<PAGE>
PROSPECTUS Pursuant to Rule 424(b)(3)
Registration No. 333-6855
CAROLINA
-----------------
FINCORP, INC.
(PROPOSED HOLDING COMPANY FOR RICHMOND SAVINGS BANK, SSB)
UP TO 1,851,500 SHARES OF COMMON STOCK
Carolina Fincorp, Inc., a North Carolina corporation (the "Holding
Company"), is offering up to 1,851,500 shares of its common stock, no par
value (the "Common Stock"), in connection with the conversion of Richmond
Savings Bank, SSB ("Richmond Savings") from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank (the
"Conversion"). The purchase price for the Common Stock is $10.00 per share. As
part of the Conversion, the Holding Company will become the sole stockholder
and parent holding company of Richmond Savings. See "THE CONVERSION." Non-
transferable rights ("Subscription Rights") to subscribe for shares of Common
Stock of the Holding Company in a subscription offering (the "Subscription
Offering") have been granted to certain depositors and borrowers of Richmond
Savings, Richmond Savings' Employee Stock Ownership Plan (the "ESOP") and
certain others in accordance with Richmond Savings' Plan of Holding Company
Conversion (the "Plan of Conversion"). The Subscription Offering will expire
at 12:00 Noon, Eastern Time, on November 5, 1996, unless extended by Richmond
Savings and the Holding Company with the approval of the Administrator (the
"Expiration Time"). See "THE CONVERSION--Subscription Offering."
(cover continued on next page)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR SHARES OF COMMON STOCK,
CALL THE STOCK INFORMATION CENTER AT (910) 997-6245.
--------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 16.
--------------
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 FEDERAL DEPOSIT INSURANCE
CORPORATION (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.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS, ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY AND INVOLVE INVESTMENT RISK INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
================================================================================
<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 $0.58 $9.42
- -------------------------------------------------------------------------------------------------------------
Per Share at Midpoint......................... $10.00 $0.54 $9.46
- -------------------------------------------------------------------------------------------------------------
Per Share at Maximum.......................... $10.00 $0.51 $9.49
- -------------------------------------------------------------------------------------------------------------
Per Share at Maximum, as adjusted............. $10.00 $0.48 $9.52
- -------------------------------------------------------------------------------------------------------------
Total at Minimum(1)........................... $11,900,000 $695,000 $11,205,000
- -------------------------------------------------------------------------------------------------------------
Total at Midpoint(1).......................... $14,000,000 $754,000 $13,246,000
- -------------------------------------------------------------------------------------------------------------
Total at Maximum(1)........................... $16,100,000 $814,000 $15,286,000
- -------------------------------------------------------------------------------------------------------------
Total at Maximum, as adjusted(2).............. $18,515,000 $882,000 $17,633,000
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by Baxter
Fentriss and Company ("Baxter Fentriss") dated August 8, 1996, which
states that the estimated aggregate pro forma market value of the Holding
Company and Richmond Savings ranged from $11,900,000 to $16,100,000
("Valuation Range") or between 1,190,000 and 1,610,000 shares of Common
Stock at the purchase price of $10.00 per share, which is the amount to be
paid for each share of Common Stock purchased in the Offerings (as
hereinafter defined). 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 due to an increase of up to 15% above the
maximum of the Valuation Range and the related increase of up to 15% above
the maximum number of shares which may be offered in the Conversion at
such maximum, without the resolicitation of subscribers or any right to
cancel or modify subscription orders, to reflect changes in market and
financial conditions following commencement of the Subscription Offering
(as hereinafter defined).
(3) Consists of the estimated costs to Richmond Savings and the Holding
Company arising from the Conversion, including estimated fixed expenses of
approximately $383,000 (including reimbursable out-of-pocket expenses to
be paid to Trident Securities, Inc.) and management and marketing fees and
commissions to be paid to Trident Securities, Inc. Total fees and
commissions to be paid to Trident Securities, Inc. are estimated to be
between $312,000 and $499,000 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. Trident Securities, Inc.
may be deemed to be an underwriter, and such fees may be deemed to be
underwriting fees. Richmond Savings and the Holding Company have agreed to
indemnify Trident Securities, Inc. against certain claims or liabilities,
including claims under the Securities Act of 1933, as amended. See "THE
CONVERSION--Marketing Arrangements."
(4) Includes estimated net proceeds from the sale of 8% of the shares to be
issued which are expected to be purchased by Richmond Savings' Employee
Stock Ownership Plan (the "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 respectively in
the Subscription Offering and in any Community Offering and Syndicated
Community Offering (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 OCTOBER 2, 1996.
<PAGE>
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale in a community offering (the "Community Offering") to
members of the general public with priority being given to natural persons or
trusts of natural persons residing in Richmond, Moore and Scotland counties in
North Carolina (the "Local Community"), including IRAs, Keogh accounts and
similar retirement accounts established for the benefit of natural persons who
are residents of the Local Community. The Community Offering, if one is held,
may begin at any time after the beginning of the Subscription Offering and may
terminate at the Expiration Time or at any time thereafter, but not later than
December 20, 1996, unless further extended with the consent of the
Administrator. See "THE CONVERSION--Community Offering."
It is anticipated that 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"). The Subscription, Community and
Syndicated Community Offerings are referred to collectively as the
"Offerings." Richmond Savings and the Holding Company have engaged Trident
Securities, Inc. ("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."
The sale of the Common Stock in the Subscription and Community Offerings,
and in the Syndicated Community Offering, if necessary, must 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 resolicited. SUBJECT TO THE FOREGOING, AN EXECUTED STOCK
ORDER FORM, ONCE RECEIVED BY RICHMOND SAVINGS, IS IRREVOCABLE AND MAY NOT BE
MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF RICHMOND SAVINGS. See
"THE CONVERSION--Exercise of Subscription Rights and Purchases in the
Community Offering."
The Conversion and the acceptance of subscriptions are, among other things,
contingent upon approval of the Conversion by Richmond Savings' members at a
special meeting scheduled to be held on November 6, 1996 (the "Special
Meeting") and upon the sale of shares of Common Stock for an aggregate
purchase price of not less than $11,900,000. See "THE CONVERSION--Offering of
Common Stock."
The Boards of Directors and management of Richmond Savings 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. Also, Trident Securities makes no recommendation relating to
such investment. See "RISK FACTORS--No Opinion or Recommendation by Sales
Agent."
A Stock Information Center has been established at Richmond Savings'
headquarters office at 115 South Lawrence Street, Rockingham, North Carolina,
in an area separate from Richmond Savings' banking operations. The telephone
number of the Stock Information Center is (910) 997-6245.
2
<PAGE>
Richmond Savings Bank, SSB
Rockingham, North Carolina
[MAP OF NORTH CAROLINA WITH RICHMOND SAVINGS' MARKET AREA HIGHLIGHTED
APPEARS HERE]
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.
Carolina Fincorp, Inc. The Holding Company is a North Carolina
corporation recently organized by the Board of
Directors of Richmond Savings to acquire all of
the capital stock that Richmond Savings will
issue upon its conversion from the mutual to
stock form of ownership. The conversion of
Richmond Savings to stock form, the issuance of
Richmond Savings' 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 solely of owning Richmond
Savings, 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 Richmond Savings.
The executive office of the Holding Company is
located at 115 South Lawrence Street,
Rockingham, North Carolina, and its telephone
number is (910) 997-6245.
Richmond Savings Bank,
SSB Richmond Savings is a North Carolina-chartered
mutual savings bank headquartered in Rockingham,
North Carolina and has been in operation since
1906. Since 1957, Richmond Savings has been a
member of the Federal Home Loan Bank ("FHLB")
system and its deposits have been federally
insured. Richmond Savings' deposits are now
insured by the Savings Association Insurance
Fund (the "SAIF") of the FDIC to the maximum
amount permitted by law.
Richmond Savings conducts business through two
full service offices in Rockingham and full
service offices in Southern Pines and Ellerbe,
North Carolina. Richmond Savings also operates a
loan origination office in Laurinburg, North
Carolina. Richmond Savings' primary market area
consists of Richmond, Moore and Scotland
counties in North Carolina. At June 30, 1996,
Richmond Savings had total assets of $94.1
million, net loans of $68.4 million, deposits of
$83.7 million and retained earnings of $8.6
million.
Richmond Savings is primarily engaged in the
business of attracting deposits from the general
public and using such deposits to make mortgage
loans secured by one-to-four family residential
real estate located in Richmond Savings' primary
market area of Richmond, Moore and Scotland
counties in North Carolina. Richmond Savings
also makes home equity line of credit loans,
multi-family residential loans, commercial
loans, construction loans, home improvement
loans, loans secured by deposit accounts, and
various types of consumer loans. See "BUSINESS
OF RICHMOND SAVINGS." Richmond Savings 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.
The Conversion Richmond Savings was organized and has operated
for most of its existence as a traditional
savings and loan association. The Board of
Directors believes that the banking and
financial services industries are in the process
of fundamental changes,
4
<PAGE>
reflecting changes in the local, national and international
economies, technological changes and changes in state and
federal laws. As a result, for several years Richmond Savings
has been studying the environment in which it operates and its
strategic options.
As a result of its study of its strategic options, Richmond
Savings adopted the Plan of Conversion, which provides for
conversion of Richmond Savings from a North Carolina-chartered
mutual savings bank to a North Carolina-chartered stock
savings bank. Richmond Savings believes that converting the
bank from the mutual to stock form and organizing the Holding
Company will provide increased flexibility for Richmond
Savings and the Holding Company to react to changes in their
operating environment, regardless of any strategies ultimately
chosen. Richmond Savings also believes that the additional
capital will enhance its ability to provide additional
customer services and that stockholders of the Holding Company
will be encouraged to do more business with, and refer more
customers to, Richmond Savings.
The Plan of Conversion must be approved by a majority of the
votes which could be cast by members of Richmond Savings at a
Special Meeting to be held on November 6, 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 Richmond Savings and the approvals of the FDIC and the
Administrator which are necessary for Richmond Savings 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
Richmond Savings' 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
notice of non-objection with respect 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, Richmond Savings will remain a North Carolina-
chartered mutual savings bank, all subscription funds will be
returned promptly plus interest at Richmond Savings' passbook
rate, and all deposit withdrawal authorizations will be
cancelled without any action on the part of subscribers or
purchasers.
The Offerings
Pursuant to the Plan of Conversion, between 1,190,000 shares
and 1,851,500 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) Richmond Savings' depositors
as of March 31, 1995 who had aggregate deposits at the close
of business on such date of at least $50 ("Eligible Account
Holders"); (ii) Richmond Savings' Employee Stock Ownership
Plan (the "ESOP"); (iii) Richmond Savings' depositors as of
June 30, 1996 (the "Supplemental Eligibility Record Date"),
who had aggregate deposits at the close of business on such
date of at least $50 ("Supplemental Eligible Account
Holders"); (iv) Richmond Savings' depositor and borrower
members as of September 20, 1996, who are not Eligible Account
Holders or Supplemental Eligible Account Holders ("Other
Members"); and (v) directors, officers and employees of
Richmond Savings who are not Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members.
Beneficial owners of individual retirement accounts
5
<PAGE>
("IRAs"), Keogh savings accounts and other similar
retirement accounts have been deemed to be holders
of such accounts for purposes of the exercise of
Subscription Rights. 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 priority given to natural persons or
trusts of natural persons who are residents of the
Local Community, including IRAs, Keogh accounts and
similar retirement accounts established for the
benefit of natural persons who are residents of the
Local Community. The Holding Company and Richmond
Savings 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 purchased in the
Community Offering will be offered for sale 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., Eastern
Time, on November 5, 1996, unless extended. The
Community Offering, if any, may commence at any
time after the commencement of the Subscription
Offering and may terminate at the Expiration Time
or at any time thereafter, but not later than
December 20, 1996, unless extended with the
approval of the Administrator.
Stock Purchase Limitations
The maximum aggregate number of shares of Common
Stock for which any person or entity (other than
the ESOP), together with associates, and persons
acting in concert, may subscribe in the Offerings
is 25,000 shares. However, Richmond Savings' Board
of Directors has the right, at any time prior to
completion of the Conversion, to decrease the
25,000 maximum purchase limitation to an amount not
less than 1% of the shares issued in the Conversion
or increase such 25,000 share limitation to an
amount up to 5% of the shares issued in the
Conversion. Any decrease or increase in the maximum
purchase limitation will be without notice to, or
resolicitation of, subscribers and without a
resolicitation of proxies in connection with the
Special Meeting. The ESOP may purchase up to 8% of
the shares of Common Stock issued in the Conversion
(between 95,200 and 128,800 shares assuming the
issuance of between 1,190,000 and 1,610,000
shares). If, because there is an oversubscription
for shares or for any other reason, the ESOP is
nevertheless unable to purchase in the aggregate up
to 8% of the shares of Common Stock issued in the
Conversion, it is expected that the ESOP will
purchase shares of Common Stock in the open market
so that after such purchases a number of shares of
Common Stock up to 8% of the number of shares
issued in the Conversion will have been acquired by
the ESOP. See "RISK FACTORS -- Cost of ESOP." No
person or entity may subscribe for less than 50
shares of Common Stock, or an aggregate dollar
amount of less than $500.
The term "acting in concert" is defined in the Plan
to mean: (i) knowing participation in a joint
activity or interdependent 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) 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
6
<PAGE>
Richmond Savings may presume that certain persons
are acting in concert based upon, among other
things, joint account relationships and the fact
that such persons have filed joint Schedules 13D
with the SEC with respect to other companies. The
term "associate" of a person is defined in the
Plan to mean: (i) any corporation or organization
(other than Richmond Savings, the Holding Company
or any of their majority-owned subsidiaries) of
which such person is an officer or partner or is,
directly or indirectly, the beneficial owner of
10% or more of any class of equity securities;
(ii) any trust or other estate in which such
person has a substantial beneficial interest or
as to which such person serves as trustee or in a
similar fiduciary capacity (excluding tax-
qualified employee plans and charitable trusts
which are exempt from federal taxation pursuant
to Section 501(c)(3) of the Internal Revenue
Code, as amended); and (iii) any relative or
spouse of such person, or any relative of such
spouse, who either has the same home as such
person or who is a director or officer of
Richmond Savings, the Holding Company or any of
their parents or subsidiaries. See "THE
CONVERSION -- Minimum and Maximum Purchase
Limitations."
Subscription Rights; Purchase
of Shares
Subscription Rights are non-transferable and may
be exercised only by the person to whom they are
issued and only for his or her own account.
Subscription Rights are exercisable and purchases
may be made in the Offerings only by returning
the stock order form accompanying this Prospectus
(the "Stock Order Form") properly completed with
full payment for the aggregate dollar amount of
Common Stock desired. Stock Order Forms and
required payments for purchases in the
Subscription Offering must be received prior to
the Expiration Time. Stock Order Forms and
required payments for purchases in the Community
Offering must be delivered prior to the time the
Community Offering terminates, which may be at
the Expiration Time or at any time thereafter
(but not later than December 20, 1996). Payment
may be made in cash (if delivered in person to
any office of Richmond Savings), by check, bank
draft, negotiable order of withdrawal or money
order, or by authorization of withdrawal from
deposit accounts maintained with Richmond
Savings, other than negotiable order of
withdrawal or other demand deposit accounts.
Subscription payments made in cash, by check,
bank draft, negotiable order of withdrawal or
money order will earn interest at Richmond
Savings' passbook savings rate from the date
payment in good funds is received by Richmond
Savings until the 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
filled. Subscription payments made by
authorization of withdrawal from a deposit
account at Richmond Savings will continue to earn
interest at the applicable contractual rate until
the Conversion is completed or terminated; such
funds will be otherwise unavailable to the
depositor. Payment for Common Stock may be made
from funds in an IRA, Keogh or similar account at
Richmond Savings only if the beneficial owner of
such account directs Richmond Savings to transfer
that account to a self-directed account in the
name of an independent trustee. No early
withdrawal penalties will be incurred in
connection with payments made through
authorization of withdrawals from certificate
accounts, including IRA, Keogh and similar
retirement accounts. However, if after such
withdrawal the applicable minimum balance
requirement ceases to be satisfied, such
certificate account will be cancelled and the
remaining balance thereof will earn interest at
Richmond Savings' passbook savings rate. See "THE
CONVERSION -- Exercise of Subscription Rights and
Purchases in the Community Offering."
7
<PAGE>
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 Richmond Savings. Baxter Fentriss and
Company ("Baxter Fentriss"), an independent financial
consulting firm, has advised Richmond Savings and the Holding
Company that in its opinion, at August 8, 1996, the Valuation
Range of the aggregate estimated pro forma market value of the
Holding Company and Richmond Savings was from $11,900,000 to
$16,100,000. The August 8, 1996 appraisal was a revision of an
earlier appraisal by Baxter Fentriss dated May 17, 1996 which
contained a valuation range of from $12,580,000 to $17,020,000.
The primary reasons for the decrease in the valuation range are
(i) a reduced level of earnings for Richmond Savings during the
last quarter of the fiscal year ended June 30, 1996, and (ii) a
decline in the stock market, which resulted in less interest in
conversion offerings between May 17, 1996 and August 8, 1996.
The appraisal will be reviewed and, if appropriate, revised by
Baxter Fentriss upon conclusion of the Offerings. The appraisal
by Baxter Fentriss 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 has been
determined by the Board of Directors of Richmond Savings and
the Holding Company based upon the independent appraisal of the
pro forma market value of the Holding Company and Richmond
Savings prepared by Baxter Fentriss. 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. 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, without any solicitation of subscriptions or right
to cancel, rescind or change subscription orders, to up to 15%
above the maximum of the Valuation Range. However, the
aggregate dollar amount of Common Stock that may be sold in the
Conversion will not be more than $18,515,000 or less than
$11,900,000 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. 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
$11,205,000 and $17,633,000 depending upon the actual expenses
of the Conversion and other factors. See "PRO FORMA DATA." The
Holding Company intends to use a portion of the net proceeds of
the Offerings (estimated between $952,000 and $1,288,000
assuming the ESOP's purchase of between 95,200 and 128,800
shares at $10 per share) 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
8
<PAGE>
Common Stock. The Holding Company will initially invest these
proceeds primarily in interest-earning deposits, U.S.
government, federal agency and other marketable securities and
mortgage-backed securities. 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 Richmond Savings
in exchange for all of the capital stock of Richmond Savings.
The net proceeds paid to Richmond Savings will become part of
Richmond Savings' general funds, and will initially be invested
in mortgage and other loans, mortgage-backed securities and
investments consisting primarily of U.S. government and federal
agency obligations, interest-earning deposits and other
marketable securities in accordance with Richmond Savings'
lending and investment policies.
Net proceeds will also be used for other general corporate
purposes. Richmond Savings is in the process of relocating its
Ellerbe, North Carolina branch office into a new Ellerbe office
which is expected to be opened in late 1996. The completion of
this relocation is not contingent upon consummation of the
Conversion. The estimated cost of such new office, less the
expected proceeds from the sale of the existing Ellerbe office,
is expected to be approximately $255,000. In addition,
regardless of whether the Conversion is consummated, Richmond
Savings anticipates relocating its Richmond Plaza branch office
in Rockingham, North Carolina (which is now leased) to another
nearby location in Rockingham to be owned by Richmond Savings.
Although the new facility is expected to cost approximately
$495,000, the effect on the Holding Company's financial
condition and results of operations is not expected to be
material because lease payments at the existing Richmond Plaza
location would terminate. Proceeds of the Conversion are not
needed to complete the relocation of the Ellerbe and Richmond
Plaza offices but could be used for such purposes.
In addition, prior to adopting the Plan of Conversion, Richmond
Savings had begun considering the possibility of opening other
branch offices in its primary market area and other nearby
communities. Whether such offices will be opened is not
contingent upon consummation of the Conversion; however, if any
such offices are opened, proceeds of the Conversion could be
used in acquiring, constructing or equipping them. In addition,
the Holding Company and Richmond Savings may consider acquiring
other financial institutions in Richmond Savings' primary
market area and other nearby communities in transactions in
which such institutions would be merged into Richmond Savings
or held as separate subsidiaries of the Holding Company. Except
for the Ellerbe and Richmond Plaza branch relocations described
above, the Holding Company and Richmond Savings have no current
plans to open any additional office or to acquire any other
financial institution.
If Richmond Savings' proposed Management Recognition Plan and
Trust (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 RICHMOND SAVINGS -- 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 Richmond
Savings from the proceeds of the Conversion. It is estimated
that between 47,600 and 64,400 shares will be acquired by the
MRP,
9
<PAGE>
assuming the issuance of between 1,190,000 and 1,610,000 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, Richmond Savings would contribute between
$476,000 and $644,000, respectively, to the MRP for this
purpose. Additional shares would be acquired if the number of
shares issued in the Conversion exceeds 1,610,000 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
RICHMOND SAVINGS -- Proposed Management Recognition Plan."
If the Holding Company's 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 would be held to satisfy options
granted under such plan. Such shares could be acquired after
options are granted and prior to the time options vest under the
Stock Option Plan. To the extent that sufficient shares are not
acquired in the open market to satisfy options granted under the
Stock Option Plan, the Holding Company will reserve authorized
but unissued shares for this purpose. See "MANAGEMENT OF
RICHMOND SAVINGS -- Proposed Stock Option Plan." The funds for
any purchases in the open market may be provided by the Holding
Company or Richmond Savings from the proceeds of the Conversion.
It is estimated that between 119,000 and 161,000 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 1,190,000 and 1,610,000 shares in the
Conversion. If shares are acquired in the open market, the
Holding Company or Richmond Savings would contribute between
$1,190,000 and $1,610,000 respectively, to the Stock Option Plan
for this purpose, assuming such shares are acquired at a price
of $10.00 per share. Additional shares could be acquired if the
number of shares issued in the Conversion exceeds 1,610,000 and
the price could be more or less than $10.00 per share, which
would change the contribution to the Stock Option Plan
accordingly. See "RISK FACTORS -- Cost and Possible Dilutive
Effect on the MRP and Stock Option Plan" and "MANAGEMENT OF
RICHMOND SAVINGS -- Proposed Stock Option Plan."
Dividends Following the Conversion, the Holding Company currently expects
to pay quarterly cash dividends on the Common Stock at a rate to
be determined. In addition, the Holding Company may determine
from time to time that it is prudent to pay special nonrecurring
cash dividends. 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 Richmond Savings, net worth
and capital requirements, regulatory restrictions, tax
consequences, industry standards, and general economic
conditions, and it will authorize cash dividends to be paid if
it deems such payment appropriate and in compliance with
applicable law. There can be no assurance that dividends will in
fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods.
See "DIVIDEND POLICY." In connection with the Conversion, the
Holding Company and Richmond Savings have agreed with the FDIC
that, within the first year after completion of the Conversion,
neither the Holding Company nor Richmond Savings will pay any
dividend or make any distribution that represents, or is
characterized as, or is treated for income tax purposes as, a
return of capital. The ability of the Holding Company to pay
dividends may be dependent upon the
10
<PAGE>
Holding Company's receipt of dividends from Richmond Savings.
Richmond Savings' ability to pay dividends is restricted. See
"SUPERVISION AND REGULATION --Regulation of Richmond Savings --
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 Richmond Savings to pay
dividends to the Holding Company without incurring a recapture
tax.
Market for The Holding Company, as a newly organized company, has never
Common Stock 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 ("Nasdaq") under the symbol "CFNC." There
can be no assurance that the Common Stock will in fact be listed
for quotation on Nasdaq. A public market having the desirable
characteristics of depth, liquidity and orderliness will depend
upon the presence in the market place of both willing buyers and
willing sellers at any given time. No assurance can be given
that an active trading market will develop and be maintained.
See "MARKET FOR COMMON STOCK."
Stock Ownership
by Management The directors and executive officers of the Holding Company and
of Richmond Savings and their associates currently anticipate
subscribing for Common Stock in the aggregate amount of
$1,299,000, or 129,900 shares. As a result, such persons
anticipate subscribing for 8.07% to 10.92% 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 95,200 and 128,800 shares,
assuming the issuance of between 1,190,000 and 1,610,000
shares). See "MANAGEMENT OF RICHMOND SAVINGS -- Employee Stock
Ownership Plan." It is expected that directors, officers and
employees of the Holding Company and Richmond Savings will also
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 at a meeting of stockholders of the
Holding Company following the Conversion. See "-- Benefits to
Directors and Officers" and "MANAGEMENT OF RICHMOND SAVINGS --
Proposed Management Recognition Plan" and "-- Proposed Stock
Option Plan."
If (i) the Stock Option Plan is approved by the stockholders of
the Holding Company within one year after the Conversion and all
of the stock options which could be granted to directors and
executive officers under the Stock Option Plan are granted and
exercised or the shares for such options are acquired by the
Stock Option Plan and all option shares are acquired in the open
market, (ii) the MRP is approved by the stockholders of the
Holding Company within one year after the Conversion, all of the
MRP shares which could be granted to directors and executive
officers are granted and issued and all such shares are acquired
in the open market, (iii) the ESOP acquires 8% of the shares
issued in the Conversion and none of such shares are allocated,
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 associates as a group, including (a) shares
purchased outright in the Conversion, (b) shares purchased by
the ESOP, (c) shares purchased pursuant to the Stock Option Plan
and (d) shares granted under the MRP, would give such
11
<PAGE>
persons effective control over as much as 28.02% or 25.17%, at
the minimum and maximum of the Valuation Range, respectively, of
the Common Stock issued and outstanding.
Benefits to
Directors and In connection with the Conversion, certain benefits will be
Executive provided to directors, officers and employees of Richmond
Officers Savings.
Employment Agreements. In connection with the Conversion,
Richmond Savings will enter into employment agreements with R.
Larry Campbell, President, and John W. Bullard, Executive Vice
President. The employment agreements provide for initial annual
salaries of $95,400 and $63,600, respectively. See "MANAGEMENT
OF RICHMOND SAVINGS -- Employment Agreements."
Restricted Stock Grants. Pursuant to the MRP, which is expected
to be adopted by the Boards of Directors of the Holding Company
and Richmond Savings, directors, officers and employees of
Richmond Savings could receive restricted stock grants of a
number of shares of Common Stock equal to 4% of the shares
issued in the Conversion (between 47,600 and 64,400 shares,
assuming the issuance of between 1,190,000 and 1,610,000
shares). Assuming that the shares issued pursuant to the MRP had
a value of $10.00 per share, such shares would have a value of
between $476,000 and $644,000. Grants of restricted stock under
the MRP will be made at no cost to recipients.
Under the MRP, it is expected that Richmond Savings' two
executive officers, R. Larry Campbell and John W. Bullard, would
receive restricted stock grants for shares of Common Stock equal
to approximately 25% and 10%, respectively, of the number of
shares issued under the MRP. If 1,610,000 shares were issued in
the Conversion and if such shares had a value of $10.00 per
share, Messrs. Campbell and Bullard would receive restricted
stock grants of 16,100 shares and 6,440 shares, respectively,
having a value of $161,000 and $64,400, respectively.
Under applicable regulations, if the proposed MRP is submitted
to and approved by the stockholders of the Holding Company
within one year after consummation of the Conversion, the seven
non-employee directors of Richmond Savings would receive
restricted stock grants for an aggregate of not more than 30% of
the shares issued under the MRP, or 19,320 shares, assuming the
issuance of 1,610,000 shares in the Conversion. Assuming the MRP
shares had a value of $10.00 per share, such shares would have
an aggregate value of $193,200. After such grants, and after the
above-described grants to Messrs. Campbell and Bullard, 35% of
the shares which could be issued under the MRP would be
available for grants to other employees or could be held under
the MRP for later grants pursuant to the plan.
Shares granted under the MRP will be forfeited unless recipients
of grants satisfy certain vesting requirements, and the MRP will
only be effective if approved by the stockholders of the Holding
Company at a meeting of stockholders which may be held no sooner
than six months following the Conversion. See "MANAGEMENT OF
RICHMOND SAVINGS -- Proposed Management Recognition Plan."
Stock Options. Pursuant to the Stock Option Plan which is
expected to be adopted by the Boards of Directors of the Holding
Company and Richmond Savings, directors and employees of
Richmond Savings could receive options to purchase a number of
shares of Common Stock equal to 10% of the shares issued in the
12
<PAGE>
Conversion (between 119,000 and 161,000 shares, assuming the
issuance of between 1,190,000 and 1,610,000 shares).
Under the proposed Stock Option Plan, it is expected that
Richmond Savings' two executive officers, R. Larry Campbell and
John W. Bullard, would receive 25% and 10%, respectively, of the
options to be issued under the Stock Option Plan. If 1,610,000
shares were issued in the Conversion, Messrs. Campbell and
Bullard would receive options to purchase 40,250 and 16,100
shares, respectively. Under applicable regulations, if the
proposed Stock Option Plan is submitted to and approved by the
stockholders of the Holding Company within one year after
consummation of the Conversion, the seven non-employee directors
of Richmond Savings would receive, in the aggregate, 30% of the
options to be issued under the Stock Option Plan, or options to
purchase 48,300 shares, assuming the issuance of 1,610,000
shares in the Conversion. After such option grants, and after
the above-described grants of options to Messrs. Campbell and
Bullard, 35% of the options which could be issued under the
Stock Option Plan would be available for grants to other
employees or could be held under the Stock Option Plan for later
grants pursuant to the plan.
Options granted under the Stock Option Plan will be forfeited
unless recipients satisfy certain vesting requirements. The
Stock Option Plan will only be effective if approved by the
stockholders of the Holding Company at a meeting of stockholders
which may be held no sooner than six months following the
Conversion. 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 RICHMOND SAVINGS --
Proposed Stock Option Plan."
ESOP. In connection with the Conversion, Richmond Savings 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 95,200 and 128,800
shares, assuming the issuance of between 1,190,000 and 1,610,000
shares. See "MANAGEMENT OF RICHMOND SAVINGS -- Employee Stock
Ownership Plan."
