote at the meeting at which the plan of merger or share exchange or
the sale or exchange of property is to be acted on, were (i) listed on a
national securities exchange or (ii) held by at least 2,000 record
shareholders, unless in either case:
(1) The articles of incorporation of the corporation issuing the shares
provide otherwise;
(2) In the case of a plan of merger or share exchange, the holders of the
class or series are required under the plan of merger or share exchange to
accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation which, at the
record date fixed to determine the shareholders entitled to receive notice of
and vote at the meeting at which the plan of merger or share exchange is to be
acted on, were either listed subject to notice of issuance on a national
securities exchange or held of record by at least 2,000 record shareholders; or
c. A combination of cash and shares as set forth in sub-subdivisions
a. and b. of this subdivision.
SS. 55-13-03. DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of
<PAGE> 251
the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered
in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the beneficial
shareholder.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
SS. 55-13-20. NOTICE OF DISSENTERS' RIGHTS
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting notice
must state that shareholders are or may be entitled to assert dissenters'
rights under this Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02 is
taken without a vote of shareholders, the corporation shall no later than 10
days thereafter notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the dissenters'
notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this section,
such failure shall not invalidate any corporate action taken; but any
shareholder may recover from the corporation any damage which he suffered from
such failure in a civil action brought in his own name within three years after
the taking of the corporate action creating dissenters' rights under G.S.
55-13-02 unless he voted for such corporate action.
SS. 55-13-21. NOTICE OF INTENT TO DEMAND PAYMENT
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder who
wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for his shares under this Article.
SS. 55-13-22. DISSENTERS' NOTICE
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall mail
by registered or certified mail, return receipt requested, a written
dissenters' notice to all shareholders who satisfied the requirements of G.S.
55-13-21.
<PAGE> 252
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after the
approval of the board of directors, of the corporate action creating
dissenters" rights under G.S. 55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date the
subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
SS. 55-13-23. DUTY TO DEMAND PAYMENT
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22 must
demand payment and deposit his share certificates in accordance with the terms
of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this Article.
SS. 55-13-24. SHARE RESTRICTIONS
(a) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
cancelled or modified by the taking of the proposed corporate action.
SS. 55-13-25. PAYMENT
(a) As soon as the proposed corporate action is taken, or within 30 days
after receipt of a payment demand, the corporation shall pay each dissenter who
complied with G.S. 55-13-23 the amount the corporation estimates to be the fair
value of his shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the end
of a fiscal year ending not more than 16 months before the date of payment, an
income statement for that year, a statement of cash flows for that year, and
the latest available interim financial statements, if any;
<PAGE> 253
(2) An explanation of how the corporation estimated the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article.
SS. 55-13-26. FAILURE TO TAKE ACTION
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates, the
corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand procedure.
SS. 55-13-28. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH CORPORATION'S PAYMENT
OR FAILURE TO PERFORM
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment of
the amount in excess of the payment by the corporation under G.S. 55-13- 25 for
the fair value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under G.S. 55-13-25 is
less than the fair value of his shares or that the interest due is incorrectly
calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on uncertificated shares within 60 days after the date set for demanding
payment.
(b) A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing (i) under subdivision
(a)(1) within 30 days after the corporation made payment for his shares or (ii)
under subdivisions (a)(2) and (a)(3) within 30 days after the corporation has
failed to perform timely. A dissenter who fails to notify the corporation of
his demand under subsection (a) within such 30-day period shall be deemed to
have withdrawn his dissent and demand for payment.
PART 3. JUDICIAL APPRAISAL OF SHARES
SS. 55-13-30. COURT ACTION
(a) (See Editor's note) If a demand for payment under G.S. 55-13-28 remains
unsettled, the dissenter may commence a proceeding within 60 days after the
earlier of (i) the date payment is made under G.S. 55-13-25, or (ii) the date
of the dissenter's payment demand under G.S. 55-13-28 by filing a complaint
with the Superior Court Division of the General Court of Justice to determine
the fair value of the shares and accrued interest. A dissenter
<PAGE> 254
who takes no action within the 60-day period shall be deemed to have withdrawn
his dissent and demand for payment.
