<PAGE>
Filed Pursuant to Rule 424(b)(5)
Under Registration No. 333-04509
PROSPECTUS
SOUTH STREET FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR HOME SAVINGS BANK OF ALBEMARLE, S.S.B.)
ANTICIPATED MAXIMUM OF 3,910,000 SHARES OF COMMON STOCK
$10.00 PER SHARE
South Street Financial Corp., a North Carolina corporation (the "Holding
Company"), is offering up to 3,910,000 shares of its common stock, no par
value (the "Common Stock"), in connection with the conversion of Home Savings
Bank of Albemarle, S.S.B. ("Home") from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank (the
"Conversion"). Under certain circumstances the Holding Company may increase
the amount of Common Stock offered hereby to up to 4,496,500 shares. As part
of the Conversion, the Holding Company will become the sole stockholder and
parent holding company of Home. See "THE CONVERSION". Non-transferable rights
to subscribe for shares of Common Stock of the Holding Company ("Subscription
Rights") have been granted to (i) Home's depositors with aggregate deposits of
at least $50 as of December 31, 1994 ("Eligible Account Holders"); (ii) Home's
Employee Stock Ownership Plan (the "ESOP"); (iii) Home's depositors with
aggregate deposits of at least $50 as of June 30, 1996 ("Supplemental Eligible
Account Holders"); (iv) Home's depositor and borrower members as of July 31,
1996, who are not Eligible Account Holders or Supplemental Eligible Account
Holders ("Other Members"); and (v) directors, officers and employees of Home
who are not Eligible Account Holders, Supplemental Eligible Account Holders or
Other Members, in the priorities and subject to the limitations described
herein (the "Subscription Offering").
(cover continued on next page)
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" ON PAGE 20. THE SHARES OF COMMON STOCK
OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND ARE NOT INSURED
OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY
OTHER GOVERNMENT AGENCY, INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL, AND ARE NOT GUARANTEED BY THE HOLDING COMPANY OR HOME.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC"), THE ADMINISTRATOR, SAVINGS INSTITUTIONS
DIVISION, NORTH CAROLINA DEPARTMENT OF COMMERCE (THE "ADMINISTRATOR"), ANY STATE
SECURITIES COMMISSION, OR THE FDIC; NOR HAS THE SEC, THE ADMINISTRATOR, ANY SUCH
STATE COMMISSION, OR THE FDIC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS (THE "PROSPECTUS"). ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================
ESTIMATED UNDERWRITING,
PURCHASE MARKETING AND OTHER FEES ESTIMATED NET
PRICE AND EXPENSES(3) CONVERSION PROCEEDS(4)
=====================================================================================
<S> <C> <C> <C>
Per Share at Minimum.... $10.00 $.37 $9.63
- -------------------------------------------------------------------------------------
Per Share at MidPoint... $10.00 $.34 $9.66
- -------------------------------------------------------------------------------------
Per Share at Maximum.... $10.00 $.32 $9.68
- -------------------------------------------------------------------------------------
Per Share at Maximum, as
adjusted............... $10.00 $.31 $9.69
- -------------------------------------------------------------------------------------
Total at Minimum(1)..... $28,900,000 $1,064,000 $27,836,000
- -------------------------------------------------------------------------------------
Total at Midpoint(1).... $34,000,000 $1,162,000 $32,838,000
- -------------------------------------------------------------------------------------
Total at Maximum(1)..... $39,100,000 $1,260,000 $37,840,000
- -------------------------------------------------------------------------------------
Total at Maximum, as
adjusted(2)............ $44,965,000 $1,372,000 $43,593,000
=====================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by
Ferguson & Co., LLP ("Ferguson") dated April 30, 1996, which states that
the estimated aggregate pro forma market value of the Holding Company and
Home ranged from $28,900,000 to $39,100,000 ("Valuation Range") or between
2,890,000 and 3,910,000 shares of Common Stock at the purchase price of
$10.00 per share. See "THE CONVERSION--Purchase Price of Common Stock and
Number of Shares Offered".
(2) As adjusted to give effect to an increase in the number of shares that
could be sold in the Conversion of up to 15% above the maximum of the
Valuation Range, without the resolicitation of subscribers or any right to
cancel subscription orders, to reflect changes in market and financial
conditions following commencement of the Subscription and Community
Offerings (as hereinafter defined).
(3) Consists of estimated costs to Home and the Holding Company arising from
the Conversion, including estimated fixed expenses of approximately
$526,380 at the midpoint of the Valuation Range (including allocable out-
of-pocket expenses to be paid to Trident Securities, Inc. ("Trident
Securities")) and a management fee and sales commissions to be paid to
Trident Securities, which fees and commissions are estimated to be between
$537,802 and $845,929 at the minimum and maximum, as adjusted, of the
Valuation Range, respectively. See "PRO FORMA DATA" for the assumptions
used to arrive at these estimates. Such fees may be deemed to be
underwriting fees.
(4) Includes estimated net proceeds from the sale of 8% of the shares to be
issued which are to be purchased by Home's ESOP with funds loaned to the
ESOP by the Holding Company. Actual net proceeds may vary substantially
from the estimated amount, depending upon the number of shares sold in the
Offerings (as hereinafter defined), actual expenses and other factors. See
"USE OF PROCEEDS", "CAPITALIZATION", "PRO FORMA DATA" and "THE
CONVERSION--Purchase Price of Common Stock and Number of Shares Offered".
TRIDENT SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1996.
<PAGE>
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in a community offering (the "Community Offering") to
members of the general public with first priority being given to natural persons
or trusts of natural persons residing in Stanly County, North Carolina and
second priority being given to natural persons or trusts of natural persons
residing in Anson, Cabarrus, Montgomery, Rowan and Union Counties, North
Carolina (the "Surrounding Counties"). The Community Offering, if one is held,
may begin at any time following commencement of the Subscription Offering. See
"THE CONVERSION --Community Offering". If necessary, any shares of Common Stock
not subscribed for in the Subscription and Community Offerings will be offered
to certain members of the general public on a best efforts basis through a
selected dealers arrangement (the "Syndicated Community Offering"). See "THE
CONVERSION -- Syndicated Community Offering". The Subscription, Community and
Syndicated Community Offerings are referred to collectively as the "Offerings".
Home and the Holding Company have engaged Trident Securities as financial
advisor and to assist in the sale of shares of Common Stock, on a best efforts
basis, in the Offerings. Trident Securities is under no obligation to purchase
any shares of Common Stock in any of the Offerings. See "THE CONVERSION --
Marketing Arrangements". Home and the Holding Company have agreed to indemnify
Trident Securities against certain claims or liabilities, including claims under
the Securities Act of 1933, as amended. See "THE CONVERSION -- Marketing
Arrangements".
The Subscription Offering will terminate at 12:00 noon, local time, on
September 17, 1996 (the "Expiration Time") and the Community Offering and the
Syndicated Community Offering, if any, must be completed within 45 days after
the close of the Subscription Offering, unless extended in any case by Home and
the Holding Company, with the approval of the Administrator. The Offerings may
not be extended beyond September 17, 1998. In the event an extension is
approved, subscribers would be resolicited. Subject to the foregoing, an
executed Stock Order Form, once received by Home, is irrevocable and may not be
modified, amended or rescinded without the consent of Home. See "THE
CONVERSION -- Exercise of Subscription Rights and Purchases in the Community
Offering".
No person (or persons exercising Subscription Rights through a single
account) or persons acting in concert may subscribe in the Conversion for more
than 40,000 shares. In addition, no person, or persons acting in concert,
together with any associates, may subscribe for more than 100,000 shares of the
Common Stock to be issued in the Conversion. However, (i) the ESOP may purchase
up to 8% of the shares issued in the Conversion; and (ii) prior to completion of
the Conversion, the Board of Directors of Home may in its absolute discretion,
without notice or resolicitation, decrease the 40,000 share limitation to an
amount not less than 1% of the shares issued in the Conversion or increase such
40,000 share limitation to an amount of up to 5% of the shares issued in the
Conversion. No person or entity may subscribe for an aggregate of less than 50
shares of the Common Stock to be issued in the Conversion. See "THE
CONVERSION -- Minimum and Maximum Purchase Limitations". Subscription Rights are
nontransferable and persons found to be attempting to transfer Subscription
Rights will be subject to forfeiture of such rights and possible further
sanctions. See "THE CONVERSION - Certain Restrictions on Transfer of
Subscription Rights; False or Misleading Order Forms".
2
<PAGE>
Home Savings Bank of Albemarle, S.S.B.
Albemarle, North Carolina
[GEOGRAPHIC MAP OF MARKET AREA]
3
<PAGE>
SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and financial statements
appearing elsewhere herein. Certain terms used in this summary are defined
elsewhere herein.
South Street
Financial Corp. The Holding Company is a North Carolina corporation recently
organized by the Board of Directors of Home to acquire all
of the capital stock that Home will issue upon its
conversion from the mutual to stock form of ownership. The
conversion of Home to stock form, the issuance of Home's
capital stock to the Holding Company, and the offer and sale
of the Common Stock of the Holding Company are referred to
in this Prospectus as the "Conversion". The Holding Company
has not as yet engaged in any business. Upon completion of
the Conversion, its business will initially consist of
owning Home, investing the proceeds of the Conversion that
are retained by the Holding Company and holding the
indebtedness to be outstanding from the ESOP. The Holding
Company has received the approval of the Administrator and
the Board of Governors of the Federal Reserve System (the
"Federal Reserve") to acquire Home.
The executive office of the Holding Company is located at
155 West South Street, Albemarle, North Carolina, and its
telephone number is (704) 982-9184.
Home Savings Bank
of Albemarle,
S.S.B. Home is a North Carolina-chartered mutual savings bank and
has been in operation since 1911. Home has been a member of
the Federal Home Loan Bank ("FHLB") system since 1954. Its
deposits have been federally insured since 1954 and are now
insured by the Savings Association Insurance Fund (the
"SAIF") of the FDIC to the maximum amount permitted by law.
Home conducts business through its main office in Albemarle,
North Carolina and its branch office in Locust, North
Carolina. Its primary market area is Stanly County, North
Carolina. At March 31, 1996, Home had total assets of $167.0
million, net loans of $106.7 million, deposits of $144.3
million and equity of $20.7 million which is 12.39% of total
assets.
Home is primarily engaged in the business of attracting
retail deposits from the general public and using those
deposits to make mortgage loans secured by one-to-four
family residential real estate located in Home's primary
market area. Home also makes 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. See
"BUSINESS OF HOME". Home has been and intends to continue to
be a community-oriented financial institution offering a
variety of financial services to meet the needs of the
communities it serves.
Highlights of Home's financial condition and operations
include:
. Profitability. For the six months ended March 31, 1996,
and for the fiscal years ended September 30, 1995, 1994
and 1993, Home had net income of $299,000, $1.9
million, $2.0 million and $3.3 million, respectively,
and a return on average assets of 0.36%, 1.23%, 1.63%
and 2.12%, respectively. Future profitability of Home
may be affected
4
<PAGE>
by changes in market interest rates and other factors.
See "RISK FACTORS -- Potentially Adverse Impact of
Changes in Interest Rates".
. Capital Position. As of March 31, 1996, Home's ratios
of Tier I capital to total assets and total capital to
risk-weighted assets were 12.39% and 30.99%,
respectively, which substantially exceeded the FDIC's
requirements. On such date, Home's ratio of net worth
to total assets, calculated under the Administrator's
regulations, was 12.65%, which substantially exceeded
North Carolina requirements. See "SUPERVISION AND
REGULATION -- Regulation of Home -- Capital
Requirements Applicable to Home".
. Level of Nonperforming Assets. On March 31, 1996 and
March 31, 1995, Home's ratio of nonperforming assets to
total assets was 0.46% and 0.64%, respectively. As of
the end of each of its last five fiscal years, Home's
ratio of nonperforming assets to total assets has not
exceeded 0.76%. See "RISK FACTORS -- Risks Related to
Illiquidity of Home's Loan Portfolio" and "BUSINESS OF
HOME -- Lending Activities -- Nonperforming Assets and
Asset Classification".
. Interest Rate Risk. Home's management measures interest
rate risk using gap, net portfolio value, and net
interest income analyses. As of March 31, 1996, Home's
interest-earning assets less interest-bearing
liabilities maturing or repricing within one year as a
percentage of total interest-earning assets was a
negative 41.58%. At March 31, 1996, Home had a three-
year cumulative negative gap of 55.73%. As a result a
significant increase in market interest rates would
affect Home's results of operations adversely. As of
March 31, 1995, $10.5 million of Home's $106.7 million
in loans outstanding were to mature or reprice within
one year or less. See "RISK FACTORS -- Potentially
Adverse Impact of Changes in Interest Rates" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATING RESULTS --Asset/Liability
Management".
. Community Orientation. Home historically has been
committed to meeting the financial needs of the
communities in which it operates. Management believes
Home is large enough to provide a range of personal and
business financial services, and yet small enough to be
able to provide such services on a personalized and
efficient basis.
The Conversion Home has been studying its strategic options for several
years. As a result of its analysis of the existing
regulatory environment, the competition it faced and other
factors, the Board of Directors of Home decided to pursue
the possibility of combining with another financial
institution with greater assets and similar management
philosophies in a "merger-conversion" transaction. On May
27, 1993, Home entered into an Agreement and Plan of
Reorganization (the "Agreement") with BB&T Financial
Corporation ("BB&T") pursuant to which Home would convert to
the stock form of ownership and simultaneously be merged
with Branch Banking and Trust Company, a wholly-owned, North
Carolina-chartered commercial bank subsidiary of BB&T. After
the FDIC objected to certain aspects of the proposed merger-
conversion transaction, Home and BB&T jointly terminated the
Agreement on June 20, 1994.
5
<PAGE>
Home has continued to evaluate its strategic options, and
the existing management of Home now believes that it will be
in the best interest of Home to remain an independent
financial institution. As a result, its Board of Directors
has adopted a Plan of Holding Company Conversion (the "Plan
of Conversion") providing for the conversion of Home from a
North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank, the concurrent
acquisition by the Holding Company of all of the capital
stock of Home issued in its conversion from mutual to stock
form and the offer and sale by the Holding Company of the
Common Stock in the Subscription Offering and, if any shares
remain, in the Community Offering and in the Syndicated
Community Offering. The Plan of Conversion must be approved
by a majority of the votes eligible to be cast by the
members of Home at a special meeting to be held on September
17, 1996 (the "Special Meeting").
Consummation of the Conversion is also contingent upon
receipt of the approvals of the Administrator and the
Federal Reserve which are necessary for the Holding Company
to acquire Home and the approvals of the FDIC and the
Administrator which are necessary for Home to convert from
mutual to stock form. The Administrator has conditionally
approved the Conversion and the Holding Company's
acquisition application, subject to approval by Home's
members and satisfaction of certain other conditions. The
Federal Reserve has conditionally approved the Holding
Company's acquisition application, subject to the
satisfaction of certain conditions. The FDIC has issued a
conditional notification that it does not intend to object
to the Conversion, subject to certain conditions. See "THE
CONVERSION -- General".
If the Conversion is not approved by the members at the
Special Meeting or an adjournment thereof, no Common Stock
will be issued, Home will remain a North Carolina-chartered
mutual savings bank, all subscription funds will be returned
promptly, with interest at Home's passbook savings rate, and
all deposit withdrawal authorizations will be canceled
without any action on the part of subscribers or purchasers.
The Offerings Pursuant to the Plan of Conversion, between 2,890,000 shares
and 3,910,000 shares of Common Stock are being offered by
the Holding Company at the price of $10.00 per share in the
Subscription Offering to the following persons in the
following order of priority: (i) Eligible Account Holders ;
(ii) the ESOP; (iii) Supplemental Eligible Account Holders;
(iv) Other Members who are not Eligible Account Holders or
Supplemental Eligible Account Holders; and (v) directors,
officers and employees of Home who are not Eligible Account
Holders, Supplemental Eligible Account Holders or Other
Members. See "THE CONVERSION -- Subscription Offering".
Shares of Common Stock not subscribed for in the
Subscription Offering will be offered in a Community
Offering to members of the general public, with first
priority given to natural persons or trusts of natural
persons who are residents of Stanly County, North Carolina
and with second priority given to natural persons or trusts
of natural persons who are residents of the Surrounding
Counties, including IRAs, Keogh accounts and similar
retirement accounts established for the benefit of natural
persons who are residents of Stanly County and the
Surrounding Counties. The Holding Company and Home have the
absolute right to reject orders in the Community Offering in
whole or in part. See "THE CONVERSION -- Community
Offering". If there is a Community Offering, it is
anticipated that all shares of Common Stock not subscribed
for in the Community Offering will be offered for sale
6
<PAGE>
by the Holding Company to the general public in the
Syndicated Community Offering. See "THE CONVERSION--
Syndicated Community Offering".
The Subscription Offering and Subscription Rights in the
Subscription Offering expire at the Expiration Time, which
is 12:00 noon, local time, on September 17, 1996, unless
extended. The Community Offering, if any, may begin at any
time following commencement of the Subscription Offering and
may terminate on any day after the Expiration Time at the
discretion of Home without prior notice, but not later than
November 1, 1996, unless extended with the approval of the
Administrator. The Offerings may not be extended beyond
September 17, 1998.
Stock Purchase
Limitations The maximum aggregate number of shares of Common Stock which
may be purchased in the Conversion by any person or entity
(or persons or entities exercising Subscription Rights
through a single account), or group of persons or entities
acting in concert (other than the ESOP), is 40,000 shares
(or an aggregate dollar amount of $400,000). In addition, no
person or entity, or group of persons or entities acting in
concert, together with any associates, may subscribe for
more than 100,000 shares of Common Stock sold in the
Conversion. Home's Board of Directors has the right, at any
time prior to completion of the Conversion, to decrease the
40,000 share maximum purchase limitation to an amount not
less than 1% of the number of shares issued in the
Conversion or increase such 40,000 share limitation to an
amount of up to 5% of the shares issued in the Conversion.
Any decrease or increase in the 40,000 share limitation will
be without notice to, or resolicitation of, subscribers and
without a resolicitation of proxies in connection with the
Special Meeting.
No person or entity may subscribe for less than 50 shares of
Common Stock, or an aggregate dollar amount of less than
$500. See "THE CONVERSION --Minimum and Maximum Purchase
Limitations".
Restrictions on
Transfer of
Subscription
Rights Prior to the completion of the Conversion, no person may
transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the
Subscription Rights issued under the Plan of Conversion or
the shares of Common Stock to be issued upon their exercise.
Each person exercising Subscription Rights will be required
to certify that the purchase of Common Stock is solely for
the purchaser's own account and that there is no agreement
or understanding regarding the sale or transfer of such
shares. See "THE CONVERSION -- Certain Restrictions on
Transfer of Subscription Rights; False or Misleading Order
Forms" in this Prospectus. Subscription Rights are
nontransferable and persons found to be attempting to
transfer Subscription Rights will be subject to the
forfeiture of such rights and possible further sanctions.
The Holding Company and Home will refer to the Administrator
any situations that they believe may involve a transfer of
Subscription Rights and will not honor orders known or
believed by them to involve the transfer of such rights.
Appraisal The Plan of Conversion requires that the aggregate purchase
price of the Common Stock be based upon an independent
valuation of the estimated aggregate pro forma market value
of the Holding Company and Home. Ferguson, an independent
financial consulting firm, has advised Home and the Holding
Company that in its opinion, at April 30, 1996, the
Valuation Range of the aggregate estimated pro forma market
value of the Holding Company and Home was from $28,900,000
to
7
<PAGE>
$39,100,000. The appraisal will be reviewed and, if
appropriate, revised by Ferguson upon conclusion of the
Offerings. Any change in the total dollar amount of the
Offerings outside of the current Valuation Range will be
subject to the receipt of an updated appraisal confirming
such valuation and regulatory approval. The appraisal by
Ferguson is not intended and should not be construed as a
recommendation of any kind as to the advisability of
purchasing the Common Stock. See "MARKET FOR COMMON STOCK",
"PRO FORMA DATA" and "THE CONVERSION -- Purchase Price of
Common Stock and Number of Shares Offered".
Stock Pricing and
Number of Shares
to be Offered The purchase price of the Common Stock offered in the
Subscription Offering and the price at which the Common
Stock is sold in the Community and Syndicated Community
Offerings, if any, will be $10.00 per share. The aggregate
dollar amount of Common Stock that may be sold in the
Conversion will be determined by the Board of Directors of
Home and the Holding Company based upon the independent
appraisal of the aggregate pro forma market value of the
Holding Company and Home prepared by Ferguson. Depending on
market and financial conditions following commencement of
the Subscription Offering, the number of shares offered and
sold in the Conversion may be increased or decreased.
However, the aggregate dollar amount of Common Stock that
may be sold in the Conversion will not be more than
$44,965,000 or less than $28,900,000 without a
resolicitation of subscribers. Any change in the total
dollar amount of the Offerings outside of the current
Valuation Range will be subject to the receipt of an updated
appraisal confirming such valuation and regulatory
approvals. With the consent of the Administrator and the
FDIC and in order to reflect changes in market and financial
conditions following commencement of the Subscription
Offering, the aggregate purchase price of the shares of
Common Stock issued in the Conversion may be increased up to
15% above the maximum of the Valuation Range without any
resolicitation of subscriptions or right to cancel, rescind
or change subscription orders. See "THE CONVERSION --
Purchase Price of Common Stock and Number of Shares
Offered".
Use of Proceeds The net proceeds from the sale of the Common Stock in the
Conversion, including shares purchased by the ESOP with
funds loaned by the Holding Company, are estimated to be
between $27,836,000 and $37,840,000 depending upon the
actual expenses of the Conversion and other factors. See
"PRO FORMA DATA". The Holding Company intends to use
approximately 8% of the gross proceeds of the Offerings
(between $2,312,000 and $3,128,000 assuming the issuance of
between 2,890,000 and 3,910,000 shares) to fund the loan
made to the ESOP to purchase shares of Common Stock in the
Conversion. After deducting the amount of such loan from the
proceeds, the Holding Company is expected to retain
approximately 50% of the remaining net proceeds from the
issuance of the Common Stock. The Holding Company will
invest these proceeds primarily in interest-bearing
deposits, U.S. government and federal agency securities with
terms of up to five years. See "USE OF PROCEEDS".
The remainder of the net proceeds from the sale of the
Common Stock will be paid by the Holding Company to Home in
exchange for all of the capital stock of Home. The net
proceeds paid to Home will become part of Home's general
funds, and will be invested in mortgage and other loans and
investments consisting primarily of U.S. government and
federal agency obligations in accordance with Home's lending
and
8
<PAGE>
investment policies. Net proceeds will also be used for
other general corporate purposes, including, possibly,
opening another branch office, although Home has no existing
plans to open any additional office in the immediate future.
The relative amounts to be invested in each of these types
of investments will depend upon loan demand, rates of return
and asset/liability matching considerations at the time the
investments are made. Management is not able to predict the
yields which will be produced by the investment of the
proceeds of the Offerings because such yields will be
significantly influenced by general economic conditions and
the interest rate environment existing at the time the
investments are made.
If Home's proposed Management Recognition Plan (the "MRP")
is approved by the stockholders of the Holding Company, the
MRP will acquire a number of shares of Common Stock equal to
4% of the number of shares issued in the Conversion. See
"MANAGEMENT OF HOME -- Proposed Management Recognition
Plan". Such shares may either be acquired in the open market
or acquired through the Holding Company's issuance of
authorized but unissued shares. In either event, it is
expected that the MRP will acquire such shares reasonably
promptly after the MRP is approved by the stockholders. In
the event shares are acquired in the open market, the funds
for such purchase may be provided by Home from the proceeds
of the Conversion. It is estimated that between 115,600 and
156,400 shares will be acquired by the MRP, assuming the
issuance of between 2,890,000 and 3,910,000 shares in the
Conversion. If all such shares were acquired by the MRP in
the open market, and if such shares were acquired at a price
of $10.00 per share, Home would contribute between
$1,156,000 and $1,564,000, respectively, to the MRP for this
purpose. Additional shares would be acquired if the number
of shares issued in the Conversion exceeds 3,910,000, and
the price per share paid by the MRP could be more or less
than $10.00 per share, which would change the total
contribution to the MRP accordingly. See "RISK FACTORS --
Cost and Possible Dilutive Effect of the MRP and Stock
Option Plan" and "MANAGEMENT OF HOME -- Proposed Management
Recognition Plan."
If the Holding Company's proposed Stock Option Plan and
Trust (the "Stock Option Plan") is approved by the
stockholders of the Holding Company, the Stock Option Plan
could acquire in the open market a number of shares equal to
10% of the number of shares issued in the Conversion, which
shares will be held to satisfy options granted under such
plan. Such shares could be acquired after options are
granted under the Stock Option Plan. To the extent the Stock
Option Plan does not acquire sufficient shares in the open
market to satisfy options granted under the Stock Option
Plan, the Holding Company will reserve authorized by
unissued shares for this purpose. See "MANAGEMENT OF HOME --
Proposed Stock Option Plan." The funds for any purchases in
the open market may be provided by the Holding Company or
Home from the proceeds of the Conversion. It is estimated
that between 289,000 and 391,000 shares will be acquired by
the Stock Option Plan in the open market and/or reserved for
issuance by the Holding Company, assuming the issuance of
between 2,890,000 and 3,910,000 shares in the Conversion. If
shares are acquired in the open market, the Holding Company
or Home would contribute between $2,890,000 and $3,910,000,
respectively, to the Stock Option Plan for this purpose,
assuming such shares are acquired at a price of $10.00 per
share. Additional shares would be acquired if the number of
shares issued in the Conversion exceeds 3,910,000, and the
price could be more or less than $10.00 per share, which
would change the contribution to the
9
<PAGE>
Stock Option Plan accordingly. See "RISK FACTORS -- Cost and
Possible Dilutive Effect of the MRP and Stock Option Plan"
and "MANAGEMENT OF HOME -- Proposed Stock Option Plan."
Dividends The Board of Directors of the Holding Company currently
intends to establish a dividend policy following the
Conversion to pay a regular quarterly cash dividend at a
rate to be determined. Payment of dividends will be subject
to determination and declaration by the Holding Company's
Board of Directors. The Board of Directors will periodically
review its dividend policy in view of the operating results
and financial condition of the Holding Company and Home, net
worth and capital requirements, regulatory restrictions, tax
consequences, industry standards, and general economic
conditions, and it will authorize cash dividends to be paid
if it deems such payment appropriate and in compliance with
applicable law. In addition, the Board of Directors may
determine from time to time that it is prudent to pay
special cash dividends. Special cash dividends, if paid, may
be in addition to, or in lieu of, regular cash dividends.
The Board will determine whether to pay special cash
dividends based upon its review of the Holding Company's
current and anticipated needs for capital and its current
and anticipated levels of capital and earnings. Special
dividends will not be paid during periods when the Board
determines that the Holding Company needs funds or that it
can deploy funds at desirable levels of profitability. On
the other hand, the Board of Directors may decide to pay
special dividends at times when the Board determines that
payment of such dividends uses such funds to greater
advantage than deploying them in the Holding Company's
operations. There can be no assurance that any dividends
will in fact be paid on the Common Stock or that, if paid,
any such dividends will not be reduced or eliminated in
future periods. The Holding Company and Home have agreed
with the FDIC that any cash dividends paid to stockholders
during the twelve-month period following the closing of the
Conversion will be paid out of accumulated earnings and
profits (as computed for federal income tax purposes) and
will not constitute or be treated for tax purposes as
returns of capital to stockholders. See "DIVIDEND POLICY".
The ability of the Holding Company to pay dividends may be
dependent upon the Holding Company's receipt of dividends
from Home. Under current North Carolina regulations, Home
could not declare or pay a cash dividend if the effect
thereof would be to reduce its net worth to an amount which
is less than the minimum required by the FDIC and the
Administrator. In addition, for a period of five years after
consummation of the Conversion, Home will be required, under
existing regulations, to obtain the prior written approval
of the Administrator before it can declare and pay a cash
dividend on its capital stock in an amount in excess of one-
half the greater of (i) its net income for the most recent
fiscal year or (ii) the average of its net income after
dividends for the most recent fiscal year and not more than
two of the immediately preceding fiscal years, if
applicable. See "SUPERVISION AND REGULATION -- Regulation of
Home --Restrictions on Dividends and Other Capital
Distributions". In addition, see "TAXATION" for a discussion
of federal income tax provisions that may limit the ability
of Home to pay dividends to the Holding Company without
incurring a recapture tax.
Market for Common
Stock The Holding Company, as a newly organized company, has never
issued capital stock, and consequently, there is no market
for the Common Stock at this time. The Holding Company has
received conditional approval to have the Common Stock
listed on the Nasdaq National Market System ("Nasdaq") under
the symbol "SSFC". There can be no assurance that the Common
Stock will in fact be listed, or will trade, on Nasdaq. A
public market having the desirable characteristics of depth,
10
<PAGE>
liquidity and orderliness will depend upon the presence in
the market place of both willing buyers and willing
sellers at any given time. There can be no assurances that
an active trading market will develop and be maintained.
See "MARKET FOR COMMON STOCK ".
Stock Ownership
by Management The directors and executive officers of the Holding Company
and of Home and their associates currently anticipate
subscribing for Common Stock in the aggregate amount of
$920,000, or 92,000 shares. As a result, such persons
anticipate subscribing for 2.35% to 3.18% of the shares of
Common Stock issued in the Conversion based upon the maximum
and minimum of the Valuation Range, respectively. See
"ANTICIPATED STOCK PURCHASES BY MANAGEMENT". In addition, it
is expected that the ESOP will subscribe for 8% of the
shares of Common Stock issued in the Conversion (between
231,200 and 312,800 shares, assuming the issuance of between
2,890,000 and 3,910,000 shares). See "MANAGEMENT OF HOME --
Employee Stock Ownership Plan". It is expected that
directors and certain employees of the Holding Company and
Home also will receive restricted stock grants under the MRP
for a number of shares of Common Stock equal to 4% of the
number of shares issued in the Conversion and will receive
options under the Stock Option Plan to purchase a number of
shares of Common Stock equal to 10% of the number of shares
issued in the Conversion, if such plans are approved by the
stockholders of the Holding Company at a meeting of
stockholders following the Conversion. See "MANAGEMENT OF
HOME --Proposed Management Recognition Plan" and "--
Proposed Stock Option Plan." If (i) the Stock Option Plan is
approved by the stockholders of the Holding Company and all
of the stock options which could be granted under the Stock
Option Plan are granted and exercised, (ii) the MRP is
approved by the stockholders of the Holding Company and all
of the MRP shares which could be granted are granted and
issued, and (iii) the Holding Company did not issue any
additional shares of its Common Stock, the shares held by
directors and executive officers and their associates as a
group, (including (a) shares purchased outright in the
Conversion, (b) shares purchased pursuant to the Stock
Option Plan and (c) shares granted under the MRP), would
give such persons effective control over as much as 12.28%
or 11.45%, at the minimum and maximum of the Valuation
Range, respectively, of the Common Stock issued and
outstanding. In addition, the other employees of Home may be
granted restricted shares under the MRP and options under
the Stock Option Plan, giving such persons effective control
over as much as 4.9%, at both the minimum and the maximum of
the Valuation Range, of the Common Stock issued and
outstanding. Thus, including the shares purchased by the
ESOP, the directors, executive officers and other employees
of Home have the potential of controlling 25.18% or 24.35%,
at the minimum and maximum of the Valuation Range,
respectively, of the Common Stock issued and outstanding
(not including shares purchased in the open market by any
such person and not including shares which may be purchased
in the Offerings by Home employees other than the executive
officers). See "-- Benefits to Directors and Officers" and
"MANAGEMENT OF HOME -- Proposed Management Recognition Plan"
and "-- Proposed Stock Option Plan" and "RISK FACTORS --
Articles of Incorporation and Bylaw Provisions, Statutory
Provisions, Agreements with Employees and Voting Control
Issues That Could Discourage Hostile Acquisitions of
Control -- Voting Control of Officers, Directors and
Employees".
11
<PAGE>
Benefits to
Directors and
Officers In connection with the Conversion, certain benefits will be
provided to directors, officers and employees of Home.
Employment Agreements. In connection with the Conversion,
Home will enter into employment agreements with Carl M.
Hill, the President and Chief Executive Officer of Home, and
R. Ronald Swanner, Executive Vice President of Home. The
employment agreements provide for initial annual salaries of
$157,320 for Mr. Hill and $101,160 for Mr. Swanner. See
"MANAGEMENT OF HOME-- Employment Agreements".
Restricted Stock Grants. Pursuant to the proposed MRP, which
the Boards of Directors of the Holding Company and Home
intend to approve, and which is subject to stockholder
approval, directors, officers and certain employees of Home
would receive restricted stock grants of a number of shares
of Common Stock equal to 4% of the shares issued in the
Conversion (between 115,600 and 156,400 shares, assuming the
issuance of between 2,890,000 and 3,910,000 shares).
Assuming that the shares issued pursuant to the MRP have a
value of $10.00 per share, such shares would have a value of
between $1,156,000 and $1,564,000. No officer may receive
more than 25%, and non-employee directors may not receive
more than 5% individually, or 30% in the aggregate, of
shares issued by the MRP.
It is currently expected that 5% of the shares available
under the MRP will be granted to each non-employee director.
If 3,910,000 shares were issued in the Conversion, each non-
employee director would receive restricted stock grants of
7,820 shares which, assuming such shares had a value of
$10.00 per share, would have a value of $78,200.
It is currently expected that Home's two executive officers,
Carl M. Hill and R. Ronald Swanner, will be granted 25% and
20%, respectively, of the shares available under the MRP. If
3,910,000 shares were issued in the Conversion and if such
shares had a value of $10.00 per share, Mr. Hill and Mr.
Swanner would receive restricted stock grants of 39,100
shares and 31,280 shares, respectively, having a value of
$391,000 and $312,800, respectively. Upon approval of the
MRP, all of the other employees of Home will be granted, in
the aggregate, 35% of the shares available under the MRP.
Assuming the issuance of 3,910,000 shares in the Conversion,
the other employees would receive an aggregate of 54,740
shares which, assuming such shares had a value of $10.00 per
share, would have a value of $547,400.
If the MRP is submitted to and approved by the stockholders
of the Holding Company at a meeting of the stockholders to
be held no sooner than six months following the Conversion,
the MRP will provide that shares granted under the MRP will
be forfeited unless recipients of grants satisfy certain
vesting requirements. If the MRP is submitted to and is
approved by the stockholders of the Holding Company at a
meeting of stockholders held no sooner than one year
following the Conversion, the MRP will provide that, under
certain conditions, the grants may vest on an accelerated
basis. Grants of restricted stock under the MRP will be made
at no cost to recipients. See "MANAGEMENT OF HOME --
Proposed Management Recognition Plan".
Stock Options. Pursuant to the proposed Stock Option Plan,
which the Boards of Directors of the Holding Company and
Home intend to approve, and which is subject to stockholder
approval, directors and employees of Home would receive
options to
12
<PAGE>
purchase a number of shares of Common Stock equal to 10% of
the shares issued in the Conversion (between 289,000 and
391,000 shares, assuming the issuance of between 2,890,000
and 3,910,000 shares). No officer may receive more than 25%,
and non-employee directors may not receive more than 5%
individually or 30% in the aggregate, of stock options
granted under the Stock Option Plan.
It is currently expected that 5% of the shares available
under the proposed Stock Option Plan, will be granted to
each non-employee director. If 3,910,000 shares were issued
in the Conversion, each non-employee director would receive
options to purchase 19,550 shares. It is currently expected
that Mr. Hill and Mr. Swanner will be granted options to
purchase 25% and 20%, respectively, of the shares available
under the Stock Option Plan. If 3,910,000 shares were issued
in the Conversion, Mr. Hill and Mr. Swanner would receive
options to purchase 97,750 shares and 78,200 shares,
respectively. Under the proposed Stock Option Plan, the
other 11 officers of Home will be granted, in the aggregate,
options to purchase 35% of the shares available under the
Stock Option Plan. Assuming the issuance of 3,910,000 shares
in the Conversion, the other officers would receive options
to purchase an aggregate of 136,850 shares.
If the Stock Option Plan is submitted to and approved by the
stockholders of the Holding Company at a meeting of the
stockholders to be held no sooner than six months following
the Conversion, the provisions of the Stock Option Plan will
provide that options granted under the Stock Option Plan
will be forfeited unless recipients of grants satisfy
certain vesting requirements. If the Stock Option Plan is
submitted to and approved by the stockholders of the Holding
Company at a meeting of stockholders held no sooner than one
year following the Conversion, the provisions of the Stock
Option Plan will provide that under certain conditions, the
grants may vest on an accelerated basis. The exercise price
of the options will be the fair market value of the Common
Stock at the time the options are granted (which will be
after the Stock Option Plan is approved by the Holding
Company's stockholders), and the options will have terms of
10 years or less. Options would be issued at no cost to
recipients. See "MANAGEMENT OF HOME -- Proposed Stock Option
Plan".
ESOP. In connection with the Conversion, Home has
established the ESOP. As part of the Conversion, the ESOP
intends to borrow funds from the Holding Company and to use
such funds to purchase 8% of the shares of Common Stock to
be issued in the Conversion, estimated to be between 231,200
and 312,800 shares, assuming the issuance of between
2,890,000 and 3,910,000 shares. Home anticipates
contributing approximately $312,800 plus interest annually
to the ESOP (assuming 3,910,000 shares are issued in the
Conversion and assuming the ESOP acquires its shares at $10
a share) to enable the ESOP to meet its principal and
interest obligations under the loan. It is expected the ESOP
loan will be repaid within 10 years. During such period, net
income of Home will be reduced by an amount equal to the
funds contributed by Home to the ESOP, less the tax benefit
to Home resulting from such payments. In accordance with
Statement of Position ("SOP") 93-6 "Employers' Accounting
for Employee Stock Ownership Plans" issued by the American
Institute of Certified Public Accountants, the amount
expensed by Home will be based upon the fair value of the
ESOP shares, although such accounting treatment will not
affect the actual out-of-pocket cost to Home of the ESOP.
See "RISK FACTORS--Cost of ESOP and Its Effect on Results
of Operations and
13
<PAGE>
Anti-Takeover Provisions The Articles of Incorporation and Bylaws of the
Holding Company and Home contain certain
restrictions that are intended to discourage non-
negotiated attempts to acquire control of the
Holding Company or Home. The Board of Directors of
the Holding Company believes that these provisions
encourage potential acquirors to negotiate directly
with the Board of Directors. However, these
provisions may discourage an attempt to acquire
control of the Holding Company which a majority of
the stockholders might deem to be in their best
interests or in which they might receive a premium
over the then market price of their shares. These
provisions may also render the removal of a director
or the entire Board of Directors of the Holding
Company more difficult and may deter or delay
changes in control which have not received the
requisite approval of the Holding Company's Board of
Directors. See "RISK FACTORS--Articles of
Incorporation and Bylaw Provisions, Statutory
Provisions, Agreements with Employees and Voting
Control Issues That Could Discourage Hostile
Acquisitions of Control" and "ANTI-TAKEOVER
PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME".
Risk Factors Special attention should be given to the "RISK
FACTORS" section of this Prospectus, which discusses
the possible effects of changes in interest rates on
Home and the thrift industry in general, the recent
change in Home's profitability, the anticipated low
return on equity following the Conversion, certain
risks associated with the illiquidity of Home's loan
portfolio, the cost of the ESOP, the cost and
possible dilutive effect of the proposed MRP and
proposed stock option plan, the potential disparity
between SAIF and Bank Insurance Fund ("BIF")
insurance premiums, risks associated with Home's
primary market area, potential financial institution
regulation and legislation, competition, certain
anti-takeover considerations, the limited market for
the Common Stock, restrictions on dividends, income
tax consequences of Subscription Rights, voting
control of officers, directors and employees and
certain other matters that potential purchasers
should consider before deciding whether to subscribe
for the Common Stock offered hereby.
Recommendation of
Management The Boards of Directors and management of Home and
the Holding Company make no recommendation
concerning whether any person or entity should
purchase shares of Common Stock. Subscribers are
urged to consult with their own financial advisors
with respect to suitability of an investment in the
Common Stock.
14
<PAGE>
SELECTED FINANCIAL
AND OTHER DATA OF HOME
Set forth below are summaries of historical financial and other data of
Home. The financial information for the five years ended September 30,
1995, is derived in part from the audited financial statements of Home, and
the financial information for the six months ended March 31, 1996 and 1995
is derived from unaudited financial statements of Home, and should be read
in conjunction with the Financial Statements and Notes to Financial
Statements of Home presented elsewhere herein and with the section of this
Prospectus entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATING RESULTS." The unaudited financial statements
reflect all adjustments, consisting of normal recurring accruals, which are
in the opinion of management, necessary for a fair presentation of the
financial position as of March 31, 1996 and the results of operations for
the six months ended March 31, 1996 and 1995. The results for the six-month
periods are not necessarily indicative of the operating results of Home for
the entire year. All averages presented in this Prospectus have been
calculated on a monthly basis unless otherwise stated.
