<PAGE>
PROSPECTUS
Pursuant to Rule 424(b)(3)
Registration No. 333-8625
CENTURY BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR HOME SAVINGS, SSB)
UP TO 407,330 SHARES OF COMMON STOCK
Century Bancorp, Inc., a North Carolina corporation (the "Holding Company"),
is offering up to 407,330 shares of its common stock, no par value (the
"Common Stock"), in connection with the conversion of Home Savings, SSB ("Home
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 $50.00 per share. The minimum number of shares that
any subscriber may purchase is 10, for an aggregate minimum purchase price of
$500.00. As part of the Conversion, the Holding Company will become the sole
stockholder and parent holding company of Home Savings. See "THE CONVERSION."
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 Home Savings, Home
Savings' Employee Stock Ownership Plan (the "ESOP") and certain others in
accordance with Home Savings' Plan of Holding Company Conversion (the "Plan of
Conversion"). The Subscription Offering will expire at 12:00 Noon, Eastern
Time, on December 11, 1996, unless extended by Home Savings and the Holding
Company with the approval of the Administrator (the "Expiration Time"). See
"THE CONVERSION--Subscription Offering." SUBSCRIPTION RIGHTS ARE NOT
TRANSFERABLE; PERSONS WHO ATTEMPT TO TRANSFER SUBSCRIPTION RIGHTS MAY LOSE
THEIR RIGHT TO PURCHASE COMMON STOCK AND MAY BE SUBJECT TO OTHER SANCTIONS.
SEE "THE CONVERSION--CERTAIN RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS;
FALSE OR MISLEADING ORDER FORMS."
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
(cover continued on next page)
--------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED
BY EACH PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 21.
--------------
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 AND ARE NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENT AGENCY. THE SECURITIES ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF THE PRINCIPAL INVESTED.
<TABLE>
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
<CAPTION>
ESTIMATED UNDERWRITING,
PURCHASE MARKETING AND OTHER ESTIMATED NET
PRICE FEES AND EXPENSES(3) CONVERSION PROCEEDS(4)
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share at Minimum... $50.00 $2.73 $47.27
- ------------------------------------------------------------------------------------
Per Share at Midpoint.. $50.00 $2.54 $47.46
- ------------------------------------------------------------------------------------
Per Share at Maximum... $50.00 $2.39 $47.61
- ------------------------------------------------------------------------------------
Per Share at Maximum, as
adjusted.............. $50.00 $2.26 $47.74
- ------------------------------------------------------------------------------------
Total at Minimum(1).... $13,090,000 $715,000 $12,375,000
- ------------------------------------------------------------------------------------
Total at Midpoint(1)... $15,400,000 $781,000 $14,619,000
- ------------------------------------------------------------------------------------
Total at Maximum(1).... $17,710,000 $847,000 $16,863,000
- ------------------------------------------------------------------------------------
Total at Maximum, as
adjusted(2)........... $20,366,500 $922,000 $19,445,500
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by JMP
Financial, Inc. ("JMP Financial") dated October 22, 1996, which states
that the estimated aggregate pro forma market value of the Holding Company
and Home Savings ranged from $13,090,000 to $17,710,000 ("Valuation
Range") or between 261,800 to 354,200 shares of Common Stock at the
purchase price of $50.00 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 Home Savings and the Holding Company
arising from the Conversion, including estimated fixed expenses of
approximately $368,000 (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 $347,000 and $554,000 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. Home 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 Home 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 any Community Offering and in any 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 NOVEMBER 12, 1996.
<PAGE>
persons residing in Davidson County, 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 January 25, 1997, 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." Home 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 Boards of Directors and management of Home 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. Trident Securities has not prepared any fairness opinion with
respect to the terms of the Offerings or any opinion with respect to the price
at which shares of Common Stock may trade. See "RISK FACTORS--Best Efforts
Offering."
The sale of the Common Stock in the Subscription Offering, and in the
Community and Syndicated Community Offerings, 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 HOME SAVINGS, IS IRREVOCABLE AND MAY NOT BE
MODIFIED, AMENDED OR RESCINDED WITHOUT THE CONSENT OF HOME 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 Home Savings' members at a
special meeting scheduled to be held on December 12, 1996 (the "Special
Meeting") and upon the sale of shares of Common Stock for an aggregate
purchase price of not less than $13,090,000 nor more than $20,366,500. See
"THE CONVERSION--Offering of Common Stock."
Neither the Holding Company nor Home Savings has ever issued stock before
and, due to the relatively small size of the Offerings, it is unlikely that an
active and liquid trading market will develop. Upon the consummation of the
Conversion, the Holding Company will review the eligibility of the Common
Stock for quotation on the Nasdaq SmallCap Market. In the event that the
Common Stock is eligible for quotation on the Nasdaq SmallCap Market, the
Holding Company will apply to have the Common Stock quoted on the Nasdaq
SmallCap Market. There can be no assurance, however, that any such application
will be approved or that the Common Stock will be quoted on the Nasdaq
SmallCap Market. If the Common Stock is quoted on the Nasdaq SmallCap Market,
Trident Securities intends to act as a market maker and to encourage at least
one other market maker to make a market in the Common Stock. In the event the
Common Stock does not qualify for quotation on the Nasdaq SmallCap Market, the
Holding Company intends to list the Common Stock over-the-counter through the
National Daily Quotation System "Pink Sheets" published by the National
Quotation Bureau, Inc., and the Holding Company intends to request that
Trident Securities undertake to match offers to buy and offers to sell the
Common Stock. There can be no assurance that timely or accurate quotations
will be available in the "Pink Sheets." In addition, the existence of a public
trading market will depend upon the presence in the market of both willing
buyers and willing sellers at any given time. Due to the small number of
shares of Common Stock being offered in the Conversion and the concentration
of ownership, it is unlikely that an active or liquid trading market for the
Common Stock will develop and be maintained. Further, the absence of an active
and liquid trading market may make it difficult to sell the Common Stock and
may have an adverse effect on the price of the Common Stock. Purchasers should
consider the potentially illiquid and long-term nature of their investment in
the shares offered hereby. See "MARKET FOR COMMON STOCK."
A Stock Information Center has been established at Home Savings'
headquarters office at 22 Winston Street, Thomasville, North Carolina, in an
area separate from Home Savings' banking operations. The telephone number of
the Stock Information Center is (910) 475-4616.
2
<PAGE>
Home Savings Bank, SSB
Thomasville, North Carolina
[GRAPHIC OF MAP OF NORTH CAROLINA WITH
DAVIDSON COUNTY HIGHLIGHTED]
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.
Century Bancorp, The Holding Company is a North Carolina corporation
Inc. recently organized by the Board of Directors of Home
Savings to acquire all of the capital stock that Home
Savings will issue upon its conversion from the mutual to
stock form of ownership. The conversion of Home Savings to
stock form, the issuance of Home 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 Home 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 Home
Savings.
The executive office of the Holding Company is located
at 22 Winston Street, Thomasville, North Carolina, and
its telephone number is (910) 475-4663.
Home Savings, SSB Home Savings is a North Carolina-chartered mutual savings
bank headquartered in Thomasville, North Carolina and has
been in operation since 1915. Home Savings has been a
member of the Federal Home Loan Bank ("FHLB") system, and
its deposits have been federally insured since the late
1950's. Home Savings' deposits are now insured by the
Savings Association Insurance Fund (the "SAIF") of the FDIC
to the maximum amount permitted by law.
Home Savings conducts business through one full service
office in Thomasville, North Carolina. Home Savings'
primary market area consists of the communities within a
10-mile radius of its office, which includes portions of
Davidson, Randolph and Guilford counties in North Carolina.
At June 30, 1996, Home Savings had total assets of $81.3
million, net loans of $55.2 million, deposits of $69.7
million and retained earnings of $11.2 million.
Home 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 Home Savings'
primary market area. Home Savings also makes home equity
line of credit loans, multi-family residential loans,
commercial loans, construction loans, loans secured by
deposit accounts, and various types of consumer loans. Home
Savings is a portfolio lender in that it does not originate
its fixed or adjustable rate loans for sale in the
secondary market. See "BUSINESS OF HOME SAVINGS." Home
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.