Anti-Takeover The Articles of Incorporation and Bylaws of the Holding Company
Provisions and Richmond Savings contain certain restrictions that are
intended to discourage non-negotiated attempts to acquire
control of the Holding Company or Richmond Savings. 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. Other
factors, such as voting control of directors and officers and
agreements with employees, may also have an anti-takeover
effect. See "RISK FACTORS -- Anti-Takeover Considerations Which
13
<PAGE>
Could Impede Changes in Control" and "ANTI-TAKEOVER PROVISIONS
AFFECTING THE HOLDING COMPANY AND RICHMOND SAVINGS."
Risk Factors Special attention should be given to the "RISK FACTORS" section
of this Prospectus, which discusses the possible effects of
increases in interest rates on Richmond Savings, the disparity
between SAIF and Bank Insurance Fund ("BIF") insurance premiums,
a special SAIF insurance premium assessment, strong competition
and slow growth in Richmond Savings' market area, possible
expansion of Richmond Savings, anticipated low return on equity
following the Conversion, the cost of the ESOP, the cost and
possible dilutive effect of the MRP and Stock Option Plan,
increased tax liability related to recapture of bad debt
reserves, potential financial institution regulation and
legislation, absence of a prior market for the Common Stock,
income tax consequences of Subscription Rights, anti-takeover
considerations, and certain other matters that potential
purchasers should consider before deciding whether to subscribe
for the Common Stock offered hereby.
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<PAGE>
SELECTED FINANCIAL
AND OTHER DATA OF RICHMOND SAVINGS
Set forth below are summaries of historical financial and other data of
Richmond Savings. This information is derived in part from, and should be read
in conjunction with, the Consolidated Financial Statements and Notes to
Consolidated Financial Statements of Richmond Savings presented elsewhere herein
and with the section of this Prospectus entitled "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." All averages
presented in this Prospectus have been calculated on a monthly basis unless
otherwise stated.
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
----------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Financial condition data:
Total assets $94,110 $91,410 $87,504 $87,353 $84,703
Investments (1) 21,783 18,540 16,034 12,789 15,351
Loans receivable 68,358 68,745 67,680 67,900 63,004
Deposits 83,715 81,437 78,315 79,005 77,431
Retained earnings 8,641 8,128 7,414 6,561 5,605
Operating data:
Interest income $6,836 $ 6,378 $ 6,128 $6,698 $ 7,203
Interest expense 3,949 3,271 2,934 3,454 4,443
------- ------- ------- ------- -------
Net interest income 2,887 3,107 3,194 3,244 2,760
Provision for loan losses 36 36 36 38 48
------- ------- ------- ------- -------
Net interest income after provision for loan losses 2,851 3,071 3,158 3,206 2,712
Non-interest income 532 430 586 533 475
Non-interest expense 2,493 2,452 2,392 2,213 2,001
------- ------- ------- ------- -------
Income before income taxes 890 1,049 1,352 1,526 1,186
Income tax expense 299 329 492 570 400
------- ------- ------- ------- -------
Net income $ 591 $ 720 $ 860 $ 956 $ 786
======= ======= ======= ======= =======
Selected Other Data:
Number of outstanding loans 2,685 2,944 2,727 2,707 2,597
Number of deposit accounts 11,610 11,443 10,965 11,163 11,729
Number of full-service offices open 4 4 4 4 4
Return on average assets 0.64% 0.81% 0.98% 1.11% 0.95%
Return on average equity 7.01% 9.30% 12.27% 15.82% 15.37%
Average equity to average assets 9.12% 8.71% 7.98% 6.99% 6.18%
Interest rate spread 2.77% 3.24% 3.48% 3.59% 3.12%
Net yield on average interest-earning assets 3.26% 3.64% 3.79% 3.91% 3.48%
Average interest-earning assets to average
interest-bearing liabilities 110.90% 110.33% 108.93% 107.80% 106.45%
Ratio of non-interest expense to average total
assets 2.70% 2.76% 2.72% 2.56% 2.42%
Nonperforming assets to total assets 0.06% 0.08% 0.13% 0.08% 0.41%
Loan loss reserves to nonperforming loans at
period end 1,296.67% 484.00% 282.14% 1,137.04% 107.81%
--------- ------- ------- --------- -------
</TABLE>
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
15
<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.
Competitive Disadvantage Resulting From Disparity Between SAIF and BIF Insurance
Premiums and Special SAIF Assessment
As a SAIF-insured institution, Richmond Savings 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, which imposed assessments ranging from 23 cents to 31 cents
per $100 of insured domestic deposits. As a result of subsequent changes to the
uniform assessment rate, financial institutions such as Richmond Savings which
are members of the SAIF are currently required to pay higher deposit insurance
premiums than financial institutions which are members of the BIF, primarily
commercial banks, because the BIF has higher reserves than the SAIF and has been
responsible for fewer troubled institutions. This has created a disparity
between SAIF and BIF assessments. Annual assessments for BIF members in the
lowest risk category are now only $2,000. Richmond Savings paid deposit
insurance premiums of $186,000 and $185,000 in fiscal 1996 and 1995,
respectively. The FDIC has noted that the premium differential may have adverse
consequences for SAIF members, including reduced earnings and an impaired
ability to raise funds in capital markets. In addition, SAIF members, such as
Richmond Savings, could be placed at a substantial competitive disadvantage to
BIF members with respect to pricing of loans and deposits and the ability to
achieve lower operating costs.
A comprehensive continuing appropriations bill, which was passed by the
United States Congress and signed by the President on September 30, 1996,
reduced this premium differential between BIF- and SAIF-insured institutions but
did not eliminate it. As a result of this legislation, it is now anticipated
that, beginning on January 1, 1997, BIF-insured institutions, except those in
higher risk categories, will pay deposit insurance premiums equal to
approximately 1.3 cents per $100 of insured domestic deposits and that SAIF-
insured institutions, except those in higher risk categories, will pay deposit
insurance premiums equal to 6.4 cents per $100 of insured domestic deposits.
This premium differential is expected to exist until at least January 1, 1999.
See "SUPERVISION AND REGULATION -- Regulation of Richmond Savings -- Insurance
of Deposit Accounts."
The above-described comprehesive continuing appropriations bill enacted on
September 30, 1996 provides for a one-time assessment on SAIF members to
recapitalize the SAIF. The assessment is estimated to equal 65.7 cents per each
$100 of insured domestic deposits. Such premium will have the effect of
immediately reducing the capital of SAIF-member institutions by the amount of
the assessment. It is anticipated that SAIF-member institutions will not be
allowed to amortize the expense of the one-time assessment over a period of
years. The one-time assessment, which is expected to be based on Richmond
Savings' deposits as of March 31, 1995, is expected to equal approximately
$519,000 on a before tax basis and be payable prior to December, 1996. This
one-time assessment to recapitalize the SAIF is expected to have an adverse
effect on the operating expenses and results of operations of Richmond Savings
during the quarter ended December 31, 1996. See "SUPERVISION AND REGULATION --
Regulation of Richmond Savings -- Insurance of Deposit Accounts."
Potential Decreases in Earnings Which Could Result From Interest Rate Increases
The results of operations of Richmond Savings, 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. Richmond Savings' interest income
and interest expense are significantly affected by general economic conditions
and by policies of the federal government and various regulatory agencies.
In recent years, the assets of many savings institutions, including
Richmond Savings, have been negatively "gapped"--which means that the dollar
amount of interest-bearing liabilities which reprice within specific time
periods, either through maturity or rate adjustment, exceeds the dollar amount
of interest-earning assets which reprice within such
16
<PAGE>
time periods. As a result, the net interest income of these savings
institutions, including Richmond Savings, would be expected to be negatively
impacted by increases in interest rates.
At June 30, 1996, Richmond Savings' cumulative one year gap as a percentage
of total interest-earning assets was a negative 15.14%. Richmond Savings
computes its gap position using certain prepayment, deposit decay and other
assumptions used by the FHLB in making gap computations. The results of
Richmond Savings' gap computations could be substantially different if other
assumptions were used.
In addition to the interest rate gap analysis discussed above, Richmond
Savings' management monitors interest rate sensitivity through the use of a
model which estimates the change in net portfolio value ("NPV") and net interest
income in response to a range of assumed changes in market interest rates. NPV
is the present value of expected cash flows from assets, liabilities and off-
balance sheet items. The model estimates the effect on Richmond Savings' NPV
and net interest income of instantaneous and permanent 100 to 400 basis point
increases and decreases in market interest rates. Richmond Savings' Board of
Directors has established maximum acceptable decreases in NPV and net interest
income for various rate scenarios. Computations as of June 30, 1996, based upon
information provided by the FHLB of Atlanta, indicated that a 200 basis point
increase in interest rates would result in a 22% decrease in Richmond Savings'
NPV and a 200 basis point decrease in interest rates would result in a 17%
increase in Richmond Savings' NPV. Such computations also indicate that the
same 200 basis point increase in interest rates would result in a 9% decrease in
net interest income and that the 200 basis point decrease in interest rates
would result in an 8% increase in net interest income. Computations of an
interest rate gap and computations of the prospective effects of hypothetical
interest rate changes on NPV and net interest income are based on numerous
assumptions, including relative levels of market interest rates, loan
prepayments and deposit decay and should not be relied upon as indicative of
actual results. Further, the computations do not incorporate any actions
management may undertake in response to changes in interest rates. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION -- Asset/Liability Management."
Richmond Savings' net interest income during fiscal 1996 was $220,000 or 7%
less than fiscal 1995. This decrease was largely due to an increase in market
interest rates which resulted in a reduction in Richmond Savings' interest rate
spread from 3.24% in fiscal 1995 to 2.77% in fiscal 1996. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION --
Comparison of Results of Operation for the Years Ended June 30, 1996, 1995 and
1994 - Net Interest Income."
Strong Competition and Slow Growth Within Richmond Savings' Market Area
Richmond Savings faces significant competition both in attracting deposits
and in originating loans. Richmond Savings 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 arises from other savings
institutions, commercial banks, credit unions and other providers of financial
services, many of which are significantly larger than Richmond Savings and,
therefore, have greater financial and marketing resources than Richmond Savings.
See "BUSINESS OF RICHMOND SAVINGS -- Competition." In addition, Richmond and
Scotland counties in North Carolina have experienced slow population growth in
recent years, although Moore County has had more growth. As a result, the
existing financial institutions are competing for shares of markets which are
experiencing little or no growth.
Uncertainties Related to Possible Expansion of Richmond Savings
The Holding Company may expand its operations in its existing primary
market area and in other nearby areas. The Holding Company may acquire or
construct new branch offices or acquire other financial institutions which could
be merged with Richmond Savings or operated as separate subsidiaries. If the
Holding Company does expand the existing operations of Richmond Savings, the
success of such activities will depend to a large extent upon the ability of
existing management and employees to effectively manage a larger institution and
to compete in new markets. Neither the Holding Company nor Richmond Savings has
any current plans to open any additional offices (other than in connection with
the relocation of its Ellerbe and Richmond Plaza branches) or acquire any other
financial institutions. See "USE OF PROCEEDS."
17
<PAGE>
Anticipated Low Return on Equity Following Conversion
At June 30, 1996, Richmond Savings' ratio of equity to assets was 9.18%.
On a pro forma basis at June 30, 1996, assuming the sale of 1,610,000 shares of
Common Stock in the Conversion, the Holding Company's ratio of equity to assets
would have been 20.47%. With its higher capital position as a result of the
Conversion, it is doubtful that the Holding Company will be able to quickly
deploy the capital raised in the Conversion in loans and other assets in a
manner consistent with its business plan and 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 standards for the foreseeable future
should carefully evaluate and consider the risk that such returns will not be
achieved.
Cost of ESOP and Its Effect on Results of Operations
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 RICHMOND SAVINGS -- Employee Stock Ownership Plan." Assuming the
issuance of 1,610,000 shares in the Conversion, it is expected that 128,800
shares will be purchased by the ESOP, which--if such shares are acquired at
$10.00 per share--would have a cost of $1,288,000. If, because there is an
oversubscription of shares of Common Stock or for any other reason, the ESOP is
unable to purchase in the Conversion 8% of the total number of shares offered in
the Conversion, then the Board of Directors of the Holding Company intends to
approve the purchase by the ESOP in the open market after the Conversion, of
such shares as are necessary for the ESOP to own a number of shares equal to 8%
of the shares of Common Stock issued in the Conversion. In such event, the
actual cost of the ESOP may be more or less than the amounts set forth above
because the ESOP will be purchasing its shares in the open market and the price
paid for its shares will depend upon the price at which shares can be acquired
in the open market. The purchase of Common Stock by the ESOP will reduce the
pro forma stockholders' equity of Richmond Savings. See "PRO FORMA DATA."
In November 1993, the American Institute of Certified Public Accountants
approved Statement of Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans ("SOP 93-6")." SOP 93-6, among other things, changes the
measure of compensation recorded by employers from the cost of ESOP shares to
the fair value of ESOP shares committed to be released to participants'
accounts. Since the fair value of the shares following the Offerings cannot be
predicted, Richmond Savings cannot reasonably estimate the impact of SOP 93-6 on
its financial statements. While an increase in such fair value will cause an
increase in ESOP-related expenses for accounting purposes, an increase in the
fair value of the shares should not increase the actual out-of-pocket cost to
Richmond Savings of the ESOP. Also, earnings per share will be increased as a
result of the implementation of SOP 93-6 because only shares which have been
committed to be released by the ESOP are included as outstanding shares in the
computation.
Cost and Possible Dilutive Effect of the MRP and Stock Option Plan
It is expected that the stockholders of the Holding Company will be asked
to approve the Stock Option Plan and the MRP at a meeting of stockholders to be
held no sooner than six months after the Conversion. Under the MRP, directors
and employees of Richmond Savings 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 and employees of Richmond Savings 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 and
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 1,610,000 shares of the Common Stock are issued in the
Conversion, it is expected that options to acquire 161,000 shares of the Common
Stock could be granted under the Stock Option Plan, and awards of an additional
64,400 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 1,610,000 to 1,835,400 the pro forma book value per
share of the outstanding Common Stock at June 30, 1996 would have been
18
<PAGE>
$13.21 compared with $14.06 if such plans did not exist, and the pro forma net
income per share of the outstanding Common Stock for the fiscal year ended June
30, 1996 would have been $0.55 compared with $0.64 if such plans did not exist.
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 1,610,000 shares of Common
Stock are issued in the Conversion and the MRP acquired 64,400 shares at a cost
of $10.00 per share, the total annual expense of the MRP would be $128,800 per
year. See "PRO FORMA DATA" and "MANAGEMENT OF RICHMOND SAVINGS -- Proposed
Management Recognition Plan" and "--Proposed Stock Option Plan."
Increased Tax Liability Resulting From Recapture of Bad Debt Reserves
Recently enacted federal legislation has repealed the reserve method of
accounting for thrift bad debt reserves and requires thrifts to recapture into
income over a six-year period their post-1987 additions to their excess bad debt
tax reserves, thereby generating additional tax liability. Under the
legislation, recapture of post-1987 excess reserves is suspended for up to two
years, to the first tax year beginning after December 31, 1997, if during those
years the institution satisfies a "residential loan requirement." At June 30,
1996, Richmond Savings' post-1987 excess reserves amounted to approximately
$581,000. See "TAXATION -- Federal Income Taxation."
Possible Negative Impact of Legislative and Regulatory Changes
Richmond Savings is subject to extensive regulation and supervision as a
North Carolina-chartered savings bank. In addition, the Holding Company, as a
bank holding company, is 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 Congress, could have a material impact on the Holding
Company, Richmond Savings, or Richmond Savings' Conversion.
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, Richmond Savings is unable to determine the extent to
which legislation, if enacted, would affect its business.
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 for quotation on Nasdaq under the symbol "CFNC." There can
be no assurance that the Common Stock will in fact be listed for quotation 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. See "MARKET
FOR COMMON STOCK."
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 income or
capital gain, in an amount not in excess of such value. Whether such
Subscription Rights are considered to have any ascertainable value is an
inherently factual determination. Richmond Savings has received an opinion from
Baxter Fentriss stating that the Subscription Rights do not have any value. The
opinion of Baxter Fentriss is not binding on the Internal Revenue Service
("IRS"). See "THE CONVERSION -- Income Tax Consequences."
Anti-Takeover Considerations Which Could Impede Changes in 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
19
<PAGE>
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. See
"ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND RICHMOND SAVINGS."
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 Richmond Savings, 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 Richmond Savings. See "ANTI-TAKEOVER PROVISIONS AFFECTING
THE HOLDING COMPANY AND RICHMOND SAVINGS."
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
Richmond Savings or to vote 25% or more of any class of voting stock. Control
is rebuttably presumed to exist under the Change in Bank Control Act if, among
other things, a person acquires more than 10% of any class of voting stock and
(i) the issuer's securities are registered under Section 12 of the Securities
Exchange Act of 1934, as amended (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 and Directors. Directors and executive officers
of Richmond Savings and the Holding Company and their associates expect to
purchase approximately 10.92% to 8.07% of the shares of Common Stock issued in
the Conversion based upon the minimum and the maximum of the Valuation Range,
respectively. See "ANTICIPATED STOCK PURCHASES BY MANAGEMENT."
In addition, it is expected that the ESOP will acquire a number of shares
equal to 8% of the shares issued in the Conversion. Employees will vote the
shares allocated to them under the ESOP. The ESOP trustees (directors of the
Holding Company) 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.
Also, upon approval of the MRP by the shareholders of the Holding Company,
it is expected that an amount equal to 4% of the shares issued in the Conversion
will be issued to directors and employees. It is expected that a minimum of 65%
of such MRP shares will be issued to directors and executive officers.
Directors and executive officers will have authority to vote such shares even
though they are not vested and nonforfeitable.
In addition, upon approval of the Stock Option Plan by the shareholders of
the Holding Company, the Stock Option Plan could acquire a number of shares up
to 10% of the shares issued in the Conversion, which shares would be held to
satisfy options granted to directors and employees. Option holders would be
permitted to direct the voting of
20
<PAGE>
shares held to satisfy options granted to them, and directors and executive
officers are expected to receive at least 65% of the options to be granted under
the Stock Option Plan. In addition, trustees under the Stock Option Plan (three
directors of the Holding Company) would vote all shares held by them to satisfy
any options not yet granted under the Stock Option Plan.
If (i) the Stock Option Plan is approved by the stockholders of the Holding
Company within one year after the Conversion and all of the stock options which
could be granted to directors and executive officers under the Stock Option Plan
are granted and exercised or the shares for such options are acquired by the
Stock Option Plan and all option shares are acquired in the open market, (ii)
the MRP is approved by the stockholders of the Holding Company within one year
after the Conversion, all of the MRP shares which could be granted to directors
and executive officers are granted and issued and all such shares are acquired
in the open market, (iii) the ESOP acquires 8% of the shares issued in the
Conversion and none of such shares are allocated, 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 associates as a group, including (a)
shares purchased outright in the Conversion, (b) shares purchased by the ESOP,
(c) shares purchased pursuant to the Stock Option Plan and (d) shares granted
under the MRP, would give such persons effective control over as much as 28.02%
or 25.17%, at the minimum and maximum of the Valuation Range, respectively, of
the Common Stock issued and outstanding. 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 and directors, as a group, could effectively
block such transactions. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING
COMPANY AND RICHMOND SAVINGS -- The Holding Company -- Supermajority Voting
Provisions."
Agreements With Employees. In connection with the Conversion, Richmond
Savings will enter into employment agreements with its two executive officers.
See "MANAGEMENT OF RICHMOND SAVINGS --Employment Agreements." In addition,
Richmond Savings 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
Richmond Savings. See "MANAGEMENT OF RICHMOND SAVINGS -- Severance Plan." The
existence of the employment agreements and severance plans may tend to
discourage mergers, consolidations, acquisitions or other transactions that
would result in a change in control of the Holding Company or Richmond Savings.
No Opinion or Recommendation by Sales Agent; Best Efforts Offering
Richmond Savings has engaged Trident Securities to consult with and advise
Richmond Savings 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
Richmond Savings and the work performed pursuant to such engagement 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. See "THE CONVERSION -- Marketing Arrangements."
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 or any other
government agency, and they involve investment risk, including possible loss of
principal.
CAROLINA FINCORP, INC.
The Holding Company was incorporated under North Carolina law in June 1996
at the direction of Richmond Savings for the purpose of acquiring and holding
all of the outstanding capital stock of Richmond Savings 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
21
<PAGE>
Reserve and the Administrator. The holding company structure will give the
Holding Company greater flexibility than Richmond Savings currently has to
expand and diversify its business activities, although there are no definitive
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 Richmond Savings 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
which are 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 headquarters
office of Richmond Savings at 115 South Lawrence Street, Rockingham, North
Carolina.
RICHMOND SAVINGS BANK, SSB
Richmond Savings is a North Carolina-chartered mutual savings bank.
Richmond Savings was organized in 1906. Since 1957, Richmond Savings has been a
member of the FHLB system and its deposits have been federally insured. The
deposits of Richmond Savings are insured by the SAIF of the FDIC to the maximum
amount permitted by law.
Richmond Savings 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. As a North Carolina-chartered savings bank,
Richmond Savings is regulated by the Administrator. Richmond Savings 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 Richmond Savings."
Richmond Savings conducts business through its headquarters and branch
offices in Rockingham, North Carolina, its branch offices in Southern Pines and
Ellerbe, North Carolina and its loan origination office in Laurinburg, North
Carolina. Richmond Savings' primary market area is Richmond, Moore and Scotland
counties in North Carolina. While Richmond and Scotland counties have
experienced relatively slow growth during the last five years, more growth has
occurred in Moore County, which includes the retirement and resort communities
of Pinehurst and Southern Pines. At June 30, 1996, Richmond Savings had total
assets of $94.1 million, net loans of $68.4 million, deposits of $83.7 million
and retained earnings of $8.6 million.
Richmond Savings is a community-oriented financial institution which offers
a variety of financial services to meet the needs of the communities it serves.
Richmond Savings is principally engaged in the business of attracting deposits
from the general public and using such deposits to make one-to-four family
residential real estate loans, home equity line of credit loans, multi-family
residential and commercial loans and other loans and investments. In the late
1980's and early 1990's, Richmond Savings began the introduction of credit cards
and other services typically offered by commercial banks.
Revenues of Richmond Savings are derived primarily from interest on loans.
Richmond Savings also receives interest income from its investments, mortgage-
backed securities and interest-earning deposit balances. Richmond Savings also
receives non-interest income from transaction and service fees, gains on sales
of loans and other sources. The major expenses of Richmond Savings are interest
on deposits and noninterest expenses such as personnel costs, federal deposit
insurance premiums, data processing expenses, equipment rental and maintenance
expenses and branch occupancy and related expenses.
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<PAGE>
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
estimated that such net proceeds will be between $11,205,000 and $15,286,000,
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 estimated
that net proceeds will equal $17,633,000. See "PRO FORMA DATA" for the
assumptions used to arrive at these amounts. The actual net proceeds may vary
substantially 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 at $10.00 per share
with funds borrowed from the Holding Company. The amount loaned to the ESOP to
enable such purchases is estimated to range from $952,000 (if 1,190,000 shares
are issued) to $1,288,000 (if 1,610,000 shares are issued), and the interest
rate is estimated to be one percent above the prime rate announced in the Wall
Street Journal. If the ESOP is unable to purchase its shares in the
Subscription Offering because of an oversubscription or for any other reason,
the ESOP is expected to purchase its shares in the open market--in which event
the cost of the purchases may be higher or lower because the purchase price per
share may be higher or lower than $10.00. See "MANAGEMENT OF RICHMOND SAVINGS
- -- 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 $952,000
to $1,288,000), 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 Richmond Savings in exchange for all of the
common stock of Richmond Savings 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-earning
deposits, U.S. government, federal agency and other marketable securities and
mortgage-backed securities. 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 or their
branches in or near Richmond Savings' primary market area. If another financial
institution was acquired, it could be merged into Richmond Savings or held as a
separate subsidiary of the Holding Company. The Holding Company has no pending
agreements or understandings regarding any such acquisitions, and there are no
pending negotiations regarding any such acquisitions at this time.
Upon completion of the Conversion, the Board of Directors will have
the authority 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, (ii) the ability to increase the book value and earnings per share
of the remaining outstanding shares, and improve the Holding Company's return on
equity; (iii) 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 (iv) any other circumstances in which
repurchases would be in the best interests of the Holding Company and its
stockholders.
Any stock repurchases will be subject to the determination of the
Board of Directors that both the Holding Company and Richmond Savings 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 Richmond Savings' current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. 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 12 month period. The Holding Company does not
intend to repurchase any Common Stock during the first year following the
Conversion.
Net proceeds paid to Richmond Savings initially will become part of
Richmond Savings' general funds and will be invested primarily in mortgage,
consumer and other loans, mortgage-backed securities and investments consisting
primarily of interest-earning deposit balances, U.S. government and federal
agency obligations and other marketable securities in accordance with Richmond
Savings' lending and investment policies. The relative amounts to be invested
23
<PAGE>
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 Richmond Savings will be used for
general corporate purposes. Richmond Savings is in the process of relocating
its Ellerbe, North Carolina branch office into a new Ellerbe office which is
expected to be opened in late 1996. The completion of this relocation is not
contingent upon consummation of the Conversion. The estimated cost of such new
office, less the expected proceeds from the sale of the existing Ellerbe office
is expected to be approximately $255,000. In addition, regardless of whether
the Conversion is consummated, Richmond Savings anticipates relocating its
Richmond Plaza branch office in Rockingham, North Carolina (which is now leased)
to another nearby location in Rockingham to be owned by Richmond Savings.
Although the new facility is expected to cost approximately $495,000, the effect
on the Holding Company's financial condition and results of operations is not
expected to be material because lease payments at the existing location would
terminate.
In addition, as set forth above, Richmond Savings is considering
opening other branch offices in its primary market area and in other nearby
communities. Whether such offices will be opened is not contingent upon
consummation of the Conversion, however, if any such offices are opened,
proceeds of the Conversion could be used in acquiring, constructing or equipping
them. Except for the Ellerbe and Richmond Plaza branch relocations described
above, the Holding Company and Richmond Savings have no current plans to open
any additional offices.
If 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 RICHMOND SAVINGS --
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 may be provided by Richmond Savings from the proceeds of the
Conversion. It is estimated that between 47,600 and 64,400 shares will be
acquired by the MRP, assuming the issuance of between 1,190,000 and 1,610,000
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, Richmond Savings would contribute between $476,000 and
$644,000, 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 could 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 sufficient shares
are not acquired in the open market to satisfy options granted under the Stock
Option Plan, the Holding Company will reserve authorized but unissued shares for
this purpose. See "MANAGEMENT OF RICHMOND SAVINGS -- 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 Richmond Savings from the
proceeds of the Conversion. It is estimated that between 119,000 and 161,000
shares will be acquired by the Stock Option Plan, assuming the issuance of
between 1,190,000 and 1,610,000 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
Richmond Savings would contribute between $1,190,000 and $1,610,000,
respectively, to the Stock Option Plan for this purpose.
The proceeds of the Offerings will result in an increase in Richmond
Savings' 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
Richmond Savings will not result in the receipt of new funds for investment by
Richmond Savings.
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 Holding Company now expects to pay
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<PAGE>
quarterly cash dividends on the Common Stock at a rate to be determined. In
addition, the Board of Directors may determine from time to time that it is
prudent to pay special nonrecurring cash dividends. Special cash dividends, if
paid, may be in addition to, or in lieu of, regular cash dividends. The Holding
Company's Board of Directors will periodically review its policy concerning
dividends. 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 Richmond Savings, capital requirements, regulatory
limitations, the Holding Company's and Richmond Savings' 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 connection with the Conversion, the Holding Company and Richmond
Savings have agreed with the FDIC that, within the first year after completion
of the Conversion, neither the Holding Company nor Richmond Savings will pay any
dividend or make any distribution that represents, or is characterized as, or is
treated for tax purposes as a return of capital.
The sources of income to the Holding Company initially will consist of
earnings on the capital retained by the Holding Company and dividends paid by
Richmond Savings to the Holding Company, if any. Consequently, future
declarations of cash dividends by the Holding Company may depend upon dividend
payments by Richmond Savings to the Holding Company, which payments are subject
to various restrictions. Under current North Carolina regulations, Richmond
Savings 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, Richmond Savings will be required, under
existing regulations, to obtain the prior written approval of the Administrator
before it can declare and pay annual cash dividends 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
Richmond Savings -- Restrictions on Dividends and Other Capital Distributions."
As a result of this limitation, if Richmond Savings had been a stock institution
at the end of fiscal 1996 and for the two preceding fiscal years, it could not
have paid annual cash dividends in excess of $362,000 without the approval of
the Administrator. As a converted institution, Richmond Savings 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 Richmond Savings 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 established market for the Common
Stock at this time. The Holding Company has received conditional approval to
have the Common Stock listed for quotation on Nasdaq under the symbol "CFNC."
There can be no assurance that the Common Stock will in fact be listed
for quotation on Nasdaq. In order to qualify for listing on Nasdaq, the Holding
Company must have at least 400 stockholders and at least two market makers.
Although management believes that the Holding Company will have at least 400
stockholders, there can be no assurance that it will. The Holding Company will
seek to encourage and assist at least two market makers to make a market in the
Common Stock. The Holding Company expects that Trident Securities will act as a
market maker. 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.
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<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of Richmond
Savings at June 30, 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 1,190,000,
1,400,000, 1,610,000 and 1,851,500 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."
26
<PAGE>
<TABLE>
<CAPTION>
The Holding Company Pro Forma Capitalization
Based Upon Sale of
-----------------------------------------------------------------------------
1,190,000 1,400,000 1,610,000 1,851,500(1)
Historical shares at a shares at a shares at a shares at a
Capitalization price of price of price of price of
June 30, 1996 $10.00 per share $10.00 per share $10.00 per share $10.00 per share
------------- ---------------- ---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2) $83,715 $ 83,715 $ 83,715 $ 83,715 $ 83,715
======= ========== ========== ========== ==========
Stockholders' equity
Common stock, no par value:
Authorized shares: 20,000,000
Assumed outstanding shares
as shown in column headings (3) -- $ 11,205 $ 13,246 $ 15,286 $ 17,633
Preferred stock:
Authorized shares: 5,000,000
No shares outstanding -- -- -- -- --
Additional paid-in capital -- -- -- -- --
Less: Common stock to be
acquired by the MRP (4) -- (476) (560) (644) (741)
Less: Common stock
acquired by the ESOP (4) -- (952) (1,120) (1,288) (1,481)
Retained earnings (5) 8,641 8,641 8,641 8,641 8,641
------- ---------- ---------- ---------- ----------
Total $ 8,641 $ 18,418 $ 20,207 $ 21,995 $ 24,052
======= ========== ========== ========== ==========
Total deposits and stockholders'
equity $92,356 $ 102,133 $ 103,922 $ 105,710 $ 107,767
======= ========== ========== ========== ==========
</TABLE>
(1) Represents the number of shares of Common Stock that would be issued in
the Conversion after giving effect to a 15% increase in maximum
valuation in the Valuation Range.