15
<PAGE>
<TABLE>
<CAPTION>
At
March 31, At September 30,
----------- ---------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 166,978 $ 159,863 $ 147,837 $ 157,909 $ 153,370 $ 146,003
Investment securities (1) 43,220 40,942 30,275 27,307 26,903 18,522
Loans receivable, net (2) 106,710 108,597 106,844 117,055 113,116 116,669
Mortgage-backed securities 5,987 4,529 5,325 7,076 8,175 5,753
Deposits 144,282 137,647 127,312 139,685 138,753 133,524
Equity 20,720 20,426 18,311 16,503 13,199 10,786
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended March 31, Year Ended September 30,
------------------------ ---------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Interest income $ 6,351 $ 5,831 $ 11,980 $ 11,994 $ 13,044 $ 13,792 $ 13,350
Interest expense 3,831 2,532 5,980 4,973 6,037 8,042 9,110
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income 2,520 3,299 6,000 7,021 7,007 5,750 4,240
Provision for loan losses 300 0 0 0 0 0 100
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 2,220 3,299 6,000 7,021 7,007 5,750 4,140
----------- ----------- ----------- ----------- ----------- ----------- -----------
Non-interest income 62 61 126 147 206 233 188
----------- ----------- ----------- ----------- ----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 898 724 1,859 1,324 1,018 1,059 989
Other 896 684 1,351 1,833 1,126 1,296 1,167
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total noninterest expense 1,794 1,408 3,210 3,157 2,144 2,355 2,156
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes 488 1,952 2,916 4,011 5,069 3,628 2,172
Income tax expense 189 729 1,055 1,498 1,765 1,215 798
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before cumulative effect of a
change in accounting principle 299 1,223 1,861 2,513 3,304 2,413 1,374
Cumulative effect on prior years of
changing to a different method of
accounting for income taxes 0 0 0 485 0 0 0
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income $ 299 $ 1,223 $ 1,861 $ 2,028 $ 3,304 $ 2,413 $ 1,374
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
At or For the Six Months Ended
March 31, At or For the Year Ended September 30,
------------------------ ---------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Other Data: (3)
Return on average assets (4) (5) 0.36% 1.67% 1.23% 1.63% 2.12% 1.61% 1.01%
Return on average equity (4) (5) 2.87% 12.87% 9.50% 14.22% 22.25% 20.12% 13.61%
Average equity to average assets 12.72% 12.98% 12.97% 11.45% 9.54% 8.01% 7.39%
Retained earnings to end-of-period assets 12.39% 10.65% 12.76% 12.53% 10.45% 8.61% 7.39%
Interest rate spread for period (6) 2.61% 4.19% 3.59% 4.38% 4.21% 3.56% 2.72%
Average interest-earning assets to
average interest-bearing liabilities 111.98% 112.91% 112.74% 110.19% 109.77% 106.90% 106.97%
Net interest margin (7) 3.19% 4.65% 4.11% 4.72% 4.61% 3.95% 3.21%
Non-performing assets to total assets
at period end (8) 0.46% 0.64% 0.70% 0.76% 0.61% 0.05% 0.13%
Non-performing loans to total loans
at period end 0.64% 0.72% 0.87% 0.85% 0.70% 0.00% 0.00%
Allowance for loan losses to non-peforming
loans at period end 60.83% 17.39% 13.97% 14.80% 17.06% 0.00% 0.00%
Net interest income, after provision for
loan losses to non-interest expense 123.75% 234.30% 186.92% 222.39% 326.82% 244.16% 192.02%
Non-interest expense to average assets (5) 2.18% 1.92% 2.12% 2.05% 1.38% 1.57% 1.58%
Deposit accounts 15,828 15,314 17,988 17,152 18,416 15,394 15,736
Loan accounts 3,363 3,556 3,316 3,433 3,734 3,201 3,377
Number of full service banking offices 2 2 2 2 2 2 2
</TABLE>
<TABLE>
<S> <C>
(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) Annualized for the six months ended March 31, 1996 and 1995.
(6) 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.
(7) The net interest margin represents net interest income as a percent of average interest-earning assets.
(8) Non-performing assets include mortgage loans and consumer loans 90 days or more delinquent,
and real estate acquired in settlement of loans.
</TABLE>
16
<PAGE>
RECENT DEVELOPMENTS
The following table sets forth certain selected financial data of Home
at and for the periods indicated. Financial data at June 30, 1996 and for
the three months ended June 30, 1996 and 1995 are unaudited. In the opinion
of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation have been included. The results
of operations and other data for the three months ended June 30, 1996 are
not necessarily indicative of the results of operations for the fiscal year
ending September 30, 1996.
17
<PAGE>
Management's Discussion and Analysis of Recent Developments
Total assets of Home increased by $9.9 million from September 30, 1995,
and totaled $169.8 million at June 30, 1996. Net loans receivable decreased
by $859,000 or 0.8% to $107.7 million at June 30, 1996 from $108.6 million
at September 30, 1995, primarily because loan demand declined during 1996
and Home lowered rates on 10- and 15-year loans to become more competitive
in the marketplace to maintain market share. Deposits increased by $9.1
million to $146.8 million at June 30, 1996 from $137.6 million at September
30, 1995 due to Home's offering slightly higher rates than competitors to
attract additional funds. Total investments increased by $9.5 million, or
23.2%, to $50.4 million outstanding at June 30, 1996 as compared to $40.9
million at September 30, 1995. Home invested the funds generated from
deposit inflow primarily into U.S. Government obligations. Home had no
borrowings outstanding during or at the end of the three-month period ended
June 30, 1996. Equity increased by $501,000 to $20.9 million at June 30,
1996, which is attributable to Home's earnings of $601,000 offset by
unrealized (loss) on securities available for sale, net of tax, totaling
$100,000 during the nine months ended June 30, 1996.
At June 30, 1996 Home's capital, including the equity component of
unrealized (loss), net of tax on certain "available for sale" securities,
amounted to $20.9 million. Home's capital as a percentage of assets was
12.3% at June 30, 1996 and was considerably in excess of the regulatory
capital requirement at such date.
Home's level of nonperforming loans, defined as loans past due 90 days
or more, has historically been and continues to be low as a percentage of
total loans outstanding. Home had $585,000 loans outstanding which were
delinquent more than 90 days at June 30, 1996 compared to $707,000 at June
30, 1995. Management considers the loan loss allowance of $428,000 to be
adequate to absorb any future losses in the portfolio. As a result, no
provisions to increase Home's loan loss allowance were made during the three
months ended June 30, 1996.
Net income for the three months ended June 30, 1996 was $302,000 or
$99,000 less than the $401,000 earned during the same quarter in 1995. Net
interest income decreased primarily as a result of a larger interest rate
spread in 1995. Net interest income amounted to $1.28 million for the
quarter ended June 30, 1996 as compared with $1.41 million for the same
quarter in 1995. Home's interest rate spread for the quarter ended June 30,
1996 was 2.40%, compared to 3.12% for the three months ended June 30, 1995.
Home's interest rate spread decreased primarily because Home's deposits were
more interest rate sensitive than its interest-earning assets and overall
market rates were higher in the quarter ended June 30, 1996 as compared to
the same quarter in 1995. There were no significant variations in
noninterest income between the three-month periods ended June 30, 1996 and
1995.
Noninterest expense increased $110,000 to $832,000 for the three
months ended June 30, 1996 compared to $722,000 for the same period ended
June 30, 1995. Compensation increased $70,000 for the three months ended
June 30, 1996 compared to the same period ended June 30, 1995, primarily due
to salary increases and funding of retirement plans. Other expenses
increased $40,000 as occupancy costs increased $11,000 and charitable
contributions increased $20,000 during the three-month period ended June 30,
1996 compared to the same period ended June 30, 1995.
18
<PAGE>
RISK FACTORS
The following factors, in addition to the information presented
elsewhere in this Prospectus, should be considered by investors before
deciding whether to purchase the Common Stock offered hereby.
Potentially Adverse Impact of Changes in Interest Rates
The results of operations of Home, as with savings institutions
generally, are dependent to a large degree on its net interest income, which
is generally the difference between interest income from loans and
investments and interest expense on deposits and borrowings. Home's
interest income and interest expense are significantly affected by general
economic conditions and by policies of the federal government and various
regulatory agencies.
Home has a one-year interest sensitivity gap of negative 41.58%, which
means that the amount of interest-earning assets maturing or otherwise
repricing within specific time periods generally is less than the amount of
interest-bearing liabilities maturing or otherwise repricing within such
periods. Home's three-year cumulative negative gap is 55.73%. Accordingly,
in a rising interest rate environment, absent the effect of other factors,
Home may experience a larger increase in the cost of its liabilities
relative to the yield on its assets, thus its net interest income should be
adversely affected. In a declining rate environment, Home's yield, absent
the effects of other factors, may increase more quickly than its cost of
funds, thus positively affecting its net interest income. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS --
Asset/Liability Management".
To reduce the sensitivity of net interest income to interest rate
fluctuations, Home strives to manage the maturity and repricing
relationships of its interest-earning assets and interest-bearing
liabilities. Home's principal strategies in this regard have been to
emphasize (i) shorter term fixed-rate mortgages secured by single-family
residences, (ii) the origination and retention of adjustable rate home
equity lines of credit loans; (iii) short to intermediate term investments,
(iv) the adoption of a tiered pricing program for its certificates of
deposits to encourage investment in certificates with longer maturities, and
(v) the accumulation of equity which provides a cost-free source of funds.
Home's results of operations will continue to be significantly affected
by changes in interest rates due, among other factors, to (i) the fact that
a large percentage of Home's long-term loans have fixed rates, (ii) the fact
that Home's interest-earning assets and interest-bearing liabilities reprice
at different times and with different frequencies, (iii) the fact that
interest rates on Home's assets and liabilities respond differently to
economic, market and competitive factors, and (iv) the fact that sustained
high levels of interest rates may adversely affect real estate and lending
markets in general. Changes in the level of interest rates also can affect
the amount of loans originated by Home, as well as the value of its loans
and other interest-earning assets and the resultant ability to realize gains
on the sale of such assets. Changes in interest rates also can result in
disintermediation, which is the flow of funds away from savings institutions
into direct investments, such as U.S. government and corporate securities,
and other investment vehicles which, because of the absence of federal
deposit insurance premiums and reserve requirements, generally can pay
higher rates of interest than savings institutions. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS --
Asset/Liability Management".
Anticipated Low Return on Equity Following Conversion
For the year ended September 30, 1995 and for the six-month period
ended March 31, 1996, Home's return on average equity was approximately
9.50% and 2.87%, respectively. On a pro forma basis at March 31, 1996,
assuming the sale of 3,400,000 shares of Common Stock in the Conversion, the
pro forma return on equity for the year ended September 30, 1995 and for the
six-month period ended March 31, 1996, would have been approximately 5.00%
and 2.49% (annualized), respectively. With its higher capital position as a
result of the Conversion, it is doubtful that the Holding Company will be
able to deploy quickly the capital raised in the Conversion in loans and
other assets in a manner consistent with its operating philosophies and in a
manner which will generate earnings to support its high capital position. As
a result, it is expected that the Holding Company's return on equity
initially will be below industry norms.
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RISK FACTORS
The following factors, in addition to the information presented
elsewhere in this Prospectus, should be considered by investors before deciding
whether to purchase the Common Stock offered hereby.
Potentially Adverse Impact of Changes in Interest Rates
The results of operations of Home, as with savings institutions
generally, are dependent to a large degree on its net interest income, which is
generally the difference between interest income from loans and investments and
interest expense on deposits and borrowings. Home's interest income and interest
expense are significantly affected by general economic conditions and by
policies of the federal government and various regulatory agencies.
Home has a one-year interest sensitivity gap of negative 41.58%, which
means that the amount of interest-earning assets maturing or otherwise repricing
within specific time periods generally is less than the amount of interest-
bearing liabilities maturing or otherwise repricing within such periods. Home's
three-year cumulative negative gap is 55.73%. Accordingly, in a rising interest
rate environment, absent the effect of other factors, Home may experience a
larger increase in the cost of its liabilities relative to the yield on its
assets, thus its net interest income should be adversely affected. In a
declining rate environment, Home's yield, absent the effects of other factors,
may increase more quickly than its cost of funds, thus positively affecting its
net interest income. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATING RESULTS--Asset/Liability Management".
To reduce the sensitivity of net interest income to interest rate
fluctuations, Home strives to manage the maturity and repricing relationships of
its interest-earning assets and interest-bearing liabilities. Home's principal
strategies in this regard have been to emphasize (i) shorter term fixed-rate
mortgages secured by single-family residences, (ii) the origination and
retention of adjustable rate home equity lines of credit loans; (iii) short to
intermediate term investments, (iv) the adoption of a tiered pricing program for
its certificates of deposits to encourage investment in certificates with longer
maturities, and (v) the accumulation of equity which provides a cost-free source
of funds.
Home's results of operations will continue to be significantly affected
by changes in interest rates due, among other factors, to (i) the fact that a
large percentage of Home's long-term loans have fixed rates, (ii) the fact that
Home's interest-earning assets and interest-bearing liabilities reprice at
different times and with different frequencies, (iii) the fact that interest
rates on Home's assets and liabilities respond differently to economic, market
and competitive factors, and (iv) the fact that sustained high levels of
interest rates may adversely affect real estate and lending markets in general.
Changes in the level of interest rates also can affect the amount of loans
originated by Home, as well as the value of its loans and other interest-earning
assets and the resultant ability to realize gains on the sale of such assets.
Changes in interest rates also can result in disintermediation, which is the
flow of funds away from savings institutions into direct investments, such as
U.S. government and corporate securities, and other investment vehicles which,
because of the absence of federal deposit insurance premiums and reserve
requirements, generally can pay higher rates of interest than savings
institutions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND OPERATING RESULTS--Asset/Liability Management".
Recent Decline in Profitability
During the six-month period ended March 31, 1996, Home experienced a
significant decline in its net interest income, primarily due to a decline of
158 basis points in its interest rate spread. Net interest income amounted to
$2.5 million for the six-month period ended March 31, 1996 as compared to $3.3
million for the six-month period ended March 31, 1995, amounting to a decrease
of $.8 million or 23.6%. This decline in net interest income also was largely
responsible for the decline in net income for the six-month period ended March
31, 1996. Net income for the six-month period ended March 31, 1996 was $.3
million as compared to $1.2 million for the six-month period ended March 31,
1995, amounting to a decrease of $.9 million or 75.6%. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS--
Comparison of Operating Results for the Six-Month Periods Ended March 31, 1996
and 1995".
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Management believes changes in Home's rates on interest-earning assets
and interest-bearing liabilities were reflective of changes in overall market
rates during the six-month period ended March 31, 1996. Since Home's interest-
bearing liabilities reprice faster than its interest-earning assets, future
increases in market interest rates could continue to negatively impact Home's
earnings.
Anticipated Low Return on Equity Following Conversion
For the year ended September 30, 1995 and for the six-month period
ended March 31, 1996, Home's return on average equity was approximately 9.50%
and 2.87%, respectively. On a pro forma basis at March 31, 1996, assuming the
sale of 3,400,000 shares of Common Stock in the Conversion, the pro forma return
on equity for the year ended September 30, 1995 and for the six-month period
ended March 31, 1996, would have been approximately 5.00% and 2.49%
(annualized), respectively. With its higher capital position as a result of the
Conversion, it is doubtful that the Holding Company will be able to deploy
quickly the capital raised in the Conversion in loans and other assets in a
manner consistent with its operating philosophies and in a manner which will
generate earnings to support its high capital position. As a result, it is
expected that the Holding Company's return on equity initially will be below
industry norms. Consequently, investors expecting a return on equity which will
meet or exceed industry norms for the foreseeable future should carefully
evaluate and consider the risk that such returns will not be achieved.
Following the Conversion, the Holding Company may consider plans to
reduce capital, if the opportunities to deploy it are not found. Such plans may
include payment of cash dividends and repurchasing shares. Any such steps would
be taken based on conditions as they exist following the Conversion and in
compliance with applicable regulations which limit the Holding Company's ability
to pay dividends and repurchase its stock. See "USE OF PROCEEDS", "DIVIDEND
POLICY" and "SUPERVISION AND REGULATION--Regulation of the Holding Company--
General" and "--Dividend Limitations" and "SUPERVISION AND REGULATION--
Regulation of Home--Restrictions on Dividends and Other Capital Distributions".
Effect on Operations of Weak Primary Market Area; Limited Lending Opportunities
Both of Home's offices are located in Stanly County, North Carolina;
the main office is located in Albemarle, North Carolina and a full-service
branch office is located in Locust, North Carolina. Stanly County is located in
the south central section of North Carolina less than 30 miles from Charlotte,
North Carolina.
Stanly County is largely rural with a population of 56,000. Its
economy is diversified among agriculture, manufacturing and services. Over the
past five years the local economy has weakened as a result of layoffs and plant
closings by local employers. In December 1995, the North Carolina Department of
Commerce 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. See "BUSINESS OF HOME--Competition". Due
primarily to the economic factors discussed above, Home has limited residential
mortgage lending opportunities in its local market area and does not anticipate
that residential mortgage lending opportunities will increase in the future
because of the lack of growth in the local economy. Management believes that
opportunities for future earnings growth in Home's primary market area are
limited in light of these factors.
Risks Related to Illiquidity of Home's Loan Portfolio
Home does not originate mortgage loans secured by one-to-four family
residential real estate with the intention that they will be sold in the
secondary market. It currently originates a significant number of such mortgage
loans which satisfy its underwriting requirements and are tailored for its local
community, but which may not satisfy various requirements imposed by the FHLMC
and FNMA, including some loans which may not satisfy FHLMC and FNMA loan-to-
value requirements, income requirements and credit history standards
("nonconforming loans"). Although management
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believes that many of such loans are saleable in the secondary market, some of
such loans could be sold only after Home incurred certain costs and/or
discounted the purchase price. As a result, Home's loan portfolio is less liquid
than would be the case if it did not include any such nonconforming loans. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING
RESULTS--Capital Resources and Liquidity". In addition, some types of
nonconforming loans are generally thought to have greater risks of default and
nonperformance. However, Home has historically found that its origination of
nonconforming loans has not resulted in high amounts of nonperforming loans. See
"BUSINESS OF HOME--Lending Activities--Nonperforming Assets and Asset
Classification". In addition, these loans satisfy a need in Home's local
community and generally produce a higher yield than would be produced by
conforming loans. As a result, Home plans to continue on a selected basis to
originate such nonconforming loans.
As of March 31, 1996, the ratio of Home's nonperforming assets to total
assets was 0.46%, its total nonperforming loans equaled $702,000, which includes
loans delinquent 90 days or more totaling $702,000. As of March 31, 1996, Home's
assets which were "classified" to indicate some degree of weakness totaled $1.5
million.
Cost of ESOP and Its Effect on Results of Operations and Pro Forma
Stockholders' Equity
It is expected that the ESOP will purchase 8% of the shares of Common
Stock issued in the Conversion with funds borrowed from the Holding Company. See
"MANAGEMENT OF HOME- Employee Stock Ownership Plan". Assuming the issuance of
3,910,000 shares in the Conversion, it is expected that 312,800 shares, having a
value of $3,128,000 will be purchased by the ESOP.
It is anticipated that the ESOP will borrow from the Holding Company
the amounts necessary to purchase its shares. Home anticipates contributing
approximately $312,800 plus interest annually to the ESOP (assuming the issuance
of 3,910,000 shares in the Conversion and assuming that the ESOP acquires its
shares at $10.00 per share) to enable the ESOP to meet its principal and
interest obligations under the loan. It is expected that the ESOP loan will be
fully repaid within 10 years. During such period, net income of Home will be
reduced by an amount equal to the funds contributed by Home to the ESOP to
enable it to meet its principal and interest obligations under the ESOP loan,
less the income tax benefit to Home resulting from such payments. The purchase
of Common Stock by the ESOP will reduce pro forma stockholders' equity because
the amount loaned is reflected as a reduction of stockholders' equity. See "PRO
FORMA DATA".
In November 1993, the American Institute of Certified Public
Accountants approved SOP 93-6, "Employers' Accounting for Employee Stock
Ownership Plans" which is effective for fiscal years beginning after December
15, 1993, and which applies to shares of capital stock of sponsoring employers
acquired by ESOPs after December 31, 1992, that have not been committed to be
released as of the beginning of the year in which the ESOP is adopted. SOP 93-6
will, among other things, change the measure of compensation recorded by
employers from the cost of ESOP shares to the fair value of ESOP shares. Since
the fair value of the shares following the Offerings cannot be predicted, Home
cannot reasonably estimate the impact of SOP 93-6 on its financial statements.
An increase in such fair value will cause an increase in ESOP-related expenses
for accounting purposes because Home's annual contribution will be expensed
based upon the fair value of the shares which can be released by the scheduled
principal repayment. Home's annual cash contribution to the ESOP will be based
upon the actual annual amortization requirements of the ESOP loan. The
difference between the amount expensed based upon fair value of the shares which
can be released by the scheduled principal repayment and the actual cash
requirements of the ESOP loan will be charged or credited to additional paid in
capital of Home. Also, implementation of SOP 93-6 will affect earnings per share
calculations since only the ESOP shares committed to be released (typically
shares that are no longer debt financed and shares which will be allocated to
ESOP participants when Home's contribution to ESOP is made each year) are
included as outstanding shares in the computation. See "PRO FORMA DATA".
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Cost and Possible Dilutive Effect of the Proposed MRP and Stock Option Plan
The stockholders of the Holding Company will be asked to approve the
proposed Stock Option Plan and the proposed MRP, at a meeting of stockholders to
be held no sooner than six months following the Conversion. The plans will be
effective if approved by a majority of the votes cast by stockholders at the
meeting. Under the MRP, directors, officers and certain employees of Home would
be awarded an aggregate amount of Common Stock equal to 4% of the shares issued
in the Conversion. Under the Stock Option Plan, directors, officers and
employees of Home would be granted options to purchase an aggregate amount of
Common Stock equal to 10% of the shares issued in the Conversion at exercise
prices equal to the market price of the Common Stock on the date of grants.
Shares issued to directors, officers and certain employees under the MRP and the
Stock Option Plan may be from authorized but unissued shares of Common Stock or
they may be purchased in the open market. In the event the shares issued under
the MRP and the Stock Option Plan consist of newly issued shares of Common
Stock, the interests of existing stockholders would be diluted. If 3,910,000
shares of the Common Stock are issued in the Conversion, it is expected that
options to acquire 391,000 shares of the Common Stock could be granted under the
Stock Option Plan and awards of an additional 156,400 shares could be made under
the MRP. At the maximum of the Valuation Range, if all shares under the MRP and
the Stock Option Plan were newly issued, the exercise price was $10.00 for the
shares issued pursuant to the options, and all of the options were exercised,
the number of outstanding shares of Common Stock would increase from 3,910,000
to 4,457,400, the pro forma book value per share of the outstanding Common Stock
at September 30, 1995 would have been $12.90 with the plans compared with $14.10
without the plans, and the pro forma net income per share of the outstanding
Common Stock for the fiscal year ended September 30, 1995 would have been $0.62
with the plans compared with $0.77 without the plans. At March 31, 1996, the pro
forma book value per share of the outstanding shares of Common Stock would have
been $12.96 with the plans compared with $14.18 without the plans, and the pro
forma net income per share for the outstanding Common Stock for the six-month
period ended March 31, 1996, would have been $0.16 with the plans compared with
$0.21 without the plans. The cost of the shares acquired by the MRP will be
expensed equally over the five-year vesting period set forth in the MRP. If
3,910,000 shares of Common Stock are issued in the Conversion and the MRP
acquired 156,400 shares at a cost of $10.00 per share, the total annual expense
of the MRP would be $312,800 per year. See "PRO FORMA DATA" and "MANAGEMENT OF
HOME--Proposed Management Recognition Plan" and "--Proposed Stock Option
Plan".
Competitive Disadvantage Caused by Disparity Between SAIF and BIF Insurance
Premiums; Special SAIF Assessment
Home's savings deposits are insured by the SAIF, which is administered
by the FDIC. The assessment rate currently ranges from $0.23 to $0.31 per $100
of an institution's domestic deposits. The FDIC also administers the BIF, which
has the same designated reserve ratio as the SAIF. The deposit insurance
assessment rate for most commercial banks and other depository institutions with
deposits insured by the BIF ranges from $0.04 to $0.31 per $100 of domestic
deposits. The existing substantial disparity in the deposit insurance premiums
paid by BIF and SAIF members places SAIF-insured savings institutions such as
Home at a significant competitive disadvantage to BIF-insured institutions.
The Balanced Budget Act of 1995, which was passed by the United States
Congress but vetoed by the President for reasons unrelated to the SAIF
recapitalization, provided for a one-time assessment currently estimated to be
0.85% of insured deposits that would fully capitalize the SAIF. It is unknown
whether this legislation will be enacted or that premiums for either BIF or SAIF
members will be adjusted in the future by the FDIC or by legislative action. If
a special assessment as described above were to be required, it would result in
a one-time charge to Home of up to $1.2 million before income taxes, assuming
the special assessment is based on deposits held at March 31, 1996.
Home incurred deposit insurance premium expense of $318,000 and
$295,000 in fiscal 1994 and 1995, respectively. A significant increase in SAIF
insurance premiums or a significant one-time fee to recapitalize the SAIF would
likely have an adverse effect on the operating expenses and results of
operations of Home. See "SUPERVISION AND REGULATION--Regulation of Home--
Insurance of Deposit Accounts".
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Effect of Regulatory Changes on Operations
Home is subject to extensive regulation and supervision as a North
Carolina-chartered savings bank. In addition, the Holding Company, as a bank
holding company, will be subject to extensive regulation and supervision. Any
change in the regulatory structure or the applicable statutes or regulations,
whether by the Administrator, the Federal Reserve, the FDIC, the North Carolina
Legislature or the United States Congress, could have a material impact on the
Holding Company, Home, or Home's Conversion.
The United States Congress currently has under consideration various
proposals to consolidate the regulatory functions of the four federal banking
agencies: the Office of Thrift Supervision, the FDIC, the Office of the
Comptroller of the Currency and the Federal Reserve. The outcome of efforts to
effect regulatory consolidation is uncertain. Therefore, Home is unable to
determine the extent to which legislation would affect its business, if enacted.
Strong Competition Within Home's Market Area
Home's market area is a highly competitive market, and Home faces
significant competition both in attracting deposits and in originating loans.
Home faces direct competition from a number of financial institutions, many with
a state-wide or regional presence, and, in some cases, a national presence.
Competition also arises from other savings institutions, commercial banks,
credit unions and other providers of financial services, many of which are
significantly larger than Home and, therefore, have greater financial and
marketing resources than Home. At March 31, 1996, two banks with a national
presence, two large regional banks, one smaller regional bank and one community
bank and two credit unions had branch offices located in Stanly County. At June
30, 1995, Home had a deposit market share of approximately 23% in Stanly County.
See "BUSINESS OF HOME--Competition".
Absence of Prior Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock, and consequently, there is no established market for the Common
Stock at this time. The Holding Company has received conditional approval to
have the Common Stock listed on Nasdaq under the symbol "SSFC". There can be no
assurance that the Common Stock will in fact be listed, or will trade, on
Nasdaq. A public trading market having the desirable characteristics of depth,
liquidity and orderliness will depend upon the presence in the market place of
both willing buyers and willing sellers at any given time. No assurance can be
given that an active trading market will develop or be maintained. Purchasers of
Common Stock should consider the potentially illiquid and long-term nature of
their investment in the shares being offered hereby. See "MARKET FOR COMMON
STOCK".
No Assurance of and Limitations on Dividend Payments
Following the Conversion, the Holding Company expects to pay quarterly
cash dividends on the Common Stock; however, no assurance can be given by the
Holding Company that any dividends will in fact be declared or, if declared,
what the amount of dividends will be, or whether the declaration of such
dividends, if commenced, will continue. The Holding Company's ability to pay
dividends could be dependent upon its receipt of dividends from Home. There are
regulations which restrict Home's ability to pay dividends. The Holding Company
and Home have agreed with the FDIC that any cash dividends paid to stockholders
during the twelve-month period following the closing of the Conversion will be
paid out of accumulated earnings and profits (as computed for federal income tax
purposes) and will not constitute or be treated for tax purposes as returns of
capital to stockholders. See "DIVIDEND POLICY" and "SUPERVISION AND REGULATION--
Regulation of Home--Restrictions on Dividends and Other Capital Distributions".
Possible Negative Income Tax Consequences of Subscription Rights
If the Subscription Rights granted in connection with the Conversion
are deemed to have an ascertainable value, receipt of such rights will be
taxable to recipients who exercise such Subscription Rights, either as ordinary
or capital gain, in an amount not in excess of such value. Whether such
Subscription Rights are considered to have any ascertainable
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value is an inherently factual determination. Home has received an opinion from
Ferguson stating that the Subscription Rights do not have any value. The opinion
of Ferguson is not binding on the Internal Revenue Service ("IRS"). See "THE
CONVERSION--Income Tax Consequences".
Articles of Incorporation and Bylaw Provisions, Statutory Provisions, Agreements
with Employees and Voting Control Issues That Could Discourage Hostile
Acquisitions of Control
Provisions in the Articles of Incorporation and Bylaws. The Holding
Company's Articles of Incorporation and Bylaws contain certain provisions that
may discourage attempts to acquire control of the Holding Company that are not
negotiated with the Holding Company's Board of Directors. These provisions may
result in the Holding Company being less attractive to a potential acquiror and
may result in stockholders receiving less for their shares than otherwise might
be available in the event of a takeover attempt. In addition, these provisions
may have the effect of discouraging takeover attempts that some stockholders
might deem to be in their best interests, including takeover proposals in which
stockholders might receive a premium for their shares over the then-current
market price, as well as making it more difficult for individual stockholders or
a group of stockholders to elect directors or to remove incumbent management.
The Holding Company's Board of Directors believes, however, that these
provisions are in the best interests of the Holding Company and its stockholders
because such provisions encourage potential acquirors to negotiate directly with
the Board of Directors, which the Board of Directors believes is in the best
position to act on behalf of all stockholders.
These provisions include, among others, that (1) the Board of Directors
has the authority to change the number of directors within a range from five to
15; (2) stockholders who intend to nominate a candidate for election to the
Board of Directors must give advance notice to the Secretary of the Holding
Company; (3) terms for directors will be staggered in the event the number of
directors is nine or greater; (4) certain merger, consolidation, or other
business combinations (as defined in the Articles of Incorporation) must receive
the affirmative vote of at least 75% of the Continuing Directors (as defined in
the Articles of Incorporation); and (5) special meetings of stockholders may be
called only by the Chairman of the Board, the Chief Executive Officer, the
President or by the Board of Directors.
In addition, the Articles of Incorporation do not provide for
cumulative voting for any purpose. As a result, a majority of stockholders will
be able to elect all members of the Holding Company's Board of Directors and
approve all other matters presented to the stockholders for consideration,
except such matters as require more than a majority vote for approval. The
Holding Company's Articles of Incorporation state that the Board of Directors,
without the approval of the stockholders, may authorize the issuance of shares
of preferred stock with such voting rights, designations, preferences,
limitations and relative rights as the Board of Directors shall determine. As a
result, the Board of Directors has the power, to the extent consistent with its
fiduciary duties, to issue preferred stock to persons friendly to management or
otherwise in order to impede attempts by third parties to acquire voting control
of the Holding Company and to impede other transactions not favored by
management. The amended Certificate of Incorporation and Bylaws of Home upon its
conversion to stock form also contain certain provisions that might discourage
potential takeover attempts of Home. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE
HOLDING COMPANY AND HOME".
Regulatory Provisions. Regulations of the Administrator contain
provisions that, for a period of three years after the Conversion is
consummated, prohibit any person from directly or indirectly acquiring or
offering to acquire beneficial ownership of more than 10% of any class of equity
security of the Holding Company or Home, with certain exceptions, without the
prior approval of the Administrator. If any person should acquire beneficial
ownership of more than 10% of any class of equity security without prior
approval, any shares beneficially owned in excess of 10% would not be counted as
shares entitled to vote and would not be voted in connection with any matter
submitted to the stockholders for a vote. Regulations provide that the
Administrator will give his approval of such an acquisition during the first
year after the Conversion only to protect the safety and soundness of the
Holding Company and Home. Approval will be given during the second and third
years after the Conversion upon a finding by the Administrator that (i) the
acquisition is necessary to protect the safety and soundness of the Holding
Company and Home or the Board of Directors of the Holding Company supports the
acquisition; (ii) the acquiror is of good character and integrity and possesses
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satisfactory managerial skills and after the acquisition, the acquiror will be a
source of financial strength to the Holding Company and Home; and (iii) the
interests of the public will not be adversely affected by the acquisition.
Approval is not required for (i) any offer with a view toward public resale made
exclusively to the Holding Company or its underwriters or the selling group
acting on its behalf or (ii) any offer to acquire or acquisition of beneficial
ownership of more than 10% of the common stock of the Holding Company by a
corporation whose ownership is or will be substantially the same as the
ownership of the Holding Company, provided that the offer or acquisition is made
more than one year following the consummation of the Conversion. See "ANTI-
TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME".
The Change in Bank Control Act, together with North Carolina
regulations, require that the consent of the Administrator and Federal Reserve
be obtained prior to any person or company acquiring "control" of a savings bank
or a savings bank holding company. Control is conclusively presumed to exist if,
among other things, an individual or company acquires the power, directly or
indirectly, to direct the management or policies of the Holding Company or Home
or to vote 25% or more of any class of voting stock. Control is rebuttably
presumed to exist under the Change in Bank Control Act if, among other things, a
person acquires more than 10% of any class of voting stock and (i) the issuer's
securities are registered under Section 12 of the Exchange Act, as the Holding
Company's securities will be, or (ii) the person would be the single largest
stockholder. Restrictions applicable to the operations of bank holding companies
and conditions imposed by the Federal Reserve in connection with its approval of
such acquisitions may deter potential acquirors from seeking to obtain control
of the Holding Company. See "SUPERVISION AND REGULATION --Regulation of the
Holding Company".
Voting Control of Officers, Directors and Employees. Directors and
executive officers of Home and the Holding Company and their associates expect
to purchase, in the aggregate, approximately 2.35% to 3.18% of the shares of
Common Stock issued in the Conversion based upon the maximum and the minimum of
the Valuation Range, respectively. See "ANTICIPATED STOCK PURCHASES BY
MANAGEMENT".
In addition, it is expected that 8% of the shares issued in the
Conversion will be acquired by the ESOP. Employees will vote the shares
allocated to them under the ESOP. The ESOP will vote unallocated shares, and
allocated shares for which no voting instructions have been received, in their
discretion, subject to the provisions of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
If (i) the Stock Option Plan is approved by the stockholders of the
Holding Company and all of the stock options which could be granted under the
Stock Option Plan are granted and exercised (a number of shares equal to 10% of
the shares issued in the Conversion), (ii) the MRP is approved by the
stockholders of the Holding Company and all of the MRP shares which could be
granted are granted and issued (a number of shares equal to 4% of the shares
issued in the Conversion), and (iii) the Holding Company did not issue any
additional shares of its Common Stock, the shares held by directors and
executive officers and their associates as a group, including (a) shares
purchased outright in the Conversion, (b) shares purchased pursuant to the Stock
Option Plan and (c) shares granted under the MRP, would give such persons
effective control over as much as 12.28% or 11.45%, at the minimum and maximum
of the Valuation Range, respectively, of the Common Stock issued and
outstanding. In addition, the other employees of Home may be granted restricted
shares under the MRP and options under the Stock Option Plan, giving such
persons effective control over as much as 4.9%, at both the minimum and the
maximum of the Valuation Range, of the Common Stock issued and outstanding.
Thus, including the shares purchased by the ESOP, the directors, executive
officers and other employees of Home have the potential of controlling 25.18% or
24.35%, at the minimum and maximum of the Valuation Range, respectively, of the
Common Stock issued and outstanding (not including shares purchased in the open
market by any such persons after the Conversion and not including shares which
may be purchased in the Offerings by Home employees other than the executive
officers). Because the Holding Company's Articles of Incorporation requires the
affirmative vote of 75% of the outstanding shares entitled to vote in order to
approve certain mergers, consolidations or other business combinations, the
officers, directors and employees, as a group, could effectively block such
transactions. See "ANTI-
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TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME--The Holding
Company--Supermajority Voting Provisions".
Agreements With Employees. In connection with the Conversion, Home
will enter into employment agreements with its president and executive vice
president. See "MANAGEMENT OF HOME--Employment Agreements". In addition, Home
intends to adopt a Severance Plan which would benefit its employees in the event
there was a change in control of the Holding Company or Home. See "MANAGEMENT OF
HOME--Severance Plan". The existence of the employment agreements and the
severance plan may tend to discourage mergers, consolidations, acquisitions or
other transactions that would result in a change in control of the Holding
Company or Home.
Potential Delay in Consummation or Denial of the Conversion
Consummation of the Conversion is contingent upon receipt of approvals
from the Administrator and the Federal Reserve. In addition, the Conversion
cannot be consummated until the FDIC issues a notice of non-objection with
respect to the transaction and until the Conversion has been approved by the
members of Home. Final regulatory approval is subject to receipt and review of
an updated appraisal from Ferguson which considers the results of the Offerings
and any material developments occurring subsequent to the most recent appraisal
submitted in connection with the Conversion.
Accordingly, consummation of the Conversion and issuance of
certificates for shares of Common Stock could be delayed if receipt of final
regulatory approval is delayed or not obtained. Until the Conversion is
consummated, no shares of Common Stock may be traded. If all necessary approvals
are not obtained, all subscription funds held will be returned with interest and
all withdrawal authorizations will be terminated.
No Opinion or Recommendation by Sales Agent; Best Efforts Offering
Home has engaged Trident Securities to consult with and advise Home
with respect to the Conversion and to assist, on a best-efforts basis, in
connection with the solicitation of subscriptions and purchase orders for shares
of Common Stock in the Offerings. Trident Securities has not prepared or
delivered any opinion or recommendation with respect to the suitability of the
Common Stock or the appropriateness of the amount of Common Stock to be issued
in the Conversion. The engagement of Trident Securities by Home and the work
performed pursuant to such engagement, including any due diligence
investigation, should not be construed by purchasers of the Common Stock as
constituting an opinion or recommendation relating to such investment and should
not be construed as a verification of the accuracy or completeness of the
information contained in this Prospectus.
Valuation Not Indicative of Future Price of Common Stock
The final aggregate purchase price of the Common Stock in the
Conversion will be based upon an independent appraisal. Such valuation is not
intended, and must not be construed, as a recommendation of any kind as to the
advisability of purchasing such shares of Common Stock. Ferguson did not
independently verify the financial statements and other information provided by
Home, nor did Ferguson value independently the assets or liabilities of Home.
The valuation considers Home as a going concern and should not be considered as
an indication of the liquidation value of Home or the Holding Company. Moreover,
because such valuation is necessarily based upon estimates and projections of a
number of matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing shares of Common Stock in the
Conversion will thereafter be able to sell such shares at or above the Purchase
Price. See "THE CONVERSION--Purchase Price of Common Stock and Number of
Shares Offered".
27
<PAGE>
Risk of Loss of Principal
The shares of Common Stock offered by this Prospectus are not savings
accounts or deposits and are not insured or guaranteed by the FDIC, the SAIF or
any other governmental agency, and involve investment risk, including the
possible loss of principal.
SOUTH STREET FINANCIAL CORP.
The Holding Company was incorporated under North Carolina law in 1996,
at the direction of the Board of Directors of Home for the purpose of acquiring
and holding all of the outstanding capital stock of Home to be issued in
connection with the Conversion. The Holding Company has received conditional
approval from the Federal Reserve and the Administrator to become a bank holding
company and as such will be subject to regulation by the Federal Reserve and the
Administrator. The holding company structure will give the Holding Company
greater flexibility than Home currently has to expand and diversify its business
activities, although there are no existing plans regarding expansion or
diversification. See "SUPERVISION AND REGULATION--Regulation of the Holding
Company".
Prior to completion of the Conversion, the Holding Company will not own
any material assets or transact any material business. Upon completion of the
Conversion, on an unconsolidated basis, the Holding Company will have no
significant assets other than the stock of Home acquired in the Conversion, the
loan receivable with respect to the loan made to the ESOP to enable the ESOP to
purchase shares of Common Stock in the Conversion and the portion of the net
proceeds from the sale of Common Stock in the Conversion retained by it. The
Holding Company will have no significant liabilities upon completion of the
Conversion. The management of the Holding Company is set forth under "MANAGEMENT
OF THE HOLDING COMPANY".
The executive office of the Holding Company is located at the principal
office of Home at 155 West South Street, Albemarle, North Carolina 28001.
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
Home was originally chartered in 1911 as a North Carolina-chartered
building and loan association under the name Home Builders Association. Home
converted to a North Carolina-chartered state savings bank in 1992. Home has
been a member of the FHLB system since 1954, and its deposits have been
federally insured since 1954. The deposits of Home are insured by the SAIF of
the FDIC to the maximum amount permitted by law.
Home is a member of the FHLB of Atlanta, which is one of the 12
regional banks for federally insured savings institutions and other eligible
members comprising the FHLB system. Home is further subject to certain
regulations of the FDIC with respect to certain other matters and, as a
subsidiary of the Holding Company, will be indirectly subject to regulation by
the Federal Reserve. See "SUPERVISION AND REGULATION--Regulation of the
Holding Company" and "--Regulation of Home".
Home conducts business through its principal office in Albemarle, North
Carolina and its full-service branch office in Locust, North Carolina. Home's
primary market area is Stanly County, North Carolina. On March 31, 1996, Home
had total assets of $167.0 million, net loans of $106.7 million, deposits of
$144.3 million and equity of $20.7 million which is 12.39% of total assets.
Home is a community-oriented financial institution which offers a
variety of financial services to meet the needs of the community it serves. Home
is principally engaged in the business of attracting retail deposits from the
general
28
<PAGE>
public and using such deposits to make one-to-four family residential real
estate loans, loans secured by nonresidential real estate, home equity line of
credit loans and other loans and investments. On March 31, 1996, all of the
loans in Home's loan portfolio which were secured by real estate were secured by
properties located in North Carolina. Revenues of Home are derived primarily
from interest on loans. Home also receives interest income from its investments,
mortgage-backed securities and interest-bearing deposit balances. The major
expenses of Home are interest on deposits and noninterest expenses such as
salaries, employee benefits, federal deposit insurance premiums and occupancy
and related expenses.
The existing management of Home now believes that it will be in the
best interests of Home and its stockholders for Home to remain an independent
financial institution.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
anticipated that such net proceeds will be between $27,836,000 and $37,840,000,
based on the current Valuation Range. If the gross proceeds of the shares sold
are increased to 15% above the maximum of the Valuation Range, it is anticipated
that net proceeds will equal $43,593,000. See "PRO FORMA DATA" for the
assumptions used to arrive at these amounts. The actual net proceeds may vary
materially from the estimated amounts described herein. The estimated amount of
net proceeds includes proceeds from the sale of the shares which are expected to
be purchased by the ESOP in the Subscription Offering with funds borrowed from
the Holding Company. The amount loaned to the ESOP to enable such purchases is
estimated to range from $2,312,000 (if 2,890,000 shares are issued) to
$3,128,000 (if 3,910,000 shares are issued). See "MANAGEMENT OF HOME -- Employee
Stock Ownership Plan".
After first deducting the amount of the net proceeds used by the
Holding Company to make the loan to the ESOP (estimated to range from $2,312,000
to $3,128,000), it is expected that the Holding Company will retain
approximately 50% of the remaining net proceeds of the Offerings and will pay
the balance of the net proceeds to Home in exchange for all of the common stock
of Home to be issued in connection with the Conversion. The Holding Company
expects to use the portion of the net proceeds it retains for working capital
and investment purposes. The Holding Company does not expect to have significant
operating expenses and anticipates that it will initially invest the net
proceeds it retains primarily in interest-bearing deposits, U.S. government and
federal agency securities with terms of up to five years. The types and amounts
of such investments will vary from time to time based upon the interest rate
environment, asset/liability mix considerations and other factors. The net
proceeds retained by the Holding Company also may be used to support the future
expansion of operations of the Holding Company through acquisitions of other
financial institutions. The Holding Company has no pending agreements or
understandings regarding any such acquisitions, and there are no pending
negotiations regarding any such acquisitions. No such acquisitions are planned
at this time.