Highlights of Home Savings' operations include:
4
<PAGE>
. Profitability. For the fiscal years ended June 30, 1996,
1995 and 1994, Home Savings had net income of $677,000,
$921,000, and $1.2 million, respectively, and a return
on average assets of 0.86%, 1.25%, and 1.59%,
respectively. Future profitability of Home Savings will
be affected by changes in market interest rates and
other factors. See "RISK FACTORS."
. Capital Position. As of June 30, 1996, Home Savings'
ratios of Tier I capital to total assets and total
capital to risk-weighted assets were 13.79% and 27.73%,
respectively, which substantially exceeded the FDIC's
requirements. On such date, Home Savings' ratio of net
worth to total assets, calculated under the
Administrator's regulations, was 14.44%, which
substantially exceeded the North Carolina requirement.
See "SUPERVISION AND REGULATION -- Regulation of Home
Savings --Capital Requirements Applicable to Home
Savings."
. Emphasis on One- to Four-Family Residential Lending.
Historically, Home Savings has been predominantly a one-
to-four family residential lender. As of June 30, 1996,
75.4% of Home Savings' loan portfolio, before net items,
was composed of permanent one-to-four family residential
loans and 8.0% of its loan portfolio, before net items,
was composed of construction and home equity loans.
. Asset Quality. On June 30, 1996 and June 30, 1995, Home
Savings' ratio of nonperforming assets to total assets
was 0.76% and 1.21%, respectively. See "BUSINESS OF HOME
SAVINGS -- Lending Activities -- Nonperforming Assets
and Asset Classification. "
. Control of General and Administrative Expenses. Home
Savings strives to control its non-interest expenses.
For the years ended June 30, 1996 and June 30, 1995,
Home Savings' ratio of non-interest expense to average
total assets was 1.49% and 1.33%, respectively.
. Interest Rate Risk. Home Savings has a significant
amount of interest rate risk; however, management
believes its interest rate risk is at an acceptable
level given Home Savings' capital position and
historical results of operations. As of June 30, 1996,
Home Savings' one-year interest sensitivity gap was a
negative 48.86% of total interest-earning assets, and
its three year cumulative interest sensitivity gap was a
negative 49.45%. Other modeling used by Home Savings
indicates that, as of June 30, 1996, its net portfolio
value (present values of cash flows from assets,
liabilities and off-balance sheet items) would decrease
by 27% in the event of an instantaneous and permanent
200 basis point increase in market interest rates and
would increase by 25% in the event of a 200 basis point
decrease in market interest rates. Such modeling also
indicates that, as of June 30, 1996, such a 200 basis
point increase in market interest rates would result in
a 17% decrease in net interest income and that a 200
basis point decrease in such rates would result in a 17%
increase in net interest income. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Asset/Liability Management."
. Low Loan Growth. At June 30, 1996, 1995 and 1994, Home
Savings' net loans receivable were $55.2 million, $54.0
million and $53.8 million. During recent periods, Home
Savings loan growth has been lower than the
5
<PAGE>
average for comparable thrift institutions and has not
matched its growth in deposits.
. Unpredictability of Earnings. The earnings of financial
institutions are significantly impacted by changes in
noninterest income and by the interest sensitivity of
its assets and liabilities. As is described above, Home
Savings' asset/liability structure presents a
significant amount of interest rate risk, and Home
Savings' earnings have been reduced during periods of
increasing interest rates and are likely to continue to
be significantly and negatively impacted if interest
rates increase. Home Savings has not established a
consistent source of noninterest income to stabilize its
net income. As a result, Home Savings earnings are
significantly tied to market interest rates and are,
therefore, not highly predictable.
. Effect of Recent SAIF Assessment. As part of a
comprehensive continuing appropriations bill passed by
the United States Congress and signed by the President
on September 30, 1996, SAIF-insured financial
institutions such as Home Savings will be required to
pay a special one-time assessment to recapitalize the
SAIF. The assessment, estimated to equal 65.7 cents per
each $100 of insured deposits, is payable prior to
December 1996. The assessment to be paid by Home
Savings, estimated at $409,000, was accrued as an
expense during the quarter ended September 30, 1996. As
a result of this expense, Home Savings experienced a net
loss during that quarter. See "RECENT DEVELOPMENTS,"
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT
DEVELOPMENTS" and "RISK FACTORS --Recapitalization of
SAIF, its Impact on SAIF Premiums and One-Time
Recapitalization Fee. "
The Conversion Home Savings was organized and has operated as a
traditional savings institution. 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 Home Savings has been studying the
environment in which it operates and its strategic options.
As a result of its study of its strategic options, Home
Savings adopted the Plan of Conversion, which provides for
conversion of the bank from a North Carolina-chartered
mutual savings bank to a North Carolina-chartered stock
savings bank. Home Savings believes that converting the
bank from the mutual to stock form and organizing the
Holding Company will provide increased flexibility for Home
Savings and the Holding Company to react to changes in
their operating environment.
Consummation of the Conversion is contingent upon receipt
of the approvals of the Administrator and the Federal
Reserve which are necessary for the Holding Company to
acquire Home Savings and the approvals of the FDIC and the
Administrator which are necessary for Home 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
Home 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-
6
<PAGE>
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, Home Savings will remain a North Carolina-
chartered mutual savings bank, all subscription funds will
be returned promptly plus interest at Home Savings'
passbook rate, and all deposit withdrawal authorizations
will be cancelled without any action on the part of
subscribers or purchasers.
The existing management of Home Savings and the Holding
Company believes that it will be in the best interests of
Home Savings, the Holding Company and the stockholders of
the Holding Company for the Holding Company to remain an
independent financial institution. Assuming the
consummation of the Conversion, the Holding Company and
Home Savings intend to pursue the business strategy
described in this Prospectus with the goal of enhancing
shareholder value over the long term. Neither the Holding
Company nor Home Savings has any existing plan to consider
any business combination, and neither company has any
agreement or understanding with respect to any possible
business combination.
The Offerings Pursuant to the Plan of Conversion, between 261,800 shares
and 407,330 shares of Common Stock are being offered by the
Holding Company at the price of $50.00 per share in the
Subscription Offering to the following persons in the
following order of priority: (i) Home 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) Home Savings' Employee Stock
Ownership Plan (the "ESOP"); (iii) Home Savings' depositors
as of September 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) Home Savings' depositor
and borrower members as of October 25, 1996, who are not
Eligible Account Holders or Supplemental Eligible Account
Holders ("Other Members"); and (v) directors, officers and
employees of Home Savings who are not Eligible Account
Holders, Supplemental Eligible Account Holders or Other
Members. Beneficial owners of individual retirement
accounts ("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. Subscription Rights received in any of the
foregoing categories will be subordinate to the
Subscription Rights received by those in a prior category.
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 Home 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."
7
<PAGE>
The Subscription Offering and Subscription Rights in the
Subscription Offering expire at the Expiration Time, which
is 12:00 Noon., Eastern Time, on December 11, 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 January 25, 1997,
unless extended with the approval of the Administrator.
Stock Purchase The maximum aggregate number of shares of Common Stock for
Limitations which any (i) person or entity (other than the ESOP), (ii)
persons or entities exercising Subscription Rights through
a single account or (iii) persons acting in concert, may
subscribe in the Offerings is 5,000 shares. In addition, no
person or entity, or group of persons or entities acting in
concert, together with any associates (as defined in the
Plan of Conversion), may subscribe for more than 7,000
shares of Common Stock sold in the Conversion. However,
Home Savings' Board of Directors has the right, at any time
prior to completion of the Conversion, to decrease the
5,000 and 7,000 share maximum purchase limitations to an
amount not less than 1% of the shares issued in the
Conversion or increase such 5,000 and 7,000 share
limitations 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 20,944 and 28,336 shares
assuming the issuance of between 261,800 and 354,200
shares). If because there is an oversubscription or for any
other reason the ESOP is 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 10
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 Home 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 Home 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
8
<PAGE>
director or officer of Home 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 exercisable and purchases may be
made in the Offerings only by returning the original of 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. Copies of the Stock Order Form, including
facsimile copies, will not be accepted. 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 January 25,
1997). Payment may be made in cash (if delivered in person
to any office of Home Savings), by check, bank draft,
negotiable order of withdrawal or money order, or by
authorization of withdrawal from deposit accounts
maintained with Home Savings, other than negotiable order
of withdrawal or other demand deposit accounts. Stock Order
Forms directing that payment for shares be made by
authorization of withdrawal will be accepted only if, at
the time the Stock Order Form is received, there exists
sufficient funds in the account from which withdrawal is
authorized to pay the full purchase price for the number of
shares ordered. Payment may not be made by wire transfer.