(2) Withdrawals from deposit accounts for the purchase of Common Stock are
not reflected. Any such withdrawals would reduce pro forma deposits by
the amount of such withdrawals.
(3) Does not reflect the issuance of any shares of Common Stock reserved for
issuance pursuant to Richmond Savings' stock option plan. See
"MANAGEMENT OF RICHMOND SAVINGS--Proposed Stock Option Plan."
(4) Assumes that 8% of the shares of Common Stock offered hereby will be
purchased by the ESOP in the Conversion. The funds used to acquire the
ESOP shares will be borrowed from the Holding Company. Assumes that,
after the Conversion, a number of shares equal to 4% of the shares of
Common Stock offered hereby will be purchased by the MRP with funds
contributed by Richmond Savings. The Common Stock acquired by both the
ESOP and the MRP is reflected as a reduction of stockholders' equity.
See "MANAGEMENT OF RICHMOND SAVINGS--Employee Stock Ownership Plan--
Proposed Management Recognition Plan."
(5) Retained earnings is net of unrealized holding gains or losses on
available-for-sale securities.
27
<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 $11,205,000 and $17,633,000, (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) 18.92%,
17.28%, 16.07%, and 15.02% 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 during the Subscription
Offering (and that Trident Securities will not receive certain compensation with
respect to such sales), 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 $383,000. 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 Richmond Savings deposit accounts will not result in the receipt
of new funds for investment by Richmond Savings. 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 August 8, 1996 is from a minimum of $11,900,000 to a maximum of $16,100,000
with a midpoint of $14,000,000. 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 $18,515,000, 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 June 30, 1996 have been based upon the
following assumptions: (i) the sale of shares of Common Stock in connection with
the Conversion occurred at July 1, 1995 and yielded net proceeds available for
investment of $11,205,000, $13,246,000, $15,286,000 and $17,633,000 (based upon
the issuance of 1,190,000, 1,400,000, 1,610,000 and 1,851,500 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 period at a yield of
5.82%, which represents the average one-year treasury constant maturity rate for
the last week of June, 1996. The Holding Company did not use the arithmetic
average of Richmond Savings' weighted-average yield on interest-earning assets
and weighted-average interest rate paid on deposits during the year ended June
30, 1996. Management believes that the one-year Treasury 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 39% has been assumed, resulting in a yield after taxes of
3.55%. Historical and pro forma per share amounts have been calculated by
dividing Richmond Savings' 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.
28
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1996
--------------------------------------------------------------------------
1,190,000 1,400,000 1,610,000 1,851,500
shares at $10.00 shares at $10.00 shares at $10.00 shares at $10.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (15% above Max.)
---------------- ---------------- ---------------- ----------------
(In Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 11,900 $ 14,000 $ 16,100 $ 18,515
Less Offering expenses and commissions (695) (754) (814) (882)
---------- ---------- ---------- ----------
Estimated net conversion proceeds (1) 11,205 13,246 15,286 17,633
Less shares acquired by ESOP (2) (952) (1,120) (1,288) (1,481)
Less shares to be acquired by MRP (3) (476) (560) (644) (741)
---------- ---------- ---------- ----------
Estimated net conversion proceeds $ 9,777 $ 11,566 $ 13,354 $ 15,411
========== ========== ========== ==========
Pro forma net income:
Historical net income $ 591 $ 591 $ 591 $ 591
Pro Forma adjustments:
Pro forma income on net proceeds (1) 348 410 475 547
Pro forma ESOP adjustments (2) (58) (68) (79) (91)
Pro forma MRP adjustments (3) (58) (68) (79) (91)
---------- ---------- ---------- ----------
Pro forma net income $ 823 $ 865 $ 908 $ 956
========== ========== ========== ==========
Pro forma net income per share (5):
Historical net income per share $ 0.54 $ 0.45 $ 0.40 $ 0.34
Pro forma adjustments:
Pro forma income on net proceeds 0.31 0.32 0.31 0.32
Pro forma ESOP adjustments (2) (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustments (3) (0.05) (0.05) (0.05) (0.05)
---------- ---------- ---------- ----------
Pro forma net income per share $ 0.75 $ 0.67 $ 0.61 $ 0.56
========== ========== ========== ==========
Ratio of price per share to pro forma income per 13.42 15.02 16.46 17.96
share (5) ========== ========== ========== ==========
Pro forma stockholders' equity (book value) (4):
Historical retained earnings $ 8,641 $ 8,641 $ 8,641 $ 8,641
Estimated net conversion proceeds 11,205 13,246 15,286 17,633
Less shares to be acquired by:
ESOP (2) (952) (1,120) (1,288) (1,481)
MRP (3) (476) (560) (644) (741)
---------- ---------- ---------- ----------
Pro forma stockholders' equity (4) $ 18,418 $ 20,207 $ 21,995 $ 24,052
========== ========== ========== ==========
Pro forma stockholders' equity per share (4)
Historical retained earnings $ 7.26 $ 6.17 $ 5.37 $ 4.67
Estimated net conversion proceeds 9.42 9.46 9.49 9.52
Less shares to be 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) $ 15.48 $ 14.43 $ 13.66 $ 12.99
========== ========== ========== ==========
Pro forma price to book value 64.61% 69.20% 73.20% 76.98%
========== ========== ========== ==========
Number of shares used to calculate income per 1,104,320 1,299,200 1,494,080 1,718,192
share (5) ========== ========== ========== ==========
Number of shares used to calculate stockholders'
equity per share(4) 1,190,000 1,400,000 1,610,000 1,851,500
========== ========== ========== ==========
</TABLE>
29
<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 may be reserved for issuance to directors,
officers, and employees under the Stock Option Plan. In lieu of reserving
shares for issuance, the Stock Option Plan may purchase shares to be
delivered upon the exercise of options in the open market. Because
management cannot reasonably estimate the number of options which might be
exercised or the option exercise price or whether the shares will be
purchased in the open market, 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, it is expected that options to acquire
185,150 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 1,851,500 to 2,036,650 and the pro forma
earnings per share of the outstanding Common Stock for the year ended June
30, 1996 (based on shares released for the period pursuant to SOP 93-6)
would have been $.54 compared with $.56 if the Stock Option Plan did not
exist. See "MANAGEMENT OF RICHMOND SAVINGS -- 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. Pro forma ESOP adjustments assume that 10% of
the shares will be committed to be released each year, and that expense is
reduced by a 39% tax rate. See "MANAGEMENT OF RICHMOND SAVINGS -- 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. Pro forma MRP adjustments assume that expense will be
amortized over five years, and that expense is reduced by a 39% tax rate.
See "MANAGEMENT OF RICHMOND SAVINGS -- Proposed Management Recognition
Plan."
(4) The retained earnings of Richmond Savings will be substantially restricted
after the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND REGULATION
-- Regulation of Richmond Savings -- 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) 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, earnings per share is calculated
based on the ESOP shares released for the period according to scheduled
contributions.
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
Richmond Savings 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 June 30, 1996,
Richmond Savings' net worth, computed in accordance with such requirements, was
9.69% of total assets. In addition, Richmond Savings 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%. As demonstrated in the table below, Richmond Savings
exceeds the FDIC Tier I and risk-based capital requirements and North Carolina
capital requirements on a historical and pro forma basis.
The following table presents (i) Richmond Savings' historical
regulatory capital position on June 30, 1996 and (ii) Richmond Savings' pro
forma regulatory capital position on such date after giving effect to the
assumptions set forth under "PRO FORMA DATA" and "CAPITALIZATION" and further
assuming that the Holding Company will retain 50% of the net proceeds of the
Common Stock sold in the Conversion after deducting the amount necessary to fund
the loan to the ESOP.
30
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Regulatory Capital Position at June 30, 1996
--------------------------------------------------------
Richmond Savings'
Historical
Regulatory Capital 1,190,000 1,400,000
Position at Shares sold at Shares sold at
June 30, 1996 Price of $10.00 Price of $10.00
------------------ per share per share
-------------------- --------------------
Percent of Percent of Percent of
Regulatory Regulatory Regulatory
Amount Assets (1) Amount Assets (1) Amount Assets (1)
------ ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $8,732 9.28% $13,383 13.55% $14,235 14.29%
Tier 1 (leverage) capital requirement (2) 3,764 4.00% 3,950 4.00% 3,984 4.00%
------ ----- ------- --------- ------- -----
Excess $4,968 5.28% $ 9,433 9.55% $10,251 10.29%
====== ===== ======= ========= ======= =====
Tier 1 risk based capital $8,732 17.62% $13,383 26.43% $14,235 28.02%
Tier 1 risk based capital requirement 1,982 4.00% 2,026 4.00% 2,032 4.00%
------ ----- ------- --------- ------- -----
Excess $6,750 13.62% $11,357 22.43% $12,203 24.02%
====== ===== ======= ========= ======= =====
Total risk based capital $9,121 18.41% $13,772 27.19% $14,624 28.78%
Total risk based capital requirement 3,964 8.00% 4,051 8.00% 4,065 8.00%
------ ----- ------- --------- ------- -----
Excess $5,157 10.41% $ 9,721 19.19% $10,559 20.78%
====== ===== ======= ========= ======= =====
NC regulatory capital $9,121 9.69% $13,772 13.78% $14,624 14.51%
NC regulatory capital requirement 4,706 5.00% 4,939 5.00% 4,981 5.00%
------ ----- ------- --------- ------- -----
Excess $4,415 4.69% $ 8,833 8.78% $ 9,643 9.51%
====== ===== ======= ========= ======= =====
<CAPTION>
Pro Forma Regulatory Capital Position at June 30, 1996
----------------------------------------------------------
1,610,000 1,851,500
Shares sold at Shares sold at
Price of $10.00 Price of $10.00
per share per share
------------------- -------------------
Percent of Percent of
Regulatory Regulatory
Amount Assets (1) Amount Assets (1)
------- ---------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Tier 1 (leverage) capital $15,087 15.02% $16,067 15.84%
Tier 1 (leverage) capital requirement (2) 4,018 4.00% 4,057 4.00%
------- ----- ------- ---------
Excess $11,069 11.02% $12,010 11.84%
======= ===== ======= =========
Tier 1 risk based capital $15,087 29.59% $16,067 31.39%
Tier 1 risk based capital requirement 2,039 4.00% 2,047 4.00%
------- ----- ------- ---------
Excess $13,048 25.59% $14,020 27.39%
======= ===== ======= =========
Total risk based capital $15,476 30.36% $16,456 32.16%
Total risk based capital requirement 4,078 8.00% 4,094 8.00%
------- ----- ------- ---------
Excess $11,398 22.36% $12,362 24.16%
======= ===== ======= =========
NC regulatory capital $15,476 15.23% $16,456 16.04%
NC regulatory capital requirement 5,024 5.00% 5,073 5.00%
------- ----- ------- ---------
Excess $10,452 10.23% $11,383 11.04%
======= ===== ======= =========
</TABLE>
________________________________
(1) For the Tier 1 (leverage) capital and North Carolina regulatory capital
calculations, percent of total average assets. For the Tier 1 risk-based
capital and total risk-based capital calculations, percent of total risk-
weighted assets. Net proceeds (after ESOP and MRP) were assumed to be
invested in short-term treasury securities (0% risk-weight) and one-to-four
family residential mortgage loans (50% risk-weight) with a weighted average
risk-weight of 20%.
(2) As a North Carolina-chartered savings bank, Richmond Savings is subject to
the capital requirements of the FDIC and the Administrator. The FDIC
requires state-chartered savings banks, including Richmond Savings, to have
a minimum leverage ratio of Tier 1 capital to total assets of at least 3%;
provided, however, that all institutions, other than those (i) receiving
the highest rating during the examination process and (ii) not anticipating
any significant growth, are required to maintain a ratio of 1% to 2% above
the stated minimum, with an absolute minimum leverage ratio of at least 4%.
For the purposes of this table, Richmond Savings has assumed that its
leverage capital requirement is 4% of total average assets.
31
<PAGE>
ANTICIPATED STOCK PURCHASES BY MANAGEMENT
Directors, officers and employees of Richmond Savings 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 price per share--$10.00--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 Richmond Savings who intends to purchase Common Stock, and for all
executive officers and directors as a group (including in each case all
"associates" of such persons) the aggregate dollar amount of Common Stock for
which such director or executive officer has informed Richmond Savings 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 1,400,000 shares of Common Stock will be issued and that
sufficient shares will be available to satisfy the subscriptions of Richmond
Savings' 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
- ---- -------------- ----------- -------------
<S> <C> <C> <C>
Russell E. Bennett, Jr. $ 200,000 20,000 1.43%
John W. Bullard 125,000 12,500 0.89
R. Larry Campbell 150,000 15,000 1.07
Buena Vista Coggin 150,000 15,000 1.07
Joe M. McLaurin 100,000 10,000 0.71
John T. Page, Jr. 100,000 10,000 0.71
W. Jesse Spencer 100,000 10,000 0.71
J. Stanley Vetter 250,000 25,000 1.79
E. E. Vuncannon, Jr. 124,000 12,400 0.89
---------- ------- ----------
Total $1,299,000 129,900 9.28% /(2)/
========== ======= ==========
</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 RICHMOND SAVINGS -- 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. See "MANAGEMENT OF RICHMOND SAVINGS -- 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 within one year after the Conversion, (ii) all restricted
shares to be issued to directors and executive officers under the MRP are
acquired in the open market and issued, (iii) all options which could be
issued to directors and executive officers under the Stock Option Plan are
issued and all shares necessary to fund such options are acquired in the
open market and held by the Stock Option Plan or by directors and executive
officers, and (iv) the ESOP
32
<PAGE>
acquires 8% of the shares issued in the Conversion and none of such shares
are allocated, then directors and executive officers would own or control
the voting of up to 369,300 shares or 26.38% of the 1,400,000 shares
outstanding. See "MANAGEMENT OF RICHMOND SAVINGS -- Employee Stock
Ownership Plan," "--Proposed Management Recognition Plan" and "-- Proposed
Stock Option Plan."
Without the prior written consent of the Administrator, shares of
Common Stock purchased by directors or executive officers of Richmond Savings 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 Richmond
Savings 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 Securities Exchange Act of 1934 (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 RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and
results of operations are intended to assist in understanding the financial
condition and results of operations of Richmond Savings. The information
contained in this section should be read in conjunction with the Consolidated
Financial Statements, the accompanying Notes to Consolidated Financial
Statements and the other sections contained in this Prospectus.
The Holding Company was incorporated under North Carolina law in June,
1996 at the direction of Richmond Savings for the purpose of acquiring and
holding all of the outstanding stock of Richmond Savings to be issued in the
Conversion. The Holding Company's principal business activities after the
Conversion are expected to be conducted through Richmond Savings.
Richmond Savings' results of operations depend primarily on net
interest income, which is the difference between interest income from interest-
earning assets and interest expense on interest-bearing liabilities. Richmond
Savings' operations are also affected by non-interest income, such as
transaction and other service fee income, miscellaneous income from loans,
commissions from the sale of certain insurance products, and other sources of
income. Richmond Savings' principal operating expenses, aside from interest
expense, consist of personnel costs, federal deposit and other insurance
premiums, office occupancy costs, data processing expenses, equipment expenses
and other general and administrative expenses.
Capital Resources and Liquidity
The objective of Richmond Savings' liquidity management is to ensure
the availability of sufficient cash flows to meet all financial commitments and
to capitalize on opportunities for expansion. Liquidity management addresses
Richmond Savings' ability to meet deposit withdrawals on demand or at
contractual maturity, to repay borrowings as they mature, and to fund new loans
and investments as opportunities arise.
33
<PAGE>
Richmond Savings' primary sources of internally generated funds are
principal and interest payments on loans receivable, cash flows generated from
operations and cash flows generated by investments, including mortgage-backed
securities. External sources of funds include increases in deposits, advances
from the FHLB of Atlanta, and sales of loans and investments. At June 30, 1996,
73.78% of Richmond Savings' certificate of deposit accounts were scheduled to
mature within one year. Management expects that the majority of these deposits
will be renewed. Although it has not found it necessary to do so in several
years, Richmond Savings may obtain advances from the FHLB of Atlanta to
supplement its liquidity needs. The FHLB system functions in a reserve credit
capacity for savings institutions. As a member, Richmond Savings 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. At June 30, 1996,
Richmond Savings had no outstanding borrowings.
North Carolina-chartered savings banks must maintain liquid assets
equal to at least 10% of total assets. The computation of liquidity under North
Carolina regulation allows the inclusion of mortgage-backed securities and
investments with readily marketable value, including investments with maturities
in excess of five years. As of June 30, 1996, Richmond Savings liquid assets
for purposes of this requirement equalled 23.6% of total assets. At June 30,
1996, Richmond Savings had $6.84 million of interest-earning deposit balances in
other banks and investments scheduled to mature within one year. At June 30,
1996, Richmond Savings had $5.1 million, $881,000 and $565,000 in outstanding
commitments for home equity loans, undisbursed construction loans and
outstanding commitments for mortgage loans, respectively. Richmond Savings
believes that it will have sufficient funds available to meet its anticipated
future loan commitments as well as other liquidity needs.
Following the Conversion, the Holding Company will initially conduct
no business other than holding the capital stock of Richmond Savings and the
loan it will make to the ESOP. The Holding Company expects to retain and invest
approximately 50 percent of the net proceeds of the Conversion at the Holding
Company level in order to provide sufficient funds for its operations. In the
future, the Holding Company's primary source of funds, other than income from
its investments and principal and interest payments received from the ESOP with
respect to the ESOP loan, is expected to be dividends from Richmond Savings. As
a North Carolina-chartered stock savings bank, Richmond Savings 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. At June 30, 1996, Richmond Savings was in compliance with
all applicable capital requirements. In addition, for a period of five years
after the Conversion, Richmond Savings must obtain 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) its net income for the
most recent fiscal year end, or (ii) the average of its net income after
dividends for the most recent fiscal year end and not more than two of the
immediately preceding fiscal year ends. As a result of this limitation, if
Richmond Savings had been a stock institution at the end of fiscal 1996 and for
the two preceding fiscal years, it could not have paid a cash dividend in excess
of $362,000 without approval of the Administrator. In addition, after the
Conversion, Richmond Savings will be subject to the restriction that it will not
be permitted to declare or pay a cash dividend on or repurchase any of its
capital stock if the effect thereof would be to cause its net worth to be
reduced below the amount required for the liquidation account to be established
in connection with the Conversion. See "THE CONVERSION -- Effects of Conversion
- -- Liquidation Rights -- Liquidation Rights After the Conversion."
Operating Strategy
The primary goals of management are to increase Richmond Savings'
profitability, monitor its capital position and build a community banking
franchise. Richmond Savings' results of operations are dependent primarily on
net interest income, which is the difference between the income earned on its
interest-earning assets, such as loans and investments, and the cost of its
interest-bearing liabilities, consisting of deposits. Richmond Savings'
operations are also affected by non-interest income, such as late charges on
loans, customer deposit account service charges, and other sources of income.
Richmond Savings' net income is also affected by, among other things, provisions
for loan losses and operating expenses. Richmond Savings' principal operating
expenses, aside from interest expense, consist of personnel costs, federal
deposit and other insurance premiums, data processing expenses, equipment
expenses, office occupancy costs, and other general and administrative expenses.
Richmond Savings' results of operations are also
34
<PAGE>
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates and government legislation and
policies concerning monetary and fiscal affairs, housing and financial
institutions.
In guiding the operations of Richmond Savings, management has
implemented various strategies designed to continue Richmond Savings'
profitability while maintaining the safety and soundness of the institution.
These strategies include: (i) emphasizing one-to-four family residential
lending; (ii) maintaining asset quality; and (iii) monitoring interest-rate
risk. It is anticipated, subject to market conditions, that the strategies
presently in place will be continued following completion of the Conversion.
Emphasis on One-to-Four Family Residential Housing. Historically,
Richmond Savings has been predominantly a one-to-four family residential
lender. As of June 30, 1996, approximately 81.0% of its loan portfolio,
before net amounts, was composed of permanent one-to-four family residential
loans. As of such date, an additional 11.4% of its loan portfolio, before net
amounts, was composed of construction loans and home equity loans. As a result,
Richmond Savings has developed expertise in mortgage loan underwriting and
origination. Richmond Savings has established methods to expand its loan
originations through contacts with realtors, homebuilders and past and present
customers. Richmond Savings also uses advertising and community involvement to
gain exposure within the communities in which it operates. Richmond Savings
emphasizes the origination and purchase of adjustable rate loans when market
conditions permit. As of June 30, 1996, approximately 65.4% of Richmond
Savings' net loan portfolio, before net items, was composed of adjustable rate
loans.
Maintenance of Asset Quality. Due to the types of loans made by
Richmond Savings and the implementation of its underwriting policies and
collection procedures by its employees, at June 30, 1996, Richmond Savings'
ratio of nonperforming assets to total assets was 0.06%. Since June 30, 1991,
average nonperforming assets have not exceeded 0.41% of average total assets
during any fiscal year period.
Monitoring of Interest-Rate Risk. Richmond Savings has a "negative
gap" and during recent years its net interest income has been, and in the future
will likely continue to be, negatively impacted by increases in interest rates.
However, management considers Richmond Savings' interest rate exposure to be at
an acceptable level, given Richmond Savings' historical operating results and
capital position. In order to reduce the impact on Richmond Savings' net
interest income resulting from changes in interest rates, Richmond Savings'
management has implemented several strategies. These include (i) emphasizing the
origination of adjustable rate mortgage loans when market conditions permit;
(ii) emphasizing the origination of adjustable rate home equity line of credit
loans; (iii) soliciting demand, checking and transaction accounts which are
considered to be less interest-rate sensitive deposits; (iv) attempting to
increase nonmortgage loans with shorter maturities; and (v) selling fixed rate
mortgage loans.
Asset/Liability Management
Richmond Savings' asset/liability management, or interest rate risk
management, program is designed to maximize net interest income while managing
levels of liquidity, interest rate risk, and capital adequacy. Richmond
Savings' management meets at least quarterly to review and discuss interest rate
risk management reports (produced by the FHLB of Atlanta based on information
provided by Richmond Savings) which include an interest rate gap analysis and
the projected change in net portfolio value and net interest income given
certain changes in interest rates. Based upon its modeling at June 30, 1996,
management believes that its interest rate risk is at an acceptable level. In
order to maximize net interest income in the long-term, management believes
continued emphasis on originating adjustable rate mortgages and home equity
loans in Richmond Savings' market area is desirable, along with increasing lower
cost deposit accounts. Management will also continue to consider selling
current fixed rate mortgage loans as a tool in both liquidity and
asset/liability management.
Interest Rate Gap Analysis. As part of its quarterly interest rate
risk management reports, Richmond Savings receives an interest rate "gap"
analysis based on information provided regarding the repricing of assets and
liabilities. Interest rate gap analysis is a common indicator of interest rate
risk, which measures the relative dollar amounts of interest-earnings assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. Gap is the difference between the amount
of such assets and liabilities that are subject to repricing.
35
<PAGE>
A negative gap for a given period means that the amount of interest-bearing
liabilities maturing or otherwise repricing within that period exceeds the
amount of interest-earning assets maturing or otherwise repricing within the
same period. Accordingly, in a rising interest-rate environment, an institution
with a negative gap would generally be expected, absent the effects of other
factors, to experience a larger increase in the cost of its liabilities relative
to the yield on its assets, thus its net interest income should be negatively
affected. Conversely, in a declining rate environment, the cost of funds for an
institution with a negative gap would generally be expected to decline more
quickly than the yield on its assets, thus positively affecting the
institution's net interest income. Changes in interest rates generally have the
opposite effect on an institution with a positive gap.
Richmond Savings' one year interest sensitivity gap as a percentage of
total interest-earning assets on June 30, 1996 was negative 15.14%. Therefore,
interest rate increases would be expected to negatively impact Richmond Savings'
earnings--at least in the short term. On June 30, 1996, Richmond Savings' three
year cumulative interest rate sensitivity gap as a percentage of total interest-
earning assets was negative 2.75% and its five year cumulative interest rate
sensitivity gap as a percentage of total interest-earning assets was positive
0.46%.
The following table sets forth the amount of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1996 which are
projected to reprice or mature in each of the future time periods shown. The
table was prepared using the assumptions regarding loan prepayment rates, loan
repricing and deposit decay rates which are used by the FHLB in making its gap
computations. These assumptions should not be regarded as indicative of the
actual prepayments and withdrawals that may be experienced by Richmond Savings.
However, management believes that these assumptions approximate actual
experience and considers them appropriate and reasonable.
36
<PAGE>
<TABLE>
<CAPTION>
Terms to Repricing at June 30, 1996
--------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
--------- ----------- ----------- ---------- ------
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans receivable:
Adjustable rate residential 1-4 family $ 21,583 $16,876 $ -- $ -- $38,459
Fixed rate residential 1-4 family 2,615 4,372 3,694 6,246 16,927
Multi-family residential and commercial 459 1,054 124 326 1,963
Construction 1,420 -- -- -- 1,420
Home equity credit lines 5,465 -- -- -- 5,465
Other loans 1,872 1,865 776 -- 4,513
Interest-bearing deposits 4,686 -- -- -- 4,686
Investments 2,156 4,955 3,130 6,121 16,362
FHLB common stock -- -- -- 735 735
-------- ------- ------- ------- -------
Total interest-earning assets $ 40,256 $29,122 $ 7,724 $13,428 $90,530
======== ======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement accounts $ 1,852 $ 2,813 $ 1,834 $ 4,869 $11,368
NOW and VIP checking accounts 3,245 2,970 795 1,773 8,783
Non-interest-bearing accounts 725 661 177 391 1,954
Certificate accounts 48,137 11,467 2,006 -- 61,610
-------- ------- ------- ------- -------
Total interest-bearing liabilities $ 53,959 $17,911 $ 4,812 $ 7,033 $83,715
======== ======= ======= ======= =======
INTEREST SENSITIVITY GAP PER PERIOD $(13,703) $11,211 $ 2,912 $ 6,395 $ 6,815
CUMULATIVE INTEREST SENSITIVITY GAP $(13,703) $(2,492) $ 420 $ 6,815 $ 6,815
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL
INTEREST-EARNING ASSETS (15.14)% (2.75%) 0.46% 7.53% 7.53%
CUMULATIVE INTEREST-EARNING ASSETS AS A
PERCENTAGE OF INTEREST-BEARING LIABILITIES 74.60% 96.53% 100.55% 108.14% 108.14%
</TABLE>
Net Portfolio Value and Net Interest Income Analysis. In addition to
the interest rate gap analysis discussed above, management monitors Richmond
Savings' interest rate sensitivity through the use of a model which estimates
the change in net portfolio value ("NPV") and net interest income in response to
a range of assumed changes in market interest rates. NPV is the present value
of expected cash flows from assets, liabilities, and off-balance sheet items.
The model estimates the effect on Richmond Savings' NPV and net interest income
of instantaneous and permanent 100 to 400 basis point increases and decreases in
market interest rates. Richmond Savings' Board of Directors has established
maximum acceptable decreases in NPV and net interest income for the various rate
scenarios.
The following table presents information regarding possible changes in
Richmond Savings' NPV as of June 30, 1996, based on information provided by the
FHLB of Atlanta's interest rate risk model.
37
<PAGE>
Change in Net Portfolio Value
Interest Rates -----------------------------------------------
in Basis Points Board
(Rate Shock) Amount $Change %Change Limit
- ----------------- ------ ------- ------- -----
(Dollars in Thousands)
Up 400 $ 5,882 $(5,404) (48)% (50)%
Up 300 7,353 (3,933) (35) (45)
Up 200 8,824 (2,462) (22) (35)
Up 100 10,055 (1,231) (11) (20)
Static 11,286 -- -- --
Down 100 12,234 948 8 15
Down 200 13,182 1,896 17 25
Down 300 14,189 2,903 26 35
Down 400 15,195 3,909 35 50
The following table presents the predicted effects, based on the FHLB
of Atlanta's interest rate risk model, on Richmond Savings' net interest income
as of June 30, 1996 of instantaneous and permanent 100 to 400 basis point
changes in market interest rates.
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<PAGE>
<TABLE>
<CAPTION>
Change in Net Interest Income
Interest Rates ----------------------------------
in Basis Points Board
(Rate Shock) Amount $Change %Change Limit
- --------------- ------ ------- ------- -----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Up 400 $2,190 $(557) (20)% (50)%
Up 300 2,340 (407) (15) (35)
Up 200 2,491 (256) (9) (25)
Up 100 2,619 (128) (5) (15)
Static 2,747 -- -- --
Down 100 2,854 107 4 15
Down 200 2,961 214 8 25
Down 300 3,044 297 11 35
Down 400 3,126 379 14 50
</TABLE>
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not reflect
any actions management may undertake in response to changes in interest rates.
Management has structured its assets and liabilities in an attempt to
limit its exposure to interest rate risk. In the event of a 200 basis point
decrease in interest rates, Richmond Savings would be expected to experience a
17% increase in NPV and a 8% increase in net interest income. In the event of a
200 basis point increase in interest rates, Richmond Savings would be expected
to experience a 22% decrease in NPV and a 9% decrease in net interest income.
Certain shortcomings are inherent in the method of analysis presented
in both the NPV and net interest income computations and in the gap computations
presented in the tables above. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, adjustable-rate mortgages have features which
restrict changes in interest rates on a short-term basis and over the life of
the assets. The proportion of adjustable-rate loans could be reduced in future
periods if market interest rates should decline and remain at lower levels for a
sustained period due to increased refinancing activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the tables. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of a sustained interest rate increase.
