<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
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Commission file number 0-21083
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SOUTH STREET FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1973261
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
155 West South Street
Albemarle, North Carolina 28001
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (704) 982-9184
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(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 No X
--- ---
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
$55,992,881 common stock, no par value, based on the closing price of such
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common stock on December 16, 1996.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 4,496,500 shares of common
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stock, no par value, outstanding at December 16, 1996.
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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of South Street Financial Corp. for the year ended
September 30, 1996, are incorporated by reference into Part I, Part II and Part
IV.
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders of
South Street Financial Corp. to be held on February 17, 1996, are incorporated
by reference into Part III.
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PART I
ITEM 1. BUSINESS
General
Prior to October 2, 1996, Home Savings Bank of Albemarle, Inc., S.S.B.
(the "Bank") operated as a mutual North Carolina-chartered savings bank. On
October 2, 1996, the Bank converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank (the
"Conversion"). In connection with the Conversion, all of the issued and
outstanding capital stock of the Bank was acquired by South Street Financial
Corp., a North Carolina corporation (the "Company") which was organized to
become the holding company for the Bank. At that time, the Company had an
initial public offering of its common stock, no par value (the "Common Stock").
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's and the Bank's principal
office is located at 155 West South Street, Albemarle, North Carolina. The
Company's activities consist of investing the proceeds of its initial public
offering which were retained at the holding company level and owning the Bank.
The Company's principal sources of income are earnings on its investments. In
addition, the Company will receive any dividends which are declared and paid by
the Bank on its capital stock. The Company did not commence operations until
October 2, 1996 and conducted no business during the fiscal year ended September
30, 1996. Consequently, the following general business discussion pertains
primarily to Home Savings.
The Bank was originally chartered in 1911. It has been a member of the
Federal Home Loan Bank ("FHLB") system since 1954 and its deposits are federally
insured up to allowable limits.
The Bank is engaged primarily in the business of attracting retail
deposits from the general public and using such deposits to make mortgage loans
secured by real estate. The Bank makes mortgage loans secured by residential
real property, including one-to-four family residential real estate loans, home
equity line of credit loans and other subordinate lien loans, loans secured by
improved nonresidential real property, loans secured by undeveloped real
property and construction loans. The Bank also makes a limited number of loans
which are not secured by real property, such as loans secured by savings
accounts. The Bank's primary source of revenue is interest income from its
lending activities. The Bank's other major sources of revenue are interest and
dividend income from investments and mortgage-backed securities, interest income
from its interest-bearing deposit balances in other depository institutions and
fee income from its lending and deposit activities. The major expenses of the
Bank are interest on deposits and noninterest expenses such as compensation and
fringe benefits, federal deposit insurance premiums, data processing expenses
and branch occupancy and related expenses.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") and the
North Carolina Administrator, Savings Institutions Division, North Carolina
Department of Commerce (the "Administrator"). Deposit flows and cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for financing
of real estate and other types of loans, which in turn are affected by the
interest rates at which such financing may be offered and other factors
affecting local demand and availability of funds.
Market Area
The Bank's primary market area is Stanly County, North Carolina. The
Bank's principal office is in Albemarle, North Carolina and it has one full-
service branch in Locust, North Carolina. Stanly County is located in south
central North Carolina; Albemarle is approximately 30 miles from Charlotte,
North Carolina.
3
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The Bank's loans and deposits are primarily generated from the areas
where its offices are located. It does not solicit deposits and loans outside
its primary market area and does not use brokers to obtain deposits.
Approximately 87% of the Bank's deposits are at the Albemarle office. Stanly
County is largely rural with a population of 56,000. Its economy is diversified
among manufacturing, trade and services. Major area employers include Wiscassett
Mills Company, Collins and Aikman Corporation, Michelin Aircraft Tire Company
and Alcoa Aluminum Company. Within the past five years several large
manufacturing companies have closed operations in Stanly County, resulting in
the loss of approximately 2,000 jobs. Over the past five years the local economy
has weakened as a result of layoffs and plant closings by local employers. The
North Carolina Department of Commerce has declared Stanly a "distressed county"
entitling it to use state grants and tax credits to lure industry to the area.
Population and household growth, and median and per capita income levels for
Stanly County are generally lower than comparable levels for North Carolina and
the nation, while unemployment levels are generally higher. Management regards
the Stanly County market area as a low growth area in which there is significant
competition among financial services providers for market share. Management
believes that opportunities for future earnings growth in the Bank's primary
market area are limited in light of these factors.
Lending Activities
General. The Bank's primary source of revenue is interest and fee
income from its lending activities, consisting primarily of mortgage loans for
the purchase or refinancing of one-to-four family residential real property
located in its primary market area. The Bank also makes loans secured by
improved nonresidential real estate, construction loans, loans secured by
undeveloped real estate and savings account loans. Approximately 99% of the
Bank's net loan portfolio is secured by real estate. As of September 30, 1996,
all of the loans in the Bank's real estate loan portfolio were secured by
properties in North Carolina. On September 30, 1996, the Bank's largest single
outstanding loan had a balance of approximately $1.1 million. This loan was
performing in accordance with its original terms. In addition to interest earned
on loans, the Bank receives fees in connection with loan originations, loan
servicing, loan modifications, late payments, loan assumptions and other
miscellaneous services.
Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $109.9 million at September 30, 1996 representing 50.4% of the
Bank's total assets at such date. At September 30, 1996, 84.9% of the Bank's net
loan portfolio was composed of one-to-four family residential mortgage loans.
Home equity loans, all of which have adjustable rates, represented 3.4% of the
Bank's net loan portfolio, and nonresidential real estate loans represented
3.67% of the Bank's net loan portfolio on such date.
The Bank no longer originates adjustable rate mortgage loans, excluding
home equity loans, but continues to hold a small number of adjustable rate loans
in its portfolio. As of September 30, 1996, 4.0% of the loans in the Bank's loan
portfolio, excluding home equity loans, had adjustable interest rates.
The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
4
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<TABLE>
<CAPTION>
At September 30,
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1996 1995 1994 1993
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% of % of % of % of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $ 93,275 84.90% $ 94,036 86.60% $ 91,674 85.80% $100,437 85.80%
1-4 family.........
Residential multi- 695 0.63% 840 0.77% 870 0.81% 731 0.62%
family.............
Nonresidential real 4,038 3.67% 3,013 2.77% 3,157 2.95% 3,655 3.12%
estate.............
Residential 4,720 4.30% 5,368 4.94% 6,015 5.63% 6,644 5.68%
construction.......
Land............... 6,304 5.74% 4,890 4.50% 4,998 4.68% 4,960 4.24%
Line of credit..... 3,786 3.45% 3,875 3.58% 4,056 3.81% 3,715 3.17%
----- ----- ----- ----- ----- ----- ----- -----
Total real estate
loans: 112,818 102.69% 112,022 103.16% 110,770 103.68% 120,142 102.63%
------- ------- ------- ------- ------- ------- ------- -------
Consumer loans:
Share.............. 196 0.18% 110 0.10% 105 0.10% 290 0.25%
Credit reserve..... 470 0.43% 221 0.20% 176 0.16% 102 0.09%
--- ----- --- ----- --- ----- --- -----
Total consumer 666 0.61% 331 0.30% 281 0.26% 392 0.34%
loans.............. --- ----- --- ----- --- ----- --- -----
Less:
Unearned fees and
discounts.......... 582 0.53% 519 0.48% 465 0.44% 440 0.38%
Loans in process... 2,616 2.38% 3,100 2.85% 3,602 3.37% 2,895 2.47%
Allowance for
loan losses ....... 428 0.39% 137 0.13% 140 0.13% 144 0.12%
--- ----- --- ----- --- ----- --- -----
Total reductions... 3,626 3.30% 3,756 3.46% 4,207 3.94% 3,479 2.97%
----- ----- ----- ----- ----- ----- ----- -----
Total loans
receivable, net.... $109,858 100.00% $108,597 100.00% $106,844 100.00% $117,055 100.00%
======= ======= ======== ======= ======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
1992
--------------------
% of
Amount Total
------ -----
<S> <C> <C>
Real estate loans:
Residential $96,453 85.28%
1-4 family.........
Residential multi- 763 0.67%
family.............
Nonresidential real 4,104 3.63%
estate.............
Residential
construction....... 5,919 5.23%
Land............... 5,689 5.03%
Line of credit..... 3,358 2.97%
----- -----
Total real estate
loans: 116,286 102.81%
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Consumer loans:
Share.............. 274 0.24%
Credit reserve..... 102 0.08%
--- -----
Total consumer
loans.............. 376 0.32%
--- -----
Less:
Unearned fees and
discounts.......... 306 0.27%
Loans in process... 3,096 2.74%
Allowance for
loan losses ....... 144 0.13%
--- -----
Total reductions... 3,546 3.13%
----- -----
Total loans
receivable, net.... $113,116 100.00%
======== =======
</TABLE>
The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at September 30, 1996. Loans which have adjustable rates
are shown as being due in the period during which rates are next subject to
change while fixed rate and other loans are shown as due over the contractual
maturity. Demand loans, loans having no stated maturity and overdrafts are
reported as due in one year or less. The table does not include prepayments,
however, it does include scheduled principal repayments. Prepayments and
scheduled repayments in the loan portfolio totaled $20.2 million, $16.2 million
and $30.8 million in fiscal years ended September 30, 1996, 1995 and 1994,
respectively. Amounts in the table are net of loans in process and are net of
unamortized loan fees.
5
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<TABLE>
<CAPTION>
At September 30, 1996
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Over 1 Over 3 Over 5
One Year Year to Years to Years to Over 10
Or Less 3 Years 5 Years 10 Years Years Total
-------- ------- ------- -------- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Adjustable rate 1-4 family
residential $7,108 $ 516 $ -- $ -- $ -- $ 7,624
Fixed rate 1-4 family
residential 39 454 1,151 13,975 72,751 88,370
Other adjustable rate real
estate loans 569 7 -- -- -- 576
Other fixed rate real estate
loans 2 47 205 2,352 10,444 13,050
Other loans 260 406 -- -- -- 666
Less:
Allowance for loan losses (428) -- -- -- -- (428)
----- ----- ----- ------ ------ -------
$7,550 $1,430 $1,356 $16,327 $83,195 $109,858
====== ====== ====== ======= ======= ========
</TABLE>
The following table sets forth the dollar amount at September 30, 1996
of all loans maturing or repricing on or after September 30, 1997 which have
fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
----- ----------
(In Thousands)
<S> <C> <C>
Mortgage loans $101,379 $523
Other loans 406 --
-------- ----
$101,785 $523
======== ====
</TABLE>
Origination of Loans. Historically, the Bank has not originated its
one-to-four family residential mortgage or other loans with the intention that
they will be sold in the secondary market. Accordingly, the Bank originates
fixed rate one-to-four family residential real estate loans which satisfy the
Bank's underwriting requirements and are tailored to its local community, but do
not necessarily satisfy various technical FHLMC and FNMA underwriting
requirements and purchase requirements not related to documentation.
Although the Bank believes that many of its nonconforming loans are
saleable in the secondary market, some of such nonconforming loans could be sold
only after the Bank incurred certain costs and/or discounted the purchase price.
As a result, the Bank's loan portfolio is less liquid than would be the case if
it was composed entirely of loans originated in conformity with secondary market
requirements. In addition, certain types of nonconforming loans are generally
thought to have greater risks of default and nonperformance. However, such loans
generally produce a higher yield than would be produced by conforming loans, and
the Bank has historically found that its origination of such loans
6
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has not resulted in a high level of nonperforming assets. These nonconforming
loans satisfy a need in the Bank's local community, and the Bank intends to
continue to originate nonconforming loans.
Substantially all of the one-to-four family residential mortgage loans
originated by the Bank have a fixed rate of interest because there is very
little demand for adjustable rate loans in the Bank's market area. As a result,
the Bank offers 30-year fixed rate residential real estate loans but prices its
loans to encourage shorter terms of 10 to 15 years.
The Bank has instituted a new marketing program in which all of the
Bank's loan officers visit local realtors to promote the Bank's residential
mortgage products.
The table below sets forth the Bank's loan origination, purchase
activity and loan portfolio repayment experience during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loans receivable, net, beginning of
period $108,597 $106,844 $117,055
------- ------- -------
Loan originations:
Residential 1-4 family 13,773 10,190 12,777
Residential multifamily -- 58 --
Nonresidential real estate -- 333 308
Residential construction 5,704 6,282 6,273
Line of credit 747 626 931
Consumer 1,141 454 329
------- --- ---
Total loan originations 21,365 17,943 20,618
Loans purchased -- --
Principal repayments (20,234) (16,192) (30,796)
Other changes, net (1) 130 2 (33)
-------- -------- --------
Increase in loans receivable 1,261 1,753 (10,211)
-------- -------- --------
Loans receivable, net, end of period $109,858 $108,597 $106,844
======== ======== ========
</TABLE>
Residential Real Estate Lending. The Bank's primary lending activity,
which it intends to continue to emphasize, is the origination of fixed-rate
mortgage loans to enable borrowers to purchase or refinance one-to-four family
residential real property. Consistent with the Bank's emphasis on being a
community-oriented financial institution, it is and has been the Bank's strategy
to focus its lending efforts in Stanly County, North Carolina and in contiguous
counties. On September 30, 1996, approximately 84.9% of the Bank's total net
real estate loan portfolio consisted of one-to-four family residential real
estate loans. These include both loans secured by detached single-family
7
<PAGE>
residences and condominiums and loans secured by housing containing not more
than four separate dwelling units. Of such loans, excluding home equity loans,
4.7% had adjustable interest rates.
The Bank also originates fixed-rate mortgage loans secured by owner
occupied property having terms generally ranging from 10 to 30 years in amounts
of up to 90% of the lesser of the value or purchase price. Private mortgage
insurance is always required if the loan amount exceeds 80% of the value of the
property. In addition, the Bank makes fixed-rate loans secured by non-owner
occupied residential real estate generally having terms of 15 to 20 years in
amounts of up to 80% of the value of the property. Substantially all of the
fixed-rate loans in the Bank's mortgage loan portfolio have due on sale
provisions allowing the Bank to declare the unpaid balance due and payable in
full upon the sale or transfer of an interest in the property securing the loan.
While one-to-four family residential loans are normally originated for
10 to 30 year terms, such loans customarily 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. 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 thrift and mortgage
banking industries have generally used 12-year and 7-year average loan lives in
calculations calling for prepayment assumptions for 30-year residential loans
and 15-year residential loans, respectively. Management believes that the Bank's
recent loan prepayment experience has been shorter than these assumed average
loan lives due to recent periods of low interest rates and resulting high levels
of refinancing.
The Bank requires title insurance for its one-to-four family
residential loans. The Bank also requires that fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least equal to the loan amount or replacement cost of the improvements
on the property securing the loans, whichever is greater.
Residential Multifamily. At September 30, 1996, the Bank had
approximately $695,000 in outstanding loans secured by multifamily residential
real estate, comprising approximately .63% of its loan portfolio as of that
date. Substantially all of the Bank's loans secured by multifamily residential
real estate have fixed rates. Such loans are typically made to a maximum of 80%
of the lesser of the purchase price or appraised value of the property for a
maximum term of 20 years. All such loans are personally guaranteed by
individuals.
Nonresidential Real Estate Lending. On September 30, 1996, the Bank had
$4.0 million in outstanding loans secured by nonresidential real estate,
including undeveloped land, comprising approximately 3.7% of its net loan
portfolio as of that date. Most of these loans are secured by office, retail,
other commercial real estate, as well as church properties. Loans secured by
undeveloped land generally do not exceed 65% of the appraised value of the real
estate securing the loans; loans secured by commercial real estate generally do
not exceed 80% of the appraised value of the real estate securing the loans.
Loans secured by commercial real estate and undeveloped land generally are
larger than one-to-four family residential loans and involve a greater degree of
risk. Payments on these loans depend to a large degree on results of operations
and management of the properties and may be affected to a greater extent by
adverse conditions in the real estate market or the economy in general. As of
September 30, 1996, the largest nonresidential real estate loan in the Bank's
loan portfolio totaled $1.1 million. This loan was performing in accordance with
the original loan contract.
Home Equity Lines of Credit. At September 30, 1996, the Bank had
approximately $3.8 million in home equity line of credit loans, representing
approximately 3.4% of its net loan portfolio. These loans are often originated
at the time of the closing of a one-to-four family residential real estate loan
secured by the same property. The Bank's home equity lines of credit have
adjustable interest rates tied to prime interest rates plus a margin. The home
equity lines of credit require monthly payments until the loan is paid in full.
Home equity lines of credit are generally secured by subordinate liens against
residential real property. The Bank requires that fire and extended coverage
casualty insurance (and, if appropriate, flood insurance) be maintained in an
amount at least sufficient to cover its loan. Home equity loans are generally
limited so that the amount of such loans, along with any senior indebtedness,
does not exceed 80% of the value of the real estate security. Because home
equity loans involve revolving lines of credit which can be
8
<PAGE>
drawn over a period of time, the Bank faces risks associated with changes in the
borrower's financial condition. Because home equity loans have adjustable
interest rates with no rate caps (other than usury limitations), increased
delinquencies could occur if interest rate increases occur and borrowers are
unable to satisfy higher payment requirements. The Bank intends to continue to
emphasize its home equity program. The presence of home equity loans in the
Bank's portfolio allows the institution to manage the interest sensitivity of
its assets and liabilities because home equity lines of credit have adjustable
rates which are subject to change monthly and without any significant rate caps.
Construction Lending. The Bank makes construction loans primarily for
the construction of single-family dwellings. The aggregate outstanding balance
of such loans on September 30, 1996 was approximately $4.7 million, representing
approximately 4.3% of the Bank's net loan portfolio. Most of these loans were
made to persons who are constructing properties for the purpose of occupying
them. Loans made to individual property owners are "construction-permanent"
loans which generally provide for the payment of interest only during a
construction period, after which the loans convert to a permanent loan at fixed
rates having terms similar to other one-to-four family residential loans.
Construction loans to persons who intend to occupy the finished premises
generally have a maximum loan-to-value ratio of 90%.
Construction loans are generally considered to involve a higher degree
of risk than long-term financing secured by real estate which is already
occupied. A lender's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at the
completion of construction and the estimated cost (including interest) of
construction. If the estimate of construction costs proves to be inaccurate, the
lender may be required to advance funds beyond the amount originally committed
in order to permit completion of construction. If the estimate of anticipated
value proves to be inaccurate, the lender may have security which has value
insufficient to assure full repayment.
Consumer Loans. In addition to the loans described above, the Bank
provides overdraft lines of credit in amounts of up to $2,000. Payments are
required in amounts of 5% of the outstanding balance or $10, whichever is
greater. In addition, the Bank offers loans secured by savings accounts. As of
September 30, 1996, the Bank had approximately $666,000 of such loans
outstanding, representing approximately .61% of its net loan portfolio.
Loan Solicitation, Processing and Underwriting. Loan originations are
derived from a number of sources such as referrals from real estate brokers,
present depositors and borrowers, builders, attorneys, walk-in customers and in
some instances, other lenders.
During its loan approval process, the Bank assesses the applicant's
ability to make principal and interest payments on the loan and the value of the
property securing the loan. The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations. Under current practice, the loan officer of the Bank analyzes the
loan application and the property involved, and an appraiser inspects and
appraises the property. The Bank requires independent fee appraisals on all
loans originated primarily on the basis of real estate collateral. The Bank also
obtains information concerning the income, financial condition, employment and
the credit history of the applicant.
Mortgage loans of up to $250,000 are approved by the Bank's loan
committee which is composed of its President, Executive Vice President and one
other member of the Board of Directors. All loans in excess of $250,000 must be
approved by the entire Board of Directors.
Normally, upon approval of a residential mortgage loan application, the
Bank gives a commitment to the applicant that it will make the approved loan at
a stipulated rate any time within a 30-day period. The loan is typically funded
at such rate of interest and on other terms which are based on market conditions
existing as of the date of the commitment. As of September 30, 1996, the Bank
had $4.6 million in such unfunded mortgage loan commitments. In addition, on
such date the Bank had $2.6 million in unfunded commitments for unused lines of
credit and letters of credit.
9
<PAGE>
Interest Rates, Terms, Points and Fees. Interest rates and fees charged
on the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds. These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.
In addition to earning interest on loans, the Bank receives fees in
connection with originating loans. Fees for loan servicing, loan modifications,
late payments, loan assumptions and other miscellaneous services in connection
with loans are also charged by the Bank.
Nonperforming Assets and Asset Classification. When a borrower fails to
make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent. Delinquencies on all loans are reviewed
monthly by the Board of Directors. The normal procedure followed by the Bank
once a loan is classified as delinquent is to make contact with the borrower at
prescribed intervals in an effort to bring the loan to a current status, and
late charges are assessed as allowed by law. In most cases, delinquencies are
cured promptly. If a delinquency is not cured, the Bank normally, subject to any
required prior notice to the borrower, commences foreclosure proceedings. If the
loan is not reinstated within the time permitted for reinstatement, or the
property is not redeemed prior to sale, the property may be sold at a
foreclosure sale. In foreclosure sales, the Bank may acquire title to the
property through foreclosure, in which case the property so acquired is offered
for sale and may be financed by a loan involving terms more favorable to the
borrower than those normally offered. Any property acquired as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until such time as it is sold or otherwise disposed of by the Bank to recover
its investment. As of September 30, 1996, the Bank had two pieces of single-
family property classified as real estate owned. These properties were recorded
on the Bank's books at $18,000, the unpaid principal balance of loans secured by
such property. The appraised value of these properties exceeded their unpaid
principal balances. Real estate acquired through, or in lieu of, loan
foreclosure is initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management, and the real estate is carried at the lower of cost or
fair value minus costs to sell. Revenue and expenses from holding the properties
and additions to the valuation allowance are included in operations.
The Bank continues to accrue interest on loans delinquent 90 days or
more. However, these loans are effectively placed on nonaccrual status as all
such interest income is reversed by the establishment of a reserve for
uncollected interest. Loans are returned to earning status when management
determines, based upon an evaluation of the underlying collateral, together with
the borrower's payment record and financial condition, that the borrower has the
capability and intent to meet the contractual obligations of the loan agreement.
Interest on loans placed on nonperforming status is charged off when management
determines it is not collectible. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent cash payments are received until the
loan is returned to performing status. For the fiscal year ended September 30,
1996, interest income that would have been recorded net of interest income
actually recognized on nonperforming loans under the original terms of such
loans was $40,000.
The following table sets forth information with respect to
nonperforming assets identified by the Bank, including nonperforming loans and
real estate owned at the dates indicated.
10
<PAGE>
<TABLE>
<CAPTION>
At September 30,
----------------
1996 1995 1994 1993
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total nonaccrual loans
Mortgage loans delinquent 90 days or more $ 631 $ 923 $ 910 $762
Consumer loans delinquent 90 days or more 23 58 36 82
Real estate owned 18 135 176 119
--- --- --- ---
Total non-performing assets $ 672 $ 1,116 $ 1,122 $963
=== ===== ===== ===
Non-performing loans to total gross loans 0.58% 0.87% 0.85% 0.70%
Non-performing assets to total assets 0.31% 0.70% 0.76% 0.61%
Total assets $217,954 $159,863 $147,837 $157,909
Total gross loans $113,484 $112,353 $111,051 $120,534
</TABLE>
Applicable regulations require the Bank to "classify" its own
assets on a regular basis. In addition, in connection with examinations
of savings institutions, regulatory examiners have authority to identify
problem assets and, if appropriate, classify them. Problem assets are
classified as "substandard," "doubtful" or "loss," depending on the
presence of certain characteristics as discussed below.
An asset is considered "substandard" if not adequately protected
by the current net worth and paying capacity of the obligor or the
collateral pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis
of currently existing facts, conditions, and values, "highly questionable
and improbable". Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a loss reserve is not warranted.
As of September 30, 1996, the Bank had approximately $825,000
million of loans internally classified as "substandard", and no loans
classified as "doubtful" or "loss". The Bank also identifies assets which
possess credit deficiencies or potential weaknesses deserving close
attention by management. These assets may be considered "special mention"
assets and do not yet warrant adverse classification. At September 30,
1996, the Bank had approximately $1.2 million of loans in the "special
mention" category.
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
balance of the asset. The Banks 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.
11
<PAGE>
The following table sets forth at September 30, 1996, the Bank's
aggregate carrying value of the assets classified as substandard, doubtful, loss
or "special mention":
<TABLE>
<CAPTION>
Special Mention List Substandard Doubtful Loss
-------------------- ----------- -------- ----
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family 32 $1,200 26 $769 -- -- -- --
Residential real estate -- -- -- -- -- -- -- --
Nonresidential real estate -- -- -- -- -- -- -- --
Residential construction -- -- -- -- -- -- -- --
Land -- -- -- -- -- -- -- --
Line of credit -- -- 4 55 -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total real estate loans 32 1,200 30 824 -- -- -- --
---- ----- ---- ---- ---- ---- ---- ----
Consumer loans:
Share -- -- -- -- -- -- -- --
Credit reserve -- -- 2 1 -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total consumer loans -- -- 2 1 -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total 32 $1,200 32 $825 -- -- -- --
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Allowance for Loan Losses. In originating loans, the Bank
recognizes that credit 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 and, in
the case of a secured loan, the quality of the security for the loan as
well as general economic conditions. It is management's policy to
maintain an adequate allowance for loan losses based on, among other
things, the Bank's historical loan loss experience, evaluation of
economic conditions and regular reviews of delinquencies and loan
portfolio quality. Specific allowances are provided for individual loans
when ultimate collection is considered in doubt by management after
reviewing the current status of loans which are contractually past due
and considering the fair value of the security for the loans.
Management continues to actively monitor the Bank's asset
quality, to charge off loans against the allowance for loan losses when
appropriate and to provide specific loss reserves when necessary.
Although management believes it uses the best information available to
make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in
making the initial determinations. During the fiscal year ended
September 30, 1996, the Bank substantially increased its provision for
loan losses because of the recent economic downturn in Stanly County as
a result of manufacturing plant closings and in order to more closely
approximate industry standards.
12
<PAGE>
The following table describes the activity related to the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $137 $140 $144 $144 $177
Provision for loan losses 300 -- -- -- --
Charge-offs:
Residential 1-4 family (8) (3) (3) -- (34)
Line of credit (10) -- (1) (1) --
Recoveries:
Residential 1-4 family 6 -- -- 1
Line of credit 3 -- -- 1 --
----
Balance, end of period $428 $137 $140 $144 $144
=== === === === ===
Net charge-offs as a % of average loans outstanding 0.008% 0.003% 0.004% -- 0.029%
Allowance at period end as a % of nonperforming loans 65.44% 13.97% 14.80% 17.06% --
Allowance at period end as a % of nonperforming assets 63.69% 12.28% 12.48% 14.95% 177.78%
Allowance at period end as a % of total gross loans 0.38% 0.12% 0.13% 0.12% 0.12%
</TABLE>
The following table sets forth the composition of the allowance for
loan losses by type of loan at the dates indicated. The allowance is allocated
to specific categories of loans for statistical purposes only, and may be
applied to loan losses incurred in any loan category.
13
<PAGE>
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------
1996 1995 1994
------------- ------------ ------------
Amount of Amount of Amount of
Amount of Loans to Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans Allowance Gross Loans
--------- ----------- --------- ----------- --------- -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 243 82.19% $ 125 83.70% $ 77 82.60%
Residential multi-family 1 0.61% -- 0.75% -- 0.78%
Nonresidential real estate 4 3.56% 3 2.68% 4 2.83%
Residential construction -- 4.16% -- 4.78% -- 5.41%
Land 6 5.56% -- 4.35% -- 4.50%
Line of credit 10 3.34% 8 3.45% -- 3.64%
-------- -------- -------- -------- -------- --------
Total real estate loans 264 99.42% 136 99.71% 81 99.76%
-------- -------- -------- -------- -------- --------
Consumer loans:
Share -- 0.17% -- 0.10% -- 0.09%
Credit reserve -- 0.41% 1 0.19% -- 0.15%
-------- -------- -------- -------- -------- --------
Total consumer loans -- 0.58% 1 0.29% -- 0.24%
-------- -------- -------- -------- -------- --------
Unallocated 164 -- -- -- 59 --
-------- -------- -------- -------- -------- --------
Total allowance for loan losses $ 428 100.00% $ 137 100.00% $ 140 100.00%
======== ======== ======== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------
1993 1992
------------ ------------
Amount of Amount of
Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family 129 83.33% $ 109 82.69%
Residential multi-family -- 0.61% -- 0.65%
Nonresidential real estate 6 3.03% 14 3.52%
Residential construction -- 5.51% -- 5.07%
Land -- 4.12% -- 4.88%
Line of credit -- 3.08% -- 2.88%
----- ----- ----- -----
Total real estate loans 135 99.68% 123 99.69%
----- ----- ----- ------
Consumer loans:
Share -- 0.08% -- 0.23%
Credit reserve -- 0.24% -- 0.08%
----- ----- ----- -----
Total consumer loans -- 0.32% -- 0.31%
----- ----- ----- -----
Unallocated 9 -- 21 --
----- ----- ----- -----
Total allowance for loan losses $ 144 100.00% $ 144 100.00%
===== ======= ======= =======
</TABLE>
14
<PAGE>
Investment Securities
Interest and dividend income from investment securities generally
provides the second largest source of income to the Bank after interest on
loans. In addition, the Bank receives interest income from deposits in other
financial institutions. On September 30, 1996, the carrying value of the Bank's
investment securities portfolio totaled approximately $101.0 million and
consisted of interest-bearing deposits, U.S. government and agency securities,
mortgage-backed securities, FHLMC stock, stock in the FHLB of Atlanta and in
Central Service Corporation. The mortgage-backed securities consist of mortgage-
backed securities issued by the GNMA, FNMA and FHLMC.
The investment securities portfolio includes interest-bearing deposits
of $59.3 million at September 30, 1996. Of this amount, $46.6 million relates to
deposits collected from potential subscribers to the Company's stock offering in
connection with the Conversion. After the year-end, $11.6 million was refunded
to subscribers who were unable to purchase stock because the demand for stock
exceeded the offering amount.
Investments in mortgage-backed securities involve a risk that, because
of changes in the interest rate environment, actual prepayments may be greater
than estimated prepayments over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities. In addition, the market value of such securities may be adversely
affected by changes in interest rates.
The FASB has issued Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities"
which addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. These investments are to be classified in three categories and
accounted for as follows: (1) debt securities that the entity has the positive
intent and ability to hold to maturity are classified as held-to-maturity and
reported at amortized cost; (2) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with net unrealized gains and
losses included in earnings; and (3) debt securities not classified as either
held-to-maturity or trading securities and equity securities not classified as
trading securities are classified as securities available-for-sale and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of equity. The Bank has no trading securities.
The Bank adopted SFAS 115 on September 30, 1994. The adoption affected only the
held-to-maturity and available-for-sale classifications, with the net unrealized
securities gains (loss) on the securities available-for-sale of $(220,000), net
of related deferred taxes of $114,000, reported as a separate component of
equity in its financial statements at September 30, 1994. See Note 3 of "Notes
to Financial Statements".
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest income
from investments. Realized gains and losses, and declines in value judged to be
other than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As of
September 30, 1996, the Bank's investment in stock of the FHLB of Atlanta was
$1.3 million.
North Carolina regulations require the Bank to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. The Bank is also permitted to make certain other securities
investments. The Bank's current investment policy states that the Bank's
investments will be limited to U.S. Treasury obligations, federal agency
securities, corporate notes and time deposits in the FHLB.
15
<PAGE>
Investment decisions are made by authorized officers of the Bank under
policies established by the Board of Directors. Such investments are managed in
an effort to produce the highest yield consistent with maintaining safety of
principal and compliance with regulations governing the savings industry.
The following table sets forth certain information regarding the Bank's
interest-bearing deposits and the amortized cost and market values of the Bank's
investment and mortgage-backed securities portfolios at the dates indicated.
16
<PAGE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 59,348 $ 59,348 $ 8,622 $ 8,622 $ 3,853 $ 3,853
--------- --------- -------- -------- -------- --------
Mortgage-backed securities, held to
maturity 5,496 5,511 4,529 4,642 5,325 5,271
----- ----- ----- ----- ----- -----
Investment Securities:
Held to maturity or for investment
U.S. Treasury and agency securities
Available for sale: -- -- -- --
U.S. Treasury and agency securities 34,827 34,769 30,907 30,959 25,395 25,061
Non-marketable equity securities:
Federal Home Loan Bank stock 1,346 1,346 1,346 1,346 1,346 1,346
Other 15 15 15 15 15 15
------ ------ ------ ------ ------ ------
36,188 36,130 32,268 32,320 26,756 26,422
====== ====== ====== ====== ====== ======
Unrealized gain (loss) on securities
available for sale (58) -- 52 -- (334) --
====== ====== == ====== ===== ======
Total $100,974 $100,989 $45,471 $45,584 $35,600 $35,546
======== ======== ======= ======= ======= =======
</TABLE>
(1) The net unrealized gain (loss) at September 30, 1996 and 1995 relates
to available for sale securities in accordance with SFAS No. 115. The
net unrealized gain (loss) is presented in order to reconcile the
"Amortized Cost" of the Bank's securities portfolio in the "Carrying
Cost," as reflected in the Statements of Financial Condition.
The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of the Bank's
interest-bearing deposits, investment and mortgage-backed securities as of
September 30, 1996.
17
<PAGE>
<TABLE>
<CAPTION>
After One Through After Five Through
One Year or Less Five Years Ten Years After Ten Years
-------------------- ------------------- -------------------- ---------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $59,348 5.80% $ -- -- $ -- -- $ -- --
Mortgage-backed securities -- -- -- -- -- -- 5,496 7.71%
U.S. Treasury securities
Available-for-sale 10,512 5.96% 23,251 5.52% 1,006 7.45% -- --
Federal Home Loan Bank Stock (1) -- -- -- -- -- -- 1,346 7.48%
Other (1) -- -- -- -- -- -- 15 --
------- ----- ------- ----- ------ ----- ------ -----
Total $69,860 5.82% $23,251 5.52% $1,006 7.45% $6,857 7.65%
======= ===== ======= ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Total
---------------------
Weighted
Carrying Average
Value Yield
-------- --------
<S> <C> <C>
Interest-bearing deposits $ 59,348 5.80%
Mortgage-backed securities 5,496 7.71%
U.S. Treasury securities
Available-for-sale 34,769 5.71%
Federal Home Loan Bank Stock (1) 1,346 7.48%
Other (1) 15 --
-------- -----
Total $100,974 5.89%
======== =====
</TABLE>
(1) Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in periods greater than 10 years.
Deposits and Borrowings
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, loan interest income, the stock offering,
investment income, interest-bearing deposit income, interest income from
mortgage-backed securities and otherwise from its operations. Loan repayments
are a relatively stable source of funds while deposit inflows and outflows may
be significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes. The Bank has no
borrowings outstanding at September 30, 1996; however, it does maintain
borrowing capabilities through the FHLB of Atlanta.
Deposits. On September 30, 1996 and September 30, 1995 and 1994, the
Bank's deposits totaled $146.4 million, $137.6 million and $127.3 million,
respectively. The Bank also received deposits totaling $46.6 million from
subscribers for the Company's common stock at September 30, 1996.
The following table sets forth information relating to the Bank's
deposit flows during the periods shown and total deposits at the end of the
periods shown.
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total deposits at $137,647 $127,312 $139,685 $138,753 $133,524
beginning of period
Net increase (decrease) 976 4,355 (17,346) (5,105) (2,813)
before interest credited
Interest credited 7,775 5,980 4,973 6,037 8,042
----- ------- ------- ------- -------
Total deposits at end of
period $146,398 $137,647 $127,312 $139,685 $138,753
======== ======== ======== ======== ========
</TABLE>
<PAGE>
The Bank attracts both short-term and long-term deposits from the
general public by offering a variety of accounts and rates. The Bank offers
statement savings accounts, negotiable order of withdrawal accounts, money
market accounts, and fixed interest rate certificates with varying maturities.
All deposit flows are greatly influenced by economic conditions, the general
level of interest rates, competition, and other factors, including the
restructuring of the thrift industry. The Bank's savings deposits traditionally
have been obtained primarily from its primary market area. The Bank utilizes
traditional marketing methods to attract new customers and savings deposits,
including print media advertising, local radio, local cable television and
direct mailings. The Bank does not advertise for deposits outside of its local
market area or utilize the services of deposit brokers. The vast majority of the
Bank's depositors are residents of North Carolina. In the unlikely event the
Bank is liquidated following the Conversion, depositors will be entitled to full
payment of their deposit accounts prior to any payment being made to
stockholders.
The following table sets forth certain information regarding the Bank's
savings deposits at the dates indicated.
19
<PAGE>
<TABLE>
<CAPTION>
At September 30,
1996 1995 1994
---------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Amount Average Rate Amount Average Rate Amount Average Rate
------ ------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Deposits, stock offering $ 46,601 3.00% $ -- -- $ -- --
========= ======== ======== ============ ======== ============
</TABLE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average % of Average % of Average % of
Amount Rate Deposits Amount Rate Deposits Amount Rate Deposits
------ ------ -------- ------ -------- -------- ------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Accounts:
Passbook savings $ 17,953 3.00% 12.26% $ 15,490 3.00% 11.25% $ 17,711 3.00% 13.91%
NOW accounts 6,369 2.59% 4.35% 6,331 3.02% 4.60% 6,300 2.72% 4.95%
Money market deposit
accounts 6,674 3.00% 4.56% 7,809 3.25% 5.67% 12,164 3.25% 9.55%
Noninterest bearing accounts 819 -- 0.56% 562 -- 0.41% 647 -- 0.51%
----- ----- ----- ------ ----- ----- ----- ----- -----
Total demand deposits 31,815 2.59% 21.73% 30,192 3.01% 21.93% 36,822 2.98% 28.92%
------ ----- ------ ------ ----- ----- ------
Certificates of Deposit 114,307 5.96% 78.08% 107,280 6.10% 77.94% 90,378 3.93% 70.99%
------- ----- ------ ------- ----- ------ ------ ----- ------
Accrued Interest 276 0.19% 175 0.13% 112 0.09%
------- ----- --- ----- ------ -----
Total Deposits............... $146,398 5.21% 100.00% $137,647 5.43% 100.00% $127,312 3.67% 100.00%
======== ===== ======= ======== ===== ======= ======== ====== =======
</TABLE>
As of September 30, 1996, the aggregate amount of time certificates of
deposit in amounts greater than or equal to $100,000 was $13.9 million. (Some of
these deposits were deposits of state and local governments which are subject to
rebidding from time to time and to securitization requirements.) The following
table presents the maturity of these time certificates of deposit at the dates
indicated.
<TABLE>
<CAPTION>
At
September 30, 1996
------------------
(In Thousands)
<S> <C>
3 Months or less $ 1,795
Over 3 months through 6 months 3,304
Over 6 months through 12 months 4,053
Over 12 months 4,754
-------
Total $13,906
=======
</TABLE>
Borrowings. The FHLB system functions in a reserve credit capacity for
savings institutions. As a member, the Bank is required to own capital stock in
the FHLB of Atlanta and is authorized to apply for advances from the FHLB of
Atlanta on the security of that stock and a floating lien on certain of its real
estate secured loans and other assets. Each credit program has its own interest
rate and range of maturities. Depending on the program, limitations on the
amount of advances are based either on a fixed percentage of an institution's
net worth or on the FHLB of
<PAGE>
Atlanta's assessment of the institution's creditworthiness. The Bank has not had
any outstanding borrowings from the FHLB of Atlanta or any other source in the
last five years.
Subsidiaries
The Bank has no subsidiaries.
Competition
The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. The Bank
has also faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. At September 30, 1996, there were at least six other commercial
banks, credit unions and mortgage companies as well as numerous other financial
services providers located in the Bank's market area. At September 30, 1996, the
Bank had a deposit market share of approximately 23% in Stanly County. The
ability of the Bank to attract and retain savings deposits depends on its
ability to generally provide a rate of return, liquidity and risk comparable to
that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from
other savings institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans primarily through the interest rates and loan fees
it charges, the efficiency and quality of services it provides borrowers, and
its more flexible underwriting standards. Competition may increase as a result
of the continuing reduction of restrictions on the interstate operations of
financial institutions.
Employees
As of September 30, 1996, the Bank had 37 full-time employees. All full
time employees of the Bank are covered as a group for basic hospitalization,
including major medical, dental, accidental death and dismemberment insurance.
Optional medical and dental insurance is available for dependents which must be
partially paid by the employee. The Bank also maintains a defined benefit
retirement plan. In addition, in connection with the Conversion, the Bank
adopted an employment stock ownership plan which will provide benefits to the
Bank's employees.
Employees are not represented by any union or collective bargaining
group, and the Bank considers its employee relations to be good.
Federal Income Taxation
Savings institutions such as the Bank are subject to the taxing
provisions of the Code, for corporations, as modified by certain provisions
specifically applicable for financial or thrift institutions. Income is reported
using the accrual method of accounting. The maximum corporate federal income tax
rate is 35%.