Subscription payments made in cash, by check, bank draft,
negotiable order of withdrawal or money order will earn
interest at Home Savings' passbook savings rate from the
date payment in good funds is received by Home 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 accepted. Subscription payments made by
authorization of withdrawal from a deposit account at Home
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 Home Savings only if
the beneficial owner of such account directs Home Savings
to transfer that account to a self-directed account in the
name of an independent trustee. Persons wishing to use
their Home Savings IRA's to purchase shares of Common Stock
must visit the Stock Information Center on or before
December 4, 1996 in order for the necessary paperwork for
such purchases to be completed and executed prior to the
Expiration Time. 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 Home Savings'
passbook savings rate. After amounts submitted for payment
are applied to the purchase price for shares sold, they
will no longer earn interest, and they will not be insured
by the FDIC or any other government agency or other entity.
THE CONVERSION --Exercise of Subscription Rights and
Purchases in the Community Offering."
Non-transferability
of Subscription
Rights 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
9
<PAGE>
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. See "THE CONVERSION -- Certain Restrictions on
Transfer of Subscription Rights; False or Misleading Order
Forms."
Appraisal The Plan of Conversion requires that the aggregate purchase
price of the Common Stock be based upon an independent
valuation of the estimated aggregate pro forma market value
of the Holding Company and Home Savings. JMP Financial,
Inc., of Grosse Pointe Park, Michigan ("JMP Financial"), an
independent financial consulting firm, has advised Home
Savings and the Holding Company that in its opinion, at
October 22, 1996, the Valuation Range of the aggregate
estimated pro forma market value of the Holding Company and
Home Savings was from $13,090,000 to $17,710,000. The
appraisal will be reviewed and, if appropriate, revised by
JMP Financial upon conclusion of the Offerings. The
appraisal by JMP Financial 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 $50.00 per share. The aggregate
dollar amount of Common Stock that may be sold in the
Conversion will be determined by the Board of Directors of
Home Savings and the Holding Company based upon the
independent appraisal of the pro forma market value of the
Holding Company and Home Savings prepared by JMP Financial.
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
$20,366,500 or less than $13,090,000 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 $12,375,000 and $16,863,000, 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 $1,047,200 and $1,416,800 assuming the ESOP's
purchase of between 20,944 and 28,336 shares at $50.00 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
10
<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 Home
Savings in exchange for all of the capital stock of Home
Savings. The net proceeds paid to Home Savings will become
part of Home 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
Home Savings' lending and investment policies.
Net proceeds will also be used for other general corporate
purposes. Home Savings and the Holding Company may consider
opening one or more branch offices or acquiring other
financial institutions in its primary market area and other
nearby communities, and such proceeds could be used for
such purposes. However, the Holding Company and Home
Savings have no current plans to open any additional office
or to acquire any other financial institution.
If Home Savings' proposed Management Recognition Plan (the
"MRP") is approved by the stockholders of the Holding
Company, the MRP will acquire a number of shares of Common
Stock equal to 4% of the number of shares issued in the
Conversion. See "MANAGEMENT OF HOME 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 Home
Savings from the proceeds of the Conversion. It is
estimated that between 10,472 and 14,168 shares will be
acquired by the MRP, assuming the issuance of between
261,800 and 354,200 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 $50.00 per share,
Home Savings would contribute between $523,600 and
$708,400, respectively, to the MRP for this purpose.
Additional shares would be acquired if the number of shares
issued in the Conversion exceeds 354,200, and the price per
share paid by the MRP could be more or less than $50.00 per
share, which would change the total contribution to the MRP
accordingly. See "RISK FACTORS -- Cost and Possible
Dilutive Effect of the MRP and Stock Option Plan" and
"MANAGEMENT OF HOME 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 will 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 the Stock Option Plan does not acquire
sufficient shares in the open market to satisfy options
granted under the Stock Option Plan, the Holding Company
will reserve authorized but unissued shares for this
purpose. See "MANAGEMENT OF HOME SAVINGS -- Proposed Stock
Option Plan." The funds for any purchases in the open
market may be provided by the Holding Company or Home
Savings from the
11
<PAGE>
proceeds of the Conversion. It is estimated that between
26,180 and 35,420 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
261,800 and 354,200 shares in the Conversion. If shares are
acquired in the open market, the Holding Company or Home
Savings would contribute between $1,309,000 and $1,771,000,
respectively, to the Stock Option Plan for this purpose,
assuming such shares are acquired at a price of $50.00 per
share. Additional shares would be acquired if the number of
shares issued in the Conversion exceeds 354,200, and the
price could be more or less than $50.00 per share, which
would change the contribution to the Stock Option Plan
accordingly. See "RISK FACTORS -- Cost and Possible
Dilutive Effect of the MRP and Stock Option Plan" and
"MANAGEMENT OF HOME 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 Home 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, Home
Savings has agreed with the FDIC that, within the first
year after completion of the Conversion, neither the
Holding Company nor Home 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 Holding Company's
receipt of dividends from Home Savings. Home Savings'
ability to pay dividends is restricted. See "SUPERVISION
AND REGULATION --Regulation of Home 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 Home Savings to
pay dividends to the Holding Company without incurring a
recapture tax.
Market for
Common Stock Neither the Holding Company nor Home Savings has ever
issued stock before and, due to the relatively small size
of the Offerings, it is unlikely that an active and liquid
trading market will develop. Upon the consummation of the
Conversion, the Holding Company will review the eligibility
of the Common Stock for quotation on the Nasdaq SmallCap
Market. In the event that the Common Stock is eligible for
quotation on the Nasdaq SmallCap Market, the Holding
Company will apply to have the Common Stock quoted on the
Nasdaq SmallCap Market. There can be no assurance, however,
that any such application will be approved or that the
Common Stock will be quoted on the Nasdaq SmallCap Market.
If the Common Stock is quoted on the Nasdaq SmallCap
Market, Trident Securities intends to act as a market maker
and to encourage at least one other market maker to make a
market in the Common Stock. In the event the Common Stock
does not qualify for quotation on the Nasdaq SmallCap
Market, the Holding Company intends to list the Common
Stock over-the-counter through the National Daily Quotation
System "Pink Sheets" published by the National Quotation
Bureau, Inc., and the Holding
12
<PAGE>
Company intends to request that Trident Securities
undertake to match offers to buy and offers to sell the
Common Stock. There can be no assurance that timely or
accurate quotations will be available in the "Pink Sheets."
In addition, the existence of a public trading market will
depend upon the presence in the market of both willing
buyers and willing sellers at any given time. Due to the
small number of shares of Common Stock being offered in the
Conversion and the concentration of ownership, it is
unlikely that an active or liquid trading market for the
Common Stock will develop and be maintained. Further, the
absence of an active and liquid trading market may make it
difficult to sell the Common Stock and may have an adverse
effect on the price of the Common Stock. Purchasers should
consider the potentially illiquid and long-term nature of
their investment in the shares offered hereby. See "MARKET
FOR COMMON STOCK."