As the tables set forth above indicate, Richmond Savings' earnings are
expected to be negatively impacted by rising interest rates. Richmond Savings'
earnings during recent years have been negatively impacted during periods of
rising interest rates. Nevertheless, Richmond Savings' management believes that
Richmond Savings present asset/liability matching is appropriate given Richmond
Savings historical operating results and capital position.
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<PAGE>
Net Interest Income
Net interest income represents the difference between income derived
from interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance").
The following table sets forth information relating to the balances of
Richmond Savings' assets and liabilities at June 30, 1996 and to the average
balances of Richmond Savings' assets and liabilities for the years ended June
30, 1996, 1995, and 1994. For the periods indicated, the table reflects the
average yield on interest-earning assets and the average cost of interest-
bearing liabilities (derived by dividing income or expense by the monthly
average balance of interest-earning assets or interest-bearing liabilities,
respectively) as well as the net yield on interest-earning assets (which
reflects the impact of the net earning balance). For the purpose of preparing
this table, nonaccrual loans have been included in the balances for loans.
40
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1996 Year Ended June 30, 1996 Year Ended June 30, 1995
-------------------- ---------------------------- -----------------------------
Average Average Average Average Average
Balance Yield/Cost Balance Interest Rate Balance Interest Rate
------- ----------- -------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest earning assets:
Interest-bearing balances $ 4,686 5.35% $ 3,876 $ 245 6.32% $ 2,041 $ 145 7.10%
Investments 17,097 6.68% 16,366 995 6.08% 15,079 829 5.50%
Loans 68,358 8.08% 68,332 5,596 8.19% 68,245 5,404 7.92%
------- ----- ------- ------ ---- ------- ------ ----
Total interest-earning 90,141 7.67% 88,574 6,836 7.72% 85,365 6,378 7.47%
assets
Other assets 3,969 3,844 3,521
------- ------- -------
Total assets $94,110 $92,418 $88,886
======= ======= =======
Interest-bearing
liabilities:
Deposits $83,715 4.69% $79,867 3,949 4.95% $77,371 3,271 4.23%
----- ------ ---- ------ ----
Other liabilities 1,754 4,124 3,774
Retained earnings 8,641 8,427 7,741
------- ------- -------
Total liabilities and
retained earnings $94,110 $92,418 $88,886
======= ======= =======
Net interest income and
interest rate spread 2.98% $2,887 2.77% $3,107 3.24%
===== ====== ==== ====== ====
Net yield on average
interest-earning assets 3.32% 3.26% 3.64%
===== ==== ====
<CAPTION>
Year Ended June 30, 1994
---------------------------
Average Average
Balance Interest Rate
------- -------- --------
<S> <C> <C> <C>
Interest earning assets:
Interest-bearing balances $ 2,158 $ 82 3.80%
Investments 15,234 841 5.52%
Loans 66,820 5,205 7.79%
------- -------- ----
Total interest-earning
assets 84,212 6,128 7.28%
Other assets 3,674
-------
Total assets $87,886
=======
Interest-bearing
liabilities:
Deposits $77,311 2,934 3.80%
------ -----
Other liabilities 3,565
Retained earnings 7,010
-------
Total liabilities and
retained earnings $87,886
=======
Net interest income and
interest rate spread $3,194 3.48%
====== ====
Net yield on average
interest-earning assets 3.79%
====
</TABLE>
41
<PAGE>
Rate/Volume Analysis
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
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) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
42
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 vs. 1995 June 30, 1995 vs. 1994
---------------------------- --------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
----------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest income:
Interest-bearing balances $123 $ (23) $ 100 $ (6) $ 69 $ 63
Investments 74 92 166 (9) (3) (12)
Loans 7 185 192 112 87 199
---- ----- ----- ---- ----- ----
Total interest income 204 254 458 97 153 250
Interest expense:
Deposits 115 563 678 2 335 337
---- ----- ----- ---- ----- ----
Net interest income $ 89 $(309) $(220) $ 95 $(182) $(87)
==== ===== ===== ==== ===== ====
</TABLE>
43
<PAGE>
Comparison of Financial Condition at June 30, 1996, June 30, 1995 and 1994
Richmond Savings has experienced consistent moderate asset growth in recent
years as total assets have increased to $94.1 million at June 30, 1996 from
$91.4 million at June 30, 1995, and $87.5 million at June 30, 1994. Net loans
receivable have remained relatively unchanged, totalling $68.4 million at
June 30, 1996, $68.7 million at June 30, 1995, and $67.7 million at June 30,
1994, as demand for adjustable rate loans emphasized by Richmond Savings has not
maintained pace with Richmond Savings' deposit growth. During the same
period, investments increased to $21.8 million at June 30, 1996 from
$18.5 million at June 30, 1995, and $16.0 million at June 30, 1994.
Deposits increased to $83.7 million at June 30, 1996 from $81.4 million at
June 30, 1995, and $78.3 million at June 30, 1994. This increase in deposits
provided funds to support the growth in investments described in the preceding
paragraph.
Retained earnings totalled $8.6 million, $8.1 million and $7.4 million at June
30, 1996, 1995 and 1994, respectively. At June 30, 1996, Richmond Savings was
required to maintain net worth equal to 5% of its total assets under the
Administrator's regulations. On such date, Richmond Savings had net worth under
such regulations of $9.1 million, which was equal to 9.7% of total assets.
Additionally, at June 30, 1996, Richmond Savings had Tier 1 risk based capital,
leverage capital and total risk-based capital of $8.7 million, $8.7 million and
$9.1 million, respectively, exceeding the regulatory capital requirements by
$6.8 million, $5.0 million and $5.2 million, respectively.
Comparison of Results of Operations for the Years Ended June 30, 1996, 1995, and
1994
Net Income. Richmond Savings' net income for the years ended June 30, 1996,
1995, and 1994 was $591,000, $720,000 and $860,000, respectively. Net income
was positively affected in 1994 by gains associated with the sale of loans as
management sold certain fixed rate loans in an effort to maintain and improve
Richmond Savings' interest rate risk and liquidity positions while satisfying
demand in Richmond Savings' market area for long-term fixed rate mortgage loans.
Declines in net interest income, combined with increases in other expenses and
the significant reduction in loan sales and resulting gains after fiscal 1994,
are primarily responsible for the respective decreases in net income for fiscal
1995 and 1996.
Net Interest Income. Net interest income before provision for loan losses
decreased to $2.9 million in fiscal 1996 from $3.1 million in 1995 and $3.2
million in 1994. The decrease in net interest income is attributable to a
decrease in interest rate spread over the three-year period, to 2.77% in fiscal
1996 from 3.24% in fiscal 1995 and 3.48% in fiscal 1994. Because Richmond
Savings' deposits are generally more rate sensitive than are its interest-
earning assets, interest margins generally increase during periods of declining
rates and decrease during periods of increasing rates. During the middle part
of the year ended June 30, 1994, a sustained downward trend in interest rates in
general, which had begun prior to 1993, came to an end, with an overall upward
trend in rates being generally maintained since that time. The reversal in the
rate trend in 1994 had begun quickly to negatively impact or increase interest
costs, and the lagging impact on loan yields continued to trend downward as a
result of the declining interest rate environment of previous years. The
overall impact of increasing rates was evident in fiscal 1995, as an increase in
interest income of $250,000 was more than offset by an increase in interest
costs of $338,000. The impact was more dramatic in fiscal 1996, as an increase
in interest income of $459,000 was more than offset by a $678,000 increase in
interest costs. During fiscal 1995, the increase in rates also offset the fact
that the average balances of interest-earning assets increased significantly
more than the average balances of interest-bearing deposits.
Provision for Loan Losses. The provision for loan losses was $36,000 for each
of the years ended June 30, 1996, 1995 and 1994. The provisions and the
resulting loan loss allowances are amounts Richmond Savings' management believes
will be adequate to absorb possible losses on existing loans. Loans are charged
off against the allowance when management believes collectibility is unlikely,
although management continues to actively pursue collection of loans which have
been charged off. Management decisions regarding the provision and resulting
allowance are based both on prior loan loss experience and other factors, such
as existing loan levels and types of loans outstanding, nonperforming loans,
industry standards and general economic conditions. Richmond Savings
experienced net loan charge-offs of $10,000 and $27,000 during the years ended
June 30, 1996 and 1994, respectively, as compared with a net recovery of loans
previously charged off of $11,000 during the year ended June 30, 1995.
44
<PAGE>
Other Income. Other income increased to $532,000 in fiscal 1996 from $430,000
in fiscal 1995, after decreasing from $586,000 in fiscal 1994. The principal
factor resulting in the decrease in 1995 was a reduction in gains on sales of
loans, which decreased from $151,000 in 1994 to $7,000 in 1995. Gains were
significantly higher in 1994 because market interest rates were lower and there
was more demand for fixed rate loans--which are generally sold by Richmond
Savings. Because gains on the sale of loans are dependent upon the interest
rate environment and its effect on the demand for fixed rate loans, gains from
sale of loans is a volatile source of income. Gains on sales of loans increased
only slightly to $8,000 in 1996. The overall increase in other income in 1996
was primarily the result of increases in transaction and other service fee
income and the receipt of $31,000 in proceeds from an insurance policy insuring
a former director.
Other Expenses. Other expenses increased to $2.49 million in fiscal 1996 from
$2.45 million in fiscal 1995, and $2.39 million in fiscal 1994, representing
increases of $41,000 and $60,000 in 1996 and 1995, respectively. The increase
in fiscal 1996 was due primarily to an increase in personnel costs. The
increase in fiscal 1995 was primarily due to increases in personnel costs,
equipment rental and maintenance expenses. Management anticipates that other
expenses will increase following the Conversion as the result of additional
expenses incurred as a result of operating as a public company and additional
compensation expense associated with the ESOP and MRP. Other items of
noninterest expense could also significantly increase in the future.
Income Taxes. Income tax expense decreased to $299,000 in fiscal 1996 from
$329,000 in fiscal 1995 and $492,000 in fiscal 1994, with the decreases being
primarily attributable to corresponding decreases in income before income taxes.
Insurance Premium Surcharge
A comprehensive continuing appropriations bill which was passed by the United
States Congress and signed by the President on September 30, 1996, provides for
a one-time assessment to recapitalize the SAIF. The assessment is estimated to
equal 65.7 cents per each $100 of insured domestic deposits and is expected to
be payable prior to December 1, 1996. This assessment will have the effect of
reducing the capital of SAIF-member institutions by the amount of the
assessment, net of any income tax benefit, and is expected to reduce earnings
during the quarter ended December 31, 1996. The one-time assessment is expected
to equal approximately $519,000 before income taxes. See "RISK FACTORS --
Recapitalization of SAIF, its Impact on SAIF Premiums and One-Time
Recapitalization Fee" and "SUPERVISION AND REGULATION -- Regulation of Richmond
Savings -- Insurance of Deposit Accounts."
Recapture of Bad Debt Reserves
Recently enacted federal legislation has repealed the reserve method of
accounting for thrift bad debt reserves and requires thrifts to recapture into
income over a six-year period their post-1987 additions to their excess bad debt
tax reserves, thereby generating additional tax liability. Under the
legislation, recapture of post-1987 excess reserves is suspended for up to two
years, to the first tax year beginning after December 31, 1997, if, during those
years, the institution satisfies a "residential loan requirement." At June 30,
1996, Richmond Savings' post-1987 excess reserves amounted to approximately
$581,000. See "RISK FACTORS -- Increases in Tax Liability Resulting From
Recapture of Bad Debt Reserves" and "TAXATION -- Federal Income Taxation."
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented in this
Prospectus 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 considering the change in the
relative purchasing power of money over time and due to inflation. The impact
of inflation is reflected in the increased cost of Richmond Savings' operations.
Unlike most industrial companies, nearly all the assets and liabilities of
Richmond Savings are monetary in nature. As a result, interest rates have a
greater impact on Richmond Savings' performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
45
<PAGE>
Impact of New Accounting Standards
Disclosure about Fair Value of Financial Instruments. Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosure about Fair Value of Financial
Instruments," was issued by the Financial Accounting Standards Board ("FASB") in
December 1991 and is effective for years ending after December 15, 1995. The
statement requires, among other things, disclosure of the fair value of
financial instruments, both assets and liabilities recognized and not recognized
in the statement of financial condition, for which it is practicable to estimate
fair value. Richmond Savings adopted the disclosure requirements of SFAS No.
107 on June 30, 1996. The adoption of SFAS No. 107 did not have a material
impact on Richmond Savings' financial position or results of operations.
Impairment of Long-Lived Assets. In March 1995, the FASB issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of." The statement is effective for years beginning after
December 15, 1995 and requires, among other things, recognition of impairment of
long-lived assets, if any, based upon the difference between the undiscounted
expected future cash flows and the carrying value. Further, the statement
requires that long-lived assets to be disposed of be reported at the lower of
carrying amount or fair value less costs to sell. Management does not believe
the adoption of this statement will have a material effect on Richmond Savings'
financial position or results of operations.
Impairment of Loans. The FASB has issued Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," which
requires that creditors value all loans for which it is probable that the
creditor will be unable to collect all amounts due according to the terms of the
loan agreement based on the discounted expected future cash flows. This
discounting would be at the loan's effective interest rate. The income
recognition provisions of SFAS No. 114 have subsequently been amended by
Statement of Financial Accounting Standards No. 118, which permits companies to
continue using existing income recognition policies with respect to impaired
loans upon adopting SFAS No. 114. SFAS No. 114 and SFAS No. 118 apply
prospectively for fiscal years beginning after December 15, 1994. Adoption of
SFAS No. 114 and SFAS No. 118 did not have a material impact on Richmond
Savings' financial condition or results of operations.
Mortgage Servicing Rights. In May 1995, the FASB issued Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 is effective for years beginning after December 15, 1995.
The statement will require, among other things, Richmond Savings to capitalize
the estimated fair value of servicing rights on loans originated for sale, and
amortize such amount over the estimated servicing life of the loans. Management
has not assessed the impact that adoption of SFAS No. 122 will have on Richmond
Savings' financial condition or results of operations.
In June, 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," which provides new accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities. Those standards are based on consistent application of a financial
components approach that focuses on control. Under the financial components
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
and derecognizes liabilities when extinguished. SFAS No. 125 supersedes SFAS
No. 122 and is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996. Management has
not yet determined the impact that adoption of SFAS No. 125 will have on
Richmond Savings' financial condition or results of operations.
Accounting for Stock-Based Compensation. In November 1995, the FASB issued
Statement of Financial Accounting Standards No. 123, "Accounting for Awards of
Stock-Based Compensation to Employees." SFAS No. 123 is effective for
years beginning after December 15, 1995. The statement defines a fair value-
based method of accounting for employee stock options or similar equity
instruments and encourages all entities to adopt that method of accounting for
employee stock options or similar equity instruments 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
46
<PAGE>
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. SFAS No. 123 requires
that an employer's financial statements include certain disclosures about stock-
based employee compensation arrangements regardless of the method used to
account for them. Management has not estimated the effect of adoption on
Richmond Savings' financial condition or results of operations.
Accounting for Employee Stock Ownership Plans. The Accounting Standards
Division of the American Institute of Independent Certified Public Accountants
approved SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans,"
which is effective for fiscal years beginning after December 31, 1993 and
applies to shares of capital stock of sponsoring employers acquired by employee
stock ownership plans after December 31, 1992 that had not been committed to be
released as of January 1, 1992. SOP 93-6, among other things, changed the
measure of compensation recorded by employers from the cost of employee stock
ownership plan shares to the fair value of employee stock ownership plan shares.
To the extent that the fair value of the shares held by the ESOP, committed to
be released directly to compensate employees, differs from the cost of such
shares, compensation expenses and a related charge or credit to additional paid-
in capital will be reported in Richmond Savings' 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, planning and
coordinating the business activities of Richmond Savings, 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 Holding Company will
have no significant assets other than the shares of Richmond Savings' 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, payments on the ESOP loan and any dividends received from
Richmond Savings. Initially, the Holding Company will neither own nor lease any
property, but will instead use the premises, equipment and furniture of Richmond
Savings. 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
Richmond Savings from time to time. Additional employees will be hired as
appropriate to the extent the Holding Company expands its business in the
future. In the future, the Holding Company will consider using some of the
proceeds of the Conversion retained by it to expand its operations in its
existing primary market and other nearby areas by acquiring other financial
institutions which could be merged with Richmond Savings or operated as separate
subsidiaries. Presently, there are no agreements or understandings for
expansion of the Holding Company's operations.
BUSINESS OF RICHMOND SAVINGS
General
Richmond Savings is engaged primarily in the business of attracting deposits
from the general public and using such deposits to make mortgage loans secured
by real estate. Richmond Savings makes one-to-four family residential real
estate loans, home equity line of credit loans and home improvement loans, loans
secured by multi-family residential and commercial real property and
construction loans. Richmond Savings also makes a limited number of loans which
are not secured by real property, such as loans secured by pledged deposit
accounts and various types of consumer loans. Richmond Savings' primary source
of revenue is interest income from its lending activities. Richmond Savings'
other major sources of revenue are interest and dividend income from investments
and mortgage-backed securities, interest income from its interest-earning
deposit balances in other depository institutions, transaction and fee income
from its lending and deposit activities and gains from sale of loans. The major
expenses of Richmond Savings are interest on
47
<PAGE>
deposits and noninterest expenses such as personnel costs, federal deposit
insurance premiums, data processing expenses, equipment expenses and branch
occupancy and related expenses.
As a North Carolina-chartered savings bank, Richmond Savings is subject to
examination and regulation by the FDIC and the Administrator. Upon consummation
of the Conversion, Richmond Savings, as a subsidiary of the Holding Company,
will be subject to indirect regulation by the Federal Reserve. The business and
regulation of Richmond Savings 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 Richmond Savings."
Market Area
Richmond Savings' primary market area consists of Richmond, Moore and Scotland
counties in North Carolina. Richmond County, which contains Rockingham, is
located in south central North Carolina near the North Carolina-South Carolina
boundary, and is the home of the North Carolina Motor Speedway, location of two
Winston-Cup stock car races annually. Moore County, which is immediately north
of Richmond County, is the home of several retirement communities and golf
resorts, including Pinehurst and Southern Pines. Scotland County, which
includes Laurinburg, is located east of Richmond County. Richmond and Scotland
counties have experienced relatively slow growth during the last five years.
Moore County, which includes the resort and retirement communities of Pinehurst
and Southern Pines, has experienced greater growth. The economy in Richmond
Savings' primary market area is largely rural with employment diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. Major area employers include Richmond Apparel Company, Burlington
Industries, Sara Lee Hosiery, Perdue Farms, Inc., Moore County Regional
Hospital, Ithaca Industries, Inc., Resorts of Pinehurst, Campbell Soup Company
and Abbott Laboratories.
Lending Activities
General. Richmond Savings' primary source of revenue is interest 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. Richmond Savings also makes home equity loans and loans
secured by multi-family and commercial properties, construction loans, home
improvement loans, savings account loans and various types of consumer loans.
Over 96% of Richmond Savings' loan portfolio, before net items, is secured by
real estate. On June 30, 1996, Richmond Savings' largest single outstanding
loan had a balance of approximately $373,000. This loan was performing in
accordance with its original terms. In addition to interest earned on loans,
Richmond Savings receives fees in connection with loan originations, loan
servicing, loan modifications, late payments, loan assumptions and other
miscellaneous services.
Adjustable rate loans are generally originated with the intention that they
will be held in Richmond Savings' loan portfolio. Fixed rate one-to-four family
residential loans are generally originated in conformity with secondary market
purchase requirements and sold in the secondary market. During 1996, 1995, and
1994, Richmond Savings sold $1.4 million, $640,000, and $7.4 million of fixed
rate loans in order to better manage its interest rate risk.
Loan Portfolio Composition. Richmond Savings' net loan portfolio totalled
approximately $68.4 million at June 30, 1996 representing 72.6% of Richmond
Savings' total assets at such date. At June 30, 1996, 81.0% of Richmond
Savings' loan portfolio, before net items, was composed of one-to-four family
residential mortgage loans. Home equity and home improvement loans represented
9.35% of Richmond Savings' loan portfolio, before net items, and multi-family
residential and commercial and construction loans represented 6.2% of Richmond
Savings' loan portfolio, before net items, on such date. As of June 30, 1996,
65.4% of the loans in Richmond Savings' loan portfolio had adjustable interest
rates.
The following table sets forth the composition of Richmond Savings' loan
portfolio by type of loan at the dates indicated.
48
<PAGE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Type of loan:
Real estate loans:
One-to-four family residential $55,386 81.02% $57,980 84.34% $57,025 84.26%
Multi-family residential and commercial 1,963 2.87% 1,425 2.07% 1,959 2.89%
Construction 2,301 3.37% 2,106 3.06% 2,703 3.99%
Home equity lines of credit 5,465 8.00% 4,666 6.79% 3,949 5.84%
------- ------ ------- ------ ------- ------
Total real estate loans 65,115 95.26% 66,177 96.26% 65,636 96.98%
------- ------ ------- ------ ------- ------
Other loans:
Consumer loans 2,861 4.18% 2,418 3.52% 1,734 2.56%
Home improvement loans 928 1.36% 886 1.29% 611 0.90%
Loans secured by deposits 724 1.06% 736 1.07% 784 1.16%
------- ------ ------- ------ ------- ------
Total other loans 4,513 6.60% 4,040 5.88% 3,129 4.62%
------- ------ ------- ------ ------- ------
Total loans 69,628 101.86% 70,217 102.14% 68,765 101.60%
Less:
Construction loans in process 881 1.29% 1,109 1.61% 769 1.14%
Allowance for loan losses 389 0.57% 363 0.53% 316 0.46%
------- ------ ------- ------ ------- ------
$68,358 100.00% $68,745 100.00% $67,680 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
49
<PAGE>
In addition to the home equity line of credit loans shown above,
Richmond Savings had $5.1 million in outstanding commitments for home equity
loans at June 30, 1996.
The following table sets forth the time to contractual maturity of
Richmond Savings' loan portfolio at June 30, 1996. Loans which have adjustable
rates are shown as being due in the period during which rates are next subject
to change, while fixed rate and other loans are shown as due in the period of
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 or scheduled principal repayments. Amounts in the table are net of
loans in process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
At June 30, 1996
------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
Adjustable rate residential 1-4 family $21,583 $16,876 $ -- $ -- $38,459
Fixed rate residential 1-4 family 35 308 379 16,205 16,927
Multi-family residential and commercial 283 596 524 560 1,963
Construction 1,420 -- -- -- 1,420
Home equity credit lines 5,465 -- -- -- 5,465
Other loans 1,786 1,392 796 539 4,513
Less:
Allowance for loan losses (389) -- -- -- (389)
------- ------- ------ ------- -------
$30,183 $19,172 $1,699 $17,304 $68,358
======= ======= ====== ======= =======
</TABLE>
The following table sets forth the dollar amount at June 30, 1996 of all loans
maturing or repricing on or after June 30, 1997 which have fixed or adjustable
interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
------- ----------
<S> <C> <C>
(In Thousands)
Real estate loans $18,572 $16,876
Other loans 2,727 --
------- -------
$21,299 $16,876
======= =======
</TABLE>
One-to-Four Family Residential Real Estate Lending. Richmond Savings'
primary lending activity, which it intends to continue to emphasize, is the
origination of fixed and adjustable rate first mortgage loans to enable
borrowers to purchase or refinance one-to-four family residential real property.
Consistent with Richmond Savings' emphasis on being a community-oriented
financial institution, it is and has been Richmond Savings' strategy to focus
its lending efforts in its primary market area. On June 30, 1996, approximately
81.0% of Richmond Savings' real estate loan portfolio, before net items,
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 loan amounts, 69.4% had adjustable interest rates.
Richmond Savings originates conventional mortgage loans secured by owner
occupied property having terms of up to 30 years in amounts of up to 95% of the
value of the property. Private mortgage insurance is generally required if the
loan amount exceeds 80% of the value of the property. The loans have both fixed
and adjustable rates. The fixed rate loans are generally originated for sale.
Some of such loans are sold servicing retained and others (including all FHA
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<PAGE>
and VA loans) are sold servicing released. The interest rates on adjustable
rate loans are generally adjustable every 1, 3 or 5 years and are tied to the
average weekly yield on United States Treasury securities adjusted to a constant
maturity. The loans have rate caps which limit the amount of changes at the time
of each adjustment and over the lives of the loans.
In addition, Richmond Savings originates FHA and VA loans secured by
one-to-four family residential property. These loans, which are government
insured or guaranteed, are made in amounts of up to 100% of the value of the
property. Such loans have terms of up to 30 years. These loans have fixed
interest rates and are sold in the secondary market, servicing released.
Adjustable rate loans are generally considered to involve a greater
degree of risk than fixed rate loans because borrowers may have difficulty
meeting their payment obligations if interest rates and required payment amounts
increase substantially. Substantially all of the fixed-rate loans in Richmond
Savings' mortgage loan portfolio have due on sale provisions allowing Richmond
Savings 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
up 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.
Richmond Savings generally requires title insurance for its one-to-four
family residential loans. Richmond Savings also generally 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.
Multi-family Residential and Commercial Real Estate Lending. On June 30,
1996, Richmond Savings had $2.0 million in outstanding loans secured by multi-
family residential and commercial properties, comprising approximately 2.87% of
its loan portfolio, before net items, as of that date. Of these loans,
approximately 45.0% were secured by church properties. Most of the other loans
are secured by apartments, office, retail and other commercial real estate in
Richmond Savings' primary market area and have fixed and adjustable interest
rates. These loans generally do not exceed 80% of the appraised value of the
real estate securing the loans, and have terms of up to 20 years. The
adjustable rate loans generally use the same indexes as are used in one-to-four
family residential lending. See "-- One-to-Four Family Residential Real Estate
Lending." Loans secured by multi-family and commercial real estate 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.
Construction Lending. Richmond Savings makes construction loans
primarily for the construction of single-family dwellings. The aggregate
outstanding balance of such loans on June 30, 1996 was approximately $2.3
million, representing approximately 3.4% of Richmond Savings' loan portfolio,
before net items. Most of these loans were made to persons who are constructing
properties for the purpose of occupying them; some were made to builders who
were constructing properties for sale. Loans made to builders are generally
"pure construction" loans which require the payment of interest during the
construction period of generally one year or less and the payment of the
principal in full at the end of the construction period. Loans made to
individual property owners are both pure construction loans and "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 or adjustable interest rates having terms similar to other one-to-four
family residential loans.
Short-term full construction loans generally have a maximum loan-to-
value ratio of 80% of the appraised value of the property. Construction-
permanent loans made to persons who intend to occupy the finished premises are
made at loan to value ratios of up to 80%, or up to 95% if private mortgage
insurance is obtained.
51
<PAGE>
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. In addition, repayment of loans made to
builders to finance construction of properties is often dependent upon the
builder's ability to sell the property once construction is completed.
Home Equity Lending. At June 30, 1996, Richmond Savings had
approximately $5.5 million in home equity line of credit loans, representing
approximately 8.0% of its loan portfolio, before net items. Richmond Savings'
home equity lines of credit have adjustable interest rates tied to prime
interest rates plus a margin. The home equity lines of credit require the
payments of principal and interest monthly, and all outstanding amounts must be
paid in full at the end of 15 years. Home equity lines of credit are generally
secured by subordinate liens against residential real property. Richmond Savings
requires limited title opinions in connection with these loans. Richmond Savings
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 90% 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, Richmond Savings 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. At June
30, 1996, Richmond Savings had $5.1 million in unused commitments under its home
equity lines of credit. Richmond Savings intends to continue to emphasize its
home equity program. The presence of home equity loans in Richmond Savings'
portfolio has assisted the institution in achieving a satisfactory matching of
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.
Consumer and Home Improvement Loans. Richmond Savings offers a wide
variety of secured and unsecured consumer loans, including automobile loans,
overdraft protection loans, credit card loans and other secured and unsecured
loans. At June 30, 1996, Richmond Savings' consumer loan portfolio totalled $2.9
million, representing 4.18% of its loan portfolio, before net items. Automobile
loans generally have terms not exceeding 60 months, have fixed interest rates
and do not exceed 90% of the fair market value of the automobile securing the
loan. Overdraft loans and credit card loans are unsecured and have fixed
interest rates. Consumer lending usually involves more risk than residential
mortgage lending because payment patterns are more significantly influenced by
general economic conditions and because any collateral for such loans frequently
consists of depreciating property.
In addition, at June 30, 1996, Richmond Savings had $928,000 in
outstanding home improvement loans, representing 1.36% of its loan portfolio,
before net items. These loans are generally secured by a subordinate lien on the
property being improved, do not exceed 80% of the value of such property, less
the amount secured by any prior liens, have terms of no more than 10 years and
fixed interest rates.
Loans Secured by Deposits. Richmond Savings also offers loans secured by
deposit accounts. At June 30, 1996, such loans totalled $724,000, representing
1.06% of Richmond Savings' loan portfolio, before net items. The interest rates
on these loans are variable and are generally between 2% and 3% above the
interest rate being paid on the deposit account serving as collateral with a
minimum rate of 7% per annum. The maximum amounts of these loans is generally
90% of the related deposit account.
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, Richmond Savings assesses the
applicant's ability to make principal and interest payments on the loan and the
value of the property securing the loan. Richmond Savings obtains detailed
written loan applications to determine the borrower's ability to repay and
verifies responses on the loan application through the
52
<PAGE>
use of credit reports, financial statements, and other confirmations. Under
current practice, the responsible officer or loan officer of Richmond Savings
analyzes the loan application and the property involved, and an appraiser
inspects and appraises the property. Richmond Savings requires independent fee
appraisals on all loans originated primarily on the basis of real estate
collateral. Richmond Savings also obtains information concerning the income,
financial condition, employment and the credit history of the applicant.
Richmond Savings' internal loan committee, which consists of the
President, Executive Vice President and Loan Department Manager, has authority
to approve many of the loans made by Richmond Savings, although loans exceeding
specified limits also require approval of at least one non-employee member of
the Board of Directors. The full Board of Directors must approve all real estate
loans exceeding $300,000. The largest consumer loan not secured by real estate
which may be approved by any individual officer is $30,000.