For fiscal years beginning prior to December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Code were permitted certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on qualifying real
property loans (generally loans secured by interests in real property improved
or to be improved) under (i) a method based on a percentage of the institution's
taxable income, as adjusted (the "percentage of taxable income method") or (ii)
a method based on actual loss experience (the "experience method"). The reserve
for nonqualifying loans was computed using the experience method.
21
<PAGE>
The percentage of taxable income method was limited to 8% of taxable
income. This method could not raise the reserve to exceed 6% of qualifying real
property loans at the end of the year. Moreover, the additions for qualifying
real property loans, when added to nonqualifying loans, could not exceed 12% of
the amount by which total deposits or withdrawable accounts exceed the sum of
surplus, undivided profits and reserves at the beginning of the year. This
limitation precluded the Bank from taking a bad debt deduction in its 1996 and
1995 tax returns. The experience method was the amount necessary to increase the
balance of the reserve at the close of the year to the greater of (i) the amount
which bore the same ratio to loans outstanding at the close of the year as the
total net bad debts sustained during the current and five preceding years bore
to the sum of the loans outstanding at the close of such six years or (ii) the
balance in the reserve account at the close of the last taxable year beginning
before 1988 (assuming that the loans outstanding have not declined since such
date).
In order to qualify for the percentage of income method, an institution
had to have at least 60% of its assets as "qualifying assets" which generally
included, cash, obligations of the United States government or an agency or
instrumentality thereof or of a state or political subdivision, residential real
estate-related loans, or loans secured by savings accounts and property used in
the conduct of its business. In addition, it had to meet certain other
supervisory tests and operate principally for the purpose of acquiring savings
and investing in loans.
Institutions which became ineligible to use the percentage of income
method had to change to either the reserve method or the specific charge-off
method that applied to banks. Large thrift institutions, those generally
exceeding $500 million in assets, had to convert to the specific charge-off
method. In computing its bad debt reserve for federal income taxes, the Bank
used the reserve method in fiscal years 1996, 1995 and 1994.
Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt reserve") require inclusion in taxable income upon
certain distributions to its stockholders. Distributions in redemption or
liquidation of stock or distributions with respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated as a distribution from the excess bad debt reserve. When such a
distribution takes place and it is treated as from the excess bad debt reserve,
the thrift is required to reduce its reserve by such amount and simultaneously
recognize the amount as an item of taxable income increased by the amount of
income tax imposed on the inclusion. Dividends not in excess of earnings and
profits accumulated since December 31, 1951 will not require inclusion of part
or all of the bad debt reserve in taxable income. The Bank has accumulated
earnings and profits since December 31, 1951 and has an excess in its bad debt
reserve. Distributions in excess of current and accumulated earnings and profits
will increase taxable income. Net retained earnings at September 30, 1996
includes approximately $2.9 million for which no provision for federal income
tax has been made. See Note 12 to "Notes to Financial Statements".
Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period. At September 30, 1996, the
Bank's post-1987 excess reserves amounted to approximately $1.0 million. A
special provision suspends recapture of post-1987 excess reserves for up to two
years if, during those years, the institution satisfies a "residential loan
requirement." This requirement will be met if the principal amount of the
institution's residential loans exceeds a base year amount, which is determined
by reference to the average of the institution's residential loans during the
six taxable years ending before January 1, 1996. However, notwithstanding this
special provision, recapture will begin no later than the first taxable year
beginning after December 31, 1997.
The Bank may also be subject to the corporate alternative minimum tax
("AMT"). This tax is applicable only to the extent it exceeds the regular
corporate income tax. The AMT is imposed at the rate of 20% of the corporation's
alternative minimum taxable income ("AMTI") subject to applicable statutory
exemptions. AMTI is calculated by adding certain tax preference items and making
certain adjustments to the corporation's regular taxable income. Preference
items and adjustments generally applicable to financial institutions include,
but are not limited to, the following: (i) the excess of the bad debt deduction
over the amount that would have been allowable on the basis of actual
experience; (ii) interest on certain tax-exempt bonds issued after August 7,
1986; and (iii) 75% of the excess,
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if any, of a corporation's adjusted earnings and profits over its AMTI (as
otherwise determined with certain adjustments). Net operating loss carryovers,
subject to certain adjustments, may be utilized to offset up to 90% of the AMTI.
Credit for AMT paid may be available in future years to reduce future regular
federal income tax liability. The Bank has not been subject to the AMT in recent
years.
The Bank's federal income tax returns have not been audited in over 10
years.
State Taxation
Under North Carolina law, the corporate income tax is 7.75% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition, for tax years beginning in 1991, 1992, 1993 and 1994,
corporate taxpayers were required to pay a surtax equal to 4%, 3%, 2% and 1%,
respectively, of the state income tax otherwise payable by it. An annual state
franchise tax is imposed at a rate of 0.15% applied to the greatest of the
institutions (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 North Carolina corporate tax rate will drop to 7.50% in 1997, 7.25%
in 1998, 7.00% in 1999 and 6.90% thereafter.
SUPERVISION AND REGULATION
Regulation of the Company
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a bank holding company subject to the Bank Holding Company Act of 1956, as
amended ("BHCA"), the Company will become subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto. The BHCA generally does not place territorial
restrictions on the activities of such nonbanking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-
disapproval) must be obtained prior to any person acquiring control of the
Company. Control is conclusively presumed to exist if, among other things, a
person acquires more than 25% of any class of voting stock of the holding
company or controls in any manner the election of a majority of the directors of
the holding company. Control is presumed to exist if a person acquires more than
10% of any class of voting stock and the stock is registered under Section 12 of
the Exchange Act or the acquiror will be the largest shareholder after the
acquisition.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default or in default. For example,
under the 1991 Banking Law, to avoid receivership of an insured depository
institution subsidiary, a bank holding company is required to guarantee the
compliance of any insured depository institution subsidiary that may become
"undercapitalized" with the terms of any capital restoration plan filed by such
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subsidiary with its appropriate federal banking agency up to the lesser of (i)
an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized or (ii) the amount which is necessary (or
would have been necessary) to bring the institution into compliance with all
acceptable capital standards as of the time the institution fails to comply with
such capital restoration plan. Under a policy of the Federal Reserve with
respect to bank holding company operations, a bank holding company is required
to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The Federal Reserve
under the BHCA also has the authority to require a bank holding company to
terminate any activity or to relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA") require insured depository institutions under
common control to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund (the "SAIF") or the Bank Insurance Fund (the "BIF")
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
As a result of the Company's ownership of the Bank, the Company will be
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of 10% of
its net worth during a rolling 12 month period. Also, no stock repurchases may
be made for at least one year after Conversion unless approved by the
Administrator, who may approve such repurchases only upon a finding that the
safety and soundness of the Bank would not be adversely affected thereby.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve
has adopted capital adequacy guidelines for bank holding companies. For bank
holding companies with less than $150 million in consolidated assets, 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 are required to comply with the Federal
Reserve's risk-based capital guidelines. 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 I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items and other intangible assets. 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 capital (leverage) ratio, under
which a bank holding company must maintain a minimum level of Tier I 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 I capital (leverage) ratio of at least 1% to 2%
above the stated minimum.
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Federal Securities Law. The Company has registered its Common Stock with the SEC
pursuant to Section 12(b) of the Exchange Act and will not deregister the Common
Stock for a period of three years following the completion of the Conversion. As
a result of such registration, the proxy and tender offer rules, insider trading
reporting requirements, annual and periodic reporting and other requirements of
the Exchange Act are applicable to the Company.
The registration under the Securities Act of the Offerings of the
Common Stock does not cover the resale of such shares. Shares of the Common
Stock purchased by persons who are not affiliates of the Company may be resold
without registration. Shares purchased by an affiliate of the Company are
subject to the resale provisions of Rule 144 under the Securities Act. So long
as the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) will be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
Regulation of the Bank
General. Federal and state legislation and regulation have
significantly affected the operations of federally insured savings institutions
and other federally regulated financial institutions in the past several years
and have increased competition among savings institutions, commercial banks and
other providers of financial services. In addition, federal legislation has
imposed new limitations on investment authority, and higher insurance and
examination assessments on savings institutions and has made other changes that
may adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are 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. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-
chartered savings banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated in response to violations of
laws and regulations and unsafe or unsound practices.
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The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) establish certain collateral requirements for loans to
affiliates; (ii) limit the extent to which the Bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such the Bank's capital stock and surplus, and contain an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who,
directly or indirectly, own more than 10% of any class of voting securities of a
savings bank, and certain affiliated entities of any of the foregoing, may not
exceed, together with all other outstanding loans to such person and affiliated
entities, the savings bank's loans-to-one borrower limit as established by
federal law (as discussed below). Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers or stockholders who own more than 10% of a savings bank, and
their respective affiliates, unless such loan is approved in advance by a
majority of the disinterested directors of the board of directors of the savings
bank and the Company. Any "interested" director may not participate in the
voting. The Federal Reserve has prescribed the loan amount (which includes all
other outstanding loans to such person), as to which such prior board of
director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to
Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders based on underwriting standards not less
stringent than those applied in comparable transactions with other persons and
made on terms substantially the same as offered in comparable transactions to
other persons and not involve more than the normal risk of repayment or present
other unfavorable features.
Insurance of Deposit Accounts. The FDIC administers two separate
deposit insurance funds. The SAIF maintains a fund to insure the deposits of
institutions the deposits of which were insured by the Federal Savings and Loan
Insurance Corporation (the "FSLIC") prior to the enactment of FIRREA, and the
BIF maintains a fund to insure the deposits of institutions the deposits of
which were insured by the FDIC prior to the enactment of FIRREA. The Bank is a
member of the SAIF of the FDIC.
As a SAIF-insured institution, the Bank is subject to insurance
assessments imposed by the FDIC. Effective January 1, 1993, the FDIC replaced
its uniform assessment rate with a transitional risk-based assessment schedule
issued by the FDIC pursuant to the 1991 Banking Law, which imposes assessments
ranging from 0.23% to 0.31% of an institution's average assessment base. The
actual assessment to be paid by each SAIF member is based on the institution's
assessment risk classification, which will be determined based on whether the
institution is considered "well capitalized," "adequately capitalized" or
"undercapitalized" (as such terms have been defined in federal regulations), and
whether such institution is considered by its supervisory agency to be
financially sound or to have supervisory concerns.
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As a result of subsequent changes to the assessment schedule, financial
institutions such as the Bank that are members of the SAIF, are currently
required to pay higher deposit insurance premiums than financial institutions
which are members of the BIF (primarily commercial banks), because the BIF has
higher reserves than the SAIF and has been responsible for fewer troubled
institutions. This had created a disparity between SAIF and BIF assessments.
Annual assessments for BIF members in the lowest risk categories are now only
$2,000. For the years ended September 30, 1996 and 1995, the Bank's federal
deposit insurance premium expense was $318,000 and $295,000, respectively, not
including a one-time special SAIF assessment totaling $838,000 for the year
ended September 30, 1996 for the years ended September 30, 1996 and 1995,
respectively. The FDIC has noted that the premium differential may have adverse
consequences for SAIF members, including reduced earnings and an impaired
ability to raise funds in capital markets. In addition, SAIF members, such as
the Bank, could be placed at a substantial competitive disadvantage to BIF
members with respect to pricing of loans and deposits and the ability to achieve
lower operating costs.
A comprehensive continuing appropriations bill enacted on September 30,
1996 reduced this premium differential between BIF- and SAIF-insured
institutions but did not eliminate it. As a result of this legislation, it is
now anticipated that, beginning on January 1, 1997, BIF-insured institutions,
except those in higher risk categories, will pay deposit insurance premiums
equal to approximately 1.3 cents per $100 of insured domestic deposits and SAIF-
insured institutions, except those in higher risk categories, will pay deposit
insurance premiums equal to approximately 6.4 cents per $100 of insured domestic
deposits. This premium differential is expected to exist until at least
January 1, 1999.
The above-described comprehensive continuing appropriations bill
enacted on September 30, 1996 also provides for a one-time assessment on SAIF
members to recapitalize the SAIF. The assessment is equal to 65.7 cents per each
$100 of insured domestic deposits. Such premium will have the effect of
immediately reducing the capital of SAIF-member institutions by the amount of
the assessment. SAIF-member institutions will not be allowed to amortize the
expense of the one-time assessment over a period of years. The one-time
assessment, which will be based on the Bank's deposits as of March 31, 1995, is
approximately $838,000 on a before tax basis and be payable prior to December,
1996. This one-time assessment to recapitalize the SAIF had an adverse effect on
the operating expenses and results of operations of the Bank during the quarter
ended September 30, 1996.
Community Reinvestment Act. The Bank, like other financial
institutions, is subject to the Community Reinvestment Act, as amended ("CRA").
A purpose of this Act is to encourage financial institutions to help meet the
credit needs of its entire community, including the needs of low- and moderate-
income neighborhoods. During the Bank's last compliance examination, which was
performed by the FDIC under the old CRA regulations in January 1994, the Bank
received a "satisfactory" rating with respect to CRA compliance. The Bank's
rating with respect to CRA compliance would be a factor to be considered by the
Federal Reserve and FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and could result in the denial of such applications.
The federal banking regulatory agencies have issued a rewrite of the
CRA regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs. Under the regulations, a savings bank will be
evaluated and rated under three categories: a lending test, an investment test
and a service test. For each of these three tests, the savings bank will be
given a rating of either "outstanding," "high satisfactory," "low satisfactory,"
"needs to improve" or "substantial non-compliance." A set of criteria for each
rating has been developed and is included in the regulation. If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to the service area should
be considered. The ratings received under the three tests will be used to
determine the overall composite CRA rating. The composite ratings will be the
same as those that are currently given: "outstanding," "satisfactory," "needs to
improve" or "substantial non-compliance."
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Capital Requirements Applicable To The Bank. The FDIC requires the Bank
to have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder ("Tier
II capital") may consist of a limited amount of subordinated debt, certain
hybrid capital instruments, other debt securities, certain types of preferred
stock and a limited amount of loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At September 30,
1996, the Bank had a leverage ratio of 9.59%.
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 September 30, 1996, the Bank complied with each of the capital
requirements of the FDIC and the Administrator.
The 1991 Banking Law required each federal banking agency to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risk of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages. On August 2, 1995, the federal
banking agencies issued a joint notice of adoption of final risk based capital
rules to take account of interest rate risk. The final regulation required an
assessment of the need for additional capital on a case-by-case basis,
considering both the level of measured exposure and qualitative risk factors.
The final rule also stated an intent to, in the future, establish an explicit
minimum capital charge for interest rate risk based on the level of a bank's
measured interest rate risk exposure.
Effective June 26, 1996, the federal banking agencies issued a joint
policy statement announcing the agencies' election not to adopt a standardized
measure and explicit capital charge for interest rate risk at that time. Rather,
the policy statement (i) identifies the main elements of sound interest rate
risk management, (ii) describes prudent principles and practices for each of
those elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement is not expected to have a material impact
on the Bank's management of interest rate risk.
The FDIC has adopted a final rule changing its risk-based capital rules
to recognize the effect of bilateral netting agreements in reducing the credit
risk of two types of financial derivatives - interest and exchange rate
contracts. Under the rule, savings banks are permitted to net positive and
negative mark-to-market values of rate contracts with the same counterparty,
subject to legally enforceable bilateral netting contracts that meet certain
criteria. This represents a change from the prior rules which recognized only a
very limited form of netting. The Bank does not anticipate that this rule will
have a material effect upon its financial statements.
Loans-To-One-Borrower. The Bank is subject to the Administrator's loans
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 bank
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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
bank's net worth, provided that the purchase price of each single-family
dwelling in the development does not exceed $500,000 and the aggregate amount of
loans made under this authority does not exceed 150% of net worth. These limits
also authorize a savings bank to make loans-to-one-borrower to finance the sale
of real property acquired in satisfaction of debts in an amount up to 50% of net
worth.
As of September 30, 1996, the largest aggregate amount of loans which
the Bank had to any one borrower was $1.1 million. The Bank had no loans
outstanding which management believes violate the applicable loans-to-one-
borrower limits. The Bank does not believe that the loans-to-one-borrower limits
will have a significant impact on its business, operations and earnings.
Limitations on Rates Paid for Deposits. Regulations promulgated by the
FDIC pursuant to the 1991 Banking Law place limitations on the ability of
insured depository institutions to accept, renew or roll over deposits by
offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institution's normal market
area. Under these regulations, "well capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The definitions of "well capitalized," "adequately
capitalized" and "undercapitalized" are the same as the definitions adopted by
the FDIC to implement the corrective action provisions of the 1991 Banking Law.
Federal Home Loan Bank System. The FHLB system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the
Bank is required to own capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On September 30, 1996, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $1.3 million.
FIRREA has had the effect of reducing the dividends that the Bank
receives on its stock in the FHLB of Atlanta. During fiscal 1995 and 1996, the
Bank recorded dividend income of $94,000 and $101,000, respectively, with
respect to its FHLB of Atlanta stock. FIRREA requires each FHLB to contribute a
certain amount of its reserves and undivided profits to fund the principal and a
portion of the interest on certain bonds and certain other obligations which are
used to fund the resolution of troubled savings association cases. In addition,
FIRREA requires each FHLB to transfer a percentage of its annual net earnings to
the Affordable Housing Program. That amount will increase from 5% of the annual
net income of the FHLB in 1990 to at least 10% of its annual net income in 1995
and subsequent years. As a result of these FIRREA requirements, it is
anticipated that the FHLB of Atlanta's earnings will be reduced and that the
Bank will receive reduced dividends on its FHLB of Atlanta stock in future
periods.
Federal Reserve System. Federal Reserve regulations require savings
banks, not otherwise exempt from the regulations, to maintain reserves against
their transaction accounts (primarily negotiable order of withdrawal accounts)
and certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of September 30, 1996, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of an insured institution, such as the Bank, without giving at
least 60 days' written notice to the FDIC and providing the FDIC an opportunity
to disapprove the proposed acquisition. Pursuant to regulations governing
acquisitions of control, control of an insured institution is conclusively
deemed to have been acquired by, among other things, the acquisition of more
than 25% of any class of voting stock. In addition, control generally is
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock. Such acquisitions of control may be
disapproved if it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial
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stability of the savings bank or prejudice the interests of its depositors; or
(iii) the competency, experience or integrity of the acquiring person or the
proposed management personnel indicates that it would not be in the interest of
the depositors or the public to permit the acquisitions of control by such
person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Bank. If any person were to so acquire the beneficial ownership of more than 10%
of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is not
required for (i) any offer with a view toward public resale made exclusively to
the Bank or its underwriters or the selling group acting on its behalf or (ii)
any offer to acquire or acquisition of beneficial ownership of more than 10% of
the common stock of the Bank by a corporation whose ownership is or will be
substantially the same as the ownership of the Bank, provided that the offer or
acquisition is made more than one year following the consummation of the
Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Company and
the Bank or the Boards of Directors of the Company and the Bank support the
acquisition, (ii) the acquiror is of good character and integrity and possesses
satisfactory managerial skills, and will be a source of financial strength to
the Company and the Bank; and (iii) the public interests will not be adversely
affected.
Liquidity. The 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 investments with maturities in excess
of five years. On September 30, 1996, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 47.0%.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
Impact of the 1991 Banking Law. The 1991 Banking Law became effective
on December 19, 1991. Among other things, the 1991 Banking Law provided
increased funding for the BIF and provided for expanded regulation of depository
institutions and their affiliates, including bank holding companies.
The 1991 Banking Law provided the federal banking agencies with broad
powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers will depend upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under the FDIC regulations applicable to the Bank, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based
30
<PAGE>
capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv)
is not subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
To facilitate the early identification of problems, the 1991 Banking
Law required the federal banking agencies to review and, under certain
circumstances, prescribe more stringent accounting and reporting requirements
than those required by generally accepted accounting principles. The FDIC issued
a final rule, effective July 2, 1993, implementing those provisions. The rule,
among other things, requires that management of institutions with $500 million
or more in assets report on the institution's responsibility for preparing
financial statements and establishing and maintaining an internal control
structure and procedures for financial reporting and compliance with designated
laws and regulations concerning safety and soundness, and that independent
auditors attest to and report separately on assertions in management's reports
concerning compliance with such laws and regulations, using FDIC-approved audit
procedures.
The 1991 Banking Law further requires the federal banking agencies to
develop regulations requiring disclosure of contingent assets and liabilities
and, to the extent feasible and practicable, supplemental disclosure of the
estimated fair market value of assets and liabilities. The 1991 Banking Law also
requires annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small, well-
capitalized institutions and state chartered institutions examined by state
regulators. Moreover, the 1991 Banking Law, as modified by the Federal Housing
Enterprises Financial Security and Soundness Act, requires the federal banking
agencies to set operational and managerial, asset quality, earnings and stock
valuation standards for insured depository institutions and depository
institution holding companies, as well as compensation standards (but not dollar
levels of compensation) for insured depository institutions that prohibit
excessive compensation, fees or benefits to officers, directors, employees, and
principal stockholders. The federal banking agencies have issued final
regulations, effective August 9, 1995, implementing these standards in
accordance with the 1991 Banking Law. Those agencies have also issued a joint
advance notice of proposed rulemaking soliciting comments on the addition of
asset quality and earnings guidelines to these safety and soundness standards.
The foregoing necessarily is a general description of certain
provisions of the 1991 Banking Law and does not purport to be complete. The
effect of the 1991 Banking Law on the Bank has not yet been fully ascertained.
Interstate Branching. A bank or savings bank holding company and its
subsidiaries are currently prohibited from acquiring any voting shares of, or
interest in, any banks or savings banks located outside of the state in which
the operations of the savings bank holding company's subsidiaries are located,
unless the acquisition is specifically authorized by the statutes of the state
in which the target bank is located. However, in September 1994, Congress passed
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The Interstate Banking Act permitted 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. In addition, states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. 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 saving bank may acquire more than 10% of the insured
deposits in the United States or more than 30% of the insured
31
<PAGE>
deposits in any one state, unless the state has 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
denied interstate branching by legislation prior to such time. Unlike interstate
acquisitions, a state may deny 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 branching transactions.
It is anticipated that the Interstate Banking Act will increase
competition within the markets in which the Bank now operates, although the
extent to which such competition will increase in such markets or the timing of
such increase cannot be predicted. In addition, there can be no assurance as to
whether, or in what form, legislation may be enacted in North Carolina in
reaction to the Interstate Banking Act or what impact such legislation or the
Interstate Banking Act might have upon the Bank.
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in Section 39 of the 1991 Banking Law which
required the banking regulatory agencies to write regulations governing such
topics as internal controls, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation and fees and whatever else those
agencies determined to be appropriate. The legislation exempts bank holding
companies from these provisions and requires the agencies to write guidelines,
as opposed to regulations, dealing with these areas. It also gives more
discretion to the banking regulatory agencies with regard to prescribing
standards for banks' asset quality, earnings and stock valuation.
The Interstate Banking Act also expands current exemptions from the
requirement that banks be examined on a 12-month cycle. Exempted banks will be
inspected every 18 months. Other provisions address paperwork reduction and
regulatory improvements, small business and commercial real estate loan
securitization, truth-in-lending amendments on high cost mortgages,
strengthening of the independence of certain financial regulatory agencies,
money laundering, flood insurance reform and extension of certain statutes of
limitations.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
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. Under FDIC regulations, stock repurchases may be made by
the savings bank only upon receipt of FDIC approval.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash
dividend on or repurchase any of its capital stock if the effect thereof would
be to cause its net worth to be reduced below the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock ownership.
32
<PAGE>
In connection with the Conversion, the Company and the Bank have agreed
with the FDIC that, during the first year after the Conversion, the Bank will
not pay any dividend or make any other distribution to its stockholder which
represents, is characterized as or is treated for federal tax purposes as, a
return of capital.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the 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
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 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 Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular annual 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, as discussed above. 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.
33
<PAGE>
ITEM 2. PROPERTIES
Properties
The following table sets forth the location of the Bank's principal
office in Albemarle, North Carolina and its full service branch office in
Locust, North Carolina, as well as certain other information relating to these
offices as of September 30, 1996. The Bank owns both the Albemarle and Locust
offices. The Bank also owns two vacant lots which are adjacent to its Albemarle
office but has no plans for these lots at the present time.
<TABLE>
<CAPTION>
Net Book Value Deposits
Address of Property (In Thousands)
------- -------------- --------------
<S> <C> <C>
Albemarle: $625,000 $126,861
155 West South Street
Albemarle, North Carolina 28001
Two (2) Vacant Lots $26,000
South Second Street
Albemarle, North Carolina 28001
Locust: $213,000 $19,537
406 West Main Street
Locust, North Carolina 28097
</TABLE>
The Bank's management considers the property to be in good condition.
The total net book value of the Bank's furniture, fixtures and equipment on
September 30, 1996 was $374,000.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is
involved in any pending legal proceedings other than routine, non-material
proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Prior to October 2, 1996, the Bank was organized as a mutual
institution. On September 17, 1996, the members of the Bank approved the Amended
and Restated Plan of Holding Company Conversion, dated as of July 19, 1996,
pursuant to which (i) the Bank would convert from a North Carolina chartered
savings bank organized in mutual form to a North Carolina chartered savings bank
organized in stock form and would sell its capital stock to the Company and (ii)
the Company would offer and sell shares of its Common Stock in a subscription
offering and, if necessary, in a community and syndicated community offering.
The Conversion was consummated, all shares of the converted bank were purchased
by the Company using a portion of the proceeds from the sale of its Common Stock
in the subscription offering, and subscriptions for 4,496,500 shares of the
Company's Common Stock were accepted on October 2, 1996.
34
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
See the information under the section captioned "Common Stock
Information" in the Company's 1996 Annual Report, which section is incorporated
herein by reference. See "Item 1. DESCRIPTION OF BUSINESS--Regulation of the
Bank--Restrictions on Dividends and Other Capital Distributions" above for
regulatory restrictions which limit the ability of the Bank to pay dividends to
the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table
captioned "Selected Financial Data" in the Company's 1996 Annual Report which is
incorporated herein by reference.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS
See also the information set forth under Item 1 above and the
information set forth under the section captioned "Management's Discussion and
Analysis of Financial Condition and Operating Results" on pages 3 through 14 in
the Company's 1996 Annual Report which section is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Bank set forth on pages 15 through 42
of the Company's 1996 Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
N/A.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors and "- Executive Officers" contained in the Proxy
Statement, which sections are incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors Fees" and
" - Management Compensation" contained in the Proxy Statement, which sections
are incorporated herein by reference.
35
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from
the section captioned "Security Ownership of Certain Beneficial Owners"
contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-K. See also the section captioned "Proposal 1 - Election of Directors -
Certain Indebtedness and Transactions of Management" contained in the Proxy
Statement, which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
14(a)1. Financial Statements are contained in the Bank's 1996 Annual
Report attached hereto as Exhibit (13) and incorporated
herein by reference
(a) Independent Auditors' Report
(b) Statements of Financial Condition as of September 30,
1996 and 1995
(c) Statements of Income for the Years Ended
September 30, 1996, 1995 and 1994
(d) Statements of Equity for the Years Ended
September 30, 1996, 1995 and 1994
(e) Statements of Cash Flows for the Years Ended
September 30, 1996, 1995 and 1994
(f) Notes to Financial Statements
14(a)2. Financial Statement Schedules
All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Financial
Statements.
14(a)3. Exhibits
Exhibit (3)(i) Certificate of Incorporation,
incorporated herein by reference to
Exhibit (3)(i) to the Registration
Statement on Form S-1, Registration
No. 333-04509, dated May 24, 1996,
and amended on July 25, 1996
Exhibit (3)(ii) Bylaws, incorporated herein by
reference to Exhibit (3)(ii) to the
Registration Statement on Form S-1,
Registration No. 333-04509, dated
May 24, 1996, and amended on July
25, 1996
Exhibit (4) Specimen Stock Certificate,
incorporated herein by reference to
Exhibit (4) to the Registration
Statement on Form S-1, Registration
No. 333-04509, dated May 24, 1996,
and amended on July 25, 1996
Exhibit (10)(i) Employment Agreement between Carl M.
Hill and Home Savings Bank of
Albemarle, Inc., S.S.B.
36
<PAGE>
Exhibit (10)(ii) Employment Agreement between R.
Ronald Swanner and Home Savings Bank
of Albemarle, Inc., S.S.B.
Exhibit (10)(iii) 1985 Retirement Payment Agreements
with Carl M. Hill, R. Ronald
Swanner, Caldwell A. Holbrook, Jr.
and Joel A. Huneycutt
Exhibit (10)(iv) 1995 Retirement Payment Agreements
with Carl M. Hill, R. Ronald
Swanner, Caldwell A. Holbrook, Jr.,
Joel A. Huneycutt, Douglas Dwight
Stokes and Greg E. Underwood
Exhibit (10)(v) Directors Retirement Plan Agreement
Exhibit (10)(vi) 1985 Supplemental Income Agreements
with Carl M. Hill and R. Ronald
Swanner
Exhibit (10)(vii) 1995 Supplemental Income Agreements
with Carl M. Hill and R. Ronald
Swanner
Exhibit (11) Statement Regarding Computation of
Per Share Earnings
Exhibit (12) Statement Regarding Computation of
Ratios
Exhibit (13) Portions of the 1996 Annual Report
to Stockholders
Exhibit (21) See Item 1. Business for
discussion of subsidiaries
Exhibit (27) Financial Data Schedule
14(b) The Company filed no reports on Form 8-K during the last
quarter of the fiscal year ended September 30, 1996.
37
<PAGE>
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.
SOUTH STREET FINANCIAL CORP.
Date: December 20, 1996 By: /s/ Carl M. Hill
-------------------------------------
Carl M. Hill
President and Chief Executive Officer
Pursuant to the requirements of 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:
Signature Title Date
/s/ Carl M. Hill President, Chief Executive December 20, 1996
- ----------------------------- Officer and Director
Carl M. Hill
/s/ R. Ronald Swanner Executive Vice President, December 20, 1996
- ----------------------------- Secretary and Director
R. Ronald Swanner
/s/ Christopher F. Cranford Controller and Treasurer December 20, 1996
- -----------------------------
Christopher F. Cranford
/s/ Caldwell A. Holbrook, Jr. Director December 20, 1996
- -----------------------------
Caldwell A. Holbrook, Jr.
/s/ Joel A. Huneycutt Director December 20, 1996
- -----------------------------
Joel A. Huneycutt
/s/ Douglas Dwight Stokes Director December 20, 1996
- -----------------------------
Douglas Dwight Stokes
/s/ Greg E. Underwood Director December 20, 1996
- -----------------------------
Greg E. Underwood
38
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
Exhibit (10)(i) Employment Agreement between Carl M. Hill and Home Savings
Bank of Albemarle, Inc., S.S.B.
Exhibit (10)(ii) Employment Agreement between R. Ronald Swanner and Home
Savings Bank of Albemarle, Inc., S.S.B.
Exhibit (10)(iii) 1985 Retirement Payment Agreements with Carl M. Hill, R.
Ronald Swanner, Caldwell A. Holbrook, Jr. and Joel A.
Huneycutt
Exhibit (10)(iv) 1995 Retirement Payment Agreements with Carl M. Hill, R.
Ronald Swanner, Caldwell A. Holbrook, Jr., Joel A.
Huneycutt, Douglas Dwight Stokes and Greg E. Underwood
Exhibit (10)(v) Directors Retirement Plan Agreement
Exhibit (10)(vi) 1985 Supplemental Income Agreements with Carl M. Hill and
R. Ronald Swanner
Exhibit (10)(vii) 1995 Supplemental Income Agreements with Carl M. Hill and
R. Ronald Swanner
Exhibit (11) Statement Regarding Computation of Per Share Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) Portions of the 1996 Annual Report to Stockholders
Exhibit (27) Financial Data Schedule
14(b) The Company filed no reports on Form 8-K during the last
quarter of the fiscal year ended September 30, 1996.
39
<PAGE>
Exhibit (10)(i)
HOME SAVINGS BANK OF ALBEMARLE, INC., S.S.B.
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of October 2, 1996, by and between HOME
SAVINGS BANK OF ALBEMARLE, INC., S.S.B. (hereinafter referred to as the "Savings
Bank") and CARL M. HILL (hereinafter referred to as the "Officer") and is joined
in by SOUTH STREET FINANCIAL CORP., the parent holding company of the Savings
Bank (hereinafter referred to as the "Holding Company").
WHEREAS, the Officer has heretofore been employed by the Savings Bank as
its President; and
WHEREAS, the Savings Bank is a state-chartered stock savings bank and the
wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Savings Bank desires to retain the services of the Officer as
the President of the Savings Bank upon the terms and conditions set forth
herein; and
WHEREAS, the services of the Officer, his experience and knowledge of the
affairs of the Savings Bank, and his reputation and contacts in the industry and
the local community are extremely valuable to the Savings Bank; and
WHEREAS, the Savings Bank wishes to attract and retain such well-qualified
executives and it is in the best interest of the Savings Bank and of the Officer
to secure the continued services of the Officer notwithstanding any change in
control of the Savings Bank or the Holding Company; and
WHEREAS, the Savings Bank considers the establishment and maintenance of a
sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Holding
Company, the Savings Bank and their stockholders; and
WHEREAS, the parties desire to enter into this Agreement in order to set
forth the terms and conditions of the Officer's employment relationship with the
Savings Bank.
<PAGE>
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Savings Bank hereby agrees to employ the Officer and
----------
the Officer hereby agrees to accept employment, upon the terms and conditions
stated herein, as the President of the Savings Bank. The Officer shall render
such administrative and management services to the Savings Bank as are
customarily performed by persons situated in a similar executive capacity. The
Officer shall promote the business of the Savings Bank and perform such other
duties as shall, from time to time, be reasonably prescribed by the Board of
Directors of the Savings Bank (the "Board").
2. Compensation. The Savings Bank shall pay the Officer during the term
------------
of this Agreement, as compensation for all service rendered by him to the
Savings Bank, a base salary at the rate of $157,320 per annum, payable in cash
not less frequently than monthly; provided that the rate of such salary shall be
reviewed by the Board not less often than annually. Such rate of salary, or
increased rate of salary, as the case may be, may be further increased, but not
decreased, from time to time in such amounts as the Board, in its discretion,
may decide. In determining salary increases, the Board shall compensate the
Officer for increases in the cost of living and may also provide for performance
or merit increases. Participation in incentive compensation, deferred
compensation, discretionary bonus, profit-sharing, retirement, stock option and
other employee benefit plans that the Savings Bank or the Holding Company have
adopted or may from time to time adopt, and participation in any fringe
benefits, shall not reduce the salary payable to the Officer under this Section.
The Officer will be entitled to such customary fringe benefits, vacation and
sick leave as are consistent with the normal practices and established policies
of the Savings Bank. In the event of a Change of Control (as defined in
Section 10),
2
<PAGE>
the Officer's rate of salary shall be increased not less than six percent (6%)
annually during the term of this Agreement.
3. Discretionary Bonuses. During the term of this Agreement, the Officer
---------------------
shall be entitled in an equitable manner with all other key management personnel
of the Savings Bank, to such discretionary bonuses as may be authorized,
declared and paid by the Board to the Savings Bank's key management employees.
No other compensation provided for in this Agreement shall be deemed a
substitute for the Officer's right to such discretionary bonuses when and as
declared by the Board.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits. The Officer shall be entitled to participate in any plan relating to
- --------
deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical and dental coverage,
disability coverage, education, or other retirement or employee benefits that
the Savings Bank or the Holding Company have adopted, or may, from time to time
adopt, for benefit of their executive employees and for employees generally,
subject to the eligibility rules of such plans.
The Officer shall also be entitled to participate in any other fringe
benefits which are now or may be or become applicable to the Officer or the
Savings Bank's other executive employees, including the payment of reasonable
expenses for attending annual and periodic meetings of trade associations, and
any other benefits which are commensurate with the duties and responsibilities
to be performed by the Officer under this Agreement. Additionally, the Officer
shall be entitled to such vacation and sick leave as shall be established under
uniform employee policies promulgated by the Board. The Savings Bank shall
reimburse the Officer for all out-of-pocket reasonable and necessary business
expenses which the Officer may incur in connection with his services on behalf
of the Savings Bank.
3
<PAGE>
5. Term. The initial term of employment under this Agreement shall be for
----
the period commencing upon the effective date of this Agreement and ending three
(3) calendar years from the effective date of this Agreement. On each
anniversary of the effective date of this Agreement of the Savings Bank, the
term of this Agreement shall automatically be extended for an additional one
year period beyond the then effective expiration date unless written notice from
the Savings Bank or the Officer is received 90 days prior to an anniversary date
advising the other party that this Agreement shall not be further extended;
provided that the Board shall review the Officer's performance annually and make
a specific determination pursuant to such review to renew this Agreement prior
to the 90 day notice period. In the event of a Change in Control, the term of
employment under this Agreement shall automatically be extended for a period of
three (3) years beginning on the date of the Change in Control.
6. Loyalty. The Officer shall devote his full efforts and entire business
-------
time to the performance of his duties and responsibilities under this Agreement.
The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Savings Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
use of such information, except in the ordinary course of his duties under this
Agreement, without the prior written consent of the Holding Company or the
Savings Bank.
7. Standards. The Officer shall perform his duties and responsibilities
---------
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The
4
<PAGE>
Savings Bank will provide the Officer with the working facilities and staff
customary for similar executives and necessary for him to perform his duties.
8. Termination and Termination Pay.
-------------------------------
(a) The Officer's employment under this Agreement shall be terminated upon
the death of the Officer during the term of this Agreement, in which event, the
Officer's estate shall be entitled to receive the compensation due the Officer
through the last day of the calendar month in which his death shall have
occurred and for a period of one month thereafter.
(b) The Officer's employment under this Agreement may be terminated at any
time by the Officer upon sixty (60) days' written notice to the Board of
Directors. Upon such termination, the Officer shall be entitled to receive
compensation through the effective date of such termination.
(c) In the event the Officer becomes disabled during the term of his
employment under this Agreement and it is determined by the Savings Bank that
the Officer is permanently unable to perform his duties hereunder, the Savings
Bank shall continue to compensate the Officer at the level of compensation
described in Paragraph 2 above, and shall continue to provide the Officer each
of the other benefits set forth or described in this Agreement, for the
remaining term of this Agreement, less any other payments provided under any
disability income plan of the Savings Bank which is applicable to the Officer.
In the event of any disagreement between the Officer and the Savings Bank as to
whether the Officer is physically or mentally incapacitated such as will result
in the termination of the Officer's employment pursuant to this Paragraph 8(c),
the question of such incapacity shall be submitted to an impartial and reputable
physician for determination, selected by mutual agreement of the Officer and the
Savings Bank or, failing such agreement, by two (2) physicians (one (1) of whom
shall be selected by the Savings Bank and the other by the Officer), and such
determination of the question of such incapacity by such physician or physicians
shall be final and binding on the Officer and the Savings
5
<PAGE>
Bank. The Savings Bank shall pay the reasonable fees and expenses of such
physician or physicians in making any determination required under this
Paragraph 8(c).
(d) The Board may terminate the Officer's employment at any time, but any
termination by the Board, other than termination for cause, shall not prejudice
the Officer's right to compensation or other benefits under this Agreement for
the remaining period which would have been covered by this Agreement if such
termination had not occurred. The Officer shall have no right to receive
compensation or other benefits for any period after termination for "cause."
Termination for "cause" shall include termination because of the Officer's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provisions
of this Agreement.
9. Additional Regulatory Requirements.
----------------------------------
(a) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank shall (i) pay the Officer all of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations which were suspended.
(b) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) of Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this
6
<PAGE>
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If the Savings Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act (12 U.S.C. (S)1818(x)(1)), all obligations under
this Agreement shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated, except to the
extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank, (i) by the Federal Deposit Insurance
Corporation (the "FDIC"), at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Savings Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C.
(S) 1818(c)); or (ii) by the Administrator of the Savings Institutions Division
of the North Carolina Department of Commerce (the "Administrator"), at the time
the Administrator approves a supervisory merger to resolve problems related to
operation of the Savings Bank or when the Savings Bank is determined by the
Administrator to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
10. Change in Control.
-----------------
(a) In the event of a "Change in Control" (as defined in Subsection (b)
below), the acquiror shall be bound by the terms of this Agreement for a period
of three years beginning on the date of the "Change in Control" (as provided in
Section 5) and shall be prohibited, during the remainder of such term, from:
(i) Assigning Officer any duties and/or responsibilities that are
inconsistent with his position, duties, responsibilities or status at
the time of the Change in Control or with his reporting
responsibilities or equivalent titles with the Savings Bank in effect
at such time; or
7
<PAGE>
(ii) Adjusting Officer's annual base salary rate other than in
accordance with the provisions of Section 2 of this Agreement; or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance, disability
insurance, profit sharing plans, stock option plans, stock purchase
plans, deferred compensation plans, management retention plans,
retirement plans, stock ownership plans, or similar plans or benefits
being provided by the Savings Bank or the Holding Company to the
Officer as of the effective date of the Change in Control; or
(iv) Transferring Officer to a location outside of Stanly County,
North Carolina, without the Officer's express written consent.