Stock Ownership by
Management The directors and executive officers of the Holding Company
and of Home Savings and their associates currently
anticipate subscribing for Common Stock in the aggregate
amount of $1,215,000, or 24,300 shares. As a result, such
persons anticipate subscribing for 9.28% to 6.86% of the
shares of Common Stock issued in the Conversion based upon
the minimum and maximum 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 20,944 and 28,336 shares, assuming
the issuance of between 261,800 and 354,200 shares). See
"MANAGEMENT OF HOME SAVINGS -- Employee Stock Ownership
Plan." It is expected that directors and certain employees
of the Holding Company and Home 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 by the stockholders
of the Holding Company at a meeting of stockholders
following the Conversion. See "-- Benefits to Directors and
Officers" and "MANAGEMENT OF HOME 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 persons effective
control over as much as 30.58% or 28.16%, at the minimum
and maximum of the Valuation Range, respectively, of the
Common Stock issued and outstanding.
13
<PAGE>
Benefits to Directors
and Executive
Officers In connection with the Conversion, certain benefits will be
provided to directors, officers and employees of Home
Savings.
Employment Agreement. In connection with the Conversion,
Home Savings expects to enter into an employment agreement
with James G. Hudson, Jr., President, Chief Executive
Officer and Treasurer. The employment agreement with Mr.
Hudson provides for an initial annual salary of $93,600.
See "MANAGEMENT OF HOME SAVINGS -- Employment Agreement."
In addition, Mr. Hudson participates in a bonus
compensation plan pursuant to which he received $10,283,
$15,861 and $18,909 in bonus compensation for fiscal years
1996, 1995 and 1994, respectively. Mr. Hudson, along with
all other employees, is also eligible to receive holiday
bonuses as declared by Home Savings' Board of Directors.
During the fiscal years ended June 30, 1996, 1995 and 1994,
Home Savings' employees have received holiday bonuses equal
to two weeks salary. See "MANAGEMENT OF HOME SAVINGS --
Bonus Compensation."
Special Termination Agreements. In connection with the
Conversion, the Holding Company expects to enter into
Special Termination Agreements with John E. Todd, Vice
President, and Drema A. Michael, Secretary and Assistant
Treasurer. The Special Termination Agreements provide for
the payment to such officers of an amount equal to two
times their salary and bonuses for the most recently
completed calendar year if, within two years after a change
in control, the officer is terminated without cause or if
the officer terminates their employment after certain
changes in their employment circumstances. If a change in
control and such a termination occurred during calendar
year 1996, Mr. Todd and Ms. Michael would be entitled to
receive $121,654 and $114,394, respectively, under such
agreements. See "MANAGEMENT OF HOME SAVINGS -- Special
Termination Agreements."
Restricted Stock Grants. Pursuant to the MRP, which is
expected to be adopted by the Boards of Directors of the
Holding Company and Home Savings, directors and certain
employees of Home 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 10,472 and
14,168 shares, assuming the issuance of between 261,800 and
354,200 shares). Assuming that the shares issued pursuant
to the MRP had a value of $50.00 per share, such shares
would have a value of between $523,600 and $708,400.
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, (i) no employee of Home Savings (including Mr.
Hudson, Mr. Todd and Ms. Michael) could receive more than
25% of the shares issued under the MRP, or 3,542 shares,
assuming the issuance of 354,200 shares in the Conversion,
(ii) the four non-employee directors of Home Savings could
receive restricted stock grants for an aggregate of not
more than 20% of the shares issued under the MRP, or 2,833
shares, assuming the issuance of 354,200 shares in the
Conversion and (iii) none of the four non-employee
directors of Home Savings could receive individually more
than 5% of the shares issued under the MRP, or 708 shares,
assuming the issuance of 354,200 shares in the Conversion.
Assuming the MRP shares had a value of $50.00 per share,
3,542 shares would have a value of $177,100, and 2,833
shares would have a value of $141,650 and 708 shares would
have a value of $35,400. If the MRP is submitted to and
approved by the Holding
14
<PAGE>
Company's stockholders more than one year after
consummation of the Conversion, the regulatory percentage
limitations set forth above would not apply.
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 to be held no sooner than six months following
the Conversion. Recipients of restricted stock under the
MRP will not have to pay for their restricted shares. See
"MANAGEMENT OF HOME 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 Home Savings, directors and certain
employees of Home Savings could receive options to purchase
a number of shares of Common Stock equal to 10% of the
shares issued in the Conversion (between 26,180 and 35,420
shares, assuming the issuance of between 261,800 and
354,200 shares).
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, (i) no employee of Home Savings (including
Mr. Hudson, Mr. Todd and Ms. Michael) could receive more
than 25% of the options issued under the Stock Option Plan,
or options to purchase 8,855 shares, assuming the issuance
of 354,200 shares in the Conversion, (ii) the four non-
employee directors of Home Savings could receive not more
than 20% of the options issued under the Stock Option Plan,
or options to purchase 7,084 shares, assuming the issuance
of 354,200 shares in the Conversion, and (iii) none of the
four non-employee directors of Home Savings could receive
individually more than 5% of the options issued under the
Stock Option Plan, or options to purchase 1,771 shares,
assuming the issuance of 354,200 shares in the Conversion.
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 regulatory percentage
limitations set forth above would not apply.
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 to 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. Recipients of options under the Stock Option Plan
will not have to pay for the options issued to them. See
"MANAGEMENT OF HOME SAVINGS -- Proposed Stock Option Plan."
ESOP. In connection with the Conversion, Home 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 20,944
and 28,336 shares, assuming the issuance of between 261,800
and 354,200 shares. See "MANAGEMENT OF HOME SAVINGS --
Employee Stock Ownership Plan."
15
<PAGE>
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. Home Savings has received an opinion from
JMP Financial stating that the Subscription Rights do not
have any ascertainable value. The opinion of JMP Financial
is not binding on the Internal Revenue Service ("IRS"). See
"THE CONVERSION -- Income Tax Consequences."
Anti-Takeover
Provisions The Articles of Incorporation and Bylaws of the Holding
Company and Home Savings contain certain restrictions that
are intended to discourage non-negotiated attempts to
acquire control of the Holding Company or Home 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"
and "ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY
AND HOME SAVINGS."
Risk Factors Special attention should be given to the "RISK FACTORS"
section of this Prospectus, which discusses the possible
effects of changes in interest rates on Home Savings and
the thrift industry in general, Home Savings' high volume
of deposits exceeding $100,000, anticipated low return on
equity following the Conversion, importance of key
employers, the recapitalization of the SAIF, its impact on
deposit insurance premiums and a potential recapitalization
fee, proposed recapture of bad debt reserves, the limited
market for the Common Stock, the cost of the ESOP, the cost
and possible dilutive effect of the MRP and Stock Option
Plan, potential financial institution regulation and
legislation, competition, certain anti-takeover
considerations, income tax consequences of Subscription
Rights, the possibility of a delay in completing the
offering and issuing the shares of Common Stock and certain
other matters that potential purchasers should consider
before deciding whether to subscribe for the Common Stock
offered hereby.