(a1) Repealed by Session Laws 1997-202, s. 4, effective October 1, 1997.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether or
not residents of this State) whose demands remain unsettled parties to the
proceeding as in an action against their shares and all parties must be served
with a copy of the complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the superior court in which the proceeding is
commenced under subsection (a) is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to it. The parties are entitled to
the same discovery rights as parties in other civil proceedings. The proceeding
shall be tried as in other civil actions. However, in a proceeding by a
dissenter in a corporation that was a public corporation immediately prior to
consummation of the corporate action giving rise to the right of dissent under
G.S. 55-13-02, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation.
SS. 55-13-31. COURT COSTS AND COUNSEL FEES
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall
determine all costs of the proceeding, including the reasonable compensation
and expenses of appraisers appointed by the court, and shall assess the costs
as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if the
court finds the corporation did not substantially comply with the requirements
of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either or
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
<PAGE> 255
EXHIBIT G
ELECTION FORM
TO ACCOMPANY CERTIFICATES OF COMMON STOCK, PAR VALUE$0.01 PER SHARE, OF
MITCHELL BANCORP, INC.
<TABLE>
<CAPTION>
DESCRIPTION OF SHARES SURRENDERED (PLEASE FILL IN. ATTACH SEPARATE SCHEDULE IF NEEDED.)
<S> <C> <C>
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
If there is an error in the name or address
below, please make the necessary corrections. Certificate Number(s) Number of Shares
--------------------- ----------------
--------------------- ----------------
--------------------- ----------------
--------------------- ----------------
--------------------- ----------------
TOTAL SHARES -
</TABLE>
Mail or deliver this Election Form, or a facsimile, with the certificate(s)
representing your shares, to the Exchange Agent at:
<TABLE>
<S> <C>
REGISTER & TRANSFER COMPANY For information, call Investor Relations: (800) 368-5948
10 Commerce Drive
Cranford, NJ 07016
Attn: Reorganization Department
</TABLE>
Method of delivery of the certificate(s) is at the option and risk of the
registered holder. Overnight delivery, properly insured, is recommended. See
Instruction 3. IF ANY CERTIFICATE HAS BEEN LOST, STOLEN, MISPLACED OR MUTILATED
CONTACT THE EXCHANGE AGENT AT THE NUMBER ABOVE. SEE INSTRUCTION 8.
ELECTION DEADLINE IS 5:00 PM, EASTERN TIME, ON DECEMBER 22, 1998.
Pursuant to the terms of the Agreement and Plan of Merger dated as of August
13, 1998, ("Agreement") by and between First Western Bank and Mitchell Bancorp,
Inc., upon consummation of the merger of First Western and Mitchell, each share
of Mitchell common stock ("Mitchell Shares") will be converted into the right
to receive either $20.00 in cash, 1.6 shares of First Western common stock
("First Western Shares"), or a combination of cash and First Western Shares.
With this Election Form, Mitchell Shareholders have the opportunity to elect
the form of consideration they will receive in the Mergers. For a full
discussion of the Mergers and effect of this election, see the attached Joint
Proxy Statement and the enclosed Offering Circular, both dated November 16,
1998. Capitalized terms not defined in this Election Form have the same meaning
as in the Joint Proxy Statement.
THIS ELECTION GOVERNS THE CONSIDERATION THAT YOU, AS A MITCHELL SHAREHOLDER,
WILL RECEIVE IF THE MERGERS ARE APPROVED AND CONSUMMATED. THIS ELECTION MAY
ALSO AFFECT THE INCOME TAX TREATMENT OF THE CONSIDERATION THAT YOU RECEIVE.
PLEASE REVIEW THE JOINT PROXY STATEMENT FOR THESE DISCUSSIONS.