(b) For the purposes of this Agreement, the term "Change in Control" shall
mean any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Exchange Act; or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Holding Company or Savings Bank
representing 25 percent or more of the combined voting power of the
outstanding Common Stock of the Holding Company or Common Stock of the
Savings Bank, as applicable; or
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any reason
to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Savings Bank's or
Holding Company's shareholders was approved by the Savings Bank's or
Holding Company's Board of Directors or Nominating Committee, as
applicable, shall be considered as though he or she were a member of
the Incumbent Board or Incumbent Holding Company Board, as applicable;
or
8
<PAGE>
(iv) either the Holding Company or the Savings Bank consolidates or
merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the
Savings Bank, respectively, is the surviving corporation in such
transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Savings Bank are sold or otherwise transferred to or
are acquired by any other entity or group.
Notwithstanding the other provisions of this Section 10, a transaction or
event shall not be considered a Change in Control if, prior to the consummation
or occurrence of such transaction or event, Officer and Savings Bank agree in
writing that the same shall not be treated as a Change in Control for purposes
of this Agreement.
(c) In the event any dispute shall arise between the Officer and the
Savings Bank as to the terms or interpretation of this Agreement, including this
Section 10, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Section
10 or in defending against any action taken by the Savings Bank, the Savings
Bank shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
11. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Savings Bank which shall acquire, directly
or indirectly, by conversion, merger, consolidation, purchase or otherwise, all
or substantially all of the assets of the Holding Company or the Savings Bank.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Officer, the Officer shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
9
<PAGE>
12. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing, signed by the Officer and on behalf of the Savings Bank
by such officer as may be specifically designated by the Board. No waiver by
either party hereto, at any time, of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
13. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first hereinabove written.
HOME SAVINGS BANK OF ALBEMARLE,
INC., S.S.B.
By: /s/ R. Ronald Swanner, Executive Vice President
-----------------------------------------------
R. Ronald Swanner, Executive Vice President
/s/ Carl M. Hill (SEAL)
-----------------------------------------
Carl M. Hill
10
<PAGE>
The foregoing Agreement is consented and agreed to by South Street
Financial Corp., the parent holding company of Home Savings Bank of Albemarle,
Inc., S.S.B.
SOUTH STREET FINANCIAL CORP.
By: /s/ R. Ronald Swanner, Executive Vice President
-----------------------------------------------
R. Ronald Swanner, Executive Vice President
11
<PAGE>
Exhibit (10)(ii)
HOME SAVINGS BANK OF ALBEMARLE, INC., S.S.B.
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of October 2, 1996, by and between HOME
SAVINGS BANK OF ALBEMARLE, INC., S.S.B. (hereinafter referred to as the "Savings
Bank") and R. RONALD SWANNER (hereinafter referred to as the "Officer") and is
joined in by SOUTH STREET FINANCIAL CORP., the parent holding company of the
Savings Bank (hereinafter referred to as the "Holding Company").
WHEREAS, the Officer has heretofore been employed by the Savings Bank as
its Executive Vice President; and
WHEREAS, the Savings Bank is a state-chartered stock savings bank and the
wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Savings Bank desires to retain the services of the Officer as
the Executive Vice President of the Savings Bank upon the terms and conditions
set forth herein; and
WHEREAS, the services of the Officer, his experience and knowledge of the
affairs of the Savings Bank, and his reputation and contacts in the industry and
the local community are extremely valuable to the Savings Bank; and
WHEREAS, the Savings Bank wishes to attract and retain such well-qualified
executives and it is in the best interest of the Savings Bank and of the Officer
to secure the continued services of the Officer notwithstanding any change in
control of the Savings Bank or the Holding Company; and
WHEREAS, the Savings Bank considers the establishment and maintenance of a
sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Holding
Company, the Savings Bank and their stockholders; and
WHEREAS, the parties desire to enter into this Agreement in order to set
forth the terms and conditions of the Officer's employment relationship with the
Savings Bank.
<PAGE>
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Savings Bank hereby agrees to employ the Officer and
----------
the Officer hereby agrees to accept employment, upon the terms and conditions
stated herein, as the Executive Vice President of the Savings Bank. The Officer
shall render such administrative and management services to the Savings Bank as
are customarily performed by persons situated in a similar executive capacity.
The Officer shall promote the business of the Savings Bank and perform such
other duties as shall, from time to time, be reasonably prescribed by the Board
of Directors of the Savings Bank (the "Board").
2. Compensation. The Savings Bank shall pay the Officer during the term
------------
of this Agreement, as compensation for all service rendered by him to the
Savings Bank, a base salary at the rate of $101,160 per annum, payable in cash
not less frequently than monthly; provided that the rate of such salary shall be
reviewed by the Board not less often than annually. Such rate of salary, or
increased rate of salary, as the case may be, may be further increased, but not
decreased, from time to time in such amounts as the Board, in its discretion,
may decide. In determining salary increases, the Board shall compensate the
Officer for increases in the cost of living and may also provide for performance
or merit increases. Participation in incentive compensation, deferred
compensation, discretionary bonus, profit-sharing, retirement, stock option and
other employee benefit plans that the Savings Bank or the Holding Company have
adopted or may from time to time adopt, and participation in any fringe
benefits, shall not reduce the salary payable to the Officer under this Section.
The Officer will be entitled to such customary fringe benefits, vacation and
sick leave as are consistent with the normal practices and established policies
of the Savings Bank. In the event of a Change of Control (as defined in Section
10),
2
<PAGE>
the Officer's rate of salary shall be increased not less than six percent (6%)
annually during the term of this Agreement.
3. Discretionary Bonuses. During the term of this Agreement, the Officer
---------------------
shall be entitled in an equitable manner with all other key management personnel
of the Savings Bank, to such discretionary bonuses as may be authorized,
declared and paid by the Board to the Savings Bank's key management employees.
No other compensation provided for in this Agreement shall be deemed a
substitute for the Officer's right to such discretionary bonuses when and as
declared by the Board.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits. The Officer shall be entitled to participate in any plan relating to
- --------
deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical and dental coverage,
disability coverage, education, or other retirement or employee benefits that
the Savings Bank or the Holding Company have adopted, or may, from time to time
adopt, for benefit of their executive employees and for employees generally,
subject to the eligibility rules of such plans.
The Officer shall also be entitled to participate in any other fringe
benefits which are now or may be or become applicable to the Officer or the
Savings Bank's other executive employees, including the payment of reasonable
expenses for attending annual and periodic meetings of trade associations, and
any other benefits which are commensurate with the duties and responsibilities
to be performed by the Officer under this Agreement. Additionally, the Officer
shall be entitled to such vacation and sick leave as shall be established under
uniform employee policies promulgated by the Board. The Savings Bank shall
reimburse the Officer for all out-of-pocket reasonable and necessary business
expenses which the Officer may incur in connection with his services on behalf
of the Savings Bank.
3
<PAGE>
The Savings Bank also agrees to provide the Officer with one automobile of
an appropriate class and quality owned or leased by the Savings Bank for use in
connection with the Officer's duties hereunder.
5. Term. The initial term of employment under this Agreement shall be for
----
the period commencing upon the effective date of this Agreement and ending three
(3) calendar years from the effective date of this Agreement. On each
anniversary of the effective date of this Agreement of the Savings Bank, the
term of this Agreement shall automatically be extended for an additional one
year period beyond the then effective expiration date unless written notice from
the Savings Bank or the Officer is received 90 days prior to an anniversary date
advising the other party that this Agreement shall not be further extended;
provided that the Board shall review the Officer's performance annually and make
a specific determination pursuant to such review to renew this Agreement prior
to the 90 day notice period. In the event of a Change in Control, the term of
employment under this Agreement shall automatically be extended for a period of
three (3) years beginning on the date of the Change in Control.
6. Loyalty. The Officer shall devote his full efforts and entire business
-------
time to the performance of his duties and responsibilities under this Agreement.
The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Savings Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
use of such information, except in the ordinary course of his duties under this
Agreement, without the prior written consent of the Holding Company or the
Savings Bank.
7. Standards. The Officer shall perform his duties and responsibilities
---------
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The
4
<PAGE>
Savings Bank will provide the Officer with the working facilities and staff
customary for similar executives and necessary for him to perform his duties.
8. Termination and Termination Pay.
-------------------------------
(a) The Officer's employment under this Agreement shall be terminated upon
the death of the Officer during the term of this Agreement, in which event, the
Officer's estate shall be entitled to receive the compensation due the Officer
through the last day of the calendar month in which his death shall have
occurred and for a period of one month thereafter.
(b) The Officer's employment under this Agreement may be terminated at any
time by the Officer upon sixty (60) days' written notice to the Board of
Directors. Upon such termination, the Officer shall be entitled to receive
compensation through the effective date of such termination.
(c) In the event the Officer becomes disabled during the term of his
employment under this Agreement and it is determined by the Savings Bank that
the Officer is permanently unable to perform his duties hereunder, the Savings
Bank shall continue to compensate the Officer at the level of compensation
described in Paragraph 2 above, and shall continue to provide the Officer each
of the other benefits set forth or described in this Agreement, for the
remaining term of this Agreement, less any other payments provided under any
disability income plan of the Savings Bank which is applicable to the Officer.
In the event of any disagreement between the Officer and the Savings Bank as to
whether the Officer is physically or mentally incapacitated such as will result
in the termination of the Officer's employment pursuant to this Paragraph 8(c),
the question of such incapacity shall be submitted to an impartial and reputable
physician for determination, selected by mutual agreement of the Officer and the
Savings Bank or, failing such agreement, by two (2) physicians (one (1) of whom
shall be selected by the Savings Bank and the other by the Officer), and such
determination of the question of such incapacity by such physician or physicians
shall be final and binding on the Officer and the Savings
5
<PAGE>
Bank. The Savings Bank shall pay the reasonable fees and expenses of such
physician or physicians in making any determination required under this
Paragraph 8(c).
(d) The Board may terminate the Officer's employment at any time, but any
termination by the Board, other than termination for cause, shall not prejudice
the Officer's right to compensation or other benefits under this Agreement for
the remaining period which would have been covered by this Agreement if such
termination had not occurred. The Officer shall have no right to receive
compensation or other benefits for any period after termination for "cause."
Termination for "cause" shall include termination because of the Officer's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule, regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provisions
of this Agreement.
9. Additional Regulatory Requirements.
----------------------------------
(a) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank shall (i) pay the Officer all of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations which were suspended.
(b) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) of Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this
6
<PAGE>
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If the Savings Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act (12 U.S.C. (S) 1818(x)(1)), all obligations under
this Agreement shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated, except to the
extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank, (i) by the Federal Deposit Insurance
Corporation (the "FDIC"), at the time the FDIC enters into an agreement to
provide assistance to or on behalf of the Savings Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. (S)
1818(c)); or (ii) by the Administrator of the Savings Institutions Division of
the North Carolina Department of Commerce (the "Administrator"), at the time the
Administrator approves a supervisory merger to resolve problems related to
operation of the Savings Bank or when the Savings Bank is determined by the
Administrator to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
10. Change in Control.
-----------------
(a) In the event of a "Change in Control" (as defined in Subsection (b)
below), the acquiror shall be bound by the terms of this Agreement for a period
of three years beginning on the date of the "Change in Control" (as provided in
Section 5) and shall be prohibited, during the remainder of such term, from:
(i) Assigning Officer any duties and/or responsibilities that are
inconsistent with his position, duties, responsibilities or status at
the time of the Change in Control or with his reporting
responsibilities or equivalent titles with the Savings Bank in effect
at such time; or
7
<PAGE>
(ii) Adjusting Officer's annual base salary rate other than in
accordance with the provisions of Section 2 of this Agreement; or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance, disability
insurance, profit sharing plans, stock option plans, stock purchase
plans, deferred compensation plans, management retention plans,
retirement plans, stock ownership plans, or similar plans or benefits
being provided by the Savings Bank or the Holding Company to the
Officer as of the effective date of the Change in Control; or
(iv) Transferring Officer to a location outside of Stanly County,
North Carolina, without the Officer's express written consent.
(b) For the purposes of this Agreement, the term "Change in Control" shall
mean any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Exchange Act; or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Holding Company or Savings Bank
representing 25 percent or more of the combined voting power of the
outstanding Common Stock of the Holding Company or Common Stock of the
Savings Bank, as applicable; or
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any reason
to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Savings Bank's or
Holding Company's shareholders was approved by the Savings Bank's or
Holding Company's Board of Directors or Nominating Committee, as
applicable, shall be considered as though he or she were a member of
the Incumbent Board or Incumbent Holding Company Board, as applicable;
or
8
<PAGE>
(iv) either the Holding Company or the Savings Bank consolidates or
merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the
Savings Bank, respectively, is the surviving corporation in such
transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Savings Bank are sold or otherwise transferred to or
are acquired by any other entity or group.
Notwithstanding the other provisions of this Section 10, a transaction or
event shall not be considered a Change in Control if, prior to the consummation
or occurrence of such transaction or event, Officer and Savings Bank agree in
writing that the same shall not be treated as a Change in Control for purposes
of this Agreement.
(c) In the event any dispute shall arise between the Officer and the
Savings Bank as to the terms or interpretation of this Agreement, including this
Section 10, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Section
10 or in defending against any action taken by the Savings Bank, the Savings
Bank shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
11. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Savings Bank which shall acquire, directly
or indirectly, by conversion, merger, consolidation, purchase or otherwise, all
or substantially all of the assets of the Holding Company or the Savings Bank.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Officer, the Officer shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
9
<PAGE>
12. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing, signed by the Officer and on behalf of the Savings Bank
by such officer as may be specifically designated by the Board. No waiver by
either party hereto, at any time, of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
13. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first hereinabove written.
HOME SAVINGS BANK OF ALBEMARLE,
INC., S.S.B.
By: /s/ Carl M. Hill, President
-------------------------------------
Carl M. Hill, President
/s/ R. Ronald Swanner (SEAL)
--------------------------------
R. Ronald Swanner
10
<PAGE>
The foregoing Agreement is consented and agreed to by South Street
Financial Corp., the parent holding company of Home Savings Bank of Albemarle,
Inc., S.S.B.
SOUTH STREET FINANCIAL CORP.
By: /s/ Carl M. Hill, President
------------------------------------
Carl M. Hill, President
11
<PAGE>
Exhibit (10)(iii)
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of 1st day of October 1985 between Home Savings
and Loan Association a domestic Corporation having its principal office in
Albemarle. North Carolina (hereinafter referred to as the Association) and Carl
M. Hill of Albemarle. North Carolina (hereinafter referred to as the Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire
of the Association to have the benefit of his continued loyalty and service and
also to assist him in providing for the contingencies of retirement and death;
and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a
Director in the amount of $200 per month for five years from the date of the
execution of this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
------------------
of the Association upon attainment of his 65th birthday, the Association will
commence to pay him $803 per month for a continuous period of 120 months. In the
event that the Director should die after becoming entitled to receive said
monthly installments but before any or all of said installments have been paid,
the Association will pay or will continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Association a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be computed on the basis of 6
percent per annum compound interest and shall be paid in a single sum to the
executor or administrator of the estate of the last named beneficiary to die. In
the absence of any such beneficiary designation, any amount remaining unpaid at
the Director's death shall be commuted on the basis of 6 percent per annum
compound interest and shall be paid in a single sum to the executor or
administrator of the Director's estate.
2. Death Benefit: Should the Director die while in the Directorship of
-------------
the Association and prior to the attainment of his 65th birthday, the
Association (beginning at a date to be determined by the Association but within
six months from the date of such death) will commence to pay $803 per month for
a continuous period of 120 months to such beneficiary or beneficiaries as the
Director has directed by filing with the Association a notice in writing.
Irrespective of the above, however, if the Director dies as a result of suicide
within two years of the execution of this agreement, the death benefit shall not
exceed an amount equal to his waived Directors' fees plus interest at the rate
of 7 1/2 percent per annum compounded annually. In the event of the death of the
last named beneficiary before all the unpaid payments have been made, the
balance of any amount which remains unpaid at said death shall be commuted on
the basis of 6 percent per annum compound interest and shall be paid in a single
sum to the executor or administrator of the estate of the last named beneficiary
to die. In the absence of any such beneficiary designation, any amount remaining
<PAGE>
unpaid at the Director's death shall be commuted on the basis of 6 percent per
annum compound interest and shall be paid in a single sum to the executor or
administrator of the Director's estate.
3. Termination of Directorship:
---------------------------
A. If the Director terminates his Directorship, for reasons other
than death or the attainment of his 65th birthday, prior to two
years from the execution date of this Agreement, the Director's
benefits shall be limited to his waived Director fees plus interest
at the rate of 7 1/2 percent per annum compounded annually and shall
be paid in a single sum as soon as practical following the
termination of his Directorship.
B. If the Director terminates his Directorship, for reasons other
than death or the attainment of his 65th birthday, at the end of two
or more years from the execution date of this Agreement, he or his
beneficiary, as applicable, shall be entitled upon the attainment of
his 65th birthday, or his prior death, to a percentage of the
retirement benefits stated in Section 1 of this Agreement as
determined by the following table:
<TABLE>
<CAPTION>
FULL NUMBER OF YEARS SERVED PERCENTAGE OF RETIREMENT
AS DIRECTOR FROM DATE OF BENEFITS STATED IN SECTION
EXECUTION OF THIS AGREEMENT 1 OF THIS AGREEMENT TO WHICH
UNTIL TERMINATION OF DIRECTORSHIP THE DIRECTOR IS ENTITLED
- --------------------------------- ------------------------
<S> <C>
2 40%
3 60%
4 80%
5 100%
</TABLE>
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the
Director under Section 1 of this Agreement, the Director shall not
engage in business activities which are in competition with the
Association without first obtaining the written consent of the
Association.
B. During the period the retirement payment is payable to the
Director under Section 1 of the Agreement, the Director shall be
available to render consulting services to the Association upon
request by an officer of the Association, but such requests shall
not be made more frequently than once each month. The Director shall
not be considered to have breached this condition if he is unable to
consult because of his mental or physical disability.
<PAGE>
C. Payment of the retirement benefit under this Agreement may be
terminated by the Association, if the Director fails to comply with
either of the conditions set forth in paragraph (A) and (B) of this
Section 4.
5. General Provisions:
------------------
A. Except as otherwise provided by this Agreement, it is agreed
that neither the Director, nor his beneficiary shall have any right
to commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder, which payments and the right thereto
are expressly declared to be nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent
of, and in addition to, any other employment agreements that may
exist from time to time between the parties hereto, concerning any
other compensation payable by the Association to the Director
whether as salary, bonus, or otherwise. This Agreement shall not be
deemed to constitute a contract of employment between the parties
hereto, nor shall any provision hereof restrict the right of the
Association to discharge the Director or restrict the right of the
Director to terminate his Directorship.
C. The rights of the Director under this Agreement and of any
beneficiary of the Director shall be solely those of an unsecured
creditor of the Association. Any asset acquired by the Association
in connection with the liabilities assumed by it hereunder, shall
not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the
performance of the obligations of the Association but shall be, and
remain, a general, unpledged, unrestricted asset of the Association.
D. The Association hereby reserves the right to accelerate the
payments specified in Sections 1, 2 and 3 above without the consent
of the Director, his estate, beneficiaries, or any other person
claiming through or under him.
E. The Association agrees that it will not merge or consolidate
with any other Association or organization, or permit its business
activities to be taken over by any other organization unless and
until the succeeding or continuing Association or other organization
shall expressly assume the rights and obligations of the Association
herein set forth. The Association further agrees that it will not
cease its business activities or terminate its existence, other than
as heretofore set forth in this Section, without having made
adequate provision for the fulfilling of its obligations hereunder.
F. This Agreement may be revoked or amended in whole or in part by
a writing signed by both of the parties hereto.
<PAGE>
G. This Agreement shall be subject to and construed under the laws
of the State of North Carolina.
IN WITNESS THEREOF, the said Association has caused this Agreement to be
signed in its Corporate name by its duly authorized officer, and impressed with
its corporate seal, attested by its Secretary, and the said Director has
hereunto set his hand and seal, all on the day and year first above written.
ATTEST: HOME SAVINGS AND LOAN
ASSOCIATION
/s/ Sheila S. Barbee By: /s/ Carl M. Hill (Seal)
- ------------------------------- --------------------------
President
WITNESS: /s/ Bobby Doby, Jr. /s/ Carl M. Hill (Seal)
--------------------- --------------------------
(The Director)
<PAGE>
BENEFICIARY DESIGNATION FORM
As Beneficiary to receive any death benefits payable on my behalf from
Home Savings and Loan Association, Albemarle, NC, I designate the following:
NAME DATE OF BIRTH ADDRESS RELATIONSHIP
---- ------------- ------- ------------
PRIMARY:
- -------
Peggy B. Hill 12/10/27 P.O. Box 489, Albemarle, N.C. Wife
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTINGENT, If Any:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Note: If more than one primary beneficiary is named, the benefit will be paid
in equal shares to those living. Should the contingent beneficiaries be eligible
to receive the benefits, such benefits will be paid in equal shares to such
living contingent beneficiaries. If none of the designated beneficiaries are
living at such time as the death benefit is payable, such benefit will be paid
to the Executor or the Administrator of your Estate.)
Name of Spouse if not given above:
----------------------------------------------
/s/ Bobby Doby, Jr. /s/ Carl M. Hill
- ------------------------------- ----------------------------------
Witness Signature of Director
October 1, 1985
----------------------------------
Date
Note: The original should be retained by the Association, one copy by the
Director, and one copy forwarded to Smith/Broadhurst, Inc.
<PAGE>
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of 1st day of October 1985 between Home Savings
and Loan Association a domestic Corporation having its principal office in
Albemarle. North Carolina (hereinafter referred to as the Association) and
Robert R. Swanner, Albemarle, North Carolina (hereinafter referred to as the
Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Association to have the benefit of his continued loyalty and service and
also to assist him in providing for the contingencies of retirement and death;
and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $100 per month for five years from the date of the execution of
this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
------------------
of the Association upon attainment of his 65th birthday, the Association will
commence to pay him $1,912 per month for a continuous period of 120 months. In
the event that the Director should die after becoming entitled to receive said
monthly installments but before any or all of said installments have been paid,
the Association will pay or will continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Association a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be computed on the basis of 6
percent per annum compound interest and shall be paid in a single sum to the
executor or administrator of the estate of the last named beneficiary to die. In
the absence of any such beneficiary designation, any amount remaining unpaid at
the Director's death shall be commuted on the basis of 6 percent per annum
compound interest and shall be paid in a single sum to the executor or
administrator of the Director's estate.
2. Death Benefit: Should the Director die while in the Directorship of
-------------
the Association and prior to the attainment of his 65th birthday, the
Association (beginning at a date to be determined by the Association but within
six months from the date of such death) will commence to pay $1,912 per month
for a continuous period of 120 months to such beneficiary or beneficiaries as
the Director has directed by filing with the Association a notice in writing.
Irrespective of the above, however, if the Director dies as a result of suicide
within two years of the execution of this agreement, the death benefit shall not
exceed an amount equal to his waived Directors' fees plus interest at the rate
of 7 1/2 percent per annum compounded annually. In the event of the death of
the last named beneficiary before all the unpaid payments have been made, the
balance of any amount which remains unpaid at said death shall be commuted on
the basis of 6 percent per annum compound interest and shall be paid in a single
sum to the executor or administrator of the estate of the last named beneficiary
to die. In the absence of any such beneficiary designation, any amount remaining
<PAGE>
unpaid at the Director's death shall be commuted on the basis of 6 percent per
annum compound interest and shall be paid in a single sum to the executor or
administrator of the Director's estate.
3. Termination of Directorship:
---------------------------
A. If the Director terminates his Directorship, for reasons other than
death or the attainment of his 65th birthday, prior to two years from
the execution date of this Agreement, the Director's benefits shall be
limited to his waived Director fees plus interest at the rate of 7 1/2
percent per annum compounded annually and shall be paid in a single sum
as soon as practical following the termination of his Directorship.
B. If the Director terminates his Directorship, for reasons other than
death or the attainment of his 65th birthday, at the end of two or more
years from the execution date of this Agreement, he or his beneficiary,
as applicable, shall be entitled upon the attainment of his 65th
birthday, or his prior death, to a percentage of the retirement
benefits stated in Section 1 of this Agreement as determined by the
following table:
<TABLE>
<CAPTION>
FULL NUMBER OF YEARS SERVED PERCENTAGE OF RETIREMENT
AS DIRECTOR FROM DATE OF BENEFITS STATED IN SECTION
EXECUTION OF THIS AGREEMENT 1 OF THIS AGREEMENT TO WHICH
UNTIL TERMINATION OF DIRECTORSHIP THE DIRECTOR IS ENTITLED
- ----------------------------------- -----------------------------
<S> <C>
2 40%
3 60%
4 80%
5 100%
</TABLE>
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the
Director under Section 1 of this Agreement, the Director shall not
engage in business activities which are in competition with the
Association without first obtaining the written consent of the
Association.
B. During the period the retirement payment is payable to the
Director under Section 1 of the Agreement, the Director shall be
available to render consulting services to the Association upon
request by an officer of the Association, but such requests shall
not be made more frequently than once each month. The Director
shall not be considered to have breached this condition if he is
unable to consult because of his mental or physical disability.
<PAGE>
C. Payment of the retirement benefit under this Agreement may be
terminated by the Association, if the Director fails to comply
with either of the conditions set forth in paragraph (A) and (B)
of this Section 4.
5. General Provisions:
------------------
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Director, nor his beneficiary shall have any right to
commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder, which payments and the right
thereto are expressly declared to be nonassignable and
nontransferable.
B. The benefits payable under this Agreement shall be independent of,
and in addition to, any other employment agreements that may exist
from time to time between the parties hereto, concerning any other
compensation payable by the Association to the Director whether as
salary, bonus, or otherwise. This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto,
nor shall any provision hereof restrict the right of the
Association to discharge the Director or restrict the right of the
Director to terminate his Directorship.
C. The rights of the Director under this Agreement and of any
beneficiary of the Director shall be solely those of an unsecured
creditor of the Association. Any asset acquired by the Association
in connection with the liabilities assumed by it hereunder, shall
not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the
performance of the obligations of the Association but shall be,
and remain, a general, unpledged, unrestricted asset of the
Association.
D. The Association hereby reserves the right to accelerate the
payments specified in Sections 1, 2 and 3 above without the
consent of the Director, his estate, beneficiaries, or any other
person claiming through or under him.
E. The Association agrees that it will not merge or consolidate with
any other Association or organization, or permit its business
activities to be taken over by any other organization unless and
until the succeeding or continuing Association or other
organization shall expressly assume the rights and obligations of
the Association herein set forth. The Association further agrees
that it will not cease its business activities or terminate its
existence, other than as heretofore set forth in this Section,
without having made adequate provision for the fulfilling of its
obligations hereunder.
F. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
<PAGE>
G. This Agreement shall be subject to and construed under the laws of
the State of North Carolina.
IN WITNESS THEREOF, the said Association has caused this Agreement to be
signed in its Corporate name by its duly authorized officer, and impressed with
its corporate seal, attested by its Secretary, and the said Director has
hereunto set his hand and seal, all on the day and year first above written.
ATTEST: HOME SAVINGS AND LOAN
ASSOCIATION
/s/ Sheila S. Barbee By: /s/ Carl M. Hill
________________________________ -------------------------------(Seal)
President
WITNESS: /s/ Bobby Doby, Jr. /s/ Robert R. Swanner
- -------------------------------- -------------------------------(Seal)
(The Director)
<PAGE>
BENEFICIARY DESIGNATION FORM
As Beneficiary to receive any death benefits payable on my behalf from Home
Savings
and Loan Association, Albemarle, NC, I designate the following:
NAME DATE OF BIRTH ADDRESS RELATIONSHIP
---- ------------- ------- ------------
PRIMARY:
- -------
Beth M. Swanner 10/13/49 1415 Northridge Drive, Albemarle, NC Wife
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONTINGENT, If Any:
Mary Leslie Swanner 3/14/71 1415 Northridge Drive, Albemarle, NC Daughter
- --------------------------------------------------------------------------------
Ashley Leigh Swanner 7/19/76 1415 Northridge Drive, Albemarle, NC Daughter
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Note: If more than one primary beneficiary is named, the benefit will be paid
in equal shares to those living. Should the contingent beneficiaries be eligible
to receive the benefits, such benefits will be paid in equal shares to such
living contingent beneficiaries. If none of the designated beneficiaries are
living at such time as the death benefit is payable, such benefit will be paid
to the Executor or the Administrator of your Estate.)
Name of Spouse if not given above:
----------------------------------------------
/s/ Bobby Doby, Jr. /s/ Robert R. Swanner
- --------------------------------- -------------------------------------
Witness Signature of Employee
October 1, 1985
-------------------------------------
Date
Note: The original should be retained by the Association, one copy by the
Director, and one copy forwarded to Smith/Broadhurst, Inc.
<PAGE>
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of 1st day of October 1985 between Home Savings
and Loan Association a domestic Corporation having its principal office in
Albemarle. North Carolina (hereinafter referred to as the Association) and Joel
A. Huneycutt, Albemarle, North Carolina (hereinafter referred to as the
Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Association to have the benefit of his continued loyalty and service and
also to assist him in providing for the contingencies of retirement and death;
and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $200 per month for five years from the date of the execution of
this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
------------------
of the Association upon attainment of his 65th birthday, the Association will
commence to pay him $2,204 per month for a continuous period of 120 months. In
the event that the Director should die after becoming entitled to receive said
monthly installments but before any or all of said installments have been paid,
the Association will pay or will continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Association a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be computed on the basis of 6
percent per annum compound interest and shall be paid in a single sum to the
executor or administrator of the estate of the last named beneficiary to die. In
the absence of any such beneficiary designation, any amount remaining unpaid at
the Director's death shall be commuted on the basis of 6 percent per annum
compound interest and shall be paid in a single sum to the executor or
administrator of the Director's estate.
2. Death Benefit: Should the Director die while in the Directorship of
-------------
the Association and prior to the attainment of his 65th birthday, the
Association (beginning at a date to be determined by the Association but within
six months from the date of such death) will commence to pay $2,204 per month
for a continuous period of 120 months to such beneficiary or beneficiaries as
the Director has directed by filing with the Association a notice in writing.
Irrespective of the above, however, if the Director dies as a result of suicide
within two years of the execution of this agreement, the death benefit shall not
exceed an amount equal to his waived Directors' fees plus interest at the rate
of 7 1/2 percent per annum compounded annually. In the event of the death of
the last named beneficiary before all the unpaid payments have been made, the
balance of any amount which remains unpaid at said death shall be commuted on
the basis of 6 percent per annum compound interest and shall be paid in a single
sum to the executor or administrator of the estate of the last named beneficiary
to die. In the absence of any such beneficiary designation, any amount remaining
<PAGE>
unpaid at the Director's death shall be commuted on the basis of 6 percent per
annum compound interest and shall be paid in a single sum to the executor or
administrator of the Director's estate.
3. Termination of Directorship:
---------------------------
A. If the Director terminates his Directorship, for reasons other than
death or the attainment of his 65th birthday, prior to two years from
the execution date of this Agreement, the Director's benefits shall be
limited to his waived Director fees plus interest at the rate of 7 1/2
percent per annum compounded annually and shall be paid in a single sum
as soon as practical following the termination of his Directorship.
B. If the Director terminates his Directorship, for reasons other than
death or the attainment of his 65th birthday, at the end of two or more
years from the execution date of this Agreement, he or his beneficiary,
as applicable, shall be entitled upon the attainment of his 65th
birthday, or his prior death, to a percentage of the retirement
benefits stated in Section 1 of this Agreement as determined by the
following table:
<TABLE>
<CAPTION>
FULL NUMBER OF YEARS SERVED PERCENTAGE OF RETIREMENT
AS DIRECTOR FROM DATE OF BENEFITS STATED IN SECTION
EXECUTION OF THIS AGREEMENT 1 OF THIS AGREEMENT TO WHICH
UNTIL TERMINATION OF DIRECTORSHIP THE DIRECTOR IS ENTITLED
- ----------------------------------- -----------------------------
<S> <C>
2 40%
3 60%
4 80%
5 100%
</TABLE>
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the
Director under Section 1 of this Agreement, the Director shall not
engage in business activities which are in competition with the
Association without first obtaining the written consent of the
Association.
B. During the period the retirement payment is payable to the
Director under Section 1 of the Agreement, the Director shall be
available to render consulting services to the Association upon request
by an officer of the Association, but such requests shall not be made
more frequently than once each month. The Director shall not be
considered to have breached this condition if he is unable to consult
because of his mental or physical disability.
<PAGE>
C. Payment of the retirement benefit under this Agreement may be
terminated by the Association, if the Director fails to comply with
either of the conditions set forth in paragraph (A) and (B) of this
Section 4.
5. General Provisions:
------------------
A. Except as otherwise provided by this Agreement, it is agreed
that neither the Director, nor his beneficiary shall have any right to
commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder, which payments and the right thereto
are expressly declared to be nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent
of, and in addition to, any other employment agreements that may exist
from time to time between the parties hereto, concerning any other
compensation payable by the Association to the Director whether as
salary, bonus, or otherwise. This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto, nor
shall any provision hereof restrict the right of the Association to
discharge the Director or restrict the right of the Director to
terminate his Directorship.
C. The rights of the Director under this Agreement and of any
beneficiary of the Director shall be solely those of an unsecured
creditor of the Association. Any asset acquired by the Association in
connection with the liabilities assumed by it hereunder, shall not be
deemed to be held under any trust for the benefit of the Director or
his beneficiaries or to be considered security for the performance of
the obligations of the Association but shall be, and remain, a general,
unpledged, unrestricted asset of the Association.
D. The Association hereby reserves the right to accelerate the
payments specified in Sections 1, 2 and 3 above without the consent of
the Director, his estate, beneficiaries, or any other person claiming
through or under him.
E. The Association agrees that it will not merge or consolidate
with any other Association or organization, or permit its business
activities to be taken over by any other organization unless and until
the succeeding or continuing Association or other organization shall
expressly assume the rights and obligations of the Association herein
set forth. The Association further agrees that it will not cease its
business activities or terminate its existence, other than as
heretofore set forth in this Section, without having made adequate
provision for the fulfilling of its obligations hereunder.
F. This Agreement may be revoked or amended in whole or in part by
a writing signed by both of the parties hereto.
<PAGE>
G. This Agreement shall be subject to and construed under the laws
of the State of North Carolina.
IN WITNESS THEREOF, the said Association has caused this Agreement to be
signed in its Corporate name by its duly authorized officer, and impressed with
its corporate seal, attested by its Secretary, and the said Director has
hereunto set his hand and seal, all on the day and year first above written.
ATTEST: HOME SAVINGS AND LOAN
ASSOCIATION
/s/ Sheila S. Barbee By: /s/ Carl M. Hill (Seal)
- ----------------------------- ----------------------------------
President
WITNESS: /s/ Bobby Doby, Jr. /s/ Joel A. Huneycutt (Seal)
---------------------- -------------------------------------
(The Director)
<PAGE>
BENEFICIARY DESIGNATION FORM
As Beneficiary to receive any death benefits payable on my behalf from
Home Savings and Loan Association, Albemarle, NC, I designate the following:
NAME DATE OF BIRTH ADDRESS RELATIONSHIP
---- ------------- ------- ------------
PRIMARY:
-------
Brenda W. Huneycutt 07/20/42 P. O. Box 92, Locust, NC Wife
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
CONTINGENT, If Any:
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
(Note: If more than one primary beneficiary is named, the benefit will be paid
in equal shares to those living. Should the contingent beneficiaries be
eligible to receive the benefits, such benefits will be paid in equal shares to
such living contingent beneficiaries. If none of the designated beneficiaries
are living at such time as the death benefit is payable, such benefit will be
paid to the Executor or the Administrator of your Estate.)
Name of Spouse if not given above:____________________________________________
/s/ Bobby Doby, Jr. /s/ Joel A. Huneycutt
- ------------------------ --------------------------------------
Witness Signature of Employee
October 1, 1985
---------------------------------------
Date
Note: The original should be retained by the Association, one copy by the
Director, and one copy forwarded to Smith/Broadhurst, Inc.
<PAGE>
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of 1st day of October 1985 between Home Savings
and Loan Association a domestic Corporation having its principal office in
Albemarle. North Carolina (hereinafter referred to as the Association) and
Caldwell A. Holbrook, Jr., Albemarle, North Carolina (hereinafter referred to as
the Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Association to have the benefit of his continued loyalty and service and
also to assist him in providing for the contingencies of retirement and death;
and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $200 per month for five years from the date of the execution of
this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
------------------
of the Association upon attainment of his 65th birthday, the Association will
commence to pay him $3,528 per month for a continuous period of 120 months. In
the event that the Director should die after becoming entitled to receive said
monthly installments but before any or all of said installments have been paid,
the Association will pay or will continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Association a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be computed on the basis of 6
percent per annum compound interest and shall be paid in a single sum to the
executor or administrator of the estate of the last named beneficiary to die. In
the absence of any such beneficiary designation, any amount remaining unpaid at
the Director's death shall be commuted on the basis of 6 percent per annum
compound interest and shall be paid in a single sum to the executor or
administrator of the Director's estate.
2. Death Benefit: Should the Director die while in the Directorship of
-------------
the Association and prior to the attainment of his 65th birthday, the
Association (beginning at a date to be determined by the Association but within
six months from the date of such death) will commence to pay $3,000 per month
for a continuous period of 120 months to such beneficiary or beneficiaries as
the Director has directed by filing with the Association a notice in writing.
Irrespective of the above, however, if the Director dies as a result of suicide
within two years of the execution of this agreement, the death benefit shall not
exceed an amount equal to his waived Directors' fees plus interest at the rate
of 7 1/2 percent per annum compounded annually. In the event of the death of
the last named beneficiary before all the unpaid payments have been made, the
balance of any amount which remains unpaid at said death shall be commuted on
the basis of 6 percent per annum compound interest and shall be paid in a single
sum to the executor or administrator of the estate of the last named beneficiary
to die. In the absence of any such beneficiary designation, any amount remaining
<PAGE>
unpaid at the Director's death shall be commuted on the basis of 6 percent per
annum compound interest and shall be paid in a single sum to the executor or
administrator of the Director's estate.
3. Termination of Directorship:
---------------------------
A. If the Director terminates his Directorship, for reasons other than
death or the attainment of his 65th birthday, prior to two years from
the execution date of this Agreement, the Director's benefits shall be
limited to his waived Director fees plus interest at the rate of 7 1/2
percent per annum compounded annually and shall be paid in a single sum
as soon as practical following the termination of his Directorship.
B. If the Director terminates his Directorship, for reasons other than
death or the attainment of his 65th birthday, at the end of two or more
years from the execution date of this Agreement, he or his beneficiary,
as applicable, shall be entitled upon the attainment of his 65th
birthday, or his prior death, to a percentage of the retirement
benefits stated in Section 1 of this Agreement as determined by the
following table:
<TABLE>
<CAPTION>
FULL NUMBER OF YEARS SERVED PERCENTAGE OF RETIREMENT
AS DIRECTOR FROM DATE OF BENEFITS STATED IN SECTION
EXECUTION OF THIS AGREEMENT 1 OF THIS AGREEMENT TO WHICH
UNTIL TERMINATION OF DIRECTORSHIP THE DIRECTOR IS ENTITLED
----------------------------------- -----------------------------
<S> <C>
2 40%
3 60%
4 80%
5 100%
</TABLE>
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the
Director under Section 1 of this Agreement, the Director shall not
engage in business activities which are in competition with the
Association without first obtaining the written consent of the
Association.
B. During the period the retirement payment is payable to the
Director under Section 1 of the Agreement, the Director shall be
available to render consulting services to the Association upon request
by an officer of the Association, but such requests shall not be made
more frequently than once each month. The Director shall not be
considered to have breached this condition if he is unable to consult
because of his mental or physical disability.
<PAGE>
C. Payment of the retirement benefit under this Agreement may be
terminated by the Association, if the Director fails to comply with
either of the conditions set forth in paragraph (A) and (B) of this
Section 4.
5. General Provisions:
------------------
A. Except as otherwise provided by this Agreement, it is agreed
that neither the Director, nor his beneficiary shall have any right
to commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder, which payments and the right thereto
are expressly declared to be nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent
of, and in addition to, any other employment agreements that may
exist from time to time between the parties hereto, concerning any
other compensation payable by the Association to the Director whether
as salary, bonus, or otherwise. This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto, nor
shall any provision hereof restrict the right of the Association to
discharge the Director or restrict the right of the Director to
terminate his Directorship.
C. The rights of the Director under this Agreement and of any
beneficiary of the Director shall be solely those of an unsecured
creditor of the Association. Any asset acquired by the Association in
connection with the liabilities assumed by it hereunder, shall not be
deemed to be held under any trust for the benefit of the Director or
his beneficiaries or to be considered security for the performance of
the obligations of the Association but shall be, and remain, a
general, unpledged, unrestricted asset of the Association.