Normally, upon approval of a residential mortgage loan application,
Richmond Savings 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 June 30,
1996, Richmond Savings had $565,000 in such unfunded mortgage loan commitments.
In addition, on such date Richmond Savings had $881,000 in undisbursed
construction loans and $5.1 million in unfunded commitments for unused lines of
credit.
Interest Rates, Terms, Points and Fees. Interest rates and fees charged
on Richmond Savings' loans are affected primarily by the market demand for
loans, competition, the supply of money available for lending purposes and
Richmond Savings' 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, Richmond Savings 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 Richmond Savings. During the fiscal
years ended June 30, 1996, 1995, and 1994, Richmond Savings had $32,000,
$37,000, and $37,000, respectively, in fee income on loans serviced for others.
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. In this event, the normal procedure
followed by Richmond Savings 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, Richmond Savings 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, Richmond Savings 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 Richmond Savings to
recover its investment. As of June 30, 1996, Richmond Savings held $29,000 of
real estate acquired in settlement of loans. Real estate acquired through, or in
lieu of, loan foreclosure is initially recorded at the lower of cost or 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. Costs
relating to the development and improvement of the property are capitalized, and
costs relating to holding the property are charged to expenses.
Interest on loans is recorded as borrowers' monthly payments become due.
Accrual of interest income on loans is suspended when, in management's judgment,
doubts exist as to the collectibility of additional interest within a reasonable
time. Loans are returned to accrual 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 nonaccrual status is generally charged off. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent cash payments
are received until the loan is returned to accrual status. For the fiscal year
ended June 30, 1996, interest income that would have been recorded on
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<PAGE>
nonaccrual loans under the original terms of such loans was approximately
$8,000. During such period, no interest income on nonaccrual loans was included
in net income.
The following table sets forth information with respect to nonperforming
assets identified by Richmond Savings, including nonaccrual loans and real
estate owned at the dates indicated. At such dates, Richmond Savings had no
loans which were "troubled debt restructurings," as defined in SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings."
<TABLE>
<CAPTION>
At June 30,
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Loans not accruing interest $ 27 $ 75 $ 112 $ 24 $ 256
Accruing loans 90 days or more past due 3 -- -- 3 --
----- ----- ----- ----- -----
Total non-performing loans 30 75 112 27 256
Foreclosed real estate 29 -- -- 43 95
----- ----- ----- ----- -----
Total non-performing assets $ 59 $ 75 $ 112 $ 70 $ 351
===== ===== ===== ===== =====
Non-performing assets to total assets 0.06% 0.08% 0.13% 0.08% 0.41%
===== ===== ===== ===== =====
</TABLE>
Applicable regulations require Richmond Savings 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 June 30, 1996, Richmond Savings had approximately $130,000 of
loans internally classified as "substandard," approximately $23,000 of loans
classified as "doubtful" and $6,000 of loans classified as "loss." Total
classified loans as of June 30, 1995 and 1994 were approximately $76,000 and
approximately $494,000, respectively.
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. Richmond Savings' 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.
Richmond Savings also identifies assets which possess credit
deficiencies or potential weaknesses deserving close attention by management.
These assets are maintained on a "watch list" and do not yet warrant adverse
classification. At June 30, 1996, Richmond Savings' watch list consisted of 11
one-to-four family residential loans aggregating $482,000, one commercial loan
aggregating $66,000 and 19 consumer loans aggregating $111,000.
54
<PAGE>
Allowance for Loan Losses. In originating loans, Richmond Savings
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, Richmond Savings' 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 questionable by management after reviewing the
current status of loans which are contractually past due and considering the net
realizable value of the security for the loans.
Management continues to actively monitor Richmond Savings' 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.
The following table describes the activity related to Richmond Savings'
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Balance at beginning of period $ 363 $ 316 $ 307 $ 276
----- ------- ----- -----
Loans charged off:
Real estate -- 7 20 --
Other 11 3 9 9
----- ------- ----- -----
Total loans charged off 11 10 29 9
Recoveries:
Real estate 1 20 -- --
Other -- 1 2 2
----- ------- ----- -----
Net loans charged off (recovered) 10 (11) 27 7
----- ------- ----- -----
Provision for loan losses 36 36 36 38
----- ------- ----- -----
Balance at end of period $ 389 $ 363 $ 316 $ 307
===== ======= ===== =====
Ratio of net charge-offs
(recoveries) to average loans
outstanding during the period 0.01% (0.02)% 0.04% 0.01%
===== ======= ===== =====
</TABLE>
The following table sets forth the composition of the allowance for loan
losses by type of loan at the dates indicated. The allowance is allocated to
specific categories of loans for statistical purposes only, and may be applied
to loan losses incurred in any loan category.
55
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------
1996 1995
---------------------------------- ----------------------------------
Percent of Amount Percent of Amount
Amount of Allowance of Loans Amount of Allowance of Loans
Allowance to Total to Gross Allowance to Total to Gross
--------- Allowance Loans --------- Allowance Loans
---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
One-to-four family residential $57 14.65% 79.55% $65 17.91% 82.57%
Multi-family residential and commercial 15 3.86% 2.82% 19 5.23% 2.03%
Construction 6 1.54% 3.30% 9 2.48% 3.00%
Home equity lines of credit 27 6.94% 7.85% 40 11.02% 6.65%
----- ------- ------- ----- ------- -------
Total real estate loans 105 26.99% 93.52% 133 36.64% 94.25%
----- ------- ------- ----- ------- -------
Other loans:
Consumer loans 174 44.73% 4.11% 138 38.02% 3.44%
Home improvement loans 4 1.03% 1.33% 9 2.48% 1.26%
Loans secured by deposits -- 0.00% 1.04% -- 0.00% 1.05%
----- ------- ------- ----- ------- -------
Total other loans 178 45.76% 6.48% 147 40.50% 5.75%
----- ------- ------- ----- ------- -------
Unallocated 106 27.25% -- 83 22.86% --
----- ------- ------- ----- ------- -------
Total allowance for loan losses $ 389 100.00% 100.00% $ 363 100.00% 100.00%
===== ======= ======= ===== ======= =======
<CAPTION>
--------------------------------------------------------------------
1994 1993
---------------------------------- ----------------------------------
Percent of Amount Percent of Amount
Amount of Allowance of Loans Amount of Allowance of Loans
Allowance to Total to Gross Allowance to Total to Gross
--------- Allowance Loans --------- Allowance Loans
---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
One-to-four family residential $139 43.99% 82.93% $118 38.43% 81.18%
Multi-family residential and commercial 16 5.06% 2.85% 15 4.89% 6.43%
Construction 12 3.80% 3.93% 15 4.89% 4.15%
Home equity lines of 34 10.76% 5.74% 27 8.79% 5.00%
credit ----- ------- ------- ----- ------- -------
Total real estate loans 201 63.61% 95.45% 175 57.00% 96.76%
----- ------- ------- ----- ------- -------
Other loans:
Consumer loans 54 17.09% 2.52% 51 16.61% 1.96%
Home improvement loans 8 2.53% 0.89% 1 0.33% 0.14%
Loans secured by deposits -- 0.00% 1.14% -- 0.00% 1.14%
----- ------- ------- ----- ------- -------
Total other loans 62 19.62% 4.55% 52 16.94% 3.24%
----- ------- ------- ----- ------- -------
Unallocated 53 16.77% -- 80 26.06% --
----- ------- ------- ----- ------- -------
Total allowance for loan losses $ 316 100.00% 100.00% $ 307 100.00% 100.00%
===== ======= ======= ===== ======= =======
</TABLE>
56
<PAGE>
Investment Securities
Interest and dividend income from investment securities generally
provides the second largest source of income to Richmond Savings after interest
on loans. In addition, Richmond Savings receives interest income from deposits
in other financial institutions. At June 30, 1996, Richmond Savings' investment
securities portfolio totalled approximately $21.8 million and consisted of U.S.
government and agency securities, mortgage-backed securities, municipal bonds,
deposits in other financial institutions, and investments in corporate debt
securities of three large financial institutions and IBM Corporation.
Investments in mortgage-backed securities involve a risk that, because of
changes in the interest rate environment, actual prepayments will 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 No. 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 and equity securities not
classified as either held-to-maturity or 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. At June 30, 1996, Richmond Savings had no trading securities. Richmond
Savings adopted SFAS No. 115 as of July 1, 1994. The adoption affected only the
held-to-maturity and available-for-sale classifications, with net unrealized
securities losses on the securities available-for-sale of $64,545, net of
related deferred tax assets of $34,240, reported as a separate component of
equity in its financial statements at July 1, 1994. See Note B of "Notes to
Consolidated 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. Interest and dividends are 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. Prior to the
adoption of SFAS No. 115, Richmond Savings stated its debt securities at
amortized cost and its marketable equity securities at the lower of cost or
market. Accumulated changes in net unrealized losses on marketable equity
securities were included in retained earnings.
As a member of the FHLB of Atlanta, Richmond Savings is required to
maintain an investment in stock of the FHLB of Atlanta equal to the greater of
1% of Richmond Savings' 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 June 30, 1996, Richmond Savings' investment in stock of
the FHLB of Atlanta was $735,000.
North Carolina regulations require Richmond Savings to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. See "SUPERVISION AND REGULATION--Regulation of Richmond Savings--
Liquidity." Richmond Savings is also permitted to make certain other
securities investments.
Richmond Savings' current investment policy states that Richmond Savings'
investments will be limited to U.S. Treasury obligations, federal agency
securities, certain state, county or municipal securities, certificates of
deposits and time deposits, bankers' acceptances, commercial paper, corporate
bonds, mortgage-backed securities and mutual funds composed entirely of assets
in which the institution could invest directly.
57
<PAGE>
Investment decisions are made by authorized officers of Richmond Savings
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 the carrying value of Richmond Savings'
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
(Dollars in Thousands)
Securities available for sale:
U.S. government and agency securities $ 8,387 $ 5,474 $ --
------- ------- -------
Securities held to maturity:
U.S. government and agency securities 4,008 5,991 10,476
Mortgage-backed securities 1,817 1,070 1,287
Corporate debt securities 1,999 1,518 1,533
Municipal bonds 151 304 460
Other -- -- 50
------- ------- -------
Total securities held to maturity 7,975 8,883 13,806
------- ------- -------
Marketable equity securities:
Mutual funds -- -- 626
------- ------- -------
Total investment securities 16,362 14,357 14,432
Interest-earning balances in other banks 4,686 3,448 867
Federal Home Loan Bank stock 735 735 735
------- ------- -------
Total investments $21,783 $18,540 $16,034
======= ======= =======
</TABLE>
At June 30, 1996, the market value of Richmond Savings' investment
securities available for sale and held to maturity were $8.4 million and $7.9
million, respectively.
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of Richmond Savings'
investment portfolio as of June 30, 1996.
58
<PAGE>
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years Total
----------------- ------------------ ------------------ ------------------ -----------------
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>
(Dollars in Thousands)
Securities available for
sale:
U.S. government and
agency securities $1,000 5.69% $4,921 6.35% $2,466 7.50% $ -- --% $8,387 6.61%
Securities held to
maturity:
U.S. government and
agency securities 499 6.45% 1,999 5.70% 1,510 6.35% -- --% 4,008 6.04%
Mortgage-backed
securities -- -- 169 6.08% 1,265 7.17% 383 8.50% 1,817 7.35%
Corporate bonds 506 5.51% 996 6.72% 497 6.48% -- -- 1,999 6.35%
Municipal bonds 151 4.00% -- -- -- -- -- -- 151 4.00%
Other:
Interest-earning
balances in other banks 4,686 5.35% -- -- -- -- -- -- 4,686 5.35%
Federal Home Loan Bank
stock -- -- -- -- -- -- 735 7.25% 735 7.25%
------ ------ ------ ------ -------
$6,842 5.46% $8,085 6.23% $5,738 7.04% $1,118 7.68% $21,783 6.28%
====== ====== ====== ====== =======
</TABLE>
59
<PAGE>
Deposits and Borrowings
General. Deposits are the primary source of Richmond Savings' funds for
lending and other investment purposes. In addition to deposits, Richmond Savings
derives funds from loan principal repayments, interest payments, investment
income and principal repayments, interest from its own interest-earning
deposits, interest income and repayments 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.
Deposits. Richmond Savings attracts both short-term and long-term
deposits from the general public by offering a variety of accounts and rates.
Richmond Savings offers passbook savings accounts, statement savings accounts,
negotiable order of withdrawal accounts, individual retirement accounts, and
fixed interest rate certificates with varying maturities. At June 30, 1996,
13.58% of Richmond Savings' deposits consisted of passbook and statement savings
accounts, 10.49% consisted of interest-bearing transaction accounts and 2.33%
consisted of noninterest-bearing transaction accounts. Although the vast
majority of Richmond Savings' deposits are certificate of deposit accounts,
management of Richmond Savings believes that it has been successful in
maintaining a high percentage of demand deposit and transaction accounts which
are generally considered to be less interest rate sensitive than certificate
accounts. This is consistent with Richmond Savings' asset/liability management
strategies. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Asset/Liability Management." 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. Richmond Savings' savings deposits traditionally have been obtained
primarily from its primary market area. Richmond Savings utilizes traditional
marketing methods to attract new customers and savings deposits, including print
media advertising and direct mailings. Richmond Savings does not advertise for
deposits outside of its local market area or utilize the services of deposit
brokers.
The following table sets forth certain information regarding Richmond
Savings' savings deposits at the dates indicated.
60
<PAGE>
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995 June 30, 1994
-------------------------- --------------------------- ----------------------------
Weighted Weighted Weighted
Average % of Average % of Average % of
Amount Rate Total Amount Rate Total Amount Rate Total
------ -------- ----- ------ -------- ----- ------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Passbook and statement
accounts $11,368 2.95% 13.58% $11,778 2.96% 14.46% $15,080 2.80% 19.25%
NOW accounts 5,663 2.31% 6.77% 5,666 2.30% 6.96% 5,473 2.30% 6.99%
VIP checking accounts 3,120 3.44% 3.73% 2,552 3.43% 3.13% 2,389 2.60% 3.05%
Non-interest bearing
accounts 1,954 0.00% 2.33% 1,934 0.00% 2.38% 1,770 0.00% 2.26%
------- ----- ------- ------- ----- ------- ------- ------ -------
Total demand deposits 22,105 2.59% 26.41% 21,930 2.58% 26.93% 24,712 2.47% 31.55%
------- ----- ------- ------- ----- ------- ------- ------ -------
Certificate accounts with
original maturities of:
3 months or less 3,613 3.61% 4.32% 3,747 3.79% 4.60% 3,559 2.63% 4.54%
6 months 18,156 5.06% 21.69% 16,697 5.64% 20.50% 17,012 3.49% 21.72%
12 months 11,341 5.30% 13.55% 12,637 5.66% 15.52% 10,946 3.97% 13.98%
18 months 2,718 6.08% 3.25% 1,330 6.41% 1.63% -- 0.00% 0.00%
24 months 6,484 5.80% 7.74% 6,990 5.47% 8.58% 6,145 4.86% 7.85%
36 months 2,265 5.61% 2.70% 2,237 5.58% 2.75% 1,830 5.25% 2.34%
60 months 2,006 5.92% 2.40% 1,929 5.90% 2.37% 1,427 5.60% 1.82%
IRA certificates 14,504 6.08% 17.32% 13,401 5.75% 16.46% 11,841 4.75% 15.12%
Other 523 5.99% 0.62% 539 6.18% 0.66% 843 5.90% 1.08%
------- ----- ------- ------- ----- ------- ------- ------ -------
Total certificates 61,610 5.44% 73.59% 59,507 5.32% 73.07% 53,603 4.12% 68.45%
------- ----- ------- ------- ----- ------- ------- ------ -------
Total deposits $83,715 4.69% 100.00% $81,437 4.58% 100.00% $78,315 3.60% 100.00%
======= ===== ======= ======= ===== ======= ======= ====== =======
</TABLE>
61
<PAGE>
The following table presents the maturities and weighted average rates
paid on all certificates of deposit as of June 30, 1996:
<TABLE>
<CAPTION>
Amount Due During the Year Ending June 30,
----------------------------------------------------------------------------
1997 1998 1999 Thereafter
------------------ ----------------- ----------------- ------------------
Weighted Weighted Weighted Weighted
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of $100,000 $ 5,057 5.29% $1,665 5.84% $ 216 5.25% $ 828 6.53%
or more
Certificates of less than 40,399 5.21% 5,815 5.62% 1,300 5.54% 6,330 6.50%
$100,000 ------- ----- ------ ----- ------ ----- ------ -----
$45,456 5.22% $7,480 5.67% $1,516 5.50% $7,158 6.50%
======= ===== ====== ===== ====== ===== ====== =====
<CAPTION>
Amount Due During the Year Ending June 30,
----------------------------------------------------------------
Total
---------------------
Weighted
Amount Rate
------ ----
<S> <C> <C>
Certificates of $100,000 $ 7,766 5.54%
or more
Certificates of less than 53,844 5.41%
$100,000 ------- -----
$61,610 5.54%
======= =====
</TABLE>
62
<PAGE>
Based upon historical experience, Richmond Savings expects that a substantial
percentage of its time deposits coming due within twelve months after June 30,
1996 will be renewed.
As of June 30, 1996, the aggregate amount of time certificates of
deposit in amounts greater than or equal to $100,000 outstanding was $7.8
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 such date.
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
3 Months or less $2,179
Over 3 months through 12 months 2,878
Over 12 months 2,709
------
Total $7,766
======
</TABLE>
Borrowings. Although it has not found it necessary to do so in several
years, Richmond Savings may obtain advances from the FHLB of Atlanta to
supplement its liquidity needs. The FHLB system functions in a reserve credit
capacity for savings institutions. As a member, Richmond Savings 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. At June 30, 1996, Richmond Savings had no
outstanding borrowings.
Subsidiaries
As a North Carolina-chartered savings bank, Richmond Savings is able to
invest up to 10% of its total assets in subsidiary service corporations.
However, any investment in service corporations which would cause Richmond
Savings to exceed an investment of 3% of assets must receive prior approval of
the FDIC.
Richmond Savings has one wholly-owned subsidiary, CERKO, Inc., a North
Carolina corporation ("CERKO"). CERKO acts as an agent in the sale of annuities,
Medicare and Medicaid supplements, and major medical and life insurance
policies. In addition, CERKO owns certain real property. Regulations of the
Administrator and FDIC place limitations upon the activities of subsidiaries of
North Carolina-chartered savings banks. The total assets of CERKO at June 30,
1996 were $157,000 and the net income for that subsidiary for the year ended
June 30, 1996 was $21,000.
Properties
The following table sets forth the location of Richmond Savings'
headquarters office in Rockingham, North Carolina, its three full-service branch
offices and its loan origination office, as well as certain other information
relating to these offices as of June 30, 1996:
63
<PAGE>
<TABLE>
<CAPTION>
Net Book
Value of Lease
Property and Owned or Expiration
Improvements Leased Date
------------ -------- ----------
<S> <C> <C> <C>
Headquarters Office
115 South Lawrence Street
Rockingham, North Carolina $274,000 Owned
Full-Service Branch Offices:
Richmond Plaza Office
Richmond Plaza Shopping Center
Rockingham, North Carolina 5,000 Leased March 31, 1997
Southern Pines Office
495 Pinehurst Avenue
Southern Pines, North Carolina 744,000 Owned
Ellerbe Office
119 West Sunset Avenue
Ellerbe, North Carolina 35,000 Owned
Loan Origination Office
800-C Atkinson Street
Laurinburg, North Carolina -- Leased Month-to-month
</TABLE>
The total net book value of Richmond Savings' furniture, fixtures and
equipment at June 30, 1996 was $248,000. Richmond Savings has a new office under
construction at 115 West Sunset Avenue, Ellerbe, North Carolina which will
replace the existing Ellerbe office. Costs incurred in connection with this
facility aggregated $48,000 as of June 30, 1996. This office is expected to be
opened in December, 1996. Richmond Savings is seeking regulatory approval to
replace its Richmond Plaza office with a new office to be located nearby.
Legal Proceedings
From time to time, Richmond Savings is a party to legal proceedings
which arise in the ordinary course of its business. Most commonly, such
proceedings are commenced by Richmond Savings to enforce obligations owed to it.
From time to time, claims are asserted against Richmond Savings directly or as
defenses and counterclaims in actions filed by Richmond Savings. At this time,
Richmond Savings 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
Richmond Savings 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. Richmond Savings has also faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The ability of Richmond Savings 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.
Richmond Savings experiences strong competition for real estate loans
from other savings institutions, commercial banks, and mortgage banking
companies. Richmond Savings 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
64
<PAGE>
underwriting standards. Competition may increase as a result of the continuing
reduction of restrictions on the interstate operations of financial
institutions.
Employees
As of June 30, 1996, Richmond Savings had 39 full-time employees and four
part-time employees. Richmond Savings provides its employees with basic and
major medical insurance, life insurance, sick leave and vacation benefits. In
addition, Richmond Savings maintains a target benefit retirement plan which
seeks to provide participants with a target retirement benefit equal to a
maximum of 60% of annual earnings, reduced pro-rata for years of service less
than 25. Richmond Savings also has a 401(k) retirement plan pursuant to which
Richmond Savings has in the past matched one-half of employees' contributions,
with its contribution limited to 3% of each employee's salary. See Note G of
the "Notes to Consolidated Financial Statements."
In connection with the Conversion, Richmond Savings has adopted the ESOP,
which will provide benefits to employees of Richmond Savings. See "MANAGEMENT
OF RICHMOND SAVINGS -- Employee Stock Ownership Plan." Also, the Boards of
Directors of the Holding Company and Richmond Savings plan to adopt, 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 RICHMOND SAVINGS -- Proposed Management Recognition Plan" and "--
Proposed Stock Option Plan."
Employees are not represented by any union or collective bargaining group, and
Richmond Savings considers its employee relations to be good.
TAXATION
Federal Income Taxation
Savings institutions such as Richmond Savings are subject to the taxing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for
corporations, as modified by certain provisions specifically applicable for
financial or thrift institutions. Income is reported using the accrual method
of accounting. The maximum corporate federal income tax rate is 35%.
For fiscal years beginning prior to December 31, 1995, thrift institutions
which qualified under certain definitional tests and other conditions of the
Code were permitted certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally loans
secured by interests in real property improved or to be improved) under (i) a
method based on a percentage of the institution's taxable income, as adjusted
(the "percentage of taxable income method") or (ii) a method based on actual
loss experience (the "experience method"). The reserve for nonqualifying loans
was computed using the experience method.
The percentage of taxable income method was limited to 8% of taxable income.
This method could not raise the reserve to exceed 6% of qualifying real property
loans at the end of the year. Moreover, the additions for qualifying real
property loans, when added to nonqualifying loans, could not exceed 12% of the
amount by which total deposits or withdrawable accounts exceeded the sum of
surplus, undivided profits and reserves at the beginning of the year. The
experience method was the amount necessary to increase the balance of the
reserve at the close of the year to the greater of (i) the amount which bore the
same ratio to loans outstanding at the close of the year as the total net bad
debts sustained during the current and five preceding years bore to the sum of
the loans outstanding at the close of such six years or (ii) the balance in the
reserve account at the close of the last taxable year beginning before 1988
(assuming that the loans outstanding have not declined since such date).
In order to qualify for the percentage of income method, an institution had to
have at least 60% of its assets as "qualifying assets" which generally included,
cash, obligations of the United States government or an agency or
instrumentality thereof or of a state or political subdivision, residential real
estate-related loans, or loans secured by
65
<PAGE>
savings accounts and property used in the conduct of its business. In addition,
it had to meet certain other supervisory tests and operate principally for the
purpose of acquiring savings and investing in loans.
Institutions which became ineligible to use the percentage of income method
had to change to either the reserve method or the specific charge-off method
that applied to banks. Large thrift institutions, those generally exceeding
$500 million in assets, had to convert to the specific charge-off method. In
the fiscal years 1994, 1995 and 1996, Richmond Savings elected to use the
percentage of taxable income method in computing its bad debt reserve for
federal income taxes.
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 shareholders. 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. Richmond Savings has
accumulated earnings and profits since December 31, 1951 and has an excess in
its bad debt reserve. Distributions in excess of current and accumulated
earnings and profits will increase taxable income. Net retained earnings at
June 30, 1995 includes approximately $1.5 million for which no provision for
federal income tax has been made. See Note H to "Notes to Consolidated
Financial Statements."
Legislation passed by the U.S. Congress and signed by the President in August,
1996 contains a provision that repeals the percentage of taxable income method
of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period. At June 30, 1996, Richmond
Savings' post-1987 excess reserves amounted to approximately $581,000. The
legislation suspends recapture of post-1987 excess reserves for up to two years
if, during those years, the institution satisfies a "residential loan
requirement." This requirement will be met if the principal amount of the
institution's residential loans exceeds a base year amount, which is determined
by reference to the average of the institution's residential loans during the
six taxable years ending before January 1, 1996. However, notwithstanding this
special provision, recapture must begin no later than the first taxable year
beginning after December 31, 1997. See "RISK FACTORS -- Increased Tax Liability
Resulting From Recapture of Bad Debt Reserves."
Richmond Savings 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. Richmond Savings
has not been subject to the AMT in recent years.
Richmond Savings' federal income tax returns have not been audited in the last
five tax 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 0.15% applied to the greatest of the
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institutions (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) appraised valuation of property
in North Carolina.
The North Carolina corporate tax rate will drop to 7.5% in 1997, 7.25% in
1998, 7% in 1999 and 6.9% thereafter.
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 Richmond Savings 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 shareholder after the
acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("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
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provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the SAIF or
the BIF or both. The FDIC's claim for damages is superior to claims of
stockholders of the insured depository institution or its holding company but is
subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institutions.
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 12
month period.
As a result of the Holding Company's ownership of Richmond Savings, 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.
Dividend Limitations. In connection with the Conversion, the FDIC has
required the Holding Company and Richmond Savings to agree that, during the
first year after consummation of the Conversion, the Holding Company will not
pay any dividend or make any other distribution to its stockholders which
represents, is characterized as or is treated for federal tax purposes as, a
return of capital.
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Holding Company's application to acquire control of Richmond
Savings, the Holding Company was required to execute a Capital Maintenance
Agreement whereby it has agreed to maintain Richmond Savings' capital in an
amount sufficient to enable Richmond Savings 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 Common Stock to be issued in the
Conversion. The Holding Company intends to register the Common Stock with the
SEC pursuant to Section 12 of the Exchange Act. Upon such registration, the
proxy and tender offer rules, insider trading reporting requirements and
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restrictions, annual and periodic reporting and other requirements of the
Exchange Act will be applicable to the Holding Company.
Regulation of Richmond Savings
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 Richmond Savings, will continue to be subject to changes in applicable
statutes and regulations from time to time.
Richmond Savings 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.
Richmond Savings is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As holders of loans secured by real property and as owners
of real property, financial institutions, including Richmond Savings, 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 Richmond Savings. 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
Richmond Savings and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of Richmond Savings is any company or entity
that controls, is controlled by or is under common control with the savings
bank. Upon consummation of the Conversion, Richmond Savings 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 "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
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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. Richmond
Savings is a member of the SAIF of the FDIC.
As a SAIF-insured institution, Richmond Savings 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 23 cents to 31 cents 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.
As a result of subsequent changes to the assessment schedule, financial
institutions such as Richmond Savings which are members of the SAIF are
currently required to pay higher deposit insurance premiums than financial
institutions which are members of the BIF, primarily commercial banks, because
the BIF has higher reserves than the SAIF and has been responsible for fewer
troubled institutions. This has created a disparity between SAIF and BIF
assessments. Annual assessments for BIF members in the lowest risk category are
now only $2,000. Richmond Savings paid deposit insurance premiums of $186,000
and $185,000 in fiscal 1996 and 1995, respectively. The FDIC has noted that the
premium differential may have adverse consequences for SAIF members, including
reduced earnings and an impaired ability to raise funds in capital markets. In
addition, SAIF members, such as Richmond Savings, could be placed at a
substantial competitive disadvantage to BIF members with respect to pricing of
loans and deposits and the ability to achieve lower operating costs.
A comprehensive continuing appropriations bill enacted on September 30, 1996
reduced this premium differential between BIF- and SAIF-insured institutions but
did not eliminate it. As a result of this legislation, it is now anticipated
that, beginning on January 1, 1997, BIF-insured institutions, except those in
higher risk categories, will pay deposit insurance premiums equal to
approximately 1.3 cents per $100 of insured domestic deposits and that SAIF-
insured institutions, except those in higher risk categories, will pay deposit
insurance premiums equal to approximately 6.4 cents per $100 of insured domestic
deposits. This premium differential is expected to exist until at least January
1, 1999.
The above-described comprehesive continuing appropriations bill enacted on
September 30, 1996 provides for a one-time assessment on SAIF members to
recapitalize the SAIF. The assessment is estimated to equal 65.7 cents per
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each $100 of insured domestic deposits. Such premium will have the effect of
immediately reducing the capital of SAIF-member institutions by the amount of
the assessment. It is anticipated that SAIF-member institutions will not be
allowed to amortize the expense of the one-time assessment over a period of
years. The one-time assessment, which is expected to be based on Richmond
Savings' deposits as of March 31, 1995, is expected to equal approximately
$519,000 on a before tax basis and be payable prior to December, 1996. This
one-time assessment to recapitalize the SAIF is expected to have an adverse
effect on the operating expenses and results of operations of Richmond Savings
during the quarter ended December 31, 1996.
Community Reinvestment Act. Richmond Savings, 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 Richmond Savings' last compliance examination, Richmond
Savings received a "satisfactory" rating with respect to CRA compliance.
Richmond Savings' rating with respect to CRA compliance would be a factor to be
considered by the Federal Reserve and FDIC in considering applications submitted
by Richmond Savings 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 Richmond Savings. The FDIC requires
Richmond Savings 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 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 Richmond Savings 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.