Upon completion of the Conversion, the Board of Directors will have the
to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Based upon facts and circumstances which may arise following the
Conversion, the Board of Directors may determine to repurchase stock in the
future. Such facts and circumstances may include but are not limited to (i)
market and economic factors such as the price at which the Common Stock is
trading, the volume of trading, the attractiveness of other investment
alternatives in terms of the rates of return and risks involved in the
investments, the ability to increase the book value and earnings per share of
the remaining outstanding shares, and an improvement in the Holding Company's
return on equity; (ii) the reduction of dilution to stockholders caused by
having to issue additional shares to cover the exercise of stock options or to
fund employee stock benefit plans; and (iii) any other circumstances in which
repurchases would be in the best interests of the Holding Company and its
stockholders.
29
<PAGE>
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Holding Company and Home will be capitalized in
excess of applicable regulatory requirements after any such repurchases and that
capital will be adequate taking into account, among other things, the level of
nonperforming assets and other risks, the Holding Company's and Home's current
and projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. No stock repurchases
may be made within one year after the Conversion without the approval of the
Administrator. Federal regulations require that the Holding Company must notify
the Federal Reserve prior to repurchasing Common Stock for in excess of 10% of
its net worth during any rolling 12 month period. The Holding Company does not
intend to repurchase any Common Stock during the first year following the
Conversion.
The portion of the net proceeds paid to Home in the Conversion will
have the immediate effect of providing Home with substantial new capital which
will significantly increase its net worth and regulatory capital. See "PRO FORMA
DATA" and "SUPERVISION AND REGULATION--Regulation of Home--Capital Requirements
Applicable to Home". The net proceeds paid to Home will become part of Home's
general funds and will be invested primarily in mortgage, consumer and other
loans and investments consisting primarily of U.S. government and federal agency
obligations in accordance with Home's lending and investment policies. The
relative amounts to be invested in each of these types of investments will
depend upon loan demand, rates of return and asset/liability matching
considerations at the time the investments are to be made. Management is not
able to predict the yields which will be produced by the investment of the
proceeds of the Offerings because such yields will be significantly influenced
by general economic conditions and the interest rate environment existing at the
time the investments are made. Remaining net proceeds paid to Home will be used
for general corporate purposes, including, possibly opening another branch
office, although Home has no existing plans to open any additional office in the
immediate future.
If the MRP is approved by the stockholders of the Holding Company, as
soon as practicable thereafter, the MRP will acquire a number of shares of
Common Stock equal to 4% of the number of shares issued in the Conversion. See
"MANAGEMENT OF HOME--Proposed Management Recognition Plan". Such shares may be
acquired in the open market or acquired through the Holding Company's issuance
of authorized but unissued shares. In the event shares are acquired in the open
market, the funds for such purchase will be provided by Home from the proceeds
of the Conversion and its other capital. It is estimated that between 115,600
and 156,400 shares will be acquired by the MRP, assuming the issuance of between
2,890,000 and 3,910,000 shares, respectively, in the Conversion. If all such
shares were acquired by the MRP in the open market, and if such shares were
acquired at a price of $10.00 per share, Home would contribute between
$1,156,000 and $1,564,000, respectively, to the MRP for this purpose.
If the Stock Option Plan is approved by the stockholders of the Holding
Company, the Stock Option Plan may acquire a number of shares of Common Stock in
the open market equal to 10% of the number of shares issued in the Conversion.
These shares would be held by the Stock Option Plan for issuance upon the
exercise of stock options. To the extent the Stock Option Plan does not acquire
sufficient shares to satisfy options granted under the Stock Option Plan, the
Holding Company will reserve authorized but unissued shares for this purpose.
See "MANAGEMENT OF HOME--Proposed Stock Option Plan". In the event shares are
acquired in the open market, the funds for such purchase may be provided by the
Holding Company or Home from the proceeds of the Conversion. It is estimated
that between 289,000 and 391,000 shares will be acquired by the Stock Option
Plan, assuming the issuance of between 2,890,000 and 3,910,000 shares,
respectively, in the Conversion. If all such shares were acquired by the Stock
Option Plan in the open market, and if such shares were acquired at a price of
$10.00 per share, the Holding Company or Home would contribute between
$2,890,000 and $3,910,000, respectively, to the Stock Option Plan for this
purpose.
The proceeds of the Offerings will result in an increase in Home's net
worth and regulatory capital and may enhance the potential for growth through
increased lending and investment activities, branch acquisitions, business
combinations or otherwise. Payments for shares of Common Stock of the Holding
Company made through the withdrawal of existing deposit accounts at Home will
not result in the receipt of new funds for investment by Home.
30
<PAGE>
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Holding Company will
have the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. The Board of Directors of the Holding
Company intends to establish a dividend policy following the Conversion to pay a
regular quarterly dividend at a rate to be determined. Declarations of
dividends, if any, by the Board of Directors will depend upon a number of
factors, including investment opportunities available to the Holding Company and
Home, capital requirements, regulatory limitations, the Holding Company's and
Home's results of operations and financial condition, tax considerations and
general economic conditions. Upon review of such considerations, the Board of
Directors of the Holding Company may authorize dividends to be paid in the
future if it deems such payment appropriate and in compliance with applicable
law and regulation. No assurances can be given that any dividends will in fact
be paid on the Common Stock or, if dividends are paid, that they will not be
reduced or discontinued in the future. In addition, the Board of Directors may
determine from time to time that it is prudent to pay special cash dividends.
Special cash dividends, if paid, may be in addition to, or in lieu of, regular
cash dividends. The Board will determine whether to pay special cash dividends
based upon its review of the Holding Company's current and anticipated needs for
capital and its current and anticipated levels of capital and earnings. Special
dividends will not be paid during periods when the Board determines that the
Holding Company needs funds or that it can deploy funds at desirable levels of
profitability. On the other hand, the Board of Directors may decide to pay
special dividends at times when the Board determines that payment of such
dividends uses such funds to greater advantage than deploying them in the
Holding Company's operations. Like regular cash dividends, there can be no
assurance that special dividends will be paid, or, if paid, will continue to be
paid. The Holding Company and Home have agreed with the FDIC that any cash
dividends paid to stockholders during the twelve-month period following the
closing of the Conversion will be paid out of accumulated earnings and profits
(as computed for federal income tax purposes) and will not constitute or be
treated for tax purposes as returns of capital to stockholders.
The sources of income to the Holding Company initially will consist of
income from investments and dividends paid by Home to the Holding Company, if
any. Consequently, future declarations of cash dividends by the Holding Company
may depend upon dividend payments by Home to the Holding Company, which payments
are subject to various restrictions. Under current North Carolina regulations,
Home could not declare or pay a cash dividend if the effect thereof would be to
reduce its net worth to an amount which is less than the minimum required by the
FDIC and the Administrator. In addition, for a period of five years after the
consummation of the Conversion, Home will be required, under existing
regulations, to obtain the prior written approval of the Administrator before it
can declare and pay a cash dividend on its capital stock in an amount in excess
of one-half of the greater of (i) its net income for the most recent fiscal
year, or (ii) the average of its net income after dividends for the most recent
fiscal year and not more than two of the immediately preceding fiscal years, if
applicable. See "SUPERVISION AND REGULATION--Regulation of Home--Restrictions
on Dividends and Other Capital Distributions". As a result of this limitation,
if Home had been a stock institution at the end of fiscal 1995, it could not
have paid a dividend to the Holding Company, its sole stockholder, in excess of
approximately $1.2 million without the approval of the Administrator. As a
converted institution, Home also will be subject to the regulatory restriction
that it will not be permitted to declare or pay a dividend on or repurchase any
of its capital stock if the effect thereof would be to cause its regulatory
capital to be reduced below the amount required for the liquidation account
established in connection with the Conversion. See "THE CONVERSION--Effects of
Conversion--Liquidation Rights" and "--Liquidation Rights After the
Conversion". Also, see "TAXATION--Federal Income Taxation" for a discussion of
federal income tax provisions that may limit the ability of Home to pay
dividends to the Holding Company without incurring a recapture tax.
31
<PAGE>
MARKET FOR COMMON STOCK
The Holding Company, as a newly organized company, has never issued
capital stock, and consequently, there is no established market for the Common
Stock at this time. The Holding Company has received conditional approval to
have the Common Stock listed on Nasdaq under the symbol "SSFC" upon consummation
of the Conversion. For initial and continued inclusion for listing on Nasdaq,
the Holding Company must have two active and registered active market makers.
Trident will act as a market maker for the Common Stock. In addition, Trident
and the Holding Company will seek to encourage and assist at least one other
market maker to make a market in the Common Stock. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. It is impossible to ascertain
whether a second market maker will make a market in the Holding Company's Common
Stock until the shares are listed on Nasdaq and begin to trade after
consummation of the Conversion. There can be no assurance that the Common Stock
will in fact be listed on Nasdaq or that it will trade on Nasdaq. An active and
liquid public trading market for the securities of any issuer, including the
Common Stock, depends upon the presence in the marketplace of both willing
buyers and willing sellers of the securities at any given time. Although the
Holding Company has received preliminary approval to have its shares quoted on
Nasdaq, subject to certain conditions which the Holding Company believes will be
met, there can be no assurance that an active trading market will develop and be
maintained. Further, even if a market develops, there can be no assurance that
the shares of Common Stock offered in the Conversion can be resold at or above
the purchase price after completion of the Conversion. Purchasers of Common
Stock should consider the potentially illiquid and long-term nature of their
investment in the shares being offered hereby. The aggregate price of the Common
Stock is based upon an independent appraisal of the aggregate pro forma market
value of the Common Stock. However, there can be no assurance that an investor
will be able to sell the Common Stock purchased in the Conversion at or above
the purchase price.
CAPITALIZATION
The following table presents the historical capitalization of Home at
March 31, 1996 and the pro forma capitalization of the Holding Company after
giving effect to the sale of the Common Stock and application of the assumptions
set forth under "PRO FORMA DATA", assuming that 2,890,000, 3,400,000, 3,910,000
and 4,496,500 shares of Common stock are sold at $10.00 per share (the minimum,
midpoint, maximum and 15% above the maximum of the current Valuation Range). A
change in the number of shares issued in the Conversion may materially affect
such pro forma capitalization. See "USE OF PROCEEDS" and "THE CONVERSION --
Purchase Price of Common Stock and Number of Shares Offered".
32
<PAGE>
<TABLE>
<CAPTION>
The Holding Company Pro Forma Capitalization Based Upon
Home Savings Sale at $10.00 Per Share At March 31, 1996
Bank of -------------------------------------------------------
Albemarle, SSB 2,890,000 3,400,000 3,910,000 4,496,500
Historical Shares Shares Shares Shares
-----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1) $ 144,282 $ 144,282 $ 144,282 $ 144,282 $ 144,282
=======================================================================
Stockholders' Equity:
Preferred stock - - - - -
Authorized shares: 5,000,000
No shares outstanding
Common stock, no par value - - - - -
Authorized shares: 20,000,000
assumed outstanding shares
are shown (2)
Additional paid-in capital - 27,836 32,838 37,840 43,593
Less common stock acquired:
ESOP (3) - (2,312) (2,720) (3,128) (3,597)
MRP (4) - (1,156) (1,360) (1,564) (1,799)
Retained earnings (5) 20,691 20,691 20,691 20,691 20,691
Unrealized gain on available for
sale securities 29 29 29 29 29
-----------------------------------------------------------------------
Total stockholders' equity $ 20,720 $ 45,088 $ 49,478 $ 53,868 $ 58,917
=======================================================================
Total deposits and stockholders' equity $ 165,002 $ 189,370 $ 193,760 $ 198,150 $ 203,199
=======================================================================
</TABLE>
(1) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Any such withdrawals would reduce proforma deposits by the
amount of such withdrawals.
(2) Does not reflect the issuance of any shares of Common Stock reserved for
issuance pursuant to the Holding Company's proposed stock option plans
which require stockholder approval. See "MANAGEMENT OF HOME - Stock Option
Plans."
(3) Assumes that 8% of the shares of Common Stock offered hereby will be
purchased by the ESOP in the Conversion at $10 per share. The funds used by
the ESOP to acquire the shares will be borrowed from the Holding Company
for a ten year term. For an estimate of the impact of the ESOP loan on
earnings, see "PRO FORMA DATA." Home intends to make contributions to the
ESOP sufficient to service and ultimately retire the debt. The amount of
the ESOP debt is reflected as a reduction of stockholders' equity.
(4) Assumes that an amount of shares equal to 4% of the shares issued in the
conversion will be purchased by the MRP at $10 per share. The MRP intends
to purchase 4% of the Common Stock sold in the conversion, assuming
stockholder approval has been obtained at the Holding Company's first
annual meeting of stockholders following the Conversion. No shares will be
purchased by the MRP in the conversion, and assuming stockholder approval
and regulatory approval, such purchase of shares may be acquired from the
Holding Company's authorized but unissued shares or acquired in open market
purchases. The MRP's purchase of shares cannot occur until six months after
the consummation of the conversion, and such shares will be purchased at
the then current market price. The purchase by the MRP of an amount equal
to 4% of the shares issued in the conversion has been included on a
proforma basis to give an indication of the effect on capitalization of
such 4% purchase by the MRP. The Common Stock to be acquired by the MRP is
reflected as a reduction of stockholders' equity. The number of shares
assumed to be issued at the minimum, midpoint, maximum, and 15% above the
maximum of the valuation range as adjusted are 115,600, 136,000, 156,400
and 179,900, respectively. The dilutive effect to existing shareholders
would be approximately 3.8% if the MRP were to acquire such shares from
authorized but unissued shares.
33
<PAGE>
(5) The retained earnings of Home will be substantially restricted after the
Conversion because Home may not declare or pay a cash dividend on its
Common Stock if its net worth would be reduced thereby below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations.
See Note 16 of "Notes to Financial Statements".
34
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $27,836,000 and $37,840,000, (including
net proceeds from shares expected to be purchased by the ESOP with funds
borrowed from the Holding Company), based upon the following assumptions:
(i) 10.40%, 10.04%, 9.78% and 9.55% of the Common Stock sold in the
Conversion at the minimum, midpoint, maximum and 15% above the maximum,
respectively, of the Valuation Range will be sold to the ESOP, directors and
executive officers and their associates as defined in the Plan of
Conversion, and none of the shares of Common Stock will be sold in any
Syndicated Community Offering pursuant to selected dealer agreements; (ii)
fees will be payable to Trident Securities with respect to the Subscription
and Community Offerings as described in "THE CONVERSION -- Marketing
Arrangements;" and (iii) Conversion expenses, excluding the fees and
commissions to Trident Securities, will be approximately $526,000. Actual
net proceeds may vary depending upon the number of shares sold to the ESOP
and to directors, executive officers and their associates, the number of
shares, if any, sold in the Syndicated Community Offering pursuant to
selected dealer arrangements and the actual expenses of the Conversion.
Payments for shares made through withdrawals from existing Home deposit
accounts will not result in the receipt of new funds for investment by Home.
However, capital will increase and interest-bearing liabilities will
decrease by the amount of such withdrawals. See "THE CONVERSION -- Purchase
Price of Common Stock and Number of Shares Offered".
Under the Plan of Conversion, the Common Stock must be sold at an
aggregate price equal to not less than the minimum nor more than the maximum
of the Valuation Range based upon an independent appraisal. The Valuation
Range as of April 30, 1996 is from a minimum of $28,900,000 to a maximum of
$39,100,000 with a midpoint of $34,000,000. However, with the consent of
the Administrator and the FDIC, the aggregate price of the Common Stock sold
may be increased to up to 15% above the maximum of the Valuation Range, or
to $44,965,000, without a resolicitation and without any right to cancel,
rescind or change subscription orders, to reflect changes in market and
financial conditions following commencement of the Subscription Offering.
See "THE CONVERSION -- Purchase Price of Common Stock and Number of Shares
Offered".
Pro forma consolidated net earnings and book value of the Holding
Company at or for the year ended September 30, 1995 and the six months ended
March 31, 1996 have been based upon the following assumptions: (i) the sale
of shares of Common Stock in connection with the Conversion occurred at the
beginning of the periods and yielded estimated net Conversion proceeds of
$27,836,000, $32,838,000, $37,840,000 and $43,593,000 (based upon the
issuance of 2,890,000, 3,400,000, 3,910,000 and 4,496,500 shares,
respectively, at $10.00 per share) on such date; and (ii) such net proceeds
were invested on a consolidated basis at the beginning of the periods at a
yield of 5.40%, which represents the one-year treasury bill rate at March
31, 1996. The Holding Company did not use the arithmetic average of Home's
weighted-average yield on interest-earning assets and weighted-average
interest rate paid on deposits during the year ended September 30, 1995.
Management believes that the one-year treasury bill rate is a more
appropriate rate for purposes of preparing the pro forma data because
proceeds from the Conversion are expected to be initially invested in
instruments with similar yields and maturities. The effect of withdrawals
from deposit accounts for the purchase of Common Stock has not been
reflected. Such withdrawals have no effect on pro forma stockholders'
equity, and management does not believe that such withdrawals will have a
material impact on pro forma net earnings or pro forma net earnings per
share. In calculating pro forma net earnings, an effective tax rate of 37%
has been assumed, resulting in a yield after taxes of 3.40%. Historical and
pro forma per share amounts have been calculated by dividing Home's
historical amounts and the Holding Company's pro forma amounts by the
indicated number of shares of Common Stock, assuming that such number of
shares had been outstanding during the entire period.
The following pro forma information is not intended to represent the
market value of the Common Stock, the value of net assets and liabilities or
of future results of operations. The assumption regarding investment yields
should not be considered indicative of actual yields for future periods.
The following information is not intended to be used as a basis for
projection of results of operations for future periods.
35
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September, 30 1995
------------------------------------------------------------------------
2,890,000 3,400,000 3,910,000 4,496,500
shares shares shares shares
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (Supermax)
------------------------------------------------------------------------
(In Thousands, except per share amount)
<S> <C> <C> <C> <C>
Gross proceeds $ 28,900 $ 34,000 $ 39,100 $ 44,965
Less offering expenses and commissions (1,064) (1,162) (1,260) (1,372)
------------------------------------------------------------------------
Estimated net Conversion proceeds 27,836 32,838 37,840 43,593
Less Common stock acquired by ESOP (2,312) (2,720) (3,128) (3,597)
Less Common Stock acquired by MRP (1,156) (1,360) (1,564) (1,799)
------------------------------------------------------------------------
Estimated proceeds available for investment $ 24,368 $ 28,758 $ 33,148 $ 38,197
========================================================================
Pro forma net earnings:
Historical earnings $ 1,861 $ 1,861 $ 1,861 $ 1,861
Pro Forma adjustments:
Net after tax earnings on conversion
proceeds (1) 829 978 1,128 1,299
Pro forma ESOP expense (2) (146) (171) (197) (227)
Pro forma MRP expense (3) (146) (171) (197) (227)
------------------------------------------------------------------------
Pro forma net earnings $ 2,398 $ 2,497 $ 2,595 $ 2,706
========================================================================
Pro forma net earnings per share:
Historical earnings $ 0.69 $ 0.59 $ 0.51 $ 0.45
Pro Forma adjustments:
Net after tax earnings on net conversion
proceeds (1) 0.31 0.31 0.31 0.31
Pro forma ESOP expense (2) (0.05) (0.05) (0.05) (0.05)
Pro forma MRP expense (3) (0.05) (0.05) (0.05) (0.05)
------------------------------------------------------------------------
Pro forma net earnings per share (5) $ 0.90 $ 0.80 $ 0.72 $ 0.66
========================================================================
Offering price to pro forma earning per share
(P/E ratio) (5) 11.18 x 12.64 x 13.98 x 15.41
============= ================ =============== ===============
Pro forma stockholders' equity (net book value): (4)
Historical capital $ 20,426 $ 20,426 $ 20,426 $ 20,426
Estimated net conversion proceeds 27,836 32,838 37,840 43,593
Less common stock acquired by:
ESOP (2) (2,312) (2,720) (3,128) (3,597)
MRP (3) (1,156) (1,360) (1,564) (1,799)
------------------------------------------------------------------------
Pro forma stockholders' equity (4) $ 44,794 $ 49,184 $ 53,574 $ 58,623
========================================================================
Pro forma stockholders' equity per share: (4)
Historical capital $ 7.07 $ 6.01 $ 5.22 $ 4.54
Estimated net conversion proceeds 9.63 9.66 9.68 9.69
Less common stock acquired by:
ESOP (2) (0.80) (0.80) (0.80) (0.80)
MRP (3) (0.40) (0.40) (0.40) (0.40)
------------------------------------------------------------------------
Pro forma stockholders' equity per share (4) $ 15.50 $ 14.47 $ 13.70 $ 13.03
========================================================================
Offering price as percentage of pro forma
stockholders' equity per share 64.52% 69.13% 72.98% 76.70%
========================================================================
Number of shares used to calculate earnings
per share (5) 2,681,920 3,155,200 3,628,480 4,172,752
========================================================================
Number of shares used to calculate stockholders'
equity per share (4) 2,890,000 3,400,000 3,910,000 4,496,500
========================================================================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended March 31, 1996
----------------------------------------------------------------
2,890,000 3,400,000 3,910,000 4,496,500
shares shares shares shares
at $10.00 at $10.00 at $10.00 at $10.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (Supermax)
----------------------------------------------------------------
(In Thousands, except per share amount)
<S> <C> <C> <C> <C>
Gross proceeds $ 28,900 $ 34,000 $ 39,100 $ 44,965
Less offering expenses and commissions (1,064) (1,162) (1,260) (1,372)
----------------------------------------------------------------
Estimated net Conversion proceeds 27,836 32,838 37,840 43,593
Less Common stock acquired by ESOP (2,312) (2,720) (3,128) (3,597)
Less Common Stock acquired by MRP (1,156) (1,360) (1,564) (1,799)
----------------------------------------------------------------
Estimated proceeds available for investment $ 24,368 $ 28,758 $ 33,148 $ 38,197
================================================================
Pro forma net earnings:
Historical earnings $ 299 $ 299 $ 299 $ 299
Pro Forma adjustments:
Net after tax earnings on conversion
proceeds (1) 414 489 564 650
Pro forma ESOP expense (2) (73) (86) (99) (113)
Pro forma MRP expense (3) (73) (86) (99) (113)
----------------------------------------------------------------
Pro forma net earnings $ 567 $ 616 $ 665 $ 723
================================================================
Pro forma net earnings per share:
Historical earnings $ 0.11 $ 0.09 $ 0.08 $ 0.07
Pro Forma adjustments:
Net after tax earnings on net conversion
proceeds (1) 0.16 0.16 0.16 0.16
Pro forma ESOP expense (2) (0.03) (0.03) (0.03) (0.03)
Pro forma MRP expense (3) (0.03) (0.03) (0.03) (0.03)
----------------------------------------------------------------
Pro forma net earnings per share (5) $ 0.21 $ 0.19 $ 0.18 $ 0.17
================================================================
Offering price to pro forma earning per share
(P/E ratio) (5) 23.61 x 25.58 x 27.25 x 28.89
========== ========== ========= =========
Pro forma stockholders' equity (net book value): (4)
Historical capital $ 20,720 $ 20,720 $ 20,720 $ 20,720
Estimated net conversion proceeds 27,836 32,838 37,840 43,593
Less common stock acquired by:
ESOP (2) (2,312) (2,720) (3,128) (3,597)
MRP (3) (1,156) (1,360) (1,564) (1,799)
----------------------------------------------------------------
Pro forma stockholders' equity (4) $ 45,088 $ 49,478 $ 53,868 $ 58,917
================================================================
Pro forma stockholders' equity per share: (4)
Historical capital $ 7.17 $ 6.09 $ 5.30 $ 4.61
Estimated net conversion proceeds 9.63 9.66 9.68 9.69
Less common stock acquired by:
ESOP (2) (0.80) (0.80) (0.80) (0.80)
MRP (3) (0.40) (0.40) (0.40) (0.40)
----------------------------------------------------------------
Pro forma stockholders' equity per share (4) $ 15.60 $ 14.55 $ 13.78 $ 13.10
================================================================
Offering price as percentage of pro forma
stockholders' equity per share 64.10% 68.72% 72.58% 76.32%
================================================================
Number of shares used to calculate earnings
per share (5) 2,681,920 3,155,200 3,628,480 4,172,752
================================================================
Number of shares used to calculate stockholders'
equity per share (4) 2,890,000 3,400,000 3,910,000 4,496,500
================================================================
</TABLE>
37
<PAGE>
(1) Subject to approval by the Holding Company's stockholders at a meeting
to be held no sooner than six months after the Conversion, 10% of the
shares issued in the Conversion would be reserved for issuance to
directors, officers, and employees under the Stock Option Plan. Because
management cannot reasonably estimate the number of options which might
be exercised or the option exercise price, no provision for the Stock
Option Plan has been made in the preceding pro forma calculations. At
15% above the maximum of the Valuation Range, assuming 4,496,500 shares
of the Common Stock are issued in the Conversion, it is expected that
options to acquire 449,650 shares of the Common Stock could be granted
under the Stock Option Plan. If all shares under the Stock Option Plan
were newly issued, the exercise price was $10.00 for the shares issued
pursuant to the options, and all of the options were exercised, the
number of outstanding shares of Common Stock would increase from
4,496,500 to 4,946,150 and the pro forma earnings per share of the
outstanding Common Stock (based on shares released for the period
pursuant to SOP 93-6) would have been $0.16 compared with $0.17 and
$0.60 compared with $0.66 for the six-month period ended March 31, 1996
and the year ended September 30, 1995, respectively, if the Stock
Option Plan did not exist. See "MANAGEMENT OF HOME -- Proposed Stock
Option Plan".
(2) It is assumed that 8% of the shares of Common Stock in the Conversion
will be purchased by the ESOP. For purposes of this table, the funds
used to acquire such shares are assumed to have been loaned to the ESOP
by the Holding Company. The amount loaned is reflected as a reduction
of stockholders' equity. Home intends to make annual contributions to
the ESOP over a ten-year period in an amount at least equal to the
principal and interest requirements of the loan. Home's total annual
payment of the ESOP loan is based upon 10 equal annual installments of
principal. The pro forma net earnings assumes: (i) that Home's
contribution to the ESOP for the principal portion of the debt service
requirement for the six months ended March 31, 1996 and for the year
ended September 30, 1995 was made at the end of the period; (ii) that
23,120, 27,200, 31,280 and 35,970 shares at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, were
committed to be released during the six months ended March 31, 1996 and
the year ended September 30, 1995, respectively, at an average fair
value of $10.00 per share and were accounted for as a charge to expense
in accordance with Statement of Position ("SOP") No. 93-6, net of
income tax at an assumed rate of 37%; and (iii) only the ESOP shares
committed to be released were considered outstanding for purposes of
the net earnings per share calculations, while all ESOP shares were
considered outstanding for purposes of the stockholders' equity per
share calculations. See "MANAGEMENT OF HOME -- Employee Stock Ownership
Plan".
(3) It is assumed that the MRP will purchase a number of shares equal to 4%
of the shares of Common Stock issued in the Conversion for issuance to
directors, officers and employees, subject to approval by the Holding
Company's stockholders at a meeting to be held no sooner than six
months after Conversion. If the MRP is approved by the stockholders,
the MRP intends to acquire the Common Stock either through open market
purchases, if permissible, or from authorized but unissued shares of
Common Stock of the Holding Company. Funds used by the MRP to purchase
the shares will be contributed to the MRP by Home. In calculating the
pro forma effect of the MRP, it is assumed that the required
stockholder approval has been received, that the shares were acquired
by the MRP at the beginning of the period presented in open market
purchases at the Conversion purchase price of $10.00 per share, and
that 20% of the amount contributed was amortized to expense annually
during the period (the MRP will be amortized over a five-year period),
net of income tax at an assumed rate of 37%. The issuance of authorized
but unissued shares of the Holding Company's Common Stock to the MRP
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8%; pro forma net earnings per
share would be $0.21, $0.19, $0.18 and $0.17 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, for the
six-month period ended March 31, 1996; and pro forma stockholders'
equity per share would be $15.39, $14.38, $13.63 and $12.98 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, at March 31, 1996. Pro forma net earnings per share would
be $0.87, $0.77, $0.70 and $0.64 at the minimum, midpoint, maximum and
38
<PAGE>
15% above the maximum of the range, respectively, for the year ended
September 30, 1995; and pro forma stockholders' equity per share would
be $15.29, $14.29, $13.56 and $12.92 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively at September 30,
1995. There can be no assurance that stockholder approval of the MRP
will be obtained, or that the actual purchase price of the shares will
be equal to the Conversion purchase price. See "MANAGEMENT OF HOME --
Proposed Management Recognition Plan".
(4) The retained earnings of Home will be substantially restricted after
the Conversion. See "DIVIDEND POLICY" and "SUPERVISION AND
REGULATION -- Regulation of Home -- Restrictions on Dividends and
Other Capital Distributions". Pursuant to SOP 93-6, stockholders'
equity per share is calculated based on all ESOP shares issuable.
(5) Pro forma earnings per share is calculated based on the number of
shares outstanding indicated in the previous tables which include
shares to be acquired by the ESOP and the MRP. Pursuant to SOP 93-6,
pro forma earnings per share is calculated using only the ESOP shares
released for the period according to scheduled contributions included
as share outstanding.
39
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
Home is subject to the North Carolina savings bank requirement that net
worth, computed in accordance with the requirements of the Administrator,
equal or exceed 5% of total assets. As of March 31, 1996, Home's net worth,
computed in accordance with such requirements, was 12.65% of total assets.
In addition, Home is subject to the capital requirements of the FDIC. The
FDIC requires that institutions which receive the highest rating during
their examination process and are not experiencing or anticipating
significant growth must maintain a leverage ratio of Tier I capital to
"total assets" (as defined in FDIC regulations) of at least 3%. All other
institutions are required to maintain a ratio of 1% or 2% above the 3%
minimum with an absolute minimum leverage ratio of not less than 4%. The
FDIC also imposes requirements that (i) the ratio of Tier I capital to risk-
weighted assets equal at least 4% and (ii) the ratio of total capital to
risk-weighted assets equal at least 8%. At March 31, 1996, Home had Tier I
capital of approximately $20.7 million, or 12.39% of total assets. As
demonstrated in the table below, Home exceeds the FDIC Tier I and risk-based
capital requirements and North Carolina capital requirements on a historical
and pro forma basis.
Set forth below is a summary of Home's compliance with regulatory
capital standards at March 31, 1996, on a historical and pro forma basis
assuming that the indicated number of shares are sold as of such date and
Home received 50% of the net proceeds of the Offerings after deducting the
amount of the ESOP debt. In addition, the cost of the shares expected to be
acquired by the MRP are deducted from pro forma capital.
40
<PAGE>
<TABLE>
<CAPTION>
Home's Historical Regulatory ProForma Regulatory Capital Position at March 31, 1996
----------------------------------------------------------------------------
Capital Position at 2,890,000 Shares sold at 3,400,000 Shares sold at
March 31, 1996 Price of $10 per share Price of $10 per share
--------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Adjusted Adjusted Adjusted
Amount Assets (1) Amount Assets (1) Amount Assets (1)
--------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $ 20,691 12.39 % $ 29,985 16.79 % $ 31,670 17.53 %
Tier 1 (leverage) capital
requirement: 6,679 4.00 7,143 4.00 7,227 4.00
Excess 14,012 8.39 22,842 12.79 24,443 13.53
Tier 1 risk adjusted
capital 20,691 30.36 29,985 42.41 31,670 44.50
Tier 1 risk adjusted
capital requirement (2) 2,726 4.00 2,828 4.00 2,847 4.00
Excess 17,965 26.36 27,157 38.41 28,823 40.50
Total risk based capital 21,118 30.99 30,412 43.01 32,097 45.10
Total risk based capital
requirement (2) 5,452 8.00 5,656 8.00 5,693 8.00
Excess 15,666 22.99 24,756 35.01 26,404 37.10
NC Savings Bank capital 21,118 12.65 30,412 17.03 32,097 17.76
NC Savings Bank capital
requirement 8,349 5.00 8,929 5.00 9,034 5.00
Excess 12,769 7.65 21,483 12.03 23,063 12.76
</TABLE>
<TABLE>
<CAPTION>
ProForma Regulatory Capital Position at March 31, 1996
----------------------------------------------------------------------------
3,910,000 Shares sold at 4,496,500 Shares sold at
Price of $10 per share Price of $10 per share
---------------------------------------------------------------------------
Percent of Percent of
Adjusted Adjusted
Amount Assets (1) Amount Assets (1)
---------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Tier 1 (leverage) capital $ 33,355 18.25 % $ 35,293 19.06 %
Tier 1 (leverage) capital
requirement: 7,311 4.00 7,407 4.00
Excess 26,044 14.25 27,886 15.06
Tier 1 risk adjusted
capital 33,355 46.57 35,293 48.92
Tier 1 risk adjusted
capital requirement (2) 2,865 4.00 2,866 4.00
Excess 30,490 42.57 32,407 44.92
Total risk based capital 33,782 47.17 35,720 19.29
Total risk based capital
requirement (2) 5,730 8.00 5,772 8.00
Excess 28,052 39.17 29,948 41.51
NC Savings Bank capital 33,782 18.48 35,720 19.29
NC Savings Bank capital
requirement 9,139 5.00 9,259 5.00
Excess 24,643 13.48 26,461 14.29
</TABLE>
(1) The leverage ratio of Tier 1 capital is based on average assets for
the quarter ended March 31, 1996; Tier 1 risk adjusted capital and risk
based capital is based upon risk-weighted assets outstanding at March
31, 1996; the North Carolina capital requirement is based upon total
assets at March 31, 1996.
(2) Assumes net proceeds are invested in assets that carry a 20% risk
weight.
41
<PAGE>
ANTICIPATED STOCK PURCHASES BY MANAGEMENT
Directors, officers and employees of Home will be entitled to subscribe
for shares of Common Stock in the Subscription Offering in their capacities
as such and to the extent they qualify as Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members. Shares purchased
by such persons will be purchased at the same $10.00 price per share that
will be paid by other purchasers in the Offerings. They may also purchase
Common Stock in the Community Offering or in the Syndicated Community
Offering, if any, subject to the maximum purchase limitations applicable to
all purchasers of shares in the Conversion.
The following table sets forth for each of the executive officers and
directors of Home who intends to purchase Common Stock, and for all
executive officers and directors as a group, the aggregate dollar amount of
Common Stock for which such director or executive officer has informed Home
he intends to subscribe. The amounts reflected in the table are estimates
only and the actual shares of Common Stock actually subscribed for by the
listed individuals may differ from the amounts reflected in the table. The
following table assumes that 3,910,000 shares of Common Stock will be issued
and that sufficient shares will be available to satisfy the subscriptions of
Home's executive officers and directors.
<TABLE>
<CAPTION>
Anticipated
Anticipated Number
Amount of Shares As a Percent
to be Paid to be of Shares
Name for Shares /(1)/ Purchased Offered/(2)/
---- ---------------- ----------- -------------
<S> <C> <C> <C>
Carl M. Hill, President,
CEO and Director $400,000 40,000 1.02%
Caldwell A. Holbrook, Jr.,
Director 20,000 2,000 0.05
Joel A. Huneycutt, Director 150,000 15,000 0.38
Douglas Dwight Stokes,
Director 150,000 15,000 0.38
R. Ronald Swanner, Executive
Vice President and
Director 100,000 10,000 0.26
Greg E. Underwood, Director 100,000 10,000 0.26
-------- ------ ----
Total $920,000 92,000 2.35%
======== ====== ====
</TABLE>
---------------------
(1) Subscriptions by the ESOP are not aggregated with shares of Common
Stock purchased by the executive officers and directors listed above.
See "MANAGEMENT OF HOME -- Employee Stock Ownership Plan". Also, grants
under the proposed MRP and shares subject to option under the Stock
Option Plan, if approved by the stockholders of the Holding Company at
a meeting of stockholders following the Conversion, are not aggregated
with shares of Common Stock purchased by the executive officers and
directors listed above. Recipients of shares under the ESOP will have
voting control over the shares allocated to them, and trustees of the
ESOP (directors of Home) will have voting control over unallocated
shares. Under the proposed MRP, if approved by the stockholders of the
Holding Company, a number of shares equal to 4% of the shares issued in
the Conversion could be issued to directors and certain employees of
Home. Such shares could be purchased in the open market or could be
issued out of authorized but unissued shares. Recipients of shares
under the MRP will have voting control over such shares regardless of
whether such shares have vested. Under the proposed Stock Option Plan,
if approved by the stockholders of the Holding Company, directors and
certain officers of Home could receive options to purchase a number of
shares equal to 10%
42
<PAGE>
of the shares issued in the Conversion. Shares to fund such options
could be acquired in the open market or could be acquired through the
issuance of authorized but unissued shares. If shares are acquired in
the open market and held by the Stock Option Plan prior to the exercise
of options under the Plan, holders of unexercised options will have
voting control over the shares held to fund their options. See
"MANAGEMENT OF HOME -- Proposed Management Recognition Plan" and
"-- Proposed Stock Option Plan".
(2) If (i) the MRP and Stock Option Plan are approved by the Holding
Company's stockholders, (ii) all restricted shares that could be issued
to directors and executive officers under the MRP are issued, (iii) all
options which could be issued to directors and executive officers under
the Stock Option Plan are issued and are exercised, and (iv) all shares
to be issued under the Stock Option Plan and the MRP are purchased in
the open market, then directors and executive officers and their
associates would own 447,810 shares or 11.45% of the 3,910,000 shares
outstanding. In addition, other Home employees would receive, in the
aggregate 54,470 restricted shares and options to purchase 136,850
shares pursuant to the MRP and Stock Option Plan, assuming the issuance
of 3,910,000 shares in the Conversion. In addition, the ESOP is
expected to acquire 8% of the shares outstanding, which would be issued
to executive officers and the other Home employees. Thus, the directors
and executive officers of Home and their affiliates and other employees
of Home, have the potential of owning 952,200 shares or 24.35% of the
3,910,000 shares outstanding (not including shares purchased in the
open market by any such persons after the Conversion and not including
shares which may be purchased in the Offerings by Home employees other
than the executive officers). See "MANAGEMENT OF HOME -- Employee Stock
Ownership Plan", "-- Proposed Management Recognition Plan", "--Proposed
Stock Option Plan" and "RISK FACTORS --Articles of Incorporation and
Bylaw Provisions, Statutory Provisions, Agreements with Employees and
Voting Control Issues That Could Discourage Hostile Acquisitions of
Control--Voting Control of Officers, Directors and Employees".
Without the prior written consent of the Administrator, shares of
Common Stock purchased by directors or executive officers of Home in the
Conversion cannot be sold during a period of one year following the
Conversion, except upon death of the director or executive officer. Such
restriction also applies to any shares issued to such person as a stock
dividend, stock split or otherwise with respect to any of such originally
restricted stock.
In addition, the North Carolina conversion regulations provide that
directors and executive officers and their associates are prohibited from
purchasing outstanding shares of Common Stock for a period of three years
following the Conversion, except from or through a broker or dealer
registered with the SEC or Secretary of State of North Carolina, unless the
prior written approval of the Administrator is obtained. This provision
does not apply to negotiated transactions involving more than 1% of the
Holding Company's outstanding Common Stock or to purchases of stock made by
or held by one or more tax-qualified or non-tax-qualified employee stock
benefit plans of Home or the Holding Company which may be attributable to
individual executive officers or directors. Purchases and sales of Common
Stock by officers and directors will also be subject to the short-swing
trading prohibitions contained in Section 16(b) of the Exchange Act, and the
short-swing trading and other rules promulgated pursuant to the Exchange
Act.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
The purpose of this discussion and analysis is to aid in the
understanding and evaluation of the financial condition and changes therein
and the results of operations of Home. This discussion and analysis is
intended to complement the financial statements and footnotes appearing
elsewhere in this document, and should be read in conjunction therewith.
43
<PAGE>
Changes in Financial Condition
Total assets of Home amounted to $167.0 million at March 31, 1996,
which is an increase of $7.1 million or 4.44% from total assets of Home at
September 30, 1995. Home's total assets increased by 12.0 million, or 8.13%
from total assets of 147.8 million outstanding at September 30, 1994. The
growth from September 30, 1995 to March 31, 1996 can primarily be attributed
to the increase in cash and cash equivalents, funded by savings deposits
growth, offset by a $1.7 million decrease in loans receivable. 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 $106.7 million, $108.6 million and $106.8 million at March 31,
1996, September 30, 1995 and 1994, respectively. Home was able to increase
the size of its loan portfolio during 1995 primarily through its marketing
efforts in the origination of permanent residential 1-4 family mortgages.
All other categories of Home's loan portfolio have remained fairly
consistent from 1994 to 1996. Loan originations for the six months ended
March 31, 1996 totaled $9.1 million and were funded primarily by loan
principal repayments of $10.7 million as the loan portfolio decreased by
$1.7 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 in 1995. Home maintains
underwriting and credit standards designed to maintain the quality of the
loan portfolio. Nonperforming loans at March 31, 1996, September 30, 1995
and 1994 totaled $702,000, $981,000 and $946,000, respectively and were
0.64%, 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, Home's investment portfolio consists primarily of
securities designated as available for sale. Investment securities,
excluding interest-bearing deposits and FHLB stock, at March 31, 1996,
September 30, 1995 and 1994 totaled $35.9 million, $35.5 million and $30.4
million, respectively. The securities portfolio remained relatively
unchanged for the six-month period ended March 31, 1996 from September 30,
1995 as $10.5 million of securities matured and $10.9 million of new
securities were purchased. 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 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 $6.6 million at
September 30, 1994 to $20.1 million at March 31, 1996 as Home has sought to
increase liquidity to have funds available for future expanded loan growth.
Cash and cash equivalents increased $8.6 million at March 31, 1996 and $4.8
million at September 30, 1995 from 1994. These increases were funded by
savings deposit growth.
Home has experienced substantial growth in savings deposits. At
March 31, 1996 and September 30, 1995 Home increased deposits $6.6 million
and $10.3 million to $144.3 million and $137.6 million, respectively. 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 $20.7 million, $20.4 million and $18.3 million at March 31, 1996,
September 30, 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
44
<PAGE>
separate component of equity. The equity component for net unrealized gains
(losses) at March 31, 1996, September 30, 1995 and 1994 amounted to $29,000,
$34,000 and $(220,000), respectively.
Comparison of Operating Results for the Six-Month Periods Ended March 31, 1996
and 1995
Net Income. Net income for the six-month periods ended March 31,
1996 and March 31, 1995 was $299,000 and $1.2 million, respectively. Net income
decreased in 1996 from 1995 primarily due in part to a lower net interest income
due to a larger interest rate spread in 1995. Additionally, Home provided
additional provisions for loan losses and incurred an increase in noninterest
expenses.