D. The Association hereby reserves the right to accelerate the
payments specified in Sections 1, 2 and 3 above without the consent
of the Director, his estate, beneficiaries, or any other person
claiming through or under him.
E. The Association agrees that it will not merge or consolidate
with any other Association or organization, or permit its business
activities to be taken over by any other organization unless and
until the succeeding or continuing Association or other organization
shall expressly assume the rights and obligations of the Association
herein set forth. The Association further agrees that it will not
cease its business activities or terminate its existence, other than
as heretofore set forth in this Section, without having made adequate
provision for the fulfilling of its obligations hereunder.
F. This Agreement may be revoked or amended in whole or in part by
a writing signed by both of the parties hereto.
<PAGE>
G. This Agreement shall be subject to and construed under the laws
of the State of North Carolina.
IN WITNESS THEREOF, the said Association has caused this Agreement to be
signed in its Corporate name by its duly authorized officer, and impressed with
its corporate seal, attested by its Secretary, and the said Director has
hereunto set his hand and seal, all on the day and year first above written.
ATTEST: HOME SAVINGS AND LOAN
ASSOCIATION
/s/ Sheila S. Barbee By: /s/ Carl M. Hill (Seal)
------------------------------ ---------------------------------
President
WITNESS: /s/ Bobby Doby, Jr. /s/ Caldwell A. Holbrook, Jr. (Seal)
---------------------- -------------------------------------
(The Director)
<PAGE>
BENEFICIARY DESIGNATION FORM
As Beneficiary to receive any death benefits payable on my behalf from
Home Savings and Loan Association, Albemarle, NC, I designate the following:
NAME DATE OF BIRTH ADDRESS RELATIONSHIP
---- ------------- ------- ------------
PRIMARY:
-------
Pamela T. Holbrook 09/14/49 Rt. #5, Box 778, Albemarle, NC Wife
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTINGENT, If Any:
Jennifer Anne Holbrook 03/9/79 Rt. #5, Box 778, Albemarle, NC Daughter
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Note: If more than one primary beneficiary is named, the benefit will be paid
in equal shares to those living. Should the contingent beneficiaries be
eligible to receive the benefits, such benefits will be paid in equal shares to
such living contingent beneficiaries. If none of the designated beneficiaries
are living at such time as the death benefit is payable, such benefit will be
paid to the Executor or the Administrator of your Estate.)
Name of Spouse if not given above:
---------------------------------------------
/s/ Bobby Doby, Jr. /s/ Caldwell A. Holbrook, Jr.
----------------------------- -----------------------------------------
Witness Signature of Employee
October 1, 1985
-----------------------------------------
Date
Note: The original should be retained by the Association, one copy by the
Director, and one copy forwarded to Smith/Broadhurst, Inc.
<PAGE>
Exhibit (10)(iv)
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of October, 1995 between Home
Savings Bank, S.S.B., a domestic Corporation having its principal office in
Albemarle, North Carolina (hereinafter referred to as the Bank) and Joel A.
Huneycutt of Albemarle, North Carolina (hereinafter referred to as the
Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Bank to have the benefit of his continued loyalty and service and also to
assist him in providing for the contingencies of retirement and death; and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $9,700 per year for five years from the date of the execution
of this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
of the Bank upon the attainment of his 65th birthday, the Bank will commence to
pay him $3,530 per month for a continuous period of 120 months. In the event
that the Director should die after becoming entitled to receive said monthly
installments but before any or all of said installments have been paid, the Bank
will pay or will continue to pay said installments to such beneficiary or
beneficiaries as the Director has directed by filing with the Bank a notice in
writing. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the Director's death
shall be commuted on the basis of seven percent per annum compound interest and
shall be paid in a single sum to the executor or administrator of the Director's
estate.
2. Death Benefit: Should the Director die while in the Directorship of the
Bank and prior to the attainment of his 65th birthday the Bank (beginning at a
date to be determined by the Bank but within six months from the date of such
death) will commence to pay $3,530 per month for a continuous period of 120
months to such beneficiary or beneficiaries as the Director has directed by
filing with the Bank a notice in writing. Irrespective of the above, however, if
the Director dies as a result of suicide within two years of the execution of
this agreement, the death benefit shall not exceed an amount equal to his waived
Directors' fees plus interest at the rate of seven percent per annum compounded
annually. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
any such beneficiary designation. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Director's death shall be
commuted on the basis of seven percent per annum compound interest and
<PAGE>
shall be paid in a single sum to the executor or administrator of the Director's
estate.
3. Termination of Directorship: If the Director terminates his
Directorship, for reasons other than death or disability, he or his beneficiary,
as applicable, shall be entitled on the attainment of his 65th birthday, or his
prior death, to a percentage of the retirement benefits stated in Section 1 of
this Agreement as determined by the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF RETIREMENT
BENEFITS STATED IN SECTION 1 OF
DATE OF TERMINATION OF THIS AGREEMENT TO WHICH THE
DIRECTORSHIP DIRECTOR IS ENTITLED
- ------------------------------------------------------------
<S> <C>
September 30, 1996 20%
September 30, 1997 40%
September 30, 1998 60%
September 30, 1999 80%
September 30, 2000 100%
- ------------------------------------------------------------
</TABLE>
Irrespective of the above, however, should the Director's termination of
Directorship occur after any "Successor" to the company shall occur, the
director shall be 100% vested in the retirement benefits stated in Section 1 of
this agreement regardless of his years of service. As used in this agreement the
term "Successor" shall include any person, firm, Company or other business
entity which at anytime, whether by merger, purchase or otherwise, acquires all
or substantially all of the Corporation's assets or business.
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the Director
under Section 1 of this Agreement, the Director shall not engage in business
activities which are in competition with the Bank without first obtaining the
written consent of the Bank.
B. During the period the retirement payment is payable to the Director
under Section 1 of the Agreement, the Director shall be available to render
consulting services to the Bank upon request by an officer of the Bank, but such
requests shall not be made more frequently than once each month, and shall not
require a total time expenditure by the director of more than one day per month.
Any travel, lodging, food and other reasonable necessary expenses incurred by
the Director to perform this consulting service shall be paid by the bank. The
Director shall not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability.
C. Payment of the retirement benefit under this Agreement may be
terminated by the Bank, if the
<PAGE>
Director fails to comply with either of the conditions set forth in paragraph
(A) and (B) of this Section 4.
5. Disability
A. If the Director shall become disabled (as defined in paragraph B of
this Section 5) prior to the attainment of his 65th birthday, and prior to his
termination of directorship, the Bank shall commence to pay the same benefit
that would have been payable had the Directors' death occurred on the date of
his disability.
In the event that the Director should die after becoming entitled to
receive said disability benefits but before any or all of said installments have
been paid, the Bank will pay or continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Bank a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the basis of 7
percent per annum compound interest and shall be paid to the executor or
administrator of the estate of the last named beneficiary to die. In the absence
of any such beneficiary designation, any amount remaining unpaid at the
Directors' death shall be commuted on the basis of 7 percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the Directors' estate.
B. The Director shall be considered disabled for the purpose of the
Agreement if he is unable to perform the duties of his position for a continuous
period of six months or more. During such six month period, the Director must be
under the regular care of a State licensed medical doctor (MD.) or osteopathic
physician (DO.). For the purpose of this Section, or any other Section relating
to disability, if there is any dispute between the parties as to the Director's
physical or mental disability, the questions shall be settled by the opinion of
a medical doctor or osteopathic physician licensed in the state in which this
Agreement is signed and who is selected by the mutual consent of the parties to
this Agreement or their representatives. If the parties cannot agree within ten
(10) days after a written request for the designation of an examining physician
is made by either party to the other, then the examining physician shall be
designated by the then President of the Stanly County Medical Society.
Certification of that physician as to the matter in dispute shall be final and
binding upon the parties.
6. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Director, nor his beneficiary shall have any right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments
hereunder, which payments and the right hereto are expressly declared to be
nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of, and
in addition to, any other employment agreements that may exist from time to time
between the parties hereto, concerning any other compensation payable by the
Bank to the Director whether as salary, bonus, or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between
<PAGE>
the parties hereto, nor shall any provision hereof restrict the right of the
Bank to discharge the Director or restrict the right of the Director to
terminate his Directorship.
C. The rights of the Director under this Agreement and of any beneficiary
of the Director shall be solely those of an unsecured creditor of the Bank. Any
asset acquired by the Bank in connection with the liabilities assumed by it
hereunder, shall not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the performance
of the obligations of the Bank but shall be, and remain, a general, unpledged,
unrestricted asset of the Bank.
D. The Bank hereby reserves the right to accelerate the payments specified
in Sections 1, 2, 3 and 5 above without the consent of the Director, his estate,
beneficiaries, or any other person claiming through or under him.
E. The Bank agrees that it will not merge or consolidate with any other
Bank or organization, or permit its business activities to be taken over by any
other organization unless and until succeeding or continuing Bank or other
organization shall expressly assume the rights and obligations of the Bank
herein set forth. The Bank further agrees that, it will not cease its business
activities or terminate its existence, other than as set forth in this Section,
without having made adequate provision for the fulfilling of its obligations
hereunder.
F. This agreement shall be binding upon and inure to the benefit of the
parties, their respective legal representatives, and any "Successor" of the
Company, which shall be deemed substituted for the Company under the terms of
this Agreement. As used in this Agreement the term "Successor" shall include any
person, firm, Corporation or other business entity which at anytime, whether by
merger, purchase or otherwise, acquires all or substantially all of the
Corporation's assets or business.
G. In the event the financial condition of the Bank deteriorates to the
point that under applicable regulatory authority the continued payment of the
amounts due under this Agreement would be considered imprudent, the Bank
reserves the right and authority to modify or amend the terms of the Agreement
as may be required in the best interest of the Bank.
H. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
I. This Agreement shall be subject to and construed under the laws of the
State of North Carolina.
<PAGE>
WITNESS THEREOF, the said Bank has caused this Agreement to be signed in
its Corporate name by its duly authorized officer, and impressed with the
Corporate seal, attested by its Secretary, and the said Director has hereunto
set his hand and seal, all on the date and year first above written.
Home Savings Bank, S.S.B.
By:/s/ Carl M. Hill (SEAL)
--------------------------------------
President
/s/ Joel A. Huneycutt (SEAL)
-----------------------------------------
Joel A. Huneycutt
ATTEST:
- --------------------------
WITNESS:
/s/ Sheila S. Barbee
- --------------------------
<PAGE>
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of October, 1995 between Home
Savings Bank, S.S.B., a domestic Corporation having its principal office in
Albemarle, North Carolina (hereinafter referred to as the Bank) and Caldwell A.
Holbrook, Jr. of Albemarle, North Carolina (hereinafter referred to as the
Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Bank to have the benefit of his continued loyalty and service and also to
assist him in providing for the contingencies of retirement and death; and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $4,800 per year for five years from the date of the execution
of this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
of the Bank upon the attainment of his 65th birthday, the Bank will commence to
pay him $2,287 per month for a continuous period of 120 months. In the event
that the Director should die after becoming entitled to receive said monthly
installments but before any or all of said installments have been paid, the Bank
will pay or will continue to pay said installments to such beneficiary or
beneficiaries as the Director has directed by filing with the Bank a notice in
writing. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the Director's death
shall be commuted on the basis of seven percent per annum compound interest and
shall be paid in a single sum to the executor or administrator of the Director's
estate.
2. Death Benefit: Should the Director die while in the Directorship of the
Bank and prior to the attainment of his 65th birthday the Bank (beginning at a
date to be determined by the Bank but within six months from the date of such
death) will commence to pay $2,287 per month for a continuous period of 120
months to such beneficiary or beneficiaries as the Director has directed by
filing with the Bank a notice in writing. Irrespective of the above, however, if
the Director dies as a result of suicide within two years of the execution of
this agreement, the death benefit shall not exceed an amount equal to his waived
Directors' fees plus interest at the rate of seven percent per annum compounded
annually. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
any such beneficiary designation. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Director's death shall be
commuted on the basis of seven percent per annum compound interest and
<PAGE>
shall be paid in a single sum to the executor or administrator of the Director's
estate.
3. Termination of Directorship: If the Director terminates his
Directorship, for reasons other than death or disability, he or his beneficiary,
as applicable, shall be entitled on the attainment of his 65th birthday, or his
prior death, to a percentage of the retirement benefits stated in Section 1 of
this Agreement as determined by the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF RETIREMENT
BENEFITS STATED IN SECTION 1 OF
DATE OF TERMINATION OF THIS AGREEMENT TO WHICH THE
DIRECTORSHIP DIRECTOR IS ENTITLED
- ---------------------------------------------------------------------
<S> <C>
September 30, 1996 20%
September 30, 1997 40%
September 30, 1998 60%
September 30, 1999 80%
September 30, 2000 100%
- ---------------------------------------------------------------------
</TABLE>
Irrespective of the above, however, should the Director's termination of
Directorship occur after any "Successor" to the company shall occur, the
director shall be 100% vested in the retirement benefits stated in Section 1 of
this agreement regardless of his years of service. As used in this agreement the
term "Successor" shall include any person, firm, Company or other business
entity which at anytime, whether by merger, purchase or otherwise, acquires all
or substantially all of the Corporation's assets or business.
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the Director
under Section 1 of this Agreement, the Director shall not engage in business
activities which are in competition with the Bank without first obtaining the
written consent of the Bank.
B. During the period the retirement payment is payable to the Director
under Section 1 of the Agreement, the Director shall be available to render
consulting services to the Bank upon request by an officer of the Bank, but such
requests shall not be made more frequently than once each month, and shall not
require a total time expenditure by the director of more than one day per month.
Any travel, lodging, food and other reasonable necessary expenses incurred by
the Director to perform this consulting service shall be paid by the bank. The
Director shall not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability.
C. Payment of the retirement benefit under this Agreement may be terminated
by the Bank, if the
<PAGE>
Director fails to comply with either of the conditions set forth in paragraph
(A) and (B) of this Section 4.
5. Disability
A. If the Director shall become disabled (as defined in paragraph B of
this Section 5) prior to the attainment of his 65th birthday, and prior to his
termination of directorship, the Bank shall commence to pay the same benefit
that would have been payable had the Directors' death occurred on the date of
his disability.
In the event that the Director should die after becoming entitled to
receive said disability benefits but before any or all of said installments have
been paid, the Bank will pay or continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Bank a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the basis of 7
percent per annum compound interest and shall be paid to the executor or
administrator of the estate of the last named beneficiary to die. In the absence
of any such beneficiary designation, any amount remaining unpaid at the
Directors' death shall be commuted on the basis of 7 percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the Directors' estate.
B. The Director shall be considered disabled for the purpose of the
Agreement if he is unable to perform the duties of his position for a continuous
period of six months or more. During such six month period, the Director must be
under the regular care of a State licensed medical doctor (MD.) or osteopathic
physician (DO.). For the purpose of this Section, or any other Section relating
to disability, if there is any dispute between the parties as to the Director's
physical or mental disability, the questions shall be settled by the opinion of
a medical doctor or osteopathic physician licensed in the state in which this
Agreement is signed and who is selected by the mutual consent of the parties to
this Agreement or their representatives. If the parties cannot agree within ten
(10) days after a written request for the designation of an examining physician
is made by either party to the other, then the examining physician shall be
designated by the then President of the Stanly County Medical Society.
Certification of that physician as to the matter in dispute shall be final and
binding upon the parties.
6. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Director, nor his beneficiary shall have any right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments
hereunder, which payments and the right hereto are expressly declared to be
nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of, and
in addition to, any other employment agreements that may exist from time to time
between the parties hereto, concerning any other compensation payable by the
Bank to the Director whether as salary, bonus, or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between
<PAGE>
the parties hereto, nor shall any provision hereof restrict the right of the
Bank to discharge the Director or restrict the right of the Director to
terminate his Directorship.
C. The rights of the Director under this Agreement and of any beneficiary
of the Director shall be solely those of an unsecured creditor of the Bank. Any
asset acquired by the Bank in connection with the liabilities assumed by it
hereunder, shall not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the performance
of the obligations of the Bank but shall be, and remain, a general, unpledged,
unrestricted asset of the Bank.
D. The Bank hereby reserves the right to accelerate the payments specified
in Sections 1, 2, 3 and 5 above without the consent of the Director, his estate,
beneficiaries, or any other person claiming through or under him.
E. The Bank agrees that it will not merge or consolidate with any other
Bank or organization, or permit its business activities to be taken over by any
other organization unless and until succeeding or continuing Bank or other
organization shall expressly assume the rights and obligations of the Bank
herein set forth. The Bank further agrees that, it will not cease its business
activities or terminate its existence, other than as set forth in this Section,
without having made adequate provision for the fulfilling of its obligations
hereunder.
F. This agreement shall be binding upon and inure to the benefit of the
parties, their respective legal representatives, and any "Successor" of the
Company, which shall be deemed substituted for the Company under the terms of
this Agreement. As used in this Agreement the term "Successor" shall include any
person, firm, Corporation or other business entity which at anytime, whether by
merger, purchase or otherwise, acquires all or substantially all of the
Corporation's assets or business.
G. In the event the financial condition of the Bank deteriorates to the
point that under applicable regulatory authority the continued payment of the
amounts due under this Agreement would be considered imprudent, the Bank
reserves the right and authority to modify or amend the terms of the Agreement
as may be required in the best interest of the Bank.
H. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
I. This Agreement shall be subject to and construed under the laws of the
State of North Carolina.
<PAGE>
WITNESS THEREOF, the said Bank has caused this Agreement to be signed in
its Corporate name by its duly authorized officer, and impressed with the
Corporate seal, attested by its Secretary, and the said Director has hereunto
set his hand and seal, all on the date and year first above written.
Home Savings Bank, S.S.B.
By:/s/ Carl M. Hill (SEAL)
-------------------------------
President
/s/ Caldwell A. Holbrook, Jr. (SEAL)
-------------------------------
Caldwell A. Holbrook Jr.
ATTEST:
- ----------------------------------
WITNESS:
/s/ Sheila S. Barbee
- ----------------------------------
<PAGE>
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of October, 1995 between Home
Savings Bank, S.S.B., a domestic Corporation having its principal office in
Albemarle, North Carolina (hereinafter referred to as the Bank) and Douglas D.
Stokes of Albemarle, North Carolina (hereinafter referred to as the Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Bank to have the benefit of his continued loyalty and service and also to
assist him in providing for the contingencies of retirement and death; and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $9,700 per year for five years from the date of the execution
of this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
of the Bank upon the attainment of his 65th birthday, the Bank will commence to
pay him $4,510 per month for a continuous period of 120 months. In the event
that the Director should die after becoming entitled to receive said monthly
installments but before any or all of said installments have been paid, the Bank
will pay or will continue to pay said installments to such beneficiary or
beneficiaries as the Director has directed by filing with the Bank a notice in
writing. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the Director's death
shall be commuted on the basis of seven percent per annum compound interest and
shall be paid in a single sum to the executor or administrator of the Director's
estate.
2. Death Benefit: Should the Director die while in the Directorship of the
Bank and prior to the attainment of his 65th birthday the Bank (beginning at a
date to be determined by the Bank but within six months from the date of such
death) will commence to pay $4,510 per month for a continuous period of 120
months to such beneficiary or beneficiaries as the Director has directed by
filing with the Bank a notice in writing. Irrespective of the above, however, if
the Director dies as a result of suicide within two years of the execution of
this agreement, the death benefit shall not exceed an amount equal to his waived
Directors' fees plus interest at the rate of seven percent per annum compounded
annually. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
any such beneficiary designation. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Director's death shall be
commuted on the basis of seven percent per annum compound interest and
<PAGE>
shall be paid in a single sum to the executor or administrator of the Director's
estate.
3. Termination of Directorship: If the Director terminates his
Directorship, for reasons other than death or disability, he or his beneficiary,
as applicable, shall be entitled on the attainment of his 65th birthday, or his
prior death, to a percentage of the retirement benefits stated in Section 1 of
this Agreement as determined by the following table:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
PERCENTAGE OF RETIREMENT
BENEFITS STATED IN SECTION 1 OF
DATE OF TERMINATION OF THIS AGREEMENT TO WHICH THE
DIRECTORSHIP DIRECTOR IS ENTITLED
- ------------------------------------------------------------
<S> <C>
September 30, 1996 20%
September 30, 1997 40%
September 30, 1998 60%
September 30, 1999 80%
September 30, 2000 100%
- ------------------------------------------------------------
</TABLE>
Irrespective of the above, however, should the Director's termination of
Directorship occur after any "Successor" to the company shall occur, the
director shall be 100% vested in the retirement benefits stated in Section 1 of
this agreement regardless of his years of service. As used in this agreement the
term "Successor" shall include any person, firm, Company or other business
entity which at anytime, whether by merger, purchase or otherwise, acquires all
or substantially all of the Corporation's assets or business.
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the Director
under Section 1 of this Agreement, the Director shall not engage in business
activities which are in competition with the Bank without first obtaining the
written consent of the Bank.
B. During the period the retirement payment is payable to the Director
under Section 1 of the Agreement, the Director shall be available to render
consulting services to the Bank upon request by an officer of the Bank, but such
requests shall not be made more frequently than once each month, and shall not
require a total time expenditure by the director of more than one day per month.
Any travel, lodging, food and other reasonable necessary expenses incurred by
the Director to perform this consulting service shall be paid by the bank. The
Director shall not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability. C.. Payment of the
retirement benefit under this Agreement may be terminated by the Bank, if the
<PAGE>
Director fails to comply with either of the conditions set forth in paragraph
(A) and (B) of this Section 4.
5. Disability
A. If the Director shall become disabled (as defined in paragraph B of
this Section 5) prior to the attainment of his 65th birthday, and prior to his
termination of directorship, the Bank shall commence to pay the same benefit
that would have been payable had the Directors' death occurred on the date of
his disability.
In the event that the Director should die after becoming entitled to
receive said disability benefits but before any or all of said installments have
been paid, the Bank will pay or continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Bank a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the basis of 7
percent per annum compound interest and shall be paid to the executor or
administrator of the estate of the last named beneficiary to die. In the absence
of any such beneficiary designation, any amount remaining unpaid at the
Directors' death shall be commuted on the basis of 7 percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the Directors' estate.
B. The Director shall be considered disabled for the purpose of the
Agreement if he is unable to perform the duties of his position for a continuous
period of six months or more. During such six month period, the Director must be
under the regular care of a State licensed medical doctor (MD.) or osteopathic
physician (DO.). For the purpose of this Section, or any other Section relating
to disability, if there is any dispute between the parties as to the Director's
physical or mental disability, the questions shall be settled by the opinion of
a medical doctor or osteopathic physician licensed in the state in which this
Agreement is signed and who is selected by the mutual consent of the parties to
this Agreement or their representatives. If the parties cannot agree within ten
(10) days after a written request for the designation of an examining physician
is made by either party to the other, then the examining physician shall be
designated by the then President of the Stanly County Medical Society.
Certification of that physician as to the matter in dispute shall be final and
binding upon the parties.
6. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Director, nor his beneficiary shall have any right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments
hereunder, which payments and the right hereto are expressly declared to be
nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of, and
in addition to, any other employment agreements that may exist from time to time
between the parties hereto, concerning any other compensation payable by the
Bank to the Director whether as salary, bonus, or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between
<PAGE>
the parties hereto, nor shall any provision hereof restrict the right of the
Bank to discharge the Director or restrict the right of the Director to
terminate his Directorship.
C. The rights of the Director under this Agreement and of any beneficiary
of the Director shall be solely those of an unsecured creditor of the Bank. Any
asset acquired by the Bank in connection with the liabilities assumed by it
hereunder, shall not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the performance
of the obligations of the Bank but shall be, and remain, a general, unpledged,
unrestricted asset of the Bank.
D. The Bank hereby reserves the right to accelerate the payments specified
in Sections 1, 2, 3 and 5 above without the consent of the Director, his estate,
beneficiaries, or any other person claiming through or under him.
E. The Bank agrees that it will not merge or consolidate with any other
Bank or organization, or permit its business activities to be taken over by any
other organization unless and until succeeding or continuing Bank or other
organization shall expressly assume the rights and obligations of the Bank
herein set forth. The Bank further agrees that, it will not cease its business
activities or terminate its existence, other than as set forth in this Section,
without having made adequate provision for the fulfilling of its obligations
hereunder.
F. This agreement shall be binding upon and inure to the benefit of the
parties, their respective legal representatives, and any "Successor" of the
Company, which shall be deemed substituted for the Company under the terms of
this Agreement. As used in this Agreement the term "Successor" shall include any
person, firm, Corporation or other business entity which at anytime, whether by
merger, purchase or otherwise, acquires all or substantially all of the
Corporation's assets or business.
G. In the event the financial condition of the Bank deteriorates to the
point that under applicable regulatory authority the continued payment of the
amounts due under this Agreement would be considered imprudent, the Bank
reserves the right and authority to modify or amend the terms of the Agreement
as may be required in the best interest of the Bank.
H. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
I. This Agreement shall be subject to and construed under the laws of the
State of North Carolina.
<PAGE>
WITNESS THEREOF, the said Bank has caused this Agreement to be signed in
its Corporate name by its duly authorized officer, and impressed with the
Corporate seal, attested by its Secretary, and the said Director has hereunto
set his hand and seal, all on the date and year first above written.
Home Savings Bank, S.S.B.
By:/s/ Carl M. Hill (SEAL)
------------------------------
President
/s/ Douglas D. Stokes (SEAL)
-------------------------------
Douglas D. Stokes
ATTEST:
- ----------------------------------
WITNESS:
/s/ Sheila S. Barbee
- ---------------------------------
<PAGE>
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of October, 1995 between Home
Savings Bank, S.S.B., a domestic Corporation having its principal office in
Albemarle, North Carolina (hereinafter referred to as the Bank) and Robert R.
Swanner of Albemarle, North Carolina (hereinafter referred to as the Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Bank to have the benefit of his continued loyalty and service and also to
assist him in providing for the contingencies of retirement and death; and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $2,400 per year for five years from the date of the execution
of this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
of the Bank upon the attainment of his 65th birthday, the Bank will commence to
pay him $1,123 per month for a continuous period of 120 months. In the event
that the Director should die after becoming entitled to receive said monthly
installments but before any or all of said installments have been paid, the Bank
will pay or will continue to pay said installments to such beneficiary or
beneficiaries as the Director has directed by filing with the Bank a notice in
writing. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the Director's death
shall be commuted on the basis of seven percent per annum compound interest and
shall be paid in a single sum to the executor or administrator of the Director's
estate.
2. Death Benefit: Should the Director die while in the Directorship of the
Bank and prior to the attainment of his 65th birthday the Bank (beginning at a
date to be determined by the Bank but within six months from the date of such
death) will commence to pay $1,123 per month for a continuous period of 120
months to such beneficiary or beneficiaries as the Director has directed by
filing with the Bank a notice in writing. Irrespective of the above, however, if
the Director dies as a result of suicide within two years of the execution of
this agreement, the death benefit shall not exceed an amount equal to his waived
Directors' fees plus interest at the rate of seven percent per annum compounded
annually. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
any such beneficiary designation. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Director's death shall be
commuted on the basis of seven percent per annum compound interest and
<PAGE>
shall be paid in a single sum to the executor or administrator of the Director's
estate.
3. Termination of Directorship: If the Director terminates his
Directorship, for reasons other than death or disability, he or his beneficiary,
as applicable, shall be entitled on the attainment of his 65th birthday, or his
prior death, to a percentage of the retirement benefits stated in Section 1 of
this Agreement as determined by the following table:
<TABLE>
<CAPTION>
PERCENTAGE OF RETIREMENT
BENEFITS STATED IN SECTION 1 OF
DATE OF TERMINATION OF THIS AGREEMENT TO WHICH THE
DIRECTORSHIP DIRECTOR IS ENTITLED
- ------------------------------------------------------------
<S> <C>
September 30, 1996 20%
September 30, 1997 40%
September 30, 1998 60%
September 30, 1999 80%
September 30, 2000 100%
- ------------------------------------------------------------
</TABLE>
Irrespective of the above, however, should the Director's termination of
Directorship occur after any "Successor" to the company shall occur, the
director shall be 100% vested in the retirement benefits stated in Section 1 of
this agreement regardless of his years of service. As used in this agreement the
term "Successor" shall include any person, firm, Company or other business
entity which at anytime, whether by merger, purchase or otherwise, acquires all
or substantially all of the Corporation's assets or business.
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the Director
under Section 1 of this Agreement, the Director shall not engage in business
activities which are in competition with the Bank without first obtaining the
written consent of the Bank.
B. During the period the retirement payment is payable to the Director
under Section 1 of the Agreement, the Director shall be available to render
consulting services to the Bank upon request by an officer of the Bank, but such
requests shall not be made more frequently than once each month, and shall not
require a total time expenditure by the director of more than one day per month.
Any travel, lodging, food and other reasonable necessary expenses incurred by
the Director to perform this consulting service shall be paid by the bank. The
Director shall not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability.
C.. Payment of the retirement benefit under this Agreement may be terminated by
the Bank, if the
<PAGE>
Director fails to comply with either of the conditions set forth in paragraph
(A) and (B) of this Section 4.
5. Disability
A. If the Director shall become disabled (as defined in paragraph B of
this Section 5) prior to the attainment of his 65th birthday, and prior to his
termination of directorship, the Bank shall commence to pay the same benefit
that would have been payable had the Directors' death occurred on the date of
his disability.
In the event that the Director should die after becoming entitled to
receive said disability benefits but before any or all of said installments have
been paid, the Bank will pay or continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Bank a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the basis of 7
percent per annum compound interest and shall be paid to the executor or
administrator of the estate of the last named beneficiary to die. In the absence
of any such beneficiary designation, any amount remaining unpaid at the
Directors' death shall be commuted on the basis of 7 percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the Directors' estate.
B. The Director shall be considered disabled for the purpose of the
Agreement if he is unable to perform the duties of his position for a continuous
period of six months or more. During such six month period, the Director must be
under the regular care of a State licensed medical doctor (MD.) or osteopathic
physician (DO.). For the purpose of this Section, or any other Section relating
to disability, if there is any dispute between the parties as to the Director's
physical or mental disability, the questions shall be settled by the opinion of
a medical doctor or osteopathic physician licensed in the state in which this
Agreement is signed and who is selected by the mutual consent of the parties to
this Agreement or their representatives. If the parties cannot agree within ten
(10) days after a written request for the designation of an examining physician
is made by either party to the other, then the examining physician shall be
designated by the then President of the Stanly County Medical Society.
Certification of that physician as to the matter in dispute shall be final and
binding upon the parties.
6. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Director, nor his beneficiary shall have any right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments
hereunder, which payments and the right hereto are expressly declared to be
nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of, and
in addition to, any other employment agreements that may exist from time to time
between the parties hereto, concerning any other compensation payable by the
Bank to the Director whether as salary, bonus, or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between
<PAGE>
the parties hereto, nor shall any provision hereof restrict the right of the
Bank to discharge the Director or restrict the right of the Director to
terminate his Directorship.
C. The rights of the Director under this Agreement and of any beneficiary
of the Director shall be solely those of an unsecured creditor of the Bank. Any
asset acquired by the Bank in connection with the liabilities assumed by it
hereunder, shall not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the performance
of the obligations of the Bank but shall be, and remain, a general, unpledged,
unrestricted asset of the Bank.
D. The Bank hereby reserves the right to accelerate the payments specified
in Sections 1, 2, 3 and 5 above without the consent of the Director, his estate,
beneficiaries, or any other person claiming through or under him.
E. The Bank agrees that it will not merge or consolidate with any other
Bank or organization, or permit its business activities to be taken over by any
other organization unless and until succeeding or continuing Bank or other
organization shall expressly assume the rights and obligations of the Bank
herein set forth. The Bank further agrees that, it will not cease its business
activities or terminate its existence, other than as set forth in this Section,
without having made adequate provision for the fulfilling of its obligations
hereunder.
F. This agreement shall be binding upon and inure to the benefit of the
parties, their respective legal representatives, and any "Successor" of the
Company, which shall be deemed substituted for the Company under the terms of
this Agreement. As used in this Agreement the term "Successor" shall include any
person, firm, Corporation or other business entity which at anytime, whether by
merger, purchase or otherwise, acquires all or substantially all of the
Corporation's assets or business.
G. In the event the financial condition of the Bank deteriorates to the
point that under applicable regulatory authority the continued payment of the
amounts due under this Agreement would be considered imprudent, the Bank
reserves the right and authority to modify or amend the terms of the Agreement
as may be required in the best interest of the Bank.
H. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
I. This Agreement shall be subject to and construed under the laws of the
State of North Carolina.
<PAGE>
WITNESS THEREOF, the said Bank has caused this Agreement to be signed in
its Corporate name by its duly authorized officer, and impressed with the
Corporate seal, attested by its Secretary, and the said Director has hereunto
set his hand and seal, all on the date and year first above written.
Home Savings Bank, S.S.B.
By:/s/ Carl M. Hill (SEAL)
------------------------
President
/s/ R. Ronald Swanner (SEAL)
------------------------
Executive Vice President
ATTEST:
__________________________________
WITNESS:
/s/ Sheila S. Barbee
__________________________________
<PAGE>
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of October, 1995 between Home
Savings Bank, S.S.B., a domestic Corporation having its principal office in
Albemarle, North Carolina (hereinafter referred to as the Bank) and Carl M. Hill
of Albemarle, North Carolina (hereinafter referred to as the Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Bank to have the benefit of his continued loyalty and service and also to
assist him in providing for the contingencies of retirement and death; and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $9,700 per year for five years from the date of the execution
of this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
of the Bank upon the attainment of October 1, 2000, the Bank will commence to
pay him $1,681 per month for a continuous period of 120 months. In the event
that the Director should die after becoming entitled to receive said monthly
installments but before any or all of said installments have been paid, the Bank
will pay or will continue to pay said installments to such beneficiary or
beneficiaries as the Director has directed by filing with the Bank a notice in
writing. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the Director's death
shall be commuted on the basis of seven percent per annum compound interest and
shall be paid in a single sum to the executor or administrator of the Director's
estate.
2. Death Benefit: Should the Director die while in the Directorship of the
Bank and prior to the attainment of October 1, 2000 the Bank (beginning at a
date to be determined by the Bank but within six months from the date of such
death) will commence to pay $1,681 per month for a continuous period of 120
months to such beneficiary or beneficiaries as the Director has directed by
filing with the Bank a notice in writing. Irrespective of the above, however, if
the Director dies as a result of suicide within two years of the execution of
this agreement, the death benefit shall not exceed an amount equal to his waived
Directors' fees plus interest at the rate of seven percent per annum compounded
annually. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
any such beneficiary designation. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Director's death shall be
commuted on the basis of seven percent per annum compound interest and
<PAGE>
shall be paid in a single sum to the executor or administrator of the Director's
estate.
3. Termination of Directorship: If the Director terminates his
Directorship, for reasons other than death or disability, he or his beneficiary,
as applicable, shall be entitled on the attainment of October 1, 2000, or his
prior death, to a percentage of the retirement benefits stated in Section 1 of
this Agreement as determined by the following table:
PERCENTAGE OF RETIREMENT
BENEFITS STATED IN SECTION 1 OF
DATE OF TERMINATION OF THIS AGREEMENT TO WHICH THE
DIRECTORSHIP DIRECTOR IS ENTITLED
- --------------------------------------------------------------------------------
September 30, 1996 20%
September 30, 1997 40%
September 30, 1998 60%
September 30, 1999 80%
September 30, 2000 100%
- --------------------------------------------------------------------------------
Irrespective of the above, however, should the Director's termination of
Directorship occur after any "Successor" to the company shall occur, the
director shall be 100% vested in the retirement benefits stated in Section 1 of
this agreement regardless of his years of service. As used in this agreement the
term "Successor" shall include any person, firm, Company or other business
entity which at anytime, whether by merger, purchase or otherwise, acquires all
or substantially all of the Corporation's assets or business.
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the Director
under Section 1 of this Agreement, the Director shall not engage in business
activities which are in competition with the Bank without first obtaining the
written consent of the Bank.
B. During the period the retirement payment is payable to the Director
under Section 1 of the Agreement, the Director shall be available to render
consulting services to the Bank upon request by an officer of the Bank, but such
requests shall not be made more frequently than once each month, and shall not
require a total time expenditure by the director of more than one day per month.
Any travel, lodging, food and other reasonable necessary expenses incurred by
the Director to perform this consulting service shall be paid by the bank. The
Director shall not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability. C.. Payment of the
retirement benefit under this Agreement may be terminated by the Bank, if the
<PAGE>
Director fails to comply with either of the conditions set forth in paragraph
(A) and (B) of this Section 4.
5. Disability
A. If the Director shall become disabled (as defined in paragraph B of
this Section 5) prior to the attainment of his 65th birthday, and prior to his
termination of directorship, the Bank shall commence to pay the same benefit
that would have been payable had the Directors' death occurred on the date of
his disability.
In the event that the Director should die after becoming entitled to
receive said disability benefits but before any or all of said installments have
been paid, the Bank will pay or continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Bank a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the basis of 7
percent per annum compound interest and shall be paid to the executor or
administrator of the estate of the last named beneficiary to die. In the absence
of any such beneficiary designation, any amount remaining unpaid at the
Directors' death shall be commuted on the basis of 7 percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the Directors' estate.
B. The Director shall be considered disabled for the purpose of the
Agreement if he is unable to perform the duties of his position for a continuous
period of six months or more. During such six month period, the Director must be
under the regular care of a State licensed medical doctor (MD.) or osteopathic
physician (DO.). For the purpose of this Section, or any other Section relating
to disability, if there is any dispute between the parties as to the Director's
physical or mental disability, the questions shall be settled by the opinion of
a medical doctor or osteopathic physician licensed in the state in which this
Agreement is signed and who is selected by the mutual consent of the parties to
this Agreement or their representatives. If the parties cannot agree within ten
(10) days after a written request for the designation of an examining physician
is made by either party to the other, then the examining physician shall be
designated by the then President of the Stanly County Medical Society.
Certification of that physician as to the matter in dispute shall be final and
binding upon the parties.
6. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Director, nor his beneficiary shall have any right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments
hereunder, which payments and the right hereto are expressly declared to be
nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of, and
in addition to, any other employment agreements that may exist from time to time
between the parties hereto, concerning any other compensation payable by the
Bank to the Director whether as salary, bonus, or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between
<PAGE>
the parties hereto, nor shall any provision hereof restrict the right of the
Bank to discharge the Director or restrict the right of the Director to
terminate his Directorship.
C. The rights of the Director under this Agreement and of any beneficiary
of the Director shall be solely those of an unsecured creditor of the Bank. Any
asset acquired by the Bank in connection with the liabilities assumed by it
hereunder, shall not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the performance
of the obligations of the Bank but shall be, and remain, a general, unpledged,
unrestricted asset of the Bank.
D. The Bank hereby reserves the right to accelerate the payments specified
in Sections 1, 2, 3 and 5 above without the consent of the Director, his estate,
beneficiaries, or any other person claiming through or under him.
E. The Bank agrees that it will not merge or consolidate with any other
Bank or organization, or permit its business activities to be taken over by any
other organization unless and until succeeding or continuing Bank or other
organization shall expressly assume the rights and obligations of the Bank
herein set forth. The Bank further agrees that, it will not cease its business
activities or terminate its existence, other than as set forth in this Section,
without having made adequate provision for the fulfilling of its obligations
hereunder.
F. This agreement shall be binding upon and inure to the benefit of the
parties, their respective legal representatives, and any "Successor" of the
Company, which shall be deemed substituted for the Company under the terms of
this Agreement. As used in this Agreement the term "Successor" shall include any
person, firm, Corporation or other business entity which at anytime, whether by
merger, purchase or otherwise, acquires all or substantially all of the
Corporation's assets or business.
G. In the event the financial condition of the Bank deteriorates to the
point that under applicable regulatory authority the continued payment of the
amounts due under this Agreement would be considered imprudent, the Bank
reserves the right and authority to modify or amend the terms of the Agreement
as may be required in the best interest of the Bank.
H. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
I. This Agreement shall be subject to and construed under the laws of the
State of North Carolina.
<PAGE>
WITNESS THEREOF, the said Bank has caused this Agreement to be signed in
its Corporate name by its duly authorized officer, and impressed with the
Corporate seal, attested by its Secretary, and the said Director has hereunto
set his hand and seal, all on the date and year first above written.
Home Savings Bank, S.S.B.
By: /s/ R. Ronald Swanner (SEAL)
-------------------------------------
Executive Vice President
/s/ Carl M. Hill (SEAL)
----------------------------------------
Carl M. Hill
ATTEST:
- ----------------------------------
WITNESS:
/s/ Sheila S. Barbee
- ----------------------------------
<PAGE>
RETIREMENT PAYMENT AGREEMENT
AGREEMENT entered into as of the 1st day of December, 1995 between Home
Savings Bank, S.S.B., a domestic Corporation having its principal office in
Albemarle, North Carolina (hereinafter referred to as the Bank) and Gregory E.
Underwood of Albemarle, North Carolina (hereinafter referred to as the
Director).