16
<PAGE>
SELECTED FINANCIAL
AND OTHER DATA OF HOME SAVINGS
Set forth below are summaries of historical financial and other data of
Home Savings. This information is derived in part from, and should be read in
conjunction with, the Financial Statements and Notes to Financial Statements of
Home 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
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Financial condition data:
Total assets $81,304 $75,508 $73,843 $70,864 $65,947
Investments (1) 22,823 18,852 18,012 15,833 13,729
Loans receivable, net 55,193 54,020 53,802 53,566 50,120
Deposits 69,669 64,448 63,937 62,129 58,205
Retained earnings 11,245 10,640 9,610 8,439 7,370
Operating data:
Interest income $ 5,868 $ 5,371 $ 5,337 $ 5,402 $ 5,439
Interest expense 3,540 2,788 2,487 2,736 3,472
------- ------- ------- ------- -------
Net interest income $ 2,328 2,583 2,850 2,666 1,967
Provision for loan losses 165 105 114 165 87
------- ------- ------- ------- -------
Net interest income
after provision for
loan losses 2,163 2,478 2,736 2,501 1,880
Non-interest income 35 15 40 40 97
Non-interest expense 1,169 979 910 833 775
------- ------- ------- ------- -------
Income before income
taxes 1,029 1,514 1,866 1,708 1,202
Income tax expense 352 593 694 639 421
------- ------- ------- ------- -------
Net income $ 677 $ 921 $ 1,172 $ 1,069 $ 781
======= ======= ======= ======= =======
Other selected data:
Number of outstanding loans 1,306 1,317 1,783 1,992 1,987
Number of deposit accounts 4,670 4,715 5,241 5,250 4,989
Number of full-service
offices open 1 1 1 1 1
Return on average assets 0.86% 1.25% 1.59% 1.55% 1.24%
Return on average equity 6.19% 9.15% 12.82% 13.37% 11.22%
Average equity to average
assets 13.94% 13.68% 12.43% 11.56% 11.06%
Interest rate spread 2.41% 3.10% 3.55% 3.53% 2.64%
Net yield on average
interest-earning assets 3.05% 3.61% 3.97% 3.97% 3.22%
Average interest-earning
assets to average
interest-bearing
liabilities 113.86% 113.08% 112.12% 110.59% 110.09%
Ratio of non-interest
expense to average total
assets 1.49% 1.33% 1.24% 1.20% 1.23%
Nonperforming assets to
total assets 0.76% 1.21% 2.32% 2.53% 1.09%
Nonperforming loans to
total loans 0.52% 1.56% 2.98% 2.99% 1.11%
Allowance for loan losses
to total loans 0.97% 0.74% 0.55% 0.37% 0.19%
Allowance for loan losses
to nonperforming loans 187.02% 47.68% 18.38% 12.43% 17.06%
Provision for loan losses
to total loans receivable,
net 0.30% 0.19% 0.21% 0.31% 0.17%
Net charge-offs to average
loans outstanding 0.06% 0.00% 0.03% 0.12% 0.08%
Retained earnings to total
assets 13.83% 14.09% 13.01% 11.91% 11.18%
Average equity to average
assets 13.95% 13.68% 12.43% 11.56% 11.06%
</TABLE>
- ------------------------------------------------------------------------------
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
- ------------------------------------------------------------------------------
17
<PAGE>
RECENT DEVELOPMENTS
The following summary of selected financial information and other data
does not purport to be complete and is qualified in its entirety by reference to
the detailed information and Financial Statements and accompanying Notes
appearing elsewhere in this Prospectus. Selected financial information at
September 30, 1996 and for the three months ended September 30, 1996 and 1995
has been derived from unaudited financial statements. In the opinion of
management of Home Savings, such information reflects all adjustments (which
consist only of normal recurring adjustments) necessary for a fair presentation
of the selected financial information and other data. The results of operations
for the three months ended September 30, 1996 are not necessarily indicative of
the results which may be expected for any other period.
18
<PAGE>
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
-------------- --------
(Dollars in Thousands)
<S> <C> <C>
Financial condition data:
Total assets $82,170 $81,304
Investments (1) 21,825 22,823
Loans receivable, net 56,345 55,193
Deposits 70,090 69,669
Retained earnings 11,296 11,245
<CAPTION>
At or for the Three Months Ended September 30
---------------------------------------------
1996 1995
---- ----
(Dollars in Thousands)
<S> <C> <C>
Operating data:
Interest income $ 1,523 $ 1,418
Interest expense 880 879
------- -------
Net interest income 643 539
Provision for loan losses 3 40
------- -------
Net interest income after
provision for loan
losses 640 499
Non-interest income 18 7
FDIC special assessment 409 -
Other non-interest expense 283 268
------- -------
Income (loss) before
income taxes (benefit) (34) 238
Income tax expense
(benefit) (12) 97
------- -------
Net income (loss) $ (22) $ 141
======= =======
Other selected data:
Number of outstanding loans 1,370 1.372
Number of deposit accounts 5,019 4,934
Number of full-service
offices open 1 1
Return on average assets (2) (0.11)% 0.73%
Return on average equity (2) (0.78)% 5.29%
Average equity to average
assets 13.87% 13.84%
Interest rate spread (2) 2.72% 2.25%
Net yield on average
interest-earning assets (2) 3.28% 2.88%
Average interest-earning
assets to average 112.25% 113.49%
interest-bearing
liabilities
Ratio of non-interest
expense to average total 1.38% 1.39%
assets (2, 3)
Nonperforming assets to
total assets 0.60% 0.87%
Nonperforming loans to
total loans 0.38% 0.53%
Allowance for loan losses
to total loans 0.95% 0.79%
Allowance for loan losses
to nonperforming 251.64% 148.26%
loans
Provision for loan losses
to total loans receivable, 0.02% 0.30%
net (2)
Net charge-offs to average
loans outstanding (2) 0.00% 0.10%
Retained earnings to total
assets 13.75% 13.84%
Average equity to average
assets 13.87% 13.84%
</TABLE>
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
(2) Annualized.
(3) Excludes FDIC special assessment.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Comparison of Financial Condition at September 30, 1996 and June 30, 1996
Home Savings experienced moderate asset growth as total assets
increased from $81.3 million at June 30, 1996 to $82.2 million at September 30,
1996. Loan demand during the quarter was relatively strong, as net loans
receivable increased by $1.1 million from $55.2 million to $56.3 million. The
principal source of funding for the increased loans was collection of principal
from investments, which decreased from $22.8 million at June 30, 1996 to $21.8
million at September 30, 1996.
Deposits increased $421,000 during the quarter, from $69.7 million at
June 30, 1996 to $70.1 million at September 30, 1996. Retained earnings totaled
$11.3 million at September 30, 1996 as compared with $11.2 million at June 30,
1996 with the increase arising from an increase in the market value of
available-for-sale investment securities. At September 30, 1996, Home Savings
continued to substantially exceed all regulatory capital requirements.
Comparison of Results of Operations for the Three Months Ended September 30,
1996 and 1995
Net Income (Loss). Home Savings incurred a net loss of $22,000 during
the quarter ended September 30, 1996 as compared with net income of $141,000
during the corresponding quarter of the prior year, a decrease of $163,000. The
net loss for the quarter ended September 30, 1996 resulted from a special
insurance assessment of $409,000 which was imposed on all SAIF-insured
institutions by the FDIC to recapitalize the SAIF fund. See "RISK FACTORS --
Recapitalization of SAIF, Its Impact on SAIF Premiums and One-Time
Recapitalization Fee" Net of an income tax benefit of $149,000, this special
assessment decreased earnings by $260,000 during the quarter ended September 30,
1996. If Home Savings had not incurred the SAIF special assessment, its net
income during the quarter ended September 30, 1996 would have been $238,000, an
increase of $97,000 over its net income during the quarter ended September 30,
1995.
Net Interest Income. Net interest income increased to $640,000 during
the quarter ended September 30, 1996 as compared with $499,000 during the first
quarter of the previous year. This increase resulted from a $3.7 million
increase in average interest-earning assets, which increase principally
consisted of higher yielding loans receivable, and a reduction in the rate of
interest paid on customer deposits, which declined from a weighted average rate
of 5.33% during the quarter ended September 30, 1995 to a weighted average rate
of 5.04% during the quarter ended September 30, 1996, reflecting general levels
of interest rates during the respective quarters.
Provision for Loan Losses. The provision for loan losses was $3,000
and $40,000 for the quarters ended September 30, 1996 and 1995, respectively.
The reduced provision during the quarter ended September 30, 1996 was due to a
reduction in both net loan charge-offs and nonaccrual loans as compared with the
corresponding quarter of the previous year. There were no loan charge-offs
during the three months ended September 30, 1996 as compared with net charge-
offs of $14,000 during the three months ended September 30, 1995, while
nonaccrual loans decreased to $213,000 at September 30, 1996 from $288,000 at
September 30, 1995.
Other Income. Other income increased to $18,000 during the three
months ended September 30, 1996 from $7,000 during the corresponding three month
period in 1995. This increase was principally due to a $9,000 gain from the
sale of foreclosed real estate during the quarter ended September 30, 1996.