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 June 30, 1996, Richmond Savings complied with each of the capital
requirements of the FDIC and the Administrator. For a description of Richmond
Savings' required and actual capital levels on June 30, 1996, see "HISTORICAL
AND PRO FORMA CAPITAL COMPLIANCE."
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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. Richmond Savings 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. Richmond Savings does not
anticipate that this rule will have a material effect upon its financial
condition or results of operations.
Loans to One Borrower. Richmond Savings 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. Notwithstanding the limits just
described, savings banks may make loans to one borrower, for any purpose, in an
amount of up to $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.
As of June 30, 1996, the largest aggregate amount of loans which Richmond
Savings had to any one borrower was $734,000. Richmond Savings 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 Richmond Savings -- 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, Richmond
Savings is required to own capital stock in the FHLB of
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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 June 30, 1996,
Richmond Savings was in compliance with this requirement with an investment in
FHLB of Atlanta stock of $735,000.
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 June 30, 1996, Richmond Savings 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
Richmond Savings. 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 Richmond Savings 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 Richmond Savings by a
corporation whose ownership is or will be substantially the same as the
ownership of Richmond Savings, 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 Richmond Savings or the Boards of Directors
of the Holding Company and Richmond Savings support the acquisition and (iii)
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 Richmond Savings and the public interests will not be
adversely affected.
Liquidity. Richmond Savings 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 June 30, 1996, Richmond Savings'
liquidity ratio, calculated in accordance with North Carolina regulations, was
approximately 23.6%.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that Richmond Savings 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
Richmond Savings is and continues to be in compliance with fully phased-in
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<PAGE>
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").
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 Richmond Savings,
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 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.
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<PAGE>
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 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 Richmond Savings 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 Richmond Savings.
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.
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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, Richmond Savings 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 Richmond Savings' conversion
from mutual to stock ownership.
In connection with the Conversion, the FDIC has required the Holding Company
and Richmond Savings to agree that, during the first year after the Conversion,
Richmond Savings will not pay any dividend or make any other distribution to its
stockholder which represents, is characterized as or is treated for federal tax
purposes as, a return of capital.
Restrictions on Benefit Plans. FDIC regulations provide that for a period of
one year from the date of the Conversion, Richmond Savings 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 price of the stock at
the time of grant, and (4) for restricted stock plans, no stock issued in
connection with the Conversion may be used to fund the plan.
The FDIC regulations provide that, in reviewing plans submitted to the
stockholders within one year after the consummation of the Conversion, 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 MRP and Stock Option
Plan will conform to these requirements if such plans are submitted for
stockholder approval within one year after the Conversion is consummated.
Other North Carolina Regulation. As a North Carolina-chartered savings bank,
Richmond Savings 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 Richmond Savings 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
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the assets of the institution and protect the interests of its depositors. The
Administrator has the power to issue cease and desist orders if any person or
institution is engaging in, or has engaged in, any unsafe or unsound practice or
unfair and discriminatory practice in the conduct of its business or in
violation of any other law, rule or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed in
accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered savings
banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company currently consists of eight
directors: Russell E. Bennett, Jr., R. Larry Campbell, Buena Vista Coggin, Joe
M. McLaurin, John T. Page, Jr., W. Jesse Spencer, J. Stanley Vetter and E. E.
Vuncannon, Jr. Each of these persons is also a director of Richmond Savings,
and biographical information with respect to each is set forth under "MANAGEMENT
OF RICHMOND SAVINGS -- Directors." Each director is elected for a one-year
term. However, at such times as the number of directors is at least nine, the
Articles of Incorporation and Bylaws of the Holding Company provide for
staggered elections so that approximately one-third of the directors will each
be initially elected to one, two and three-year terms, respectively, and
thereafter, all directors will be elected to terms of three years each.
The executive officers of the Holding Company, each of whom is also currently
an executive officer of Richmond Savings, 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 June 30, 1996 With the Holding Company
---- ------------- ------------------------
<S> <C> <C>
R. Larry Campbell 52 President
John W. Bullard 45 Vice President
</TABLE>
Biographical information with respect to each of these officers is set forth
below under "MANAGEMENT OF RICHMOND SAVINGS -- Executive Officers." There are
no employees of the Holding Company other than the executive officers listed
above and Winston G. Dwyer, who is treasurer, and Karen M. Rickett, who is the
corporate secretary. No officer, director or employee of the Holding Company
has received remuneration from the Holding
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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 Richmond
Savings to, the directors and executive officers of the Holding Company is set
forth under "MANAGEMENT OF RICHMOND SAVINGS." See "MANAGEMENT OF RICHMOND
SAVINGS -- Employment Agreements" for a description of certain agreements
expected to be entered into with the executive officers of the Holding Company
and Richmond Savings.
MANAGEMENT OF RICHMOND SAVINGS
Directors
The direction and control of Richmond Savings, as a mutual North Carolina-
chartered savings bank, has been vested in its eight-member Board of Directors
elected by the depositor and borrower members of Richmond Savings. Upon
conversion of Richmond Savings to capital stock form, each director of Richmond
Savings immediately prior to the Conversion will continue to serve as a director
of Richmond Savings as a stock institution. All directors currently serve for
one-year terms. Richmond Savings' proposed Bylaws, which would become effective
after the Conversion, provide for staggered elections of its directors, if and
when the number of directors shall equal at least nine, so that approximately
one-third of the directors would be elected each year for three-year terms.
Upon consummation of the Conversion, the Holding Company will own all of the
issued and outstanding shares of capital stock of Richmond Savings, and the
Holding Company will elect the directors of Richmond Savings. The Holding
Company now plans to nominate and re-elect all members of Richmond Savings'
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 Richmond Savings.
<TABLE>
<CAPTION>
Age on
June 30, Principal Occupation Director
Name 1996 During Last Five Years Since
- ---- -------- ---------------------- --------
<S> <C> <C> <C>
J. Stanley Vetter, 67 Physician in Rockingham, North 1970
Chairman Carolina
John T. Page, Jr., 72 Attorney in Rockingham, North 1975
Vice Chairman Carolina
Russell E. Bennett, Jr. 70 Retired; formerly owner and 1982/1/
president of Russell Bennett
Chevrolet-Buick-Mazda, Inc. in
Rockingham, North Carolina
R. Larry Campbell 52 President of Richmond Savings 1990
Buena Vista Coggin 68 Retired; former President of 1978
Richmond Savings
Joe M. McLaurin 69 Retired 1978
W. Jesse Spencer 75 Certified Public Accountant, 1988
Rockingham, North Carolina
E. E. Vuncannon, Jr. 67 President of E. E. Vuncannon, 1969
Inc., Ellerbe, North Carolina,
supplier of farm chemicals,
feed and fertilizer
</TABLE>
/1/Mr. Bennett also served as a director from 1967 through 1970.
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<PAGE>
Board Meetings and Committees
Richmond Savings' Board of Directors has regular monthly meetings, and held 16
regular and special meetings in the fiscal year ended June 30, 1996. The Board
has also established five committees to whom certain responsibilities have been
delegated - an Executive Committee, an Audit Committee, an Investment Committee,
a CRA Committee and a Capital Planning Committee. No director attended fewer
than 75% of the total number of Board meetings and meetings of Board committees
on which he served during the year ended June 30, 1996.
The Executive Committee is composed of directors Vetter, Chairman; Bennett,
Campbell and Vuncannon. The Executive Committee makes recommendations to the
full Board and acts on policies adopted by the full Board in the absence of a
meeting of the entire Board. This committee meets on an as needed basis, and
during the fiscal year ended June 30, 1996 met five times.
Richmond Savings' Audit Committee is composed of directors Spencer, Chairman;
Page and Coggin. This committee is responsible for meeting with and retaining
independent auditors, overseeing the adequacy of internal control, insuring
compliance with Richmond Savings' policies and procedures and with generally
accepted accounting principles. The Audit Committee meets on an as needed
basis, and during the fiscal year ended June 30, 1996, met one time.
Richmond Savings' Investment Committee is composed of directors McLaurin,
Chairman; Bennett and Campbell. The Investment Committee is responsible for
overseeing the implementation of the investment policy adopted by the Board and
meets on an as needed basis. The Investment Committee met three times during
the fiscal year ended June 30, 1996.
Richmond Savings' CRA Committee is composed of directors Coggin, Chairman;
Page and Campbell. In addition, John W. Bullard, Executive Vice President, is a
member of this committee. This committee is responsible for monitoring Richmond
Savings' compliance with the CRA and assessing community credit and deposit
needs. This committee meets as needed and did not meet during the fiscal year
ended June 30, 1996.
Richmond Savings' Capital Planning Committee is composed of directors Spencer,
Chairman; Bennett, Vetter and Campbell. John W. Bullard, Executive Vice
President is also a member of this committee. The Capital Planning Committee is
responsible for determining the capital needs of Richmond Savings and making
recommendations regarding how those needs may be satisfied. This committee
meets on an as needed basis and did not meet during the fiscal year ended June
30, 1996.
Directors' Fees
For their service on Richmond Savings' Board of Directors, all non-employee
members of Richmond Savings' Board of Directors receive $1,000 per month. The
Chairman of the Board receives an additional $500 per month for serving as
Chairman of the Board. In addition, all non-employee directors who serve on
Board committees receive $75 per meeting for their service. Board fees are
subject to adjustment annually. In addition, during fiscal 1996 all non-
employee Board members received additional compensation of $150 for each of four
additional special meetings.
Richmond Savings has entered into deferred compensation agreements with
several of its directors. Under such arrangements, the directors waived
immediate receipt of their directors' fees for various periods of time in
exchange for Richmond Savings' agreement to pay to the director amounts over a
specified period of time beginning at a date set forth in the agreements.
Benefits are also payable to designated beneficiaries upon the director's death.
Richmond Savings has purchased life insurance policies of which it is the
beneficiary in order to fund certain of the deferred compensation benefits.
Total expense related to the directors' deferred compensation arrangements was
approximately $91,000 in the fiscal year ended June 30, 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."
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<PAGE>
Executive Officers
Richmond Savings has two executive officers. The following table sets forth
certain information with respect to such executive officers:
<TABLE>
<CAPTION>
Positions and
Age on Occupations Employed By
June 30, During Last Five Richmond
Name 1996 Years Savings Since
- ---- ------------ ------------------- ----------------
<S> <C> <C> <C>
R. Larry Campbell 52 President and 1984
Chief Executive
Officer
John W. Bullard 45 Executive Vice 1988
President and
Chief Operations
Officer;
previously Vice
President in
charge of lending
</TABLE>
Executive Compensation
The following table sets forth for the fiscal year ended June 30, 1996 certain
information as to the cash compensation received by (i) the chief executive
officer of Richmond Savings and (ii) all other executive officers of Richmond
Savings whose cash compensation exceeded $100,000 (there were none), for
services in all capacities.
<TABLE>
<CAPTION>
Other Annual
Name and Compensation All Other
Principal Position Salary Bonus ($)/3/ Compensation
- ------------------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C>
R. Larry Campbell, $96,888 /1/ $9,977 /2/ - - - $18,282/4/
President and Director
</TABLE>
____________________
/1/ Includes $1,835 for unused sick days and $1,731 for unused vacation days.
/2/ Of this amount, $8,977 represents a bonus applicable to performance
during the fiscal year ended June 30, 1996, which amount was not paid
until after the end of such fiscal year.
/3/ Under the "Other Annual Compensation" category, perquisites for the
fiscal year ended June 30, 1996 did not exceed the lesser of $50,000, or
10% of salary and bonus as reported for Mr. Campbell.
/4/ Includes (a) $10,114 contributed to Richmond Savings' target benefit
retirement plan for Mr. Campbell during fiscal 1996; (b) $2,892
contributed to Richmond Savings' 401(k) retirement plan for Mr. Campbell
during fiscal 1996; and (c) $5,276 accrued under a deferred compensation
plan established for the benefit of Mr. Campbell during fiscal 1996.
Bonus Compensation
In June 1995, Richmond Savings' Board of Directors approved a bonus
compensation plan pursuant to which selected officers of the savings bank could
receive bonus compensation of up to 10% of their salaries if certain performance
goals are achieved. In August, 1996, $18,000 was paid to officers of Richmond
Savings as bonuses for their performance during fiscal 1996.
Target Benefit Plan
Richmond Savings currently maintains a defined contribution target benefit
plan for the benefit of all of its employees who have completed one year of
service and who are at least twenty-one (21) years of age. Under the plan,
Richmond Savings contributes an amount for each participant based upon the
individual level premium cost for the "target" benefit Richmond Savings is
attempting to provide the participant at retirement. This amount is calculated
using
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a formula that takes into account a participant's compensation and years of
participation. The "target" retirement benefit is 60% of each participant's
"compensation," reduced pro-rata for each year of service less than 25, but may
be more or less than the amount, depending on the participant's account balance
at his normal retirement date. For purposes of the plan, compensation means the
participant's highest consecutive three-year average salary over all years of
service, excluding salary increases during the final five years of service. The
amount contributed by Richmond Savings to this retirement plan during fiscal
1996 was $27,000.
Participants are fully vested in amounts contributed to the plan on their
behalf by Richmond Savings after seven years of service, as follows: 1 year of
service, 0%; 2 years, 0%; 3 years, 20%; 4 years, 40%; 5 years, 60%; 6 years,
80%; 7 years or more, 100%. As of December 31, 1996, R. Larry Campbell had nine
years of service under the target benefit plan.
Benefits under the plan are payable in the event of the participant's
retirement, death, disability or termination of employment. A participant's
normal retirement age under the plan is age 65, with at least 5 years of
participation in the plan. The plan also provides for early retirement within 5
years of the participant's normal retirement age.
Upon consummation of the Conversion and establishment of the ESOP, Richmond
Savings plans to terminate its defined contribution target benefit plan.
401(k) Profit Sharing Plan
Richmond Savings has established a contributory savings plan for its
employees, which meets the requirements of section 401(k) of the Code. All
employees who are at least 21 and who have completed one year of service may
elect to contribute a percentage of their compensation to the plan each year,
subject to certain maximums imposed by federal law. Richmond Savings 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 total compensation received from the
employer.
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 Richmond Savings as employer matching contributions and as profit sharing
contributions after seven years of service as follows: 1 year, 0%; 2 years, 0%;
3 years, 20%; 4 years, 40%; 5 years, 60%; 6 years, 80%; 7 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 with at least five years of participation
in the plan. The plan also provides for early retirement within five years of
the participant's normal retirement age. The total amount contributed by
Richmond Savings to the 401(k) plan during fiscal 1996 was $15,000.
Retirement Plans
Richmond Savings has adopted retirement plans for the benefit of R. Larry
Campbell, President, and John W. Bullard, Executive Vice President. Mr.
Campbell's retirement plan provides a retirement benefit of $30,000 per year
payable for ten years to Mr. Campbell and/or his family upon Mr. Campbell's
retirement on or after age 65. The plan also provides a $30,000 per year
disability benefit until age 65 and a death benefit of $300,000 to Mr.
Campbell's family if he should die prior to retirement. Mr. Bullard's
retirement plan provides a retirement benefit of $10,000 per year for ten years
to Mr. Bullard and/or his family upon Mr. Bullard's retirement on or after age
65. Mr. Bullard's plan provides for a $10,000 per year disability benefit until
age 65 and a death benefit of $100,000 to Mr. Bullard's family if he should die
prior to retirement. These plans are funded by insurance. Richmond Savings'
accrual for these plans in fiscal year 1996 totalled $6,400.
Other Benefits
Richmond Savings provides its employees with group medical, dental, life and
disability insurance benefits. Employees are also provided with vacation,
holiday and sick leave.
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Employment Agreements
In connection with the Conversion, Richmond Savings will enter into employment
agreements with R. Larry Campbell, President, and John W. Bullard, Executive
Vice President, in order to establish their duties and compensation and to
provide for their continued employment with Richmond Savings. The agreements
will provide for initial annual base salaries of $95,400 and $63,600,
respectively. The agreements will provide for an initial term of employment of
three years. Commencing at the end of the initial three year term and
continuing on each anniversary date thereafter, following a performance
evaluation of the employee, the agreement may be extended for an additional
year. The agreements also provide that base salary shall be reviewed by the
Board of Directors not less often than annually. In addition, the employment
agreements provide for participation in bonus compensation plans established for
the officers' positions and participation in all other pension, profit-sharing
or retirement plans maintained by Richmond Savings or by the Holding Company for
employees of Richmond Savings, as well as fringe benefits normally associated
with such employee's office. The employment agreements provide that they may be
terminated by Richmond Savings upon the payment of twelve months compensation
and without affecting the other benefits to which the officers are entitled
under the agreements. The agreements may also be terminated by the officers
upon 60 days written notice.
The employment agreements provide that the nature of the employee's
compensation, duties or benefits cannot be diminished following a change in
control of Richmond Savings or the Holding Company. For purposes of the
employment agreement, 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 Richmond Savings, or acquires in any manner control of the election
of a majority of the directors of either the Holding Company or Richmond
Savings, (ii) either the Holding Company or Richmond Savings consolidates or
merges with or into another corporation, association or entity, or is otherwise
reorganized, where neither the Holding Company nor Richmond Savings is the
surviving corporation in such transaction, or (iii) all or substantially all of
the assets of either the Holding Company or Richmond Savings 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
Richmond Savings or the Holding Company will be acquired by another entity. See
"ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND RICHMOND SAVINGS --
The Holding Company -- Anti-Takeover Effect of Employment Agreements and Benefit
Plans."
Severance Plan
In connection with the Conversion, Richmond Savings' 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" (as defined in the
Severance Plan) of Richmond Savings or the Holding Company and (i) Richmond
Savings or any successor of Richmond Savings terminates the employment of any
full time employee of Richmond Savings 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 Richmond
Savings 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 more than
40 miles distant from the employee's primary work station within 24 months after
a change in control, the employee 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 Richmond Savings employee or (b) the amount of one month's salary
at the employee's salary rate at the time of termination, subject to a maximum
payment equal to one half of an employee's annual salary. Officers of Richmond
Savings who, at the time of a "change in control," are parties to employment
agreements having a remaining term of more than two years are not covered by the
Severance Plan.
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Employee Stock Ownership Plan
Richmond Savings has established the ESOP for its eligible employees. The
ESOP will become effective upon the Conversion. Employees with one year of
service with Richmond Savings 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 95,200 and
128,800 shares assuming the issuance of between 1,190,000 and 1,610,000 shares.
If, because there is an oversubscription of shares of Common Stock or for any
other reason, the ESOP is unable to purchase in the Conversion 8% of the total
number of shares offered in the Conversion, then the Board of Directors of the
Holding Company intends to approve the purchase by the ESOP in the open market
after the Conversion of such shares as are necessary for the ESOP to acquire a
number of shares equal to 8% of the shares of Common Stock issued in the
Conversion.
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 Richmond Savings' 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 Richmond Savings. 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
death or disability. Richmond Savings' 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, the Holding Company 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 the Employee Retirement Income
Security Act of 1974, as amended.
The ESOP may be considered an "anti-takeover" device since the ESOP may become
the owner of a sufficient percentage of the total outstanding Common Stock of
the Holding Company 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 RICHMOND SAVINGS -- The Holding
Company -- Anti-Takeover Effect of Employment Agreements and Benefit Plans."
Proposed Management Recognition Plan
The Boards of Directors of the Holding Company and Richmond Savings intend to
adopt the MRP, subject to approval of the stockholders of the Holding Company at
a meeting to be held no sooner than six months following the Conversion. The
MRP will serve as a means of providing the directors and employees of Richmond
Savings with an ownership interest in the Holding Company in a manner designed
to encourage such persons to continue their service to Richmond Savings. All
directors and certain employees of Richmond Savings would receive benefits under
the MRP. Upon stockholder approval of the MRP, the Holding Company and Richmond
Savings expect to fund the MRP with a number of shares of Common Stock equal to
4% of the shares issued in the Conversion. Such shares would be provided by the
issuance of authorized but unissued shares of Common Stock or shares purchased
by the MRP in the open market. Shares issued to recipients under the MRP will be
restricted and subject to forfeiture as described below.
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To the extent that the MRP acquires authorized but unissued shares of Common
Stock after the Conversion, the interests of existing shareholders will be
diluted. Shares issued under the MRP will be issued at no cost to recipients.
Assuming the issuance of 1,610,000 shares in the Conversion and receipt of
stockholder approval, 64,400 shares would be issued pursuant to the MRP. It is
expected that R. Larry Campbell, President, would be issued 25% of the shares of
Common Stock to be issued under the proposed MRP, or 16,100 shares, assuming the
issuance of 1,610,000 shares of Common Stock in the Conversion. It is expected
that John W. Bullard, Executive Vice President, would be issued 10% of the
shares of Common Stock to be issued under the proposed MRP, or 6,440 shares,
assuming the issuance of 1,610,000 shares of Common Stock in the Conversion. If
the MRP is submitted to and approved by the Holding Company's stockholders
within one year after consummation of the Conversion, the seven nonemployee
directors of Richmond Savings would be issued, in the aggregate, a maximum of
30% of the shares of Common Stock to be issued under the MRP, or 19,320 shares,
assuming the issuance of 1,610,000 shares of Common Stock in the Conversion.
Remaining shares not issued to the executive officers or nonemployee directors
under the MRP would be available for possible grants to employees of Richmond
Savings or could be held for later grants in the future pursuant to the plan.
After the grant of shares of Common Stock under the MRP, recipients will be
entitled to vote all vested and unvested shares and receive all dividends and
other distributions with respect thereto. The MRP will provide that 20% of the
shares granted will vest and become nonforfeitable on the first anniversary of
the date of the grant under the MRP, and 20% will 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 will immediately vest upon the disability or death of a recipient.
If the MRP is submitted to the Holding Company's stockholders and approved by
them more than one year after the consummation of the Conversion, the MRP may
provide that grants of Common Stock under the MRP will become automatically
vested upon retirement or upon a change in control of the Holding Company or
Richmond Savings. 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."
Until shares become vested, the right to direct the voting of 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 Richmond Savings prior to the time shares
become vested (and such shares are not automatically vested under the MRP),
unvested shares would be forfeited to the MRP and would be subject to future
allocations to others. In addition, the MRP requires recipients to repay any
dividends received with respect to shares which are later forfeited. It is
expected that the MRP will provide that it cannot be terminated upon a change in
control of the Holding Company or Richmond Savings unless the acquiror provides
for an equivalent benefit.
If the MRP is approved by the stockholders, Richmond Savings 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 Richmond Savings and as an incentive for their continued
performance.
Proposed Stock Option Plan
The Boards of Directors of the Holding Company and Richmond Savings intend to
adopt the Stock Option Plan, subject to approval of the stockholders of the
Holding Company at a meeting to be held no sooner than six months following 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 Stock Option Plan (less any shares acquired by the Stock
Option Plan in the open market). Assuming the issuance of between 1,190,000 and
1,610,000 shares in the Conversion, an aggregate of between 119,000 and 161,000
shares of Common Stock would be reserved
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for issuance and/or purchased in the open market to be delivered 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, would not be transferable
except upon death and would 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 Richmond Savings. 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 Richmond Savings unless the acquiror provides
for an equivalent benefit to holders of unvested options.
It is expected that R. Larry Campbell, President, would be issued 25% of the
options to be issued under the proposed Stock Option Plan, or options to
purchase 40,250 shares of Common Stock assuming the issuance of 1,610,000 shares
in the Conversion. It is expected that John W. Bullard, Executive Vice
President, would be issued 10% of the options to be issued under the proposed
Stock Option Plan, or options to purchase 16,100 shares, assuming the issuance
of 1,610,000 shares in the Conversion. If the Stock Option Plan is submitted to
and approved by the Holding Company's stockholders within one year after
consummation of the Conversion, the seven nonemployee directors of Richmond
Savings would be issued, in the aggregate, a maximum of 30% of the options to be
issued under the Stock Option Plan, or options to purchase 48,300 shares of
Common Stock, assuming the issuance of 1,610,000 shares in the Conversion.
Remaining options not issued to executive officers or nonemployee directors
under the Stock Option Plan would be available for possible grants to employees
of Richmond Savings or could be held for later grants in the future pursuant to
the plan.
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 Richmond Savings. 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.
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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 Richmond Savings) as to the voting of any 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.
If the Stock Option Plan is approved by the stockholders of the Holding
Company, the options granted to employees and directors pursuant to the Stock
Option Plan would be issued in recognition of the recipients' past service to
Richmond Savings and as an incentive for their continued performance. No cash
consideration will be paid for the options.
Certain Indebtedness and Transactions of Management
Richmond Savings makes loans to executive officers and directors of Richmond
Savings 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 Richmond Savings from making loans to
executive officers and directors of Richmond Savings on terms more favorable
than could be obtained by persons not affiliated with Richmond Savings.
Richmond Savings' 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 June 30, 1996
totals approximately $101,000 and represents 0.5% of pro forma stockholders'
equity at June 30, 1996, assuming the sale of 1,610,000 shares of Common Stock.
In addition, director John T. Page, Jr. is a partner of Page, Page & Webb, a
Rockingham, North Carolina law firm which performs legal services for Richmond
Savings.
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. General. 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.
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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.
See "SUPERVISION AND REGULATION -- Regulation of the Holding Company --
Restrictions on Dividends." The ability of the Holding Company to pay dividends
may be dependent on the receipt of dividends from Richmond Savings. See
"DIVIDEND POLICY," "SUPERVISION AND REGULATION -- Regulation of Richmond Savings
- -- Restrictions on Dividends and Other Capital Distributions," and "TAXATION."
Stock Repurchases. The shares of Common Stock do not have any redemption
provisions. Stock repurchases are subject to North Carolina regulations
regarding capital distributions.
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 Richmond Savings will contain a restriction providing that such
shares may not be sold without the written permission of the Administrator for a
period of one year following the date of purchase, except in the event of death
of the director or the executive officer.
Preferred Stock. None of the 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
RICHMOND SAVINGS --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 RICHMOND SAVINGS -- The Holding
Company -- Restrictions in Articles of Incorporation and Bylaws" and "--
Regulatory Restrictions."
Richmond Savings
Common Stock. After consummation of the Conversion, Richmond Savings will be
authorized to issue 100,000 shares of common stock, no par value ("Richmond
Savings Common Stock"). The Richmond Savings Common
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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 Richmond Savings is subject to
limitations which are imposed by North Carolina law and regulations. See
"DIVIDEND POLICY" and "SUPERVISION AND REGULATION --Regulation of Richmond
Savings -- Restrictions on Dividends and Other Capital Distributions." In
addition, federal income tax law considerations may affect the ability of
Richmond Savings to pay dividends and make other capital distributions. See
"TAXATION." The holders of Richmond Savings Common Stock will be entitled to
receive and share ratably in such dividends on the Richmond Savings Common Stock
as may be declared by the Board of Directors of Richmond Savings out of funds
legally available therefor, subject to applicable statutory and regulatory
restrictions.
Voting Rights. As a mutual North Carolina-chartered savings bank, Richmond
Savings currently has no stockholders, and voting rights in Richmond Savings are
currently held by Richmond Savings' members (depositors and borrowers). Members
elect Richmond Savings' 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 Richmond Savings,
will possess the exclusive voting rights with respect to the Richmond Savings
Common Stock, will elect Richmond Savings' 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 Richmond Savings'
Board of Directors. The holders of Richmond Savings Common Stock will have no
right to vote their shares cumulatively in the election of directors of Richmond
Savings.
Liquidation Rights. After the Conversion, in the event of any liquidation,
dissolution or winding up of Richmond Savings, the Holding Company, as holder of
all of Richmond Savings' outstanding capital stock, would be entitled to receive
all remaining assets of Richmond Savings available for distribution, after
payment of or making of adequate provisions for, all debts and liabilities of
Richmond Savings (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."
Preemptive Rights. Holders of the Richmond Savings Common Stock will not be
entitled to preemptive rights with respect to any shares which may be issued by
Richmond Savings.
Restrictions on Acquisition. Acquisitions of Richmond Savings 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 RICHMOND SAVINGS -- Richmond Savings."
ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND RICHMOND SAVINGS
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
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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 Richmond Savings 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 Bylaws of the Holding Company provide that the number
of directors shall not be less than five nor more than 15. The initial number
of directors is eight, 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, if and when 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 Company to gain majority representation on the Board of
Directors.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of the Holding Company's shares cannot be assured representation on the
Board of Directors, the absence of cumulative voting may discourage
accumulations of the Holding Company's shares or proxy contests that would
result in changes in the Holding Company's management. The Board of Directors
believes that (i) elimination of cumulative voting will help to assure
continuity and stability of management and policies; (ii) directors should be
elected by a majority of the stockholders to represent the interests of the
stockholders as a whole rather than be the special representatives of particular
minority interests; and (iii) efforts to elect directors representing specific
minority interests are potentially divisive and could impair the operations of
the Holding Company.
Special Meetings. The Bylaws of the Holding Company provide that special
meetings of stockholders of the Holding Company may be called by the Chairman of
the Board, the Chief Executive Officer, the President, or by the Board of
Directors. If a special meeting is not called by such persons or entities,
stockholder proposals cannot be presented to the stockholders for action until
the next annual meeting.
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.
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The Board of Directors also has sole authority to determine the terms of any
one or more series of preferred stock, including voting rights, conversion
rates, dividend rights, and liquidation preferences, which could adversely
affect the voting power of the holders of the Common Stock and discourage an
attempt to acquire control of the Holding Company. The Board of Directors does
not intend to issue any preferred stock, except on terms which it deems to be in
the best interests of the Holding Company and its stockholders. However, the
Board of Directors has the power, to the extent consistent with its fiduciary
duties, to issue preferred stock to persons friendly to management or otherwise
in order to impede attempts by third parties to acquire voting control of the
Holding Company and to impede other transactions not favored by management. The
Board of Directors currently has no plans for the issuance of additional shares
of Common Stock (except for such shares as may be necessary to fund the MRP and
the Stock Option Plan) or of shares of preferred stock.
Director Nominations. The Bylaws of the Holding Company require a stockholder
who intends to nominate a candidate for election to the Board of Directors at a
stockholders' meeting to give written notice to the Secretary of the Holding
Company at least 50 days (but not more than 90 days) in advance of the date of
the meeting at which such nominations will be made. The nomination notice is
also required to include specified information concerning the nominee and the
proposing stockholder. The Board of Directors of the Holding Company believes
that it is in the best interests of the Holding Company and its stockholders to
provide sufficient time for the Board of Directors to study all nominations and
to determine whether to recommend to the stockholders that such nominees be
considered.