WITNESSETH:
WHEREAS, the Director is rendering valuable service and it is the desire of
the Bank to have the benefit of his continued loyalty and service and also to
assist him in providing for the contingencies of retirement and death; and,
WHEREAS, the Director hereby agrees to waive fees paid to him as a Director
in the amount of $4,800 per year for five years from the date of the execution
of this agreement;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Should the Director still be in the Directorship
of the Bank upon the attainment of his 65th birthday, the Bank will commence to
pay him $5,777 per month for a continuous period of 120 months. In the event
that the Director should die after becoming entitled to receive said monthly
installments but before any or all of said installments have been paid, the Bank
will pay or will continue to pay said installments to such beneficiary or
beneficiaries as the Director has directed by filing with the Bank a notice in
writing. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the Director's death
shall be commuted on the basis of seven percent per annum compound interest and
shall be paid in a single sum to the executor or administrator of the Director's
estate.
2. Death Benefit: Should the Director die while in the Directorship of the
Bank and prior to the attainment of his 65th birthday the Bank (beginning at a
date to be determined by the Bank but within six months from the date of such
death) will commence to pay $5,777 per month for a continuous period of 120
months to such beneficiary or beneficiaries as the Director has directed by
filing with the Bank a notice in writing. Irrespective of the above, however, if
the Director dies as a result of suicide within two years of the execution of
this agreement, the death benefit shall not exceed an amount equal to his waived
Directors' fees plus interest at the rate of seven percent per annum compounded
annually. In the event of the death of the last named beneficiary before all the
unpaid payments have been made, the balance of any amount which remains unpaid
at said death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
any such beneficiary designation. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Director's death shall be
commuted on the basis of seven percent per annum compound interest and
<PAGE>
shall be paid in a single sum to the executor or administrator of the Director's
estate.
3. Termination of Directorship: If the Director terminates his
Directorship, for reasons other than death or disability, he or his beneficiary,
as applicable, shall be entitled on the attainment of his 65th birthday, or his
prior death, to a percentage of the retirement benefits stated in Section 1 of
this Agreement as determined by the following table:
- --------------------------------------------------------------------------------
PERCENTAGE OF RETIREMENT
BENEFITS STATED IN SECTION 1 OF
DATE OF TERMINATION OF THIS AGREEMENT TO WHICH THE
DIRECTORSHIP DIRECTOR IS ENTITLED
- --------------------------------------------------------------------------------
September 30, 1996 20%
September 30, 1997 40%
September 30, 1998 60%
September 30, 1999 80%
September 30, 2000 100%
- --------------------------------------------------------------------------------
Irrespective of the above, however, should the Director's termination of
Directorship occur after any "Successor" to the company shall occur, the
director shall be 100% vested in the retirement benefits stated in Section 1 of
this agreement regardless of his years of service. As used in this agreement the
term "Successor" shall include any person, firm, Company or other business
entity which at anytime, whether by merger, purchase or otherwise, acquires all
or substantially all of the Corporation's assets or business.
4. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the Director
under Section 1 of this Agreement, the Director shall not engage in business
activities which are in competition with the Bank without first obtaining the
written consent of the Bank.
B. During the period the retirement payment is payable to the Director
under Section 1 of the Agreement, the Director shall be available to render
consulting services to the Bank upon request by an officer of the Bank, but such
requests shall not be made more frequently than once each month, and shall not
require a total time expenditure by the director of more than one day per month.
Any travel, lodging, food and other reasonable necessary expenses incurred by
the Director to perform this consulting service shall be paid by the bank. The
Director shall not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability. C.. Payment of the
retirement benefit under this Agreement may be terminated by the Bank, if the
<PAGE>
Director fails to comply with either of the conditions set forth in paragraph
(A) and (B) of this Section 4.
5. Disability
A. If the Director shall become disabled (as defined in paragraph B of
this Section 5) prior to the attainment of his 65th birthday, and prior to his
termination of directorship, the Bank shall commence to pay the same benefit
that would have been payable had the Directors' death occurred on the date of
his disability.
In the event that the Director should die after becoming entitled to
receive said disability benefits but before any or all of said installments have
been paid, the Bank will pay or continue to pay said installments to such
beneficiary or beneficiaries as the Director has directed by filing with the
Bank a notice in writing. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the basis of 7
percent per annum compound interest and shall be paid to the executor or
administrator of the estate of the last named beneficiary to die. In the absence
of any such beneficiary designation, any amount remaining unpaid at the
Directors' death shall be commuted on the basis of 7 percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the Directors' estate.
B. The Director shall be considered disabled for the purpose of the
Agreement if he is unable to perform the duties of his position for a continuous
period of six months or more. During such six month period, the Director must be
under the regular care of a State licensed medical doctor (MD.) or osteopathic
physician (DO.). For the purpose of this Section, or any other Section relating
to disability, if there is any dispute between the parties as to the Director's
physical or mental disability, the questions shall be settled by the opinion of
a medical doctor or osteopathic physician licensed in the state in which this
Agreement is signed and who is selected by the mutual consent of the parties to
this Agreement or their representatives. If the parties cannot agree within ten
(10) days after a written request for the designation of an examining physician
is made by either party to the other, then the examining physician shall be
designated by the then President of the Stanly County Medical Society.
Certification of that physician as to the matter in dispute shall be final and
binding upon the parties.
6. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Director, nor his beneficiary shall have any right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments
hereunder, which payments and the right hereto are expressly declared to be
nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of, and
in addition to, any other employment agreements that may exist from time to time
between the parties hereto, concerning any other compensation payable by the
Bank to the Director whether as salary, bonus, or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between
<PAGE>
the parties hereto, nor shall any provision hereof restrict the right of the
Bank to discharge the Director or restrict the right of the Director to
terminate his Directorship.
C. The rights of the Director under this Agreement and of any beneficiary
of the Director shall be solely those of an unsecured creditor of the Bank. Any
asset acquired by the Bank in connection with the liabilities assumed by it
hereunder, shall not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the performance
of the obligations of the Bank but shall be, and remain, a general, unpledged,
unrestricted asset of the Bank.
D. The Bank hereby reserves the right to accelerate the payments specified
in Sections 1, 2, 3 and 5 above without the consent of the Director, his estate,
beneficiaries, or any other person claiming through or under him.
E. The Bank agrees that it will not merge or consolidate with any other
Bank or organization, or permit its business activities to be taken over by any
other organization unless and until succeeding or continuing Bank or other
organization shall expressly assume the rights and obligations of the Bank
herein set forth. The Bank further agrees that, it will not cease its business
activities or terminate its existence, other than as set forth in this Section,
without having made adequate provision for the fulfilling of its obligations
hereunder.
F. This agreement shall be binding upon and inure to the benefit of the
parties, their respective legal representatives, and any "Successor" of the
Company, which shall be deemed substituted for the Company under the terms of
this Agreement. As used in this Agreement the term "Successor" shall include any
person, firm, Corporation or other business entity which at anytime, whether by
merger, purchase or otherwise, acquires all or substantially all of the
Corporation's assets or business.
G. In the event the financial condition of the Bank deteriorates to the
point that under applicable regulatory authority the continued payment of the
amounts due under this Agreement would be considered imprudent, the Bank
reserves the right and authority to modify or amend the terms of the Agreement
as may be required in the best interest of the Bank.
H. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
I. This Agreement shall be subject to and construed under the laws of the
State of North Carolina.
<PAGE>
WITNESS THEREOF, the said Bank has caused this Agreement to be signed in
its Corporate name by its duly authorized officer, and impressed with the
Corporate seal, attested by its Secretary, and the said Director has hereunto
set his hand and seal, all on the date and year first above written.
Home Savings Bank, S.S.B.
By:/s/ R. Ronald Swanner (SEAL)
---------------------------------
Executive Vice President
/s/ Gregory E. Underwood (SEAL)
------------------------------------
Gregory E. Underwood
ATTEST:
- -----------------------------------
WITNESS:
/s/ Sheila S. Barbee
- ------------------------------------
<PAGE>
Exhibit (10)(V)
RETIREMENT PLAN AGREEMENT
THIS AGREEMENT entered into this 1st day of September, 1995 between Home
Savings Bank, S.S.B. having its principal office in Albemarle, North Carolina
(hereinafter referred to as the "Bank") and those persons listed on attached
Exhibit A who are current Directors for the Bank, all of whom are residents of
Stanly County, North Carolina (hereinafter individually referred to as
"Director" and collectively referred to as the "Directors").
WITNESSETH:
WHEREAS, the Directors have loyally and faithfully served as Directors of
the Bank for an extended tenure;
AND WHEREAS, for a large part of this tenure as Directors, very little in
the way of monetary compensation has been paid to the Directors by the Bank for
their services;
AND WHEREAS, it is the intent of the Bank to compensate the Directors for
their past services to the Bank, and to provide incentive for the Directors'
continued service to the Bank to insure the continued success of the Bank and to
provide management of the Bank with the benefit of the expertise and experience
of the Directors;
AND WHEREAS, in consideration of the loyal and faithful service of the
Directors over the years, and their rendering of such valuable service to the
Bank, it is the desire of the Bank to assist the Directors in providing for the
contingencies of retirement, death and disability;
NOW, THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Retirement Benefit: Beginning on the first day of the month following
the date of the annual meeting of the bank after the Director's attainment of
age 70, (hereafter sometimes referred to as Normal Retirement Date), the Bank
will commence to pay the Director One Thousand Dollars ($1,000) per month for a
continued period of 120 months (or ten (10) years). Any amount payable under
this Section shall be reduced by any disability payments already paid under
Section 3 of this Agreement. At the sole option of the Bank, the balance of the
monthly retirement benefits to be paid to the Director may be paid in a single
lump sum payment based on the total balance of all payments due under this
Section commuted on the basis of Seven Percent (7%) per annum compounded
interest.
In the event that a Director should die after becoming entitled to receive
said monthly retirement benefit installments, but before any or all of said
installments have been paid, the provisions of Section 2 below shall control the
same as if the Director had died while continuing to serve as a Director. Any
amounts already paid to the Director under this Section shall reduce the death
benefit to be paid under Section 2 below.
<PAGE>
2. Death Benefit: Should a Director die while in the Directorship of the
Bank, the Bank (beginning at a date to be determined by the Bank but within six
(6) months from the date of such death) will commence to pay One Thousand
Dollars ($1,000) per month for a continuous period of 120 months (or ten (10)
years) to such beneficiary or beneficiaries as the Director has directed by
filing with the Bank a notice in writing. Also, irrespective of the above,
however if the Director dies as result of suicide within two years of the
execution of this agreement, no death benefit shall be payable. A copy of the
Beneficiary Designation Form is attached as an Exhibit to this Agreement. Any
amount payable under this Section shall be reduced by any retirement payments
already paid under Section 1, and any disability payments already paid under
Section 3, of this Agreement.
Upon death of the Director while in the Directorship of the Bank, or in the
event that a Director should die after becoming entitled to receive said monthly
benefit installments under either Section 1 or 3 of this Agreement, but before
any or all of said installments have been paid, the Bank (in its sole
discretion) shall have the option to either: (i) pay or continue to pay said
monthly benefit installments to such beneficiary or beneficiaries as the
Director has directed by filing with the Bank a notice in writing; or (ii) pay
the balance of any death benefit installments which remains unpaid commuted on
the basis of Seven Percent (7%) per annum compounded interest in a single lump
sum payment to said designated beneficiary or beneficiaries. If payment option
(i) above is elected by the Bank and the last named beneficiary dies before all
the unpaid death benefit installment payments have been made, the balance of any
amount which remains unpaid at said beneficiary's death shall be commuted on the
basis of Seven Percent (7%) per annum compounded interest and shall be paid in a
single lump sum payment to the executor or administrator of the estate of the
last named beneficiary to die. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Director's death shall be
commuted on the basis of Seven Percent (7%) per annum compounded interest and
shall be paid in a single lump sum payment to the executor or administrator of
the Director's estate.
3. Disability:
A. If a director shall become disabled (as defined in Subsection B of
this Section 3) prior to his Normal Retirement Date while continuing to serve in
the Directorship of the Bank, the Bank shall commence to pay him One Thousand
Dollars ($1,000) per month for a continuous period of 120 months (or Ten (10)
years). At the sole option of the Bank, the balance of the monthly disability
benefit installments to be paid to the Director may be paid in a single lump sum
payment based on the total balance of all payments due under this Section
commuted on the basis of Seven Percent (7%) per annum compounded interest. The
Bank shall notify the disabled Director of its decision to make a lump sum
payment within thirty (30) days following its receipt of written notice of the
Director's disability retirement from service. In the event that a Director
should die after becoming entitled to receive said monthly disability benefit
installments but before any or all of said installments have been paid, the
provisions of Section 2 above shall control the same as if the Director had died
while continuing to serve as a Director. Any amounts already paid to the
Director under this Section shall reduce the death benefit to be paid under
Section 2 above.
<PAGE>
B. The Director shall be considered disabled for the purpose of this
Agreement if he is unable to perform the duties of his position for a continuous
period of six (6) months or more. During such six (6) month period, that
Director must be under the regular care of a State licensed medical doctor
(M.D.) or osteopathic physician (D.O.). For the purpose of this Section, or any
other section relating to disability, if there is any dispute between the
parties as to the Director's physical or mental disability, the questions shall
be settled by the opinion of a medical doctor or osteopathic physician licensed
in the state in which this Agreement is signed and who is selected by the mutual
consent of the parties to this Agreement or their representatives. If the
parties cannot agree within ten (10) days after a written request for the
designation of an examining physician is made by either party to the other, then
the examining physician shall be designated by the then President of the Stanly
County Medical Society. Certification of that physician as to the matter in
dispute shall be final and binding upon the parties.
4. Vesting on Termination of Directorship: If the Director terminates his
Directorship before his Normal Retirement Date, for reasons other than death or
disability, he or his beneficiary, as applicable, shall be entitled at his
Normal Retirement Date, or his prior death, to a percentage of the retirement
benefits stated in Exhibit B of this Agreement as determined by the attached
table. Notwithstanding any other provisions of this agreement, should a
Director's service on the Board of Directors terminate as a result of a
corporate reorganization, consolidation, merger, or sale of substantially all of
the Bank's assets, such Director shall be 100% vested in the retirement benefits
to which the Director would have been entitled to under Section 1 of this
agreement if such corporate reorganization, consolidation, merger or sale of
assets had not occurred.
5. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the Director
under Section 1 of this Agreement, the Director shall not engage in business
activities which are in competition with the Bank without first obtaining the
written consent of the Bank.
B. During the period of the retirement payment is payable to the Director
under Section 1 of the Agreement, the Director shall be available to render
consulting services to the Bank upon the reasonable request by an officer of the
Bank, but such requests shall not be made more frequently than once each month,
and shall not require a total time expenditure by the director of more than one
day per month. Any travel, lodging, food and other reasonable necessary expenses
incurred by the Director to perform this consulting service shall be paid by the
bank. The Director shall not be considered to have breached this condition if he
is unable to consult because of his mental or physical disability.
C. Payment of the retirement benefit under this Agreement may be
terminated by the Bank, if the Director fails to comply with either of the
conditions set forth in subsection A and B of this Section 6.
<PAGE>
6. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Director, nor his beneficiary shall have any right to commute, sell,
assign, transfer or otherwise convey the right to receive any payments and the
right thereto are expressly declared to be nonassignable and nontransferable.
B. The benefits payable under this Agreement shall be independent of, and
in addition to, any other employment agreements that may exist from time to time
between the parties hereto, concerning any other compensation payable by the
Bank to the Director whether as salary, bonus, or otherwise. This Agreement
shall not be deemed to constitute a contract of employment between the parties
hereto, nor shall any provision hereof restrict the right of the Bank to
discharge the Director or restrict the right of the Director to terminate his
Directorship of the Bank.
C. The rights of the Director under this Agreement and of any beneficiary
of the Director shall be solely those of an unsecured creditor of the Bank. Any
asset acquired by the Bank in connection with the liabilities assumed by it
hereunder, shall not be deemed to be held under any trust for the benefit of the
Director or his beneficiaries or to be considered security for the performance
of the obligations of the Bank, but shall be, and remain, a general, unpledged,
unrestricted asset of the Bank.
The Bank may purchase a life insurance policy or policies to aid the Bank
in meeting its obligations under this agreement. The Director shall have no
rights, ownership, or beneficial interest in any such policy or policies which
may be purchased by the Bank on his life. Should the Bank purchase any insurance
policy or policies on the life of the Director, such policy or policies shall in
no way be deemed to constitute collateral or security for this Agreement and
this Agreement shall remain an unsecured promise to pay.
D. The Bank hereby reserves the right to accelerate the payments
specified in Sections 1, 2, 3 and 4 above without the consent of the Director,
his estate, beneficiaries, or any other person claiming through or under him.
E. In the event the financial condition of the Bank deteriorates to the
point that under applicable regulatory authority the continued payment of the
amounts due under this Agreement would be considered imprudent, the Bank
reserves the right and authority to modify or amend the terms of the Agreement
as may be required in the best interests of the Bank.
F. The Bank agrees that it will not merge or consolidate with any other
Bank or organization, or permit its business activities to be taken over by any
other organization unless and until the succeeding or continuing Bank or other
organization shall expressly assume the rights and obligations of the Bank
herein set forth. The Bank further agrees that it will not cease its business
activities or terminate its existence, other than as heretofore set forth in
this Section, without having made adequate provision for the fulfilling of its
obligations hereunder.
<PAGE>
G. This agreement shall be binding upon and inure to the benefit of the
parties, their respective legal representatives, and any "Successor" of the
Bank, which shall be deemed substituted for the Bank under the terms of this
Agreement. As used in this Agreement the term "Successor" shall include any
person, firm, Corporation or other business entity which at any time, whether by
merger, purchase or otherwise, acquires all or substantially all of the
Corporation's assets or business.
H. This Agreement may be revoked or amended in whole or in part by a
writing signed by all of the parties hereto.
I. This Agreement shall be subject to and construed under the laws of the
State of North Carolina.
IN WITNESS THEREOF, the said Bank has caused this Agreement to be signed in
its Corporate name by its duly authorized officer, and impressed with the
Corporate seal, attested by its Secretary, and the said Directors have hereunto
set their hands and seals, all on the day and year first above written.
HOME SAVINGS BANK, S.S.B.
By: /s/ Carl M. Hill
-----------------------------------(Seal)
President
ATTEST:
/s/ Sheila S. Barbee
-------------------------------
Secretary
[CORPORATE SEAL]
WITNESS:
/s/ Sheila S. Barbee /s/ Carl M. Hill
------------------------------- -----------------------------------(Seal)
Carl M. Hill, Director
/s/ Sheila S. Barbee /s/ Caldwell A. Holbrook
------------------------------- -----------------------------------(Seal)
Caldwell A. Holbrook, Director
/s/ Sheila S. Barbee /s/ Joel A. Huneycutt
------------------------------- -----------------------------------(Seal)
Joel A. Huneycutt, Director
/s/ Sheila S. Barbee /s/ Douglas D. Stokes
------------------------------- -----------------------------------(Seal)
Douglas D. Stokes, Director
/s/ Sheila S. Barbee /s/ Robert R. Swanner
------------------------------- -----------------------------------(Seal)
Robert R. Swanner, Director
<PAGE>
EXHIBIT A
Current Directorship and Years of Service
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Director Date Service Began Date of Birth
- ------------------------------------------------------------------------------
<S> <C> <C>
Carl M. Hill 2/61 01-31-1932
Caldwell A. Holbrook 2/85 01-28-1947
Joel A. Huneycutt 2/84 01-24-1942
Douglas D. Stokes 11/88 10-19-1945
Robert R. Swanner 2/81 03-25-1948
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
Vesting Schedule
<TABLE>
<CAPTION>
Year Hill Holbrook Huneycutt Stokes Swanner
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
06-30-95 20% 20% 20% 20% 20%
- -----------------------------------------------------------------------------
06-30-96 40% 40% 40% 40% 40%
- -----------------------------------------------------------------------------
06-30-97 60% 60% 60% 60% 60%
- -----------------------------------------------------------------------------
06-30-98 80% 80% 80% 80% 80%
- -----------------------------------------------------------------------------
06-30-99 100% 100% 100% 100% 100%
- -----------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit (10)(vi)
SUPPLEMENTAL INCOME AGREEMENT
AGREEMENT entered into as of the first day of October, 1985 between Home
Savings and Loan Association, a domestic Corporation having its principal office
in Albemarle, NC (hereinafter referred to as the Company) and Robert Ronald
Swanner of Albemarle, North Carolina (hereinafter referred to as the Employee).
WITNESSETH:
WHEREAS the Employee has been employed by the Company since 4/22/74 and is
now employed in the capacity of Executive Vice President; and,
WHEREAS, the performance of the Employee is such that assurance of his
continued services is essential to the future growth and profits of the Company;
and,
WHEREAS, the Company desires to retain the services of the Employee, and
realizes that if the Employee were to leave the Company it would suffer a
substantial financial loss; and,
WHEREAS, the Employee is willing to continue in the employ of the Company
if the Company will agree to pay to the Employee or his designees certain
benefits in accordance with the provisions and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Remuneration: During the period of the Employee's employment with the
------------
Company, the Company will pay the Employee for services to be rendered:
A. Cash amounts at rates and times mutually agreed upon; and,
B. Additional amounts, payment of which will be deferred pursuant to
the terms hereinafter set forth.
2. Retirement Benefit: Upon attainment of the first day of the month
------------------
following the employee's 65th birthday, the Company will commence to
pay him $861 per month for a continuous period of 180 months. However,
any amount payable under this Section shall be reduced by any
disability payments already paid under Section 4 of this agreement. In
the event that the Employee shall die after becoming entitled to
receive said monthly installments but before any or all of said
installments have been paid, the Company will pay or will continue to
pay said installments to such beneficiary or beneficiaries as the
Employee has directed by filing with the Company a notice in writing.
In the event of the death of the last named beneficiary before all
unpaid payments have been made, the balance of any amount which remains
unpaid at said death shall be commuted on the basis of 9 percent per
annum compound interest and shall be paid in a single sum to the
executor or administrator of the estate
<PAGE>
of the last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the Employee's
death shall be commuted on the basis of 9 percent per annum compound
interest and shall be paid in a single sum to the executor or
administrator of the Employee's estate.
3. Death Benefit: Should the Employee die while in the employment of the
-------------
Company and prior to the attainment of the first day of the month
following his 65th birthday, the Company (beginning at a date to be
determined by the Company but within six months from the date of such
death) will commence to pay $861 per month for a continuous period of
180 months to such beneficiary or beneficiaries as the Employee has
directed by filing with the Company a notice in writing. However, any
amount payable under this Section shall be reduced by any disability
payments already paid under Section 4 of this agreement. Irrespective
of the above, however, if the Employee dies as a result of suicide
within two years of the execution of this Agreement, no death benefit
shall be payable. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance
of any amount which remains unpaid at said death shall be commuted on
the basis of 9 percent per annum compound interest and shall be paid in
a single sum to the executor or administrator of the estate of the last
named beneficiary to die. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Employee's death shall
be commuted on the basis of 9 percent per annum compound interest and
shall be paid in a single sum to the executor or administrators of the
Employee's estate.
4. Disability Benefit:
-------------------
A. If the Employee shall become disabled-(as defined in paragraph B of
this Section 4) prior to the attainment of his 65th birthday and
prior to his termination of employment, the Company shall commence
to pay him $861 per month for a continuous period of 180 months. In
the event that the Employee should die after becoming entitled to
receive said monthly installments but before any or all of said
installments have been paid, the Company will pay or will continue
to pay said installments to such beneficiary or beneficiaries as
the Employee has directed by filing with the Company a notice in
writing. In the event of the death of the last named beneficiary
before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the
basis of 9 percent per annum compound interest and shall be paid in
a single sum to the executor or administrator of the estate of the
last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the
Employee's death shall be commuted on the basis of 9 percent per
annum compound interest and shall be paid in a single sum to the
executor or administrator of the Employee's estate.
<PAGE>
B. The Employee shall be considered disabled for the purposes of this
Agreement if he is unable to perform the duties of his position for
a continuous period of 6 months or more. During such 6 month
period, the Employee must be under the regular care of a State
licensed medical doctor (M.D.) or osteopathic physician (D.O.). For
the purposes of this Section, or any other Section relating to
disability, if there is any dispute between the parties as to the
Employee's physical or mental disability, the question shall be
settled by the opinion of a medical doctor or osteopathic physician
licensed by the state in which this Agreement is signed and who is
selected by the mutual consent of the parties to this Agreement or
their representatives. If the parties cannot agree within ten days
after a written request for the designation of an examining
physician is made by either party to the other, then the examining
physician shall be designated by the then President of the Stanly
County Medical Society. Certification of that physician as to the
matter in dispute shall be final and binding upon the parties.
5. Early Retirement Benefit: In event the Employee's employment with the
------------------------
Company terminates for any reason other than disability, death, or the
attainment of his 65th birthday, and on such termination date the
employee has 30 years of employment with the Company, the employee
shall be entitled to the monthly income stipulated in Section 2 of this
Agreement, reduced by 4% for each year the employee is younger than age
65 when such income begins. Such payments shall begin on a date to be
determined by the Company, but within six months from the date of
termination. However, any amount payable under this Section shall be
reduced by any disability payments already paid under Section 4 of this
Agreement. In the event that the Employee shall die after becoming
entitled to receive said monthly installments but before any or all of
said installments have been paid, the Company will pay or will continue
to pay said installments to such beneficiary or beneficiaries as the
Employee has directed by filing with the Company a notice in writing.
In the event of the death of the last named beneficiary before all
unpaid payments have been made, the balance of any amount which remains
unpaid at said death shall be commuted on the basis of 9 percent per
annum compound interest and shall be paid in a single sum to the
executor or administrator of the estate of the last named beneficiary
to die. In the absence of any such beneficiary designation, any amount
remaining unpaid at the Employee's death shall be commuted on the basis
of 9 percent per annum compound interest and shall be paid in a single
sum to the executor or administrator of the Employee's estate.
6. Forfeiture Provisions:
----------------------
A. During the period the retirement benefit is payable to the Employee
under Section 2 or Section 5 of this Agreement, the Employee shall
not engage in business activities in Stanly County North Carolina
which are in competition with the Company without first obtaining
the written consent of the Company.
<PAGE>
B. During the period the retirement benefit is payable to the Employee
under Section 2 or Section 5 of the Agreement, the Employee shall
be available to render consulting services to the Company upon
request by an officer of the Company, but such requests shall not
be made more frequently than once each month. The Employee shall
not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability.
C. Payment of the retirement benefit under this Agreement may be
terminated by the Company, if the Employee fails to comply with
either of the conditions set forth in paragraph (A) and (B) of this
Section 6.
7. General Provisions:
------------------
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Employee, nor his beneficiary shall have any right to
commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder, which payments and the right
thereto are expressly declared to be nonassignable and
nontransferable.
B. The benefits payable under this Agreement shall be independent of,
and in addition to, any other employment agreements that may exist
from time to time between the parties hereto, concerning any other
compensation payable by the Company to the Employee whether as
salary, bonus, or otherwise. This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto, nor
shall any provision hereof restrict the right of the Company to
discharge the Employee or restrict the right of the Employee to
terminate his employment.
C. The rights of the Employee under this Agreement and of any
beneficiary of the Employee shall be solely those of an unsecured
creditor of the Company. Any asset acquired by the Company in
connection with the liabilities assumed by it hereunder, shall not
be deemed to be held under any trust for the benefit of the
Employee or his beneficiaries or to be considered security for the
performance of the obligations of the Company but shall be, and
remain, a general unpledged, unrestricted asset of the Company.
D. The Company hereby reserves the right to accelerate the payments
specified in Sections 2, 3, 4 and 5 above without the consent of
the Employee, his estate, beneficiaries, or any other person
claiming through or under him.
E. The Company agrees that it will not merge or consolidate with any
other Company or organization, or permit its business activities to
be taken over by any other organization unless and until the
succeeding or continuing Company or other organization shall
expressly assume the rights and
<PAGE>
obligations of the Company herein set forth. The Company further
agrees that it will not cease its business activities or terminate
its existence, other than as heretofore set forth in the Section,
without having made adequate provision for the fulfilling of its
obligations hereunder.
F. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
G. This Agreement shall be subject to and construed under the laws of
the State of North Carolina.
IN WITNESS THEREOF, the said Company has caused this Agreement to be signed
in its Corporate name by its duly authorized officer, and impressed with its
Corporate seal, attested by its Secretary, and the said Employee has hereunto
set his hand and seal, all on the day and year first above written.
ATTEST: HOME SAVINGS AND LOAN ASSOCIATION,
ALBEMARLE, NC
/s/ Sheila S. Barbee By /s/ Carl M. Hill, President (Seal)
- --------------------------------- -------------------------------
WITNESS:/s/ Bobby Doby, Jr. /s/ R. Ronald Swanner (Seal)
------------------------- -------------------------------
(The Employee)
<PAGE>
BENEFICIARY DESIGNATION FORM
As Beneficiary to receive any death benefits payable on my behalf from Home
Savings and Loan Association, Albemarle, NC, I designate the following:
<TABLE>
<CAPTION>
NAME DATE OF BIRTH ADDRESS RELATIONSHIP
---- ------------- ------- ------------
<S> <C> <C> <C>
PRIMARY:
- -------
Beth M. Swanner 10/13/49 1415 Northridge Drive, Albemarle, NC Wife
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTINGENT, If Any:
Mary Leslie Swanner 3/14/71 1415 Northridge Drive, Albemarle, NC Daughter
- ------------------------------------------------------------------------------------
Ashley Leigh Swanner 7/19/76 1415 Northridge Drive, Albemarle, NC Daughter
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
(Note: If more than one primary beneficiary is named, the benefit will be paid
in equal shares to those living. Should the contingent beneficiaries be eligible
to receive the benefits, such benefits will be paid in equal shares to such
living contingent beneficiaries. If none of the designated beneficiaries are
living at such time as the death benefit is payable, such benefit will be paid
to the Executor or the Administrator of your Estate.)
Name of Spouse if not given above:
---------------------------------------------
/s/ Bobby Doby, Jr. /s/ Robert Ronald Swanner
- --------------------------------- ----------------------------------------
Witness Signature of Employee
October 1, 1985
----------------------------------------
Date
Note: The original should be retained by the Company and one copy by the
Employee.
<PAGE>
SUPPLEMENTAL INCOME AGREEMENT
AGREEMENT entered into as of the first day of October, 1985 between Home
Savings and Loan Association , a domestic Corporation having its principal
office in Albemarle, NC (hereinafter referred to as the Company) and Carl Melvin
Hill of Albemarle, North Carolina (hereinafter referred to as the Employee).
WITNESSETH:
WHEREAS the Employee has been employed by the Company since 5/1/57 and is
now employed in the capacity of President; and,
WHEREAS, the performance of the Employee is such that assurance of his
continued services is essential to the future growth and profits of the Company;
and,
WHEREAS, the Company desires to retain the services of the Employee, and
realizes that if the Employee were to leave the Company it would suffer a
substantial financial loss; and,
WHEREAS, the Employee is willing to continue in the employ of the Company
if the Company will agree to pay to the Employee or his designees certain
benefits in accordance with the provisions and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Remuneration: During the period of the Employee's employment with the
------------
Company, the Company will pay the Employee for services to be rendered:
A. Cash amounts at rates and times mutually agreed upon; and,
B. Additional amounts, payment of which will be deferred pursuant to
the terms hereinafter set forth.
2. Retirement Benefit: Upon attainment of the first day of the month
------------------
following the employee's 65th birthday, the Company will commence to
pay him $1,200 per month for a continuous period of 180 months.
However, any amount payable under this Section shall be reduced by any
disability payments already paid under Section 4 of this agreement. In
the event that the Employee shall die after becoming entitled to
receive said monthly installments but before any or all of said
installments have been paid, the Company will pay or will continue to
pay said installments to such beneficiary or beneficiaries as the
Employee has directed by filing with the Company a notice in writing.
In the event of the death of the last named beneficiary before all
unpaid payments have been made, the balance of any amount which remains
unpaid at said death shall be commuted on the basis of 9 percent per
annum compound interest and shall be paid in a single sum to the
executor or administrator of the estate
<PAGE>
interest and shall be paid in a single sum to the executor or
administrator of the estate of the last named beneficiary to die. In
the absence of any such beneficiary designation, any amount remaining
unpaid at the Employee's death shall be commuted on the basis of 9
percent per annum compound interest and shall be paid in a single sum
to the executor or administrator of the Employee's estate.
3. Death Benefit: Should the Employee die while in the employment of the
-------------
Company and prior to the attainment of the first day of the month
following his 65th birthday, the Company (beginning at a date to be
determined by the Company but within six months from the date of such
death) will commence to pay $ 1,200 per month for a continuous period
of 180 months to such beneficiary or beneficiaries as the Employee has
directed by filing with the Company a notice in writing. However, any
amount payable under this Section shall be reduced by any disability
payments already paid under Section 4 of this agreement. Irrespective
of the above, however, if the Employee dies as a result of suicide
within two years of the execution of this Agreement, no death benefit
shall be payable. In the event of the death of the last named
beneficiary before all the unpaid payments have been made, the balance
of any amount which remains unpaid at said death shall be commuted on
the basis of 9 percent per annum compound interest and shall be paid in
a single sum to the executor or administrator of the estate of the last
named beneficiary to die. In the absence of any such beneficiary
designation, any amount remaining unpaid at the Employee's death shall
be commuted on the basis of 9 percent per annum compound interest and
shall be paid in a single sum to the executor or administrators of the
Employee's estate.
4. Disability Benefit:
-------------------
A. If the Employee shall become disabled-(as defined in paragraph B of
this Section 4) prior to the attainment of his 65th birthday and
prior to his termination of employment, the Company shall commence
to pay him $1,200 per month for a continuous period of 180 months.
In the event that the Employee should die after becoming entitled
to receive said monthly installments but before any or all of said
installments have been paid, the Company will pay or will continue
to pay said installments to such beneficiary or beneficiaries as
the Employee has directed by filing with the Company a notice in
writing. In the event of the death of the last named beneficiary
before all the unpaid payments have been made, the balance of any
amount which remains unpaid at said death shall be commuted on the
basis of 9 percent per annum compound interest and shall be paid in
a single sum to the executor or administrator of the estate of the
last named beneficiary to die. In the absence of any such
beneficiary designation, any amount remaining unpaid at the
Employee's death shall be commuted on the basis of 9 percent per
annum compound interest and shall be paid in a single sum to the
executor or administrator of the Employee's estate.
<PAGE>
B. The Employee shall be considered disabled for the purposes of this
Agreement if he is unable to perform the duties of his position for
a continuous period of 6 months or more. During such 6 month
period, the Employee must be under the regular care of a State
licensed medical doctor (M.D.) or osteopathic physician (D.O.). For
the purposes of this Section, or any other Section relating to
disability, if there is any dispute between the parties as to the
Employee's physical or mental disability, the question shall be
settled by the opinion of a medical doctor or osteopathic physician
licensed by the state in which this Agreement is signed and who is
selected by the mutual consent of the parties to this Agreement or
their representatives. If the parties cannot agree within ten days
after a written request for the designation of an examining
physician is made by either party to the other, then the examining
physician shall be designated by the then President of the Stanly
County Medical Society. Certification of that physician as to the
matter in dispute shall be final and binding upon the parties.
5. Early Retirement Benefit: In event the Employee's employment with the
------------------------
Company terminates for any reason other than disability, death, or the
attainment of his 65th birthday, and on such termination date the
employee has 30 years of employment with the Company, the employee
shall be entitled to the monthly income stipulated in Section 2 of this
Agreement, reduced by 4% for each year the employee is younger than age
65 when such income begins. Such payments shall begin on a date to be
determined by the Company, but within six months from the date of
termination. However, any amount payable under this Section shall be
reduced by any disability payments already paid under Section 4 of this
Agreement. In the event that the Employee shall die after becoming
entitled to receive said monthly installments but before any or all of
said installments have been paid, the Company will pay or will continue
to pay said installments to such beneficiary or beneficiaries as the
Employee has directed by filing with the Company a notice in writing.
In the event of the death of the last named beneficiary before all
unpaid payments have been made, the balance of any amount which remains
unpaid at said death shall be commuted on the basis of 9 percent per
annum compound interest and shall be paid in a single sum to the
executor or administrator of the estate of the last named beneficiary
to die. In the absence of any such beneficiary designation, any amount
remaining unpaid at the Employee's death shall be commuted on the basis
of 9 percent per annum compound interest and shall be paid in a single
sum to the executor or administrator of the Employee's estate.
6. Forfeiture Provisions:
----------------------
A. During the period the retirement benefit is payable to the Employee
under Section 2 or Section 5 of this Agreement, the Employee shall
not engage in business activities in Stanly County North Carolina
which are in competition with the Company without first obtaining
the written consent of the Company.
<PAGE>
B. During the period the retirement benefit is payable to the Employee
under Section 2 or Section 5 of the Agreement, the Employee shall
be available to render consulting services to the Company upon
request by an officer of the Company, but such requests shall not
be made more frequently than once each month. The Employee shall
not be considered to have breached this condition if he is unable
to consult because of his mental or physical disability.
C. Payment of the retirement benefit under this Agreement may be
terminated by the Company, if the Employee fails to comply with
either of the conditions set forth in paragraph (A) and (B) of this
Section 6.
7. General Provisions:
------------------
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Employee, nor his beneficiary shall have any right to
commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder, which payments and the right
thereto are expressly declared to be nonassignable and
nontransferable.
B. The benefits payable under this Agreement shall be independent of,
and in addition to, any other employment agreements that may exist
from time to time between the parties hereto, concerning any other
compensation payable by the Company to the Employee whether as
salary, bonus, or otherwise. This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto, nor
shall any provision hereof restrict the right of the Company to
discharge the Employee or restrict the right of the Employee to
terminate his employment.
C. The rights of the Employee under this Agreement and of any
beneficiary of the Employee shall be solely those of an unsecured
creditor of the Company. Any asset acquired by the Company in
connection with the liabilities assumed by it hereunder, shall not
be deemed to be held under any trust for the benefit of the
Employee or his beneficiaries or to be considered security for the
performance of the obligations of the Company but shall be, and
remain, a general unpledged, unrestricted asset of the Company.
D. The Company hereby reserves the right to accelerate the payments
specified in Sections 2, 3, 4 and 5 above without the consent of
the Employee, his estate, beneficiaries, or any other person
claiming through or under him.
E. The Company agrees that it will not merge or consolidate with any
other Company or organization, or permit its business activities to
be taken over by any other organization unless and until the
succeeding or continuing Company or other organization shall
expressly assume the rights and
<PAGE>
obligations of the Company herein set forth. The Company further
agrees that it will not cease its business activities or terminate
its existence, other than as heretofore set forth in the Section,
without having made adequate provision for the fulfilling of its
obligations hereunder.
F. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
G. This Agreement shall be subject to and construed under the laws of
the State of North Carolina.
IN WITNESS THEREOF, the said Company has caused this Agreement to be signed
in its Corporate name by its duly authorized officer, and impressed with its
Corporate seal, attested by its Secretary, and the said Employee has hereunto
set his hand and seal, all on the day and year first above written.
ATTEST: HOME SAVINGS AND LOAN ASSOCIATION,
ALBEMARLE, NC
/s/ Sheila S. Barbee By /s/ Carl M. Hill, President (Seal)
- ---------------------------- ----------------------------------
WITNESS: /s/ Bobby Doby, Jr. /s/ Carl M. Hill (Seal)
------------------- -------------------------------------
(The Employee)
<PAGE>
BENEFICIARY DESIGNATION FORM
As Beneficiary to receive any death benefits payable on my behalf from Home
Savings and Loan Association, Albemarle, NC, I designate the following :
NAME DATE OF BIRTH ADDRESS RELATIONSHIP
---- ------------- ------- ------------
PRIMARY:
- -------
Peggy B. Hill 12/10/27 P.O. Box 489, Albemarle, N.C. Wife
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTINGENT, If Any:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Note: If more than one primary beneficiary is named, the benefit will be paid
in equal shares to those living. Should the contingent beneficiaries be eligible
to receive the benefits, such benefits will be paid in equal shares to such
living contingent beneficiaries. If none of the designated beneficiaries are
living at such time as the death benefit is payable, such benefit will be paid
to the Executor or the Administrator of your Estate.)
Name of Spouse if not given above:
----------------------------------------------
/s/ Bobby Doby, Jr. /s/ Carl M. Hill
- ------------------------------- -----------------------------------
Witness Signature of Employee
October 1, 1985
-----------------------------------
Date
Note: The original should be retained by the Company and one copy by the
Employee.
<PAGE>
FIRST AMENDMENT
TO
CARL MELVIN HILL'S SUPPLEMENTAL INCOME AGREEMENT
-------------------------------------------------
This First Amendment to this "Agreement" entered into by Home Savings &
Loan Association, hereafter referred to as "Company" and Carl Melvin Hill,
hereafter referred to as "Employee", is made this 20th day of May , 1991.