General and Administrative Expenses. Excluding the FDIC special
insurance assessment described under "-- Net Income (Loss)" above, general and
administrative expenses remained relatively stable, increasing to $283,000
during the quarter ended September 30, 1996 as compared with $268,000 during the
quarter ended September 30, 1995. This increase generally tracked Home Savings'
growth in assets, representing, on an annualized basis, 1.38% and 1.39% of
average total assets during the respective quarters.
20
<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.
Potential Impact of Changes in Interest Rates
The results of operations of Home 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. Home 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
Home 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 time periods. As a result,
the net interest income of these savings institutions, including Home Savings,
would be expected to be negatively impacted by increases in interest rates.
Some thrift and banking institutions have a positive gap, which means
that the amount of interest-earning assets maturing or otherwise repricing
within specific time periods generally exceeds the amount of interest-bearing
liabilities maturing or otherwise repricing within such periods. Accordingly,
in a rising interest rate environment, absent the effect of other factors, those
institutions would expect to experience a larger increase in the yield on their
assets relative to the cost of their liabilities, thus their net interest income
should be positively affected.
At June 30, 1996, Home Savings' cumulative one year gap as a
percentage of total interest-earning assets was a negative 48.86%, and its
cumulative three year gap as a percentage of total interest-earning assets was a
negative 49.45%. Home Savings' computes its gap position without using certain
prepayment, deposit decay and other assumptions sometimes used in such
computations. The results of Home Savings' gap computations could be
substantially different if these or other assumptions were used.
In addition to the interest rate gap analysis discussed above, Home
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 Home Savings' NPV and
net interest income of instantaneous and permanent 100 to 400 basis point
increases and decreases in market interest rates. Home 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 27% decrease in Home Savings' NPV
and a 200 basis point decrease in interest rates would result in a 25% increase
in Home Savings' NPV. Such computations also indicate that the same 200 basis
point increase in interest rates would result in a 17% decrease in net interest
income and that the 200 basis point decrease in interest rates would result in a
17% increase in net interest income. Computations of the prospective effects of
hypothetical interest rate changes in determining the effect 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, such computations and the
gap computations described above 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."
The computations described above indicate that Home Savings' asset and
liability structure presents significant interest rate risk and that Home
Savings' portfolio value and net interest income would be negatively impacted by
increases in interest rates. Home Savings net interest income during fiscal
1996 was $255,000 or 9.87% less than fiscal 1995. This decrease was largely due
to an increase in market interest rates which resulted in a reduction of Home
Savings' interest rate spread from 3.10% in fiscal year 1995 to 2.41% in fiscal
year 1996. See "MANAGEMENT'S
21
<PAGE>
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." However, because of Home Savings' capital
position and historical results of operations, Home Savings' management did not
consider Home Savings' interest rate risk position as of June 30, 1996 to be
unacceptable.
Home Savings' results of operations will continue to be significantly
affected by changes in interest rates due, among other factors, to (i) the fact
that a large percentage of Home Savings' adjustable rate assets only reprice
once a year, (ii) the fact that Home Savings originates significant amounts of
fixed rate mortgage loans and does not sell such loans in the secondary market,
(iii) the fact that a large percentage of Home Savings' deposit accounts are
subject to immediate repricing or to repricing within one year, (iv) the fact
that Home Savings' interest-earning assets and interest-bearing liabilities
reprice at different times and with different frequencies, (v) the effects of
periodic and lifetime interest rate caps on Home Savings' interest-earning
assets, (vi) the fact that interest rates on Home Savings' assets and
liabilities respond differently to economic, market and competitive factors, and
(vii) the fact that sustained high levels of interest rates may adversely affect
real estate and lending markets in general. Changes in the level of interest
rates also can affect the amount of loans originated by Home Savings. Changes
in interest rates also can result in disintermediation, which is the flow of
funds away from savings institutions into direct investments, such as U.S.
government and corporate securities, and other investment vehicles which,
because of the absence of federal deposit insurance premiums and reserve
requirements, generally can pay higher rates of interest than savings
institutions. Home Savings does not originate its fixed rate or adjustable rate
loans for sale, or sell its loans in the secondary market, and this tends to
increase its exposure to interest rate risk. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset/Liability
Management."
High Level of Deposits of $100,000 or More
At June 30, 1996, $13.7 million of Home Savings' certificate of
deposit accounts, or 26.3% of all of its certificate of deposit accounts, were
for balances of $100,000 or more. Such deposit accounts, which are frequently
referred to as "jumbo" deposits, are generally considered to be more interest
rate sensitive than other deposits. As a result, it would generally be
expected that a significant amount of such jumbo deposits could be withdrawn
from Home Savings if higher rates could be obtained elsewhere. Home Savings
does not solicit or accept brokered deposits. Home Savings believes that most
of the jumbo deposits at Home Savings are held by long-time local customers of
the institution.
Anticipated Low Return on Equity Following Conversion
At June 30, 1996, Home Savings' ratio of equity to assets was 13.83%.
On a pro forma basis at June 30, 1996, assuming the sale of 333,500 shares of
Common Stock in the Conversion, the Holding Company's ratio of equity to assets
would have been 26.38%. 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 norms for the foreseeable future
should carefully evaluate and consider the risk that such returns will not be
achieved.
Following the Conversion, the Holding Company may consider plans to
reduce capital if the opportunities to deploy it are not found. Such plans may
include payment of cash dividends and repurchasing shares. Any such steps would
be taken based on conditions as they exist following the Conversion and in
compliance with applicable regulations which limit the Holding Company's ability
to pay dividends and repurchase its stock. See "USE OF PROCEEDS," "DIVIDEND
POLICY" and "SUPERVISION AND REGULATION -- Regulation of the Holding Company --
General" and "-- Dividend Limitations" and "SUPERVISION AND REGULATION --
Regulation of Home Savings -- Restrictions on Dividends and Other Capital
Distributions."
22
<PAGE>
Importance of Key Employers
The High Point and Thomasville, North Carolina area is considered to
be the furniture capital of the world. As a result, the furniture industry is a
key employer in Home Savings' primary market area. Thomasville Furniture
Industries, Inc., a Thomasville, North Carolina furniture manufacturer, is by
far the largest employer in Thomasville, North Carolina. As a result, any
adverse changes in the furniture industry in general or in the business of
Thomasville Furniture Industries, Inc., could have an adverse impact upon Home
Savings' primary market area. Any such changes could adversely affect real
estate values in Home Savings' primary market area, increase unemployment and
increase rates of delinquencies in Home Savings' loan portfolio.
Recapitalization of SAIF, its Impact on SAIF Premiums and One-Time
Recapitalization Fee
As a SAIF-insured institution, Home 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 Home 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. Home Savings paid deposit insurance
premiums of $149,000 and $145,000 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 Home 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 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.
See "SUPERVISION AND REGULATION --Regulation of Home Savings -- Insurance of
Deposit Accounts."
The above-described comprehensive 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, net of any income tax benefit. The one-time assessment, based
on Home Savings' deposits as of March 31, 1995, is expected to be payable prior
to December, 1996. This special assessment, estimated at $409,000, was accrued
as an expense during the quarter ended September 30, 1996. As a result of this
expense, Home Savings experienced a net loss for that fiscal quarter. See
"RECENT DEVELOPMENTS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT
DEVELOPMENTS" and "SUPERVISION AND REGULATION -- Regulation of Home Savings --
Insurance of Deposit Accounts."
Increased Tax Liability 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, Home Savings' post-1987 excess reserves amounted to approximately
$264,000. See "TAXATION -- Federal Income Taxation."
23
<PAGE>
Limited Market for the Common Stock
It is anticipated that immediately following completion of the
Conversion the Holding Company will have no more than 407,330 shares of Common
Stock issued and outstanding if the pro forma appraised valuation of the Holding
Company and Home Savings is increased by 15% above the maximum of the Valuation
Range. Upon the consummation of the Conversion, the Holding Company will review
the eligibility of the Common Stock for quotation on the Nasdaq SmallCap Market.