Removal of Directors. The Holding Company's Articles of Incorporation provide
that directors may be removed prior to the end of their term only for cause.
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 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 RICHMOND SAVINGS -- 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 Richmond Savings and for voting control by directors and employees
over shares held by the MRP and Stock Option Plan which are attributable to
grants made to them under such plans even though the grants are not yet vested.
See "MANAGEMENT OF RICHMOND SAVINGS -- Proposed Management Recognition Plan" and
"-- Proposed Stock Option Plan."
If (i) the MRP and the Stock Option Plan are approved by the stockholders of
the Holding Company within one year after the Conversion, (ii) all of the
options issuable to directors and executive officers under the Stock Option Plan
are issued and all shares necessary to fund such options are acquired in the
open market and held by the Stock Option Plan or by directors and executive
officers, (iii) all of the shares issuable to directors and executive officers
under the MRP are purchased in the open market and issued, (iv) the ESOP
acquires 8% of the shares issued in the Conversion and none of such shares are
allocated, the directors and executive officers and their affiliates as a group
would own or control the voting of as much as 28.02% or 25.17% 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."
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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 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 Richmond Savings or the Board of Directors of the Holding
Company and Richmond Savings 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
Richmond Savings 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 Richmond Savings 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."
Richmond Savings
Upon consummation of the Conversion, Richmond Savings will become a wholly-
owned subsidiary of the Holding Company, and, consequently, restrictions on the
acquisition of Richmond Savings would have a more limited effect than if
Richmond Savings' common stock were held directly by the stockholders purchasing
in the Conversion. However, restrictions on the acquisition of Richmond Savings
may discourage takeover attempts of the Holding Company in order to gain
immediate control of Richmond Savings.
Regulatory Restrictions. The Administrator and the Federal Reserve have
conditionally approved the Holding Company's acquisition of all of the stock of
Richmond Savings 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 Richmond Savings.
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 Richmond Savings 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 Richmond Savings by a corporation whose ownership is or will be
substantially the same as the ownership of Richmond Savings, provided that the
offer or acquisition is made more than one year following the
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consummation of the Conversion. Similarly, Federal Reserve approval is required
before any person or entity may acquire "control" of Richmond Savings. See "--
The Holding Company-- Regulatory Restrictions."
Board of Directors. The amended Articles of Incorporation of Richmond Savings
upon consummation of the Conversion will provide that the number of directors
may be no less than five. The initial number of directors will be eight, but
such number may be changed by resolution of the Board of Directors. This
provision has the effect of enabling the Board of Directors to elect directors
friendly to management in the event of a non-negotiated takeover attempt.
Richmond Savings' Bylaws also provide for staggered elections of directors if
and when 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
Richmond Savings to gain majority representation on the Board of Directors in a
relatively short period of time. Richmond Savings believes these provisions to
be important to continuity in the composition and policies of its Board of
Directors.
THE CONVERSION
THE BOARD OF DIRECTORS OF RICHMOND SAVINGS HAS ADOPTED AND THE ADMINISTRATOR HAS
APPROVED COMPLETION OF THE TRANSACTIONS DESCRIBED IN THE PLAN OF CONVERSION
SUBJECT TO APPROVAL BY THE MEMBERS OF RICHMOND SAVINGS 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
Richmond Savings was organized and has operated for most of its existence as a
traditional savings and loan association. It recognizes that the banking and
financial services industries are in the process of fundamental changes,
reflecting changes in the local, national and international economies,
technological changes and changes in state and federal laws. As a result, for
several years Richmond Savings has been studying the environment in which it
operates and its strategic options.
As a result of its study of its strategic options, Richmond Savings adopted
the Plan of Conversion. The Board of Directors believes that converting the
bank from the mutual to stock form and organizing the Holding Company will
provide increased flexibility for Richmond Savings and the Holding Company to
react to changes in their operating environment, regardless of the strategies
ultimately chosen. Richmond Savings also believes that the additional capital
will enhance its ability to provide additional customer services and that
stockholders of the Holding Company will be encouraged to do more business with,
and refer more customers to, Richmond Savings.
The Board of Director's adoption of the Plan of Conversion is subject to
approval by the members of Richmond Savings and receipt of required regulatory
approvals. Pursuant to the Plan of Conversion, Richmond Savings 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 Richmond Savings. By
letter dated September 27, 1996, the Administrator approved the Plan of
Conversion, subject to approval by the members of Richmond Savings and
satisfaction of certain other conditions. The Special Meeting will be held on
November 6, 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 Richmond Savings. 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 October 9, 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.
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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 Richmond
Savings' Proxy Statement for the Special Meeting which has been delivered to all
members of Richmond Savings. The Plan of Conversion can also be obtained by
written request from Richmond Savings. See "ADDITIONAL INFORMATION."
Purposes of Conversion
Richmond Savings, as a mutual savings bank, now has no stockholders and no
authority to issue capital stock. By converting to the stock form of
organization, Richmond Savings 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 Richmond Savings, including
(i) a larger capital base for Richmond Savings' operations, (ii) an enhanced
future access to capital markets, (iii) an opportunity for depositors of
Richmond Savings to become stockholders of the Holding Company, and (iv) an
enhanced ability to enter into business combinations with other financial
institutions.
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 Richmond Savings. See "MANAGEMENT OF
RICHMOND SAVINGS --Employee Stock Ownership Plan," "-- Proposed Management
Recognition Plan" and "-- Proposed Stock Option Plan."
Formation of the Holding Company will provide greater flexibility than
Richmond Savings 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.
Effects of Conversion
General. Each person with a deposit account in Richmond Savings has pro rata
rights, based upon the balance in his or her account, in the net worth of
Richmond Savings upon liquidation. However, this right is tied to the
depositor's account and has no tangible market value separate from such deposit
account. Further, Richmond Savings' depositors can realize value with respect
to their interests only in the unlikely event that Richmond Savings 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 Richmond Savings' 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 Richmond Savings, 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 Richmond Savings 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 Richmond
Savings.
Voting Rights. Under Richmond Savings' current Articles of Incorporation and
Bylaws, deposit account holders and borrowers have voting rights with respect to
certain matters relating to Richmond Savings, including the election of
directors. After the Conversion, (i) neither deposit account holders nor
borrowers will have voting rights with respect to Richmond Savings and will
therefore not be able to elect directors of Richmond Savings or control its
affairs; (ii) voting rights with respect to Richmond Savings will be vested in
the Holding Company as the sole stockholder of Richmond Savings; 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
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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 Richmond Savings and the existing deposit insurance
coverage of such accounts will not be affected by the Conversion (except to the
extent that a depositor directs Richmond Savings 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 Richmond Savings.
Continuity. Richmond Savings 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 Richmond Savings.
Liquidation Rights. In the unlikely event of a complete liquidation of
Richmond Savings, 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 Richmond Savings, each holder of a deposit
account in Richmond Savings would receive such holder's pro rata share of any
assets of Richmond Savings 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 Richmond Savings at the time of liquidation.
Liquidation Rights After the Conversion. As required by North Carolina
conversion regulations, the Plan of Conversion provides that, upon completion of
the Conversion, a memorandum account 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 Richmond Savings as of the date of its latest statement of
financial condition contained in the final prospectus relating to the sale of
shares of Common Stock in the Conversion. Under applicable regulations, Richmond
Savings 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 Richmond Savings --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 Richmond Savings, 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 Richmond Savings' 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 March 31, 1995 (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 Richmond Savings 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
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Supplemental Eligible Account Holders are satisfied would be distributed to the
Holding Company, as sole stockholder of Richmond Savings.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with another FDIC-insured depository institution, whether or not
Richmond Savings 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 priority being given to natural
persons and trusts of natural persons residing or located in the Local
Community, including IRAs, Keogh accounts and similar retirement accounts
established for the benefit of natural persons who are residents of the Local
Community. See "-- Community Offering." If necessary, all shares of Common
Stock not purchased in the Subscription Offering and Community Offering, if any,
may 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 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, Eastern Time, on November 5, 1996, unless, with the approval of the
Administrator, the offering period is extended by the Holding Company and
Richmond Savings. The Community Offering, if any, may begin at any time after
the Subscription Offering begins and will terminate at the Expiration Time or at
any time thereafter, but not later than December 20, 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 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 at any particular 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 Richmond Savings' members.
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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) Richmond Savings'
Eligible Account Holders, who are depositors as of March 31, 1995 who had
aggregate deposits at the close of business on such date of at least $50
("Qualifying Deposits"); (ii) the ESOP; (iii) Richmond Savings' Supplemental
Eligible Account Holders, who are depositors as of June 30, 1996 who had
Qualifying Deposits on such date; (iv) Richmond Savings' Other Members, who are
depositor and borrower members as of September 20, 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 Richmond
Savings who are not Eligible Account Holders, Supplemental Eligible Account
Holders or Other Members, in the priorities and subject to the limitations
described herein. All subscriptions received will be subject to the
availability of Common Stock after 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." 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 up 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. If, because of an
oversubscription or for any other reason, the ESOP is unable to purchase in the
Conversion 8% of the total number of shares offered in the Conversion, then the
Board of Directors of the Holding Company intends to approve the purchase by the
ESOP in the open market after the Conversion, of such shares as are necessary
for the ESOP to acquire a number of shares equal to 8% of the shares of Common
Stock issued in the Conversion.
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, members of Richmond Savings as of
September 20, 1996 (the voting record date for the Special Meeting), other than
Eligible Account Holders and Supplemental Eligible Account Holders (Other
Members) have each been granted, without payment therefor, non-
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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 in the proportion that the number of votes eligible to be cast by
each Other Member bears to the total number of votes eligible to be cast at the
Special Meeting by all Other Members whose subscriptions remain unsatisfied.
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,
Richmond Savings' 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 may be offered by the Holding Company to members of the general public
in the Community Offering, which may commence at any time after commencement of
the Subscription Offering, with priority given to natural persons and trusts of
natural persons residing or located in Richmond, Moore and Scotland counties in
North Carolina (the Local Community), including IRA accounts, Keogh accounts and
similar retirement accounts established for the benefit of natural persons who
are residents of, the Local Community. The Community Offering may terminate the
Expiration Time or at any time thereafter, but no later than December 20, 1996,
unless further extended with the consent of the Administrator. The opportunity
to subscribe for shares of Common Stock in the Community Offering is subject to
the right of Richmond Savings 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 Richmond Savings 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 Richmond
Savings' passbook savings rate.
In the event that subscriptions by 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 the Local Community, including IRAs, Keogh accounts
and similar retirement accounts established for the benefit of natural persons
who are residents of the Local Community ("First Priority Community
Subscribers") will be filled in full up to applicable purchase limitations (to
the extent such subscriptions are not rejected by Richmond Savings and the
Holding Company) prior to any allocation to other subscribers in the Community
Offering.
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 Richmond Savings and the Holding Company in the
entire amount of such order up to a number of shares no greater than 25,000
shares, which number shall be determined by the Board of Directors of Richmond
Savings 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 other subscribers in the Community Offering, 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
Richmond Savings 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 Trident Securities and the Holding Company
believe 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 Richmond
Savings' 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 Richmond Savings and the Holding Company, but in no
case later than December 20, 1996.
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 Richmond Savings' 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 purchase price was determined by the Boards of Directors of the
Holding Company and Richmond Savings in consultation with Richmond Savings'
financial advisor and sales agent, Trident Securities, and was based upon a
number of factors, including the market price per share of the stock of other
financial institutions. The North Carolina regulations governing 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.
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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.
Richmond Savings has retained Baxter Fentriss, 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
Richmond Savings and the Holding Company and to assist Richmond Savings in
preparing a business plan. For its services in determining such valuation and
assisting with the business plan, Baxter Fentriss will receive an aggregate fee
of $25,000, plus an additional $2,500 for each appraisal update required in
excess of one, and will be reimbursed for certain reasonable out-of-pocket
expenses, subject to a $3,000 maximum.
Baxter Fentriss has informed Richmond Savings that its appraisal has been made
in reliance upon the information contained in this Prospectus, including the
financial statements of Richmond Savings. Baxter Fentriss has further informed
Richmond Savings 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 Richmond Savings; (ii) the
economic and demographic conditions in Richmond Savings' existing market area;
(iii) certain historical, financial and other information relating to Richmond
Savings; (iv) the proposed dividend policy of the Holding Company; (v) a
comparative evaluation of the operating and financial statistics of Richmond
Savings 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 Baxter Fentriss believes to be comparable in relevant respects to
the Holding Company and Richmond Savings and general conditions in the markets
for such securities. In addition, Baxter Fentriss has advised Richmond Savings
that it has considered the effect of the Conversion on the net worth and
earnings potential of the Holding Company and Richmond Savings.
On the basis of its consideration of the above factors, Baxter Fentriss has
advised Richmond Savings that, in its opinion, at August 8, 1996, the Valuation
Range of Richmond Savings and the Holding Company was from a minimum of
$11,900,000 to a maximum of $16,100,000, with a midpoint of $14,000,000. 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
1,190,000 shares to a maximum of 1,610,000 shares, with a midpoint of 1,400,000
shares.
The Board of Directors of Richmond Savings has reviewed the methodology and
assumptions used by Baxter Fentriss 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 Offerings, Baxter Fentriss will confirm or update its
valuation of the estimated aggregate pro forma market value of Richmond Savings
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 $18,515,000 (1,851,500 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, Baxter Fentriss confirms to Richmond Savings,
the Holding Company, the Administrator and the FDIC, that, to the best of its
knowledge, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause Baxter Fentriss 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 Richmond Savings and the
Holding Company at the conclusion of the Offerings. If the aggregate pro forma
market value of Richmond Savings and the Holding Company as of such date is
within the Valuation Range (or, with the consent of the Administrator and FDIC,
not more
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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 Richmond Savings 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 cancelled, funds submitted with the subscription will be
refunded promptly with interest at Richmond Savings' 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
Richmond Savings' 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."
The valuation by Baxter Fentriss is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing Common
Stock. Baxter Fentriss did not independently verify the financial statements
and other information provided by Richmond Savings, nor did Baxter Fentriss
value independently the assets or liabilities of Richmond Savings. The
valuation considers Richmond Savings as a going concern and should not be
considered as an indication of the liquidation value of Richmond Savings 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 Baxter Fentriss 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 Richmond Savings deposit accounts (other than
negotiable order of withdrawal accounts or other demand deposit accounts), must
be received by Richmond Savings by the Expiration Time, which is 12:00 noon,
Eastern Time, on November 5, 1996. Subscription Rights (i) for which Richmond
Savings 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 Richmond Savings 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 Richmond Savings deposit
accounts (other than negotiable order of withdrawal accounts or other demand
deposit accounts), must be received by Richmond Savings prior to the time the
Community Offering terminates, which could be at any time at or subsequent to
the Expiration Time. No orders will be accepted from persons who do not have
Subscription Rights in the Subscription Offering unless a Community Offering is
commenced.
An executed Stock Order Form once received by Richmond Savings, may not be
modified, amended or rescinded without the consent of Richmond Savings.
Richmond Savings has the right to extend the subscription
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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 any office of Richmond Savings; (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 Richmond
Savings (other than a negotiable order of withdrawal account or other demand
deposit account). 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 Richmond Savings 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 Richmond Savings on payments for Common Stock made in
cash or by check, bank draft, negotiable order of withdrawal or money order at
Richmond Savings' 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 Richmond Savings until consummation or termination of the Conversion.
Richmond Savings shall be entitled to invest all amounts paid on subscriptions
for Common Stock for its own account until completion or termination of the
Conversion. Richmond Savings 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 Richmond Savings 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 cancelled and the remaining balance thereof
will earn interest at Richmond Savings' passbook savings rate.
Upon completion or termination of the Conversion, Richmond Savings 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 Richmond Savings 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
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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.
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, Richmond Savings 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
Richmond Savings has retained Trident Securities to consult with and advise
Richmond Savings 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
will assist Richmond Savings 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 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 Richmond Savings 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 appropriately respond to customer inquiries.
For rendering its services, Richmond Savings has agreed to pay Trident
Securities (a) a management fee equal to 1.0% of the aggregate dollar amount of
Common Stock sold in the Offerings; (b) a commission equal to 2.0% of the
aggregate dollar amount of Common Stock sold in the Subscription Offering,
excluding shares purchased by the ESOP, directors, executive officers and their
"associates" (as defined in the Plan of Conversion); and (c) a commission equal
to 2.0% of the aggregate dollar amount of Common Stock sold by Trident
Securities in the Community Offering, excluding shares sold by other NASD member
firms under Selected Dealers agreements. Richmond Savings has also agreed to
pay to Selected Dealers, if any, negotiated commissions. Richmond Savings has
paid Trident Securities $10,000 toward amounts due to such agent.
Richmond Savings has agreed to reimburse Trident Securities for its reasonable
out-of-pocket expenses, including but not limited to travel, communications,
legal fees and postage, and to indemnify Trident Securities against certain
claims or liabilities, including certain liabilities under the Securities Act.
Trident has agreed that Richmond Savings is not required to pay its legal fees
to the extent they exceed $30,000 or its other out of pocket expenses to the
extent they exceed $7,500. Total fees and commissions to Trident Securities are
expected to be between $312,000 and $499,000 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 Richmond Savings may participate in the solicitation of
offers to purchase Common Stock. Other employees of Richmond Savings 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
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to purchase Common Stock or provide advice regarding the purchase of Common
Stock. A Stock Information Center will be established in Richmond Savings'
headquarters office, in an area separate from Richmond Savings' 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 Richmond Savings' 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,
Richmond Savings 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 Richmond Savings 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 Richmond Savings employees to
participate in the sale of Common Stock. No officer, director or employee of
the Holding Company or Richmond Savings 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, together with all associates of such person, or
group of persons otherwise acting in concert, is 25,000 shares; provided,
however, that the ESOP may purchase up to 8% of the number of shares offered in
the Conversion (128,800 shares, assuming the issuance of 1,610,000 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 Richmond Savings may in its
absolute discretion (i) reduce the 25,000 share maximum purchase limitation to
an amount not less than 1% of the number of shares offered and sold in the
Conversion or (ii) increase the 25,000 share maximum purchase limitation to an
amount of up to 5% of the shares of Common Stock offered and sold. Any
reduction or increase in the maximum purchase limitation by Richmond Savings'
Board of Directors may occur at any time prior to consummation of the
Conversion, either before or after the Special Meeting on November 6, 1996. In
the event the 25,000 share maximum purchase limitation is increased, any
subscriber in the Subscription, Community or Syndicated Community Offering who
has subscribed for 25,000 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
Richmond Savings, the Holding Company or any subsidiary of Richmond
Savings or of the Holding Company;
(ii) any corporation or organization (other than Richmond Savings, the
Holding Company or a majority-owned subsidiary of Richmond Savings 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
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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
Richmond Savings 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 interdependent 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
Richmond Savings may presume that certain persons are acting in concert based
upon, among other things, joint account relationships and 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 Richmond Savings 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 Richmond Savings of favorable opinions of counsel or other tax
advisor 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, Richmond Savings will continue to operate as a
North Carolina-chartered mutual savings bank, all subscription funds will be
promptly returned with interest at Richmond Savings' passbook savings rate, and
all deposit withdrawal authorizations (and holds placed on such accounts) will
be cancelled. In such an event, the Holding Company would not acquire control
of Richmond Savings.
All interpretations by Richmond Savings 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. Richmond Savings and the Holding Company may reject Stock
Order Forms that are not properly completed. However, the Holding Company and
Richmond Savings 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 Richmond
Savings' Board of Directors at any time prior to the Special Meeting, and at any
time thereafter by a two-thirds vote of Richmond Savings' Board of Directors
with the concurrence of the Administrator. If Richmond Savings 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
Richmond Savings' Board of Directors at any time prior to the Special Meeting
and may be terminated by a two-thirds vote of Richmond Savings' 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.
104
<PAGE>
Certain Restrictions on Transfer of Subscription Rights; False or Misleading
Order Forms
The Subscription Rights granted under the Plan of Conversion are non-
transferable. 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 accounts 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.
The Plan of Conversion provides that, if Richmond Savings' 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 Richmond Savings 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.
Income Tax Consequences
Richmond Savings 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 Richmond Savings and no
gain or loss will be recognized by Richmond Savings either in its mutual or
stock form; (ii) no gain or loss will be recognized by Richmond Savings as a
result of the transfer of the Subscription Rights to Eligible Account Holders;
(iii) no gain or loss will be recognized by Richmond Savings upon the purchase
of Richmond Savings' 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
Richmond Savings' depositors with respect to their deposit accounts at Richmond
Savings as a consequence of the Conversion; (v) the tax basis of depositors'
deposit accounts at Richmond Savings 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 Richmond Savings
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. Richmond Savings 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. Richmond Savings has been advised
by Baxter Fentriss 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 Baxter
Fentriss 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
105
<PAGE>
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.
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 Richmond Savings 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 Breyer & Aguggia, Washington, D.C.
EXPERTS
The Financial Statements of Richmond Savings as of June 30, 1996 and 1995, and
for each of the years in the three-year period ended June 30, 1996 included
herein have been included herein in reliance upon the report of Dixon, Odom &
Co., L.L.P., independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
Baxter Fentriss 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 Richmond Savings 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 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.
Richmond Savings 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 Baxter
Fentriss' appraisal, may be inspected at the office of the Administrator,
Savings Institutions Division, North Carolina Department of Commerce, Tower
106
<PAGE>
Building, Suite 301, 1110 Navaho Drive, Raleigh, North Carolina 27609. Copies
of the Plan of Conversion, which includes a copy of Richmond Savings' 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 Richmond Savings and may be obtained by writing to Richmond
Savings at Post Office Box 1597, Rockingham, North Carolina 28379; Attention:
R. Larry Campbell, President, or by telephoning Richmond Savings at (910) 997-
6245. A copy of Baxter Fentriss' independent appraisal is also available for
inspection at the Stock Information Center.
107
<PAGE>
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report F-1
Consolidated Financial Statements:
Consolidated Statements of Financial Condition at
June 30, 1996 and 1995 F-2
Consolidated Statements of Income for the Years
Ended June 30, 1996, 1995 and 1994 F-3
Consolidated Statements of Retained Earnings for
the Years Ended June 30, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the
Years Ended June 30, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements for the
Years Ended June 30, 1996, 1995 and 1994 F-7
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
Consolidated Financial Statements of Richmond Savings or related notes. No
financial statements are provided for the Holding Company since it was not in
operation for any of the periods presented.
108
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Richmond Savings Bank, SSB
Rockingham, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Richmond Savings Bank, SSB and subsidiary as of June 30, 1996 and 1995 and
the related consolidated statements of income, retained earnings, and cash flows
for each of the three years in the period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Richmond Savings
Bank, SSB and subsidiary at June 30, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, the Bank
changed its method of accounting for investment securities in 1995 to adopt the
provisions of Statement of Financial Accounting Standards No. 115.
/s/ Dixon, Odom & Co., L.L.P.
High Point, North Carolina
August 1, 1996
__________
Page F-1
<PAGE>
==============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
- ----------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Cash on hand and in banks $ 1,207,513 $ 1,418,980
Interest-bearing balances in other banks 4,685,583 3,448,058
Investment securities available for sale, at fair value
(amortized cost of $8,526,954 and $5,493,835 at June 30,
1996 and 1995, respectively) (Note B) 8,386,835 5,474,425
Investment securities held to maturity, at amortized cost
(fair value of $7,871,834 and $8,832,282 at June 30, 1996
and 1995, respectively) (Note B) 7,974,880 8,883,510
Loans receivable, net (Note C) 68,357,610 68,744,661
Accrued interest receivable 577,578 537,179
Premises and equipment, net (Note D) 1,355,694 1,403,086
Real estate acquired in settlement of loans 29,074 -
Stock in the Federal Home Loan Bank, at cost 734,700 734,700
Other assets 800,589 765,733
------------ ------------
TOTAL ASSETS $ 94,110,056 $ 91,410,332
============ ============
LIABILITIES AND RETAINED EARNINGS
Deposit accounts (Note E) $ 83,714,929 $ 81,437,068
Accrued interest payable 210,823 218,171
Advance payments by borrowers for property taxes
and insurance 469,603 656,786
Accrued expenses and other liabilities 1,073,975 970,145
------------ ------------
TOTAL LIABILITIES 85,469,330 83,282,170
Commitments and contingencies (Notes C, D and L)
Retained earnings, substantially restricted (Notes H and I) 8,640,726 8,128,162
------------ ------------
TOTAL LIABILITIES AND
RETAINED EARNINGS $ 94,110,056 $ 91,410,332
============ ============
</TABLE>
See accompanying notes. Page F-2
________________________________________________________________________________
<PAGE>
=========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, 1996, 1995 and 1994
- -----------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 5,596,504 $ 5,403,633 5,205,264
Investments and deposits in other banks 1,239,616 973,970 922,393
----------- ----------- ----------
TOTAL INTEREST INCOME 6,836,120 6,377,603 6,127,657
INTEREST EXPENSE ON DEPOSIT ACCOUNTS (Note E) 3,949,476 3,271,197 2,933,705
----------- ----------- ----------
NET INTEREST INCOME 2,886,644 3,106,406 3,193,952
PROVISION FOR LOAN LOSSES (Note C) 36,000 36,000 36,000
----------- ----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,850,644 3,070,406 3,157,952
----------- ----------- ----------
OTHER INCOME
Transaction and other service fee income 357,386 286,452 304,681
Gain on sale of loans 8,390 6,975 151,420
Loss on sale of investment securities (4,404) (4,831) (1,544)
Gain on sale of real estate acquired in settlement
of loans, net - 5,875 3,943
Other income 170,970 135,397 127,809
----------- ----------- ----------
TOTAL OTHER INCOME 532,342 429,868 586,309
----------- ----------- ----------
OTHER EXPENSES
Personnel costs 1,284,791 1,252,657 1,201,018
Occupancy 148,963 152,614 148,177
Equipment rental and maintenance 159,803 173,038 154,455
Marketing 50,351 43,343 57,454
Data processing and outside service fees 274,763 266,523 274,849
Federal and other insurance premiums 218,822 216,983 221,419
Supplies, telephone and postage 116,280 119,783 117,359
Other 239,107 226,642 216,985
----------- ----------- ----------
TOTAL OTHER EXPENSES 2,492,880 2,451,583 2,391,716
----------- ----------- ----------
INCOME BEFORE INCOME TAXES 890,106 1,048,691 1,352,545
INCOME TAX EXPENSE (Note H) 299,146 329,168 492,118
----------- ----------- ----------
NET INCOME $ 590,960 $ 719,523 $ 860,427
=========== =========== ==========
</TABLE>
See accompanying notes. Page F-3
________________________________________________________________________________
<PAGE>
============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Years Ended June 30, 1996, 1995 and 1994
- --------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, BEGINNING $ 8,128,162 $ 7,413,950 $ 6,560,894
(Increase) decrease in net unrealized losses on
certain marketable equity securities - 7,371 (7,371)
Initial effect of adoption of accounting change, net
of deferred income tax assets of $34,240 (Note B) - (64,545) -
(Increase) decrease in net unrealized losses on
available for sale securities, net of deferred
income tax assets (liabilities) of $42,314 and
$(27,512), respectively (Note B) (78,396) 51,863 -
Net income 590,960 719,523 860,427
----------- ----------- -----------
BALANCE, ENDING $ 8,640,726 $ 8,128,162 $ 7,413,950
=========== =========== ===========
</TABLE>
See accompanying notes. Page F-4
________________________________________________________________________________
<PAGE>
=========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1996, 1995 and 1994
- -----------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 590,960 $ 719,523 $ 860,427
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 130,485 135,806 125,695
Amortization, net 42,925 66,759 42,873
(Gain) loss on sale of assets, net (3,986) (8,019) (152,045)
Origination of mortgage loans held for sale (1,380,132) (639,692) (7,408,690)
Proceeds from sale of loans held for sale 1,388,522 646,667 7,560,110
FHLB stock dividend - - (28,600)
Provision for loan losses 36,000 36,000 36,000
Deferred income taxes (2,988) 4,485 47,237
Deferred compensation 97,024 89,457 79,127
Change in assets and liabilities
(Increase) decrease in accrued interest receivable (40,399) 8,347 4,030
(Increase) decrease in other assets 25,026 (136,030) (17,756)
Increase (decrease) in accrued interest payable (7,348) 91,635 (46,279)
Increase (decrease) in accrued expenses and
other liabilities 52,108 (96,378) (41,672)
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 928,197 918,560 1,060,457
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Available for sale investment securities (4,559,814) (511,434) -
Held to maturity investment securities (3,482,952) (999,295) -
Marketable equity securities - - (1,524,589)
Proceeds from maturities and calls of:
Available for sale investment securities 2,000,000 500,000 -
Held to maturity investment securities 2,401,418 414,056 2,425,560
Proceeds from sales of:
Available for sale investment securities 1,511,069 634,316 -
Held to maturity investment securities - - 998,437
Marketable equity securities - - 1,940,270
Net (increase) decrease in loans 283,896 (1,219,514) 162,609
Purchase of property and equipment (81,353) (10,940) (323,606)
Proceeds from sale of property and equipment - - 575
Proceeds from sale of real estate acquired in
settlement of loans - 77,272 47,402
Capital expenditures for real estate acquired in
settlement of loans (3,459) (449) -
----------- ----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (1,931,195) (1,115,988) (760,560)
----------- ----------- -----------
</TABLE>
See accompanying notes. Page F-5
________________________________________________________________________________
<PAGE>
=========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1996, 1995 and 1994
- -----------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand accounts $ 174,584 $ (2,782,040) $ 2,209,536
Net increase (decrease) in certificates of deposit 2,103,277 5,903,895 (2,899,285)
Decrease in advance payments by borrowers for
taxes and insurance (187,183) (12,445) (50,952)
Stock conversion costs incurred (61,622) - -
------------ ------------ ------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 2,029,056 3,109,410 (740,701)
------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 1,026,058 2,911,982 (440,804)
CASH AND CASH EQUIVALENTS, BEGINNING 4,867,038 1,955,056 2,395,860
------------ ------------ ------------
CASH AND CASH
EQUIVALENTS, ENDING $ 5,893,096 $ 4,867,038 $ 1,955,056
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 3,956,824 $ 3,179,562 $ 2,979,984
============ ============ ============
Income taxes $ 234,733 $ 381,500 $ 473,900
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Loans receivable transferred to real estate acquired
in settlement of loans $ 25,615 $ 70,948 $ -
============ ============ ============
Transfer of investment securities from held to maturity
to available for sale (Note B) $ 1,995,851 $ - $ -
============ ============ ============
Increase (decrease) in net unrealized losses on
marketable equity securities $ - $ (7,371) $ 7,371
============ ============ ============
Increase in net unrealized losses on available for
sale investment securities, net of deferred income
taxes $ 78,396 $ 12,682 $ -
============ ============ ============
</TABLE>
See accompanying notes. Page F-6
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Richmond Savings Bank, SSB and
Subsidiary (the Bank) conform to generally accepted accounting principles and to
general practice within the savings bank industry. The following is a
description of the more significant accounting and reporting policies that the
Bank follows in preparing its consolidated financial statements.