Net Interest Income. Net interest income amounted to $2.5 million and
$3.3 million during the six-month periods ended March 31, 1996 and 1995,
respectively. The average balance of interest earning assets and interest
bearing liabilities increased by a net of $655,000 during 1996; however, Home's
interest rate spread decreased from 4.19% in 1995 to 2.61% 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 had a
negative impact on net interest income and more than offset the higher balance
of net interest earning assets outstanding during 1996.
See the table on page 48 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).
Interest Income. Interest income amounted to $6.4 million and $5.8
million for the six-month periods ended March 31, 1996 and 1995, respectively,
an increase of $520,000 or 8.9%. Although Home experienced a 17 basis point
decline in total yield, it was more than offset by the increase in Home's
average balances of interest earning assets. The increase in average balances
was primarily in investments and interest bearing deposits, while the average
balance of loans receivable remained fairly constant.
Interest Expense. Interest expense increased $1.3 million for the six-
month period ended March 31, 1996 to $3.8 million from $2.5 million for the same
period ended March 31, 1995. Home's average balance of outstanding deposits
increased $15.3 million, while the average cost of funds increased from 4.03%
during 1995 to 5.44 % during 1996. The increase in cost of funds was primarily
in certificates of deposit which increased from 4.38% during 1995 to 6.11%
during 1996. The increase in outstanding average balance was primarily due to
certificates of deposits, while core deposits of passbook, NOW and money market
accounts declined as customers have shifted funds into longer term certificates
of deposit. Management believes Home's cost of funds was indicative of changes
in overall market rates.
See the table on page 50 for additional information concerning Home's
yields on interest earning assets and cost of funds on interest bearing
liabilities for the six-months periods ended March 31, 1996 and 1995.
Provision for Loan Losses and Asset Quality
Home's provision for loan losses amounted to $300,000 and $-0- in 1996
and 1995. 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 six months ended
March 31, 1996 management determined that its allowance for loan losses should
be increased to reflect peer group banks
45
<PAGE>
levels of outstanding reserves and for risk in the portfolio as a result of
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. Home had loans amounting to $702,000 which were delinquent
more than 90 days at March 31, 1996. In addition, Home had $73,000 of real
estate owned at March 31, 1996. Home adopted policies which it believes
provides for prudent and adequate levels of loan loss allowances.
At March 31, 1996, Home's level of general valuation allowances for
loan losses amounted to $427,000, which management believes is adequate to
absorb potential losses in its loan portfolio.
Noninterest Income. Noninterest income amounted to $62,000 and $61,000
for the six-month period ended March 31, 1996 and 1995, respectively.
Noninterest income consists primarily of service charges and fees associated
with Home's checking accounts. Home's level of noninterest income has
remained fairly stable over the periods.
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 $1.8 million and $1.4
million for the six months ended March 31, 1996 and 1995, respectively.
Compensation increased $174,000 for the six-month period ended March 31,
1996 from a comparable period ended 1995 due to inflationary increases and
additional unfunded deferred compensation agreements entered into during the
period ended March 31, 1996. Occupancy expenses, data processing and
federal insurance premium expense increased nominally during the six months
ended March 31, 1996 compared to 1995. Charitable contributions increased
$167,000 during 1996 primarily due to Home's funding of one-time prior
commitments to Wingate University ($40,000), Boy Scouts ($10,000), Stanly
Community College ($20,000) and Pfeiffer College ($80,000).
Income Taxes. Home's effective income tax rate was 38.7% and 37.3% for
the six-month period ended March 31, 1996 and 1995 and reflect normal
expected rates on taxable income.
Comparison of Operating Results for the Years Ended September 30, 1995, 1994
and 1993
Net Income. Net income for the years ended September 30, 1995, 1994
and 1993, amounted to $1.9 million, $2.0 million and $3.3 million,
respectively. While net interest income was stable during 1994 and 1993, an
increase in cost of funds during 1995 resulted in an increase in interest
expense of $1.0 million and a corresponding decrease in net interest income
of $1.0 million. Home also incurred an increase in noninterest expenses
during 1994 which remained at approximately the same level for 1995 and
implemented SFAS 109, the effect of which was to record an additional
$485,000 in income tax expense during 1994.
Net Interest Income. Net interest income for the years ended September
30, 1995, 1994 and 1993 amounted to $6.0 million, $7.0 million and $7.0
million, respectively. The average outstanding balance of interest earning
assets and interest bearing liabilities was relatively stable during 1994
and 1993 and increased $2.7 million to $16.5 million during 1995. Home's
interest rate spread increased to 4.38% in 1994 from 4.21% in 1993 but
declined in 1995 to 3.59%. The narrowing of Home's interest rate spread in
1995 had a negative impact on net interest income which more than offset the
income effect due to the $2.7 million increase in net average balances of
interest earning assets. The net interest income for 1994 and 1993 were
comparable as decreases on interest earning asset yields were offset by
decreases in interest bearing liabilities cost of funds.
The following table 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
46
<PAGE>
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 periods volume) and (iii) mixed changes (changes in volume multiplied
by changes in rate).
47
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended March 31,
1996 vs. 1995
---------------------------------------------------------
Increase (Decrease) Attributable to
---------------------------------------------------------
Rate/
Volume Rate Volume Net
(in Thousands)
<S> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits $ 565 (114) (146) 305
Investments 76 121 5 202
Mortgage-backed securities 12 (19) (1) (8)
Loans receivable (6) 27 0 21
---------- ---------- ----------- -----------
Total interest income on
interest-earning assets 647 15 (142) 520
---------- ---------- ----------- -----------
Interest expense on:
Passbook savings (21) (2) 0 (23)
NOW and money market (20) (37) 2 55
Certificate of deposit 704 598 75 1,377
---------- ---------- ----------- -----------
Total interest expense on
interest-bearing liabilities 563 559 77 1,299
---------- ---------- ----------- -----------
Increase (decrease) in net
interest income $ (16) $ (544) $ (219) $ (779)
========== ========== =========== ===========
<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 0 (63)
NOW and money market (90) 8 (1) (83)
Certificate of deposit (7) 1,162 (2) 1,153
---------- ---------- ----------- -----------
Total interest expense on
interest-bearing liabilities (161) 1,171 (3) 1,007
---------- ---------- ----------- -----------
Increase (decrease) in net
interest income $ 68 $ (930) $ (159) $ (1,021)
========== ========== =========== ===========
<CAPTION>
Year Ended September 30,
1994 vs. 1993
---------------------------------------------------------
Increase (Decrease) Attributable to
---------------------------------------------------------
Rate/
Volume Rate Volume Net
(in Thousands)
<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
Certificate of deposit (388) (773) 61 (1,100)
---------- ---------- ----------- -----------
Total interest expense on
interest-bearing liabilities (233) (876) 45 (1,064)
---------- ---------- ----------- -----------
Increase (decrease) in net
interest income $ (165) $ 160 $ (1) $ 14
========== ========== =========== ===========
</TABLE>
48
<PAGE>
Interest Income. Interest income amounted to $12.0 million, $12.0
million and $13.0 million for the years ended September 30, 1995, 1994 and
1993, respectively. Home's average yield on interest earning assets
decreased to 8.06% in 1994 from 8.57% in 1993 and rebounded to 8.20% in
1995. The primary interest earning asset is loans which experienced a
slight decrease in both average yield and average outstanding balance during
1995. In 1994 loan demand declined and the average balances decreased
substantially to $109.8 million from $117.1 million in 1993. Additionally,
average yields on loans decreased from 9.29% in 1993 to 8.95% in 1995
resulting in a decrease in interest income of $175,000 in 1995 and $971,000
in 1994. These declines in loan income were offset, however, in 1995 and
1994 by income due to increases in average yields and average outstanding
balances in interest bearing deposits and investment securities.
Interest Expense. Interest expense amounted to $6.0 million, $5.0
million and $6.0 million for the years ended September 30, 1995, 1994 and
1993, respectively. 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. Certificates
of deposit average outstanding balance was stable during this period of
time; however, cost of funds on certificates of deposit increased to 5.16%
from 3.95% during 1994. Interest expense had declined substantially in 1994
from 1993 due to a significant decrease in average cost of funds to 3.68%
from 4.36%.
The following table provides additional information concerning Home's
yields on interest earning assets and cost of funds on interest bearing
liabilities at March 31, 1996, for the six-month periods ended March 31,
1996 and 1995, and for the years ended September 30, 1995, 1994 and
1993.
49
<PAGE>
<TABLE>
<CAPTION>
AT FOR THE SIX MONTHS ENDED MARCH 31,
MARCH -----------------------------------------------------
31, 1996 1995
1996 -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
RATE(6) BALANCE INTEREST RATE(4) BALANCE INTEREST RATE(4)
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning
assets:
Interest bearing
deposits.......... 5.35% $ 13,156 $ 373 5.67% $ 1,779 $ 68 7.64%
Investments(1).... 5.77% 31,364 938 5.98% 26,833 736 5.49%
Mortgage-backed
securities........ 7.71% 5,174 196 7.58% 5,023 204 8.12%
Loans receivable,
net(5)............ 8.60% 108,075 4,844 8.96% 108,182 4,823 8.92%
-------- -------- -------- --------
Total interest-
earning assets...... 7.78% 157,769 $6,351 8.05% 141,817 $5,831 8.22%
-------- --------
Non-interest-earning
assets.............. 6,136 4,610
-------- --------
Total........... $163,905 $146,427
======== ========
Liabilities and
retained earnings:
Interest-bearing
liabilities:
Passbook savings.. 3.00% $ 15,275 $ 231 3.02% $ 16,805 $ 255 3.03%
NOW and money
market............ 2.63% 14,769 214 2.90% 17,183 270 3.14%
Certificates of
deposit........... 6.09% 110,852 3,386 6.11% 91,611 2,007 4.38%
-------- -------- -------- --------
Total interest-
bearing liabilities. 5.40% 140,896 $3,831 5.44% 125,599 $2,532 4.03%
-------- --------
Non-interest-bearing
liabilities......... 2,167 1,829
Equity.............. 20,842 18,999
-------- --------
Total........... $163,905 $146,427
======== ========
Net interest income
and interest rate
spread(2)........... 2.38% $2,520 2.61% $3,299 4.19%
======== ========
Net yield on
interest-earning
assets(3)........... 3.19% 3.19% 4.65%
Ratio of interest-
earning assets &
interest-bearing
liabilities......... 111.98% 112.91%
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1995 1994 1993
-------------------------- -------------------------- --------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning
assets:
Interest bearing
deposits.......... $ 4,283 $ 270 6.30% $ 10,675 $ 397 3.72% $ 7,038 $ 197 2.80%
Investments(1).... 28,250 1,585 5.61% 22,239 1,222 5.49% 20,435 1,334 6.53%
Mortgage-backed
securities........ 4,842 394 8.14% 5,999 469 7.82% 7,626 636 8.34%
Loans receivable,
net(5)............ 108,755 9,731 8.95% 109,816 9,906 9.02% 117,055 10,877 9.29%
-------- -------- -------- -------- --------
Total interest-
earning assets...... 146,130 $11,980 8.20% 148,729 $11,994 8.06% 152,154 $13,044 8.57%
-------- -------- --------
Non-interest-earning
assets.............. 5,004 5,626 3,486
-------- -------- --------
Total........... $151,134 $154,355 $155,640
======== ======== ========
Liabilities and
retained earnings:
Interest-bearing
liabilities:
Passbook savings.. $ 16,261 $ 463 2.85% $ 18,504 $ 544 2.94% $ 17,063 $ 538 3.15%
NOW and money
market............ 15,975 496 3.10% 18,909 579 3.06% 15,699 545 3.47%
Certificates of
deposit........... 97,382 5,021 5.16% 97,559 3,850 3.95% 105,853 4,954 4.68%
-------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities. 129,618 $ 5,980 4.61% 134,972 $ 4,973 3.68% 138,615 $ 6,037 4.36%
-------- -------- --------
Non-interest-bearing
liabilities......... 1,918 1,705 2,174
Equity.............. 19,598 17,678 14,851
-------- -------- --------
Total........... $151,134 $154,355 $155,640
======== ======== ========
Net interest income
and interest rate
spread(2)........... $ 6,000 3.59% $ 7,021 4.38% $ 7,007 4.21%
======== ======== ========
Net yield on
interest-earning
assets(3)........... 4.11% 4.72% 4.61%
Ratio of interest-
earning assets &
interest-bearing
liabilities......... 112.74% 110.19% 109.77%
</TABLE>
- -----
(1) Includes investment securities 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) Average yield/rate for the six months ended March 31, 1996 and 1995 have
been annualized.
(5) Loans placed on nonperforming status have been included in the computation
of average balances.
(6) 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>
Provision for Loan Losses and Asset Quality. Home had no provision for
loan losses in 1995, 1994 or 1993. The 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 loans portfolio, overall portfolio quality
and current economic conditions.
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 $981,000, $946,000 and $844,000 at September 30, 1995, 1994
and 1993, respectively. Foreclosures or real estate transfers in lieu of
foreclosures amounted to $209,000, $212,000 and $376,000 in 1995, 1994 and
1993, respectively. Home has adopted policies which it believes provides for
prudent and adequate levels of loan loss allowances.
At September 30, 1995, Home's level of general valuation allowances for
loan losses amounted to $137,000, which management believes is adequate to
absorb potential losses in its loan portfolio.
Noninterest Income. Noninterest income amounted to $126,000, $147,000
and $206,000 for the years ended September 30, 1995, 1994 and 1993,
respectively. Noninterest income consists primarily of service charges and
fees associated with Home's checking accounts. Home's level of noninterest
income has remained fairly stable over the three years ended September 30,
1995.
Noninterest Expense. Noninterest expense consists primarily of
operating expenses for compensation and employee benefit, occupancy, federal
deposit insurance premiums, data processing charges, pension expense and
other operating expense. Noninterest expense amounted to $3.2 million, $3.2
million and $2.1 million for the years ended September 30, 1995, 1994 and
1993, respectively. Compensation expense increased $535,000 and $306,000
during the years ended September 30, 1995 and 1994, respectively. The
increases were due to additional personnel, inflationary increases and
additional pension and supplemental income agreements entered into
increasing compensation $364,000 and $121,000 during 1995 and 1994,
respectively. Home terminated its old defined benefit pension plan during
1994 incurring $493,000 of expense related to termination of the plan.
Occupancy expenses, data processing, federal insurance premium and other
operating expenses increased nominally during the three year period ended
September 30, 1995.
Income Taxes. Home's effective income tax rate was 36.2%, 37.3% and
34.8% for the year ended September 30, 1995, 1994 and 1993, respectively and
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.
51
<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 Home is able to generate. During the six months ended
March 31, 1996 new savings deposits provided $6.6 million in net cash inflow
while operating and investment activities provided funds totaling $458,000
and $1.3 million, respectively. These funds were used primarily to increase
liquidity by investing in interest earning deposits. Due to a decline in
the loan portfolio in 1996 loan principal payments exceeded originations by
$1.7 million. 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 Home's loan portfolio by
approximately $2.8 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 activities and by allowing
the loan portfolio to decline as loan principal repayments of $30.8 million
exceeded originations by $10.2 million. 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 FHLB of Atlanta in the event it needs to borrow funds.
Home 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 March 31, 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.
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 March 31, 1996, as computed under such regulations, was
considerably 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.
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
52
<PAGE>
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 March 31, 1996, Home had a one-year sensitivity gap of negative
41.58%. 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 Home's
operations, management has implemented an asset/liability program designed
to stabilize Home's interest rate gap. The program emphasizes the
investment of excess cash in short or intermediate term interest-earning
assets, and the solicitation of transaction deposit accounts which are less
sensitive to changes in interest rates and can be repriced rapidly.
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 March 31, 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 repayments 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-year 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.
53
<PAGE>
<TABLE>
<CAPTION>
At March 31, 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 $ 3,704 $ 4,046 $ 377 $ 0
Fixed rate 1-4 family residential 404 1,265 3,798 4,506
Other adjustable rate real estate loans 270 298 22 0
Other fixed rate real estate loans 65 204 611 724
Other loans 121 146 27 0
------------ ------------- ------------- -------------
Total loans 4,564 5,959 4,835 5,230
Interest-bearing deposits 11,931 0 0 0
Investment securities
Available for sale 6,004 4,017 18,899 1,008
Nonmarketable equity securities 0 0 0 0
Mortgage-backed securities (2) 55 171 510 598
------------ ------------- ------------- -------------
Total interest-earning assets $ 22,554 $ 10,147 $ 24,244 $ 6,836
============ ============= ============= =============
Interest-bearing liabilities:
Deposits:
Certificates of deposit $ 21,573 $ 45,783 $ 46,372 $ 0
Money market deposit accounts 7,529 0 0 0
NOW and commercial checking accounts 7,433 0 0 0
Passbook savings 15,390 0 0 0
------------ ------------- ------------- -------------
51,925 45,783 46,372 0
Total deposits ------------ ------------- ------------- -------------
$ 51,925 $ 45,783 $ 46,372 $ 0
Total interest-bearing liabilities ============ ============= ============= =============
$ (29,371) $ (35,636) $ (22,128) $ 6,836
Interest sensitivity gap per report (29,371) (65,007) (87,135) (80,299)
Cumulative interest sensitivity gap
Cumulative gap as a percentage of -18.79% -41.58% -55.73% -51.36%
total interest-earning assets
Cumulative interest-earning assets 43.44% 33.47% 39.52% 44.27%
as a percentage of interest-bearing liabilities
</TABLE>
<TABLE>
<CAPTION>
At March 31, 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 $ 0 $ 0 $ 8,127
Fixed rate 1-4 family residential 15,286 59,333 84,592
Other adjustable rate real estate loans 0 0 590
Other fixed rate real estate loans 2,452 9,478 13,534
Other loans 0 0 294
------------ ------------- -------------
Total loans 17,738 68,811 107,137
Interest-bearing deposits 0 0 11,931
Investment securities 0
Available for sale 0 0 29,928
Nonmarketable equity securities 0 1,361 1,361
Mortgage-backed securities (2) 1,856 2,797 5,987
------------ ------------- -------------
Total interest-earning assets $ 19,594 $ 72,969 $ 156,344
============ ============= =============
Interest-bearing liabilities:
Deposits:
Certificates of deposit $ 0 $ 0 $ 113,728
Money market deposit accounts 0 0 7,529
NOW and commercial checking accounts 0 0 7,433
Passbook savings 0 0 15,390
------------ ------------- -------------
Total deposits 0 0 144,080
------------ ------------- -------------
Total interest-bearing liabilities $ 0 $ 0 $ 144,080
============ ============= =============
Interest sensitivity gap per report $ 19,594 $ 72,969
Cumulative interest sensitivity gap (60,705) 12,264
Cumulative gap as a percentage of
total interest-earning assets -38.83% 7.84%
Cumulative interest-earning assets
as a percentage of interest-bearing liabilities 57.87% 108.51%
</TABLE>
(1) Interest-earning assets are included in th 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.
54
<PAGE>
Possible Insurance Premium Surcharge
Legislation has been introduced in the United States Congress which
would require financial institutions which are members of SAIF to pay a one-
time premium currently estimated to be approximately $0.85 per $100 of
domestic deposits. If enacted, this premium or surcharge would have the
effect of reducing the capital of SAIF-member institutions by the amount of
the fee, net of any income tax benefit, and would reduce earnings in the
fiscal year during which such fee was enacted into law. Based upon Home's
deposits as of March 31, 1996, the proposed one-time premium or surcharge
would equal approximately $1.2 million before income taxes. Management
cannot predict whether the proposed legislation will be enacted by Congress
or, if enacted, the amount of the one-time premium or surcharge. See "RISK
FACTORS -- Competitive Disadvantage Caused by Disparity Between SAIF and BIF
Insurance Premiums; Special SAIF Assessment" and "SUPERVISION AND REGULATION
-- Regulation of Home -- Insurance of Deposit Accounts."
Impact of Inflation and Changing Prices
The financial statements and accompanying footnotes have been prepared
in accordance with generally accepted accounting principles, 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 Home'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 valued-based method of accounting
for an employee stock option or similar equity instrument, encourages all
entities to adopt that 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 of
Home's financial condition or results of operations. See Note 18 of "Notes
to Financial Statements".
BUSINESS OF THE HOLDING COMPANY
Prior to the Conversion, the Holding Company will not transact any
material business. Following the Conversion, in addition to directing the
business activities of Home, the Holding Company will invest the proceeds of
the Conversion which are retained by it. See "USE OF PROCEEDS". Upon
consummation of the Conversion, the
55
<PAGE>
Holding Company will have no significant assets other than the shares of
Home's capital stock acquired in the Conversion, the loan receivable held
with respect to its loan to the ESOP and that portion of the net proceeds of
the Conversion retained by it, and will have no significant liabilities.
Cash flow to the Holding Company will be dependent upon investment earnings
from the net proceeds retained by it in the Conversion and any dividends
received from Home. Presently, there are no agreements or understandings for
expansion of the Holding Company's operations. Initially, the Holding
Company will neither own nor lease any property, but will instead use the
premises, equipment and furniture of Home. At the present time, the Holding
Company does not intend to employ any persons other than its officers (who
are not anticipated to be separately compensated by the Holding Company),
but will utilize the support staff of Home from time to time. Additional
employees will be hired as appropriate to the extent the Holding Company
expands its business in the future.
BUSINESS OF HOME
General
Home 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. Home 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. Home also makes a limited
number of loans which are not secured by real property, such as loans
secured by savings accounts. Home's primary source of revenue is interest
income from its lending activities. Home'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 Home 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.
As a North Carolina-chartered savings bank, Home is subject to
examination and regulation by the FDIC and the Administrator. Upon
consummation of the Conversion, Home, as a subsidiary of the Holding
Company, will be subject to indirect regulation by the Federal Reserve. The
business and regulation of Home are subject to legislative and regulatory
changes from time to time, such as those resulting from the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and
the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "1991
Banking Law"). See "SUPERVISION AND REGULATION -- Regulation of Home".
Market Area
Home's primary market area is Stanly County, North Carolina. Home'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.
Home'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 Home'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. In December 1995, the North Carolina
Department of Commerce declared Stanly a "distressed county"
56
<PAGE>
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. See "BUSINESS OF HOME -- Competition" and "RISK
FACTORS -- Effect on Operations of Weak Primary Market Area; Limited Lending
Opportunities". Management believes that opportunities for future earnings
growth in Home's primary market area are limited in light of these
factors.
Lending Activities
General. Home'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. Home also makes loans secured by
improved nonresidential real estate, construction loans, loans secured by
undeveloped real estate and savings account loans. Approximately 99% of
Home's net loan portfolio is secured by real estate. As of March 31, 1996,
all of the loans in Home's real estate loan portfolio were secured by
properties in North Carolina. On March 31, 1996, Home's largest single
outstanding loan had a balance of approximately $480,000. This loan was
performing in accordance with its original terms. In addition to interest
earned on loans, Home receives fees in connection with loan originations,
loan servicing, loan modifications, late payments, loan assumptions and
other miscellaneous services.
Loan Portfolio Composition. Home's net loan portfolio totaled
approximately $106.7 million at March 31, 1996 representing 63.91% of Home's
total assets at such date. At March 31, 1996, 84.60% of Home's net loan
portfolio was composed of one-to-four family residential mortgage loans.
Home equity loans, all of which have adjustable rates, represented 3.53% of
Home's net loan portfolio, and nonresidential real estate loans represented
2.84% of Home's net loan portfolio on such date.
Home 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 March 31, 1996, 4.64% of the loans in Home's
loan portfolio, excluding home equity loans, had adjustable interest rates.
The following table sets forth the composition of Home's loan portfolio
by type of loan at the dates indicated.
57
<PAGE>
<TABLE>
<CAPTION>
At March 31, At September 30,
--------------- -------------------------------------------
1996 1995 1994
--------------- -------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
--------- -------- --------- -------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 90,274 84.60% $ 94,036 86.60% $ 91,674 85.80%
Residential multi-family 712 0.67% 840 0.77% 870 0.81%
Nonresidential real estate 3,034 2.84% 3,013 2.77% 3,157 2.95%
Residential construction 5,973 5.60% 5,368 4.94% 6,015 5.63%
Land 6,426 6.02% 4,890 4.50% 4,998 4.68%
Line of credit 3,766 3.53% 3,875 3.58% 4,056 3.81%
--------- -------- --------- -------- --------- ---------
Total real estate loans 110,185 103.26% 112,022 103.16% 110,770 103.68%
--------- -------- --------- -------- --------- ---------
Consumer loans:
Share 194 0.18% 110 0.10% 105 0.10%
Credit reserve 100 0.09% 221 0.20% 176 0.16%
--------- -------- --------- -------- --------- ---------
Total consumer loans 294 0.27% 331 0.30% 281 0.26%
--------- -------- --------- -------- --------- ---------
Less:
Unearned fees and discounts 545 0.51% 519 0.48% 465 0.44%
Loans in process 2,797 2.62% 3,100 2.85% 3,602 3.37%
Allowance for loan losses 427 0.40% 137 0.13% 140 0.13%
--------- -------- --------- -------- --------- ---------
Total reductions 3,769 3.53% 3,756 3.46% 4,207 3.94%
--------- -------- --------- -------- --------- ---------
Total loans receivable, net $106,710 100.00% $108,597 100.00% $106,844 100.00%
========= ======== ========= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
1993 1992 1991
-----------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
---------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $100,437 85.80% $ 96,453 85.28% $101,447 86.95%
Residential multi-family 731 0.62% 763 0.67% 707 0.61%
Nonresidential real estate 3,655 3.12% 4,104 3.63% 4,887 4.19%
Residential construction 6,644 5.68% 5,919 5.23% 4,458 3.82%
Land 4,960 4.24% 5,689 5.03% 4,862 4.17%
Line of credit 3,715 3.17% 3,358 2.97% 2,531 2.17%
---------- -------- --------- -------- --------- ---------
Total real estate loans 120,142 102.63% 116,286 102.81% 118,892 101.91%
---------- -------- --------- -------- --------- ---------
Consumer loans:
Share 290 0.25% 274 0.24% 309 0.26%
Credit reserve 102 0.09% 102 0.08% 91 0.08%
---------- -------- --------- -------- --------- ---------
Total consumer loans 392 0.34% 376 0.32% 400 0.34%
---------- -------- --------- -------- --------- ---------
Less:
Unearned fees and discounts 440 0.38% 306 0.27% 316 0.27%
Loans in process 2,895 2.47% 3,096 2.74% 2,130 1.83%
Allowance for loan losses 144 0.12% 144 0.13% 177 0.15%
---------- -------- --------- -------- --------- ---------
Total reductions 3,479 2.97% 3,546 3.13% 2,623 2.25%
---------- -------- --------- -------- --------- ---------
Total loans receivable, net $117,055 100.00% $113,116 100.00% $116,669 100.00%
========== ======== ========= ======== ========= =========
</TABLE>
58
<PAGE>
The following table sets forth the time to contractual maturity of
Home's loan portfolio at March 31, 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 $10.7 million, $16.2 million, $30.8 million and $25.5 million in the
six months ended March 31, 1996 and the fiscal years ended September 30,
1995, 1994 and 1993, respectively. Amounts in the table are net of loans in
process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
At March 31, 1996
------------------------------------------------------------
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 $ 7,750 $ 377 $ - $ - $ - $ 8,127
Fixed rate 1-4 family
residential 1,669 3,798 4,506 15,286 59,333 84,592
Other adjustable rate real
estate loans 568 22 - - - 590
Other fixed rate real estate
loans 269 611 724 2,452 9,478 13,534
Other loans 267 27 - - - 294
Less:
Allowance for loan losses (427) - - - - (427)
------- ------ ------ ------- ------- --------
$10,096 $4,835 $5,230 $17,738 $68,811 $106,710
======= ====== ====== ======= ======= ========
</TABLE>
The following table sets forth the dollar amount at March 31, 1996 of
all loans maturing or repricing on or after March 31, 1997 which have fixed
or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
----- ----------
(In Thousands)
<S> <C> <C>
Mortgage loans $ 96,188 $ 399
Other loans 27 -
--------- --------
$ 96,215 $ 399
========= ========
</TABLE>
59
<PAGE>
Origination of Loans. Historically, Home 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, Home originates
fixed rate one-to-four family residential real estate loans which satisfy
Home's underwriting requirements and are tailored to its local community,
but do not necessarily satisfy various technical FHLMCA and FNMA
underwriting requirements and purchase requirements not related to
documentation.
Although Home believes that many of its nonconforming loans are
saleable in the secondary market, some of such nonconforming loans could be
sold only after Home incurred certain costs and/or discounted the purchase
price. As a result, Home'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 Home has historically found that
its origination of such loans has not resulted in a high level of
nonperforming assets. See "-- Nonperforming Assets and Asset
Classification". These nonconforming loans satisfy a need in Home's local
community, and Home intends to continue to originate nonconforming loans.
Substantially all of the one-to-four family residential mortgage loans
originated by Home have a fixed rate of interest because there is very
little demand for adjustable rate loans in Home's market area. As a result,
Home offers 30-year fixed rate residential real estate loans but prices its
loans to encourage shorter terms of 10 to 15 years.
Home has instituted a new marketing program in which all of Home's loan
officers visit local realtors to promote Home's residential mortgage
products.
The table below sets forth Home's loan origination, purchase activity
and loan portfolio repayment experience during the periods indicated.
60
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended March 31, Year Ended September 30,
-------------------------- ------------------------------------------
1996 1995 1995 1994 1993
----------- ------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, net, beginning
of period $ 108,597 $ 106,844 $ 106,844 $ 117,055 $ 113,116
----------- ------------ ------------ ------------ ------------
Loan originations:
Residential 1-4 family 5,499 8,530 10,190 12,777 19,377
Residential multifamily - 58 58 - -
Nonresidential real estate - 272 333 308 625
Residential construction 3,149 6,282 6,282 6,273 7,144
Line of credit 234 323 626 931 1,736
Consumer 190 67 454 329 407
----------- ------------ ------------ ------------ ------------
Total loan originations 9,072 15,532 17,943 20,618 29,289
Loans purchased - - - - -
Principal repayments (10,745) (12,756) (16,192) (30,796) (25,503)
Other changes, net (1) (214) (10) 2 (33) 153
----------- ------------ ------------ ------------ ------------
Increase in loans receivable (1,887) 2,766 1,753 (10,211) 3,939
----------- ------------ ------------ ------------ ------------
Loans receivable, net, end of period $ 106,710 $ 109,610 $ 108,597 $ 106,844 $ 117,055
=========== ============ ============ ============ ============
</TABLE>
(1) Includes changes in deferred loan fees, allowance for loan losses and
undisbursed portion of construction loans.
61
<PAGE>
Residential Real Estate Lending. Home'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 Home's emphasis on being
a community-oriented financial institution, it is and has been Home's
strategy to focus its lending efforts in Stanly County, North Carolina and
in contiguous counties. On March 31, 1996, approximately 84.60% of Home'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 residences and condominiums and loans secured by housing
containing not more than four separate dwelling units. Of such loans,
excluding home equity loans, 4.02% had adjustable interest rates.
Home 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, Home 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 Home's mortgage loan portfolio
have due on sale provisions allowing Home 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 Home'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.
Home requires title insurance for its one-to-four family residential
loans. Home 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 March 31, 1996, Home had approximately
$712,000 in outstanding loans secured by multifamily residential real
estate, comprising approximately 0.67% of its loan portfolio as of that
date. Substantially all of Home'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 March 31, 1996, Home had $3.0
million in outstanding loans secured by nonresidential real estate,
including undeveloped land, comprising approximately 2.84% 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 March 31, 1996, the largest
nonresidential real estate loan in Home's loan portfolio totaled $318,000.
This loan was performing in accordance with the original loan contract. See
"-- Lending Activities -- Nonperforming Assets and Asset Classification".
62
<PAGE>
Home Equity Lines of Credit. At March 31, 1996, Home had approximately $3.8
million in home equity line of credit loans, representing approximately 3.53% 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. Home'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. Home
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 drawn over a period of time, Home 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. Home intends to
continue to emphasize its home equity program. The presence of home equity loans
in Home'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. Home makes construction loans primarily for the
construction of single-family dwellings. The aggregate outstanding balance of
such loans on March 31, 1996 was approximately $6.0 million, representing
approximately 5.60% of Home'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, Home 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, Home offers loans secured by savings accounts. As of March 31, 1996,
Home had approximately $294,000 of such loans outstanding, representing
approximately 0.27% 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, Home assesses the applicant's ability to
make principal and interest payments on the loan and the value of the property
securing the loan. Home 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 Home analyzes the
loan application and the property involved, and an appraiser inspects and
appraises the property. Home requires independent fee appraisals
63
<PAGE>
on all loans originated primarily on the basis of real estate collateral. Home
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 Home'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, Home
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 March 31, 1996, Home had $1.3
million in such unfunded mortgage loan commitments. In addition, on such date
Home had $2.8 million in unfunded commitments for unused lines of credit and
letters of credit.
Interest Rates, Terms, Points and Fees. Interest rates and fees charged on
Home's loans are affected primarily by the market demand for loans, competition,
the supply of money available for lending purposes and Home'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, Home 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 Home.
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 Home 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, Home 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, Home 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 Home to recover its investment.
As of March 31, 1996, Home had two pieces of single-family property classified
as real estate owned. These properties were recorded on Home's books at $73,000,
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.
Home 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
64
<PAGE>
received until the loan is returned to performing status. For the fiscal year
ended September 30, 1995 and for the six months ended March 31, 1996, interest
income [expense] that would have been recorded net of interest income actually
recognized on nonperforming loans under the original terms of such loans was
$7,000 and $[11,000], respectively.
The following table sets forth information with respect to nonperforming
assets identified by Home, including nonperforming loans and real estate owned
at the dates indicated.
65
<PAGE>
<TABLE>
<CAPTION>
At September 30,
At March 31, ------------------------------------------------------
1996 1995 1994 1993 1992 1991
------------ ------- ------- -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total nonaccruing loans
Mortgage loans delinquent 90 days or more $ 614 $ 923 $ 910 $ 762 $ - $ -
Consumer loans delinquent 90 days or more 88 58 36 82 - -
Real estate owned 73 135 176 119 81 196
--------- ------- ------ ------- ------- --------
Total non-performing assets $ 775 $ 1,116 $ 1,122 $ 963 $ 81 $ 196
========= ======= ====== ======= ======= ========
Non-performing loans to total gross loans 0.64% 0.87% 0.85% 0.70% - -
Non-performing assets to total assets 0.46% 0.70% 0.76% 0.61% 0.05% 0.13%
Total assets $ 166,978 $ 159,863 $ 147,837 $ 157,909 $ 153,370 $ 146,003
Total gross loans $ 110,479 $ 112,353 $ 111,051 $ 120,534 $ 116,662 $ 119,292
</TABLE>
66
<PAGE>
Applicable regulations require Home 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 March 31, 1996, Home had approximately $1.5 million of loans
internally classified as "substandard", and no loans classified as "doubtful" or
"loss". Home 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 March 31, 1996, Home had approximately $1.1 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. Home's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
FDIC and the Administrator which can order the establishment of additional loss
allowances. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OPERATING RESULTS -- Comparison of the Operating Results for the Six-Month
Period Ended March 31, 1996 and 1995 -- Provision for Loan Losses and Asset
Quality" for a discussion of recent increases in Home's allowance for loan
losses.
The following table sets forth at March 31, 1996, Home's aggregate carrying
value of the assets classified as substandard, doubtful, loss or "special
mention":
67
<PAGE>
<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 36 $ 1,065 54 $ 1,481 - $ - - $ -
Residential real estate - - - - - - - -
Nonresidential real estate - - - - - - - -
Residential construction - - - - - - - -
Land - - - - - - - -
Line of credit - - - - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Total real estate loans 36 1,065 54 1,481 - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Consumer loans:
Share - - - - - - - -
Credit reserve - - 8 5 - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Total consumer loans - - 8 5 - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Total 36 $ 1,065 62 $ 1,486 - $ - - $ -
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
68
<PAGE>
Allowance for Loan Losses. In originating loans, Home 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, Home'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 Home'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 six-month period ended March 31,
1996, Home 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. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING
RESULTS --Comparison of the Operating Results for the Six-Month Period Ended
March 31, 1996 and 1995 -- Provision for Loan Losses and Asset Quality" for a
discussion of recent increases in Home's allowance for loan losses.
The following table describes the activity related to Home's allowance
for loan losses for the periods indicated.
69
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended March 31, Year Ended September 30,
-------------------------- ---------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period $ 137 $ 140 $ 140 $ 144 $ 144 $ 177 $ 103
Provision for loan losses 300 - - - - - 100
Charge-offs:
Residential 1-4 family (8) (3) (3) (3) 0 (34) (23)
Line of credit (9) - - (1) (1) - (3)
Recoveries:
Residential 1-4 family 6 - - - 1 -
Line of credit 1 - - - 1 - -
---------- ----------- ---------- ---------- ---------- ----------- ----------
Balance, end of period $ 427 $ 137 $ 137 $ 140 $ 144 $ 144 $ 177
========== =========== ========== ========== ========== =========== ==========
Net charge-offs as a % of average
loans outstanding 0.009% 0.003% 0.003% 0.004% - % 0.029% 0.023%
Allowance at period end as a %
of nonperforming loans 60.83% 17.39% 13.97% 14.80% 17.06% - % - %
Allowance at period end as a %
of nonperforming assets 55.10% 14.29% 12.28% 12.48% 14.95% 177.78% 90.31%
Allowance at period end as a %
of total gross loans 0.39% 0.12% 0.12% 0.13% 0.12% 0.12% 0.15%
</TABLE>
70
<PAGE>
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.
71
<PAGE>
<TABLE>
<CAPTION>
At March 31, 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
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 326 61.71% $ 125 83.70% $ 77 62.60%
Residential multi-family 1 0.54% -- 0.75% -- 0.78%
Nonresidential real estate 3 2.74% 3 2.68% 4 2.63%
Residential construction -- 5.41% -- 4.78% -- 5.41%
Land 7 5.82% -- 4.35% -- 4.50%
Line of credit -- 3.41% 8 3.45% -- 3.64%
--------- ---------- --------- --------- --------- ---------
Total real estate loans 337 99.73% 136 99.71% 81 99.76%
--------- ---------- --------- --------- --------- ---------
Consumer loans:
Shares -- 0.18% -- 0.10% -- 0.09%
Credit reserve -- 0.09% 1 0.19% -- 0.15%
--------- ---------- --------- --------- --------- ---------
Total consumer loans -- 0.27% 1 0.29% -- 0.24%
--------- ---------- --------- --------- --------- ---------
Unallocated 90 -- -- -- 59 --
--------- ---------- --------- --------- --------- ---------
Total allowance for loan loses $ 427 100.00% $ 137 100.00% $ 140 100.00%
========= ========== ========= ========= ========= =========
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------
1993 1992 1991
------------------------ ------------------------ ------------------------
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
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 129 63.33% $ 109 82.89% $ 92 85.04%
Residential multi-family -- 0.61% -- 0.55% -- 0.59%
Nonresidential real estate 6 3.00% 14 3.52% -- 4.10%
Residential construction -- 5.51% -- 5.07% -- 3.74%
Land -- 4.12% -- 4.86% -- 4.06%
Line of credit -- 3.06% -- 2.88% -- 2.12%
--------- ---------- --------- --------- --------- ---------
Total real estate loans 135 99.58% 123 99.69% 92 99.67%
--------- ---------- --------- --------- --------- ---------
Consumer loans:
Shares -- 0.08% -- 0.23% -- 0.26%
Credit reserve -- 0.24% -- 0.06% -- 0.07%
--------- ---------- --------- --------- --------- ---------
Total consumer loans -- 0.32% -- 0.31% -- 0.33%
--------- ---------- --------- --------- --------- ---------
Unallocated 9 -- 21 -- 85 --
--------- ---------- --------- --------- --------- ---------
Total allowance for loan loses $ 144 100.00% $ 144 100.00% $ 177 100.00%
========= ========== ========= ========= ========= =========
</TABLE>
72
<PAGE>
Investment Securities
Interest and dividend income from investment securities generally provides
the second largest source of income to Home after interest on loans. In
addition, Home receives interest income from deposits in other financial
institutions. On March 31, 1996, the carrying value of Home's investment
securities portfolio totalled approximately $49.2 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.
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. Home has no trading securities. Home
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 2 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, Home is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of Home'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
March 31, 1996, Home's investment in stock of the FHLB of Atlanta was $1.3
million.
North Carolina regulations require Home to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities. See
"SUPERVISION AND REGULATION -- Regulation of Home -- Liquidity". Home is also
permitted to make certain other securities investments.
Home's current investment policy states that Home's investments will be
limited to U.S. Treasury obligations, federal agency securities, corporate notes
and time deposits in the FHLB.
73
<PAGE>
Investment decisions are made by authorized officers of Home 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 Home's
interest-bearing deposits and the amortized cost and market values of Home's
investment and mortgage-backed securities portfolios at the dates indicated.
74
<PAGE>
<TABLE>
<CAPTION>
At March 31, At September 30,
---------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ---------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest-bearing deposits $ 11,931 11,931 $ 8,622 $ 8,622 $ 3,853 $ 3,853
-------- ------ ------- ------- ------- -------
Mortgage-backed securities, held to maturity 5,987 6,058 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 29,880 29,928 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
-------- ------ ------ ------ ------ -------
31,241 31,289 32,268 32,320 26,756 26,422
-------- ------ ------ ------ ------ -------
Unrealized gain (loss) on securities
available for sale 48 - 52 - (334) -
-------- ------ ------ ------ ------ -------
Total $ 49,207 49,278 $ 45,471 $ 45,584 $ 35,600 $ 35,546
======== ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1993
-----------------------
Amortized Fair
Cost Value
--------- -----
<S> <C> <C>
Interest-bearing deposits $ 7,038 $ 7,038
------- -------
Mortgage-backed securities, held to maturity 7,076 7,554
------- -------
Investment securities:
Held to maturity or for investment:
U.S. Treasury and agency securities 18,941 19,335
Available for sale:
U.S. Treasury and agency securities - -
Non-marketable equity securities:
Federal Home Loan Bank stock 1,313 1,313
Other 15 15
------- -------
20,269 20,663
------- -------
Unrealized gain (loss) on securities
available for sale - -
Total $ 34,383 $ 35,255
======= =======
</TABLE>
(1) The net unrealized gain (loss) at March 31, 1996 and September 30, 1995 and
1994 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.