In the event that the Common Stock is eligible for quotation on the Nasdaq
SmallCap Market, the Holding Company will apply to have the Common Stock quoted
on the Nasdaq SmallCap Market. There can be no assurance, however, that any
such application will be approved or that the Common Stock will be quoted on the
Nasdaq SmallCap Market. If the Common Stock is quoted on the Nasdaq SmallCap
Market, Trident Securities intends to act as a market maker and will attempt to
enlist at least one other market maker to make a market in the Common Stock. In
the event the Common Stock does not qualify for quotation on the Nasdaq SmallCap
Market, the Holding Company intends to list the Common Stock over-the-counter
through the National Daily Quotation System "Pink Sheets" published by the
National Quotation Bureau, Inc., and the Holding Company will request that
Trident Securities undertake to match offers to buy and offers to sell the
Common Stock. There can be no assurance that timely or accurate quotations will
be available in the "Pink Sheets." In addition, the existence of a public
trading market will depend upon the presence in the market place of both willing
buyers and willing sellers at any given time. The presence of a sufficient
number of buyers and sellers at any given time is a factor over which neither
the Holding Company nor any broker or dealer has control. Due to the small
number of shares of Common Stock being offered in the Conversion and the
concentration of ownership, it is unlikely that an active or liquid trading
market for the Common Stock will develop and be maintained. Purchasers of Common
Stock should recognize that the absence of an active and liquid trading market
may make it difficult to sell the Common Stock and may have an adverse effect on
the price. Purchasers should consider the potentially illiquid and long-term
nature of their investment in the shares offered hereby. See "MARKET FOR COMMON
STOCK."
Cost of ESOP
It is expected that the ESOP will purchase 8% of the shares of Common
Stock issued in the Conversion with funds borrowed from the Holding Company.
See "MANAGEMENT OF HOME SAVINGS -- Employee Stock Ownership Plan." Assuming the
issuance of 354,200 shares in the Conversion, it is expected that 28,336 shares
will be purchased by the ESOP, which--if such shares are acquired at $50.00 per
share--would have a value of $1,416,800. If, because there is an
oversubscription for 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 Home Savings. See "PRO FORMA DATA."
In November 1993, the American Institute of Certified Public
Accountants approved Statement of Position ("SOP") 93-6, "Employers' Accounting
for Employee Stock Ownership Plans." 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. Since the fair value of the shares following the
Offerings cannot be predicted, Home 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 Home 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.
24
<PAGE>
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
after the Conversion. Under the MRP, directors and certain employees of Home
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
certain employees of Home 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 certain employees under the
MRP and the Stock Option Plan may be from authorized but unissued shares of
Common Stock or they may be purchased in the open market. In the event the
shares issued under the MRP and the Stock Option Plan consist of newly issued
shares of Common Stock, the interests of existing stockholders would be diluted.
If 354,200 shares of the Common Stock are issued in the Conversion, it is
expected that options to acquire 35,420 shares of the Common Stock could be
granted under the Stock Option Plan, and awards of an additional 14,168 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 $50.00 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 354,200 to 403,788, the pro forma book value per share of the
outstanding Common Stock at June 30, 1996 would have been $70.49 compared with
$75.36 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 $2.95 compared with $3.47 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 354,200 shares of Common Stock are issued in
the Conversion and the MRP acquired 14,168 shares at a cost of $50.00 per share,
the total annual expense of the MRP would be $141,680 per year. See "PRO FORMA
DATA" and "MANAGEMENT OF HOME SAVINGS -- Proposed Management Recognition Plan"
and "-- Proposed Stock Option Plan."
Financial Institution Regulation and Possible Legislation
Home 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, Home Savings, or Home 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, Home Savings is unable to determine the
extent to which legislation, if enacted, would affect its business.
Competition
Home Savings' market area is a highly competitive market, and Home
Savings faces significant competition both in attracting deposits and in
originating loans. Home 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 Home Savings and,
therefore, have greater financial and marketing resources than Home Savings.
Management estimates that, based upon 1995 comparative data, Home Savings had
15.7% of the deposits in Thomasville, North Carolina and 5.5% of the deposits in
Davidson County, North Carolina. See "BUSINESS OF HOME SAVINGS -- Competition."
25
<PAGE>
Anti-Takeover Considerations
Provisions in the Articles of Incorporation and Bylaws. The Holding
Company's Articles of Incorporation and Bylaws contain certain provisions that
may discourage attempts to acquire control of the Holding Company that are not
negotiated with the Holding Company's Board of Directors. These provisions may
result in the Holding Company being less attractive to a potential acquiror and
may result in stockholders receiving less for their shares than otherwise might
be available in the event of a takeover attempt. In addition, these provisions
may have the effect of discouraging takeover attempts that some stockholders
might deem to be in their best interests, including takeover proposals in which
stockholders might receive a premium for their shares over the then-current
market price, as well as making it more difficult for individual stockholders or
a group of stockholders to elect directors or to remove incumbent management.
The Holding Company's Board of Directors believes, however, that these
provisions are in the best interests of the Holding Company and its stockholders
because such provisions encourage potential acquirors to negotiate directly with
the Board of Directors, which the Board of Directors believes is in the best
position to act on behalf of all stockholders.
These provisions include, among others, that (1) the Board of
Directors has the authority to change the number of directors within a range
from five to 15; (2) stockholders who intend to nominate a candidate for
election to the Board of Directors must give advance notice to the Secretary of
the Holding Company; (3) terms for directors will be staggered at any time that
the number of directors exceeds nine; (4) certain merger, consolidation, or
other business combinations (as defined in the Articles of Incorporation) must
receive the affirmative vote of at least 75% of the Continuing Directors (as
defined in the Articles of Incorporation); (5) special meetings of stockholders
may be called only by the Chairman of the Board, the Chief Executive Officer,
the President or by the Board of Directors and (6) directors may be removed from
office prior to the end of their term only for cause.
In addition, the Articles of Incorporation do not provide for
cumulative voting for any purpose. As a result, a majority of shareholders will
be able to approve matters presented to the shareholders for consideration,
except such matters as require more than a majority vote for approval. The
Holding Company's Articles of Incorporation state that the Board of Directors,
without the approval of the stockholders, may authorize the issuance of shares
of preferred stock with such voting rights, designations, preferences,
limitations and relative rights as the Board of Directors shall determine. As a
result, the Board of Directors has the power, to the extent consistent with its
fiduciary duties, to issue preferred stock to persons friendly to management or
otherwise in order to impede attempts by third parties to acquire voting control
of the Holding Company and to impede other transactions not favored by
management. The amended Certificate of Incorporation and Bylaws of Home Savings
upon its conversion to stock form also contain certain provisions that might
discourage potential takeover attempts of Home Savings. See "ANTI-TAKEOVER
PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME 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 Home 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 Home Savings. Approval will be given during the second and
third years after the Conversion upon a finding by the Administrator that (i)
the acquisition is necessary to protect the safety and soundness of the Holding
Company and Home Savings or the Board of Directors of the Holding Company
supports the acquisition and (ii) the acquiror is of good character and
integrity and possesses satisfactory managerial skills, after the acquisition
the acquiror will be a source of financial strength to the Holding Company and
Home Savings, and the interests of the public will not be adversely affected by
the acquisition. Approval is not required for (i) any offer with a view toward
public resale made exclusively to the Holding Company or its underwriters or the
selling group acting on its behalf or (ii) any offer to acquire or acquisition
of beneficial ownership of more than 10% of the common stock of the Holding
Company by a corporation whose
26
<PAGE>
ownership is or will be substantially the same as the ownership of the Holding
Company, provided that the offer or acquisition is made more than one year
following the consummation of the Conversion. See "ANTI-TAKEOVER PROVISIONS
AFFECTING THE HOLDING COMPANY AND HOME 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 Home
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, Directors and Employees. Directors and
executive officers of Home Savings and the Holding Company and their associates
expect to purchase approximately 9.28% to 6.86% 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
Home Savings) 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.