Organization and Operations
- ---------------------------
The Bank is an operating North Carolina-chartered mutual savings bank primarily
engaged in the business of obtaining savings deposits and providing mortgage and
consumer loans to the general public.
Principles of Consolidation and Reporting
- -----------------------------------------
These consolidated financial statements include the accounts of the Bank and its
wholly-owned subsidiary, CERKO, Inc. The subsidiary's principal business
activity is that of an agent for various insurance products. All significant
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on hand and in banks, interest-bearing
balances in other banks with original maturities of three months or less and
federal funds sold.
Investments and Mortgage-Backed Securities
- ------------------------------------------
The Bank adopted the provisions of Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), as of July 1, 1994. Under SFAS No. 115, management determines
the appropriate classification of investments and mortgage-backed securities at
the time of purchase and reevaluates such designation at each reporting date.
Securities are classified as held-to-maturity when the Bank has both the
positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are stated at amortized cost. Securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported in a separate component of retained earnings. The Bank has no
trading securities.
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. Interest and dividends are 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.
Page F-7
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments and Mortgage-Backed Securities (Continued)
- -----------------------------------------------------
Prior to the adoption of SFAS No. 115, the Bank stated its debt securities at
amortized cost and its marketable equity securities (mutual funds) at the lower
of aggregate cost or market. Accumulated changes in net unrealized losses on
marketable equity securities were included in retained earnings.
Note B to the consolidated financial statements provides further information
about the effect of adopting SFAS No. 115.
Loans Receivable
- ----------------
Loans receivable are carried at their principal amount outstanding, net of
deferred loan origination fees.
Interest on loans is recorded as borrowers' monthly payments become due.
Accrual of interest income on loans is suspended when, in management's judgment,
doubts exist as to the collectibility of principal and interest. Loans are
returned to accrual status when management determines, based on 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.
Loan fees are accounted for in accordance with Statement of Financial Accounting
Standards No. 91. Loan origination fees and certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment of the
related loans' yield over the contractual life of the related loans using a
level-yield method. Unamortized net loan fees or costs on loans sold are
recorded as gain or loss on sale in the year of disposition.
Loans Held for Sale
- -------------------
First mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements calculated on an aggregate basis.
Allowance for Loan Losses
- -------------------------
The Bank provides for loan losses on the allowance method. Accordingly, all
loan losses are charged to the related allowance and all recoveries are credited
to it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
is adjusted accordingly. While management uses the best information available
to make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
Page F-8
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses (Continued)
- ------------------------------------
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," which is
effective for fiscal years beginning after December 15, 1994. The
Statement addresses the accounting by creditors for impairment of certain loans.
It is generally applicable for all loans except large groups of smaller balance
homogeneous loans that are collectively evaluated for impairment including
residential mortgage loans and consumer installment loans.
SFAS No. 114 requires that impaired loans be measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate,
or at the loan's observable market price or the fair value of the collateral if
the loan is collateral dependent. A loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreements.
In October 1994, the FASB issued SFAS No. 118, which is effective concurrent
with the effective date of SFAS No. 114. This Statement amends SFAS No. 114 to
allow a creditor to use existing methods for recognizing interest income on
impaired loans. Also, this Statement requires disclosure about the recorded
investment in certain impaired loans and how the creditor recognizes interest
income related to those impaired loans.
The Bank adopted the provisions of SFAS Nos. 114 and 118 as of July 1, 1995 and
the impact of the adoption of SFAS Nos. 114 and 118 was immaterial.
Premises and Equipment
- ----------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation of premises and equipment is recorded on a straight-line basis over
the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
while those for improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains or losses are credited
or charged to earnings.
Page F-9
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Federal Home Loan Bank Stock
- ------------------------------------------
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta (FHLB) in the amount of 1% of its outstanding residential
loans or 5% of its outstanding advances from the FHLB, whichever is greater. At
June 30, 1996, the Bank owned 7,347 shares of the FHLB's $100 par value capital
stock.
Real Estate Acquired In Settlement of Loans
- -------------------------------------------
Real estate acquired in settlement of loans represents real estate acquired
through foreclosure or deed in lieu thereof and is initially recorded at the
lower of cost (principal balance of the former mortgage loan) or estimated fair
value. Management evaluates the carrying value of real estate acquired in
settlement of loans periodically and carrying values are reduced when they
exceed net realizable value. Costs relating to the development and improvement
of property are capitalized, whereas those costs relating to holding the
property are charged to expense.
Income Taxes
- ------------
During the year ended June 30, 1994, the Bank adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109").
Under SFAS No. 109, deferred income taxes or benefits are provided on temporary
differences between the financial statement carrying values and the tax bases of
assets and liabilities. The cumulative effect of this change in accounting
principle is not significant and is included in determining net income for the
year ended June 30, 1994. Financial statements for prior years have not been
restated. For prior years, the provision for income taxes was based on income
and expenses included in the consolidated statements of income, with differences
between taxes so computed and taxes payable under applicable statutes and
regulations classified as deferred taxes arising from timing differences.
Retirement Plans
- ----------------
The Bank has a noncontributory defined contribution retirement plan and a 401(k)
retirement plan covering substantially all of its employees. The Bank's policy
is to fund retirement plan contributions as accrued.
New Accounting Pronouncements
- -----------------------------
The FASB has issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
evaluating recoverability, if estimated future cash flows, undiscounted and
without interest charges, are less than the carrying amount of the asset, an
impairment loss is recognized. SFAS No. 121 also requires that certain long-
lived assets and certain identifiable intangibles to be disposed of be reported
at the lower of carrying amount or fair value less cost to sell. SFAS No. 121
applies prospectively for fiscal years beginning after December 15, 1995.
Management does not expect that adoption of SFAS No. 121 will have a material
impact on the Bank financial statements.
Page F-10
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements (Continued)
- ----------------------------------------
The FASB has also issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights," an amendment of FASB Statement No. 65, which provides guidance for the
capitalization of originated as well as purchased mortgage servicing rights and
the measurement of impairment of those rights. SFAS No. 122 requires that an
entity recognize as separate assets the rights to service mortgage loans for
others, however those servicing rights are acquired. SFAS No. 122 also requires
that an entity assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. It should stratify its mortgage
servicing rights based on one or more predominant risk characteristics of the
underlying loans, and recognize impairment through a valuation allowance for
each impaired stratum. SFAS No. 122 applies prospectively for the Bank's fiscal
year beginning July 1, 1996. Management has not assessed the impact that
adoption of SFAS No. 122 will have on the Bank's financial statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. Those standards are based on
consistent application of a financial components approach that focuses on
control. Under the financial components approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This
statement supersedes SFAS No. 122 and is effective for transfers and servicing
of financial assets and extinguishment of liabilities occurring after December
31, 1996. Management of the Bank has not yet determined the impact of the
adoption of SFAS No. 125.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Page F-11
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE B - INVESTMENT SECURITIES
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities." This statement 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 and equity securities not classified
as either held-to-maturity or 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 retained
earnings.
The Bank adopted SFAS No. 115 on July 1, 1994. The adoption affected only the
held-to-maturity and available-for-sale classifications, with the net unrealized
securities losses on the securities available-for-sale of $64,545, net of
deferred tax assets of $34,240, reported as a decrease in retained earnings.
The adoption had no effect on previously reported net income. The Bank has no
trading securities.
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
June 30, 1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U. S. government securities and obligations
of U. S. government agencies $ 8,526,954 $ 10,270 $ 150,389 $ 8,386,835
=========== ========== ========== ===========
Securities held-to-maturity:
U. S. government securities and obligations
of U. S. government agencies $ 4,008,469 $ 1,850 $ 98,715 $ 3,911,604
Mortgage-backed securities 1,816,592 21,505 14,105 1,823,992
Corporate debt securities 1,998,695 1,685 15,590 1,984,790
Municipal securities 151,124 324 - 151,448
----------- ---------- ---------- -----------
$ 7,974,880 $ 25,364 $ 128,410 $ 7,871,834
=========== ========== ========== ===========
</TABLE>
Page F-12
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE B - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
June 30, 1995
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U. S. government securities and obligations
of U. S. government agencies $ 5,493,835 $ 19,175 $ 38,585 $ 5,474,425
=========== ========== ========== ===========
Securities held-to-maturity:
U. S. government securities and obligations
of U. S. government agencies $ 5,991,360 $ 26,885 $ 89,065 $ 5,929,180
Mortgage-backed securities 1,069,741 27,861 2,022 1,095,580
Corporate debt securities 1,517,985 520 14,515 1,503,990
Municipal securities 304,424 - 892 303,532
----------- ---------- ---------- -----------
$ 8,883,510 $ 55,266 $ 106,494 $ 8,832,282
=========== ========== ========== ===========
</TABLE>
The amortized cost and fair values of investment securities available for sale
and held to maturity at June 30, 1996 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
----------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due within one year $ 998,880 $ 1,000,440 $ 1,155,789 $ 1,157,213
Due after one year through five years 4,984,320 4,920,530 2,995,450 2,952,225
Due after five years through ten years 2,543,754 2,465,865 1,509,989 1,455,474
Due after ten years - - 497,060 482,930
Mortgage-backed securities - - 1,816,592 1,823,992
----------- ----------- ----------- -----------
$ 8,526,954 $ 8,386,835 $ 7,974,880 $ 7,871,834
=========== =========== =========== ===========
</TABLE>
The accounting change relating to investment securities which the Bank adopted
on July 1, 1994 is discussed in Note A. The change in unrealized gain/loss on
investment securities available for sale during the year ended June 30, 1995,
including the related effects on deferred income taxes and retained earnings,
follows:
<TABLE>
<CAPTION>
Deferred Increase
Unrealized Income (Decrease)
Holding Tax Asset in Retained
Gain (Loss) (Liability) Earnings
----------- ----------- -----------
<S> <C> <C> <C>
Initial effect of adoption of accounting change $ (98,785) $ 34,240 $ (64,545)
Decrease in unrealized loss on available-for-sale
securities during the year 79,375 (27,512) 51,863
----------- ---------- ----------
$ (19,410) $ 6,728 $ (12,682)
=========== ========== ==========
</TABLE>
Page F-13
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE B - INVESTMENT SECURITIES (Continued)
In November 1995, the FASB published a guide with respect to implementation of
SFAS No. 115 (the "guide"). Any entity which implemented SFAS No. 115 prior to
issuance of this guide was permitted to make a one-time reassessment of its
implementation of SFAS No. 115 on the basis of the information contained in the
guide. The guide stated that timely reclassifications from the held to maturity
category that resulted from that one-time reassessment would not call into
question the classifications of the entity's other securities. On December 31,
1995, the Bank reclassified securities with an amortized cost of $1,995,851 and
a net unrealized gain of $12,954 from held to maturity to available for sale.
Proceeds from sales and maturities of investment securities available for sale
during the year ended June 30, 1996 were $3,511,069. Gross gains of $-0- and
gross losses of $4,404 were realized on those sales.
Proceeds from sales and maturities of investment securities available for sale
during the year ended June 30, 1995 were $1,134,316. Gross gains of $5,243 and
gross losses of $10,074 were realized on those sales.
Securities with a carrying value of $554,172 and $286,611 and a fair value of
$568,355 and $287,687 at June 30, 1996 and 1995, respectively, were pledged to
secure public monies on deposit as required by law.
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Type of loan:
Real estate loans:
One-to-four family residential $55,385,874 $57,979,655
Multi-family residential and commercial 1,963,248 1,424,895
Construction 2,300,620 2,106,145
Home equity lines of credit 5,465,095 4,666,530
----------- -----------
Total real estate loans 65,114,837 66,177,225
----------- -----------
Other loans:
Consumer loans 2,861,449 2,417,648
Home improvement loans 927,919 886,401
Loans secured by deposits 723,838 735,610
----------- -----------
Total other loans 4,513,206 4,039,659
----------- -----------
Total loans 69,628,043 70,216,884
Less:
Construction loans in process 881,075 1,109,352
Allowance for loan losses 389,358 362,871
----------- -----------
$68,357,610 $68,744,661
=========== ===========
</TABLE>
Page F-14
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE C - LOANS RECEIVABLE (Continued)
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 362,871 $ 315,910 $ 307,061
Provision for loan losses 36,000 36,000 36,000
Charge-offs (10,970) (10,377) (29,089)
Recoveries 1,457 21,338 1,938
---------- ---------- ----------
Balance at end of year $ 389,358 $ 362,871 $ 315,910
========== ========== ==========
</TABLE>
At June 30, 1996 and 1995, respectively, the Bank had loans totaling
approximately $27,000 and $75,000 which were in a nonaccrual status.
Loans serviced for other investors amounted to $9,695,290 and $11,667,424 at
June 30, 1996 and 1995, respectively. The Bank had no loans held for sale at
June 30, 1996 and 1995.
At June 30, 1996, the Bank had mortgage loan commitments outstanding of $565,000
and pre-approved but unused lines of credit totaling $5,131,000. In
management's opinion, these commitments, and undisbursed proceeds on
construction loans in process reflected above, represent no more than normal
lending risk to the Bank and will be funded from normal sources of liquidity.
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land $ 467,285 $ 428,299
Buildings and improvements 1,159,259 1,145,789
Furniture and equipment 857,026 830,370
Leasehold improvements 21,740 19,497
----------- -----------
2,505,310 2,423,955
Accumulated depreciation (1,149,616) (1,020,869)
----------- -----------
$ 1,355,694 $ 1,403,086
=========== ===========
</TABLE>
The Bank has committed for construction of a new branch facility to replace an
existing branch. The total cost of the new branch, including land, is estimated
to be approximately $340,000. Approximately $48,000 of these costs have been
incurred as of June 30, 1996. Proceeds from the sale of the existing branch
facility of approximately $85,000 will be applied to the new branch facility.
Page F-15
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE E - DEPOSIT ACCOUNTS
Deposit accounts consist of the following:
<TABLE>
<CAPTION> 1996 1995
---- ----
<S> <C> <C>
Demand and NOW accounts, including non-interest-
bearing deposits of $1,954,320 and $1,923,993 at
June 30, 1996 and 1995, respectively, weighted
average rate of 2.21% and 2.14% at June 30, 1996
and 1995, respectively $ 10,736,983 $ 10,151,964
Passbook savings, weighted average rate of 2.95% and
2.96% at June 30, 1996 and 1995, respectively 11,367,611 11,778,046
------------ ------------
22,104,594 21,930,010
------------ ------------
Certificates of deposit:
2.60% to 3.74% 3,141,282 3,040,932
3.75% to 5.49% 35,067,738 18,133,811
5.50% to 7.55% 23,391,957 38,269,038
7.56% to 9.25% 9,358 63,277
------------ ------------
61,610,335 59,507,058
------------ ------------
$ 83,714,929 $ 81,437,068
============ ============
</TABLE>
The weighted average cost of deposit accounts was 4.69% and 4.77% at June 30,
1996 and 1995, respectively.
A summary of certificate accounts by maturity as of June 30, 1996 follows:
<TABLE>
<CAPTION>
Less than 100,000
$ 100,000 or More Total
------------ ----------- -----------
<S> <C> <C> <C>
July 1, 1996 - June
30, 1997 $ 40,398,530 $ 5,057,265 $ 45,455,795
July 1, 1997 - June
30, 1998 5,814,628 1,665,229 7,479,857
July 1, 1998 - June
30, 1999 1,300,086 216,147 1,516,233
Thereafter 6,330,459 827,991 7,158,450
------------ ----------- ------------
Total certificate
accounts $ 53,843,703 $ 7,766,632 $ 61,610,335
============ =========== ============
</TABLE>
Page F-16
________________________________________________________________________________
<PAGE>
==========================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ------------------------------------------
NOTE E - DEPOSIT ACCOUNTS (Continued)
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Passbook savings $ 339,120 $ 387,907 $ 413,297
NOW accounts 231,069 213,164 200,711
Certificates of deposit 3,391,091 2,681,898 2,329,509
----------- ----------- -----------
3,961,280 3,282,969 2,943,517
Penalties for early withdrawal 11,804 11,772 9,812
----------- ----------- -----------
$ 3,949,476 $ 3,271,197 $ 2,933,705
=========== =========== ===========
</TABLE>
NOTE F - EMPLOYEES' RETIREMENT PLAN
The Bank has a defined contribution retirement plan which covers substantially
all the Bank's employees. Contributions to the plan are discretionary, but are
generally made in amounts which are estimated to be sufficient to provide a
target retirement benefit based on a percentage of the employee's eligible
compensation. In addition, the Bank has a 401(k) plan which contains provisions
for specified matching contributions. Provisions for contributions to the plans
totaled $41,526, $71,817 and $67,780 for the years ended June 30, 1996, 1995 and
1994, respectively.
NOTE G - DEFERRED COMPENSATION
The Bank has deferred compensation plans for certain directors and officers.
These plans provide benefits upon disability, death or attainment of a certain
age. The Bank has made current provisions for future payments under these
plans, and the related liabilities and deferred income tax benefits are included
in the accompanying consolidated financial statements. Expenses associated with
these plans were $97,024, $89,457 and $79,127 for the years ended June 30, 1996,
1995 and 1994, respectively.
Page F-17
________________________________________________________________________________
<PAGE>
============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- --------------------------------------------
NOTE H - INCOME TAXES
During the year ended June 30, 1994, the Bank adopted SFAS No. 109, "Accounting
for Income Taxes." The cumulative effect of the change in accounting principle
is included in determining net income for the year ended June 30, 1994 and is
not significant. Financial statements for prior years have not been restated.
Prior to the year ended June 30, 1994, the provision for income taxes was based
on income and expenses included in the statements of income, with differences
between taxes so computed and taxes payable under applicable statutes and
regulations classified as deferred taxes arising from timing differences (the
deferred method as required by the American Institute of Certified Public
Accountants Accounting Principles Board Opinion No. 11). SFAS No. 109 requires
the use of the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences, by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Temporary differences giving rise to deferred taxes relate to property and
equipment, deferred loan fees and costs, FHLB of Atlanta stock dividends,
deferred compensation, bad debt reserves, and unrealized gains (losses) on
investment securities available for sale.
The components of income tax expense are as follows for the years ended June 30,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current tax expense $ 302,134 $ 324,683 $ 444,881
---------- ---------- ----------
Deferred tax expense (benefit)
Tax on temporary differences (45,302) (2,243) 47,237
Less benefit of unrealized loss on
investment securities available for
sale allocated directly to retained
earnings 42,314 6,728 -
---------- ---------- ----------
Net deferred tax expense (benefit)
included in operations (2,988) 4,485 47,237
---------- ---------- ----------
$ 299,146 $ 329,168 $ 492,118
========== ========== ==========
</TABLE>
Page F-18
________________________________________________________________________________
<PAGE>
============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- --------------------------------------------
NOTE H - INCOME TAXES (Continued)
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate to income before income taxes
were as follows for the years ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income tax at federal statutory rate $ 302,636 $ 356,555 $ 459,865
State income tax, net of federal tax benefit - 259 30,314
Other (3,490) (27,646) 1,939
---------- ---------- ----------
$ 299,146 $ 329,168 $ 492,118
========== ========== ==========
</TABLE>
Deferred tax assets and liabilities arising from temporary differences at June
30, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets relating to:
Deferred compensation $ 259,034 $ 236,667
Unrealized losses on investment securities
available for sale 49,042 6,728
----------- -----------
Gross deferred tax assets 308,076 243,395
Valuation allowance - -
----------- -----------
Net deferred tax assets 308,076 243,395
----------- -----------
Deferred tax liabilities relating to:
Allowance for loan losses (74,999) (62,936)
Property and equipment (70,704) (77,206)
FHLB stock dividends (135,948) (135,948)
Loan fees and costs (37,038) (23,220)
----------- -----------
Total deferred tax liabilities (318,689) (299,310)
----------- -----------
Net deferred tax liability $ (10,613) $ (55,915)
=========== ===========
</TABLE>
Retained earnings at June 30, 1996 include approximately $1,400,000 of bad debt
reserves for which no provision for income taxes has been made. If in the
future this portion of retained earnings is used for any purpose other than to
absorb tax bad debt losses, income taxes will be imposed at the then applicable
rates. Since there is no intention to use the reserves for purposes other than
to absorb tax bad debt losses, a deferred tax liability, which would otherwise
be approximately $550,000, has not been provided on such reserve.
Page F-19
________________________________________________________________________________
<PAGE>
==============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ----------------------------------------------
NOTE I - RETAINED EARNINGS AND CAPITAL REQUIREMENTS
The Bank is subject to a North Carolina savings bank capital requirement of at
least 5% of total assets. The Bank's capital to total assets ratio is 9.18% at
June 30, 1996. In addition, the Bank is subject to the capital requirements of
the FDIC. The FDIC requires the Bank to maintain (i) a Tier 1 capital to risk-
weighted assets ratio of 4% and (ii) a risk-based capital requirement of 8%.
The FDIC also imposes a minimum leverage ratio requirement which varies from 3%
to 5%, depending on the institution. At June 30, 1996, the Bank exceeded the
maximum requirement.
As of June 30, 1995, the Bank exceeded all of its capital requirements.
NOTE J - TRANSACTIONS WITH RELATED PARTIES
The Bank has loan and deposit relationships with executive officers and with
members of the Board of Directors. Such loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other borrowers. In the opinion of
management, such loans did not involve more than the normal risk of
collectibility. A summary of loans to directors and executive officers for the
years ended June 30, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Balance at beginning of year $ 111,650 $ 114,830
Additions 793 13,029
Repayments (11,035) (16,209)
--------- ---------
Balance at end of year $ 101,408 $ 111,650
========= =========
</TABLE>
Page F-20
________________________________________________________________________________
<PAGE>
==============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ----------------------------------------------
NOTE K - CONSOLIDATED SUBSIDIARY
The following condensed statements summarize the financial position and
operating results of the Bank's wholly-owned subsidiary, CERKO, Inc.
Summary Statements of Financial Condition as of June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Assets:
Cash $ 10,707 $ 1,709
Other assets 146,625 148,136
--------- ---------
$ 157,332 $ 149,845
========= =========
Liabilities and Stockholders' Equity:
Income taxes payable $ - $ 803
Loan from parent 11,231 24,500
Accrued expenses 893 769
Stockholders' equity 145,208 123,773
--------- ---------
$ 157,332 $ 149,845
========= =========
</TABLE>
Summary Statements of Income for the years ended June 30, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Income:
Insurance commissions $ 94,695 $ 84,194 $ 103,998
Interest and other 5,116 6,950 4,358
----------- ----------- ------------
99,811 91,144 108,356
----------- ----------- ------------
Expense:
Management fee to parent 9,700 9,500 9,500
Salaries and other 7,467 4,907 15,304
Commission expense 46,139 39,922 52,578
Income tax expense 15,070 13,569 11,460
----------- ----------- ------------
78,376 67,898 88,842
----------- ----------- ------------
Net Income $ 21,435 $ 23,246 $ 19,514
=========== =========== ============
</TABLE>
Page F-21
________________________________________________________________________________
<PAGE>
==============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ----------------------------------------------
NOTE L - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its primary
lending area of Richmond, Scotland and Moore counties. The Bank's underwriting
policies require such loans to be made at no greater than 80% loan-to-value
based upon appraised values unless private mortgage insurance is obtained.
These loans are secured by the underlying properties.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit on mortgage loans,
standby letters of credit and equity lines of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated statements 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.
A summary of the contract amount of the Bank's exposure to off-balance sheet
risk as of June 30, 1996 is as follows:
<TABLE>
<S> <C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit, mortgage loans $ 565,000
Undisbursed construction loans 881,000
Undisbursed lines of credit 5,131,000
</TABLE>
NOTE M - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Bank has implemented Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments ("SFAS 107"), which
requires disclosure of the estimated fair values of the Bank's financial
instruments whether or not recognized in the balance sheet, where it is
practical to estimate that value. Such instruments include cash and cash
equivalents, investment securities, loans, accrued interest receivable, stock in
the Federal Home Loan Bank of Atlanta, deposit accounts, and commitments. Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Bank's entire holdings of a particular financial instrument.
Because no active market readily exists for a portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgement and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Page F-22
________________________________________________________________________________
<PAGE>
============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- --------------------------------------------
NOTE M - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS
The carrying amounts for cash and cash equivalents approximate fair value.
INVESTMENT SECURITIES
Fair value for investment securities equals quoted market price if such
information is available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
LOANS
For certain homogenous categories of loans, such as residential mortgages,
fair value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
ACCRUED INTEREST
The carrying amounts of accrued interest approximate fair values.
STOCK IN FEDERAL HOME LOAN BANK OF ATLANTA
The fair value for FHLB stock is its carrying value, since this is the
amount for which it could be redeemed. There is no active market for this
stock and the Bank is required to maintain a minimum balance based on the
unpaid principal of home mortgage loans.
DEPOSIT LIABILITIES
The fair value of demand deposits is the amount payable on demand at the
reporting date. The fair value of certificates of deposit is estimated
using the rates currently offered for deposits of similar remaining
maturities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
With regard to financial instruments with off-balance sheet risk, it is
not practicable to estimate the fair value of future financing
commitments, and because, in the case of loans sold with limited recourse,
the Bank has access to underlying collateral and other lender's remedies,
the fair value of such recourse loans is estimated to have only a nominal
value.
Page F-23
________________________________________________________________________________
<PAGE>
=============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ---------------------------------------------
NOTE M - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The carrying amounts and estimated fair values of the Bank's financial
instruments, none of which are held for trading purposes, are as follows at June
30, 1996:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
------------- --------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,893,096 $ 5,893,096
Investment securities 16,361,715 16,258,669
Loans 68,357,610 69,180,000
Accrued interest receivable 577,578 577,578
Stock in Federal Home Loan Bank of Atlanta 734,700 734,700
Financial liabilities:
Deposits $ 83,714,929 $ 82,086,000
</TABLE>
NOTE N - PLAN OF CONVERSION
On May 1, 1996, the Board of Directors of the Bank unanimously adopted a Plan of
Holding Company Conversion whereby 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.
The stockholders of the holding company will be asked to approve a proposed
stock option plan and a proposed management recognition plan at a meeting of the
stockholders after the conversion. Shares issued to directors and employees
under these plans may be from authorized but unissued shares of common stock or
they may be purchased in the open market. In the event that options or shares
are issued under these plans, such issuances will be included in the earnings
per share calculation; thus, the interests of existing stockholders will be
diluted.
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to its net worth as reflected in its latest statement of financial
condition used in its final conversion prospectus. 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 will each eligible deposit account holder be
entitled to receive a 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.
Page F-24
________________________________________________________________________________
<PAGE>
=============================================
RICHMOND SAVINGS BANK, SSB AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
- ---------------------------------------------
NOTE N - PLAN OF CONVERSION (Continued)
The Bank may not declare or pay a cash dividend on or repurchase any of 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.
Conversion costs of approximately $62,000 have been incurred and are included in
prepaid expenses and other assets as of June 30, 1996. 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 Savings Bank's operations.
Page F-25
________________________________________________________________________________
<PAGE>
================================================================================
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 PRO-
SPECTUS 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 CAROLINA FINCORP, INC. OR RICHMOND SAVINGS BANK, SSB. THIS PRO-
SPECTUS 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 PER-
SON 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 SOLICITA-
TION 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 CAROLINA FINCORP, INC. OR RICHMOND SAVINGS
BANK, SSB 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 Richmond............................. 15
Risk Factors.............................................................. 16
Carolina Fincorp, Inc..................................................... 21
Richmond Savings Bank, SSB................................................ 22
Use of Proceeds........................................................... 23
Dividend Policy........................................................... 24
Market for Common Stock................................................... 25
Capitalization............................................................ 26
Pro Forma Data............................................................ 28
Historical and Pro Forma Capital Compliance............................... 30
Anticipated Stock Purchases by Management................................. 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 33
Business of the Holding Company........................................... 47
Business of Richmond Savings.............................................. 47
Taxation.................................................................. 65
Supervision and Regulation................................................ 67
Management of the Holding Company......................................... 77
Management of Richmond Savings............................................ 78
Description of Capital Stock.............................................. 86
Anti-Takeover Provisions Affecting the Holding Company and Richmond
Savings.................................................................. 88
The Conversion............................................................ 92
Legal Opinions............................................................ 106
Experts................................................................... 106
Registration Requirements................................................. 106
Additional Information.................................................... 106
Index to Consolidated Financial Statements................................ 108
</TABLE>
---------------
Until November 3, 1996 dealers effecting transactions in the registered secu-
rities, whether or not participating in this distribution, may be required to
deliver a prospectus when acting as underwriters and with respect to their un-
sold allotments or subscriptions.
================================================================================
================================================================================
UP TO
1,851,500
SHARES
CAROLINA
----------------
FINCORP, INC.
(PROPOSED HOLDING COMPANY FOR
RICHMOND SAVINGS BANK, SSB)
COMMON STOCK
---------------
PROSPECTUS
---------------
TRIDENT SECURITIES, INC.
OCTOBER 2, 1996
================================================================================