Complete the box below to make an election (i) to have all of your Mitchell
Shares converted into the right to receive 1.6 First Western Shares per share
(a "Stock Election"), OR (ii) to have all of your Mitchell Shares converted
into the right to receive $20.00 in cash per share (a "Cash Election"), OR
(iii) to have the indicated percentage of your Mitchell Shares converted into
the right to receive $20.00 in cash per share and the remainder of your
Mitchell Shares converted into the right to receive 1.6 First Western Shares
per share (a "Partial Cash and Stock Election") OR (iv) to indicate that you
make no election. If the "NON-ELECTION" box is checked, you will receive either
First Western Shares or cash or a combination of First Western Shares and cash
pursuant to the proration and allocation procedures set forth in the Agreement
after all Stock Elections, Cash Elections and Partial Cash and Stock Elections
have been given effect.
ELECTION
I hereby elect to receive the following as consideration for my Mitchell
Shares: (Check only one box.)
[ ] STOCK ELECTION: Covert each of my Mitchell Shares into 1.6 First Western
Shares.
[ ] CASH ELECTION: Pay $20.00 in cash for each of my Mitchell Shares.
[ ] PARTIAL CASH AND STOCK ELECTION: Pay $20.00 in cash for each of my
Mitchell Shares up to ______ % (insert number not exceeding 100) of my
Mitchell Shares and convert each of my remaining Mitchell Shares into 1.6
First Western Shares.
[ ] NON-ELECTION. No preference with respect to the receipt of either of the
elections above in exchange for the total number of shares of Mitchell
Shares represented by the certificate(s) enclosed or that will be
otherwise delivered to the Transfer Agent by the Election Deadline.
You will be deemed to have made a NON-ELECTION if:
A. You check the Non-Election Box above or do not make an election.
B. You fail to follow the instructions on this Election Form (including not
submitting your Mitchell Share certificates) or otherwise fail to make a
proper election; or
C. The Transfer Agent does not actually receive a completed Election Form
(including submission of your Mitchell Share certificates) by the
Election Deadline.
<PAGE> 256
The number of First Western Shares to be issued in the Mergers is fixed under
the terms of the Agreement. Accordingly, no assurance can be given that an
election by any given Mitchell Shareholder will be accommodated. If the
aggregate elections are not as specified in the Agreement, the election of each
Mitchell Shareholder will be subject to the allocation procedures set forth in
the Agreement.
TO BE EFFECTIVE, THIS ELECTION FORM MUST BE PROPERLY COMPLETED, SIGNED AND
DELIVERED TO THE EXCHANGE AGENT, TOGETHER WITH THE CERTIFICATES REPRESENTING
YOUR MITCHELL SHARES, AT THE ADDRESS ABOVE PRIOR TO THE ELECTION DEADLINE.
The undersigned represents that I (we) have full authority to surrender without
restriction the certificate(s) for exchange. Please issue the new certificate
and/or check in the name shown above to the above address unless instructions
are given in the boxes below.
SPECIAL ISSUANCE/PAYMENT INSTRUCTIONS
- ------------------------------------------------------------------------------
Complete ONLY if the now certificate and/or check is to be issued in a name
which differs from the name on the surrendered certificate(s), Issue to:
Name: ____________________________________________
Address: ___________________________________________
Please also complete Substitute Form W-9 on page ____ and see Instructions 5,
6, 7, and 10 regarding signature guarantee.
SPECIAL DELIVERY INSTRUCTIONS
- ------------------------------------------------------------------------------
Complete ONLY if the new certificate and/or check is to be mailed to an address
other than the address shown above. Mail to:
Name: ___________________________________________________
Address: _________________________________________________
- ---------------------------------------------------------
YOU MUST SIGN IN THE BOX BELOW:
-- SIGNATURE(S) REQUIRED --
Signature(s) of Registered Holders) or Agent
- -------------------------------------------------------------------------------
Must be signed by the registered holder(s) EXACTLY as name(s)
appear(s) on stock certificate(s). If signature is by a trustee. executor.
administrator, guardian. attorney-in-fact, officer for a corporation
acting in a fiduciary or representative capacity, or other person. please
set forth full title. See Instructions 4, 6, or 7.
- -------------------------------------------------------------------
Registered Holder
- -------------------------------------------------------------------
Registered Holder
Title, if any: ________________________________________________________
Also: Sign and provide your tax ID on page 4 of this form.