-----
WITNESSETH
----------
WHEREAS, Home Savings & Loan Association (Company), in Albemarle, North
Carolina, entered into a non-qualified Supplemental Income Agreement (Agreement)
on October 1, 1985 with Carl Melvin Hill (Employee); and
WHEREAS, the Board of Directors of the Company have by appropriate
resolution authorized the amendment of this Agreement to be effective April 1,
1991. The following sections of this Agreement are amended as follows:
Section 2, Retirement Benefit. The first sentence of this Section 2 is
------------------
deleted and the following is substituted:
"Upon the later of (i) the Employee's 62nd birthday, or (ii) his
actual retirement, the Company will commence to pay the Employee
$1,200 per month for a continuous period of 216 months"
Section 3, Death Benefit. The first sentence of this Section 3 is deleted
--------------
and the following is substituted:
"Should the Employee die while in the employment of the Company and
prior to the later of the attainment of the first day of the month
following his 62nd birthday or the commencement of the retirement
benefit payable in Section 2 above, the Company (beginning at a date
to be determined by the Company but within six months from the date of
such death) will commence to pay $1,200 per month for a continuous
period of 216 months to such beneficiary or beneficiaries as the
Employee has directed by filing with the Company a notice in writing."
Section 4, Disability Benefit - Subsection A. The first sentence of Section
-------------------
4A is deleted and the following is substituted:
"If the Employee shall become disabled (as defined in paragraph B of
this Section 4) prior to the attainment of his 62nd birthday and prior
<PAGE>
to his termination of employment, the Company shall commence to pay
him $1,200 per month for a continuous period of 216 months."
Section 5, Early Retirement Benefit. In the first sentence of this Section
--------------------------
5, the term "65th birthday" is replaced by the term "62nd birthday" in both
places in this first sentence.
IN WITNESS WHEREOF, the Company has caused this Agreement to be amended and
signed in its Corporate name by its duly authorized officer and attested its
Secretary, and said Employee has hereunto set his hand and seal, on 20th day of
May , 1991.
(SEAL) HOME SAVINGS & LOAN ASSOCIATION
Albemarle, North Carolina
By: /s/ R. Ronald Swanner, Exec. Vice President
---------------------------------------------
ATTEST:
/s/ Sheila S. Barbee
- ---------------------------
SECRETARY
EMPLOYEE:
/s/ Bonnie P. Pinion /s/ Carl M. Hill
- ------------------------- ------------------------------------------------
Witness Carl M. Hill
<PAGE>
Exhibit (10)(vi)
Registration Statement
Supplemental Income Plan
Home Savings Bank, S.S.B.
of
Albemarle, North Carolina
1. Home Savings Bank, S.S.B.
P.O. Box 489
Albemarle, NC 28002-0489
Employer Identification number: 56-0266500
3. This Registration Statement is to declare that Home Savings Bank, S.S.B.
maintains a Supplemental Income Plan solely for the purpose of providing
deferred compensation for a select group of management.
4. Home Savings Bank, S.S.B. in Albemarle, North Carolina currently maintains
one such plan with two employees.
5. Document attached to the Registration Statement.
Home Savings Bank, S.S.B.
Date: 10-3-95 By: /s/ Carl M. Hill
---------------------- ---------------------------------------
President
<PAGE>
SUPPLEMENTAL INCOME AGREEMENT
AGREEMENT entered into as of the 1st day of September, 1995 between
Home Savings Association, of Albemarle, North Carolina, a domestic Corporation
having its principal office in Albemarle, North Carolina (hereinafter referred
to as the Company) and Robert Ronald Swanner (hereinafter referred to as the
Employee).
WITNESSETH:
WHEREAS, the Employee has been an Employee of the Company since
4/22/74 and,
WHEREAS, the value of the Employee is such that assurance of his
continued service is essential to the future growth and profits of the Company;
and,
WHEREAS, the Company desires to retain the service of the Employee,
and realizes that if the Employee were to terminate his employment it would
suffer a substantial financial loss;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Remuneration: During the period of the Employee's employment with
the Company, the Company will pay the Employee for services to be rendered;
A. Cash amounts at rates and time mutually agreed upon and,
B. Additional amounts, payment of which will be deferred pursuant
to the terms hereinafter set forth.
2. Retirement Benefit: Upon the attainment of the Employee's 65th
birthday or, the Employee's actual later retirement after the Employee's actual
later retirement, the Company will commence to pay the Employee $15,000 annually
for a continuous period of 15 years. In the event that the Employee should die
after becoming entitled to receive said monthly installments but before any or
all of said installments have been paid, the Company will pay or will continue
to pay said installments to such beneficiary or beneficiaries as the Employee
has directed by filing with the Company a notice in writing. In the event of the
death of the last named beneficiary before all of the unpaid payments have been
made, the balance of any amount which remains unpaid at said death shall be
commuted on the basis of seven percent per annum compound interest and shall be
paid in a single sum to the executor or administrator of the estate of the last
named beneficiary to die. In the absence of such beneficiary designation, any
amount remaining unpaid at Employee's death shall be commuted on the basis of
seven percent per annum compound interest and shall be paid in a single sum to
the executor or administrator of the Employee's estate.
3. Death Benefit: Should the Employee die while in the employment of
the Company and prior to age 65 the Company (beginning at a date to be
determined by the Company but within six months from the date of such death)
will commence to pay $15,000 annually for a continuous period of 15 years to
such beneficiary or beneficiaries as the Employee has directed by filing with
<PAGE>
the Company a notice in writing. Irrespective of the above, however, if the
Employee dies as result of suicide within two years of the execution of this
agreement, no death benefit shall be payable. In the event that the Executive
should die after becoming entitled to receive said monthly installments but
before any or all of said installments have been paid, the Company will pay or
will continue to pay said installments to such beneficiary or beneficiaries as
the Executive has directed by filing with the Company a notice in writing. In
the event of the death of the last named beneficiary before all the unpaid
payments have been made, the balance of any amount which remains unpaid at said
death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of any such
beneficiary designation any amount remaining unpaid at the Employee's death
shall be commuted on the basis of seven percent per annum compound interest
shall be paid in a single sum to the executor or administrator of the Employee's
estate.
4. Termination of Employment: If the Employee terminates his
Employment before qualifying for retirement benefits as defined in section 2
above, for reasons other than death or disability, he or his beneficiary, as
applicable, shall be entitled at age 65, or his prior death, to a percentage of
the retirement benefits stated in Section 2 of this Agreement as determined by
the following table:
PERCENTAGE OF RETIREMENT
BENEFITS STATED IN SECTION 2
DATE OF TERMINATION OF OF THIS AGREEMENT TO WHICH
EMPLOYMENT THE EMPLOYEE IS ENTITLED
---------- ------------------------
Prior to 09-30-95 0%
09-30-95 100%
Irrespective of the above, however, should the employee's termination of
employment occur after any "Successor" to the company shall occur, the employee
shall be 100% vested in the retirement benefits stated in Section 2 of this
agreement. The term "Successor" shall include any person, firm, Company or other
business entity which at anytime, whether by merger, purchase or otherwise,
acquires all or substantially all of the Corporation's assets or business.
5. Disability:
A. If the Employee shall become disabled (as defined in Subsection B
of this Section 5) prior to his retirement date while continuing
to serve in the Employment of the Association, the Association
shall commence to pay him the same benefit that would have been
payable had the Employee's death occurred on the date of his
disability. At the sole option of the Association, the balance of
the monthly disability benefit installments to be paid to the
Employee may be paid in a single lump sum payment based on the
total balance of all payments due under this Section commuted on
the basis of Seven Percent (7%) per annum compounded interest. The
Association shall notify the retiring Employee of its decision to
make a lump sum payment within thirty (30) days following its
receipt of written notice of the Employee's retirement
<PAGE>
from service. In the event that a Employee should die after
becoming entitled to receive said monthly disability benefit
installments but before any or all of said installments have been
paid, the provisions of Section 3 above shall control the same as
if the Employee had died while Employed. Any amounts already paid
to the Employee under this Section shall reduce the death benefit
to be paid under Section 3 above.
B. The Employee shall be considered disabled for the purpose of this
Agreement if he is unable to perform the duties of his position
for a continuous period of six (6) months or more. During such six
(6) month period, that Employee must be under the regular care of
a State licensed medical doctor (M.D.) or osteopathic physician
(D.O.). For the purpose of this Section, or any other section
relating to disability, if there is any dispute between the
parties as to the Employee's physical or mental disability, the
questions shall be settled by the opinion of a medical doctor or
osteopathic physician licensed in the state in which this
Agreement is signed and who is selected by the mutual consent of
the parties to this Agreement or their representatives. If the
parties cannot agree within ten (10) days after a written request
for the designation of an examining physician is made by either
party to the other, then the examining physician shall be
designated by the then President of the Stanly County Medical
Society. Certification of that physician as to the matter in
dispute shall be final and binding upon the parties.
6. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the
Employee under Section 2 of this Agreement, the Employee shall not
engage in business activities in Albemarle, North Carolina, which
are in competition with the Company without first obtaining the
written consent of the Company.
B. During the period the retirement payment is payable to the
Employee under Section 1 of the Agreement, the Employee shall be
available to render consulting services to the Association upon
request by an officer of the Company, but such requests shall not
be made more frequently than once each month, and shall not
require a total time expenditure by the employee of more than one
day per month. Any travel, lodging, food and other reasonable
necessary expenses incurred by the Employee to perform this
consulting service shall be paid by the association. The Employee
shall not be considered to have breached this condition if he is
unable to consult because of his mental or physical disability.
C. Payments of the retirement benefit under this Agreement may be
terminated by the Company, if the Employee fails to comply with
either of the conditions set forth in paragraph (A) and (B) of
this Section 6.
<PAGE>
7. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Employee, nor his beneficiary shall have any right to
commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder, which payments and the right
thereto are expressly declared to be nonassignable and
nontransferable.
B. The benefits payable under this Agreement shall be independent of,
and in addition to, any other employment agreements that may exist
from time to time between the parties hereto, concerning any other
compensation payable by the Company to the Employee whether as
salary, bonus, or otherwise. This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto,
not shall any provision hereof restrict the right of the Company
to discharge the Employee or restrict the right of the Employee to
terminate his employment.
C. The rights of the Employee under this Agreement and of any
beneficiary of the Employee shall be solely those of an unsecured
creditor of the Company. Any asset acquired by the Company in
connection with the liabilities assumed by it hereunder, shall not
be deemed to be held under any trust for the benefit of the
Employee or his beneficiaries or to be considered security for the
performances of the obligations of the Company but shall be, and
remain, a general, unpledged, unrestricted asset of the Company.
D. The Company hereby reserves the right to accelerate the payments
specified in Section 2, 3, 4 and 5 above without the consent of
the employee, his estate, beneficiaries, or any other person
claiming through or under him.
E. The Company agrees that it will not merge or consolidate with any
other Company or organization, or permit its business activities
to be taken over by any other organization unless and until the
succeeding or continuing Company or other organization shall
expressly assume the rights and obligations of the Company herein
set forth. The Company further agrees that it will not cease its
business activities or terminate its existence other than as
heretofore set forth in this Section, without having made adequate
provision for the fulfilling of its obligations hereunder.
F. This Agreement shall be binding upon and inure to the benefit of
the parties, their respective legal representatives, and any
"Successor" of the Company, which shall be deemed substituted for
the Company under the terms of this Agreement. As used in this
Agreement the term "Successor" shall include any person firm,
Corporation or other business entity which at anytime, whether by
merger purchase or otherwise, acquire all or substantially all of
the Corporation's assets business.
G. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
<PAGE>
H. In the event the financial condition of the Bank deteriorates to
the point that under applicable regulatory authority the continued
payment of the amounts due under this Agreement would be
considered imprudent, the Bank reserves the right and authority to
modify or amend the terms of the Agreement as may be required in
the best interest of the Bank.
I. This Agreement shall be subject to and construed under the laws of
the State of North Carolina.
IN WITNESS THEREOF, the Said Company has caused this Agreement to be
signed in its Corporate name by its duly authorized officer, and impresses with
its Corporate seal, attested by its secretary, and the said Employee has
hereunto set his hand and seal, all on the date and year first above written.
Home Savings Bank, S.S.B.
By: /s/ Carl M. Hill
-----------------------------------------
President
/s/ Robert Ronald Swanner
--------------------------------------------
Robert Ronald Swanner
ATTEST:
/s/ Sheila S. Barbee, Secretary
- -----------------------------------------------
WITNESS:
/s/ Sheila S. Barbee
- -----------------------------------------------------
<PAGE>
ERISA CLAIMS PROCEDURE CLAIMS PROCEDURE.
In accord with the Employee Retirement Income Security Act of 1974,
the following claims procedure is hereby adopted by the Company as the claims
procedure for this unfunded nonqualified deferred compensation plan; and, for
the purposes of implementing such claims procedure (but not for any other
purpose) Home Savings Bank, S.S.B. is hereby designated as the named fiduciary
and plan administrator of this plan:
a. Filing of a Claim for Benefits. A participant or beneficiary of
the plan shall make a claim for the benefits provided by delivering a written
request to the plan administrator.
b. Notification to Claimant of Decision. If a claim is wholly or
partially denied, notice of the decision, meeting the requirements of paragraph
c following shall be furnished to the claimant within a reasonable period of
time after receipt of the claim by the plan administrator.
c. Content of Notice. The plan administrator shall provide to every
claimant who is denied a claim for benefits written notice setting forth in a
manner calculated to be understood by the claimant, the following:
(1) The specific reason or reasons for the denial;
(2) Specific reference to pertinent plan provision on which the
denial is based.
(3) A description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why any such material or information is
necessary; and,
(4) An explanation of the plan's claim review procedure set forth
in paragraphs d and e following.
d. Review Procedure. The purpose of the review procedure, set forth
in this paragraph and in paragraph e following, is to provide a procedure by
which a claimant under the plan may have a reasonable opportunity to appeal a
denial of a claim to the named fiduciary for a full and fair review. To
accomplish that purpose, the claimant or his duly authorized representative:
(1) May request a review upon written application to the plan
administrator;
(2) May review pertinent plan documents; and
(3) May submit issues and comments in writing. A claimant (or his
duly authorized representative) shall request a review by
filing a written application for review with the plan
administrator at any time within sixty (60) days after receipt
by the claimant of written notice of the denial of his claim.
e. Decision on Review. The decision on review of a denied claim shall
be made in the following manner:
(1) The decision on review shall be made by the plan
administrator, who may in his discretion hold a hearing on the
denied claim. The plan administrator shall
<PAGE>
make his decision promptly, and not later than sixty (60) days
after receipt of the request for review, unless special
circumstances (such as the need to hold a hearing require an
extension of time for processing, in which case a decision
shall be rendered as soon as possible, but not later than one
hundred twenty (120) days after receipt of the request for
review).
(2) The decision on review shall be in writing and shall include
specific reasons for the decisions, written in a manner
calculated to be understood by the claimant, and specific
references to the pertinent plan provisions on which the
decision is based.
<PAGE>
BENEFICIARY DESIGNATION FORM
As Beneficiary to receive any death benefits payable on my behalf from
Home Savings Bank, S.S.B., I designate the following:
NAME DATE OF BIRTH ADDRESS RELATIONSHIP
PRIMARY:
Beth M. Swanner 10/13/49 1415 Northridge Drive, Albermarle, NC Wife
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CONTINGENT, If Any:
Mary Leslie Swanner 3/14/71 1415 Northridge Drive, Albermarle, NC Daughter
- -------------------------------------------------------------------------------
Ashley Leigh Swanner 7/19/76 1415 Northridge Drive, Albermarle, NC Daughter
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Note: If more than one primary beneficiary is named, the benefit will be paid in
equal shares to those living. Should the contingent beneficiaries be eligible to
receive the benefits, such benefits will be paid in equal shares to such living
contingent beneficiaries.
Each amount payable after my death shall be paid exclusively to the Primary
Beneficiary if living at the time such payments become due. The right is
reserved to the Primary Beneficiary to change contingent beneficiaries after my
death. For the purposes of this agreement, the term "contingent beneficiaries"
shall include any beneficiary who is not receiving payments. A New contingent
beneficiary may be designated from time to time by filing at the Home Office of
the Company written notice thereof in such form as the Company may require. When
such notice is received at the Home Office, the change shall be effective on the
date the notice was signed, whether or not the Primary Beneficiary is living at
the time of the receipt, but without prejudice to the Company on account of any
payment made by it before receipt of the written notice at its Home Office.
Name of Spouse of not given above:
---------------------------------------------
/s/ Sheila S. Barbee /s/ Robert Ronald Swanner
- ------------------------------- ---------------------------------------
Witness Signature of Employee
9/26/96
- --------------------------------
Date
Note: The original should be retained by the Association, one copy by the
Employee and one copy resumed to Smith/Broadhurst, Inc.
<PAGE>
Registration Statement
Supplemental Income Plan
Home Savings Bank, S.S.B.
of
Albemarle, North Carolina
1. Home Savings Bank, S.S.B.
P.O. Box 489
Albemarle, NC 28002-0489
Employer Identification number: 56-0266500
3. This Registration Statement is to declare that Home Savings Bank, S.S.B.
maintains a Supplemental Income Plan solely for the purpose of providing
deferred compensation for a select group of management.
4. Home Savings Bank, S.S.B. in Albemarle, North Carolina currently maintains
one such plan with two employees.
5. Document attached to the Registration Statement.
Home Savings Bank, S.S.B.
Date: 10-3-95 By: /s/ Carl M. Hill
--------------------- -------------------------------
President
<PAGE>
SUPPLEMENTAL INCOME AGREEMENT
AGREEMENT entered into as of the 1st day of September, 1995 between
Home Savings Association, of Albemarle, North Carolina, a domestic Corporation
having its principal office in Albemarle, North Carolina (hereinafter referred
to as the Company) and Carl Melvin Hill (hereinafter referred to as the
Employee).
WITNESSETH:
WHEREAS, the Employee has been an Employee of the Company since 5/1/57
and,
WHEREAS, the value of the Employee is such that assurance of his
continued service is essential to the future growth and profits of the Company;
and,
WHEREAS, the Company desires to retain the service of the Employee,
and realizes that if the Employee were to terminate his employment it would
suffer a substantial financial loss;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto mutually agree as follows:
1. Remuneration: During the period of the Employee's employment with
the Company, the Company will pay the Employee for services to be rendered;
A. Cash amounts at rates and time mutually agreed upon and,
B. Additional amounts, payment of which will be deferred pursuant
to the terms hereinafter set forth.
2. Retirement Benefit: Upon the attainment of the Employee's 65th
birthday or, the Employee's actual later retirement after the Employee's actual
later retirement, the Company will commence to pay the Employee $25,000 annually
for a continuous period of 15 years. In the event that the Employee should die
after becoming entitled to receive said monthly installments but before any or
all of said installments have been paid, the Company will pay or will continue
to pay said installments to such beneficiary or beneficiaries as the Employee
has directed by filing with the Company a notice in writing. In the event of the
death of the last named beneficiary before all of the unpaid payments have been
made, the balance of any amount which remains unpaid at said death shall be
commuted on the basis of seven percent per annum compound interest and shall be
paid in a single sum to the executor or administrator of the estate of the last
named beneficiary to die. In the absence of such beneficiary designation, any
amount remaining unpaid at Employee's death shall be commuted on the basis of
seven percent per annum compound interest and shall be paid in a single sum to
the executor or administrator of the Employee's estate.
3. Death Benefit: Should the Employee die while in the employment of
the Company and prior to age 65 the Company (beginning at a date to be
determined by the Company but within six months from the date of such death)
will commence to pay $25,000 annually for a continuous period of 15 years to
such beneficiary or beneficiaries as the Employee has directed by filing with
<PAGE>
the Company a notice in writing. Irrespective of the above, however, if the
Employee dies as result of suicide within two years of the execution of this
agreement, no death benefit shall be payable. In the event that the Executive
should die after becoming entitled to receive said monthly installments but
before any or all of said installments have been paid, the Company will pay or
will continue to pay said installments to such beneficiary or beneficiaries as
the Executive has directed by filing with the Company a notice in writing. In
the event of the death of the last named beneficiary before all the unpaid
payments have been made, the balance of any amount which remains unpaid at said
death shall be commuted on the basis of seven percent per annum compound
interest and shall be paid in a single sum to the executor or administrator of
the estate of the last named beneficiary to die. In the absence of any such
beneficiary designation any amount remaining unpaid at the Employee's death
shall be commuted on the basis of seven percent per annum compound interest
shall be paid in a single sum to the executor or administrator of the Employee's
estate.
4. Termination of Employment: If the Employee terminates his
Employment before qualifying for retirement benefits as defined in section 2
above, for reasons other than death or disability, he or his beneficiary, as
applicable, shall be entitled at age 65, or his prior death, to a percentage of
the retirement benefits stated in Section 2 of this Agreement as determined by
the following table:
PERCENTAGE OF RETIREMENT
BENEFITS STATED IN SECTION 2
DATE OF TERMINATION OF OF THIS AGREEMENT TO WHICH
EMPLOYMENT THE EMPLOYEE IS ENTITLED
---------- ------------------------
Prior to 09-30-95 0%
09-30-95 100%
Irrespective of the above, however, should the employee's termination of
employment occur after any "Successor" to the company shall occur, the employee
shall be 100% vested in the retirement benefits stated in Section 2 of this
agreement. The term "Successor" shall include any person, firm, Company or other
business entity which at anytime, whether by merger, purchase or otherwise,
acquires all or substantially all of the Corporation's assets or business.
5. Disability:
A. If the Employee shall become disabled (as defined in Subsection B
of this Section 5) prior to his retirement date while continuing
to serve in the Employment of the Association, the Association
shall commence to pay him the same benefit that would have been
payable had the Employee's death occurred on the date of his
disability. At the sole option of the Association, the balance of
the monthly disability benefit installments to be paid to the
Employee may be paid in a single lump sum payment based on the
total balance of all payments due under this Section commuted on
the basis of Seven Percent (7%) per annum compounded interest. The
Association shall notify the retiring Employee of its decision to
make a lump sum payment within thirty (30) days following its
receipt of written notice of the Employee's retirement
<PAGE>
from service. In the event that a Employee should die after
becoming entitled to receive said monthly disability benefit
installments but before any or all of said installments have been
paid, the provisions of Section 3 above shall control the same as
if the Employee had died while Employed. Any amounts already paid
to the Employee under this Section shall reduce the death benefit
to be paid under Section 3 above.
B. The Employee shall be considered disabled for the purpose of this
Agreement if he is unable to perform the duties of his position
for a continuous period of six (6) months or more. During such six
(6) month period, that Employee must be under the regular care of
a State licensed medical doctor (M.D.) or osteopathic physician
(D.O.). For the purpose of this Section, or any other section
relating to disability, if there is any dispute between the
parties as to the Employee's physical or mental disability, the
questions shall be settled by the opinion of a medical doctor or
osteopathic physician licensed in the state in which this
Agreement is signed and who is selected by the mutual consent of
the parties to this Agreement or their representatives. If the
parties cannot agree within ten (10) days after a written request
for the designation of an examining physician is made by either
party to the other, then the examining physician shall be
designated by the then President of the Stanly County Medical
Society. Certification of that physician as to the matter in
dispute shall be final and binding upon the parties.
6. Forfeiture Provisions:
A. During the period the retirement benefit is payable to the
Employee under Section 2 of this Agreement, the Employee shall not
engage in business activities in Albemarle, North Carolina, which
are in competition with the Company without first obtaining the
written consent of the Company.
B. During the period the retirement payment is payable to the
Employee under Section 1 of the Agreement, the Employee shall be
available to render consulting services to the Association upon
request by an officer of the Company, but such requests shall not
be made more frequently than once each month, and shall not
require a total time expenditure by the employee of more than one
day per month. Any travel, lodging, food and other reasonable
necessary expenses incurred by the Employee to perform this
consulting service shall be paid by the association. The Employee
shall not be considered to have breached this condition if he is
unable to consult because of his mental or physical disability.
C. Payments of the retirement benefit under this Agreement may be
terminated by the Company, if the Employee fails to comply with
either of the conditions set forth in paragraph (A) and (B) of
this Section 6.
<PAGE>
7. General Provisions:
A. Except as otherwise provided by this Agreement, it is agreed that
neither the Employee, nor his beneficiary shall have any right to
commute, sell, assign, transfer or otherwise convey the right to
receive any payments hereunder, which payments and the right
thereto are expressly declared to be nonassignable and
nontransferable.
B. The benefits payable under this Agreement shall be independent of,
and in addition to, any other employment agreements that may exist
from time to time between the parties hereto, concerning any other
compensation payable by the Company to the Employee whether as
salary, bonus, or otherwise. This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto,
not shall any provision hereof restrict the right of the Company
to discharge the Employee or restrict the right of the Employee to
terminate his employment.
C. The rights of the Employee under this Agreement and of any
beneficiary of the Employee shall be solely those of an unsecured
creditor of the Company. Any asset acquired by the Company in
connection with the liabilities assumed by it hereunder, shall not
be deemed to be held under any trust for the benefit of the
Employee or his beneficiaries or to be considered security for the
performances of the obligations of the Company but shall be, and
remain, a general, unpledged, unrestricted asset of the Company.
D. The Company hereby reserves the right to accelerate the payments
specified in Section 2, 3, 4 and 5 above without the consent of
the employee, his estate, beneficiaries, or any other person
claiming through or under him.
E. The Company agrees that it will not merge or consolidate with any
other Company or organization, or permit its business activities
to be taken over by any other organization unless and until the
succeeding or continuing Company or other organization shall
expressly assume the rights and obligations of the Company herein
set forth. The Company further agrees that it will not cease its
business activities or terminate its existence other than as
heretofore set forth in this Section, without having made adequate
provision for the fulfilling of its obligations hereunder.
F. This Agreement shall be binding upon and inure to the benefit of
the parties, their respective legal representatives, and any
"Successor" of the Company, which shall be deemed substituted for
the Company under the terms of this Agreement. As used in this
Agreement the term "Successor" shall include any person firm,
Corporation or other business entity which at anytime, whether by
merger purchase or otherwise, acquire all or substantially all of
the Corporation's assets business.
G. This Agreement may be revoked or amended in whole or in part by a
writing signed by both of the parties hereto.
<PAGE>
H. In the event the financial condition of the Bank deteriorates to
the point that under applicable regulatory authority the continued
payment of the amounts due under this Agreement would be
considered imprudent, the Bank reserves the right and authority to
modify or amend the terms of the Agreement as may be required in
the best interest of the Bank.
I. This Agreement shall be subject to and construed under the laws of
the State of North Carolina.
IN WITNESS THEREOF, the Said Company has caused this Agreement to be
signed in its Corporate name by its duly authorized officer, and impresses with
its Corporate seal, attested by its secretary, and the said Employee has
hereunto set his hand and seal, all on the date and year first above written.
Home Savings Bank, S.S.B.
By: /s/ Robert Ronald Swanner
-----------------------------------
(Executive Vice President)
/s/ Carl Melvin Hill
-----------------------------------
Carl Melvin Hill
ATTEST:
/s/ Sheila S. Barbee, Secretary
- --------------------------------------
WITNESS:
/s/ Sheila S. Barbee
- --------------------------------------
<PAGE>
ERISA CLAIMS PROCEDURE CLAIMS PROCEDURE.
In accord with the Employee Retirement Income Security Act of 1974,
the following claims procedure is hereby adopted by the Company as the claims
procedure for this unfunded nonqualified deferred compensation plan; and, for
the purposes of implementing such claims procedure (but not for any other
purpose) Home Savings Bank, S.S.B. is hereby designated as the named fiduciary
and plan administrator of this plan:
a. Filing of a Claim for Benefits. A participant or beneficiary of
the plan shall make a claim for the benefits provided by delivering a written
request to the plan administrator.
b. Notification to Claimant of Decision. If a claim is wholly or
partially denied, notice of the decision, meeting the requirements of paragraph
c following shall be furnished to the claimant within a reasonable period of
time after receipt of the claim by the plan administrator.
c. Content of Notice. The plan administrator shall provide to every
claimant who is denied a claim for benefits written notice setting forth in a
manner calculated to be understood by the claimant, the following:
(1) The specific reason or reasons for the denial;
(2) Specific reference to pertinent plan provision on which the
denial is based.
(3) A description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of why any such material or information is
necessary; and,
(4) An explanation of the plan's claim review procedure set forth
in paragraphs d and e following.
d. Review Procedure. The purpose of the review procedure, set forth
in this paragraph and in paragraph e following, is to provide a procedure by
which a claimant under the plan may have a reasonable opportunity to appeal a
denial of a claim to the named fiduciary for a full and fair review. To
accomplish that purpose, the claimant or his duly authorized representative:
(1) May request a review upon written
application to the plan administrator;
(2) May review pertinent plan documents; and
(3) May submit issues and comments in writing. A claimant (or his
duly authorized representative) shall request a review by
filing a written application for review with the plan
administrator at any time within sixty (60) days after receipt
by the claimant of written notice of the denial of his claim.
e. Decision on Review. The decision on review of a denied claim shall
be made in the following manner:
(1) The decision on review shall be made by the plan
administrator, who may in his discretion hold a hearing on the
denied claim. The plan administrator shall
<PAGE>
make his decision promptly, and not later than sixty (60) days
after receipt of the request for review, unless special
circumstances (such as the need to hold a hearing require an
extension of time for processing, in which case a decision
shall be rendered as soon as possible, but not later than one
hundred twenty (120) days after receipt of the request for
review).
(2) The decision on review shall be in writing and shall include
specific reasons for the decisions, written in a manner
calculated to be understood by the claimant, and specific
references to the pertinent plan provisions on which the
decision is based.
<PAGE>
BENEFICIARY DESIGNATION FORM
As Beneficiary to receive any death benefits payable on my behalf from
Home Savings Bank, S.S.B., I designate the following:
NAME DATE OF BIRTH ADDRESS RELATIONSHIP
PRIMARY:
Peggy B. Hill 12-10-27 1415 Melchor Rd. Albemarle, N C, Wife
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTINGENT, if any
Kenneth Melvin Hill 2-6-59 121 O Melchor Rd. Albemarle N.C. Son
- --------------------------------------------------------------------------------
Timothy Dale Hill 4-17-62 1207 Melchor Rd. Albemarle N. C. Son
- --------------------------------------------------------------------------------
Note: If more than one primary beneficiary is named, the benefit will be paid in
equal shares to those living. Should the contingent beneficiaries be eligible to
receive the benefits, such benefits will be paid in equal shares to such living
contingent beneficiaries.
Each amount payable after my death shall be paid exclusively to the Primary
Beneficiary if living at the time such payments become due. The right is
reserved to the Primary Beneficiary to change contingent beneficiaries after my
death. For the purposes of this agreement, the term "contingent beneficiaries"
shall include any beneficiary who is not receiving payments. A New contingent
beneficiary may be designated from time to time by filing at the Home Office of
the Company written notice thereof in such form as the Company may require. When
such notice is received at the Home Office, the change shall be effective on the
date the notice was signed, whether or not the Primary Beneficiary is living at
the time of the receipt, but without prejudice to the Company on account of any
payment made by it before receipt of the written notice at its Home Office.
Name of Spouse of not given above:______________________________________________
/s/ Sheila S. Barbee /s/ Carl M. Hill
- -------------------------------- -------------------------------------
Witness Signature of Employee
9/26/96
- --------------------------------
Date
Note: The original should be retained by the Association, one copy by the
Employee and one copy resumed to Smith/Broadhurst, Inc.
<PAGE>
Exhibit (11)
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
The Company did not commence operations until October 2, 1996 and
conducted to business during the fiscal year ended September 30, 1996.
Consequently, the Company had no earning for fiscal 1996.
<PAGE>
Exhibit (12)
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item 6
represent average daily balances.
<PAGE>
Exhibit (13)
SOUTH STREET FINIANCIAL, CORP.
ANNUAL REPORT
SEPTEMBER 30, 1996
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
- --------------------------------------------------------------------------------
<S> <C>
Report to Stockholders 1
Selected Financial Data 2
Management's Discussion and Analysis of Financial Condition 3 - 14
and Operating Results
Independent Auditor's Report 15
Financial Statements
Statements of financial condition 16
Statements of income 17
Statements of equity 18
Statements of cash flows 19 - 21
Notes to financial statements 22 - 41
Corporate Information 43
</TABLE>
- --------------------------------------------------------------------------------
This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of the Company that are subject to various factors
which could cause actual results to differ materially from those estimates.
Factors which could influence the estimates include changes in the national,
regional and local market conditions, legislative and regulatory conditions, and
an adverse interest rate environment.
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B. *
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 217,954 $ 159,863 $ 147,837 $ 157,909 $ 153,370
Investment securities (1) 100,974 45,471 35,600 34,383 35,078
Loans receivable, net (2) 109,858 108,597 106,844 117,055 113,116
Deposits 146,398 137,647 127,312 139,685 138,753
Deposits, stock offering 46,601 -- -- -- --
Equity 20,867 20,426 18,311 16,503 13,199
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest income $ 12,869 $ 11,980 $ 11,994 $ 13,044 $ 13,792
Interest expense 7,775 5,980 4,973 6,037 8,042
---------- ---------- ---------- ---------- ----------
Net interest income 5,094 6,000 7,021 7,007 5,750
Provision for loan losses 300 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 4,794 6,000 7,021 7,007 5,750
---------- ---------- ---------- ---------- ----------
Non-interest income 126 126 147 206 233
---------- ---------- ---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits 1,905 1,867 1,324 1,018 1,059
Other 2,341 1,343 1,833 1,126 1,296
---------- ---------- ---------- ---------- ----------
Total noninterest expense 4,246 3,210 3,157 2,144 2,355
---------- ---------- ---------- ---------- ----------
Income before income taxes 674 2,916 4,011 5,069 3,628
Income tax expense 164 1,055 1,498 1,765 1,215
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of a change in
accounting principle 510 1,861 2,513 3,304 2,413
Cumulative effect on prior years of changing to a
different method of accounting for income taxes -- -- 485 -- --
---------- ---------- ---------- ---------- ----------
Net income $ 510 $ 1,861 $ 2,028 $ 3,304 $ 2,413
========== ========== ========== ========== ==========
<CAPTION>
At or For the Year Ended September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Selected Other Data: (3)
Return on average assets (4) 0.30% 1.23% 1.63% 2.12% 1.61%
Return on average equity (4) 2.45% 9.50% 14.22% 22.25% 20.12%
Average equity to average assets 12.23% 12.97% 11.45% 9.54% 8.01%
Retained earnings to end-of-period assets 9.59% 12.76% 12.53% 10.45% 8.61%
Interest rate spread for period (5) 2.52% 3.59% 4.38% 4.21% 3.56%
Average interest-earning assets
to average interest-bearing liabilities 112.00% 112.74% 110.19% 109.77% 106.90%
Net interest margin (6) 3.09% 4.11% 4.72% 4.61% 3.95%
Non-performing assets to total assets
at period end (7) 0.31% 0.70% 0.76% 0.61% 0.05%
Non-performing loans to total loans
at period end 0.59% 0.87% 0.85% 0.70% 0.00%
Allowance for loan losses to non-peforming
loans at period end 65.44% 13.97% 14.80% 17.06% 0.00%
Net interest income, after provision for
loan losses to non-interest expense 112.91% 186.92% 222.39% 326.82% 244.16%
Non-interest expense to average assets 2.49% 2.12% 2.05% 1.38% 1.57%
Deposit accounts 16,486 17,988 17,152 18,416 15,394
Loan accounts 3,283 3,316 3,433 3,734 3,201
Number of full service banking offices 2 2 2 2 2
</TABLE>
(1) Includes interest-bearing deposits, Federal Home Loan Bank stock, and
investment securities.
(2) Loans, net, represents gross loans less net deferred loan fees and
allowance for loan losses.
(3) Ratios other than period-end ratios are based on average monthly balances.
(4) Income before cumulative effect of changes in accounting principle is used
to calculate return on average assets and return on average equity ratios.
(5) The interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(7) Non-performing assets include mortgage loans and consumer loans 90 days or
more delinquent, and real estate acquired in settlement of loans.
* South Street Financial Corp. (the holding company) completed it's stock
offering on October 2, 1996 and then acquired all of the common stock of
Home Savings Bank of Albemarle, S.S.B.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
Description of Business
South Street Financial Corp. (the "Company") was incorporated under laws of the
State of North Carolina for the purpose of becoming the bank holding company of
Home Savings Bank of Albemarle, Inc., S.S.B. (the "Bank" or "Home Savings') in
connection with the Bank's conversion from a state chartered mutual savings bank
to a state chartered stock savings bank, pursuant to its Plan of Conversion.
The Company was organized to acquire all of the common stock of Home Savings
upon its conversion to stock form. A subscription and community offering of the
Company's shares closed on October 2, 1996, at which time the Company acquired
all of the shares of the Bank and commenced operations.
In accordance with the Plan of Conversion, the Company issued 4,496,500 shares
of common stock at the price of $10 per share which resulted in proceeds of
$43,193,500, net of conversion costs. The company transferred $24,252,000 of
the net proceeds to Home Savings for the purchase of all of the capital stock of
the Bank.
The Company has no operations and conducts no business of its own other than
owning Home Savings, investing its portion of the net proceeds received in the
conversion, and lending funds to the Employee Stock Ownership Plan (the "ESOP")
which was formed in connection with the Conversion. The principal business of
the Bank is accepting deposits from the general public and using those deposits
and other sources of funds to make loans secured by real estate and other forms
of collateral located in the Bank's primary market area of Stanly County, North
Carolina.
Home Savings' results of operations depend primarily on its net interest income,
which is the difference between interest income from interest-earning assets and
interest expense on interest-bearing liabilities. The Bank's operations are
also affected by noninterest income, such as miscellaneous income from loans,
customer deposit account service charges, and other sources of revenue. The
Bank's principal operating expenses, aside from interest expense, consist of
compensation and associated benefits, federal deposit insurance premiums,
occupancy costs, and other general and administrative expenses.
The Company did not commence operations until October 2, 1996 and conducted no
business during the fiscal year ended September 30, 1996. Consequently, the
following discussion and analysis contains only the financial results for Home
Savings and is intended to assist readers in understanding the results of Home
Savings' operations in 1996, 1995 and 1994, and changes in financial position
for the years ended September 30, 1996 and 1995, respectively. This discussion
and analysis is intended to compliment, and should be read in conjunction with
the audited financial statements of Home Savings and related notes appearing
elsewhere in this annual report to stockholders.
3
<PAGE>
Changes in Financial Condition
Total assets of Home Savings amounted to $218.0 million at September 30, 1996,
which is an increase of $58.2 million or 36.4% from total assets of Home at
September 30, 1995. The Bank's total assets at September 30, 1995 increased by
$12.0 million, or 8.13% from total assets of $147.8 million at September 30,
1994. The growth from September 30, 1995 to September 30, 1996 can primarily be
attributed to the increase in cash and cash equivalents, funded by deposits from
the stock offering and savings deposit growth. The growth from September 30,
1994 to September 30, 1995 was funded by an increase in savings deposits and
internal operating profits and was utilized to increase levels of liquidity and
to fund growth in the securities and loans receivable portfolios.
The principal category of earnings assets is loans receivable which amounted to
$109.9 million, $108.6 million and $106.8 million at September 30, 1996, 1995
and 1994, respectively. Home was able to increase the size of its loan
portfolio during 1996 and 1995 primarily through its marketing efforts in the
origination of permanent residential 1-4 family mortgages during a time period
in which loan prepayments stabilized. All other categories of Home's loan
portfolio have remained fairly consistent from 1994 to 1996. Loan originations
for the year ended September 30, 1996 totaled $21.4 million and were funded
primarily by loan principal repayments of $20.1 million as the loan portfolio
increased by $1.3 million. Loan originations for the year ended September 30,
1995 totaled $17.9 million while principal repayments totaled $16.2 million for
a net increase in the loan portfolio of $1.7 million over 1994. The growth was
primarily in the residential 1-4 family category. Management believes that its
marketing efforts, competitive rates and contacts within its community
contributed to the increased loan demand. The Bank maintains underwriting and
credit standards designed to maintain the quality of the loan portfolio.
Nonperforming loans at September 30, 1996, 1995 and 1994 totaled $654,000,
$981,000 and $946,000, respectively and were 0.59%, 0.87% and 0.85% of total
loans, respectively.
In addition to loans, Home invests in U. S. Treasury and Government agency
securities. Management does not engage in the practice of trading securities;
rather, the Bank's investment portfolio consists primarily of securities
designated as available for sale. Investment securities, excluding interest-
bearing deposits and Federal Home Loan Bank stock, at September 30, 1996, 1995
and 1994 totaled $40.3 million, $35.5 million and $30.4 million, respectively.
The securities portfolio increased by $4.8 million for the year ended September
30, 1996 from September 30, 1995 as $13.9 million of securities matured, $3.0 of
securities were sold, and $21.7 million of new securities were purchased. The
stock offering deposits and deposit growth funded the securities growth in 1996.
The securities portfolio increased $5.1 million from $30.4 million at September
30, 1994 to $35.5 million at September 30, 1995 as $6.5 million in securities
matured and $12.0 million in new securities were purchased. The exceptional
deposit growth in 1995 exceeded loan demand and funded the securities portfolio
growth.