75
<PAGE>
The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of Home's
interest-bearing deposits, investment and mortgage-backed securities as of
March 31, 1996.
76
<PAGE>
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years Total
----------------- ------------------ ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 11,931 5.35% $ - - $ - - $ - - $ 11,931 5.35%
Mortgage-backed securities - - - - - - 5,987 7.71% 5,987 7.71%
U.S. Treasury securities
Available for sale 10,021 5.78% 19,907 5.69% - - - - 29,928 5.72%
Federal Home Loan Bank Stock(1) - - - - - - 1,346 6.98% 1,346 6.98%
Other(1) - - - - - - 15 - 15 -
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 21,952 5.55% $ 19,907 5.69% $ - - $ 7,348 7.56% $ 49,207 5.91%
</TABLE>
(1) Nonmarketable equity security; substantially all required to be maintained
and assumed to mature in period greater than 10 years.
77
<PAGE>
Deposits and Borrowings
General. Deposits are the primary source of Home's funds for lending and
other investment purposes. In addition to deposits, Home derives funds from loan
principal repayments, loan interest income, 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. Home has no borrowings outstanding at March 31, 1996; however, it does
maintain borrowing capabilities through the FHLB of Atlanta.
Deposits. Home's deposits have grown significantly during recent years. On
March 31, 1996 and September 30, 1995 and 1994, Home's deposits totalled $144.3
million, $137.6 million and $127.3 million, respectively.
The following table sets forth information relating to Home's deposit flows
during the periods shown and total deposits at the end of the periods shown.
<TABLE>
<CAPTION>
For the Six Months
Ended March 31, At or For the Year Ended September 30,
-------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Total deposits at $137,647 $127,312 $127,312 $139,685 $138,753 $133,524 $114,462
beginning of period
Net increase (decrease) 2,804 (1,433) 4,355 (17,346) (5,105) (2,813) 9,978
before interest credited
Interest credited 3,831 2,532 5,980 4,973 6,037 8,042 9,084
-------- -------- -------- -------- -------- -------- --------
Total deposits at end of $144,282 $128,411 $137,647 $127,312 $139,685 $138,753 $133,524
period ======== ======== ======== ======== ======== ======== ========
</TABLE>
Home attracts both short-term and long-term deposits from the general
public by offering a variety of accounts and rates. Home 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. Home's savings deposits traditionally have been obtained
primarily from its primary market area. Home utilizes traditional marketing
methods to attract new customers and savings deposits, including print media
advertising, local radio, local cable television and direct mailings. Home does
not advertise for deposits outside of its local market area or utilize the
services of deposit brokers. The vast majority of Home's depositors are
residents of North Carolina. In the unlikely event Home 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 Home's
savings deposits at the dates indicated.
78
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1996 At September 30,
---------------------------------------- ------------------------------------------
1995
------------------------------------------
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Passbook savings $ 15,390 3.00% 10.67% $ 15,490 3.00% 11.25%
NOW accounts 6,710 2.26% 4.65% 6,331 3.02% 4.60%
Money market deposit accounts 7,529 2.99% 5.22% 7,809 3.25% 5.67%
Noninterest bearing accounts 723 -- 0.50% 562 -- 0.41%
----------- ----------- ----------- ----------- ----------- -----------
Total demand deposits 30,352 2.63% 21.04% 30,192 3.01% 21.03%
----------- ----------- ----------- ----------- ----------- -----------
Certificates of deposit 113,728 6.09% 78.82% 107,280 6.10% 77.94%
----------- ----------- ----------- ----------- ----------- -----------
Accrued interest 202 0.14% 175 0.13%
----------- ----------- ----------- ----------- ----------- -----------
Total deposits $ 144,282 5.40% 100.00% $ 137,647 5.43% 100.00%
=========== =========== =========== =========== =========== ===========
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------
1994 1993
---------------------------------------- ------------------------------------------
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Passbook savings $ 17,711 3.00% 13.91% $ 17,984 3.00% 12.87%
NOW accounts 6,300 2.72% 4.95% 5,865 3.00% 4.20%
Money market deposit accounts 12,164 3.25% 0.55% 11,219 3.25% 6.03%
Noninterest bearing accounts 647 -- 0.51% 507 -- 0.36%
----------- ----------- ----------- ----------- ----------- -----------
Total demand deposits 36,822 2.96% 28.92% 35,575 3.04% 25.46%
----------- ----------- ----------- ----------- ----------- -----------
Certificates of deposit 90,378 3.93% 70.99% 104,002 4.06% 74.46%
----------- ----------- ----------- ----------- ----------- -----------
Accrued interest 112 0.09% 106 0.08%
----------- ----------- ----------- ----------- ----------- -----------
Total deposits $ 127,312 3.57% 100.00% $ 139,685 3.82% 100.00%
=========== =========== =========== =========== =========== ===========
</TABLE>
79
<PAGE>
As of March 31, 1996, the aggregate amount of time certificates of deposit
in amounts greater than or equal to $100,000 was $10.1 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
March 31, 1996
---------------
(In Thousands)
<S> <C>
3 Months or less $ 2,120,000
Over 3 months through 6 months 2,490,000
Over 6 months through 12 months 1,915,000
Over 12 months 3,582,000
-----------
$10,107,000
Total ===========
</TABLE>
Borrowings. The FHLB system functions in a reserve credit capacity for
savings institutions. As a member, Home 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 Atlanta's assessment of the institution's creditworthiness. Home
has not had any outstanding borrowings from the FHLB of Atlanta or any other
source in the last five years.
Subsidiaries
Home has no subsidiaries.
Properties
The following table sets forth the location of Home'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
March 31, 1996. Home owns both the Albemarle and Locust office. Home also owns
two vacant lots which are adjacent to its Albemarle office. Home 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: $631,572 $124,805
155 West South Street
Albemarle, North Carolina 28001
Two (2) Vacant Lots $26,692
South Second Street
Albemarle, North Carolina 28001
Locust: $215,296 $19,477
406 West Main Street
Locust, North Carolina 28097
</TABLE>
The total net book value of Home's furniture, fixtures and equipment on
March 31, 1996 was $374,994.
80
<PAGE>
Legal Proceedings
From time to time, Home is a party to legal proceedings which arise in the
ordinary course of its business. Most commonly, such proceedings are commenced
by Home to enforce obligations owed to it. From time to time, claims are
asserted against Home directly or as defenses and counterclaims in actions filed
by Home. At this time, Home is not a party to any legal proceeding which is
expected to have a material effect on its financial condition or results of
operations.
Competition
Home 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. Home has
also faced additional significant competition for investors' funds from short-
term money market securities and other corporate and government securities. At
March 31, 1996, two banks with a national presence, two large regional banks,
one smaller regional bank and one community bank, and two credit unions had
branch locations in Stanly County. At June 30, 1995, Home had a deposit market
share of approximately 23% in Stanly County. The ability of Home 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.
Home experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. Home
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 March 31, 1996, Home had 37 full-time employees. All full-time
employees of Home 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. In addition, Home maintains a defined benefit retirement
plan. Home also maintains a 401(k) retirement plan. Home anticipates continuing
the defined benefit retirement plan after the Conversion. The 401(k) retirement
plan will be terminated prior to the Conversion.
In connection with the Conversion, Home has adopted the ESOP, which will
provide benefits to employees of Home. See "MANAGEMENT OF HOME --Employee Stock
Ownership Plan". Also, the Boards of Directors of Home and the Holding Company
anticipate approving, and stockholders of the Holding Company will be asked to
approve, the MRP and the Stock Option Plan at a meeting of stockholders
following the Conversion. See "MANAGEMENT OF HOME -- Proposed Management
Recognition Plan" and "-- Proposed Stock Option Plan".
Employees are not represented by any union or collective bargaining group,
and Home considers its employee relations to be good.
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TAXATION
Federal Income Taxation
Savings institutions such as Home 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%.
Thrift institutions which qualify under certain definitional tests and
other conditions of the Code are permitted certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. A reserve may 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 is computed using the experience method.
The percentage of taxable income method is limited to 8% of taxable income.
This method may 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, cannot 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 Home from taking a bad debt deduction in its 1995 and 1994
tax returns. The experience method is the amount necessary to increase the
balance of the reserve at the close of the year to the greater of (i) the amount
which bears 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 bear
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
must have at least 60% of its assets as "qualifying assets" which generally
include, 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 must meet certain other supervisory
tests and operate principally for the purpose of acquiring savings and investing
in loans.
Institutions which become ineligible to use the percentage of income method
must change to either the reserve method or the specific charge-off method that
applies to banks. Large institutions, those generally exceeding $500 million in
assets, must convert to the specific charge-off method. Proposed regulations
require ratable inclusion in income of excess reserves over a six-year period in
the event of ineligibility.
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. Home 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
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retained earnings at March 31, 1996 includes approximately $2.9 million for
which no provision for federal income tax has been made. See Note 11 to "Notes
to Financial Statements".
Proposed legislation will repeal the special bad debt deduction methods
presently available to thrift institutions under Section 593 of the Code,
effective for taxable years beginning after 1995. In addition under such
legislation, thrift institutions will be required to treat as taxable income
over a six-year period, beginning with the first taxable year commencing after
1995, the excess bad debt reserves attributable to the special reserve methods
that have built up since tax years beginning in 1988; however, no recapture will
be required for pre-1988 excess bad debt reserves. Under such legislation,
thrifts will become subject prospectively to the same bad debt reserve treatment
as is presently applicable to banks, and most thrifts would become subject
prospectively to increased federal taxation because they could no longer take
advantage of presently authorized special bad debt reserve methods that they
have been using. A special provision suspends recapture of post-1987 excess
reserves for up to two years if, during those years, the institution satisfies a
"residential loan requirement." This requirement would be met if the principal
amount of the institution's residential loans exceeds a base year amount, which
is determined by reference to the average of the institution's loans during the
six taxable years ending January 1, 1996. However, notwithstanding this special
provision, recapture would be required to begin no later than the first taxable
year beginning after December 31, 1997. Management cannot predict whether the
legislation providing for the recapture of bad debt reserves will be enacted,
or, if enacted, the final form of such legislation and its ultimate impact of
Home. At March 31, 1996, Home's post-1987 excess reserves amounted to
approximately $1.2 million.
Home 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, 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. Home has not been
subject to the AMT in recent years.
Home's federal income tax returns have not been audited in over 10
years.
State and Local 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 .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.
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SUPERVISION AND REGULATION
Regulation of the Holding Company
General. The Holding Company was organized for the purpose of acquiring and
holding all of the capital stock of Home to be issued in the Conversion. As a
savings bank holding company subject to the Bank Holding Company Act of 1956, as
amended ("BHCA"), the Holding Company will become subject to certain regulations
of the Federal Reserve. Under the BHCA, the Holding 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 Holding 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 Holding 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 Holding 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 stockholder 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 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 SAIF or
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
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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 subosrdinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
No stock repurchases may be made within one year after the Conversion
without the approval of the Administrator. Also, the Holding Company must notify
the Federal Reserve prior to repurchasing Common Stock for in excess of 10% of
its net worth during any rolling 12 month period.
As a result of the Holding Company's ownership of Home, the Holding Company
will be registered under the savings bank holding company laws of North
Carolina. Accordingly, the Holding Company is also subject to regulation and
supervision by the Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. 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 subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
regulations. Under these regulations, the minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is required
to be "Tier 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. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum Tier I (leverage)
capital ratio, under which a bank holding company must maintain a minimum level
of Tier 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 (leverage) capital ratio of
at least 1% to 2% above the stated minimum.
The 1991 Banking Law requires each federal banking agency, including the
Federal Reserve, to revise its risk-based capital standards within 18 months of
enactment of the statute to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of non-
traditional activities, as well as reflect the actual performance and expected
risk of loss on multi-family mortgages. In December 1994, the federal banking
agencies jointly issued final regulations effective January 17, 1995, revising
the risk-based capital rules to take account of interest rate risk.
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Holding Company's application to acquire control of Home, the
Holding Company was required to execute a Capital Maintenance Agreement whereby
it has agreed to maintain Home's capital in an amount sufficient to enable Home
to satisfy all regulatory capital requirements.
Federal Securities Law. The Holding Company has filed with the SEC a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), for the registration of the offering of the Common Stock in
connection with the Conversion. The Holding Company intends to register the
Common Stock with the SEC pursuant to Section 12(b) of the Exchange Act. Upon
such registration, the proxy and tender offer rules, insider trading reporting
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requirements and restrictions, annual and periodic reporting and other
requirements of the Exchange Act will be applicable to the Holding Company. See
"REGISTRATION REQUIREMENTS".
Regulation of Home
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 Home, will continue to be subject to changes in applicable statutes
and regulations from time to time.
Home 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-chartered savings banks whose deposits are
insured 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.
Home 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 Stockholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As holders of loans secured by real property and as owners
of real property, financial institutions, including Home, 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 Home. 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.
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 Home and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of Home is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Upon consummation of the Conversion, Home will be an affiliate of the Holding
Company. Generally, Sections 23A and 23B (i) establish certain collateral
requirements for loans to affiliates; (ii) limit the extent to which the savings
institution or its subsidiaries may engage in
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"covered transactions" with any one affiliate to an amount equal to 10% of such
savings institution'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 savings
institution 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 own more than 10% 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 and 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 board of directors of the savings bank. 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 be 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. Home is a
member of the SAIF of the FDIC.
As a SAIF-insured institution, Home 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 per $100 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 is 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. Under the 1991 Banking Law, the FDIC also may
impose special assessments on SAIF members to repay amounts borrowed from the
U.S. Treasury or for any other reason deemed necessary by the FDIC. As a result
of the 1991 Banking Law, the assessment rate on deposits could further increase
over a 15-year period.
Financial institutions such as Home which are members of the SAIF, are
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. The FDIC Board of Directors has recently approved a new risk-based
premium schedule that will reduce assessment rates for commercial banks, will
leave assessment rates for financial institutions such as Home at current
levels, and will increase the disparity between SAIF and BIF assessments.
Assessments for BIF members range from $0.04 to $0.31 per $100 of domestic
deposits. In announcing this rule, the FDIC noted that the premium differential
may have adverse consequences for SAIF members, including reduced earnings and
an impaired ability to raise funds in the capital markets. In addition, SAIF
members, such
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as Home, 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. Several alternatives to mitigate the effect of the
BIF/SAIF premium disparity have been suggested by the federal banking
regulators, by members of the United States Congress and by industry groups.
The Balanced Budget Act of 1995, which was passed by the United States
Congress but vetoed by the President for reasons unrelated to the SAIF
recapitalization, provided for a one-time assessment currently estimated to be
0.85% of insured deposits that would fully capitalize the SAIF. It is unknown
whether this legislation will be enacted or that premiums for either BIF or SAIF
members will be adjusted in the future by the FDIC or by legislative action. If
a special assessment as described above were to be required, it would result in
a one-time charge to Home of up to $1.2 million pre-tax, assuming the special
assessment is based on deposits held at March 31, 1996. Management cannot
predict whether the legislation will be enacted, or, if enacted, the amount of
any one-time fee or whether ongoing SAIF premiums will be reduced to a level
equal to that of BIF premiums.
Home incurred deposit insurance premium expense of $295,000 and $318,000 in
fiscal 1995 and 1994, respectively. A significant increase in SAIF insurance
premiums or a significant one-time fee to recapitalize the SAIF would likely
have an adverse effect on the operating expenses and results of operations of
Home.
Community Reinvestment Act. Home, like other financial institutions, is
subject to the Community Reinvestment Act ("CRA"). A purpose of the CRA 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
Home's last compliance examination, Home received a "satisfactory" rating with
respect to CRA compliance. Home'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 Home to acquire branches or to acquire or combine with
other financial institutions and take other actions and, if such rating was less
than "satisfactory," could result in the denial of such applications.
The federal banking regulatory agencies have issued a revision 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 first
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 its 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."
Capital Requirements Applicable to Home. The FDIC requires Home 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 and goodwill
items), to average 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 Home 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 general loan loss
allowance.
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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
institution 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.
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 March 31, 1996, Home complied with each of the capital requirements of
the FDIC and the Administrator. For a description of Home's required and actual
capital levels on March 31, 1996, see "HISTORICAL AND PRO FORMA CAPITAL
COMPLIANCE".
The 1991 Banking Law requires each federal banking agency to revise its
risk-based capital standards within 18 months of enactment of the statute 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 September 14, 1993, the agencies issued a joint notice of proposed
rulemaking soliciting comment on proposed revisions to the risk-based capital
rules to take account of interest rate risk. The notice proposes alternative
approaches for determining the additional amount of capital, if any, that a bank
may be required to have as a result of interest rate risk. The first approach
would reduce a bank's risk-based capital ratios by an amount based on its
measured exposure to interest rate risk in excess of a specified threshold. The
second approach would assess the need for additional capital on a case-by-case
basis, considering both the level of measured exposure and qualitative risk
factors. In February 1994, the federal banking agencies proposed amendments to
their respective risk-based capital requirements that would explicitly identify
concentration of credit risk and certain risks arising from nontraditional
activities, and the management of such risks, as important factors to consider
in assessing an institution's overall capital adequacy. The proposed amendments
do not, however, mandate any specific adjustments to the risk-based capital
calculations as a result of such factors. Home cannot assess at this point the
impact the proposal would have on its capital requirements.
In December 1994, the FDIC 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. Home does not anticipate that
this rule will have a material effect upon its financial condition or results of
operations.
Loans to One Borrower. Home 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 institution also is authorized to make loans to one borrower
to develop domestic residential housing units, not to exceed the lesser of $30
million, or 30% of the savings institution's net worth, provided that (i) the
purchase price of each single-family dwelling in the development does not exceed
$500,000; (ii) the savings institution is in compliance with its fully phased-in
capital requirements; (iii) the loans comply with applicable loan-to-value
requirements; (iv) the aggregate amount of loans made under this authority does
not exceed 150% of net worth; and (v) the institution's regulator issues an
order permitting the savings institution to use this higher limit. These limits
also authorize a savings bank to make loans-to-one borrower to finance the sale
of real property acquired in satisfaction of debts in an amount up to 50% of net
worth.
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As of March 31, 1996, the largest aggregate amount of loans which Home had
to any one borrower was $764,000. Home had no loans outstanding which management
believes violate the applicable loans-to-one borrower limits.
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. See " --
Regulation of Home -- Impact 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, Home 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 March 31, 1996, Home was in compliance with this requirement with
an investment in FHLB of Atlanta stock of $1.3 million.
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 March 31, 1996, Home 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 a state savings 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,
among other things, upon the acquisition of more than 25% of any class of voting
stock. In addition, control 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
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 acquisition 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
Home. 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
Home 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 Home
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by a corporation whose ownership is or will be substantially the same as the
ownership of Home, provided that the offer or acquisition is made more than one
year following the consummation of the Conversion. The regulation provides that
within one year following the Conversion, the Administrator would approve the
acquisition of more than 10% of beneficial ownership only to protect the safety
and soundness of the institution. During the second and third years after the
Conversion, the Administrator may approve such an acquisition upon a finding
that (i) the acquisition is necessary to protect the safety and soundness of the
Holding Company and Home or the Boards of Directors of the Holding Company and
Home 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 Holding Company and Home; and (iii) the public
interests will not be adversely affected.
Liquidity. Home 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. At March 31, 1996, Home's liquidity ratio was substantially in
excess of the North Carolina regulations.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that Home 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 Home 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 for savings banks are permitted to
engage are limited to those of service corporations for national banks.
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.
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").
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 Home, 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 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% and is not
experiencing or anticipating significant growth); (B) "significantly
undercapitalized" if the
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institution has (i) a total risk-based capital ratio of less than 6%, (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 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. In July 1992, the federal banking agencies issued a
joint advance notice of proposed rulemaking soliciting comments on all aspects
of the implementation of these standards in accordance with the 1991 Banking
Law, including whether the compensation standards should apply to depository
institution holding companies. An interagency notice of proposed rulemaking was
issued in November 1993. However, sections of the Riegle Community Development
and Regulatory Improvement Act of 1994 will affect the nature and scope of the
proposed regulations, and eliminates the requirement that the regulations apply
to depository institution holding companies.
The foregoing necessarily is a general description of certain provisions of
the 1991 Banking Law and does not purport to be complete.
Interstate Banking. 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 permits adequately
capitalized bank and savings bank holding companies to acquire control of banks
and savings banks in any state beginning on September 29, 1995, one year after
the effectiveness of the Interstate Banking Act. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state 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
prohibited interstate branching by legislation prior to such time. Unlike
interstate acquisitions, a state may prohibit interstate branching if it
specifically elects to do so by June 1, 1997. States may choose to allow
interstate
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branching prior to June 1, 1997 by opting-in to a group of states that permits
these transactions. These states generally allow interstate branching via a
merger of an out-of-state bank with an in-state bank, or on a de novo basis.
North Carolina has enacted legislation permitting interstate branching
transactions.
It is anticipated that the Interstate Banking Act will increase competition
within the market in which Home now operates, although the extent to which such
competition will increase in such market or the timing of such increase cannot
be predicted. In addition, there can be no assurance as to whether, or in what
form, legislation may be enacted in North Carolina in reaction to the Interstate
Banking Act or what impact such legislation or the Interstate Banking Act might
have upon Home.
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in Section 39 of the 1991 Banking Law which
required the banking regulatory agencies to promulgate regulations governing
such topics as internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation and fees and other matters
those agencies determine to be appropriate. The legislation exempts bank holding
companies from these provisions and requires the agencies to prepare guidelines,
as opposed to regulations, dealing with these areas. It also gives more
discretion to the banking regulatory agencies in prescribing standards for
banks' asset quality, earnings and stock valuation.
The Interstate Banking Act also 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 regarding high cost mortgages,
strengthening of the independence of certain financial regulatory agencies,
money laundering, flood insurance reform and extension of certain statutes of
limitations.
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.
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. Under FDIC regulations, stock repurchases may be made during
the first year after the Conversion only after receipt of FDIC approval.
In addition, Home is not permitted to declare or pay a cash dividend 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 Home's conversion from mutual to stock ownership.
Restrictions on Benefit Plans. FDIC regulations provide that for a period
of one year from the date of the Conversion, Home may not implement or adopt a
stock option plan or restricted stock plan, other than a tax-qualified plan or
ESOP, unless: (1) the plans are fully disclosed in the Conversion proxy
soliciting and stock offering material, (2) all such plans are approved by a
majority of the Holding Company's stockholders prior to implementation and no
earlier than six months following the Conversion, (3) for stock option plans,
the exercise price must be at least equal to the market
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price of the stock at the time of grant, (4) for restricted stock plans, no
stock issued in connection with the Conversion may be used to fund the plan and
(5) prior to implementing the plans, all such plans are submitted for review and
approval to the Regional Director of the FDIC.
The FDIC regulations provide that the FDIC will presume that excessive
compensation will result if stock based benefit plans fail to satisfy percentage
limitations on management stock-based benefit plans set forth in the regulations
of the OTS. Those regulations provide that (1) for stock option plans, the total
number of shares for which options may be granted may not exceed 10% of the
shares issued in the Conversion, (2) for restricted stock plans, the shares
issued may not exceed 3% of the shares issued in the Conversion (4% for
institutions with tangible capital of 10% or greater after the Conversion), (3)
the aggregate amount of stock purchased by the ESOP shall not exceed 10% (8% for
well-capitalized institutions utilizing a 4% restricted stock plan), (4) no
individual employee may receive more than 25% of the available awards under any
plan, and (5) directors who are not employees may not receive more than 5%
individually or 30% in the aggregate of the awards under any plan. The awards
and grants to be made under the Holding Company's proposed MRP and Stock Option
Plan conform to these requirements.
Other North Carolina Regulation. As a North Carolina-chartered savings
bank, Home 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
Home maintain federal deposit insurance as a condition of doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, 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
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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.
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company currently consists of six
directors: C.A. Holbrook, Joel A. Huneycutt, Douglas P. Stokes, Greg E.
Underwood, Carl M. Hill and R. Ronald Swanner. Each of these persons is also a
director of Home, and biographical information with respect to each is set forth
under "MANAGEMENT OF HOME --Directors". The Holding Company's Bylaws provide for
staggered election of its directors, if and when the number of directors equals
at least nine, so that approximately one-third of the directors are elected each
year for three-year terms. Until the number of directors reaches nine, directors
of the Holding Company are elected for one year terms, or until their successors
are elected and qualified. Under the Holding Company's Bylaws, no person over 75
years of age shall be eligible for election or appointment to the Holding
Company's Board of Directors and no director may serve after the first annual
meeting of stockholders immediately following such person's reaching 75 years of
age.
The executive officers of the Holding Company, each of whom is also
currently an executive officer of Home, and each of whom serves at the
discretion of the Board of Directors of the Holding Company, are as follows:
<TABLE>
<CAPTION>
Age at Position Held
Name September 30, 1995 With the Holding Company
---- ------------------ ------------------------
<S> <C> <C>
Carl M. Hill 63 President and Chief Executive
Officer
R. Ronald Swanner 47 Executive Vice President and
Secretary
</TABLE>
Biographical information with respect to each of these officers is set
forth below under "MANAGEMENT OF HOME -- Executive Officers". There are no
employees of the Holding Company other than the executive officers listed above.
No officer, director or employee of the Holding Company has received
remuneration from the Holding Company to date, and it is currently expected that
no compensation will be paid by the Holding Company after the Conversion.
Information concerning the principal occupations and employment of, and
compensation paid by Home to, the directors and executive officers of the
Holding Company is set forth under "MANAGEMENT OF HOME". See "MANAGEMENT OF
HOME -- Employment Agreements" and "-- Special Termination Agreements" for a
description of certain agreements expected to be entered into with certain
officers of the Holding Company and Home.
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MANAGEMENT OF HOME
Directors
The direction and control of Home, as a mutual North Carolina-chartered
savings bank, has been vested in its six-member Board of Directors elected by
the depositor and borrower members of Home. Upon conversion of Home to capital
stock form, each director of Home immediately prior to the Conversion will
continue to serve as a director of Home as a stock institution. Home's proposed
Bylaws, which would become effective after the Conversion, provide for staggered
elections of its directors, if and when the number of directors equals at least
nine, so that approximately one-third of the directors are elected each year for
three-year terms. Unless and until the number of directors on the Home Board of
Directors reaches nine, directors will be elected for one-year terms, or until
their successors are elected and qualified. Under Home's Bylaws, no person over
70 years of age shall be eligible for election or appointment to the Home Board
of Directors and no director may serve after the first annual meeting of
stockholders immediately following such person's reaching 70 years of age. Upon
consummation of the Conversion, the Holding Company will own all of the issued
and outstanding shares of capital stock of Home, and the Holding Company will
elect the directors of Home. The Holding Company now plans to nominate and re-
elect all members of Home's existing board of directors when their existing
terms expire. The following table sets forth certain information with respect to
the persons who currently serve as members of the Board of Directors of Home.
<TABLE>
<CAPTION>
Age on
September
30, Principal Occupation Term Director
Name 1995 During Last Five Years Expires Since
- ---- -------- ---------------------- ------- --------
<S> <C> <C> <C> <C>
Carl M. Hill 63 President and CEO, Home Savings 1996 1961
Caldwell A. Holbrook, Jr. 48 Partner, D.A. Holbrook & Sons, 1996 1985
General Contractors
Joel A. Huneycutt 53 President, Locust Lumber Company, 1996 1984
Inc.
Douglas Dwight Stokes 49 Owner and President, Stokes 1996 1988
Construction Company
R. Ronald Swanner 47 Executive Vice President, Home 1996 1981
Savings
Greg E. Underwood 32 CPA in private practice; Owner, 1996 1995
Carolina Oil Co. of Albemarle, Inc.
and Barefoot Oil Co. of Albemarle,
Inc.; Secretary/Treasurer of
Southeastern Floral Corp.
</TABLE>
Board Meetings and Committees
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Home conducts its business through meetings of the Board of Directors and
through activities of its committees. During the last fiscal year ended
September 30, 1995, the Board of Directors held 12 meetings. All directors
attended at least 75% of the total meetings of the Board of Directors during the
year ended September 30, 1995. The Board of Directors has four committees as
described below.
The Loan Committee is composed of Messrs. Stokes, Hill and Swanner. This
Committee reviews and approves or disapproves loans. The Loan Committee meets
once a week and met approximately 52 times during the fiscal year ended
September 30, 1995.
The Audit Committee is composed of Messrs. Stokes, Underwood and Huneycutt
and meets annually to review and obtain the annual audit report and also meets
on an as-needed basis. The Committee met one time during the fiscal year ended
September 30, 1995.
The Nominating Committee is composed of Messrs. Holbrook, Huneycutt and
Stokes. The Nominating Committee recommends individuals to be elected to serve
as directors of Home. The Nominating Committee generally meets on an annual
basis and met one time during the fiscal year ended September 30, 1995.
The Proxy Committee is composed of Messrs. Stokes, Holbrook and Huneycutt.
The Proxy Committee meets on an as needed basis and met one time during the
fiscal year ended September 30, 1995.
The Compensation Committee is composed of Messrs. Huneycutt, Holbrook and
Stokes. The Compensation Committee meets on an annual basis and met one time
during the fiscal year ended September 30, 1995.
Directors' Fees
For their service on the Home Board of Directors, members of the Board,
including Mr. Hill and Mr. Swanner, receive a retainer of $2,500 per year and an
additional $600 per regular monthly board meeting attended. Mr. Stokes receives
an additional $300 per month for his service on the Loan Committee.
Deferred Compensation Agreements with Directors
1985 Retirement Payment Agreements. Mr. Hill and Mr. Swanner, as well as
two outside directors and two retired directors, participate in a deferred
compensation plan established in 1985 under which such directors, or their
designated beneficiaries, would be paid specified amounts over a ten-year period
beginning at age 65 (or in one case, age 70) in return for the deferral of
certain amounts of the director's fees over a five-year period. If a director
dies while serving as a director but before receiving all of his benefits under
the agreement, payments will be made to his designated beneficiary, or if none,
to his estate.
As a condition of the agreement, each director has agreed not to engage in
activities in competition with Home and to provide consulting services to Home
during the period the retirement benefits are payable.
Messrs. Troy E. Alexander and Ellie F. Wilson, Jr., both retired directors,
are currently receiving monthly payments of $540 and $356, respectively, under
these agreements.
1995 Retirement Payment Agreements. In 1995, Home entered into additional
deferred compensation arrangements with all of its directors. Under the
agreements, Home will pay each director a specified amount per month for a
period of ten years upon the director's attainment of age 65 (or in Mr. Hill's
case, beginning in 2000), in return for the deferral of certain amounts of the
director's fees over a five-year period.
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If a director dies while serving as a director but before receiving all of
his benefits under the agreement, payments will be made to his designated
beneficiary, or if none, to his estate, unless the death is by suicide within
two years of the execution of the agreement (in which case the deferred fees
will be returned, with interest). If a director becomes disabled while serving
as a director, but prior to attaining age 65 (October 1, 2000 for Mr. Hill),
Home will pay the same benefits that would be payable in the event of the
director's death. If a director terminates his service to Home for reasons other
than death or disability, he or his beneficiary shall be entitled to receive at
age 65 (or October 1, 2000 for Mr. Hill) or his prior death only the vested
portion of the benefit due under the agreement. Vesting occurs according to a
schedule contained in the agreement. If any director's termination of service
shall occur after a change in control of Home, the director shall be 100% vested
in the retirement benefits.
As a condition of the agreement, each director has agreed not to engage in
activities in competition with Home and to provide consulting services to Home
during the period that the retirement benefits are payable.
Directors Retirement Plan
In 1995, Home adopted a retirement plan for directors after determining
that such a plan would help it attract and retain qualified directors. Under the
plan all directors will be paid $1,000 per month over a ten-year period
beginning after the director attains 70 years of age (the "Normal Retirement
Date"). If a director dies while serving as a director but before receiving all
of his benefits under the plan, payments will be made to his designated
beneficiary in lump sum or installments at Home's option, unless the death is by
suicide within two years of the execution of the agreement. If a director
becomes disabled while serving as a director, but prior to his Normal Retirement
Date, Home will pay the benefits due under the plan, either in installments over
the ten-year period or in a lump sum payment. If a director terminates his
service to Home before his Normal Retirement Date for reasons other than death
or disability, he or his beneficiary shall be entitled at the Normal Retirement
Date or his prior death to receive only the vested portion of the benefits due
under the plan. Vesting occurs according to a schedule contained in the
agreement. If any director's termination of service shall occur after a change
in control of Home, the director shall be 100% vested in the retirement
benefits.
As a condition of the agreement, each director has agreed not to engage in
activities in competition with Home and to provide consulting services to Home
during the period the retirement benefits are payable.
Home has purchased life insurance on the lives of its directors to fund its
obligations under the deferred compensation and directors' retirement plan
agreements described above. Total expense related to the above-described
agreements was approximately $94,000 and $148,000 for the six-month period ended
March 31, 1996 and for the fiscal year ended September 30, 1995, respectively.
Home's accrued liability for obligations under the plans amounted to $548,000 at
March 31, 1996.
Existing members of the Board of Directors may also receive additional
benefits following the Conversion. See "-- Proposed Management Recognition Plan"
and "-- Proposed Stock Option Plan."
Executive Officers
Home's executive officers are Carl M. Hill, President and Chief Executive
Officer, and R. Ronald Swanner, Executive Vice President.
Mr. Hill has been employed by Home since 1957 and was named President
in 1974.
Mr. Swanner joined Home in 1974. He has served as Executive Vice
President since 1980.
98
<PAGE>
Executive Compensation
The following table sets forth for the fiscal year ended September 30,
1995 certain information as to the cash compensation received by and the amounts
accrued for the benefit of the President and Executive Vice President of Home.
No other executive officer of Home had cash compensation during the year ended
September 30, 1995 that exceeded $100,000 for services rendered in all
capacities to Home.
<TABLE>
<CAPTION>
Other Annual
Name and Compensation All Other
Principal Position Salary Bonus ($)/(1)/ Compensation
- ----------------------------- -------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Carl M. Hill $138,411 $7,591 - - - $9,250/(2)/
President, CEO and Director
R. Ronald Swanner $ 91,887 $5,694 - - - $9,250/(3)/
Executive Vice President
</TABLE>
(1) Under the "Other Annual Compensation" category, perquisites for the
fiscal year ended September 30, 1995 did not exceed the lesser of $50,000
or 10% of salary and bonus as reported for either Mr. Hill or Mr.
Swanner.
(2) Directors' fees received by Mr. Hill. This amount does not include
$223,000 accrued under supplemental income agreements established for the
benefit of Mr. Hill. Such amounts accrued under the supplemental income
agreements have not been paid to Mr. Hill. See "--Supplemental Income
Agreements". No amount was contributed to Home's 401(k) profit sharing
plan for Mr. Hill during fiscal year 1995 because such plan was not
established until January 1, 1996. As of March 31, 1996, Home had
contributed $1,199 to the 401(k) profit sharing plan for Mr. Hill.
(3) Directors' fees received by Mr. Swanner. This amount does not include
$8,000 accrued under supplemental income agreements established for the
benefit of Mr. Swanner. Such amounts accrued under the supplemental
income agreements have not been paid to Mr. Swanner. See "--Supplemental
Income Agreements". No amount was contributed to Home's 401(k) profit
sharing plan for Mr. Swanner during fiscal year 1995 because such plan
was not established until January 1, 1996. As of March 31, 1996, Home had
contributed $781 to the 401(k) profit sharing plan for Mr. Swanner.
Supplemental Income Agreements
1985 Agreements. Home entered into Supplemental Income Agreements with
Mr. Hill and Mr. Swanner on October 1, 1985. The agreements provide that Home
will pay Mr. Hill $1,200 per month for a continuous period of 216 months, and
Mr. Swanner $861 per month for a continuous period of 180 months. Mr. Hill's
benefits will commence on the later of his 62nd birthday or his actual
retirement. Mr. Swanner's benefits will commence on the first day of the month
following his 65th birthday. If the executive dies while employed by Home but
before receiving any or all of the payments due under the agreement, the
remaining payments will be made to his designated beneficiary, or, if none, to
his estate. If the executive becomes disabled prior to his retirement from Home,
Home will pay him the benefits due under the agreement. The plan also provides
for an early retirement benefit upon retirement with 30 years of service with
Home.
As a condition of the agreements, Mr. Hill and Mr. Swanner must be
available to provide consulting services to Home during the period the
retirement payments are payable and must not engage in activities in Stanly
County, North Carolina in competition with Home .
99
<PAGE>
1995 Agreements. In September 1995, Home also entered into
Supplemental Income Agreements with Mr. Hill and Mr. Swanner. Under the
agreements, Home will pay Mr. Hill $25,000 annually and Mr. Swanner $15,000
annually for a period of fifteen years upon the executive's attainment of age 65
or actual retirement, if later.
If the executive dies while employed by Home but before receiving all
of his benefits under the agreement, payments will be made to his designated
beneficiary, or if none, to his estate, unless the death is by suicide within
two years of the execution of the agreement. If the executive becomes disabled
while employed by Home, but prior to attaining age 65, Home will pay the same
benefits that would be payable in the event of the executive's death, either in
installments over the fifteen-year period or in a lump sum payment. If the
executive terminates his service to Home for reasons other than death or
disability, he or his beneficiary shall be entitled to receive at age 65 or his
prior death only the vested portion of the benefits due under the agreement.
Vesting occurs according to a schedule contained in the agreement. If the
executive's termination of service shall occur after a change in control of
Home, the executive shall be 100% vested in the retirement benefits.
As a condition of the agreement, each executive has agreed not to
engage in activities in competition with Home in Albemarle, North Carolina, and
to provide consulting services to Home during the period that the retirement
benefits are payable.
Home has purchased life insurance on the lives of Mr. Hill and Mr.
Swanner to fund its obligations under the agreements described above. Total
expense related to those agreements was approximately $17,000 and $231,000 for
the six-month period ending March 31, 1996 and for the fiscal year ended
September 30, 1995, respectively, and Home's accrued liability for plan
obligations amounted to $418,000 at March 31, 1996.
Retirement Plan
Home maintains a non-contributory defined benefit pension plan
("Pension Plan") for the benefit of all of its employees who have completed one
year of service and who are at least 21 years of age. Under the Pension Plan,
Home annually contributes an actuarially determined amount to provide a benefit
for each participant at retirement.
Participants are fully vested in amounts contributed to the Pension
Plan on their behalf by Home after completing five years of service. Benefits
under the plan are payable in the event of the participant's retirement, death,
disability or termination of employment.
Normal retirement age under the Pension Plan is the later of (a) age 65
or (b) the fifth anniversary of the date an employee first became a participant
in the Pension Plan ("Normal Retirement Age"). Subject to certain restrictions
on maximum benefits required by federal law, upon reaching Normal Retirement
Age, each participant will receive a retirement benefit in the form of a
straight life annuity, determined pursuant to a formula which takes into
consideration a participant's "final average compensation," years of service
with Home and the participant's expected benefits from Social Security. In
general, for purposes of the Pension Plan, a participant's "final average
compensation" is defined as his average annual compensation for those five
consecutive years in the last ten calendar years immediately preceding Normal
Retirement Age that produce the highest average. The plan also offers early
retirement to participants who have completed fifteen years of service and who
are at least fifty-five years of age.
The following table shows the retirement benefit payable for a range of
compensation and years of service for a person who retires at Normal Retirement
Age. These are hypothetical benefits based upon the plan's normal benefit
formula.
100
<PAGE>
<TABLE>
<CAPTION>
Earnings Credited for Years of Service at Normal Retirement
Retirement Benefits
15 20 25 30 35
-- -- -- -- --
<S> <C> <C> <C> <C> <C>
$ 25,000............... $ 6,998 $ 9,330 $11,663 $11,745 $ 11,828
$ 50,000............... $16,560 $22,080 $27,600 $28,620 $ 29,640
$ 75,000............... $26,123 $31,830 $43,538 $45,495 $ 47,453
$100,000............... $35,685 $47,580 $59,475 $62,370 $ 65,265
$125,000............... $45,248 $60,330 $75,413 $79,245 $ 83,078
$150,000............... $54,810 $73,080 $91,350 $96,120 $100,890
</TABLE>
The benefits listed above are annual amounts and are based on the assumption
that the participant is age 65. As of September 30, 1995, Carl M. Hill and R.
Ronald Swanner had 38 and 21 years, respectively, of service under the Pension
Plan.
401(k) Profit Sharing Plan
In January 1996, Home established a contributory savings plan for its
employees, which meets the requirements of Section 401(k) of the Code. All
employees who have completed twelve months of service may elect to contribute a
percentage of their compensation to the plan each year, subject to certain
maximums imposed by federal law. Home will match 50% of each participant's
contribution, up to a maximum employer contribution of 3% of the participant's
compensation. For purposes of the 401(k) plan, compensation means a
participant's compensation received from the employer as reported on Form W-2.
Participants are fully vested in amounts they contribute to the plan.
Participants are fully vested in amounts contributed to the plan on their behalf
by Home as employer matching contributions after six years of service as
follows: 1 year, 0%; 2 years, 20%; 3 years, 40%; 4 years, 60%; 5 years, 80%; 6
or more years, 100%.
Benefits under the plan are payable in the event of the participant's
retirement, death, disability or termination of employment. Normal retirement
age under the plan is 65 years of age. The total amount contributed by Home to
the 401(k) plan for the six-month period ended March 31, 1996 and for the fiscal
year ended September 30, 1995 was $7,800 and $0, respectively. Home intends to
terminate the 401(k) plan in connection with the Conversion.
Other Benefits
Home provides its employees with group medical, life and accidental death
and dismemberment insurance benefits. Employees are also provided with vacation,
holiday and sick leave.
The Board of Directors may, in its absolute discretion, award a bonus to
employees based on each employee's then-current salary. The bonus is first
applied to each employee's 401(k) plan account to the extent allowable by law.
Any excess amount is paid directly to the employees.
101
<PAGE>
Employment Agreements
In connection with the Conversion, Home will enter into employment
agreements with Carl M. Hill and R. Ronald Swanner in order to establish their
duties and compensation and to provide for their continued employment with Home.
The agreements will provide for an initial annual base salary of $157,320, for
Mr. Hill and $101,160 for Mr. Swanner. The agreements provide for an initial
term of employment of three years. Commencing on the first anniversary date and
continuing on each anniversary date thereafter, following a performance
evaluation of the employee, each agreement may be extended for an additional
year. Each agreement provides that base salary shall be reviewed by the Board of
Directors not less often than annually. In addition, the employment agreements
provide for discretionary bonuses and participation in all other pension,
profit-sharing or retirement plans maintained by Home or by the Holding Company
for employees of Home, as well as fringe benefits normally associated with such
employee's office, including the use of a company car. The employment agreements
provide that they may be terminated by Home for cause, as defined in the
agreement, and that they may otherwise be terminated by Home (subject to vested
rights) or by the employee. In the event of a change in control (as defined
below), the terms of each agreement shall be automatically extended for three
years from the date of the change of control, and the employee's base salary
shall be increased at least 6% annually.