SIGNATURE GUARANTEED (IF REQUIRED)
See Instruction 5.
- -------------------------------------------------------------------------------
Unless the shares are tendered by the registered holder(s) of the common stock,
or the account of a member of a "Signature Guarantee Program" ("STAMP"), Stock
Exchange Medallion Program ("SEMP") or New York Stock Exchange Medallion
Signature Program ("MSP") (an "Eligible Institution"), your signature(s) must
be guaranteed by an Eligible Institution. See Instruction 6.
- --------------------------------------------------------------------
Authorized Signature
- --------------------------------------------------------------------
Name of Firm
- --------------------------------------------------------------------
Address of Firm (Please print)
<PAGE> 257
INSTRUCTIONS
-- Please read carefully --
1. TIME IN WHICH TO MAKE AN ELECTION. For any election contained herein to be
considered, this Election Form, or a facsimile thereof, properly completed and
signed, and the related Mitchell Stock certificates, must be received by the
Exchange Agent at the address on the front of this Election Form no later than
5:00 p.m., Eastern Time, on December 22, 1998. The Exchange Agent, in its sole
discretion, will determine whether any Election Form is received on a timely
basis and whether an Election Form has been properly completed.
2. REVOCATION OR CHANGE OF ELECTION FORM. A holder of Mitchell Shares who has
made an Election may, at any time before the Election Deadline, change that
Election by submitting to the Exchange Agent a revised Election Form, properly
completed and signed. The revised Election Form must be received by the
Exchange Agent prior to the Election Deadline.
3. METHOD OF DELIVERY. Your old certificate(s) and the Election Form must be
sent or delivered to the Exchange Agent. Do not send them to First Western Bank
or Mitchell. The method of delivery of certificates to be surrendered to the
Exchange Agent is at the option and risk of the surrendering shareholder.
Overnight delivery, properly insured, is recommended. Delivery will be deemed
effective only when received. If the certificate(s) are sent by mail, you are
encouraged to use registered mail with return receipt requested and properly
insured. A return envelope is enclosed.
4. CERTIFICATE ISSUED IN THE SAME NAME. If the new certificate and/or check is
issued in the same name as the surrendered certificate is registered, the
Election Form should be completed and signed exactly as the surrendered
certificate is registered. Do not sign the Certificate(s). Signature guarantees
are not required if the certificate(s) surrendered herewith are submitted by
the registered owner of such shares who has not completed the section entitled
"Special Issuance/Payment Instructions" or are for the account of an Eligible
Institution (defined below).
5. JOINT FORMS OF ELECTION. For the purposes of this Election Form and
allocation procedures, holders of Mitchell Shares who join in making a joint
election will be considered to be a single holder of such shares. Joint
Election Forms may be submitted only by persons submitting certificates
registered in different forms of the same name (e.g., John Smith on one
certificate and J. Smith on another) and by persons who may be considered to
own each other's shares by reason of ownership attribution rules contained in
Section 318(A) of the Internal Revenue Code of 1986, as amended. If this
Election Form is submitted as a joint Election Form, each record holder of
Mitchell Shares covered hereby must properly sign this Election Form. attaching
additional sheets if necessary. The signatures of such holders will be deemed
to constitute a certification that the persons submitting a joint Election Form
are eligible to do so. Election Forms executed by trustees, executors,
administrators, guardians, officers of corporations, or others acting in a
fiduciary capacity who are not identified as such in the registration must be
accompanied by proper evidence of the signer's authority to act.
6. NEW CERTIFICATE ISSUED IN DIFFERENT NAME. If the section entitled "Special
Issuance/Payment Instructions" is completed, then signatures on this Letter of
Transmittal must be guaranteed by a firm that is a bank, broker, dealer, credit
union, savings association, or other entity that is a member in good standing
of the Securities Transfer Agents' Medallion Program (each an "Eligible
Institution"). If the surrendered certificates are registered in the name of a
person other than the signer of this Election Form, or if issuance is to be
made to a person other then the signer of this Election Form, or if the
issuance is to be made to a person other than the registered owner(s), then the
surrendered certificates must be endorsed or accompanied by duly executed stock
powers, in either case signed exactly as the name(s) of the registered owners
appear on such certificate(s) or stock power(s), with the signatures on the
certificate(s) or stock power(s) guaranteed by an Eligible Institution as
provided herein.
7. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Indicate the name and address in
which the new certificate and/or check is to be sent if different from the name
and/or address of the person(s) signing this Election Form. The shareholder is
required to give the Social Security number or employer identification number
of the record owner of the shares. If Special Issuance Instructions have been
completed, the shareholder named therein will be considered the record owner
for this purpose.
<PAGE> 258
8. SURRENDER OF CERTIFICATE(S), LOST CERTIFICATE(S). For any election contained
herein to be effective, this Election Form must be accompanied by the
certificate(s) evidencing your shares and any required accompanying evidences
of authority. IF YOUR CERTIFICATE(S) HAS(VE) BEEN LOST, STOLEN, MISPLACED OR
DESTROYED, CONTACT INVESTOR RELATIONS AT THE EXCHANGE AGENT FOR INSTRUCTIONS AT
(800) 368-5948 PRIOR TO SUBMITTING THIS ELECTION FORM.
9. TERMINATION OF MERGER. In the event of termination of the Agreement, the
Exchange Agent will promptly return stock certificates representing shares of
Mitchell common stock. In such event, Mitchell Shares held through the nominees
are expected to be available for sale or transfer promptly following First
Western's decision not to act so as to prevent termination of the Agreement.
Certificates representing Mitchell Shares held directly by Mitchell
Shareholders will be returned by registered mail (with attendant delay). The
Exchange Agent and First Western have agreed to use their commercially
reasonable efforts to cooperate with Mitchell and Mitchell Shareholders to
facilitate return of certificates representing Mitchell Shares in the event of
such termination, but return other than by registered mail will only be made at
the expense, written direction and risk of Mitchell Shareholders, accompanied
by a pre-paid, pre-addressed return courier envelope sent to the Exchange
Agent.
10. SUBSTITUTE FORM W-9. Under Federal income tax law, a non-exempt shareholder
is required to provide the Exchange Agent with such shareholder's correct
Taxpayer Identification Number ('TIN"). Use the Substitute Form W-9 below. If
the certificate(s) are in more than one name or are not in the name of the
actual owner, consult the "Important Tax Information" section below for
additional guidance on which number to report. Failure to provide the
information on the W-9 Form may subject the surrendering shareholder to 31%
federal income tax withholding on the payment of any cash. The surrendering
shareholder must check the box marked "Awaiting TIN" if a TIN has not been
issued and the shareholder has applied for a number or intends to apply for a
number in the near future. If a TIN has been applied for and the Exchange Agent
is not provided with a TIN before payment is made, the Exchange Agent will
withhold 31% on all payments to such surrendering shareholders of any cash
consideration due for their Mitchell Shares. Please review the "Important Tax
Information" section below for additional details on what TIN to give the
Exchange Agent.
- -------------------------------------------------------------------------------
INSTRUCTIONS FORM IRS FORM W-9
- Important Tax Information -
PURPOSE OF FORM W-9
- - Use this form to report the Taxpayer Identification Number of the record
owner of the account to the payor.
- - Under Federal income tax laws, payers (i.e., First Western) must generally
withhold 31% of taxable interest, dividend, and certain other payments if
you fail to furnish payors with the correct Taxpayer Identification Number
(this is referred to as "backup withholding").
- - To prevent backup withholding on these payments, be sure to notify the payor
of the correct Taxpayer Identification Number. You must use this form to
certify that the Taxpayer Identification Number you are giving to the payor
is correct and that you are not subject to backup withholding.
WHAT NUMBER TO PROVIDE:
On the W-9, list the Social Security number or employer identification number
of the record owner of the account. If the account belongs to you as an
individual, give your Social Security number. If the account is in more than
one name or is not in the name of the actual owner, give the Social Security
number as follows:
If you have this type of account: Give the Social Security number of:
- - Two or more individuals,
including husband and wife
(joint account): > The actual owner of the account, or
if combined funds, any one of the
individuals.