Cash and cash equivalents for Home have increased from $5.8 million at September
30, 1995 to $62.1 million at September 30, 1996 as the Bank has sought to
increase liquidity to have funds available for future expanded loan growth and
due to the cash received from the stock offering. Cash and cash equivalents
increased $50.6 million at September 30, 1996 from 1995 due primarily to the
deposits for the stock offering. Cash and cash equivalents increased $4.8
million at September 30, 1995 from 1994. The increase was funded by savings
deposit growth.
4
<PAGE>
Home has experienced substantial growth in savings deposits. At September 30,
1996 and September 30, 1995 Home increased deposits $8.8 million and $10.3
million to $146.4 million and $137.6 million, respectively. Additionally, the
Bank received $46.6 million in deposits from the stock offering. Home priced
its deposits in a fashion to be at or near the top of the market because of its
dependence on the local market for funds availability.
Home's equity, which consists entirely of retained earnings and unrealized gain
(loss) on securities available for sale, net of tax, amounted to $20.9 million,
$20.4 million and $18.3 million at September 30, 1996, 1995 and 1994,
respectively. During 1994 Home adopted SFAS No. 115 and has classified a
portion of its investment as available for sale which requires reporting such
investments at market with unrealized gains or losses, net of tax, shown as a
separate component of equity. The equity component for net unrealized gains
(losses) at September 30, 1996, 1995 and 1994 amounted to $(35,000), $34,000 and
$(220,000), respectively.
Comparison of Operating Results for the Years Ended September 30, 1996, 1995,
and 1994
Net Income
- ----------
Net income for the years ended September 30, 1996, 1995, and 1994 was $510,000,
$1.9 million and $2.0 million, respectively. Net income decreased in 1996 from
1995 primarily due to a decrease in net interest income caused by a decrease in
the interest rate spread from 1995 to 1996 and the cost of $838,000 associated
with the one time special assessment that occurred as a result of the
legislation to recapitalize the Savings Association Insurance Fund ("SAIF").
Additionally, Home provided additional provisions for loan losses and incurred
an increase in other noninterest expenses. Net income decreased in 1995 due to
an increase in cost of funds which resulted in an increase in interest expense
of $1.0 million and a corresponding decrease in net interest income of $1.0
million.
Net Interest Income
- -------------------
Net interest income amounted to $5.1 million, $6.0 million and $7.0 million
during the years ended September 30, 1996, 1995, and 1994, respectively. The
average outstanding balance of interest earning assets in excess of interest
bearing liabilities increased by a net of $1.2 million during 1996 and $2.7
million in 1995 to $21.5 million in 1996 and $16.5 million in 1995. However,
the Bank's interest rate spread decreased from 4.38% in 1994 to 3.59% in 1995
and to 2.52% in 1996 as a result of an increase in Home's cost of funds coupled
with a slight decrease in Home's yield on interest earning assets. The
narrowing of Home's spread in 1996 and 1995 had a negative impact on net
interest income and more than offset the higher balance of net interest earning
assets outstanding during 1996 and 1995.
See the table on page 6 which analyzes the dollar amount of changes in interest
income and interest expense for major components of interest earning assets and
interest bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's rate)
(ii) changes attributable to rate (changes in rate multiplied by the prior
period's volume) and (iii) mixed changes (changes in volume multiplied by
changes in rate).
5
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
1996 vs. 1995
--------------------------------------------------------
Increase (Decrease) Attributable to
--------------------------------------------------------
Rate/
Volume Rate Volume Net
<S> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits $ 838 $ (65) $ (201) $ 572
Investments 316 107 22 445
Mortgage-backed securities 40 (20) (2) 18
Loans receivable (44) (102) - (146)
-------- -------- -------- --------
Total interest income on
interest-earning assets 1,150 (80) (181) 889
-------- -------- -------- --------
Interest expense on:
Passbook savings (15) 18 (1) 2
NOW and money market (39) (53) 4 (88)
Certificates of deposit 797 882 138 1,817
Deposits, stock offering 64 - - 64
Total interest expense on -------- -------- -------- --------
interest-bearing liabilities 807 847 141 1,795
-------- -------- -------- --------
Increase (decrease) in net
interest income $ 343 $ (927) $ (322) $ (906)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
1995 vs. 1994
--------------------------------------------------------
Increase (Decrease) Attributable to
--------------------------------------------------------
Rate/
Volume Rate Volume Net
(In Thousands)
<S> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits $ (237) $ 276 $ (166) $ (127)
Investments 330 26 7 363
Mortgage-backed securities (90) 19 (4) (75)
Loans receivable (96) (80) 1 (175)
-------- -------- -------- --------
Total interest income on
interest-earning assets (93) 241 (162) (14)
-------- -------- -------- --------
Interest expense on:
Passbook savings (64) 1 - (63)
NOW and money market (90) 8 (1) (83)
Certificates of deposit (7) 1,162 (2) 1,153
Deposits, stock offering - - - -
Total interest expense on -------- -------- -------- --------
interest-bearing liabilities (161) 1,171 (3) 1,007
-------- -------- -------- --------
Increase (decrease) in net
interest income $ 68 $ (930) $ (159) $ (1,021)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
1994 vs. 1993
--------------------------------------------------------
Increase (Decrease) Attributable to
--------------------------------------------------------
Rate/
Volume Rate Volume Net
<S> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits $ 118 $ 51 $ 31 $ 200
Investments 118 (211) (19) (112)
Mortgage-backed securities (136) (40) 9 (167)
Loans receivable (498) (496) 23 (971)
-------- -------- -------- --------
Total interest income on
interest-earning assets (398) (696) 44 (1,050)
-------- -------- -------- --------
Interest expense on:
Passbook savings 44 (39) (3) 2
NOW and money market 111 (64) (13) 34
Certificates of deposit (388) (773) 61 (1,100)
Deposits, stock offering - - - -
Total interest expense on -------- -------- -------- --------
interest-bearing liabilities (233) (876) 45 (1,064)
-------- -------- -------- --------
Increase (decrease) in net
interest income $ (165) $ 180 $ (1) $ 14
======== ======== ======== ========
</TABLE>
<PAGE>
Interest Income
- ---------------
Interest income amounted to $12.9 million, $12.0 million and $12.0 million for
the years ended September 30, 1996, 1995, and 1994, respectively. Home's
average yield on interest earning assets increased from 8.06% in 1994 to 8.20%
in 1995 and decreased in 1996 to 7.80%. The primary interest earning asset is
loans which experienced a slight decrease in both average yield and average
outstanding balance during 1995 and 1996. The declines in loan income were
offset in 1996 and 1995 by income due to increases in average yield and average
outstanding balances in interest bearing deposits and an increase in the average
outstanding balances in investment securities.
Interest Expense
- ----------------
Interest expense amounted to $7.8 million, $6.0 million, and $5.0 million for
the years ended September 30, 1996, 1995 and 1994, respectively. Interest
expense increased $1.8 million in 1996 due to the increase in Home's average
balance of outstanding deposits of $17.6 million and an increase in the average
cost of funds from 4.61% in 1995 to 5.28% in 1996. The increase in cost of
funds was primarily in certificates of deposit which increased from 5.16% during
1995 to 6.05% during 1996. The increase in outstanding average balance was
primarily due to certificates of deposits and deposits received from the stock
offering, while core deposits of passbook, NOW and money market accounts
declined as customers have shifted funds into longer term certificates of
deposit. Interest expense increased in 1995 as a $5.4 million decrease in
average outstanding balances was more than offset by an increase in cost of
funds to 4.61% from 3.68% for the year ended 1994. The average outstanding
balance of certificates of deposit was stable during this period of time;
however, cost of funds on certificates of deposit increased to 5.16% from 3.95%
during 1994. Management believes Home's cost of funds was indicative of changes
in overall market rates.
See the table on page 8 for additional information concerning Home's yields on
interest earnings assets and cost of funds on interest bearing liabilities for
the years ended September 30, 1996 and 1995.
Provision for Loan Losses and Asset Quality
Home's provision for loan losses amounted to $300,000, $-0- and $- 0 - in 1996,
1995 and 1994. The provision, which is charged to operations, and the resulting
loan loss allowances are amounts Home's management believes will be adequate to
absorb potential losses on existing loans that may become uncollectible. Loans
are charged off against the allowance when management believes that
collectibility is unlikely. The evaluation to increase or decrease the
provision and resulting allowances is based both on prior loan loss experience
and other factors, such as changes in the nature and volume of the loan
portfolio, overall portfolio quality, and current economic conditions. During
the year ended September 30, 1996 management determined that its allowance for
loan losses should be increased to more closely reflect peer group banks' levels
of outstanding reserves and for increased risk in the loan portfolio resulting
from the economic environment of the market area and manufacturing plant
closings.
Home's level of nonperforming loans, defined as loans past due 90 days or more,
has historically been low as a percentage of total loans outstanding. Loans
outstanding which were delinquent more than 90 days were approximately $654,000,
$981,000 and $946,000 at September 30, 1996, 1995 and 1994, respectively.
Foreclosures or real estate transfers in lieu of foreclosures amounted to
$162,000, $209,000 and $212,000 in 1996, 1995 and 1994, respectively. Home
Savings has adopted policies which it believes provides for prudent and adequate
levels of loan loss allowances. At September 30, 1996, Home's level of general
valuation allowances for loan losses amounted to $428,000, which management
believes is adequate to absorb potential losses in its loan portfolio.
7
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------
At September 30, 1996
1996 ------------------------------------------------------
Average Average
Yield/ Average Yield/
Rate (5) Balance Interest Rate
---------------- ----------- ------------ -------------
(In Thousands)
<S> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest bearing deposits 5.80% $ 17,583 $ 842 4.79%
Investments (1) 5.71% 33,884 2,030 5.99%
Mortgage-backed securities 7.71% 5,330 412 7.73%
Loans receivable, net (4) 8.60% 108,126 9,585 8.86%
--------- ----------
Total interest-earning assets 7.68% 164,923 $ 12,869 7.80%
----------
Non-interest-earning assets 5,608
---------
Total $ 170,531
=========
Liabilities and retained earnings:
Interest-bearing liabilities:
Passbook savings 3.00% $ 15,720 $ 465 2.96%
NOW and money market 2.71% 14,716 408 2.77%
Certificates of deposit 5.96% 112,939 6,838 6.05%
Deposits, stock offering 3.00% 3,883 64 3.00%
--------- ----------
Total interest-bearing liabilities 4.70% 147,258 $ 7,775 5.28%
----------
Non-interest-bearing liabilities 2,418
Equity 20,855
---------
Total $ 170,531
=========
Net interest income and interest
rate spread (2) 2.98% $ 5,094 2.52%
==========
Net yield on interest-
earning assets (3) 3.09% 3.09%
Ratio of interest-earning assets
to interest-bearing liabilities 112.00%
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------------------------
1995
------------------------------------------------------------------------
Average
Average Yield/
Balance Interest Rate
------------------ ------------------- -------------------
(In Thousands)
<S> <C> <C> <C>
Assets:
Interest earning assets:
Interest bearing deposits $ 4,283 $ 270 6.30%
Investments (1) 28,250 1,585 5.61%
Mortgage-backed securities 4,842 394 8.14%
Loans receivable, net (4) 108,755 9,731 8.95%
----------- --------------
Total interest-earning assets 146,130 $ 11,980 8.20%
--------------
Non-interest-earning assets 5,004
-----------
Total $ 151,134
===========
Liabilities and retained earnings:
Interest-bearing liabilities:
Passbook savings $ 16,261 $ 463 2.85%
NOW and money market 15,975 496 3.10%
Certificates of deposit 97,382 5,021 5.16%
Deposits, stock offering - - -
----------- --------------
Total interest-bearing liabilities 129,618 $ 5,980 4.61%
--------------
Non-interest-bearing liabilities 1,918
Equity 19,598
-----------
Total $ 151,134
===========
Net interest income and interest
rate spread (2) $ 6,000 3.59%
==============
Net yield on interest-
earning assets (3) 4.11%
Ratio of interest-earning assets
to interest-bearing liabilities 112.74%
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------------------------
1994
------------------------------------------------------------------------
Average
Average Yield/
Balance Interest Rate
------------------ ------------------- -------------------
(In Thousands)
<S> <C> <C> <C>
Assets:
Interest earning assets:
Interest bearing deposits $ 10,675 $ 397 3.72%
Investments (1) 22,239 1,222 5.49%
Mortgage-backed securities 5,999 469 7.82%
Loans receivable, net (4) 109,816 9,906 9.02%
--------------- -----------------
Total interest-earning assets 148,729 $ 11,994 8.06%
-----------------
Non-interest-earning assets 5,626
---------------
Total $ 154,355
===============
Liabilities and retained earnings:
Interest-bearing liabilities:
Passbook savings $ 18,504 $ 544 2.94%
NOW and money market 18,909 579 3.06%
Certificates of deposit 97,559 3,850 3.95%
Deposits, stock offering - - -
--------------- -----------------
Total interest-bearing liabilities 134,972 $ 4,973 3.68%
-----------------
Non-interest-bearing liabilities 1,705
Equity 17,678
---------------
Total $ 154,355
===============
Net interest income and interest
rate spread (2) $ 7,021 4.38%
=================
Net yield on interest-
earning assets (3) 4.72%
Ratio of interest-earning assets
to interest-bearing liabilities 110.19%
</TABLE>
(1) Includes investment securities available for sale and FHLB of Atlanta
common stock.
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income
divided by average interest-earning assets.
(4) Loans placed on nonperforming status have been included in the
computation of average balances.
(5) The weighted average rate represents the coupon associated with each
asset and liability, weighted by the principle balance associated with
each asset and liability.
<PAGE>
Noninterest Income
- ------------------
Noninterest income amounted to $126,000, $126,000 and $147,000 for the years
ended September 30, 1996, 1995 and 1994, respectively. Noninterest income
consists primarily of service charges and fees associated with the Bank's
checking accounts. Home's level of noninterest income has remained fairly
stable over the three years ended September 30, 1996.
Noninterest Expense
- -------------------
Noninterest expense consists primarily of operating expenses for compensation
and employee benefits, occupancy, federal deposit insurance premiums, data
processing charges and other operating expense. Noninterest expense amounted to
$4.2 million $3.2 million and $3.2 million for the years ended September 30,
1996, 1995 and 1994, respectively. Compensation increased $38,000, $543,000 and
$306,000 for the years ended September 30, 1996, 1995, and 1994, respectively.
The increases were due to additional personnel, inflationary increases,
additional supplemental income agreements and additional unfunded deferred
compensation agreements. Home terminated its old defined benefit pension plan
during 1994 incurring $493,000 of expense related to termination of the plan.
Home incurred $838,000 in expense due to the special SAIF assessment in 1996.
Occupancy expenses, data processing and federal insurance premium expense
increased nominally during the years ended September 30, 1996 , 1995 and 1994.
Charitable contributions increased $181,000 during 1996 primarily due to the
Bank's funding of one-time prior commitments to Wingate University ($40,000),
Boy Scouts ($10,000), Stanly Community College (420,000) and Pfeiffer College
($80,000).
Income Taxes
- ------------
Home's effective income tax rate was 24.3%, 36.2%, and 37.3% for the years ended
September 30, 1996, 1995 and 1994, respectively. The decline in the 1996
effective income rate was due to a permanent difference and incurring a net
operating loss for state tax purposes. The effective rates for 1995 and 1994
reflect normal expected rates on taxable income. Additionally, Home adopted
SFAS 109 during 1994 resulting in $485,000 of expense for recording the
cumulative effect on prior years of changing to a different method of accounting
for income taxes.
Capital Resources and Liquidity
The objective of Home's liquidity management is to ensure the availability of
sufficient cash flows to meet all of its financial commitments. Liquidity
management addresses Home's ability to meet deposit withdrawals either on demand
or at contractual maturity, to repay borrowings, if any, as they mature and to
originate new loans and make investments as opportunities arise.
9
<PAGE>
Significant liquidity sources for Home are cash provided by new savings deposits
and operating activities. Cash flows from investing activities typically are
dependent on the level of loan demand and the amount of new savings deposits
that the Bank is able to generate. During the year ended September 30, 1996 new
savings deposits provided $ 8.7 million in net cash inflow while operating
activities provided funds totaling $1.5 million and stock offering deposits
provided $46.6 million. These funds were used primarily to increase liquidity
by investing in interest earning deposits, purchase additional investments and
fund increases in the loan portfolio in 1996. During 1995, new savings deposits
provided $10.3 million in funds and operating activities provided $1.5 million,
while investing activities generated a net outflow of cash amounting to $6.5
million with the excess cash generated being invested in short term interest
earning deposits. During 1995 loan demand increased the Bank's loan portfolio
by approximately $1.8 million. During 1994 Home's savings deposit portfolio
declined resulting in cash outflow of approximately $12.4 million.
Additionally, Home purchased securities in excess of maturing securities
totaling $4.7 million.
These cash outflows were funded by operating and financing activities. Cash
provided by operations and deposit growth has enabled Home to place little
dependence on borrowed funds for its liquidity needs; however, Home does
maintain readily available sources with the Federal Home Loan Bank ("FHLB") of
Atlanta in the event it needs to borrow funds. The Bank's had no borrowings
outstanding during 1996, 1995 or 1994. Home's primary source of financing
activities is its deposit accounts.
Levels of deposit accounts are impacted primarily by overall market rates and
the pricing policies that Home sets to attract or maintain its deposits, which
are affected by Home's demand for loans and its other liquidity needs.
Approximately 59% of Home's certificates of deposit outstanding at September 30,
1996 are scheduled to mature within the next year. Management believes that
substantially all of these deposits will be renewed and intends to price such
deposits at competitive rates in order to ensure that these deposits are
renewed. Home does not hold brokered deposits or significant levels of public
deposits which are less likely to renew if a higher rate of interest can be
obtained elsewhere. Liquidity levels and Home's operations would be
significantly hindered should a sizable portion of these deposits not be
renewed. Home has excess deposits from the stock offering of $11.6 million
which will be returned to stock subscribers in October of 1996.
Cash provided by operating and financing activities has historically been used
by Home to make new loans to its customers. Excess cash will be used in the
future to make new loans as demand warrants and to maintain Home's liquid
investment portfolios by offsetting maturities which are timed to provide needed
cash flows to meet anticipated short term liquidity requirements.
As a state chartered savings bank, Home must meet certain liquidity requirements
which are established by the Administrator. Home's liquidity ratio at September
30, 1996, as computed under such regulations, was in excess of such
requirements. Given its excess liquidity and its ability to borrow from the
FHLB of Atlanta, Home believes that it will have sufficient funds available to
meet anticipated future loan commitments, unexpected deposit withdrawals, or
other cash requirements.
Asset/Liability Management
Home's asset/liability management, or interest rate risk management, is focused
primarily on evaluating and managing Home's net interest income given various
risk criteria. Factors beyond Home's control, such as the effects of changes in
market interest rates and competition, may also have an impact on the management
of interest rate risk.
10
<PAGE>
In the absence of other factors, Home's overall yield on interest-earning assets
will increase as will its cost of funds on its interest-bearing liabilities when
market rates increase over an extended period of time. Inversely, Home's yields
and cost of funds will decrease when market rates decline. Home is able to
manage these swings to some extent by attempting to control the maturity or rate
adjustments of its interest-earning assets and interest-bearing liabilities over
given periods of time. Home's "gap" is typically described as the difference
between the amounts of such assets and liabilities which reprice within a period
of time. In a declining interest rate environment, a negative gap, or a
situation where Home's interest-bearing liabilities subject to repricing exceed
the level of interest-earning assets which will mature or reprice, will have a
favorable impact on Home's net interest income. At September 30, 1996, Home had
a one-year sensitivity gap of negative 50.23%. Conversely, an increase in
general market rates over a sustained period of time will tend to affect Home's
net interest income adversely.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Bank's operations,
management has implemented an asset/liability program designed to stabilize the
Bank's interest rate gap. The program emphasizes the investment of excess cash
in short or intermediate term interest-earning assets, the solicitation of
transaction deposit accounts which are less sensitive to changes in interest
rates and can be repriced rapidly, and to a lesser extent, the origination of
adjustable rate mortgage loans.
In addition to shortening the average repricing period of its assets, Home has
sought to lengthen the average maturity of its liabilities by adopting a tiered
pricing program for its certificates of deposit, which provides higher rates of
interest on its longer term certificates in order to encourage depositors to
invest in certificates with longer maturities.
Although Home's asset/liability management program has generally helped to
decrease the exposure of its earnings to interest rate increases, Home continues
to have a negative gap position which will be adversely impacted during
prolonged periods of rising interest rates and positively affected during
prolonged periods of interest rate declines.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996, which are
projected to reprice or mature in each of the future time periods shown. The
computations were made without using assumptions for loan prepayments or deposit
decline. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature within a given period were determined in accordance with
contractual terms of the assets or liabilities. In making the computations, all
adjustable rate loans were considered to be due at the end of the next upcoming
adjustment period. Fixed rate loans are reflected at their contractual
maturities with consideration given to scheduled payments. Marketable equity
securities and savings accounts with no stated maturities are subject to
immediate repricing and availability and have been classified in the earliest
category. FHLB of Atlanta stock must be maintained at certain regulatory levels
and is classified in the more than ten category. The interest rate sensitivity
of Home's assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.
11
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1996
-------------------------------------------------------------
Less than More than More than More than
3 3 Months to 1 Year to 3 Years to
Months 1 Year 3 Years 5 Years
-------------- -------------- -------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets (1):
Loans Receivable:
Adjustable rate 1-4 family residential $ 3,397 $ 3,711 $ 516 $ -
Fixed rate 1-4 family residential 9 30 454 1,151
Other adjustable rate real estate loans 270 299 7 -
Other fixed rate real estate loans 1 1 47 205
Other loans 118 142 406 -
----------- ----------- ------------ ----------
Total loans 3,795 4,183 1,430 1,356
Interest-bearing deposits 59,348 - - -
Investment securities
Available for sale 497 10,015 23,251 -
Nonmarketable equity securities - - - -
Mortgage-backed securities (2) - - - -
----------- ----------- ------------ ----------
Total interest-earning assets $ 63,640 $ 14,198 $ 24,681 $ 1,356
=========== =========== ============ ==========
Interest-bearing liabilities:
Deposits:
Certificates of deposit $ 21,641 $ 54,905 $ 37,746 $ -
Money market deposit accounts 6,674 - - -
NOW and commercial checking accounts 7,188 - - -
Passbook savings 17,953 - - -
Deposits, stock offering 46,601 - - -
------------- ------------- ------------- ----------
Total deposits 100,057 54,905 37,746 -
------------- ------------- ------------- ----------
Total interest-bearing liabilities $ 100,057 $ 54,905 $ 37,746 $ -
============= ============= ============= ==========
Interest sensitivity gap per report $ (36,417) $ (40,707) $ (13,065) $ 1,356
Cumulative interest sensitivity gap (36,417) (77,124) (90,189) (88,833)
Cumulative gap as a percentage of
total interest-earning assets -17.24% -36.51% -42.69% -42.05%
Cumulative interest-earning assets
as a percentage of interest-bearing liabilities 63.60% 50.23% 53.20% 53.90%
<CAPTION>
At September 30, 1996
---------------------------------------------------------------
More than
5 Years to More than
10 Years 10 Years Total
-------------- --------------- -------------
<S> <C> <C> <C>
Interest-earning assets (1):
Loans Receivable:
Adjustable rate 1-4 family residential $ - $ - $ 7,624
Fixed rate 1-4 family residential 13,975 72,751 88,370
Other adjustable rate real estate loans - - 576
Other fixed rate real estate loans 2,352 10,444 13,050
Other loans - - 666
----------- --------------- -------------
Total loans 16,327 83,195 110,286
Interest-bearing deposits - - 59,348
Investment securities - - -
Available for sale 1,006 - 34,769
Nonmarketable equity securities - 1,361 1,361
Mortgage-backed securities (2) 772 4,724 5,496
----------- --------------- ----------------
Total interest-earning assets $ 18,105 $ 89,280 $ 211,260
=========== =============== ================
Interest-bearing liabilities:
Deposits:
Certificates of deposit $ 15 $ - $ 114,307
Money market deposit accounts - - 6,674
NOW and commercial checking accounts - - 7,188
Passbook savings - - 17,953
Deposits, stock offering - - 46,601
----------- ---------------
Total deposits 15 - 192,723
----------- --------------- ----------------
Total interest-bearing liabilities $ 15 $ - $ 192,723
=========== =============== ================
Interest sensitivity gap per report $ 18,090 $ 89,280
Cumulative interest sensitivity gap (70,743) 18,537
Cumulative gap as a percentage of
total interest-earning assets -33.49% 8.77%
Cumulative interest-earning assets
as a percentage of interest-bearing liabilities 63.29% 109.62%
</TABLE>
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Based upon historical repayment experience.
12
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles ("GAAP"), which require
the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of Home
are primarily monetary in nature and changes in market interest rates have a
greater impact on it's performance than do the effects of inflation.
Impact of New Accounting Standards
In November 1995, the FASB issued SFAS No. 123, "Accounting for Awards of Stock-
Based Compensation to Employees." SFAS No. 123 is effective for the years
beginning after December 15, 1995. Earlier application is permitted. The
statement defines a fair value-based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value-based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25").
Under the fair value-based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. Under the intrinsic value-based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. Most fixed stock option plans- the most common type of
stock compensation plan - have no intrinsic value at grant date, and under
Opinion 25 no compensation cost is recognized for them. Compensation cost is
recognized for other types of stock-based compensation plans under Opinion 25,
including plans with variable, usually performance-based, features. This
statement requires that an employer's financial statements include certain
disclosures about stock-based employee compensation arrangements regardless of
the method used to account for them. Management has not estimated the effect of
adoption on Home's financial condition or results of operations. See Note 17 of
"Notes to Financial Statements".
Deposit Insurance/SAIF Recapitalization
For the first three quarters of calendar year 1996, SAIF-insured institutions
paid deposit insurance assessment rates of $0.23 to $0.31 per $100 of deposits.
In contrast, institutions insured by the FDIC's Bank Insurance Fund (the "BIF")
that were well supervised and without any significant supervisory concerns paid
the minimum annual assessment of $2,000, and all other BIF-insured institutions
paid deposit insurance assessment rates of $0.03 to $0.27 per $100 of deposits.
In response to the SAIF/BIF assessment disparity, the Deposit Funds Insurance
Act of 1996 (the "Funds Act") was enacted into law on September 30, 1996.
The Funds Act authorized the FDIC to impose a special assessment on all
institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. As implemented by the FDIC, institutions with SAIF-
assessable deposits will pay a special assessment, subject to adjustment, of
65.7 basis points per $100 of the SAIF-assessable deposits held at March 31,
1995. Based on the foregoing, the Bank charged $838,000 against pretax earnings
for the year ended September 30, 1996. In addition, this assessment can not be
deducted for income tax purposes until paid.
13
<PAGE>
Due to the recapitalization of the SAIF, the FDIC proposed on October 8, 1996 to
reduce the assessment rate for SAIF-assessable deposits for periods beginning on
October 1, 1996. The proposed assessment rates would range from 18 to 27 basis
points per $100 of deposits for the last calendar quarter of 1996 and would
range from -0- to 27 basis points per $100 of deposits for subsequent assessment
periods. However, the Funds Act also provides that the FDIC cannot assess
regular insurance assessments for an insurance fund unless required to maintain
or achieve the designated reserve ratio of 1.25% per $100 of deposits, except
for institutions that are not classified as "well capitalized" or that have
moderately severe or unsatisfactory financial, operational, or compliance
weaknesses as determined by the FDIC. The Bank has not been so classified.
Accordingly, assuming the designated reserve ratio is maintained by the SAIF
after collection of the special assessment, the Bank will pay substantially
lower regular SAIF assessments compared to those paid by the Bank in recent
years, as long as it maintains its current regulatory status.
In addition, the Funds Act expanded the assessment base for the payment of
interest on FICO bonds, which were issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation, to include the deposits of both BIF and SAIF insured institutions
beginning January 1, 1997. Until December 31, 1999, or until such earlier date
on which the last savings association ceases to exist, the rate of assessment
for BIF insured deposits will be one-fifth of the rate imposed on SAIF-
assessable deposits. The current estimate of the assessment rate for the
payment of the FICO interest is approximately 1.3 basis points for BIF-
assessable deposits and 6.4 basis points for SAIF-assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF on January 1,
1999, assuming the prior elimination of the thrift charter. The Secretary of
the Treasury is required to conduct a study of the relevant factors for the
development of a common charter for banks and thrifts and report conclusions and
findings to Congress on or before March 31, 1997.
Recapture of Tax Bad Debt Reserves
Prior to the enactment of the Small Business Job Protection Act of 1996 (the
"1996 Act") on August 20, 1996, thrift institutions which met certain
definitional tests, were permitted to establish tax reserves for bad debts and
to deduct annual additions to such reserves in arriving at taxable income. The
Bank was permitted to compute the annual bad debt deduction based upon an
experience method or a percentage equal to 8.0% of the Bank's taxable income
(the "PTI Method") before such bad debt deduction, subject to certain
limitations. Under the 1996 Act, the PTI Method was repealed and the Bank will
be required to use the experience method for computing its annual bad debt
deduction for taxable years beginning on or after October 1, 1996.
The Bank will also have to recapture its tax bad debt reserves which have
accumulated since 1987 amounting to approximately $1,023,000 over a six year
period. The tax associated with the recaptured reserves is approximately
$400,000. The recapture is scheduled to begin with the Bank's 1997 year, but
can be delayed up to two years if the Bank originates a certain level of
residential mortgage loans over the next two years. Deferred income taxes have
been previously established for the taxes associated with the recaptured
reserves and the ultimate payment of the taxes will not result in a charge to
earnings.
14
<PAGE>
[LETTERHEAD OF MCGLADREY & PULLEN. LLP APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Home Savings Bank of Albemarle, S.S.B.
Albemarle, North Carolina
We have audited the accompanying statements of financial condition of Home
Savings Bank of Albemarle, as of September 30, 1996 and 1995, and the related
statements of income, equity and cash flows for each of the years in the three
year period ended September 30, 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Home Savings Bank of Albemarle,
S.S.B. as of September 30, 1996 and 1995, and the results of its operations and
its cash flows for each of the years in the three year period ended September
30, 1996 in conformity with generally accepted accounting principles.
As discussed in Notes 3 and 12 to the financial statements, the Bank changed its
methods of accounting for investment securities and income taxes in 1994.
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
October 30, 1996
15
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF FINANCIAL CONDITION
September 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Noninterest-bearing deposits (Note 2) $ 2,787,000 $ 2,872,000
Interest-bearing deposits 59,348,000 8,622,000
Securities held to maturity, fair value 1996, $5,511,000;
1995, $4,642,000 (Note 4) 5,496,000 4,529,000
Securities available for sale (Note 3) 34,784,000 30,974,000
Federal Home Loan Bank stock, at cost 1,346,000 1,346,000
Loans receivable, net (Note 5) 109,858,000 108,597,000
Real estate acquired in settlement of loans 18,000 135,000
Accrued interest receivable (Note 6) 1,165,000 1,150,000
Office properties and equipment, net (Note 7) 1,238,000 1,294,000
Prepaid expenses and other assets (Notes 8, 12 and 18) 1,914,000 239,000
---------------------------------
$ 217,954,000 $ 159,758,000
=================================
LIABILITIES AND EQUITY
- -------------------------------------------------------------------------------------------------------
Liabilities:
Deposits (Note 9) $ 146,398,000 $ 137,647,000
Deposits, stock offering (Notes 9 and 18) 46,601,000 -
Special SAIF assessment (Note 10) 838,000 -
Advance payments by borrowers for taxes and insurance 115,000 97,000
Accounts payable and other liabilities (Note 12) 2,148,000 1,099,000
Checks outstanding on disbursement account 987,000 489,000
---------------------------------
Total liabilities 197,087,000 139,332,000
---------------------------------
Commitments (Notes 11 and 14)
Equity:
Retained earnings, substantially restricted (Notes 12 and 13) 20,902,000 20,392,000
Unrealized gain (loss) on securities available for sale,
net of tax (Note 3) (35,000) 34,000
---------------------------------
20,867,000 20,426,000
---------------------------------
$ 217,954,000 $ 159,758,000
=================================
</TABLE>
See Notes to Financial Statements
16
<PAGE>
Home Savings Bank of Albemarle, S.S.B.
Statements of Income
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 9,585,000 $ 9,731,000 $ 9,906,000
Mortgage-backed securities 412,000 394,000 469,000
Securities 2,030,000 1,585,000 1,222,000
Other interest-bearing deposits 842,000 270,000 397,000
--------------------------------------------
12,869,000 11,980,000 11,994,000
Interest expense on deposits (Note 9) 7,775,000 5,980,000 4,973,000
--------------------------------------------
Net interest income 5,094,000 6,000,000 7,021,000
Provision for loan losses (Note 5) 300,000 - -
--------------------------------------------
Net interest income after
provision for loan losses 4,794,000 6,000,000 7,021,000
--------------------------------------------
Noninterest income 126,000 126,000 147,000
--------------------------------------------
Noninterest expenses:
Compensation and benefits (Notes 8 and 11) 1,905,000 1,867,000 1,324,000
Net occupancy 291,000 256,000 267,000
Federal insurance premium expenses 318,000 295,000 318,000
Special SAIF assessment (Note 10) 838,000 - -
Data processing 210,000 205,000 194,000
Pension liquidation expense (Note 8) - - 493,000
Contributions 227,000 46,000 61,000
Other 457,000 541,000 500,000
--------------------------------------------
4,246,000 3,210,000 3,157,000
--------------------------------------------
Income before income taxes 674,000 2,916,000 4,011,000
Income taxes (Note 12) 164,000 1,055,000 1,498,000
--------------------------------------------
Income before cumulative effect
of a change in accounting
principle 510,000 1,861,000 2,513,000
Cumulative effect on prior years of changing
to a different method of accounting for
income taxes (Note 12) - - 485,000
--------------------------------------------
Net income $ 510,000 $ 1,861,000 $ 2,028,000
============================================
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF EQUITY
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Retained Unrealized
Earnings Gain (Loss)
Substantially on Securities Total
Restricted Available for Sale Equity
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1993 $ 16,503,000 $ - $ 16,503,000
Net income 2,028,000 - 2,028,000
Net change in unrealized loss on
securities available for sale, net - (220,000) (220,000)
-------------------------------------------------------------
Balance at September 30, 1994 18,531,000 (220,000) 18,311,000
Net income 1,861,000 - 1,861,000
Net change in unrealized gain (loss) on
securities available for sale, net - 254,000 254,000
-------------------------------------------------------------
Balance at September 30, 1995 20,392,000 34,000 20,426,000
Net income 510,000 - 510,000
Net change in unrealized gain (loss) on
securities available for sale, net - (69,000) (69,000)
-------------------------------------------------------------
Balance at September 30, 1996 $ 20,902,000 $ (35,000) $ 20,867,000
=============================================================
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF CASH FLOWS
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 510,000 $ 1,861,000 $ 2,028,000
Adjustments to reconcile net income
to net cash provided by
operating activities:
Provision for loan losses 300,000 -- --
Net accretion of premiums and
discounts on securities (59,000) (19,000) (9,000)
Amortization of deferred loan fees (146,000) (73,000) (137,000)
FHLB stock dividends -- -- (33,000)
Gain on recalled securities -- -- (4,000)
Gain on sale of real estate acquired
in settlement of loans (5,000) (3,000) (14,000)
Provision for depreciation 116,000 104,000 83,000
Deferred income taxes (490,000) (75,000) 372,000
Loss on sale of office properties
and equipment 3,000 -- --
(Increase) decrease in assets:
Accrued interest receivable (15,000) (123,000) 111,000
Prepaid and other assets (291,000) (32,000) 366,000
Income tax refund receivable (47,000) (105,000) --
Increase (decrease) in liabilities:
Accounts payable and other liabilities 227,000 377,000 94,000
Interest payable 101,000 63,000 5,000
Accrued special SAIF assessment 838,000 -- --
Checks outstanding on accounts 498,000 (294,000) 253,000
Income taxes payable -- (187,000) (22,000)
-----------------------------------------
Net cash provided by
operating activities 1,540,000 1,494,000 3,093,000
-----------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
Home Savings Bank of Albemarle, S.S.B.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Investing Activities
Purchases of securities held to maturity $ (1,954,000) $ -- $ (11,934,000)
Purchases of securities available for sale (19,815,000) (11,987,000) --
Proceeds from sales of securities
available for sale 3,000,000 -- --
Proceeds from maturities and recalls of
securities available for sale 12,960,000 6,500,000 --
Proceeds from maturities and recalls of
securities held to maturity -- -- 5,500,000
Principal collected on securities
held to maturity 981,000 790,000 1,744,000
Loan originations and principal
payments on loans, net (1,391,000) (1,751,000) 10,178,000
Purchase of office properties
and equipment (63,000) (211,000) (241,000)
Proceeds from sale of foreclosed
real estate 114,000 115,000 127,000
-----------------------------------------------------
Net cash provided by
(used in) investing activities (6,168,000) (6,544,000) 5,374,000
-----------------------------------------------------
Cash Flows from Financing Activities
Net increase (decrease) in certificates of
deposit, demand deposits, NOW
accounts and passbook savings
accounts 8,650,000 10,272,000 (12,377,000)
Deposits, stock offering 46,601,000 -- --
Net increase (decrease) in advance
payments by borrowers for taxes
and insurance 18,000 (377,000) (11,000)
-----------------------------------------------------
Net cash provided by
(used in) financing activities 55,269,000 9,895,000 (12,388,000)
-----------------------------------------------------
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash
and cash equivalents $ 50,641,000 $ 4,845,000 $ (3,921,000)
Cash and cash equivalents:
Beginning 11,494,000 6,649,000 10,570,000
----------------- --------------- --------------
Ending $ 62,135,000 $ 11,494,000 $ 6,649,000
================= =============== ==============
Supplemental Schedule of Cash and
Cash Equivalents
Cash:
Interest-bearing deposits $ 59,348,000 $ 8,622,000 $ 3,853,000
Noninterest-bearing deposits 2,787,000 2,872,000 2,796,000
----------------- --------------- --------------
$ 62,135,000 $ 11,494,000 $ 6,649,000
================= =============== ==============
Supplemental Disclosures of Cash
Flow Information:
Cash payments for:
Interest $ 7,674,000 $ 5,917,000 $ 4,969,000
Income taxes 702,000 1,346,000 1,520,000
Supplemental Disclosures of Noncash
Transactions
Transfer of loans to real estate acquired
in settlement of loans 162,000 209,000 212,000
Loans originated to finance the sale of real
estate acquired in settlement of loans 178,000 138,000 42,000
Transfers from securities held to maturity
to securities available for sale - - 25,420,000
Net change in unrealized (gain) loss on
securities available for sale, net of
deferred taxes (credits) 69,000 (254,000) 220,000
Prepaid conversion costs 1,089,000 - -
</TABLE>
21
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
Conversion and organization of holding company: On October 2, 1996, pursuant
- -----------------------------------------------
to a Plan of Conversion which was approved by its members and regulators, Home
Savings Bank of Albemarle, S.S.B. ("Home Savings" or the "Bank") converted from
a North Carolina-chartered mutual savings bank to a North Carolina-chartered
stock savings bank (the "Conversion"), and became a wholly-owned subsidiary of
South Street Financial Corp. (the "Company"). The Company was formed to
acquire all of the common stock of the Bank upon its conversion to stock form.
The Company has no operations and conducts no business of its own other than
owning Home Savings, investing its portion of the net proceeds received in the
Conversion, and lending funds to the Employee Stock Ownership Plan (the "ESOP")
which was formed in connection with the Conversion. See Note 18 for additional
information concerning the Conversion and the stock offering.
Nature of business: Home Savings Bank of Albemarle, S.S.B. (the "Bank") is
- -------------------
primarily engaged in the business of obtaining savings deposits and originating
single-family residential loans within its primary lending area, the Stanly
County, North Carolina area. The Bank's underwriting polices require such loans
to be made 80% loan-to-value based upon appraised values unless private mortgage
insurance is obtained. These loans are secured by the underlying properties.
The following is a description of the significant accounting policies used in
the preparation of the accompanying financial statements:
Basis of financial statement presentation and accounting estimates: The
- -------------------------------------------------------------------
financial statements have been prepared in conformity with generally accepted
accounting principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the statement of financial condition
and revenues and expenses for the period. Actual results could differ from
those estimates.
Cash and cash equivalents: For purposes of reporting the statements of cash
- --------------------------
flows, the Bank includes cash on hand and demand deposits at other financial
institutions as cash equivalents. From time to time, the Bank maintains deposits
with financial institutions which are in excess of the federally-insured
amounts.
Investment in debt securities and accounting change: The Bank has investments
- ----------------------------------------------------
in debt securities. Debt securities consist primarily of obligations of the
U.S. Government and federal agencies and mortgage-backed securities.