The employment agreements provide that the nature of the employee's
compensation, duties or benefits may not be diminished following a change in
control of Home or the Holding Company. For purposes of the employment
agreements, a change in control generally will occur if (i) after the effective
date of the employment agreement, any "person" (as such term is defined in
Sections 3(a)(9) and 13(d)(3) of the Exchange Act) directly or indirectly,
acquires beneficial ownership of voting stock, or acquires irrevocable proxies
or any combination of voting stock and irrevocable proxies, representing 25% or
more of any class of voting securities of either the Holding Company or Home, or
acquires in any manner control of the election of a majority of the directors of
either the Holding Company or Home, (ii) either the Holding Company or Home
consolidates or merges with or into another corporation, association or entity,
or is otherwise reorganized, where neither the Holding Company nor Home is the
surviving corporation in such transaction, or (iii) all or substantially all of
the assets of either the Holding Company or Home are sold or otherwise
transferred to, or are acquired by, any other entity or group.
The employment agreements could have the effect of making it less likely
that Home or the Holding Company will be acquired by another entity. See "ANTI-
TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME -- The Holding
Company -- Anti-Takeover Effect of Employment Agreements, Severance Plan and
Benefit Plans".
Severance Plan
In connection with the Conversion, Home's Board of Directors plans to adopt
a Severance Plan for the benefit of its employees. The Severance Plan provides
that in the event there is a "change in control" of Home or the Holding Company
(as defined in the Severance Plan) and (i) Home or any successor of Home
terminates the employment of any full time employee of Home in connection with,
or within 24 months after the change in control, other than for "cause" (as
defined in the Severance Plan), or (ii) an employee terminates his or her
employment with Home or any successor following a decrease in the level of such
employee's annual base salary rate or a transfer of such employee to a location
outside of Stanly County, North Carolina, as applicable, within 24 months after
a change in control, all non-officer employees shall be entitled to a severance
benefit equal to the greater of (a) an amount equal to two weeks' salary at the
employee's existing salary rate multiplied times the employee's number of
complete years of service as a Home employee, subject to a maximum payment equal
to the employee's annual salary rate at the time of termination; or (b) the
amount of one month's salary at the employee's salary rate at the time of
termination. The Severance Plan provides that under the circumstances described
above, officers of Home shall be entitled to receive a severance benefit equal
to the greater of (a) the amount of one year's salary at the officer's annual
salary rate at the time of termination or (b) an amount equal to two weeks'
salary at the officer's existing salary rate multiplied times the officer's
number of complete years of service
102
<PAGE>
to Home. Officers and employees of Home who, at the time of a "change in
control," are parties to employment agreements are not covered by the Severance
Plan.
The Severance Plan could have the effect of making it less likely that Home
or the Holding Company will be acquired by another entity. See "ANTI-TAKEOVER
PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME -- The Holding Company --
Anti-Takeover Effect of Employment Agreements, Severance Plan and Benefit
Plans".
Employee Stock Ownership Plan
Home has established the ESOP for its eligible employees. The ESOP will
become effective upon the Conversion. Employees with one year of service with
Home and who have attained age 21 are eligible to participate. As part of the
Conversion, the ESOP intends to borrow funds from the Holding Company and use
the funds to purchase up to 8% of the shares of Common Stock to be issued in the
Conversion, estimated to be between 231,200 and 312,800 shares assuming the
issuance of between 2,890,000 and 3,910,000 shares. In the event of an
oversubscription of shares of Common Stock and, as a result, the ESOP is unable
to purchase in the Conversion 8% of the total number of shares offered in the
Conversion, then the ESOP intends to purchase in the open market after the
Conversion such shares as are necessary for the ESOP to own a number of shares
equal to 8% of the shares of Common Stock issued in the Conversion.
Collateral for the Holding Company's loan to the ESOP will be the Common
Stock purchased by the ESOP. It is expected that the loan will be repaid
principally from Home's discretionary contributions to the ESOP within 10 years.
Dividends, if any, paid on shares held by the ESOP may also be used to reduce
the loan. It is anticipated that the interest rate for the loan will be a
commercially reasonable rate at the time of the loan inception. The loan will
not be guaranteed by Home. Shares purchased by the ESOP and pledged as security
for the loan will be held in a suspense account for allocation among
participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of relative compensation in the year of
allocation. Benefits will vest in full upon five years of service with credit
given for years of service prior to the Conversion. Benefits are payable upon
the participant's retirement, death, disability or termination of service.
Home's contributions to the ESOP are not fixed, so benefits payable and
corresponding expenses under the ESOP cannot be determined, although benefits
payable and corresponding expenses have been estimated in preparing the pro
forma computations set forth in this Prospectus. See "PRO FORMA DATA".
In connection with the establishment of the ESOP, Home will establish a
committee of the Board of Directors to administer the ESOP. Trustees for the
ESOP will also be appointed prior to the Conversion. The ESOP committee may
instruct the trustees regarding investment of funds contributed to the ESOP.
Participating employees shall instruct the trustees as to the voting of all
shares allocated to their respective accounts and held in the ESOP. The
unallocated shares held in the suspense account, and all allocated shares for
which voting instructions are not received, will be voted by the trustees in
their discretion subject to the provisions of ERISA.
The ESOP may be considered an "anti-takeover" device because the ESOP may
become the owner of a sufficient percentage of the total outstanding Common
Stock of the Holding Company so that the vote or decision whether to tender
shares of the ESOP may be used as a defense in a contested takeover. See "ANTI-
TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME -- The Holding
Company -- Anti-Takeover Effect of Employment Agreements, Severance Plan and
Benefit Plans".
103
<PAGE>
Proposed Management Recognition Plan
The Boards of Directors of Home and the Holding Company intend to adopt a
MRP within one year of the Conversion, subject to approval by the stockholders
of the Holding Company at a stockholders meeting to be held no sooner than six
months after the Conversion. The MRP serves as a means of providing the
directors, officers and certain employees of Home with an ownership interest in
the Holding Company in a manner designed to encourage such persons to continue
their service to Home. All directors and officers and certain employees of Home
would receive benefits under the MRP. Upon stockholder approval of the MRP, the
Holding Company expects to either provide for (i) the issuance of authorized but
unissued shares of Common Stock or (ii) the purchase in the open market of an
amount of Common Stock, in either instance equal to 4% of the shares of Common
Stock issued in the Conversion. To the extent that the MRP acquires authorized
but unissued shares after the Conversion, the interests of existing stockholders
will be diluted. Shares issued under the MRP will be issued at no cost to
recipients. Assuming the issuance of 3,910,000 shares in the Conversion and
receipt of regulatory and stockholder approval, 156,400 shares would be issued
pursuant to the MRP and allocated as follows:
<TABLE>
<CAPTION>
Estimated Number
of Restricted Shares Percentage of Total
Recipient Title to be Granted Restricted Shares
- --------- ----- -------------------- -------------------
<S> <C> <C> <C>
Caldwell A. Holbrook, Jr. Director 7,820 5%
Joel A. Huneycutt Director 7,820 5
Douglas Dwight Stokes Director 7,820 5
Greg E. Underwood Director 7,820 5
Carl M. Hill President and CEO, 39,100 25
Director
R. Ronald Swanner Executive Vice President 31,280 20
and Director
Other Employees 54,740 35
------- ---
Total 156,400 100%
======= ===
</TABLE>
After the grant of shares under the MRP, recipients will be entitled to
vote such shares and receive all dividends and cash distributions with respect
thereto. The MRP provides that 20% of the shares granted would vest and become
nonforfeitable on the first anniversary of the date of the grant under the MRP
and 20% would vest and become nonforfeitable on each subsequent anniversary
date, so that the shares would be completely vested at the end of five years
after the date of grant. Grants of Common Stock under the MRP would immediately
vest upon the disability or death of a recipient. Until shares become vested,
the right to vote such shares and the right to receive dividends thereon may not
be sold, assigned, transferred, exchanged, pledged or otherwise encumbered. If
the recipient of shares under the MRP terminates his service to Home (other than
by death or disability) prior to the time shares become vested, unvested shares
would be forfeited to the MRP and would be subject to future allocations to
others. The MRP provides that the MRP cannot be terminated upon the change in
control of the Holding Company or Home unless the acquiror provides for an
equivalent benefit. For this purpose, "change in control" has the same meaning
as is set forth in the employment
104
<PAGE>
agreements of the president and the executive vice president and the special
termination agreements. See "-- Employment Agreements" and "-- Special
Termination Agreements".
If the MRP is approved by the stockholders and by the applicable regulatory
authorities, Home expects to recognize a compensation expense for the MRP awards
in the amount of the fair market value of the Common Stock granted. The expense
would be recognized pro rata over the years during which shares vest. The
recipients of stock grants would be required to recognize ordinary income equal
to the fair market value of the stock. The stock grants would be made in
recognition of the recipients' past service to Home and as an incentive for
their continued performance.
The Boards of Directors of Home and the Holding Company may decide to wait
to submit the MRP to the stockholders of the Holding Company until a date no
earlier than one year following the Conversion. In this event, the MRP may
provide for a vesting schedule of less than five years and accelerated vesting
in the event of retirement or a change in control, in addition to death or
disability.
Proposed Stock Option Plan
The Boards of Directors of Home and the Holding Company intend to adopt a
Stock Option Plan within one year of the Conversion, subject to approval by the
stockholders of the Holding Company at a stockholders meeting to be held no
sooner than six months after the Conversion.
Upon stockholder approval of the Stock Option Plan, the trustees under the
Stock Option Plan could acquire in the open market a number of shares of Common
Stock equal to 10% of shares issued in the Conversion. Such shares could be
acquired prior to the time options vest or are exercised under the Stock Option
Plan, or they could be acquired after the options vest and upon their exercise.
In lieu of purchasing shares in the open market, the Holding Company could issue
authorized but unissued shares of Common Stock to satisfy options. The Holding
Company will reserve for issuance the maximum number of shares of Common Stock
to be issued under the Plan (less any shares acquired by the Stock Option Plan
in the open market). Assuming the issuance of between 2,890,000 and 3,910,000
shares in the Conversion, an aggregate of between 289,000 and 391,000 shares of
Common Stock would be reserved for issuance and/or purchased in the open market
to be issued upon the exercise of options granted under the Stock Option Plan.
Assuming the Stock Option Plan is approved by the stockholders of the
Holding Company, the Stock Option Plan would be administered by a committee of
the Holding Company's Board of Directors. Options granted under the Stock Option
Plan will have an option exercise price of not less than the fair market value
of the Common Stock on the date the options are granted. Options granted under
the Stock Option Plan will have a term of ten years, will not be transferable
except upon death and will continue to be exercisable upon retirement, death or
disability. Options granted under the Stock Option Plan will have a vesting
schedule which will provide that 20% of the options granted would vest and
become nonforfeitable on the first anniversary of the date of the option grant
and 20% will vest and become nonforfeitable on each subsequent anniversary date,
so that the options would be completely vested at the end of five years after
the date of the option grant. Options will become 100% vested upon death or
disability. In addition, if the Stock Option Plan is submitted to and approved
by the Holding Company's stockholders more than one year after consummation of
the Conversion, the Stock Option Plan may provide that options will become
automatically vested upon retirement or upon a change in control of the Holding
Company or Home. In such event, it is expected that "change in control" would
have the same meaning as is set forth in the employment agreements of the
executive officers. See "-- Employment Agreements." The Stock Option Plan will
provide that the Plan cannot be terminated upon a change in control of the
Holding Company or Home unless the acquiror provides for an equivalent benefit
to holders of unvested options.
105
<PAGE>
Options granted to employees under the Stock Option Plan may be "incentive
stock options" which are designed to result in beneficial tax treatment to the
employee but no tax deduction to the Holding Company or Home. The holder of an
incentive stock option generally is not taxed for federal income tax purposes on
either the grant or the exercise of the option. However, the optionee must
include in his or her federal alternative minimum tax income any excess (the
"Bargain Element") of the acquired common stock's fair market value at the time
of exercise over the exercise price paid by the optionee. Furthermore, if the
optionee sells, exchanges, gives or otherwise disposes of such common stock
(other than in certain types of transactions) either within two years after the
option was granted or within one year after the option was exercised (an "Early
Disposition"), the optionee generally must recognize the Bargain Element as
compensation income for regular federal income tax purposes. Any gain realized
on the disposition in excess of the Bargain Element is subject to recognition
under the usual rules applying to dispositions of property. If a taxable sale or
exchange is made after such holding periods are satisfied, the difference
between the exercise price and the amount realized upon the disposition of the
common stock generally will constitute a capital gain or loss for tax purposes.
If an optionee exercises an incentive stock option and delivers shares of common
stock as payment for part or all of the exercise price of the stock purchased
("Payment Stock"), no gain or loss generally will be recognized with respect to
the Payment Stock; provided, however, if the Payment Stock was acquired pursuant
to the exercise of an incentive stock option, the optionee will be subject to
recognizing as compensation income the Bargain Element on the Payment Stock as
an Early Disposition if the exchange for the new shares occurs prior to the
expiration of the holding periods for the Payment Stock. The Holding Company
generally would not recognize gain or loss or be entitled to a deduction upon
either the grant of an incentive stock option or the optionee's exercise of an
incentive stock option. However, if there is an Early Disposition, the Holding
Company generally would be entitled to deduct the Bargain Element as
compensation paid the optionee.
Options granted to directors under the Stock Option Plan would be "non-
qualified stock options." In general, the holder of a non-qualified stock option
will recognize compensation income equal to the amount by which the fair market
value of the common stock received on the date of exercise exceeds the sum of
the exercise price and any amount paid for the non-qualified stock option. If
the optionee elects to pay the exercise price in whole or in part with common
stock, the optionee generally will not recognize any gain or loss on the common
stock surrendered in payment of the exercise price. The Holding Company would
not recognize any income or be entitled to claim any deduction upon the grant of
a non-qualified stock option. At the time the optionee is required to recognize
compensation income upon the exercise of the non-qualified stock option, the
Holding Company would recognize a compensation expense and be entitled to claim
a deduction in the amount equal to such compensation income.
It is expected that the Stock Option Plan will provide that after an option
has been granted, the optionee will be entitled to direct the trustees (three
directors of Home) as to the voting of all shares of Common Stock held by the
trustees to satisfy vested and unvested options which have been granted to the
optionee. In the event a tender offer is made for shares held by the trustees to
satisfy vested and unvested options granted to an optionee, the optionee will be
able to instruct the trustees' response. Any shares held by the trustees to
satisfy options not yet granted shall be voted or tendered by the trustees in
their discretion.
It is expected that the Stock Option Plan will provide that any cash
dividends or other distributions paid or made with respect to shares of Common
Stock held by the trustees in trust under the Stock Option Plan, plus earnings
on such amounts, less amounts retained by the trustees to pay the expenses of
such trust, will be paid by the trustees to the Holding Company.
Assuming the issuance of 3,910,000 shares in the Conversion and approval of
the Stock Option Plan by the stockholders of the Holding Company and the
applicable regulatory agencies, the Board of Directors of the Holding Company
and the Board of Directors of Home intend to grant options under the Stock
Option Plan to the persons and in the amounts set forth below:
106
<PAGE>
<TABLE>
<CAPTION>
Estimated Number Percentage of Total
of Shares Shares
Recipient Title Subject to Option Subject to Options
- --------- ----- ----------------- -------------------
<S> <C> <C> <C>
Caldwell A. Holbrook, Jr. Director 19,550 5%
Joel A. Huneycutt Director 19,550 5
Douglas Dwight Stokes Director 19,550 5
Greg E. Underwood Director 19,500 5
Carl M. Hill President, CEO 97,750 25
and Director
R. Ronald Swanner Executive Vice 78,200 20
President and
Director
Other Officers 136,850 35
------- ---
Total 391,000 100%
======= ===
</TABLE>
If the Stock Option Plan is approved by the stockholders of the Holding
Company and the applicable regulatory agencies, the options granted to employees
and directors pursuant to the Stock Option Plan would be issued in recognition
of the recipients' past service to Home and as an incentive for their continued
performance. No cash consideration will be paid for the options.
The Boards of Directors of Home and the Holding Company may decide to wait
to submit the Stock Option Plan to the stockholders of the Holding Company until
a date no earlier than one year following the Conversion. In this event, the
Stock Option Plan may provide for a vesting schedule of less than five years and
accelerated vesting in the event of retirement or a change in control, in
addition to death and disability.
Certain Indebtedness and Transactions of Management
Home makes loans to executive officers and directors of Home in the
ordinary course of its business. These loans are made on the same terms,
including interest rates and collateral, as those then prevailing for comparable
transactions with nonaffiliated persons, and do not involve more than the normal
risk of collectibility or present any other unfavorable features. Applicable
regulations prohibit Home from making loans to executive officers and directors
of Home on terms more favorable than could be obtained by persons not affiliated
with Home. Home's policy concerning loans to executive officers and directors
complies with such regulations. The aggregate unpaid principal balance of loans
to directors and officers and their affiliates outstanding at March 31, 1996,
totals approximately $1.0 million and represents 2.0% of pro forma stockholders'
equity at March 31, 1996, assuming the sale of 3,400,000 shares of Common Stock.
107
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Holding Company
The Holding Company is authorized to issue 20,000,000 shares of Common
Stock and 5,000,000 shares of preferred stock. Neither the authorized Common
Stock nor the authorized preferred stock has any par value.
Common Stock. The Holding Company's Common Stock will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC or any other governmental entity. Upon payment of the
purchase price for the Common Stock, all such stock will be duly authorized,
validly issued, fully paid, and nonassessable.
Dividends. The holders of the Holding Company's Common Stock will be
entitled to receive and share ratably in such dividends on Common Stock as may
be declared by the Board of Directors of the Holding Company out of funds
legally available therefor, subject to applicable statutory and regulatory
restrictions. The ability of the Holding Company to pay dividends may be
dependent on the receipt of dividends from Home. See "DIVIDEND POLICY",
"SUPERVISION AND REGULATION -- Regulation of Home --Restrictions on Dividends
and Other Capital Distributions" and "TAXATION".
Stock Repurchases. The shares of Common Stock do not have any redemption
provisions. The Holding Company may not, for a period of at least one year from
the effective date of the Conversion, without the approval of the Administrator,
repurchase any of its capital stock. Such approval shall be given only upon a
showing that the proposed repurchase will not adversely affect the safety and
soundness of Home. Stock repurchases are also subject to North Carolina
regulations regarding capital distributions. In addition, the Holding Company
must notify the Federal Reserve prior to repurchasing Common Stock for in excess
of 10% of its net worth during any rolling 12 month period. See "SUPERVISION AND
REGULATION -- Regulation of the Holding Company".
Voting Rights. Upon Conversion, the holders of Common Stock, as the only
class of capital stock of the Holding Company then outstanding, will possess
exclusive voting rights with respect to the Holding Company. Such holders will
have the right to elect the Holding Company's Board of Directors and to act on
such other matters as are required to be presented to stockholders under North
Carolina law or as are otherwise presented to them. Each holder of Common Stock
will be entitled to one vote per share. The holders of Common Stock will have no
right to vote their shares cumulatively in the election of directors. As a
result, the holders of a majority of the shares of Common Stock will have the
ability to elect all of the directors on the Holding Company's Board of
Directors.
Liquidation Rights. In the event of a liquidation, dissolution or winding
up of the Holding Company, the holders of Common Stock of the Holding Company
would be entitled to ratably receive, after payment of or making of adequate
provisions for, all debts and liabilities of the Holding Company and after the
rights, if any, of preferred stockholders of the Holding Company, all remaining
assets of the Holding Company available for distribution.
Preemptive Rights. Holders of the Common Stock of the Holding Company will
not be entitled to preemptive rights with respect to any shares which may be
issued by the Holding Company.
Shares Owned by Directors and Executive Officers. All shares of Common
Stock issued in the Conversion to directors and executive officers of the
Holding Company and Home will contain a restriction providing that such shares
may not be sold without the written permission of the Administrator for a period
of one year following the date of purchase, except in the event of death of the
director or the executive officer.
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Preferred Stock. None of the 5,000,000 shares of the Holding Company's
authorized preferred stock have been issued and none will be issued in the
Conversion. Such stock may be issued in one or more series with such rights,
preferences and designations as the Board of Directors of the Holding Company
may from time to time determine subject to applicable law and regulations. If
and when such shares are issued, holders of such shares may have certain
preferences, powers and rights (including voting rights) senior to the rights of
the holders of the Common Stock. The Board of Directors can (without stockholder
approval) issue preferred stock with voting and conversion rights which could,
among other things, adversely affect the voting power of the holders of the
Common Stock and assist management in impeding an unfriendly takeover or
attempted change in control of the Holding Company that some stockholders may
consider to be in their best interests but to which management is opposed. See
"ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME --The Holding
Company --Restrictions in Articles of Incorporation and Bylaws". The Holding
Company has no current plans to issue preferred stock.
Restrictions on Acquisition. Acquisitions of the Holding Company and
acquisitions of the capital stock of the Holding Company are restricted by
provisions in the Articles of Incorporation and Bylaws of the Holding Company
and by various federal and state laws and regulations. See "ANTI-TAKEOVER
PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME -- The Holding Company --
Restrictions in Articles of Incorporation and Bylaws" and "--Regulatory
Restrictions".
Home
Common Stock. After consummation of the Conversion, Home will be authorized
to issue 100,000 shares of common stock, no par value ("Home Common Stock"). The
Home Common Stock will represent nonwithdrawable capital, will not be an account
of an insurable type, and will not be insured by the FDIC or any other
governmental entity.
Dividends. The payment of dividends by Home is subject to limitations which
are imposed by North Carolina law and regulations. See "DIVIDEND POLICY" and
"SUPERVISION AND REGULATION -- Regulation of Home --Restrictions on Dividends
and Other Capital Distributions". In addition, federal income tax law
considerations may affect the ability of Home to pay dividends and make other
capital distributions. See "TAXATION". The holders of Home Common Stock will be
entitled to receive and share ratably in such dividends on the Home Common Stock
as may be declared by the Board of Directors of Home out of funds legally
available therefor, subject to applicable statutory and regulatory restrictions.
Voting Rights. As a mutual North Carolina-chartered savings bank, Home
currently has no stockholders, and voting rights in Home are currently held by
Home's members (depositors and borrowers). Members elect Home's Board of
Directors and vote on such other matters as are required to be presented to them
under North Carolina law.
Upon Conversion, the Holding Company, as sole stockholder of Home, will
possess the exclusive voting rights with respect to the Home Common Stock, will
elect Home's Board of Directors and will act on such other matters as are
required to be presented to stockholders under North Carolina law or as are
otherwise presented to stockholders by Home's Board of Directors. The holders of
Home Common Stock will have no right to vote their shares cumulatively in the
election of directors of Home.
Liquidation Rights. After the Conversion, in the event of any liquidation,
dissolution or winding up of Home, the Holding Company, as holder of all of
Home's outstanding capital stock, would be entitled to receive all remaining
assets of Home available for distribution, after payment of or making of
adequate provisions for, all debts and liabilities of Home (including all
deposit accounts and accrued interest thereon) and after distribution of the
balance in the liquidation account established in connection with the Conversion
to Eligible Account Holders and Supplemental Eligible Account Holders. See "THE
CONVERSION -- Effects of Conversion --Liquidation Rights".
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Preemptive Rights. Holders of the Home Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued by Home.
Restrictions on Acquisition. Acquisitions of Home and acquisitions of its
capital stock are restricted by various federal and state laws and regulations.
See "ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME -- Home".
ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME
The Holding Company
Restrictions in Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of the Holding Company contain certain provisions that
are intended to encourage a potential acquiror to negotiate any proposed
acquisition of the Holding Company directly with the Holding Company's Board of
Directors. An unsolicited non-negotiated takeover proposal can seriously disrupt
the business and management of a corporation and cause it great expense.
Accordingly, the Board of Directors believes it is in the best interests of the
Holding Company and its stockholders to encourage potential acquirors to
negotiate directly with management. The Board of Directors believes that these
provisions will encourage such negotiations and discourage hostile takeover
attempts. It is also the Board of Directors' view that these provisions should
not discourage persons from proposing a merger or transaction at prices
reflective of the true value of the Holding Company and that otherwise is in the
best interests of all stockholders. However, these provisions may have the
effect of discouraging offers to purchase the Holding Company or its securities
which are not approved by the Board of Directors but which certain of the
Holding Company's stockholders may deem to be in their best interests or
pursuant to which stockholders would receive a substantial premium for their
shares over the current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors and management more difficult. The Boards of Directors of Home and the
Holding Company believe these provisions are in the best interests of the
stockholders because they will assist the Holding Company's Board of Directors
in managing the affairs of the Holding Company in the manner they believe to be
in the best interests of stockholders generally and because a company's board of
directors is often best able in terms of knowledge regarding the company's
business and prospects, as well as resources, to negotiate the best transaction
for its stockholders as a whole.
The following description of certain of the provisions of the Articles of
Incorporation and Bylaws of the Holding Company is necessarily general and
reference should be made in each instance to such Articles of Incorporation and
Bylaws. See "ADDITIONAL INFORMATION" regarding how to obtain a copy of these
documents.
Board of Directors. The Articles of Incorporation provide that the number
of directors shall not be less than five nor more than 15. The initial number of
directors is six, but such number may be changed by resolution of the Board of
Directors. These provisions have the effect of enabling the Board of Directors
to elect directors friendly to management in the event of a non-negotiated
takeover attempt and may make it more difficult for a person seeking to acquire
control of the Holding Company to gain majority representation on the Board of
Directors in a relatively short period of time. The Holding Company believes
these provisions to be important to continuity in the composition and policies
of the Board of Directors.
The Articles of Incorporation provide that, so long as the number of
directors is at least nine, there will be staggered elections of directors so
that the directors will each be initially elected to one, two or three-year
terms, and thereafter (so long as the number of directors is nine or more) all
directors will be elected to terms of three years each. This provision also has
the effect of making it more difficult for a person seeking to acquire control
of the Holding
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Company to gain majority representation on the Board of Directors. The Board of
Directors currently does not have staggered terms but should the number of
directors be increased to nine or more, the staggered election provision of the
Holding Company's Articles of Incorporation will become operative.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of the Holding Company's shares cannot be assured representation on the
Board of Directors, the absence of cumulative voting may discourage
accumulations of the Holding Company's shares or proxy contests that would
result in changes in the Holding Company's management. The Board of Directors
believes that (i) elimination of cumulative voting will help to assure
continuity and stability of management and policies; (ii) directors should be
elected by a majority of the stockholders to represent the interests of the
stockholders as a whole rather than be the special representatives of particular
minority interests; and (iii) efforts to elect directors representing specific
minority interests are potentially divisive and could impair the operations of
the Holding Company.
Special Meetings. The Bylaws of the Holding Company provide that special
meetings of stockholders of the Holding Company may be called by the Chairman of
the Board, the Chief Executive Officer, the President, or by the Board of
Directors. If a special meeting is not called by such persons or entities,
stockholder proposals cannot be presented to the stockholders for action until
the next annual meeting.
Capital Stock. The Articles of Incorporation of the Holding Company
authorize the issuance of 20,000,000 shares of common stock and 5,000,000 shares
of preferred stock. The shares of common stock and preferred stock authorized in
addition to the number of shares of Common Stock to be issued pursuant to the
Conversion were authorized to provide the Holding Company's Board of Directors
with flexibility to issue additional shares, without further stockholder
approval, for proper corporate purposes, including financing, acquisitions,
stock dividends, stock splits, director and employee stock options, grants of
restricted stock to directors and employees and other appropriate purposes.
However, issuance of additional authorized shares may also have the effect of
impeding or deterring future attempts to gain control of the Holding Company.
The Board of Directors also has sole authority to determine the terms of
any one or more series of preferred stock, including voting rights, conversion
rates, dividend rights, and liquidation preferences, which could adversely
affect the voting power of the holders of the Common Stock and discourage an
attempt to acquire control of the Holding Company. The Board of Directors does
not intend to issue any preferred stock, except on terms which it deems to be in
the best interests of the Holding Company and its stockholders. However, the
Board of Directors has the power, to the extent consistent with its fiduciary
duties, to issue preferred stock to persons friendly to management or otherwise
in order to impede attempts by third parties to acquire voting control of the
Holding Company and to impede other transactions not favored by management. The
Board of Directors currently has no plans for the issuance of additional shares
of Common Stock (except for such shares as may be necessary to fund the MRP and
the Stock Option Plan) or of shares of preferred stock.
Director Nominations. The Bylaws of the Holding Company require a
stockholder who intends to nominate a candidate for election to the Board of
Directors at a stockholders' meeting to give written notice to the Secretary of
the Holding Company at least 50 days (but not more than 90 days) in advance of
the date of the meeting at which such nominations will be made. The nomination
notice is also required to include specified information concerning the nominee
and the proposing stockholder. The Board of Directors of the Holding Company
believes that it is in the best
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interests of the Holding Company and its stockholders to provide sufficient time
for the Board of Directors to study all nominations and to determine whether to
recommend to the stockholders that such nominees be considered.
Supermajority Voting Provisions. The Holding Company's Articles of
Incorporation require the affirmative vote of 75% of the outstanding shares
entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least 75% of the number of the Continuing Directors (as defined in
the Articles of Incorporation) on the Holding Company's Board of Directors.
"Continuing Directors" generally includes all members of the Board of Directors
who are not affiliated with any individual, partnership, trust or other person
or entity (or the affiliates and associates of such person or entity) which is a
beneficial owner of 10% or more of the voting shares of the Holding Company.
This provision could tend to make the acquisition of the Holding Company more
difficult to accomplish without the cooperation or favorable recommendation of
the Holding Company's Board of Directors.
Anti-Takeover Effect of Employment Agreements, Severance Plan and Benefit
Plans. The existence of the ESOP may tend to discourage takeover attempts
because employees participating under the ESOP and the trustees of the ESOP will
effectively control the voting of the large block of shares held by the ESOP.
See "MANAGEMENT OF HOME -- Employee Stock Ownership Plan". Also, if approved by
the stockholders of the Holding Company at a meeting of stockholders following
the Conversion, the MRP and the Stock Option Plan will provide for the ownership
of additional shares of Common Stock by the employees and the directors of Home.
See "MANAGEMENT OF HOME -- Proposed Management Recognition Plan" and "--
Proposed Stock Option Plan".
If (i) the MRP and the Stock Option Plan are approved, (ii) all of the
options issuable under the Stock Option Plan are granted and exercised, (iii)
all of the shares issuable under the MRP are awarded and issued, and (iv) the
Holding Company did not issue any additional shares of its Common Stock, the
shares held by directors and executive officers and their affiliates as a group,
including shares expected to be purchased outright in the Conversion and shares
expected to be purchased by the ESOP, would give such persons effective control
over as much as 19.50% or 18.88% of the Common Stock issued and outstanding at
the minimum and maximum of the Valuation Range, respectively. Because the
Holding Company's Articles of Incorporation require the affirmative vote of 75%
of the outstanding shares entitled to vote in order to approve certain mergers,
consolidations or other business combinations, the officers and directors, as a
group, could effectively block such transactions. See "-- The Holding Company --
Supermajority Voting Provisions".
In connection with the Conversion, Home will enter into employment
agreements with its president and executive vice president and intends to adopt
a severance plan which would benefit all of Home's employees in the event of a
change in control. The employment agreements and severance plan all contain
provisions providing for certain monetary payments and/or restrictions on
termination in the event of a change in control which may tend to discourage
mergers, consolidations, acquisitions or other transactions that would result in
such a change of control of the Holding Company or Home.
Regulatory Restrictions. Applicable North Carolina regulations provide that
for a period of three years following the Conversion, the prior written approval
of the Administrator will be required before any person may, directly or
indirectly, acquire beneficial ownership of or make any offer to acquire any
stock or other equity security of the Holding Company if, after the acquisition
or consummation of such offer, such person would be the beneficial owner of more
than 10% of such class of stock or other class of equity security of the Holding
Company. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is not
required for (i) any offer with a view toward public resale made exclusively to
the Holding Company or its underwriters or the selling group acting on its
behalf or (ii) any offer to acquire or acquisition of beneficial ownership of
more than 10% of
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the common stock of the Holding Company by a corporation whose ownership is or
will be substantially the same as the ownership of the Holding Company, provided
that the offer or acquisition is made more than one year following the
consummation of the Conversion. The regulation provides that within one year
following the Conversion, the Administrator would approve the acquisition of
more than 10% of beneficial ownership only to protect the safety and soundness
of the institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Holding
Company and Home or the Board of Directors of the Holding Company and Home
support the acquisition and (ii) the acquiror is of good character and integrity
and possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to the Holding Company and Home and the public interests will
not be adversely affected.
The Change in Bank Control Act, together with North Carolina regulations,
require that the consent of the Administrator and Federal Reserve be obtained
prior to any person or company acquiring "control" of a North Carolina-chartered
savings bank or a North Carolina-chartered savings bank holding company. Upon
acquiring control, such acquiror will be deemed to be a bank holding company.
Control is conclusively presumed to exist if, among other things, an individual
or company acquires the power, directly or indirectly, to direct the management
or policies of the Holding Company or Home or to vote 25% or more of any class
of voting stock. Control is rebuttably presumed to exist under the Change in
Bank Control Act if, among other things, a person acquires more than 10% of any
class of voting stock, and the issuer's securities are registered under Section
12 of the Exchange Act or the person would be the single largest stockholder.
Restrictions applicable to the operations of bank holding companies and
conditions imposed by the Federal Reserve in connection with its approval of
such acquisitions may deter potential acquirors from seeking to obtain control
of the Holding Company. See "SUPERVISION AND REGULATION -- Regulation of the
Holding Company".
Home
Upon consummation of the Conversion, Home will become a wholly-owned
subsidiary of the Holding Company, and, consequently, restrictions on the
acquisition of Home would have a more limited effect than if Home's common stock
were held directly by the stockholders purchasing in the Conversion. However,
restrictions on the acquisition of Home may discourage takeover attempts of the
Holding Company in order to gain immediate control of Home.
Regulatory Restrictions. The Administrator and the Federal Reserve have
conditionally approved the Holding Company's acquisition of all of the stock of
Home issued in the Conversion. For three years following completion of a
conversion, North Carolina conversion regulations require the prior written
approval of the Administrator before any person may directly or indirectly offer
to acquire or acquire the beneficial ownership of more than 10% of any class of
an equity security of a converting state savings bank such as Home. If any
person were to so acquire the beneficial ownership of more than 10% of any class
of any equity security without prior written approval, the securities
beneficially owned in excess of 10% would not be counted as shares entitled to
vote and would not be voted or counted as voting shares in connection with any
matter submitted to stockholders for a vote. Approval is not required for (i)
any offer with view toward public resale made exclusively to Home 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 Home by a corporation whose ownership is or will be substantially the
same as the ownership of Home, provided that the offer or acquisition is made
more than one year following the consummation of the Conversion. Similarly,
Federal Reserve approval is required before any person or entity may acquire
"control" of Home. See "-- The Holding Company--Regulatory Restrictions".
Board of Directors. The amended Articles of Incorporation of Home upon
consummation of the Conversion will provide that the number of directors may be
no less than five, with the exact number to be fixed from time to time by the
Board of Directors. The initial number of directors will be six. This provision
has the effect of enabling the Board of Directors to elect directors friendly to
management in the event of a non-negotiated takeover attempt. Home's Bylaws
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also provide for staggered elections of directors so long as the total number of
directors is at least nine. These provisions are designed to make it more
difficult for a person seeking to acquire control of Home to gain majority
representation on the Board of Directors in a relatively short period of time.
Home believes these provisions to be important to continuity in the composition
and policies of its Board of Directors. The Board of Directors of Home currently
does not have staggered terms but should the number of directors be increased to
nine or more, the staggered election provision of Home's amended Articles of
Incorporation will become operative.
CERTAIN PROVISIONS OF THE CHARTERS AND BYLAWS OF
THE HOLDING COMPANY AND HOME
Limitations of Liability. The Charters of both the Holding Company and Home
provide that the directors of each shall not be personally liable to the
corporation they serve or its stockholders for money damages for breach of any
duty as a director to the fullest extent permitted by North Carolina law. The
North Carolina Business Corporation Act authorizes such provisions, but provides
that they shall not be effective with respect to (i) acts or omissions of
directors that the director knew or believed at the time were clearly in
conflict with the best interests of the corporation, (ii) transactions from
which the director derived an improper personal benefit, (iii) liability for
certain unlawful distributions of corporation assets, and (iv) with respect to
acts or omissions that occurred prior to the effectiveness of the provisions.
Home's mutual charter contains a similar provision.
Indemnification. The Bylaws of both the Holding Company and Home provide
that any person who serves as a director, officer, employee or agent of the
corporation shall have a right to be indemnified by the corporation they serve
to the full extent allowed by applicable law for liability or litigation expense
arising out of activities in such capacities. Both the Bylaws and the North
Carolina Business Corporation Act provide that there shall be no indemnification
for liability or expense arising out of activities which were known or believed
by such persons at the time of such activities to be clearly in conflict with
the best interests of the corporation. Home's mutual bylaws contain a similar
provision.
THE CONVERSION
THE BOARD OF DIRECTORS OF HOME HAS ADOPTED AND THE ADMINISTRATOR HAS APPROVED
COMPLETION OF THE TRANSACTIONS DESCRIBED IN THE PLAN OF CONVERSION SUBJECT TO
APPROVAL BY THE MEMBERS OF HOME AND TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. APPROVAL BY THE ADMINISTRATOR DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE ADMINISTRATOR.
General
Home's Board of Directors has been studying Home's strategic options for
several years. As a result of its analysis of the existing regulatory
environment, the competition faced by Home and other factors, Home's Board of
Directors decided to pursue the possibility of combining with another financial
institution with greater assets and similar management philosophies in a
"merger-conversion" transaction. On May 27, 1993, Home entered into an
Agreement with BB&T pursuant to which Home would convert to the stock form of
ownership and simultaneously be merged with Branch Banking and Trust Company.
After the FDIC objected to certain aspects of the proposed merger-conversion
transaction, Home and BB&T jointly terminated the Agreement on June 20, 1994.
Home has continued to evaluate its strategic options since that time and the
existing management of Home now believes that it will be in the best interest of
Home to remain an independent financial institution. As a result, on May 14,
1996, Home's Board of Directors adopted a Plan of Conversion. The Plan of
Conversion was subsequently amended and restated on July 19, 1996. The
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and Home intend to pursue the business strategy described in this Prospectus
with the goal of enhancing stockholder value after the Conversion over the long
term. Neither the Holding Company nor Home has any existing plan to consider any
possible business combination, and neither company has any agreement or
understanding with respect to any possible business combination.
The Board of Directors' adoption of the Plan of Conversion is subject
to approval by the members of Home and receipt of required regulatory approvals.
Pursuant to the Plan of Conversion, Home will be converted from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank and will become a wholly-owned subsidiary of the Holding Company.
The Holding Company will issue the Common Stock to be sold in the Conversion and
will use that portion of the net proceeds thereof which it does not retain to
purchase the capital stock of Home. By letter dated July 24, 1996, the
Administrator approved the Plan of Conversion, subject to approval by the
members of Home and satisfaction of certain other conditions. The Special
Meeting will be held on September 17, 1996 for the purpose of considering
approval of the Plan of Conversion.
Consummation of the Conversion is contingent also upon receipt of the
approvals of the Federal Reserve and the Administrator for the Holding Company
to acquire Home. Those approvals have been received. The Conversion cannot be
consummated until the expiration of the Bank Merger Act of 1956 waiting period
which began to run upon approval by the Federal Reserve of the Holding Company's
application and expires August 24, 1996. Finally, consummation of the Conversion
is contingent upon receipt from the FDIC of a final non-objection letter with
respect to the transaction. The FDIC has issued a conditional notification that
it does not intend to object to the Conversion.
The following is a summary of all material provisions of the Plan of
Conversion. It is qualified in its entirety by the provisions of the Plan of
Conversion, which contains a more detailed description of the terms of the
Conversion. The Plan of Conversion is attached as Attachment I to Home's Proxy
Statement for the Special Meeting which has been delivered to all members of
Home. The Plan of Conversion can also be obtained by written request from Home.
See "ADDITIONAL INFORMATION".
Purposes of Conversion
Home, as a mutual savings bank, now has no stockholders and no
authority to issue capital stock. By converting to the stock form of
organization, Home will be structured in the form used by most commercial banks,
other business entities and a substantial number of savings institutions.
Conversion to a North Carolina-chartered capital stock savings bank and the
formation of a holding company offers a number of advantages which may be
important to the future and performance of Home, including (i) a larger capital
base for Home's operations, (ii) enhanced future access to capital markets and
(iii) an opportunity for depositors of Home to become stockholders of the
Holding Company.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Holding Company's Articles of Incorporation will permit
the Holding Company, subject to market conditions, to raise additional equity
capital through further sales of securities. Following the Conversion, the
Holding Company will also be able to use stock-related incentive programs to
attract, retain and provide incentives for qualified directors and executive and
other personnel of the Holding Company and Home. See "MANAGEMENT OF HOME--
Employee Stock Ownership Plan", "--Proposed Management Recognition Plan" and
"--Proposed Stock Option Plan".
Formation of the Holding Company will provide greater flexibility than
Home would otherwise have to diversify its business activities through existing
or newly formed subsidiaries, or through acquisitions of, or mergers with, both
mutual and stock institutions, as well as other companies. However, there are no
current arrangements, understandings or agreements regarding any such business
combinations.
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Effects of Conversion
General. Each person with a deposit account in Home has pro rata rights,
based upon the balance in his or her account, in the net worth of Home upon
liquidation. However, this right is tied to the depositor's account and has no
tangible market value separate from such deposit account. Further, Home's
depositors can realize value with respect to their interests only in the
unlikely event that Home is liquidated and has a positive net worth. In such an
event, the depositors of record at that time, as owners, would share pro rata in
any residual surplus after other claims, including those with respect to the
deposit accounts of depositors, are paid.
Upon Home's conversion to stock form, its Articles of Incorporation will be
amended to authorize the issuance of permanent nonwithdrawable capital stock to
represent the ownership of Home, including its net worth. The capital stock will
be separate and apart from deposit accounts and will not be insured by the FDIC
or any other governmental entity. Certificates will be issued to evidence
ownership of the capital stock. All of the outstanding capital stock of Home
will be acquired by the Holding Company, which in turn will issue its Common
Stock to purchasers in the Conversion. The stock certificates issued by the
Holding Company will be transferable and, therefore, subject to applicable law,
the stock could be sold or traded if a purchaser is available with no effect on
any deposit account the seller may hold at Home.