- - Custodian account of a minor
(Uniform Gift to Minors Act): > The minor.
- - Adult and minor (joint account): > The adult, or if the minor is the
only contributor, the minor.
- - Account in the name of the guardian
or committee for a designated ward: > The ward, minor, or incompetent
person.
- -------------------------------------------------------------------------------
<PAGE> 259
IMPORTANT TAX INFORMATION
PURPOSE OF FORM W-9
- -- Use this form to report the Taxpayer Identification Number of the record
owner of the account to the payor.
- -- Under Federal income tax laws, payers (i.e., First Western) must
generally withhold 31% of taxable interest, dividend, and certain other
payments if you fail to furnish payors with the correct Taxpayer
Identification Number (this is referred to as "backup withholding").
- -- To prevent backup withholding on these payments, be sure to notify the
payor of the correct Taxpayer Identification Number. You must use this
form to certify that the Taxpayer Identification Number you are giving to
the payor is correct and that you are not subject to backup withholding.
WHAT NUMBER TO GIVE THE PAYOR:
Give the payor the Social Security number or employer identification number of
the record owner of the account. If the account belongs to you as an
individual, give your Social Security number. If the account is in more than
one name or is not in the name of the actual owner, give the Social Security
number as follows:
<TABLE>
<S> <C>
If you have this type of account: Give the Social Security number of:
- -- Two or more individuals, including husband and wife (joint account): -- The actual owner of the account, or if
combined funds, any one
of the individuals.
- -- Custodian account of a minor (Uniform Gift to Minors Act): -- The minor.
- -- Adult and minor (joint account): -- The adult, or if the minor is the only
contributor, the minor.
- -- Account in the name of the guardian or committee for a designated ward: -- The ward, minor, or incompetent person.
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
PAYOR: REGISTER & TRANSFER COMPANY
<S> <C>
SUBSTITUTE FORM W - 9 PART I-- Enter your TIN in the box to the
right. For individuals this is is your Social
DEPARTMENT OF THE TREASURY Security number. However, if you are a resident SOCIAL SECURITY NO. OR EMPLOYER IDENTIFICATION NO.
INTERNAL REVENUE SERVICE alien or a sole proprietor, see the "Important
Tax Information" section above. For other
entities, it is your employer identification
number (EIN).
__________________________________________
[ ] Awaiting TIN
REQUEST FOR TAXPAYER NOTE: If the account is in more than one name,
IDENTIFICATION NUMBER (TIN) see the chart in the enclosed "Special
Instructions" for guidelines on whose number to
enter.
Give form to the requester.
Do NOT send to the IRS. PART II -- For Payees exempt from backup
withholding, see the "Important Tax
Information" section above.
</TABLE>
CERTIFICATION -- Under penalties of perjury, I certify that: (1) The Number
shown above on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me), AND (2) I am not subject to backup
withholding because (A) I am exempt from backup withholding, or (B) I have not
been notified by the Internal Revenue Service (IRS) that I am subject to backup
withholding as a result of a failure to report all interest or dividends, OR
(C) the IRS has notified me that I am no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out ITEM 2 above if you have been
notified by the IRS that you are currently subject to backup withholding
because you have failed to report all interest and dividends on your tax
return. See the "Important Tax Information" section above.
<TABLE>
<S> <C> <C>
PLEASE SIGN HERE -
SIGNATURE _______________________________________ DATE__________________________
</TABLE>
<PAGE> 260
FIRST WESTERN BANK
321 WEST MAIN STREET
BURNSVILLE NORTH CAROLINA 28714
APPOINTMENT OF PROXY SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF FIRST WESTERN BANK
FOR THE SPECIAL MEETING TO BE HELD DECEMBER 22, 1998
The undersigned shareholder of First Western Bank, a North Carolina
banking corporation ("First Western"), hereby constitutes and appoints Charles
Ownbey and Martin Shuford, or either of them (the "Proxies"), proxies with full
power of substitution to act and vote for and on behalf of the undersigned at
the Special Meeting of Shareholders of First Western to be held on December
22, 1998, at 2:00 p.m. local time, at the Pinebridge Inn, 101 Pinebridge
Avenue, Spruce Pine, Mitchell County, North Carolina, or at any adjournment
thereof, as fully as the undersigned would be entitled to act and vote if
personally present, upon the proposals set forth herein and described in the
Joint Proxy Statement, and in their discretion with respect to such other
matters that may properly be brought before the meeting or any adjournment
thereof. If only one such Proxy be present and acting as such at the meeting,
or any adjournment thereof, then that one shall have and may exercise all the
powers hereby conferred.