The Bank adopted the provisions of Financial Accounting Standards Board (FASB)
Statement No. 115, Accounting for Certain Investments in Debt and Equity
-----------------------------------------------------
Securities, as of September 30, 1994. Statement 115 requires that management
- ----------
classify all securities as trading, available for sale, or held to maturity on
the date of adoption, and thereafter as individual investment securities are
acquired, and that the appropriateness of such classification be reassessed at
each statement of financial condition date. Since the Bank does not buy
investment securities in anticipation of short-term fluctuations in market
prices, none of the investment securities are classified as trading in
accordance with Statement 115. All securities have been classified as either
available-for-sale or held to maturity.
22
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Securities available for sale: Securities classified as available
- ------------------------------
for sale are those securities that the Bank intends to hold for an indefinite
period of time but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors, including
significant movements in interest rates, changes in the maturity mix of the
Bank's assets and liabilities, liquidity needs, regulatory capital
consideration, and other similar factors. Securities available for sale are
carried at fair value. Unrealized gains or losses are reported as increases or
decreases in equity, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are
included in income
Securities held to maturity: Securities classified as held to maturity are those
- ----------------------------
securities the Bank has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives. Based on the Bank's financial position and
liquidity, management believes the Bank has the ability to hold these securities
to maturity.
Investment in Federal Home Loan Bank stock: The Bank, as a member of the Federal
- -------------------------------------------
Home Loan Bank system (FHLB), is required to maintain an investment in capital
stock of the FHLB in an amount equal to the greater of 1% of its outstanding
home loans or 5% of advances from the FHLB. No ready market exists for the FHLB
stock, and it has no quoted market value.
Loans receivable: Loans receivable are stated at unpaid principal balances,
- -----------------
less the allowance for loan losses, the undisbursed portion of construction
loans, and net deferred loan origination fees.
Allowance for loan losses: The allowance for loan losses is increased by charges
- --------------------------
to income and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to pay, the estimated value of
any underlying collateral, and current economic conditions. While management
uses the best information to make evaluations, future adjustments may be
necessary, if economic or other conditions differ substantially from the
assumptions used.
23
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
The Bank adopted SFAS No. 114 Accounting by Creditors for Impairment of a Loan
------------------------------------------------
which was subsequently amended by SFAS No. 118 Accounting by Creditors for
---------------------------
Impairment of a Loan - Income Recognition and Disclosures on October 1, 1995.
- ---------------------------------------------------------
SFAS No. 114 requires that the Bank establish specific loan loss allowances on
impaired loans if it is doubtful that all principal and interest due, according
to the loan terms, will be collected. An allowance on an impaired loan is
required if the present value of the future cash flows discounted using the
loan's effective interest rate is less than the carrying value of the loan. An
impaired loan can also be valued based upon its fair value in the market place
or on the basis of its underlying collateral if the loan is collateral
dependent. If foreclosure is imminent, and the loan is collateral dependent, the
loan must be valued based upon the fair value of the underlying collateral. The
Statement does not allow previously issued financial statements to be restated
and its adoption had no effect on the Bank's 1996 financial statements, since
the Bank had no loans outstanding during the year ended September 30, 1996 which
it considered to be impaired. Therefore, there is no SFAS No. 114 allowance for
unpaid loans at September 30, 1996.
Interest Income: The Bank adopted SFAS No. 118 on October 1, 1995 which requires
- ----------------
the disclosure of the Bank's method of accounting for interest income on
impaired loans. The Bank continues to accrue interest on loans, including loans
delinquent 90 days or more. At the time a loan becomes nonperforming, the loan
is placed on nonaccrual status by establishing an allowance for uncollected
interest. If and when management determines that the collectibility of principal
and interest is no longer in doubt, the loan is returned to performing status
and the reserve for uncollected interest is reversed. The Bank anticipates that
it will account for interest on impaired loans in a similar fashion in the
future if and when it has impaired loans.
Loan origination fees: Loan fees and certain direct loan origination costs are
- ----------------------
deferred, and the net fee or cost is recognized as an adjustment to interest
income using the interest method over the contractual life of the loans,
adjusted for actual prepayments.
Real estate acquired in settlement of loans: Real estate acquired in settlement
- --------------------------------------------
of loans is initially recorded at estimated fair value. Based on periodic
evaluations by management, the carrying values are reduced where they exceed
fair value minus estimated costs to sell. Costs relating to the development and
improvement of the property are capitalized, while holding costs of the property
are charged to expense in the period incurred.
Office properties and equipment: Office properties and equipment are stated at
- --------------------------------
cost less accumulated depreciation which is computed principally by the
straight-line method over the estimated useful life.
Benefit plan: The Bank provides a noncontributory pension plan covering
- -------------
substantially all of the Bank's employees who are eligible as to age and length
of service. The Bank's funding policy is to make the maximum annual contribution
that is deductible for income tax purposes.
24
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Income taxes: Effective October 1, 1993, the Bank adopted FASB Statement No.
- ------------
109, Accounting for Income Taxes. Under this method, deferred taxes are provided
---------------------------
on a liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. Prior to October 1, 1993, deferred
tax expenses and credits were recorded to reflect the tax consequences of timing
differences between the recording of income and expense for financial purposes
of filing federal income tax returns at income tax rates in effect when the
difference arose. Reference should also be made to Note 12 regarding a change in
the method of accounting for income taxes.
Off-statement of financial condition risk: The Bank is a party to financial
- ------------------------------------------
instruments with off statement of financial condition risk such as commitments
to extend credit and lines of credit. Management assesses the risk related to
these instruments for potential losses on an ongoing basis.
Fair value of financial instruments: The estimated fair values required under
- ------------------------------------
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, have been
-----------------------------------------------------
determined by the Bank using available market information and appropriate
valuation methodologies; however, considerable judgment is required to develop
the estimates of fair value. Accordingly, the estimates presented for the fair
value of the Bank's financial instruments are not necessarily indicative of the
amounts the Bank could realize in a current market exchange. The use of
different market assumptions or estimation methodologies may have a material
effect on the estimated fair market value amounts.
The fair value estimates presented are based on pertinent information available
to management as of September 30, 1996 and 1995. Although management is not
aware of any factors that would significantly affect the estimated fair value
amount, such amounts have not been comprehensively revalued for purposes of
these financial statements since these dates and therefore, current estimates of
fair value may differ significantly from the amounts presented in these
financial statements.
Note 2. Cash
Noninterest-bearing cash amounting to approximately $16,000 and $11,000 was held
by a trustee at September 30, 1996 and 1995, respectively, and was required to
be used to repay loan principal and interest and taxes and insurance for the
related loans due to the Federal National Mortgage Association.
25
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Securities Available for Sale and Accounting Change
As discussed in Note 1, the Bank adopted FASB Statement No. 115 as of September
30, 1994. There was no effect on net income in 1994 from adopting FASB Statement
No. 115. The September 30, 1994 equity was decreased by $220,000 net of $114,000
related deferred tax effect, to recognize the net unrealized holding loss on
securities available for sale at that date.
Under Statement 115, debt and equity securities "available for sale" are carried
at fair value with unrealized holding gains and losses excluded from earnings
and reported net of income taxes in a separate component of equity. Such
securities may be sold in response to certain conditions such as changes in
market interest rates, needs for liquidity, or changes in the availability of
and the yield on alternative investments, but are not bought and held
principally for the purpose of selling in the near term with the objective of
generating profits on short-term differences in price. Prior to adoption of
Statement 115, these securities were reported as "held to maturity".
Amortized cost and fair values of securities available for sale as of September
30, are summarized as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies
obligations $ 34,827,000 $ 61,000 $ (119,000) $ 34,769,000
Other security 15,000 - - 15,000
--------------------------------------------------------------
$ 34,842,000 $ 61,000 $ (119,000) $ 34,784,000
==============================================================
<CAPTION>
1995
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies
obligations $ 30,907,000 $ 110,000 $ (58,000) $ 30,959,000
Other security 15,000 15,000
--------------------------------------------------------------
$ 30,922,000 $ 110,000 $ (58,000) $ 30,974,000
==============================================================
</TABLE>
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Securities Available for Sale and Accounting Change (Continued)
The amortized cost and fair values of securities available for sale as of
September 30, 1996 by contractual maturity are shown below. The "other security"
has no contractual maturity.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------------------------
<S> <C> <C>
Due in one year or less $ 10,488,000 $ 10,512,000
Due after one year through five years 23,348,000 23,251,000
Due after five years through ten years 991,000 1,006,000
Other security 15,000 15,000
--------------------------------
$ 34,842,000 $ 34,784,000
================================
</TABLE>
Proceeds from the sales of securities available for sale for the years ended
September 30, 1996, 1995, and 1994 were $3,000,000, $-0-, and $-0-,
respectively. Gross proceeds from maturities and recalled securities available
for sale for the years ended September 30, 1996, 1995, and 1994 were
$12,960,000, $6,500,000 and $-0-, respectively. There were no realized gains or
losses from sales, maturities or recalls of securities available for sale for
the years ended September 30, 1996, 1995 and 1994.
The change in net unrealized gains and losses shown as a separate component of
equity for the years ended September 30, 1996 and 1995 is as shown below:
<TABLE>
<CAPTION>
1996 1995
--------------------------------
<S> <C> <C>
Balance in equity component, beginning $ 34,000 $ (220,000)
Change in unrealized gains (losses) (110,000) 122,000
Change in deferred income taxes 41,000 132,000
--------------------------------
Balance in equity component, ending $ (35,000) $ 34,000
================================
</TABLE>
Note 4. Securities Held to Maturity
Under FASB Statement No. 115, identification of securities as "held to maturity"
indicates that such securities will be held until their contractual maturities,
and will not be available to be sold even in response to certain conditions such
as changes in market interest rates, needs for liquidity, or changes in the
availability of and the yield on alternative investments.
27
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Securities Held to Maturity (Continued)
Carrying amounts and fair values of securities being held to maturity as of
September 30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------------
<S> <C> <C> <C>
Mortgage-backed securities
and related securities $ 5,496,000 $ 119,000 $ (104,000) $ 5,511,000
=================================================================
1995
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-----------------------------------------------------------------
<S> <C> <C> <C>
Mortgage-backed securities
and related securities $ 4,529,000 $ 116,000 $ (3,000) $ 4,642,000
=================================================================
</TABLE>
There were no sales of investment securities held to maturity during the years
ended September 30, 1996, 1995 and 1994. Gross proceeds from maturities and
recalled securities during the years ended September 30, 1996, 1995 and 1994
were $-0-, $-0- and $5,500,000, respectively. Gross realized gains of $4,000 on
recalled securities were realized during the year ended September 30, 1994.
The contractual maturities of securities held to maturity are not disclosed
because the actual maturities of mortgage-backed securities may differ from
contractual maturities because the mortgages underlying the securities may be
prepaid without a penalty.
Mortgage-backed securities and related securities consist of the following at
September 30:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Association
(GNMA) securities $ 3,894,000 $ 3,885,000 $ 2,439,000 $ 2,531,000
Federal National Mortgage Association
(FNMA) securities 882,000 882,000 1,069,000 1,080,000
Federal Home Loan Mortgage Corporation
(FHLMC) securities 689,000 713,000 970,000 980,000
Small Business Administration 31,000 31,000 51,000 51,000
------------------------------------------------------------
$ 5,496,000 $ 5,511,000 $ 4,529,000 $ 4,642,000
============================================================
</TABLE>
28
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1996 1995
-------------------------------------
<S> <C> <C>
Principal balances:
First mortgage loans (principally conventional):
Secured by one-to-four family residences $ 93,275,000 $ 94,036,000
Secured by other properties 11,037,000 8,743,000
Construction loans 4,720,000 5,368,000
Home equity 3,786,000 3,875,000
-------------------------------------
112,818,000 112,022,000
-------------------------------------
Other loans 666,000 331,000
-------------------------------------
Allowance for loan losses (428,000) (137,000)
Undisbursed portion of construction loans (2,616,000) (3,100,000)
Net deferred loan origination fees (582,000) (519,000)
-------------------------------------
(3,626,000) (3,756,000)
-------------------------------------
$ 109,858,000 $ 108,597,000
=====================================
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended
September 30,
----------------------------------------------------------
1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 137,000 $ 140,000 $ 144,000
Provision charged to operations 300,000 - -
Loans charged off (18,000) (3,000) (4,000)
Recoveries 9,000 - -
----------------------------------------------------------
Balance, ending $ 428,000 $ 137,000 $ 140,000
==========================================================
</TABLE>
The Bank adopted SFAS No. 114 Accounting by Creditors for Impairment of a Loan
------------------------------------------------
on October 1, 1995, which requires that the Bank establish a specific allowance
on impaired loans. The Bank assesses loans delinquent more than 90 days for
impairment. Such loans amounted to approximately $654,000 at September 30, 1996
and had an average outstanding balance of approximately $1,075,000 for the year
ended September 30, 1996. These loans are primarily collateral dependent and
management has determined that the underlying collateral is in excess of the
carrying amounts. As a result, the Bank has determined that specific allowances
on these loans is not required.
During 1996, the Bank adopted SFAS No. 118 Accounting by Creditors for
---------------------------
Impairment of a Loan-Income Recognition and Disclosures which requires
- -------------------------------------------------------
disclosure of the Bank's method of accounting for interest income on impaired
loans. (See Note 1).
29
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Loans Receivable (Continued)
Nonperforming loans for which interest has been reduced totaled approximately
$654,000, and $981,000 at September 30, 1996, and 1995, respectively. The
differences between interest income that would have been recorded under the
original terms of such loans and the interest income actually recognized totaled
$40,000, $7,000, and $10,000 for the years ended September 30, 1996, 1995 and
1994, respectively.
Mortgage loans serviced for others consist of FNMA loans and are not included in
the accompanying statements of financial condition. The unpaid principal
balances of these loans totaled $715,000 and $970,000 at September 30, 1996 and
1995, respectively. Custodial escrow balances maintained in connection with the
foregoing loan servicing was approximately $16,000 and $11,000 at September 30,
1996 and 1995, respectively.
Officers and directors of the Bank were indebted to the Bank for loans made in
the ordinary course of business. The following is an analysis of the loans to
officers and directors for the year ended September 30:
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Balance, beginning $ 984,000 $ 884,000
Originations 374,000 246,000
Payments received (102,000) (146,000)
---------------------------
Balance, ending $ 1,256,000 $ 984,000
===========================
</TABLE>
Note 6. Accrued Interest
Accrued interest receivable is
summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Securities $ 440,000 $ 410,000
Mortgage-backed securities 44,000 40,000
Loans receivable 681,000 700,000
---------------------------
$ 1,165,000 $ 1,150,000
===========================
</TABLE>
30
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Office Properties and Equipment
Office properties and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1996 1995
-------------------------------------
<S> <C> <C>
Land $ 138,000 $ 138,000
Buildings and improvements 1,321,000 1,313,000
Furniture and equipment 660,000 615,000
Automobiles 45,000 45,000
-------------------------------------
2,164,000 2,111,000
Accumulated depreciation 926,000 817,000
-------------------------------------
$ 1,238,000 $ 1,294,000
=====================================
</TABLE>
Note 8. Employee Pension Plan
Prior to November 10, 1993, the Bank had a defined benefit pension plan covering
substantially all of its employees. The benefits were based on years of service
and the employee's expected compensation during the last five years of
employment. The Bank's funding policy was to contribute annually the maximum
amount that could be deducted for federal income tax purposes. On September 13,
1993, the Bank's board of directors approved the termination of the defined
benefit pension plan effective November 10, 1993. In the year ended September
30, 1994, all plan participants received a lump sum distribution from the Plan.
Total pension expense for the year ended September 30, 1994 was $493,000, which
included $491,000 related to the termination of the Plan. The expense is
attributed to changes in the actuarial assumptions such as lower retirement
ages, inclusion of value of early retirement subsidies and a decrease in
interest rates as compared to the prior years.
On October 1, 1994, the Bank established a new pension plan for its employees.
The new plan is a defined benefit plan covering substantially all of the Bank's
employees. The benefits are based on years of service and the employee's
expected compensation during five consecutive plan years within the last ten
plan years that produce the highest average. Total pension expense was $139,000,
$108,000 and $2,000 for the years ended September 30, 1996, 1995 and 1994,
respectively, and is included in compensation and benefits in the accompanying
statements of income.
31
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Employee Pension Plan (Continued)
The following table sets forth the Plan's funded status and amounts recognized
in the Bank's statement of financial condition as of September 30, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <S> <C>
Actuarial present value of benefit (obligations):
Accumulated benefit (obligation):
Vested $ (276,000) $ (90,000)
Nonvested (12,000) (24,000)
-----------------------------
(288,000) (114,000)
Effect of projected future compensation (494,000) (439,000)
-----------------------------
Projected benefit (obligation) for service rendered to date (782,000) (553,000)
Plan assets at fair value; primarily cash and short-term investments 234,000 84,000
-----------------------------
Projected benefit (obligation) in excess of plan assets (548,000) (469,000)
Unrecognized prior service cost 438,000 547,000
Unrecognized net (gain) loss 131,000 (73,000)
-----------------------------
Prepaid pension cost (included in prepaid and other assets) $ 21,000 $ 5,000
=============================
</TABLE>
The components of net pension expense for the years ended September 30, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 39,000 $ 33,000 $ -
Interest cost on projected benefit obligation 60,000 43,000 25,000
Actual return on plan assets (10,000) (2,000) (26,000)
Net amortization and deferral 50,000 34,000 3,000
----------------------------------------------
Net pension expense $ 139,000 $ 108,000 $ 2,000
==============================================
</TABLE>
Assumptions used to develop the net periodic pension cost as of September 30,
1996 and 1995 were:
<TABLE>
<S> <C>
Discount rate 8.0 %
Expected long-term rate of return on assets 8.0
Rate of increase in compensation levels 5.0
</TABLE>
32
<PAGE>
Home Savings Bank of Albemarle, S.S.B.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 9. Deposits
Deposits at September 30 are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Rate at 1996 1995
September 30, -------------------------------------------------------------------
1996 Amount Percent Amount Percent
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Demand and NOW accounts, including non-
interest-bearing deposits of $819,000 at
September 30, 1996 and $562,000 at
September 30, 1995 2.59 % $ 7,188,000 4.91 % $ 6,893,000 5.01 %
Money market 3.00 6,674,000 4.56 7,809,000 5.67
Passbook savings 3.00 17,953,000 12.26 15,490,000 11.25
-------------------------------------------------------------------
31,815,000 21.73 % 30,192,000 21.93 %
-------------------------------------------------------------------
Certificates of deposit:
2.00% to 3.99% 16,000 0.01 % $ 15,000 0.01 %
4.00% to 5.99% 59,286,000 40.50 38,643,000 28.07
6.00% to 7.99% 55,005,000 37.57 68,622,000 49.86
-------------------------------------------------------------------
5.96 % 114,307,000 78.08 % 107,280,000 77.94 %
-------------------------------------------------------------------
Accrued interest payable 276,000 0.19 % 175,000 0.13 %
-------------------------------------------------------------------
$ 146,398,000 100.00 % $ 137,647,000 100.00 %
===================================================================
Weighted average cost of savings deposits 5.21 % 5.43 %
================ ================
</TABLE>
The Bank received deposits from stock subscriptions totaling $46,601,000 at
September 30, 1996.
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $13,906,000 and $10,838,000
at September 30, 1996 and 1995, respectively.
The aggregate amount of certificates of deposit by maturity with a minimum
denomination of $100,000 included in the above table is as follows:
September 30,
1996
---------------------
Maturity Period:
Within 3 months or less $ 1,795,000
Over 3 months through 6 months 3,304,000
Over 6 months through 12 months 4,053,000
Over 12 months 4,754,000
---------------------
$ 13,906,000
=====================
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------
<S> <C> <C> <C>
Passbook savings $ 529,000 $ 492,000 $ 555,000
NOW and money market 408,000 496,000 579,000
Certificates of deposit 6,838,000 4,992,000 3,839,000
--------------------------------------------------------------------
$ 7,775,000 $ 5,980,000 $ 4,973,000
====================================================================
</TABLE>
33
<PAGE>
Home Savings Bank of Albemarle, S.S.B.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 9. Deposits (Continued)
The Bank has pledged securities with an amortized cost of $1,000,000 at
September 30, 1996 as collateral for public deposits.
Eligible savings accounts are insured to $100,000 by the Savings Association
Insurance Fund (SAIF) which is administered by the Federal Deposit Insurance
Corporation (FDIC).
Note 10. Special SAIF Assessment
On September 30, 1996, The "Deposit Insurance Funds Act of 1996" was signed into
law. The legislation included a special assessment to capitalize the SAIF up to
a statutory goal of 1.25% of insured deposits. The assessment is equal to
approximately 65.7 basis points of the SAIF assessable deposit base as of March
31, 1995. Although the assessment will be paid during the three month period
ended December 31, 1996, the Bank was required to accrue and expense the cost of
the assessment as of September 30, 1996. In addition, this assessment can not be
deducted for income tax purposes until paid. The expense recorded for the
special SAIF assessment as of September 30, 1996 was $838,000.
Note 11. Deferred Compensation Agreements
The Bank has entered into unfunded deferred compensation agreements providing
retirement and death benefits for seven directors and supplemental retirement
and death benefits income agreements for two executive officers. Vested benefits
under the deferred compensation agreements are payable in monthly installments
over 10 and 15 year periods for the supplemental income agreements. The present
value of the liability for the benefits is being accrued over the vesting period
per the underlying agreements. The total expense for the deferred compensation
agreements and supplemental income agreement amounted to approximately $222,000,
$379,000, and $121,000 for the years ended September 30, 1996, 1995 and 1994,
respectively.
Note 12. Accounting Change and Income Tax Matters
Effective October 1, 1993, the Bank adopted FASB Statement No. 109, Accounting
----------
for Income Taxes. The adoption of Statement 109 changes the Bank's method of
- ----------------
accounting for income taxes from the deferred method to a liability method.
Under the deferred method, the Bank deferred the past tax effects of timing
differences between financial reporting and taxable income. As explained in Note
1, the liability method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the reported amounts of assets and liabilities and their tax bases.
34
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Accounting Change and Income Tax Matters (Continued)
The effect of the adjustments to the October 1, 1993 statement of financial
condition to adopt Statement 109 was $485,000. This amount is reported as the
effect of a change in accounting principle on the accompanying 1994 statement of
income.
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purposes of absorbing losses. Through 1996, the provisions of the Code permitted
the Bank to deduct from taxable income an allowance for bad debts based on 8% of
taxable income before such deduction or actual loss experience. The Bank was
unable to take a bad debt deduction in 1996, 1995, and 1994 due to limitations
imposed by the Code. In addition, legislation passed in 1996 eliminates the
percentage of taxable income method as an option for computing bad debt
deductions in all future years. The Bank will still be permitted to take
deductions for bad debts, but will be required to compute such deductions using
an experience method.
The Bank will also have to recapture its tax bad debt reserves which have
accumulated since 1987 amounting to approximately $1,023,000 over a six year
period. The tax associated with the recaptured reserve is approximately
$400,000. The recapture is scheduled to begin with the Bank's 1997 year, but can
be delayed up to two years if the Bank originates a certain level of residential
mortgage loans over the next two years. Deferred income taxes have been
previously established for the taxes associated with the recaptured reserves and
the ultimate payment of the taxes will not result in a charge to earnings.
Deferred taxes have been provided for certain increases in the Bank's tax bad
debt reserves subsequent to September 30, 1988 which are in excess of recorded
book loan loss allowances. At September 30, 1996, retained earnings contain
certain historical additions to bad debt reserves for income tax purposes of
approximately $2,870,000, the balance at September 30, 1988, for which no
deferred taxes have been provided because the Bank does not intend to use these
reserves for purposes other than to absorb losses. If amounts which qualified as
bad debt deductions are used for purposes other than to absorb losses or
adjustments arising from the carryback of net operating losses, income taxes may
be imposed at the then existing rates. The unrecorded deferred income tax
liability on the above amount was approximately $1,125,000 as of September 30,
1996. In the future, if the Bank does not meet the income tax requirements
necessary to permit the deduction of an allowance for bad debts, the Bank's
effective tax rate would increase to the maximum percent under existing law.
35
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Accounting Change and Income Tax Matters (Continued)
The tax effects of temporary differences that gave rise to significant portions
of the net deferred tax asset (liability) (classified with prepaid expenses and
other assets and accounts payable and other liabilities) in the Statement of
Financial Condition at September 30, as adjusted for the adoption of FASB
Statement No. 109, were:
<TABLE>
<CAPTION>
Deferred tax liabilities: 1996 1995
-----------------------------
<S> <C> <C>
FHLB dividends $ 232,000 $ 231,000
Reserve for bad debts 400,000 412,000
Unrealized gain on securities available for sale - 18,000
Property and equipment 70,000 59,000
Other - 9,000
-----------------------------
Total 702,000 729,000
-----------------------------
Deferred tax assets:
Net deferred loan fees and costs 45,000 80,000
Deferred compensation and supplemental income 414,000 333,000
Federal Insurance Premium 328,000 -
Reserve for uncollected interest - 26,000
Unrealized loss on securities available for sale 23,000 -
Allowance for loan losses 187,000 54,000
-----------------------------
Total 997,000 493,000
-----------------------------
Net deferred tax asset (liability) $ 295,000 $ (236,000)
=============================
</TABLE>
A valuation allowance was not recorded for deferred tax assets at September 30,
1996 or September 30, 1995.
Income tax expense (credits) consist of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Current $ 654,000 $ 1,130,000 $ 1,611,000
Deferred (490,000) (75,000) (113,000)
-------------------------------------------
Total $ 164,000 $ 1,055,000 $ 1,498,000
===========================================
</TABLE>
36
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Accounting Change and Income Tax Matters (Continued)
The following is a reconciliation of the federal income tax rate of 34% to the
effective tax rate:
<TABLE>
<CAPTION>
Year Ended
September 30,
--------------------------------------------
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0 % 34.0 % 34.0 %
Increase in taxes resulting from:
State income taxes, net of federal benefit - 2.2 3.3
Permanent differences 0.2 - -
Decrease in taxes resulting from:
Permanent differences and state net
operating loss (9.5) - -
Other deferred taxes (0.4) - -
--------------------------------------------
24.3% 36.2% 37.3%
============================================
</TABLE>
Note 13. Capital Requirements
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
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 regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The FDIC requires Home Savings Bank of Albemarle, S.S.B. to have a minimum
leverage ratio of Tier I Capital (principally consisting of retained earnings
and any future common stockholders' equity, less any intangible assets) to all
assets of at least 3%, provided that it receives the highest rating during the
examination process. For institutions that receive less than the highest rating,
the Tier I capital requirement is 1% to 2% above the stated minimum. The FDIC
also requires the Bank to have a ratio of total capital to risk-weighted assets
of 8%, of which at least 4% must be in the form of Tier I capital. The
Administrator requires a net worth equal to at least 5% of total assets. Home
Savings Bank of Albemarle, S.S.B. complied with all of the capital requirements
at September 30, 1996.
37
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Capital Requirements (Continued)
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the components of regulatory
capital at September 30, 1996:
<TABLE>
<CAPTION>
Leverage
Ratio of Tier I N. C.
GAAP Tier I Risk-Adjusted Risk-Based Savings Bank
Equity Capital Capital Capital Capital
--------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
GAAP equity before adjustments $ 21,262
Audit adjustments for income taxes (395)
------------
GAAP equity $ 20,867 $ 20,867 $ 20,867 $ 20,867 $ 20,867
============
Supplemental capital items:
General valuation allowance - - 428 428
Unrealized loss on securities available for sale 35 35 35 35
--------------------------------------------------------------
Regulatory capital 20,902 20,902 21,330 21,330
Minimum capital requirement 6,539 2,342 6,245 10,898
--------------------------------------------------------------
Excess regulatory capital $ 14,363 $ 18,560 $ 15,085 $ 10,432
==============================================================
Total assets at September 30, 1996 $ 217,954 $ 217,954
============ ===========
Risk-weighted assets at September 30, 1996 $ 78,063 $ 78,063
=============================
Capital as a percentage of assets:
Actual % 9.59 % 26.77 % 27.32 % 9.79
Required 3.00 3.00 8.00 5.00
---------------------------------------------------------------
Excess % 6.59 % 23.77 % 19.32 % 4.79
===============================================================
</TABLE>
As of September 30, 1996, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
total capital to risk weighted assets of 10%, Tier I Capital to risk weighted
assets of 6% and Tier I Capital to total assets of 5% or $7,806,000, $4,684,000,
and $10,898,000, respectively. There are no conditions or events since that
notification that management believes have changed the Bank's category.
Note 14. Financial Instruments with Off-Statement of Financial Condition Risk
The Bank is a party to financial instruments with off-statement of financial
condition risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statement of financial
condition. The contract or notional amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
38
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Financial Instruments with Off-Statement of Financial Condition Risk
(Continued)
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual or notional amount of these instruments. The Bank
uses the same credit polices in making commitments and conditional obligations
as it does for on-statement of financial condition instruments.
<TABLE>
<CAPTION>
September 30, 1996
Financial instruments whose contract amounts represent credit risk: ------------------------------------
Commitments to extend credit, mortgage loans Fixed Rate Variable Rate
Undisbursed lines of credit ------------------------------------
<S> <C>
$ 4,576,000 $ -
2,628,000
------------------------------------
$ 4,576,000 $ 2,628,000
====================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and many
require payment of a fee. The total commitment amounts do not necessarily
represent future requirements, since some may expire without being drawn upon.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
Note 15. Disclosures About Fair Value of Financial Instruments
The fair value of the Bank's cash and cash equivalents, is estimated to be equal
to its recorded amount. For securities held to maturity and securities available
for sale, the fair value is estimated using quoted market values obtained from
independent pricing services. For Federal Home Loan Bank stock, the fair value
is the same as the recorded book value since the stock can be redeemed at face
value.
The fair value for all fixed rate loans has been estimated by discounting the
projected future cash flows using the rate at which similar loans would be made
to borrowers with similar credit ratings and for similar maturities. The
discount rate used has been adjusted by an estimated credit risk factor to
approximate the adjustment that would be applied in the marketplace for any
nonperforming loans. Certain prepayment assumptions have also been made
depending upon the original contractual lives of the loans. The fair value for
all adjustable rate loans has been estimated to be equal to their carrying
amounts because the repricing periods are relatively short-term in nature.
The fair value of deposits with no stated maturities, including checking
accounts and statement savings accounts, is estimated to be equal to the amount
payable on demand. The fair value of certificates of deposit is based upon the
discounted value of the contractual cash flows. The discount rates used in these
calculations approximate the current rates offered for deposits of similar
remaining maturities.
The fair values of checks outstanding on disbursement account, accrued interest
receivable, accrued interest payable and advance payments to borrowers for taxes
and insurance are presumed to be their recorded book values.
39
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Disclosures About Fair Value of Financial Instruments (Continued)
The estimated fair value of commitments to extend credit is estimated using fees
currently charged for similar arrangements adjusted for changes in interest
rates and credit risk that has occurred subsequent to origination. Because the
Bank believes that the credit risk associated with available but undisbursed
commitments would essentially offset fees that could be recognized under similar
arrangements, and because the commitments are either short term in nature or
subject to immediate repricing, no fair value has been assigned to these
off-statement of financial condition commitments.
The recorded book value and estimated fair value of the Bank's financial assets
and liabilities at September 30, are summarized below:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------
Recorded Estimated Recorded Estimated
Book Value Fair Value Book Value Fair Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 62,135,000 $ 62,135,000 $ 11,494,000 $ 11,494,000
Securities held to maturity 5,496,000 5,511,000 4,529,000 4,642,000
Securities available for sale 34,784,000 34,784,000 30,974,000 30,974,000
Federal Home Loan Bank stock 1,346,000 1,346,000 1,346,000 1,346,000
Loans receivable, net 109,858,000 110,914,000 108,597,000 108,824,000
Accrued interest receivable 1,165,000 1,165,000 1,150,000 1,150,000
Financial Liabilities:
Savings deposits with no stated maturities 31,815,000 31,815,000 30,192,000 30,192,000
Savings deposits with stated maturities 114,307,000 114,882,000 107,280,000 107,644,000
Deposits, stock offering 46,601,000 46,601,000 -- --
Checks outstanding on disbursement account 987,000 987,000 489,000 489,000
Accrued interest payable 276,000 276,000 175,000 175,000
Advance payments by borrowers for taxes
and insurance 115,000 115,000 97,000 97,000
</TABLE>
Note 16. Dissolution of Subsidiary
Effective September 13, 1994, the Board of Directors of the Bank approved the
dissolution of Stanly County Service Corporation, a wholly-owned subsidiary. The
stock of the corporation was canceled and the equity was distributed, in the
form of dividends, to the Bank. The assets acquired were recorded at the
carrying value to Stanly County Service Corp. The subsidiary was inactive prior
to dissolution.
40
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 17. Future Reporting Requirements
The FASB has issued SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities which the Bank has not been
required to adopt as of September 30, 1996.
The Statement will be in effect for transfers and servicing of financial assets
and extinguishment of liabilities occurring after December 31, 1996. The
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The standards
are based on a control approach which requires, after a transfer of financial
assets, an entity recognize the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes assets when control is
surrendered, and derecognizes liabilities when extinguished. The Statement
provides standards to distinguish transfers of assets that are sales from
transfers that are secured borrowings. The Statement is not expected to have an
impact on the Bank's financial statements because the Bank does not currently
sell loans in the secondary market or have current intentions to do so in the
near future.
The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation, which
the Bank has not been required to adopt as of September 30, 1996.
The Statement, which will be in effect for the Bank's fiscal year ending
September 30, 1997, will require that an entity account for stock based
compensation plans using a fair value based method which measures compensation
cost at the grant date based upon the value of the award, which is then
recognized over the service period, usually the vesting period. The accounting
requirements of the Statement apply to grants of awards entered into in fiscal
years that begin after December 15, 1995. The Statement allows entities to
continue to use APB Opinion No. 25 to measure compensation cost, but requires
that the proforma effects on net income and earnings per share be disclosed to
reflect the difference between the compensation cost, if any, from applying APB
Opinion No. 25 and the related cost measured by the fair value method defined in
the Statement. The Statement is not expected to have a material effect on the
Bank's financial statements because management is expected to elect to continue
to use the accounting and reporting permitted by APB Opinion No. 25 and will
disclose the differences, if any, as proforma effects in notes to the financial
statements of not utilizing the fair value method prescribed in SFAS No. 123.
Note 18. Subsequent Event - Conversion and Stock Offering
On October 2, 1996, the Conversion was consummated as explained in Note 1. As a
part of the Conversion, the Company issued 4,496,500 shares of its common stock
in a public offering which resulted in gross proceeds of $44,496,500, and were
reduced by conversion costs of $1,303,000. The Company paid $24,252,000 for the
purchase of all the common stock of the Bank. The Bank then refunded $11,608,000
in stock offering deposits to subscribers that did not purchase stock due to an
oversubscription.
41
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 18. Subsequent Event - Conversion and Stock Offering (Continued)
The Bank established an employee stock ownership plan (ESOP) which purchased
359,720 shares of the Company's common stock in the open market. The funds used
by the ESOP to acquire these shares were obtained from borrowings from the
holding company. The loan will be reflected in the financial statements of the
Bank which intends to make contributions to the ESOP necessary to amortize the
debt.
The Bank entered into employment agreements with two executive officers to
provide for their continued employment. The agreements provide for an initial
term of three years and can be extended an additional year annually.
At September 30, 1996, the Bank had incurred or accrued anticipated conversion
costs of approximately $1,303,000, which are shown as prepaid expenses and other
assets in its statement of financial condition as of September 30, 1996. At
closing, such cost were netted against the stock proceeds received and shown as
a reduction of stockholders' equity.
The Company's stockholders will be asked to consider at a future stockholders
meeting approval of a management recognition plan. Such a plan is designed to
provide the directors, officers and certain employees of the Bank with an
ownership interest in the Company to encourage their continued service to the
Bank. Up to 179,860 shares of the Company's stock would be awarded under the
plan. The stockholders will also be asked to approve certain stock option plans
for directors, officers and employees of the Bank. The plans may provide for the
issuance of incentive or non-incentive options. As many as 449,650 shares are
expected to be reserved for future issuance under the stock option plans. The
Company may elect to fund any approved plans through the issuance of authorized
but unissued shares, or may elect to purchase the shares to fund the plans in
the open market.
In connection with the Conversion, the Bank has established a liquidation
account in an amount equal to its net worth as reflected in its latest statement
of financial condition used in its final offering circular. The liquidation
account will be maintained for the benefit of eligible deposit account holders
and supplemental eligible deposit account holders who continue to maintain their
deposit accounts in the Bank after the reorganization. Only in the event of a
complete liquidation will eligible deposit account holders and supplemental
eligible deposit account holders be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted sub account balance for deposit accounts then held before any
liquidation distribution may be made with respect to common stock. Dividends
paid by the Bank subsequent to the conversion cannot be paid from this
liquidation account.
The Bank may not declare or pay a cash dividend on its common stock if its net
worth would thereby be reduced below either the aggregate amount then required
for the liquidation account or the minimum regulatory capital requirements
imposed by federal regulations.
Note 19. Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform with 1996 presentation with no effect on net income or retained
earnings.
42
<PAGE>
CORPORATE INFORMATION
SOUTH STREET FINANCIAL CORP.
EXECUTIVE OFFICERS:
CARL M. HILL CHRISTOPHER F. CRANFORD R. RONALD SWANNER
President and CEO Treasurer/Controller Vice-President and Secretary
<TABLE>
<CAPTION>
DIRECTORS:
Carl M. Hill
Chairman; President and CEO, Home Savings
<S> <C>
Caldwell A. Holbrook, Jr.; Partner Greg E. Underwood; CPA in private practice,
D.A. Holbrook & Sons, Contractors Owner, Carolina Oil Company of Albemarle,
Inc. and Barefoot Oil Company of Albemarle,
Inc., Secretary/Treasurer of Southeastern Floral
Corp.
Joel A. Huneycutt; President Douglas D. Stokes; Owner and President,
Locust Lumber Company, Inc. Stokes Construction Company
R. Ronald Swanner; Executive Vice President
Home Savings
</TABLE>
<TABLE>
Stock Transfer Agent Annual Meeting
<S> <C>
Registrar and Transfer Company The 1996 annual meeting of stockholders of
10 Commerse Drive South Street Financial Corp. will be held at 7:00
Cranford, NJ 07016 p.m. on February 17, 1996 at the corporate office
at 155 West South Street, Albemarle, NC.
Special Legal Counsel Form 10-K
Brooks, Pierce, McLendon, A copy of Form 10-K as filed with the Securities
Humphrey, & Leonard, LLP and Exchange Commission will be furnished
2000 Renaissance Plaza without charge to the Company's stockholders
230 North Elm Street upon written request to Home Savings Bank of
Greensboro, NC 27420 Albemarle, SSB, 155 West South Street, P.O. Box
489, Albemarle, NC 28002-0489.
Independent Auditors Corporate Office
McGladrey & Pullen, LLP 155 West South Street
One Morrocroft Centre P.O. Box 489
6805 Morrison Boulevard, Suite 200 Albemarle, NC 28002-0489
Charlotte, NC 28211-3577
</TABLE>
Common Stock Information
On October 2, 1996, the Company issued 4,496,500 shares of common stock. The
Company's common stock is listed on the NASDAQ National Market under the symbol
"SSFC" and began trading on October 3, 1996. At October 3, 1996 there were
approximately 979 shareholders of record, not including the number of persons or
entities where stock is held in nominee or "street" name through various
brokerage firms or banks. The Company issued no dividends in fiscal 1996. The
high and low bids for the common stock for the period from October 3, 1996 to
November 30, 1996 were 12.125 and 14.75, respectively.
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1995
<PERIOD-START> OCT-01-1995 OCT-01-1994
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 2,787 2,872
<INT-BEARING-DEPOSITS> 59,348 8,622
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 34,784 30,974
<INVESTMENTS-CARRYING> 5,496 4,529
<INVESTMENTS-MARKET> 5,511 4,642
<LOANS> 109,858 108,597
<ALLOWANCE> 428 137
<TOTAL-ASSETS> 217,954 159,758
<DEPOSITS> 192,999 137,647
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 4,088 1,685
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 0 0
<TOTAL-LIABILITIES-AND-EQUITY> 217,954 159,758
<INTEREST-LOAN> 9,585 9,731
<INTEREST-INVEST> 2,030 1,585
<INTEREST-OTHER> 1,254 664
<INTEREST-TOTAL> 12,869 11,980
<INTEREST-DEPOSIT> 7,775 5,980
<INTEREST-EXPENSE> 7,775 5,980
<INTEREST-INCOME-NET> 5,094 6,000
<LOAN-LOSSES> 300 0
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 4,246 3,210
<INCOME-PRETAX> 674 2,916
<INCOME-PRE-EXTRAORDINARY> 674 2,916
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 510 1,861
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.80 8.20
<LOANS-NON> 654 981
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 137 140
<CHARGE-OFFS> 18 3
<RECOVERIES> 9 0
<ALLOWANCE-CLOSE> 428 137
<ALLOWANCE-DOMESTIC> 264 137
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 164 0
</TABLE>