Voting Rights. Under Home's current Articles of Incorporation and Bylaws,
deposit account holders and borrowers have voting rights with respect to certain
matters relating to Home, including the election of directors. After the
Conversion, (i) neither deposit account holders nor borrowers will have voting
rights with respect to Home and will therefore not be able to elect directors of
Home or control its affairs; (ii) voting rights with respect to Home will be
vested in the Holding Company as the sole stockholder of Home; and (iii) voting
rights with respect to the Holding Company will be vested in the Holding
Company's stockholders. Each purchaser of Common Stock will be entitled to vote
on any matters to be considered by the Holding Company's stockholders. For a
description of the voting rights of the holders of Common Stock, see
"DESCRIPTION OF CAPITAL STOCK".
Deposit Accounts and Loans. The account balances, interest rates and other
terms of deposit accounts at Home and the existing deposit insurance coverage of
such accounts will not be affected by the Conversion (except to the extent that
a depositor directs Home to withdraw funds to pay for his or her Common Stock).
Furthermore, the Conversion will not affect any loan account, the balances,
interest rates, maturities or other terms of these accounts, or the obligations
of borrowers under their individual contractual arrangements with Home.
Continuity. Home will continue without interruption, during and after
completion of the Conversion, to provide its services to depositors and
borrowers pursuant to existing policies and will maintain its offices operated
by the existing management and employees of Home.
Liquidation Rights. In the unlikely event of a complete liquidation of
Home, either before or after Conversion, account holders would have claims for
the amount of their deposit accounts, including accrued interest, and would
receive the protection of deposit insurance up to applicable limits. In addition
to deposit insurance coverage, depositor liquidation rights before and after
Conversion would be as follows:
Liquidation Rights Prior to the Conversion. Prior to the Conversion, in the
event of a complete liquidation of Home, each holder of a deposit account in
Home would receive such holder's pro rata share of any assets of Home remaining
after payment of claims of all creditors (including the claims of all depositors
to the withdrawal value of their accounts, including accrued interest). Such
holder's pro rata share of such remaining assets, if any, would be in the same
proportion of such assets as the value of such holder's deposit account was to
the total value of all deposit accounts in Home at the time of liquidation.
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Liquidation Rights After the Conversion. As required by North Carolina
conversion regulations, the Plan of Conversion provides that, upon completion of
the Conversion, a special account called a "Liquidation Account" will be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. The amount of the Liquidation Account will be equal to
the net worth of Home as of the date of its latest statement of financial
condition contained in the final prospectus relating to the sale of shares of
Common Stock in the Conversion. The liquidation account will be established as a
memorandum account, (i.e., an account not appearing on Home's statement of
financial condition). The liquidation account is not an escrow account and is
established to provide a limited priority claim to the assets of Home after the
Conversion. Under applicable regulations, Home will not be permitted to pay
dividends on, or repurchase any of, its capital stock if its net worth would
thereby be reduced below the aggregate amount then required for the Liquidation
Account. See "DIVIDEND POLICY" and SUPERVISION AND REGULATION -- Regulation of
Home --Restrictions on Dividends and Other Capital Distributions". After the
Conversion, Eligible Account Holders and Supplemental Eligible Account Holders
will be entitled, in the event of a liquidation of Home, to receive liquidating
distributions of any assets remaining after payment of all creditors' claims
(including the claims of all depositors to the withdrawal values of their
deposit accounts, including accrued interest), before any distributions are made
on Home's capital stock, equal to their proportionate interests at that time in
the Liquidation Account.
Each Eligible Account Holder and Supplemental Eligible Account Holder will
have an initial interest ("subaccount balance") in the Liquidation Account for
each deposit account held as of December 31, 1994 (the Eligibility Record Date)
or as of June 30, 1996 (the Supplemental Eligibility Record Date), respectively.
Each initial subaccount balance will be the amount determined by multiplying the
total opening balance in the Liquidation Account by the Qualifying Deposit (a
deposit of at least $50 as of the Eligibility Record Date or Supplemental
Eligibility Record Date, as applicable) of such deposit account divided by the
total of all Qualifying Deposits on that date. If the amount in the deposit
account on any subsequent annual closing date of Home is less than the balance
in such deposit account on any other annual closing date or the balance in such
an account on the Eligibility Record Date or Supplemental Eligibility Record
Date, as the case may be, this interest in the Liquidation Account will be
reduced by an amount proportionate to any such reduction, and will not
thereafter be increased despite any subsequent increase in the related deposit
account. An Eligible Account Holder's or Supplemental Eligible Account Holder's
interest in the Liquidation Account will cease to exist if the deposit account
is closed. The Liquidation Account will never increase and will be
correspondingly reduced as the interests in the Liquidation Account are reduced
or cease to exist. In the event of a liquidation, any assets remaining after the
above liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to the Holding Company, as
sole stockholder of Home.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with another FDIC-insured depository institution, whether or not
Home is the surviving institution, would not be viewed as a complete liquidation
for purposes of distribution of the Liquidation Account. In any such
transaction, the Liquidation Account would be assumed by the surviving
institution to the full extent authorized by regulations of the Administrator as
then in effect.
Offering of Common Stock
As part of the Conversion, the Holding Company is making the Subscription
Offering of Common Stock in the priorities and to the persons described below
under "-- Subscription Offering". In addition, any shares which remain
unsubscribed for in the Subscription Offering will be offered in the Community
Offering to members of the general public, with first priority being given to
natural persons and trusts of natural persons residing or located in Stanly
County, North Carolina, and with second priority being given to natural persons
or trusts of natural persons residing or located in the Surrounding Counties,
including IRAs, Keogh accounts and similar retirement accounts established for
the benefit of natural persons who are residents of Stanly County and the
Surrounding Counties. See "-- Community Offering". If necessary, all shares of
Common Stock not purchased in the Subscription Offering and Community Offering,
if any, may
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be offered for sale to the general public through a syndicate of registered
broker-dealers as selected dealers to be managed by Trident Securities. See "--
Syndicated Community Offering". The Plan of Conversion requires that the
aggregate dollar amount of the Common Stock sold equal not less than the minimum
nor more than the maximum of the Valuation Range which is established in
connection with the Conversion; provided, however, with the consent of the
Administrator and the FDIC the aggregate dollar amount of the Common Stock sold
may be increased to as much as 15% above the maximum of the Valuation Range,
without a resolicitation of subscribers or any right to cancel subscriptions, in
order to reflect changes in market and financial conditions following
commencement of the Subscription Offering. See "--Purchase Price of Common Stock
and Number of Shares Offered". If the Syndicated Community Offering is not
feasible or successful and Common Stock having an aggregate value of at least
the minimum of the Valuation Range is not subscribed for in the Subscription and
Community Offerings, the Holding Company will consult with the Administrator to
determine an appropriate alternative method of selling all shares of Common
Stock required to be offered in the Conversion and not subscribed for in the
Offerings. The same per share price ($10.00) will be paid by purchasers in the
Subscription, Community and Syndicated Community Offerings.
The Subscription Offering will expire at the Expiration Time, which is
12:00 noon, local time, on September 17, 1996, unless, with the approval of the
Administrator, the offering period is extended by the Holding Company and Home.
The Community Offering, if any, may commence at any time following commencement
of the Subscription Offering and will terminate at any time thereafter at the
discretion of Home without prior notice, but not later than November 1, 1996,
unless extended with the approval of the Administrator. The Syndicated Community
Offering, if any, or other sale of all shares not subscribed for in the
Subscription and Community Offerings, will be made as soon as practicable
following the Expiration Time. The sale of the Common Stock must, under the
North Carolina conversion regulations, be completed within 45 days after the
Expiration Time unless such period is extended with the approval of the
Administrator. In the event such an extension is approved, subscribers would be
given the opportunity to increase (subject to maximum purchase limitations),
decrease (subject to minimum purchase limitations) or rescind their
subscriptions. In such event, substantial additional printing, legal and
accounting expenses may be incurred in completing the Conversion. The Offerings
may not be extended beyond September 17, 1998.
The commencement and completion of any required Community or Syndicated
Community Offering will be subject to market conditions and other factors beyond
the Holding Company's control. Accordingly, no assurance can be given that any
required Community or Syndicated Community Offering or other sale of Common
Stock will be commenced immediately after the Expiration Time or as to the
length of time that will be required to complete the sale of all shares of
Common Stock offered, and significant changes may occur in the estimated pro
forma market value of the Common Stock, together with corresponding changes in
the offering price, the number of shares being offered, and the net proceeds
realized from the sale of the Common Stock. The Plan of Conversion requires that
the Conversion be completed within 24 months after the date of approval of the
Plan of Conversion by Home's members.
Subscription Offering
In accordance with North Carolina conversion regulations, non-transferable
Subscription Rights have been granted under the Plan of Conversion to the
following persons in the following order of priority: (i) Home's Eligible
Account Holders, who are depositors as of December 31, 1994 who had aggregate
deposits at the close of business on such date of at least $50 ("Qualifying
Deposits"); (ii) the ESOP; (iii) Home's Supplemental Eligible Account Holders,
who are depositors as of June 30, 1996 who had Qualifying Deposits on such date;
(iv) Home's Other Members, who are depositor and borrower members as of July 31,
1996, the voting record date for the Special Meeting, who are not Eligible
Account Holders or Supplemental Eligible Account Holders; and (v) directors,
officers and employees of Home who are not Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members, subject to the
limitations described herein. All subscriptions received will be subject to the
availability of Common Stock after
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satisfaction of subscriptions of all persons having prior rights in the
Subscription Offering, and to the maximum purchase limitations and other terms
and conditions set forth in the Plan of Conversion and described below.
In order to ensure proper identification of Subscription Rights, it is the
responsibility of subscribers in the Subscription Offering to provide correct
account verification information on the Stock Order Form.
Eligible Account Holders. Each Eligible Account Holder has been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the maximum purchase limitation described in "--Minimum and
Maximum Purchase Limitations". Subscription rights of Eligible Account Holders
are superior to all other Subscription Rights granted in the Conversion. If
Eligible Account Holders subscribe for more shares of Common Stock than are
available for purchase, the shares offered will first be allocated among the
subscribing Eligible Account Holders so as to enable each subscribing Eligible
Account Holder to the extent possible, to purchase the number of shares
necessary to make his or her total allocation of Common Stock equal to the
lesser of 100 shares of Common Stock or the number of shares subscribed for by
such Eligible Account Holder. Any shares remaining after such allocation will be
allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that each such Eligible Account Holder's
Qualifying Deposits bears to the total of the Qualifying Deposits of all such
Eligible Account Holders.
ESOP. The ESOP has been granted, without payment therefor, Subscription
Rights to purchase a number of shares of Common Stock equal to 8% of the
aggregate number of shares issued in the Conversion. The ESOP is expected to
purchase 8% of the number of shares to be issued in the Conversion. In the event
of an oversubscription of shares of Common Stock and, as a result, the ESOP is
unable to purchase in the Conversion 8% of the total number of shares offered in
the Conversion, then the ESOP intends to purchase in the open market after the
Conversion such shares as are necessary for the ESOP to own a number of shares
equal to 8% of the shares of Common Stock issued in the Conversion. See
"MANAGEMENT OF HOME --Employee Stock Ownership Plan".
Supplemental Eligible Account Holders. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders and the ESOP, each Supplemental Eligible Account Holder has been
granted, without payment therefor, non-transferable Subscription Rights to
purchase Common Stock up to the maximum purchase limitation described in "--
Minimum and Maximum Purchase Limitations". If Supplemental Eligible Account
Holders subscribe for more shares of Common Stock than are available for
purchase, the shares offered will first be allocated among the subscribing
Supplemental Eligible Account Holders so as to enable each subscribing
Supplemental Eligible Account Holder to the extent possible, to purchase the
number of shares necessary to make his or her total allocation of Common Stock
equal to the lesser of 100 shares of Common Stock or the number of shares
subscribed for by such Supplemental Eligible Account Holder. Any shares
remaining after such allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion that each such Supplemental Eligible Account Holder's Qualifying
Deposits bears to the total of the Qualifying Deposits of all such Supplemental
Eligible Account Holders.
Other Members. To the extent that shares remain available for purchase
after satisfaction of subscriptions of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders, Other Members of Home as of July 31,
1996, (the voting record date for the Special Meeting), other than Eligible
Account Holders and Supplemental Eligible Account Holders, have each been
granted, without payment therefor, non-transferable Subscription Rights to
purchase Common Stock up to the maximum purchase limitation described in "--
Minimum and Maximum Purchase Limitations". If Other Members subscribe for more
shares of Common Stock than remain available for purchase by Other Members,
shares will be allocated among the subscribing Other Members whose subscriptions
remain unsatisfied in the proportion that the number of votes eligible to be
cast by each such Other Member bears to the total number of votes eligible to be
cast by all such Other Members at the Special Meeting.
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Employees, Officers, and Directors. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members,
Home's employees, officers and directors who are not Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members have each been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the maximum purchase limitation described in "-- Minimum and
Maximum Purchase Limitations". If more shares are subscribed for by such
employees, officers and directors than are available for purchase by them, the
available shares will be allocated among subscribing employees, officers and
directors pro rata on the basis of the amount of their respective subscriptions.
Community Offering
Any shares of Common Stock which remain unsubscribed for in the
Subscription Offering will be offered by the Holding Company to members of the
general public in the Community Offering, which may commence at any time
following commencement of the Subscription Offering, with first priority given
to natural persons and trusts of natural persons residing or located in Stanly
County, North Carolina, and with second priority being given to natural persons
or trusts of natural persons residing or located in the Surrounding Counties,
including IRA accounts, Keogh accounts and similar retirement accounts
established for the benefit of natural persons who are residents of, Stanly
County and the Surrounding Counties. The Community Offering may terminate at any
time after the Expiration Time at the discretion of Home without prior notice,
but no later than November 1, 1996, unless further extended with the consent of
the Administrator. The Community Offering may not be extended beyond September
17, 1998. The opportunity to subscribe for shares of Common Stock in the
Community Offering is subject to the right of Home and the Holding Company, in
their sole discretion, to accept or reject any such orders, in whole or in part,
either at the time of receipt of an order or as soon as practicable following
the termination of the Community Offering. In the event Home and the Holding
Company reject any such orders after receipt, subscribers will be promptly
notified and all funds submitted with subscriptions will be returned with
interest at Home's passbook savings rate.
In the event that subscriptions by first priority and second priority
subscribers in the Community Offering whose orders would otherwise be accepted
exceed the shares available for purchase in the Community Offering, then
subscriptions of natural persons and trusts of natural persons residing in
Stanly County, North Carolina, including IRAs, Keogh accounts and similar
retirement accounts established for the benefit of natural persons who are
residents of Stanly County ("First Priority Community Subscribers") will be
filled in full up to applicable purchase limitations (to the extent such
subscriptions are not rejected by Home and the Holding Company) prior to any
allocation to second priority subscribers in the Community Offering (natural
persons and trusts of natural persons residing in the Surrounding Counties)
("Second Priority Community Subscribers").
In the event of an oversubscription by First Priority Community Subscribers
whose orders would otherwise be accepted, shares of Common Stock will be
allocated first to each First Priority Community Subscriber whose order is
accepted in full or in part by Home and the Holding Company in the entire amount
of such order up to a number of shares no greater than 40,000 shares, which
number shall be determined by the Board of Directors of Home prior to the time
the Conversion is consummated with the intent to provide for a wide distribution
of shares among such subscribers. Any shares remaining after such allocation
will be allocated to each First Priority Community Subscriber whose order is
accepted in full or in part on an equal number of shares basis until all orders
are filled. Such allocation shall also be applied to subscriptions by Second
Priority in the Community Subscribers, in the event shares are available for
such subscribers but there is an oversubscription by them.
In order to ensure proper allocation of shares in the event of an
oversubscription, it is the responsibility of subscribers in the Community
Offering to provide correct addresses of residence on the Stock Order Form.
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Syndicated Community Offering
The Plan of Conversion provides that, if necessary, all shares of Common
Stock not purchased in the Subscription and Community Offerings, if any, may be
offered for sale to the general public in a Syndicated Community Offering
through a syndicate of registered broker-dealers as selected dealers ("Selected
Dealers") to be formed and managed by Trident Securities acting as agent of the
Holding Company in the sale of the Common Stock. The Holding Company and Home
have the right to reject orders, in whole or in part, in their sole discretion
in the Syndicated Community Offering. Neither Trident Securities nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering; however,
Trident Securities has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering. Common Stock sold in the Syndicated Community
Offering will be sold at the purchase price of $10.00 per share which is the
same price as all other shares being offered in the Conversion.
It is estimated that the Selected Dealers will receive a negotiated
commission based on the amount of Common Stock sold by the Selected Dealer,
payable by the Holding Company. During the Syndicated Community Offering,
Selected Dealers may only solicit indications of interest from their customers
to place orders with the Holding Company as of a certain date (the "Order Date")
for the purchase of shares of Common Stock. When and if the Holding Company
believes that enough indications and orders have been received in the Offerings
to consummate the Conversion, Trident Securities will request, as of the Order
Date, Selected Dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected Dealers will
send confirmations of the orders to such customers on the next business day
after the Order Date. Selected Dealers will debit the accounts of their
customers on a date which will be three business days from the Order Date
("Debit Date"). Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Debit Date. On the next business day following the Debit
Date, Selected Dealers will remit funds to the account that the Holding Company
established for each Selected Dealer. After payment has been received by the
Holding Company from Selected Dealers, funds will earn interest at Home's
passbook savings rate until the consummation of the Conversion. In the event the
Conversion is not consummated as described above, funds with interest will be
returned promptly to the Selected Dealers, who, in turn, will promptly credit
their customers' brokerage accounts.
The Syndicated Community Offering may close at any time after the
Expiration Time at the discretion of Home and the Holding Company, but in no
case later than November 1, 1996, unless further extended with the consent of
the Administrator. The Syndicated Community Offering may not be extended beyond
September 17, 1998.
Certain Restrictions on Transfer of Subscription Rights; False or Misleading
Order Forms
Home's Plan of Conversion, as required by North Carolina and federal
conversion regulations, prohibits the transfer of Subscription Rights.
Subscription Rights may be exercised only by the person to whom they are issued
and only for his or her own account. Persons exercising Subscription Rights are
required to certify that they are purchasing shares for their own account within
the purchase limitations set forth in the Plan of Conversion and that they have
no agreement or understanding for the sale or transfer of such shares.
Home reserves the right to make an independent investigation of any facts
or circumstances brought to its attention that indicate or tend to indicate that
one or more persons acting independently or as a group acting in concert may be
attempting to violate or circumvent the regulatory prohibition on
transferability of Subscription Rights. The nature and extent of such
investigation will be at Home's sole discretion and Home may require a holder of
Subscription Rights to provide certified affidavits and other documentation to
satisfy Home that its Plan of Conversion and North Carolina and federal
conversion regulations regarding nontransferability are not being subverted by
actions of holders of Subscription Rights. In extreme cases Home reserves the
right to seek legal advice from the General Counsel of the
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Administrator as to compliance with all regulations governing the Conversion,
including the nontransferability of Subscription Rights.
The Plan of Conversion provides that, if Home's Board of Directors
determines that a subscriber (i) has submitted a false or misleading information
on his or her Stock Order Form or otherwise in connection with the attempted
purchase of shares, (ii) has attempted to purchase shares of Common Stock in
violation of provisions of the Plan of Conversion or (iii) fails to cooperate
with attempts by Home or the Holding Company or their employees or agents to
verify information with respect to purchase rights, the Board of Directors may
reject the order of such subscriber and may refer the situation to the
Administrator.
No Fractional Shares
In making allocations in the event of oversubscriptions, all computations
will be rounded down to the nearest whole share; no fractional shares will be
issued. Excess and other amounts sent by subscribers which are not used to
satisfy subscriptions will be refunded with interest at Home's passbook savings
rate, and amounts designated for withdrawal from deposit accounts will be
released.
Purchase Price of Common Stock and Number of Shares Offered
The purchase price of shares of Common Stock sold in the Subscription
Offering, Community Offering and Syndicated Community Offering will be $10.00
per share. The North Carolina regulations governing conversions of North
Carolina-chartered mutual savings banks to stock form require that the aggregate
purchase price of the shares of Common Stock of the Holding Company sold in
connection with the Conversion be equal to not less than the minimum, nor more
than the maximum, of the Valuation Range which is established by an independent
appraisal in the Conversion and is described below; provided, however, that with
the consent of the Administrator and the FDIC the aggregate purchase price of
the Common Stock sold may be increased to up to 15% above the maximum of the
Valuation Range, without a resolicitation of subscribers or any right to cancel,
rescind or change subscription orders, to reflect changes in market and
financial conditions following commencement of the Subscription Offering.
FDIC rules with respect to appraisals require that the independent
appraisal must include a complete and detailed description of the elements of
the appraisal report, justification for the methodology employed and sufficient
support for the conclusions reached. The appraisal report must include a full
discussion of each peer group member and documented analytical evidence
supporting variances from peer group statistics. The appraisal report must also
include a complete analysis of the converting institution's pro forma earnings,
which should include the institution's full potential once it fully deploys the
capital from the conversion pursuant to its business plan.
Home has retained Ferguson, an independent appraisal firm experienced in
the valuation and appraisal of savings institutions and their holding companies,
to prepare an appraisal of the pro forma market value of Home and the Holding
Company and to assist Home in preparing a business plan. For its services in
determining such valuation and assisting with the business plan, Ferguson will
receive an aggregate fee of $32,000 and will be reimbursed for certain
reasonable out-of-pocket expenses. Home has agreed to indemnify Ferguson and its
employees against certain losses (including any losses in connection with claims
under the federal securities laws) arising out of its services.
Ferguson has informed Home that its appraisal has been made in reliance
upon the information contained in this Prospectus, including the financial
statements of Home. Ferguson has further informed Home that it also considered
the following factors, among others, in making the appraisal: (i) the present
and projected operating results and financial condition of the Holding Company
and Home; (ii) the economic and demographic conditions in Home's existing market
area; (iii) certain historical, financial and other information relating to
Home; (iv) the proposed dividend policy of the
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Holding Company; (v) a comparative evaluation of the operating and financial
statistics of Home with those of other savings institutions; (vi) the aggregate
size of the offering of the Common Stock; and (vii) the trading market for the
securities of institutions Ferguson believes to be comparable in relevant
respects to the Holding Company and Home and general conditions in the markets
for such securities. In addition, Ferguson has advised Home that it has
considered the effect of the Conversion on the net worth and earnings potential
of the Holding Company and Home.
On the basis of its consideration of the above factors, Ferguson has
advised Home that, in its opinion, at April 30, 1996, the Valuation Range of
Home and the Holding Company was from a minimum of $28,900,000 to a maximum of
$39,100,000, with a midpoint of $34,000,000. Based upon such valuation and a
purchase price for shares offered in the Conversion of $10.00 per share, the
number of shares to be offered ranges from a minimum of 2,890,000 shares to a
maximum of 3,910,000 shares, with a midpoint of 3,400,000 shares.
The Board of Directors of Home has reviewed the methodology and assumptions
used by Ferguson in preparing the appraisal and has determined that the
Valuation Range, as well as the methodology and assumptions used, were
reasonable and appropriate.
Upon completion of the Subscription and Community Offerings, Ferguson will
confirm or update its valuation of the estimated aggregate pro forma market
value of Home and the Holding Company. Based on the confirmed or updated
appraisal, a determination will be made of the total number of shares of Common
Stock which shall be offered and sold in the Conversion.
With the consent of the Administrator and the FDIC, the aggregate price of
the shares sold in the Conversion may be increased by up to 15% above the
maximum of the Valuation Range, or to $44,965,000 (4,496,500 shares), without a
resolicitation of subscribers and without any right to cancel, rescind or change
subscription orders, to reflect changes in market and financial conditions
following commencement of the Subscription Offering.
No sale of shares of Common Stock may be consummated unless, after the
expiration of the offering period, Ferguson confirms to Home and the Holding
Company that, to the best of its knowledge, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause Ferguson
to conclude that the aggregate purchase price of the Common Stock sold in the
Conversion is incompatible with its estimate of the aggregate pro forma market
value of Home and the Holding Company at the conclusion of the Subscription and
Community Offerings or Syndicated Community Offering, if any. If the aggregate
pro forma market value of Home and the Holding Company as of such date is within
the Valuation Range (or, with the consent of the Administrator and FDIC, not
more than 15% above the maximum of the Valuation Range), then such pro forma
market value will determine the number of shares of Common Stock to be sold in
the Conversion. If there has occurred a change in the aggregate pro forma market
value of Home and the Holding Company so that the aggregate pro forma market
value is below the minimum of the Valuation Range or more than 15% above the
maximum of the Valuation Range, a resolicitation of subscribers may be made
based upon a new Valuation Range, the Plan of Conversion may be terminated or
such other actions as the Administrator and the FDIC may permit may be taken.
In the event of a resolicitation, subscribers would be given a specified
time period within which to respond to the resolicitation. If a subscriber fails
to respond to the resolicitation by the end of such period, the subscription of
such subscriber will be canceled, funds submitted with the subscription will be
refunded promptly with interest at Home's passbook savings rate, and holds on
accounts from which withdrawals were designated will be released. Any such
resolicitation will be by means of an amended prospectus filed with the SEC. A
resolicitation may delay completion of the Conversion. If the Plan of Conversion
is terminated, all funds will be returned promptly with interest at Home's
passbook savings rate from the date payment was deemed received, and holds on
funds authorized for withdrawal from deposit accounts will be released. See "--
Exercise of Subscription Rights and Purchases in the Community Offering".
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The valuation by Ferguson is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing Common Stock.
Ferguson did not independently verify the financial statements and other
information provided by Home, nor did Ferguson value independently the assets or
liabilities of Home. The valuation considers Home as a going concern and should
not be considered as an indication of the liquidation value of Home or the
Holding Company. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons purchasing such
shares in the Conversion will thereafter be able to sell shares at prices in the
range of the foregoing valuation of the pro forma market value thereof.
A copy of the complete appraisal by Ferguson is on file and available for
inspection at the office of the Savings Institutions Division of the North
Carolina Department of Commerce, Tower Building, Suite 301, 1110 Navaho Drive,
Raleigh, North Carolina 27609. A copy is also available for inspection at the
Stock Information Center. A copy of the appraisal has also been filed as an
exhibit to the Registration Statement filed with the SEC with respect to the
Common Stock offered hereby. See "ADDITIONAL INFORMATION".
Exercise of Subscription Rights and Purchases in Community Offering
In order for Subscription Rights to be effectively exercised in the
Subscription Offering and in order to purchase in the Subscription Offering, the
Stock Order Form, accompanied by the required payment for the aggregate dollar
amount of Common Stock desired or appropriate instructions authorizing
withdrawal from one or more Home deposit accounts (other than negotiable order
of withdrawal accounts or other demand deposit accounts), must be received by
Home by the Expiration Time, which is 12:00 noon, local time, on September 17,
1996. However, the ESOP will not be required to make payment for shares
subscribed for until the date set for consummation of the Conversion; provided,
however, that at the time the ESOP submits its order form, it has obtained a
commitment from the Holding Company or an independent third party lender to loan
the ESOP the funds necessary to satisfy its order. Subscription Rights (i) for
which Home does not receive Stock Order Forms by the Expiration Time (unless
such time is extended), or (ii) for which Stock Order Forms are executed
defectively or are not accompanied by full payment (or appropriate withdrawal
instructions) for subscribed shares, will expire whether or not Home has been
able to locate the persons entitled to such rights. In order to purchase in the
Community Offering, the Stock Order Form, accompanied by the required payment
for the aggregate dollar amount of Common Stock desired or appropriate
instructions authorizing withdrawal from one or more Home deposit accounts
(other than negotiable order of withdrawal accounts or other demand deposit
accounts), must be received by Home prior to the time the Community Offering
terminates, which could be at any time subsequent to the Expiration Time. No
wire transfer, facsimile, altered or photocopied Stock Order Forms will be
accepted.
An executed Stock Order Form once received by Home, may not be modified,
amended or rescinded without the consent of Home. Home has the right to extend
the subscription period subject to applicable regulations, unless otherwise
ordered by the Administrator, or to waive or permit correction of incomplete or
improperly executed Stock Order Forms, but does not represent that it will do
so.
The amount to be remitted with the Stock Order Form shall be the aggregate
dollar amount that a subscriber or purchaser desires to invest in the
Subscription and Community Offerings. Payment must accompany all completed Stock
Order Forms submitted in the Subscription and Community Offerings in order for
subscriptions to be valid. See "--Purchase Price of Common Stock and Number of
Shares Offered".
Payment for shares will be permitted to be made by any of the following
means: (i) in cash, if delivered in person to either office of Home; (ii) by
check, bank draft, negotiable order of withdrawal or money order, provided that
the foregoing will only be accepted subject to collection and payment; or (iii)
by appropriate authorization of withdrawal from any deposit account in Home
(other than a negotiable order of withdrawal account or other demand deposit
account).
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<PAGE>
Wire payments will not be accepted for the purchase of Common Stock. In order to
ensure proper identification of Subscription Rights and proper allocations in
the event of an oversubscription, it is the responsibility of subscribers to
provide correct account verification information on the Stock Order Form. Stock
Order Forms submitted by unauthorized purchasers or in amounts exceeding
purchase limitations will not be honored.
For purposes of determining the withdrawal balance of deposit accounts from
which withdrawals have been authorized, such withdrawals will be deemed to have
been made upon receipt of appropriate authorization therefor, but interest will
be paid by Home on the amount deemed to have been withdrawn at the contractual
rate of interest paid on such accounts until the date on which the Conversion is
completed or terminated.
Interest will be paid by Home on payments for Common Stock made in cash or
by check, bank draft, negotiable order of withdrawal or money order at Home's
passbook savings rate. Such interest shall be paid from the date the order is
accepted for processing and payment in good funds is received by Home until
consummation or termination of the Conversion. Home shall be entitled to invest
all amounts paid on subscriptions for Common Stock for its own account until
completion or termination of the Conversion. Home may not knowingly lend funds
or otherwise extend credit to any person to purchase Common Stock.
The Stock Order Forms contain appropriate means by which authorization of
withdrawals from deposit accounts may be made to pay for subscribed shares. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be withdrawn (except by Home as payment for Common Stock) until the
Conversion is completed or terminated. Savings accounts will be permitted to be
established for the purpose of making payment for subscribed shares of Common
Stock. Funds authorized for withdrawal will continue to earn interest at the
applicable contract interest rate until completion or termination of the
Conversion or, in the case of an order submitted in the Community Offering,
until it is determined that such order cannot or will not be accepted.
Notwithstanding any regulatory provision regarding penalties for early
withdrawal from certificate accounts, payment for subscribed shares of Common
Stock will be permitted through authorization of withdrawals from such accounts
without the assessment of such penalties. However, if after such withdrawal the
applicable minimum balance requirement ceases to be satisfied, such certificate
account will be canceled and the remaining balance thereof will earn interest at
Home's passbook savings rate.
Upon completion or termination of the Conversion, Home will return to
subscribers all amounts paid with subscriptions which are not applied to the
purchase price for shares, plus interest at its passbook savings rate from the
date good funds are received until the consummation or termination of the
Conversion, and Home will release deposit account withdrawal orders given in
connection with the subscriptions to the extent funds are not withdrawn and
applied toward the purchase of shares.
Delivery of Stock Certificates
Certificates representing Common Stock issued in the Conversion will be
mailed by the Holding Company's transfer agent to persons entitled thereto at
the address of such persons appearing on the Stock Order Form as soon as
practicable following consummation of the Conversion. Any certificates returned
as undeliverable will be held by the Holding Company until claimed by persons
legally entitled thereto or otherwise disposed of in accordance with applicable
law. Until certificates for Common Stock are available and delivered to
subscribers, subscribers may not be able to sell the shares of Common Stock for
which they have subscribed, even though trading of the Common Stock may have
commenced.
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<PAGE>
Persons in Non-Qualified or Foreign Jurisdictions
The Holding Company will make reasonable efforts to comply with the
securities laws of all states of the United States in which Eligible Account
Holders, Supplemental Eligible Account Holders, or Other Members entitled to
subscribe for shares of Common Stock reside. However, no shares of Common Stock
or Subscription Rights under the Plan of Conversion will be offered or sold in a
foreign country, or in a state in the United States (i) where a small number of
persons otherwise eligible to subscribe for shares under the Plan of Conversion
reside or (ii) if the Holding Company determines that compliance with the
securities laws of such state would be impracticable for reasons of cost or
otherwise, including, but not limited to, a requirement that the Holding
Company, Home or any employee or representative thereof register as a broker,
dealer, agent or salesperson or register or otherwise qualify the Subscription
Rights or Common Stock for sale in such state. No payments will be made in lieu
of the granting of Subscription Rights to persons residing in such
jurisdictions.
Marketing Arrangements
Home has retained Trident Securities to consult with and advise Home and
the Holding Company and to assist the Holding Company, on a best-efforts basis,
in the marketing of shares in the Offerings. Trident Securities is a broker-
dealer registered with the SEC and a member of the National Association of
Securities Dealers, Inc. ("NASD"). Trident Securities is headquartered in
Raleigh, North Carolina, and its telephone number is (919) 781-8900. Trident
Securities will assist Home and the Holding Company in the Conversion as
follows: (i) it will act as marketing advisor with respect to the Subscription
Offering and will represent the Holding Company as placement agent on a best-
efforts basis in the sale of the Common Stock in the Community Offering and
Syndicated Community Offering; (ii) members of its staff will conduct training
sessions to ensure that directors, officers and employees of Home are
knowledgeable regarding the Conversion process; and (iii) it will provide
assistance in the establishment and supervision of the Stock Information Center,
including training staff to properly record and tabulate orders for the purchase
of Common Stock and to respond appropriately to customer inquiries.
For rendering its services, Home has agreed to pay Trident Securities (a) a
management fee equal to four tenths of one percent (.40%) of the aggregate
dollar amount of Common Stock sold in the Subscription Offering and the
Community Offering and (b) a commission equal to 1.65% of the aggregate dollar
amount of Common Stock sold in the Subscription Offering and the Community
Offering, excluding shares purchased by the ESOP, directors, executive officers
and their "associates" (as defined in the Plan of Conversion). Home has also
agreed to pay to Selected Dealers, if any, negotiated commissions. Home has paid
Trident Securities $10,000 toward amounts due to such agent.
Home has agreed to reimburse Trident Securities for its reasonable out-of-
pocket expenses, including but not limited to travel, communications, legal fees
and postage, in an amount not exceeding $37,500, and to indemnify Trident
Securities against certain claims or liabilities, including certain liabilities
under the Securities Act. Total fees and commissions to Trident Securities are
expected to be between $537,802 and $733,438 at the minimum and 15% above the
maximum, respectively, of the Valuation Range. See "PRO FORMA DATA" for the
assumptions used to determine these estimates.
Sales of Common Stock will be made primarily by registered representatives
affiliated with Trident Securities or by the broker-dealers managed by Trident
Securities. In addition, subject to applicable law, executive officers of the
Holding Company and Home may participate in the solicitation of offers to
purchase Common Stock. Other employees of Home may participate in the Offerings
in clerical capacities, providing administrative support in effecting sales
transactions and answering questions of a mechanical nature relating to the
proper execution of the Stock Order Form. Other questions of prospective
purchasers, including questions as to the advisability or nature of the
investment, will be directed to registered representatives. Such other employees
have been instructed not to solicit offers to purchase
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<PAGE>
Common Stock or provide advice regarding the purchase of Common Stock. A Stock
Information Center will be established in Home's headquarters office, in an area
separate from Home's banking operations. Employees will inform prospective
purchasers that their questions should be directed to the Stock Information
Center and will provide such persons with the telephone number of the Stock
Information Center. Stock orders will be accepted at Home's offices and will be
promptly forwarded to the Stock Information Center for processing. Sales of
Common Stock by registered representatives will be made from the Stock
Information Center. In addition, Home may hire one or more temporary clerical
persons to assist in typing, opening mail, answering the phone, and with other
clerical duties. An employee of Home will also be present at the Stock
Information Center to process funds and answer questions regarding payment for
stock, including verification of account numbers in the case of payment by
withdrawal authorization and similar matters. Subject to applicable state law,
the Holding Company will rely on Rule 3a4-1 under the Exchange Act, and sales of
Common Stock will be conducted within the requirements of Rule 3a4-1, so as to
permit officers and current full and part-time Home employees to participate in
the sale of Common Stock. No officer, director or employee of the Holding
Company or Home will be compensated in connection with his or her participation
by the payment of commissions or other remuneration based either directly or
indirectly on the transactions in the Common Stock.
The engagement of Trident Securities and the work performed by Trident
Securities pursuant to its engagement, including a due diligence investigation,
should not be construed by purchasers of Common Stock as constituting an
endorsement or recommendation relating to such investment or a verification of
the accuracy or completeness of information contained in this Prospectus.
Minimum and Maximum Purchase Limitations
Each person subscribing for Common Stock in the Conversion must subscribe
for at least 50 shares of the Common Stock to be offered in the Conversion. In
addition, the maximum number of shares of Common Stock which may be purchased in
the Conversion by any person or entity (or persons or entities exercising
Subscription Rights through a single account), or group of persons or entities
acting in concert, is 40,000 shares. In addition, no person or entity, or group
of persons or entities acting in concert, together with any associates, may
subscribe for more than 100,000 shares of Common Stock issued in the Conversion;
provided, however, that the ESOP may purchase up to 8% of the number of shares
offered in the Conversion (312,800 shares, assuming the issuance of 3,910,000
shares). Any shares held by the ESOP and attributed to a natural person shall
not be aggregated with other shares purchased directly by or otherwise
attributable to that natural person.
The Board of Directors of Home may in its absolute discretion (i) decrease
the 40,000 share maximum purchase price limitation to an amount not less than 1%
of the number of shares offered and sold in the Conversion or (ii) increase such
40,000 share maximum purchase limitation to an amount of up to 5% of the shares
of Common Stock offered and sold. Any decrease or increase in the maximum
purchase limitation by Home's Board of Directors may occur at any time prior to
consummation of the Conversion, either before or after the Special Meeting on
September 17, 1996. In the event the 40,000 share maximum purchase limitation is
increased, any subscriber in the Subscription, Community or Syndicated Community
Offering who has subscribed for 40,000 shares and certain other large
subscribers in the discretion of the Holding Company, shall be given the
opportunity to increase their subscriptions up to the then applicable maximum
purchase limitation.
The Plan of Conversion further provides that for purposes of the foregoing
limitations the term "associate" is used to indicate any of the following
relationships with a person:
(i) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or
officer of Home, the Holding Company or any subsidiary of Home or of
the Holding Company;
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<PAGE>
(ii) any corporation or organization (other than Home, the Holding Company
or a majority-owned subsidiary of Home or the Holding Company) of
which the person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of
equity security; and
(iii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as a trustee or
in a similar fiduciary capacity, except for any tax-qualified
employee stock benefit plan or any charitable trust which is exempt
from federal taxation pursuant to Section 501(c)(3) of the Code.
For purposes of the foregoing limitations, (i) directors and officers of
Home or the Holding Company shall not be deemed to be associates or a group of
persons acting in concert solely as a result of their serving in such
capacities, (ii) the ESOP will not be deemed to be acting in concert with any of
its trustees for purposes of determining the number of shares which any such
trustee, individually, may purchase and (iii) shares of Common Stock held by the
ESOP and attributed to an individual will not be aggregated with other shares
purchased directly by, or otherwise attributable to, that individual.
For purposes of the foregoing limitations, persons will be deemed to be
"acting in concert" if they are (i) knowingly participating in a joint activity
or conscious parallel action towards a common goal (whether or not pursuant to
an express agreement), with respect to the purchase, ownership, voting or sale
of Common Stock or (ii) engaged in a combination or pooling of voting or other
interests in the securities of the Holding Company for a common purpose pursuant
to any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise. The Holding Company and Home may presume that
certain persons are acting in concert based upon, among other things, the fact
that such persons have filed joint Schedules 13D with the SEC with respect to
other companies.
Approval, Interpretation, Amendment and Termination
Under the Plan of Conversion, the Administrator's approval thereof, and
applicable North Carolina conversion regulations, consummation of the Conversion
is subject to satisfaction of certain conditions, including the following: (i)
approval of the Plan of Conversion by the affirmative vote of a majority of the
votes eligible to be cast by members of Home at the Special Meeting; (ii) sale
of shares of Common Stock for an aggregate purchase price equal to not less than
the minimum or more than the maximum of the Valuation Range unless the aggregate
purchase price is increased to as much as 15% above the maximum with the consent
of the Administrator and FDIC, and (iii) receipt by the Holding Company and Home
of favorable opinions of counsel or other tax advisors as to the federal and
state tax consequences of the Conversion. See "-- Income Tax Consequences".
If all conditions for consummation of the Conversion are not satisfied, no
Common Stock will be issued, Home will continue to operate as a North Carolina-
chartered mutual savings bank, all subscription funds will be promptly returned
with interest at Home's passbook savings rate, and all deposit withdrawal
authorizations (and holds placed on such accounts) will be canceled. In such an
event, the Holding Company would not acquire control of Home.
All interpretations by Home and the Holding Company of the Plan of
Conversion and of the Stock Order Forms and related materials for the
Subscription and Community Offerings will be final, subject to the authority of
the Administrator. Home and the Holding Company may reject Stock Order Forms
that are not properly completed. However, the Holding Company and Home retain
the right, but will not be required, to waive irregularities in submitted Stock
Order Forms or to require the submission of corrected Stock Order Forms or the
remittance of full payment for all shares subscribed for by such dates as they
may specify. In addition, the Plan of Conversion may be substantively amended by
a two-thirds vote of Home's Board of Directors at any time prior to the Special
Meeting, and at any time thereafter by a two-thirds vote of Home's Board of
Directors with the concurrence of the Administrator. If Home
128
<PAGE>
determines upon the advice of counsel and after consultation with the
Administrator that any such amendment is material, subscribers would be given
the opportunity to increase, decrease or cancel their subscriptions. Also, as
required by the regulations of the Administrator, the Plan of Conversion
provides that the transactions contemplated thereby may be terminated by a two-
thirds vote of Home's Board of Directors at any time prior to the Special
Meeting and may be terminated by a two-thirds vote of Home's Board of Directors
at any time thereafter but prior to the completion of the Conversion with the
concurrence of the Administrator, notwithstanding approval of the Plan of
Conversion by the Members at the Special Meeting.