This appointment of proxy when properly executed and dated will be
voted in the manner directed herein. You are encouraged to specify your choices
by marking the appropriate boxes, but you need not mark any boxes if you wish
to vote in accordance with the Board of Directors' recommendations. The Board
of Directors recommends a vote "FOR" the approval of the Agreement and Plan of
Merger and the Merger. The signer hereby revokes all appointments of proxy
heretofore given by the signer to vote at said meeting or any adjournments
thereof.
APPROVAL OF THE AGREEMENT AND PLAN OF MERGER DATED AUGUST 13, 1998, AND
THE MERGER OF MITCHELL BANCORP, INC., INTO FIRST WESTERN BANK, WITH FIRST
WESTERN BANK AS THE SURVIVING ENTITY.
FOR AGAINST ABSTAIN
---- ---- ----
THE SHARES REPRESENTED BY THIS APPOINTMENT OF PROXY WILL BE VOTED AS
DIRECTED ABOVE. IN THE ABSENCE OF ANY DIRECTION, THE PROXIES WILL VOTE THE
SHARES REPRESENTED BY THIS APPOINTMENT FOR APPROVAL OF THE AGREEMENT AND PLAN
OF MERGER AND APPROVAL OF THE MERGER, AND, SHOULD OTHER MATTERS PROPERLY COME
BEFORE THE MEETING, IN ACCORDANCE WITH THE BEST JUDGEMENT OF THE PROXIES. THIS
APPOINTMENT OF PROXY MAY BE REVOKED BY THE SHAREHOLDER AT ANY TIME BEFORE IT IS
EXERCISED BY FILING A LATER DATED APPOINTMENT WITH FIRST WESTERN'S SECRETARY OR
BY ATTENDING THE MEETING AND NOTIFYING THE SECRETARY THAT THE SHAREHOLDER
INTENDS TO VOTE IN PERSON.
[Box with
Shareholder address
information to appear
here.]
<PAGE> 261
------------------------------
Signature of Shareholder
------------------------------
Signature of Shareholder
Date: _____________________, 1998
Please sign appointment of proxy as name
appears. ONLY ONE SIGNATURE IS REQUIRED IN
THE CASE OF A JOINT ACCOUNT, BUT JOINT
OWNERS SHOULD EACH SIGN PERSONALLY IF
POSSIBLE. Trustees and others signing in a
representative capacity should indicate the
capacity in which they sign.
IMPORTANT: TO ENSURE THAT A QUORUM IS PRESENT AT THE MEETING, PLEASE MARK,
SIGN, DATE AND PROMPTLY RETURN THIS APPOINTMENT OF PROXY IN THE ENCLOSED
ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES. FAILURE TO RETURN THIS APPOINTMENT OF PROXY OR VOTE IN
PERSON WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" PROPOSAL 1.
<PAGE> 262
MITCHELL BANCORP, INC.
211 Oak Avenue
Spruce Pine, North Carolina 28777
APPOINTMENT OF PROXY SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF MITCHELL BANCORP, INC.
FOR THE ANNUAL MEETING TO BE HELD DECEMBER 22, 1998
The undersigned shareholder of Mitchell Bancorp, Inc., a North Carolina
corporation ("Mitchell"), hereby constitutes and appoints Edward Ballew, Jr.,
and Emma Lee M. Wilson, or either of them (the "Proxies"), proxies with full
power of substitution to act and vote for and on behalf of the undersigned at
the Annual Meeting of Shareholders of Mitchell to be held on December 22,
1998, at 2:00 p.m. local time, at 211 Oak Avenue, Spruce Pine, Mitchell County,
North Carolina, or at any adjournment thereof, as fully as the undersigned
would be entitled to act and vote if personally present, upon the proposals set
forth herein and described in the Joint Proxy Statement, and in their
discretion with respect to such other matters that may properly be brought
before the meeting or any adjournment thereof. If only one such Proxy be
present and acting as such at the meeting, or any adjournment thereof, then
that one shall have and may exercise all the powers hereby conferred.
This appointment of proxy when properly executed and dated will be voted
in the manner directed herein. You are encouraged to specify your choices by
marking the appropriate boxes, but you need not mark any boxes if you wish to
vote in accordance with the Board of Directors' recommendations. The Board of
Directors recommends a vote "FOR" the approval of the Agreement and Plan of
Merger and the Merger, and "FOR" election of the director candidates listed
below. The signer hereby revokes all appointments of proxy heretofore given by
the signer to vote at said meeting or any adjournments thereof.
1. APPROVAL OF THE AGREEMENT AND PLAN OF MERGER DATED AUGUST 13, 1998,
PROVIDING FOR THE MERGER OF MITCHELL SAVINGS BANK, INC., SSB, INTO
MITCHELL BANCORP, INC., AND THE MERGER OF MITCHELL BANCORP, INC., INTO
FIRST WESTERN BANK. WITH FIRST WESTERN BANK AS THE SURVIVING ENTITY.
FOR AGAINST ABSTAIN
---- ---- ----
2. ELECTION OF DIRECTORS: [INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY
NOMINEE(S), STRIKE A LINE THROUGH THE NOMINEE'S NAME(S) IN THE LIST
BELOW.]
FOR all six nominees listed below (except as marked to the contrary
below).
----
WITHHOLD authority to vote for all six nominees listed below.
----
Calvin F. Hall Edward Ballew, Jr. Emma Lee M. Wilson
Baxter D. Johnson Lloyd Hise, Jr. Michael B. Thomas
THE SHARES REPRESENTED BY THIS APPOINTMENT OF PROXY, IF PROPERLY SIGNED
AND DATED, WILL BE VOTED AS DIRECTED ABOVE. IN THE ABSENCE OF ANY DIRECTION,
THE PROXIES WILL VOTE THE SHARES REPRESENTED BY THIS APPOINTMENT FOR APPROVAL
OF THE AGREEMENT AND PLAN OF MERGER AND APPROVAL OF THE MERGER, FOR EACH OF THE
DIRECTOR NOMINEES, AND, SHOULD OTHER MATTERS PROPERLY COME BEFORE THE MEETING,
IN ACCORDANCE WITH THE BEST JUDGEMENT OF THE PROXIES. THIS APPOINTMENT OF PROXY
MAY BE REVOKED BY THE SHAREHOLDER AT ANY TIME BEFORE IT IS EXERCISED BY FILING
A LATER DATED APPOINTMENT WITH MITCHELL'S SECRETARY OR
<PAGE> 263
BY ATTENDING THE MEETING AND NOTIFYING THE SECRETARY THAT THE SHAREHOLDER
INTENDS TO VOTE IN PERSON.
[Box with
Shareholder address
information to appear
here.]
------------------------------
Signature of Shareholder
------------------------------
Signature of Shareholder
Date: _____________________, 1998
Please sign appointment of proxy as name appears. ONLY ONE
SIGNATURE IS REQUIRED IN THE CASE OF A JOINT ACCOUNT, BUT
JOINT OWNERS SHOULD EACH SIGN PERSONALLY, IF POSSIBLE.
Trustees and others signing in a representative capacity
should indicate the capacity in which they sign.
IMPORTANT: TO ENSURE THAT A QUORUM IS PRESENT AT THE MEETING, PLEASE MARK,
SIGN, DATE AND PROMPTLY RETURN THIS APPOINTMENT OF PROXY IN THE ENCLOSED
ENVELOPE WHETHER OR NOT YOU PLAN TO ATTEND. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES. FAILURE TO RETURN THIS APPOINTMENT OF PROXY OR VOTE IN
PERSON WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" PROPOSAL 1.