Income Tax Consequences
Home has received an opinion from its special counsel, Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P., of Greensboro, North Carolina, to the
effect that for federal income tax purposes: (i) the Conversion will constitute
a tax free reorganization with respect to Home and no gain or loss will be
recognized by Home either in its mutual or stock form; (ii) no gain or loss will
be recognized by Home as a result of the transfer of the Subscription Rights to
Eligible Account Holders; (iii) no gain or loss will be recognized by Home upon
the purchase of Home's stock by the Holding Company or upon the sale by the
Holding Company of its Common Stock; (iv) no gain or loss will be recognized by
Home's depositors with respect to their deposit accounts at Home as a
consequence of the Conversion; (v) the tax basis of depositors' deposit accounts
at Home will not be changed as a result of the Conversion; (vi) assuming the
Subscription Rights have no value, no gain or loss will be recognized by
Eligible Account Holders, Supplemental Eligible Account Holders, Other Members,
or directors, officers and employees of Home upon either the issuance to them of
the Subscription Rights or the exercise or lapse thereof; (vii) no gain or loss
will be recognized by Eligible Account Holders or Supplemental Eligible Account
Holders upon the distribution to them of interests in the Liquidation Account;
(viii) assuming the Subscription Rights have no value, the tax basis for Common
Stock purchased in the Conversion will be the amount paid therefor; and (ix) the
tax basis of interests in the Liquidation Account will be zero. Home has been
further advised by its special counsel, Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P., that the tax effects of the Conversion under North Carolina tax
laws will be consistent with the federal income tax consequences.
Several of the foregoing legal opinions are premised on the assumption that
the Subscription Rights will have no value. Home has been advised by Ferguson
that, in its opinion, the Subscription Rights will not have any value, based on
the fact that such rights are acquired by the recipients without cost, are non-
transferable, are of short duration and afford the recipients the right only to
purchase Common Stock at a price equal to its estimated fair market value as of
the date such rights are issued, which will be the same price paid by all
purchasers in the Conversion. The opinion of Ferguson is not binding on the IRS
and if the Subscription Rights were ultimately determined to have ascertainable
value, recipients of Subscription Rights would have to include in gross income
an amount equal to the value of the Subscription Rights received by them. The
basis of the Common Stock purchased pursuant to Subscription Rights would be
increased by the amount of income realized with respect to the receipt or
exercise of the Subscription Rights. Moreover, recipients of Subscription Rights
could then have to report the transaction to the IRS. Each Eligible Account
Holder, Supplemental Eligible Account Holder, Other Member or other recipient of
Subscription Rights is encouraged to consult with his, her or its own tax
advisor as to the tax consequences in the event the Subscription Rights are
deemed to have ascertainable value.
No legal opinion has been or will be received with respect to any tax
consequences of the Conversion not specifically described above, including the
tax consequences to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members, other recipients of Subscription Rights or purchasers of
Common Stock under the laws of any other state, local or foreign taxing
jurisdiction to which they may be subject. Special counsel expresses no opinion
regarding the value of the Subscription Rights.
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LEGAL OPINIONS
The validity of the issuance of the Common Stock in the Conversion will be
passed upon for the Holding Company by its special counsel, Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P., Greensboro, North Carolina, which firm has
also rendered its opinion to Home concerning certain federal and North Carolina
income tax aspects of the Conversion as described herein under "THE CONVERSION
- -- Income Tax Consequences". Certain legal matters will be passed upon for
Trident Securities by Housley Kantarian & Bronstein, P.C., Washington, D.C.
EXPERTS
The statements of financial condition of Home as of September 30, 1995 and
1994, and the related statements of income, equity and cash flows for the three
years ended September 30, 1995 included herein, have been included herein in
reliance upon the report of McGladrey & Pullen LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
Ferguson has consented to being named as an expert herein and to the
summary herein of its appraisal report as to the estimated pro forma market
value of Home and the Holding Company and its opinion with respect to
Subscription Rights.
REGISTRATION REQUIREMENTS
The Holding Company will register its Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act in connection with the Conversion and will not
deregister the Common Stock for a period of three years following the completion
of the Conversion. Upon such registration, the proxy and tender offer rules,
insider trading reporting requirements and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will be applicable to the
Holding Company.
ADDITIONAL INFORMATION
The Holding Company has filed a registration statement with the SEC on Form
S-1 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the SEC, this Prospectus does not
contain all of the information set forth in the registration statement. Such
information can be examined and copied at the public reference facilities of the
SEC located at Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and
at the regional offices of the SEC at 75 Park Place, Fourteenth Floor, New York,
New York 10007 and Room 3190, John C. Kluczynski Building, 230 South Dearborn
Street, Chicago, Illinois 60604. Copies of such material can be obtained by mail
from the SEC at prescribed rates from the Public Reference Section of the SEC at
450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC maintains
a World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC, including the Holding Company; the address is (http://www.sec.gov.). The
statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are, of
necessity, brief descriptions thereof and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
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Home has filed an Application to Convert a Mutual Savings Bank to a Stock
Owned Savings Bank with the Administrator. Pursuant to the North Carolina
conversion regulations, this Prospectus omits certain information contained in
such Application. The Application, which contains a copy of Ferguson's
appraisal, may be inspected at the office of the Administrator, Savings
Institutions Division, North Carolina Department of Commerce, Tower Building,
Suite 301, 1110 Navaho Drive, Raleigh, North Carolina 27609. Copies of the Plan
of Conversion, which includes a copy of Home's proposed Amended Certificate of
Incorporation and Stock Bylaws, and copies of the Holding Company's Articles of
Incorporation and Bylaws are available for inspection at each office of Home and
may be obtained by writing to Home at 155 West South Street, Albemarle, North
Carolina 28001; Attention: Carl M. Hill, President, or by telephoning Home at
(704) 982-9184. A copy of Ferguson's independent appraisal is also available for
inspection at the Stock Information Center.
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Index to Financial Statements
Page
----
Independent Auditors' Report F-2
<TABLE>
<CAPTION>
Financial Statements:
<S> <C>
Statements of financial condition as of
March 31, 1996 (unaudited), September 30, 1995 and 1994 F-3
Statements of income for the six months ended
March 31, 1996 and 1995 (unaudited),
and the three years ended September 30, 1995 F-4 - F-5
Statements of equity for the six months ended
March 31, 1996 (unaudited), and the
three years ended September 30, 1995 F-6
Statements of cash flows for the six months
ended March 31, 1996 and 1995
(unaudited) and the three years ended
September 30, 1995 F-7 - F-10
Notes to financial statements F-11 - F-29
</TABLE>
All schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included in
the financial statements of Home Savings Bank of Albemarle, S.S.B., or
related notes. No financial statements are provided for the Holding Company
since it was not in operation for any of the periods presented.
<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, S.S.B. as of September 30, 1995 and 1994, and the
related statements of income, equity and cash flows for each of the years in the
three year period ended September 30, 1995. 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, 1995 and 1994, and the results of its operations and
its cash flows for the year's then endedin conformity with generally accepted
accounting principles.
As discussed in Notes 3 and 11 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 25, 1995
F-2
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF FINANCIAL CONDITION
March 31, 1996, September 30, 1995 and 1994
<TABLE>
<CAPTION>
March 31, September 30,
ASSETS 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Cash and cash equivalents:
Noninterest-bearing deposits (Note 2) $ 8,145,000 $ 2,872,000 $ 2,796,000
Interest-bearing deposits 11,931,000 8,622,000 3,853,000
Securities held to maturity, fair value 1996,
$6,058,000; 1995, $4,642,000;
1994, $5,271,000 (Note 4) 5,987,000 4,529,000 5,325,000
Securities available for sale (Note 3) 29,943,000 30,974,000 25,076,000
Federal Home Loan Bank stock (Note 4) 1,346,000 1,346,000 1,346,000
Loans receivable, net (Note 5) 106,710,000 108,597,000 106,844,000
Real estate acquired in settlement of loans 73,000 135,000 176,000
Accrued interest receivable (Note 6) 1,151,000 1,150,000 1,027,000
Office properties and equipment, net (Note 7) 1,248,000 1,294,000 1,187,000
Prepaid expenses and other assets (Note 8) 387,000 239,000 207,000
Income tax refund receivable 57,000 105,000 --
---------------------------------------------------
$ 166,978,000 $ 159,863,000 $ 147,837,000
===================================================
LIABILITIES AND EQUITY
- ---------------------------------------------------------------------------------------------------------
Liabilities:
Deposits (Note 9) $ 144,282,000 $ 137,647,000 $ 127,312,000
Advance payments by borrowers for taxes
and insurance 305,000 97,000 474,000
Accounts payable and other liabilities 1,043,000 968,000 591,000
Checks outstanding on disbursement account 563,000 489,000 783,000
Income taxes payable -- -- 187,000
Deferred income taxes (Note 11) 65,000 236,000 179,000
---------------------------------------------------
Total liabilities 146,258,000 139,437,000 129,526,000
---------------------------------------------------
Commitments (Notes 10 and 13)
Equity:
Retained earnings, substantially restricted
(Notes 11 and 12) 20,691,000 20,392,000 18,531,000
Unrealized gain (loss) on securities available
for sale, net of tax (Note 3) 29,000 34,000 (220,000)
---------------------------------------------------
20,720,000 20,426,000 18,311,000
---------------------------------------------------
$ 166,978,000 $ 159,863,000 $ 147,837,000
===================================================
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF INCOME
Six Months Ended March 31, 1996 and 1995, and Years
Ended September 30, 1995, 1994, and 1993
<TABLE>
<CAPTION>
March 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 4,844,000 $ 4,823,000
Mortgage-backed certificates 196,000 204,000
Securities 938,000 736,000
Other interest-bearing deposits 373,000 68,000
--------------------------------------
6,351,000 5,831,000
Interest expense on deposits (Note 9) 3,831,000 2,532,000
--------------------------------------
Net interest income 2,520,000 3,299,000
Provision for loan losses (Note 5) 300,000 --
--------------------------------------
Net interest income after provision for loan losses 2,220,000 3,299,000
--------------------------------------
Noninterest income 62,000 61,000
--------------------------------------
Noninterest expenses:
Compensation and benefits (Note 10) 898,000 724,000
Occupancy 140,000 115,000
Federal insurance premium expense 155,000 142,000
Data processing 106,000 99,000
Pension liquidation expense (Note 8) -- --
Contributions 191,000 24,000
Other 304,000 304,000
--------------------------------------
1,794,000 1,408,000
--------------------------------------
Income before income taxes 488,000 1,952,000
Income taxes (Note 11) 189,000 729,000
--------------------------------------
Income before cumulative effect of a change in
accounting principle 299,000 1,223,000
Cumulative effect on prior years of changing to a different
method of accounting for income taxes (Note 11) -- --
--------------------------------------
Net Income $ 299,000 $ 1,223,000
======================================
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
September 30,
1995 1994 1993
---------------------------------------------------
<S> <C> <C>
$ 9,731,000 $ 9,906,000 $ 10,877,000
394,000 469,000 636,000
1,585,000 1,222,000 1,334,000
270,000 397,000 197,000
---------------------------------------------------
11,980,000 11,994,000 13,044,000
5,980,000 4,973,000 6,037,000
---------------------------------------------------
6,000,000 7,021,000 7,007,000
-- -- --
---------------------------------------------------
6,000,000 7,021,000 7,007,000
---------------------------------------------------
126,000 147,000 206,000
---------------------------------------------------
1,859,000 1,324,000 1,018,000
256,000 267,000 202,000
295,000 318,000 290,000
205,000 194,000 188,000
-- 493,000 33,000
46,000 61,000 30,000
549,000 500,000 383,000
---------------------------------------------------
3,210,000 3,157,000 2,144,000
---------------------------------------------------
2,916,000 4,011,000 5,069,000
1,055,000 1,498,000 1,765,000
---------------------------------------------------
1,861,000 2,513,000 3,304,000
-- 485,000 --
---------------------------------------------------
$ 1,861,000 $ 2,028,000 $ 3,304,000
===================================================
</TABLE>
F-5
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF EQUITY
For the Six Months Ended March 31, 1996, and Years Ended
September 30, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Retained
Earnings Unrealized
Substantially Gain(Loss) Total
Restricted on Securities Equity
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, September 30, 1992 $13,199,000 -- 13,199,000
Net income 3,304,000 -- 3,304,000
--------------------------------------------------
Balance, September 30, 1993 16,503,000 -- 16,503,000
Net income 2,028,000 -- 2,028,000
Net unrealized loss on securities available
for sale -- (220,000) (220,000)
--------------------------------------------------
Balance, 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 -- 254,000 254,000
--------------------------------------------------
Balance, September 30, 1995 20,392,000 34,000 20,426,000
Net income 299,000 -- 299,000
Net change in unrealized gain (loss) on
securities available for sale -- (5,000) (5,000)
--------------------------------------------------
Balance, March 31, 1996 (Unaudited) $20,691,000 $ 29,000 $20,720,000
==================================================
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 1996 and 1995 and Years Ended September 30, 1995,
1994 and 1993
<TABLE>
<CAPTION>
March 31,
1996 1995
- ------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 299,000 $ 1,223,000
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 (14,000) (10,000)
Amortization of deferred loan fees (68,000) (33,000)
FHLB stock dividends -- --
Gain on recalled securities -- --
Gain on sale of real estate acquired in settlement of loans (12,000) (8,000)
Provision for depreciation 50,000 41,000
Deferred income taxes (172,000) 50,000
(Increase) decrease in assets:
Accrued interest receivable (1,000) (31,000)
Prepaid and other assets (148,000) (100,000)
Income tax refund receivable 48,000 --
Increase (decrease) in liabilities:
Accounts payable and other liabilities 75,000 (35,000)
Interest payable 27,000 21,000
Checks outstanding on disbursement accounts 74,000 (503,000)
Income taxes payable -- (192,000)
--------------------------------
Net cash provided by operating activities 458,000 423,000
--------------------------------
Cash Flows from Investing Activities
Purchases of securities held to maturity (1,954,000) --
Purchases of securities available for sale (8,916,000) (2,008,000)
Proceeds from maturities of securities available
for sale 9,960,000 1,500,000
Proceeds from maturities and recalls of securities held to
maturity -- --
Principal collected on securities held to maturity 493,000 388,000
Loan originations and principal payments on loans, net 1,673,000 (2,776,000)
Purchase of office properties and equipment (4,000) (111,000)
Proceeds from sale of foreclosed real estate 56,000 57,000
Investment reduction in foreclosed real estate -- --
Net cash provided by (used in) investing activities 1,308,000 (2,950,000)
--------------------------------
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
September 30,
1995 1994 1993
------------------------------------------------------
<S> <C> <C>
$ 1,861,000 $ 2,028,000 $ 3,304,000
-- -- --
(19,000) (9,000) (3,000)
(73,000) (137,000) (247,000)
-- (33,000) (75,000)
-- (4,000) (33,000)
(3,000) (14,000) (41,000)
104,000 83,000 59,000
(75,000) 372,000 23,000
(123,000) 111,000 101,000
(32,000) 366,000 (195,000)
(105,000) -- 36,000
377,000 94,000 (16,000)
63,000 5,000 (4,000)
(294,000) 253,000 37,000
(187,000) (22,000) 209,000
------------------------------------------------------
1,494,000 3,093,000 3,155,000
------------------------------------------------------
-- (11,934,000) (10,972,000)
(11,987,000) -- --
6,500,000 -- --
-- 5,500,000 10,400,000
790,000 1,744,000 2,113,000
(1,751,000) 10,178,000 (3,786,000)
(211,000) (241,000) (307,000)
115,000 127,000 112,000
-- -- (15,000)
------------------------------------------------------
(6,544,000) 5,374,000 (2,455,000)
------------------------------------------------------
</TABLE>
F-8
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended March 31, 1996 and 1995 and Years Ended September 30, 1995,
1994 and 1993
<TABLE>
<CAPTION>
March 31,
1996 1995
- -------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash Flows from Financing Activities
Net increase (decrease) in certificates of deposit, demand
deposits, NOW accounts and passbook savings accounts $ 6,608,000 $ 1,078,000
Net increase (decrease) in advance payments by borrowers for
taxes and insurance 208,000 (143,000)
-------------------------------------
Net cash provided by (used in) financing activities 6,816,000 935,000
-------------------------------------
Increase (decrease) in cash and cash equivalents 8,582,000 (1,592,000)
Cash and cash equivalents:
Beginning 11,494,000 6,649,000
-------------------------------------
Ending $ 20,076,000 $ 5,057,000
=====================================
Supplemental Schedule of Cash and Cash Equivalents
Cash:
Interest-bearing deposits $ 11,931,000 $ 2,687,000
Noninterest-bearing deposits 8,145,000 2,370,000
-------------------------------------
$ 20,076,000 $ 5,057,000
=====================================
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest $ 3,804,000 $ 2,511,000
Income taxes 313,000 871,000
Supplemental Disclosures of Noncash Transactions
Transfer of loans to real estate acquired in settlement of loans 89,000 106,000
Loans originated to finance the sale of real estate acquired in
settlement of loans 107,000 63,000
Transfers from securities held to maturity to securities
available for sale -- --
Net change in unrealized (gain) loss on securities available for
sale, net of deferred taxes (credits) (5,000) 60,000
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
September 30,
1995 1994 1993
-----------------------------------------------------
<S> <C> <C>
$ 10,272,000 $ (12,377,000) $ 936,000
(377,000) (11,000) 37,000
-----------------------------------------------------
9,895,000 (12,388,000) 973,000
-----------------------------------------------------
4,845,000 (3,921,000) 1,673,000
6,649,000 10,570,000 8,897,000
-----------------------------------------------------
$ 11,494,000 $ 6,649,000 $ 10,570,000
=====================================================
$ 8,622,000 $ 3,853,000 $ 7,038,000
2,872,000 2,796,000 3,532,000
-----------------------------------------------------
$ 11,494,000 $ 6,649,000 $ 10,570,000
=====================================================
$ 5,917,000 $ 4,969,000 $ 6,042,000
1,346,000 1,520,000 1,520,000
209,000 212,000 376,000
138,000 42,000 282,000
-- 25,420,000 --
(254,000) 220,000 --
</TABLE>
F-10
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
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 Stanley
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.
Unaudited financial statements: The unaudited financial statements furnished
- ------------------------------
reflect all adjustments, consisting of normal recurring accruals, which are in
the opinion of management, necessary for a fair presentation of the financial
position as of March 31, 1996 and the results of operations and cash flows for
the six months ended March 31, 1996 and 1995. The results for the six month
periods are not necessarily indicative of the operating results of the Bank for
the entire year.
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 certificates.
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 thereafier 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.
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 considerations, 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.
F-11
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
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, is required to maintain an investment in capital stock of
the Federal Home Loan Bank 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 Federal Home Loan Bank 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-off (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 borrowers' 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.
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.
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 impaired 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.
F-12
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
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.
Defined benefit pension 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.
Income taxes: Effective October 1, 1993, the Bank adopted Financial Accounting
- ------------
Standards Board ("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 income 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 11 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 value amounts.
F-13
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies (Continued)
The fair value estimates presented are based on pertinent information available
to management as of March 31, 1996 and September 30, 1995 and 1994. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since 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, $11,000 and $53,000
was held by a trustee at March 31, 1996 and September 30, 1995 and 1994,
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.
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 the adoption of
Statement 115, these securities were reported as "held to maturity".
F-14
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Securities Available for Sale and Accounting Change (Continued)
Amortized cost and fair values of securities available for sale are summarized
as follows:
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------------------
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies
obligations $ 29,880,000 $ 112,000 $ (64,000) $ 29,928,000
Other security 15,000 -- -- 15,000
----------------------------------------------------------------
$ 29,895,000 $ 112,000 $ (64,000) $ 29,943,000
================================================================
<CAPTION>
September 30, 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
================================================================
<CAPTION>
September 30, 1994
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and federal agencies
obligations $ 25,395,000 $ 10,000 $ (344,000) $ 25,061,000
Other security 15,000 -- -- 15,000
----------------------------------------------------------------
$ 25,410,000 $ 10,000 $ (344,000) $ 25,076,000
================================================================
</TABLE>
The amortized cost and fair values of securities available for sale by
contractual maturity are shown below. The "other security" has no contractual
maturity.
<TABLE>
<CAPTION>
March 31, 1996 September 30, 1995
----------------------------------------------------------------
(Unaudited)
Amortized Fair Amorized Fair
Cost Value Cost Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,987,000 $ 10,021,000 $ 12,959,000 $ 12,945,000
Due after one year through five years 19,893,000 19,907,000 17,948,000 18,014,000
----------------------------------------------------------------
29,880,000 29,928,000 30,907,000 30,959,000
Other security 15,000 15,000 15,000 15,000
----------------------------------------------------------------
$ 29,895,00 $ 29,943,00 $ 30,922,000 $ 30,974,000
================================================================
</TABLE>
F-15
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Securities Available for Sale and Accounting Change (Continued)
There are no sales of securities available for sale for the six months ended
March 31, 1996 and 1995 and for the years ended September 30, 1995, 1994, and
1993.
Note 4. Securities Held to Maturity
Under Statement No. 115, identification of securities as "held to maturity", a
more stringent definition than previously contemplated for securities 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.
Carrying amounts and fair values of securities being held to maturity are
summarized as follows:
<TABLE>
<CAPTION>
March 31, 1996
------------------------------------------------------------------------------------------------------
(Unaudited)
Gross Gross
Principal Unamortized Unearned Amortized Unrealized Unrealized Fair
Balance Premiums (Discounts) Costs Gains (Losses) Value
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
and related securities $ 5,998,000 $ 41,000 $ (52,000) $ 5,987,000 $ 159,000 $ (88,000) $ 6,058,000
======================================================================================================
<CAPTION>
September 30, 1995
------------------------------------------------------------------------------------------------------
Gross Gross
Principal Unamortized Unearned Amortized Unrealized Unrealized Fair
Balance Premiums (Discounts) Costs Gains (Losses) Value
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
and related securities $ 4,530,000 $ 48,000 $ (49,000) $ 4,529,000 $ 116,000 $ (3,000) $ 4,642,000
======================================================================================================
<CAPTION>
September 30, 1994
------------------------------------------------------------------------------------------------------
Gross Gross
Principal Unamortized Unearned Amortized Unrealized Unrealized Fair
Balance Premiums (Discounts) Cost Gains (Losses) Value
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
and related securities $ 5,320,000 $ 60,000 $ (55,000) $ 5,325,000 $ 51,000 $ (105,000) $ 5,271,000
======================================================================================================
</TABLE>
There were no sales of investment securities held to maturity during the six
months ended March 31, 1996 and 1995, and the years ended September 30, 1995,
1994 and 1993. Gross proceeds from maturities and recalled securities during the
six months ended March 31, 1996 and 1995, and the years ended September 30,
1995, 1994 and 1993 were $-0-, $-0-, $-0-, $5,500,000 and $10,400,000,
respectively. Gross realized gains were $-0-, $-0-, $-0-, $4,000 and $33,000 on
recalled securities during the six months ended March 31, 1996 and 1995, and the
years ended September 30, 1995, 1994 and 1993, respectively.
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.
F-16
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 4. Securities Held to Maturity (Continued)
The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required
to maintain an investment in capital stock of the Federal Home Loan Bank 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 Federal Home Loan Bank
stock, and it has no quoted market value. For presentation purposes, such stock
is assumed to have a fair value which is equal to cost.
Note 5. Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
March 31, ---------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Principal balances:
First mortgage loans (principally conventional):
Secured by one-to-four family residences $ 90,274,000 $ 94,036,000 $ 91,674,000
Secured by other properties 10,172,000 8,743,000 9,025,000
Construction loans 5,973,000 5,368,000 6,015,000
Home equity and second mortgage 3,766,000 3,875,000 4,056,000
-----------------------------------------------------------------------
110,185,000 112,022,000 110,770,000
-----------------------------------------------------------------------
Other loans 294,000 331,000 281,000
-----------------------------------------------------------------------
Allowance for loan losses (427,000) (137,000) (140,000)
Undisbursed portion of construction loans (2,797,000) (3,100,000) (3,602,000)
Net deferred loan origination fees (545,000) (519,000) (465,000)
-----------------------------------------------------------------------
(3,769,000) (3,756,000) (4,207,000)
-----------------------------------------------------------------------
$ 106,710,000 $ 108,597,000 $ 106,844,000
=======================================================================
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, September 30,
-------------------------------------------------------------------------------------
1996 1995 1995 1994 1993
-------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning $ 137,000 $ 140,000 $ 140,000 $ 144,000 $ 144,000
Loans charged off (17,000) (3,000) (3,000) (4,000) (1,000)
Recoveries 7,000 -- -- -- 1,000
Provision charged to operations 300,000 -- -- -- --
-------------------------------------------------------------------------------------
Balance, ending $ 427,000 $ 137,000 $ 137,000 $ 140,000 $ 144,000
=====================================================================================
</TABLE>
F-17
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Loans Receivable (Continued)
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 considers loans delinquent more than 90 days to be
impaired. Such loans amounted to approximately $702,000 at March 31, 1996 and
had an average outstanding balance of approximately $1,080,000 for the six
months pending March 31, 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 impaired loans is not required.
Nonperforming loans for which interest has been reduced totaled approximately
$702,000, $981,000 and $946,000 at March 31, 1996 and September 30, 1995 and
1994, 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 ($11,000), $2,000, $7,000, $10,000 and $47,000 for the six
months ended March 31, 1996 and 1995, and for the years ended September 30,
1995, 1994 and 1993, 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 $846,000, $970,000 and $1,262,000 at March 31,
1996, and September 30, 1995 and 1994, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing was approximately
$16,000, $11,000 and $53,000 at March 31, 1996 and September 30, 1995 and 1994,
respectively.
Officers and directors of the Bank were indebted to the Bank for loans made in
the ordinary course of business. The balances of such loans were $1,006,000,
$984,000 and $889,000 at March 31, 1996 and September 30, 1995 and 1994,
respectively.
Note 6. Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
March 31, September 30,
---------------------------
1996 1995 1994
------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Securities $ 402,000 $ 410,000 $ 325,000
Mortgage-backed securities 48,000 40,000 45,000
Loans receivable 701,000 700,000 657,000
------------------------------------------
$ 1,151,000 $ 1,150,000 $ 1,027,000
==========================================
</TABLE>
F-18
<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>
March 31, September 30,
--------------------------------
1996 1995 1994
--------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Land $ 138,000 $ 138,000 $ 138,000
Buildings and improvements 1,313,000 1,313,000 1,308,000
Furniture and equipment 622,000 615,000 454,000
Automobiles 45,000 45,000
--------------------------------------------------
2,118,000 2,111,000 1,900,000
Accumulated depreciation 870,000 817,000 713,000
--------------------------------------------------
$ 1,248,000 $ 1,294,000 $ 1,187,000
==================================================
</TABLE>
Note 8. Employee Pension Plan
Previous 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 $67,000,
$29,000 and $108,000 for the six months ended March 31, 1996 and 1995 and for
the year ended September 30, 1995, respectively, and is included in compensation
and benefits in the accompanying statements of income.
F-19
<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 March 31, 1996 and
September 30, 1995:
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
-------------------------------------
(Unaudited)
<S> <C> <C>
Actuarial present value of benefit (obligations):
Accumulated benefit (obligation):
Vested $ (183,000) $ (90,000)
Nonvested (18,000) (24,000)
-------------------------------------
(201,000) (144,000)
Effect of projected future compensation (466,000) (439,000)
-------------------------------------
Projected benefit (obligation) for service rendered
to date (667,000) (553,000)
Plan assets at fair value; primarily cash and
short-term investments 226,000 84,000
-------------------------------------
Projected benefit (obligation) in excess of plan
assets (441,000) (469,000)
Unrecognized prior service cost 455,000 547,000
Unrecognized net (gain)/loss 76,000 (73,000)
-------------------------------------
Prepaid pension cost (included in prepaid and
other assets) $ 90,000 $ 5,000
=====================================
</TABLE>
The components of net pension expense as of March 31, 1996, September 30, 1995
and 1994 are as follows (The information is not available for the six months
ended March 31, 1995):
<TABLE>
<CAPTION>
Years Ended
Six Months Ended September 30,
March 31, -----------------------------------
1996 1995 1994
-------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ 20,000 $ 33,000 $ --
Interest cost on projected benefit obligation 27,000 43,000 25,000
Actual return on plan assets (7,000) (2,000) (26,000)
Net amortization and deferral 27,000 34,000 3,000
-------------------------------------------------------
Net pension expense $ 67,000 $ 108,000 $ 2,000
=======================================================
</TABLE>
Assumptions used to develop the net periodic pension cost as of March 31, 1996
and September 30, 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>
F-20
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average March 31, September 30,
Rate at 1996 1995 1994
March 31, ----------------------------------------------------------------------------
1996 Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand and NOW accounts,
including noninterest bearing
of $723,000 at March 31, 1996,
$562,000 at September 30, 1995 and
$647,000 at September 31, 1994 2.26 % $ 7,433,000 5.15 % $ 6,893,000 5.01 % $ 6,947,000 5.46 %
Moneymarket 2.99 7,529,000 5.22 7,809,000 5.67 12,164,000 9.55
Passbook savings 3.00 15,390,000 10.67 15,490,000 11.25 17,711,000 13.91
----------------------------------------------------------------------------
30,352,000 21.04 % 30,192,000 21.93 % 36,822,000 28.92 %
----------------------------------------------------------------------------
Certificates of deposit:
2.00% to 3.99% 15,000 0.01 % 15,000 0.01 % 45,130,000 35.45 %
4.00% to 5.99% 50,469,000 34.98 38,643,000 28.07 45,207,000 35.51
6.00% to 7.99% 63,244,000 43.83 68,622,000 49.86 -- --
8.00% to 9.99% -- -- -- -- 41,000 0.03
----------------------------------------------------------------------------
6.09 113,728,000 78.82 % 107,280,000 77.94 % 90,378,000 70.99 %
----------------------------------------------------------------------------
Accrued interest payable 202,000 0.14 % 175,000 0.13 % 112,000 0.09 %
----------------------------------------------------------------------------
$114,282,000 100.00 % $137,647,000 100.00 % $127,312,000 100.00 %
============================================================================
Weighted average cost of savings
deposits 5.40 % 5.43 % 3.67 %
========= ========= =========
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $10,107,000, $10,838,000 and
$5,633,000 at March 31, 1996, and September 30, 1995 and 1994, 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:
<TABLE>
<CAPTION>
March 31,
1996
----------------
Maturity Period: (Unaudited)
<S> <C>
Within 3 months or less $ 2,120,000
Over 3 months through 6 months 2,490,000
Over 6 months through 12 months 1,915,000
Over 12 months 3,582,000
----------------
$ 10,107,000
================
</TABLE>
F-21
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Deposits (Continued)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
March 31, September 30,
---------------------------------------------------------------------------------
1996 1995 1995 1994 1993
---------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Passbook savings $ 231,000 $ 255,000 $ 492,000 $ 555,000 $ 553,000
NOW and money market 214,000 270,000 496,000 579,000 545,000
Certificates of deposit 3,386,000 2,007,000 4,992,000 3,839,000 4,939,000
---------------------------------------------------------------------------------
$ 3,831,000 $ 2,532,000 $ 5,980,000 $ 4,973,000 $ 6,037,000
=================================================================================
</TABLE>
The Bank has pledged securities with a book value of $1,000,000 at March 31,
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. Deferred Compensation Agreements
The Bank has entered into unfunded deferred compensation agreements providing
retirement and death benefits for six active and two retired 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 of the deferred
compensation expense and supplemental income agreement for the six months ended
March 31, 1996 and 1995, and for the years ended September 30, 1995, 1994, and
1993 amounted to approximately $111,000, $17,000, $379,000, $121,000, and $-0-,
respectively.
Note 11. 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.
F-22
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Accounting Change and Income Tax Matters (Continued)
Under FASB No. 109, a net deferred tax liability has been provided for certain
increases in the Bank's tax bad debt reserves subsequent to September 30, 1988
in excess of recorded book loan loss allowances. At March 31, 1996, retained
earnings contain certain additions to bad debt preserves 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 $1,119,000
as of March 31, 1996.
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.
The tax effects of temporary differences that gave rise to significant portions
of the net deferred tax liability in the statement of financial condition at
March 31, 1996, and September 30, 1995 and 1994 as adjusted for the adoption of
FASB Statement No. 109, were:
<TABLE>
<CAPTION>
March 31, September 30,
------------------------------------------------------
1996 1995 1994
------------------------------------------------------
Deferred tax liabilities: (Unaudited)
<S> <C> <C> <C>
FHLB stock dividends $ 231,000 $ 231,000 $ 215,000
Reserve for bad debts 402,000 412,000 416,000
Unrealized gain on securities available for sale 19,000 18,000 --
Property and equipment 65,000 59,000 40,000
Other 35,000 9,000 --
------------------------------------------------------
Total 752,000 729,000 671,000
------------------------------------------------------
Deferred tax assets:
Net deferred loan fees and costs 115,000 80,000 113,000
Deferred compensation and supplemental income 385,000 333,000 188,000
Reserve for uncollected interest 20,000 26,000 --
Unrealized loss on securities available for sale -- -- 114,000
Allowance for loan losses 167,000 54,000 77,000
------------------------------------------------------
Total 687,000 493,000 492,000
------------------------------------------------------
Net deferred tax liability $ 65,000 $ 236,000 $ 179,000
======================================================
</TABLE>
A valuation allowance was not recorded for deferred tax assets at March 31,
1996, September 30, 1995 or September 30, 1994.
F-23
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Accounting Change and Income Tax Matters (Continued)
Income tax expense (credits) consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
---------------------------------------------------------------------------------
1996 1995 1995 1994 1993
---------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current $ 361,000 679,000 $ 1,130,000 $ 1,611,000 1,742,000
Deferred (172,000) 50,000 (75,000) (113,000) 23,000
---------------------------------------------------------------------------------
Total $ 189,000 729,000 $ 1,055,000 $ 1,498,000 1,765,000
=================================================================================
</TABLE>
The following is a reconciliation of the federal
income tax rate of 34% to the effective tax rate:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, September 30,
--------------------------------------------------------------------------------
1996 1995 1995 1994 1993
--------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Statutory federal income tax rate 34.0 34.0 % 34.0 % 34.0 % 34.0 %
Increase in taxes resulting from:
Tax bad debt deduction -- -- -- -- (2.9)
State income taxes, net of federal
benefit 4.7 3.3 2.2 3.3 3.7
--------------------------------------------------------------------------------
38.7 % 37.3 % 36.2 % 37.3 % 34.8 %
================================================================================
</TABLE>
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
purpose of absorbing losses. The applicable provisions of the law permit the
Bank, upon meeting certain critical tests, to deduct from taxable income an
allowance for bad debts based on the greater of 8% of taxable income before such
deduction or actual loss experience. The Bank has utilized the experience method
for the years ended September 30, 1995 and 1994 and the percentage of taxable
income method for the year ended September 30, 1993.
Note 12. Capital Requirements
The FDIC requires the Bank 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.
F-24
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Capital Requirements (Continued)
At March 31, 1996, the Bank complied with all the capital requirements described
above as shown below:
<TABLE>
<CAPTION>
Leverage N. C.
Ratio of Tier I Savings
GAAP Tier I Risk-Adjusted Risk-Based Bank
Equity Capital Capital Capital Capital
--------------------------------------------------------------------------------
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
GAAP equity $ 20,720 $ 20,720 $ 20,720 $ 20,720 $ 20,720
===============
Supplemental capital items:
General valuation allowance -- 427 427
Unrealized (gains) on
securities available for sale (29) (29) (29) (29)
----------------------------------------------------------------
Regulatory capital 20,691 20,691 21,118 21,118
Minimum capital requirement 6,679 2,726 5,452 8,349
----------------------------------------------------------------
Excess regulatory capital $ 14,012 $ 17,965 $ 15,666 $ 12,769
================================================================
Total assets at March 31, 1996 $ 166,978 $ 166,978
============== ==============
Risk-weighted assets at
March 31, 1996 $ 68,152 $ 68,152
Capital as a percentage of ==============================
assets:
Actual 12.39% 30.36% 30.99% 12.65 %
Required 4.00 4.00 8.00 5.00
----------------------------------------------------------------
Excess 8.39% 26.36% 22.99% 7.65 %
================================================================
</TABLE>
Note 13. Financial Installments 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
it 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.
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.
F-25
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Financial Instruments with Off-Statement of Financial Condition Risk
(Continued)
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------
Fixed Rate Variable Rate
----------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $ 1,311,000 $ --
Undisbursed lines of credit -- 2,814,000
----------------------------------
$ 1,311,000 $ 2,814,000
==================================
</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 cash requirements, since some may expire without being drawn
upon. The Bank evaluates peach customers credit worthiness on a case-by-case
basis.
Note 14. 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 the 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.
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 or subject to
immediate repricing, no fair value has been assigned to these off-statement of
financial condition commitments.
F-26
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Disclosures About Fair Value of Financial Instruments (Continued)
The recorded book value and estimated fair value of the Bank's financial
instruments at March 31, 1996, September 30, 1995 and 1994 are summarized below:
<TABLE>
<CAPTION>
March 31, September 30,
-----------------------------------------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Values Fair Value Values Fair Value Values Fair Value
-----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 20,076,000 $ 20,076,000 $ 11,494,000 $ 11,494,000 $ 6,649,000 $ 6,649,000
Securities held to maturity 5,987,000 6,058,000 4,529,000 4,642,000 5,325,000 5,271,000
Securities available for sale 29,943,000 29,943,000 30,974,000 30,974,000 25,076,000 25,076,000
Federal Home Loan Bank
stock 1,346,000 1,346,000 1,346,000 1,346,000 1,346,000 1,346,000
Loans receivable, net 106,710,000 107,722,000 108,597,000 108,824,000 106,844,000 108,300,000
Accrued interest receivable 1,151,000 1,151,000 1,150,000 1,150,000 1,027,000 1,027,000
Financial Liabilities:
Savings deposits with no
stated maturities 30,352,000 30,352,000 30,192,000 30,192,000 36,822,000 36,822,000
Savings deposits with
stated maturities 113,728,000 114,440,000 107,280,000 107,644,000 90,378,000 89,875,000
Checks outstanding on
disbursement account 563,000 563,000 489,000 489,000 783,000 783,000
Accrued interest payable 202,000 202,000 175,000 175,000 112,000 112,000
Advance payments by
borrowers for taxes and
insurance 305,000 305,000 97,000 97,000 474,000 474,000
</TABLE>
Note 15. Dissolution of Subsidiary
Effective September 13, 1994, the Board of Directors 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 Corporation. The subsidiary was inactive prior to
dissolution.
F-27
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 16. Subsequent Event-Plan of Conversion (Unaudited)
Pending the approval of the Board of Directors, the Bank will adopt a Plan of
Conversion (the Plan) under which the Bank will convert from a North Carolina
chartered mutual savings bank to a North Carolina chartered stock savings bank
and will become a wholly-owned subsidiary of a holding company formed in
connection with the conversion. The holding company will issue common stock to
be sold in the conversion and will use that portion of the net proceeds thereof
which it does not retain to purchase the capital stock of the Bank. The Plan is
subject to approval by regulatory authorities and the members of the Bank at a
special meeting.
At the time of the conversion, the Bank will establish a liquidation account in
the amount equal to its net worth as reflected in its latest statement of
financial condition used in its final conversion-offering circular. The
liquidation account will be maintained for the benefit of eligible deposit
account holders who continue to maintain their deposit accounts in the Bank
after conversion. Only in the event of a complete liquidation each deposit
account holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
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 and state regulations. As a North Carolina-chartered stock
savings bank, the Bank may not declare or pay a cash dividend on its capital
stock if the effect of such transaction would be to reduce the net worth of the
Bank to an amount which is less than the minimum amount required by applicable
federal and state regulations. For a period of five years after its conversion
from mutual to stock form, the Bank must obtain written approval from the
Administrator of the North Carolina Savings Institutions Division 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 Banks net income for the most recent
fiscal year end, or (ii) the average of the Banks net income after dividends for
the most recent year end and not more than two of the immediately preceding
fiscal year ends.
If the conversion is ultimately successful, conversion costs will be accounted
for as a reduction of the stock proceeds. If the conversion is unsuccessful,
conversion costs will be charged to the Bank's operations. The Bank incurred
approximately $18,000 of conversion costs as of March 31, 1996, which have been
deferred and included in prepaid assets.
Note 17. Reclassification
Certain amounts in the September 30, 1995, 1994, and 1993 financial statements
have been reclassified to conform with March 31, 1996 presentation with no
effect on net income or retained earnings.
F-28
<PAGE>
HOME SAVINGS BANK OF ALBEMARLE, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 18. Future Reporting Requirements
The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation, which
the Bank has not been required to adopt as of March 31, 1996.
The Statement, which will be in effect for the Bank's fiscal year pending
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.
F-29
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL OR ENTITY HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
ANY SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY SOUTH STREET FINANCIAL CORP. OR HOME SAVINGS BANK OF
ALBEMARLE, S.S.B. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY, OR ANY
OTHER SECURITIES, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF SOUTH STREET FINANCIAL CORP. OR HOME SAVINGS BANK OF ALBEMARLE,
S.S.B. SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR
SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 4
Selected Financial and Other Data of Home................................. 15
Recent Developments....................................................... 17
Risk Factors.............................................................. 20
South Street Financial Corp. ............................................. 28
Home Savings Bank of Albemarle, S.S.B. ................................... 28
Use of Proceeds........................................................... 29
Dividend Policy........................................................... 31
Market for Common Stock................................................... 32
Capitalization............................................................ 32
Pro Forma Data............................................................ 35
Historical and Pro Forma Capital Compliance............................... 40
Anticipated Stock Purchases by Management................................. 42
Management's Discussion and Analysis of
Financial Condition and Operating Results................................ 43
Business of the Holding Company........................................... 55
Business of Home.......................................................... 56
Taxation.................................................................. 82
Supervision and Regulation................................................ 84
Management of the Holding Company......................................... 95
Management of Home........................................................ 96
Description of Capital Stock.............................................. 108
Anti-Takeover Provisions of the Holding Company and Home.................. 110
Certain Provisions of the Charters and Bylaws of the Holding Company and
Home..................................................................... 114
The Conversion............................................................ 114
Legal Opinions............................................................ 130
Experts................................................................... 130
Registration Requirements................................................. 130
Additional Information.................................................... 130
Index to Financial Statements of Home Savings Bank of Albemarle, S.S.B. .. F-1
</TABLE>
---------------
UNTIL NOVEMBER 14, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
ANTICIPATED MAXIMUM OF
3,910,000SHARES
SOUTH STREET FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR HOME SAVINGS BANK OF ALBEMARLE, INC., S.S.B.)
COMMON STOCK
---------------
PROSPECTUS
---------------
TRIDENT SECURITIES, INC.
AUGUST 12, 1996
===============================================================================