Under the proposed MRP, if approved by the stockholders of the Holding
Company, a number of shares equal to 4% of the shares issued in the Conversion
could be issued to directors and certain employees of Home Savings. Such shares
could be purchased in the open market or could be issued out of authorized but
unissued shares. Recipients of shares under the MRP will have voting control
over such shares regardless of whether such shares have vested. See "MANAGEMENT
OF HOME SAVINGS -- Proposed Management Recognition Plan." Under the proposed
Stock Option Plan, if approved by the stockholders of the Holding Company,
directors and certain employees of Home Savings could receive options to
purchase a number of shares equal to 10% of the shares issued in the Conversion.
Shares to fund such options could be acquired in the open market or could be
acquired through the issuance of authorized but unissued shares. If shares are
acquired in the open market and held by the Stock Option Plan prior to the
exercise of options under the Plan, holders of unexercised options will have
voting control over the shares held to fund their options. See "MANAGEMENT OF
HOME SAVINGS -- 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 persons effective control over as
much as 30.58% or 28.16%, 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
directors, officers and employees, as a group, could effectively block such
transactions. See "ANTI-TAKEOVER
27
<PAGE>
PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME SAVINGS -- The Holding Company
- --Supermajority Voting Provisions."
Agreements With Employees. In connection with the Conversion, Home
Savings will enter into an employment agreement with James G. Hudson, Jr.,
President, Chief Executive Officer and Treasurer and will enter into Special
Termination Agreements with John E. Todd, Vice President, and Drema A. Michael,
Secretary and Assistant Treasurer. See "MANAGEMENT OF HOME SAVINGS --
Employment Agreement" and "Special Termination Agreements." In addition, Home
Savings intends to adopt a Severance Plan which would benefit its employees in
the event there is a change in control of the Holding Company or Home Savings.
See "MANAGEMENT OF HOME SAVINGS -- Severance Plan." The existence of the
employment agreement, special termination 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 Home Savings.
See "ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME SAVINGS --
The Holding Company -- Anti-Takeover Effect of Employment Agreement, Special
Termination Agreements and Benefit Plans."
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. Home Savings has received an opinion from JMP
Financial stating that the Subscription Rights do not have any ascertainable
value. The opinion of JMP Financial is not binding on the Internal Revenue
Service ("IRS"). See "THE CONVERSION -- Income Tax Consequences."
Possible Delays in Consummation of the Conversion
Consummation of the Conversion is contingent upon receipt of approvals
from the Administrator and Federal Reserve. In addition, the Conversion cannot
be consummated until the FDIC issues a notice of non-objection with respect to
the transaction and until the Conversion has been approved by the members of
Home Savings. Final regulatory approval is subject to receipt and review of an
updated appraisal from JMP Financial which considers the results of the
Offerings and any material developments occurring subsequent to the most recent
appraisal submitted in connection with the Conversion.
Accordingly, consummation of the Conversion and issuance of
certificates for shares of Common Stock could be delayed if receipt of the final
regulatory approval is delayed or not obtained. Until the Conversion is
consummated, no shares of Common Stock may be traded. If all necessary
approvals are not obtained, all subscription funds held will be returned with
interest and all withdrawal authorizations will be terminated.
Best Efforts Offering
Home Savings has engaged Trident Securities to consult with and advise
Home 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 is under no
obligation to purchase any shares of Common Stock in any of the Offerings.
Trident Securities has not prepared or delivered any opinion or recommendation
with respect to the appropriateness of the amount of Common Stock to be issued
in the Conversion. Trident Securities has not prepared any fairness opinion
with respect to the terms of the Offerings or any opinion with respect to the
price at which shares of Common Stock may trade.
CENTURY BANCORP, INC.
The Holding Company was incorporated under North Carolina law in July
1996 at the direction of Home Savings for the purpose of acquiring and holding
all of the outstanding capital stock of Home 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
28
<PAGE>
Reserve and the Administrator. The holding company structure will give the
Holding Company greater flexibility than Home Savings currently has to expand
and diversify its business activities, although there are no current plans
regarding expansion or diversification. See "SUPERVISION AND REGULATION --
Regulation of the Holding Company."
Prior to completion of the Conversion, the Holding Company will not
own any material assets or transact any material business. Upon completion of
the Conversion, on an unconsolidated basis, the Holding Company will have no
significant assets other than the stock of Home 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 Home
Savings at 22 Winston Street, Thomasville, North Carolina.
The existing management of the Holding Company believes that it will
be in the best interests of the Holding Company, Home Savings and the Holding
Company's stockholders for the Holding Company to remain an independent company.
HOME SAVINGS, SSB
Home Savings is a North Carolina-chartered mutual savings bank. Home
Savings was organized in 1915. Home Savings has been a member of the FHLB system
and its deposits have been federally insured since the late 1950's. The deposits
of Home Savings are insured by the SAIF of the FDIC to the maximum amount
permitted by law.
Home 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,
Home Savings is regulated by the Administrator. Home 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 Home Savings."
Home Savings conducts business through its full service office in
Thomasville, North Carolina. Home Savings' primary market area encompasses the
communities within a 10-mile radius of its office, which includes portions of
Davidson, Randolph and Guilford counties in North Carolina. At June 30, 1996,
Home Savings had total assets of $81.3 million, net loans of $55.2 million,
deposits of $69.7 million and retained earnings of $11.2 million.
Home Savings is a community-oriented financial institution which
offers a variety of financial services to meet the needs of the communities it
serves. Home 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, multi-family residential and commercial
loans, construction loans, home equity line of credit loans and other loans and
investments.
Revenues of Home Savings are derived primarily from interest on loans.
Home Savings also receives interest income from its investments, mortgage-backed
securities and interest-earning deposit balances. Home Savings also receives
non-interest income from transaction and service fees and other sources. The
major expenses of Home Savings are interest on deposits and general and
administrative expenses such as compensation and employee benefits, federal
deposit insurance premiums, data processing expenses and occupancy and related
expenses.
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 $12,375,000 and $16,863,000,
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 $19,445,500. See "PRO FORMA DATA" for the
assumptions used to arrive at these amounts. The actual net proceeds may vary
materially from the estimated amounts
29
<PAGE>
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 $50.00 per share with funds borrowed from the Holding
Company. The amount loaned to the ESOP to enable such purchases is estimated to
range from $1,047,200 if 261,800 shares are issued) to $1,416,800 (if 354,200
shares are issued). If for any reason the ESOP is unable to purchase its shares
in the Subscription Offering, 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 $50.00. See
"MANAGEMENT OF HOME 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 $1,047,200
to $1,416,800), it is expected that the Holding Company will retain
approximately 50% of the remaining net proceeds of the Offerings and will pay
the balance of the net proceeds to Home Savings in exchange for all of the
common stock of Home 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 could 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 Home Savings' primary market area. The Holding Company has
no current plans or pending agreements or understandings regarding any such
acquisitions, and there are no pending negotiations regarding any such
acquisitions at this time.
Net proceeds paid to Home Savings initially will become part of Home
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 Home Savings'
lending and investment policies. The relative amounts to be invested in each of
these types of investments will depend upon loan demand, rates of return and
asset/liability matching considerations at the time the investments are to be
made. Management is not able to predict the yields which will be produced by
the investment of the proceeds of the Offerings because such yields will be
significantly influenced by general economic conditions and the interest rate
environment existing at the time the investments are made. Remaining net
proceeds paid to Home Savings will be used for general corporate purposes.
The proceeds of the Offerings will result in an increase in Home
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 Home
Savings will not result in the receipt of new funds for investment by Home
Savings.
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 Home 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 Home Savings' current and projected results of operations and
asset/liability structure, the economic environment and tax and other regulatory
considerations. Federal regulations require that, subject to certain
exceptions, the Holding Company must obtain approval of the Federal Reserve
prior to repurchasing
30
<PAGE>
Common Stock for in excess of 10% of its net worth during any 12 month period.
See "SUPERVISION AND REGULATION -- Regulation of the Holding Company -- Dividend
and Repurchase Limitations." The Holding Company has no intention to repurchase
any Common Stock during the first year following the Conversion.
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 HOME 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 Home Savings from the proceeds of the Conversion.
It is estimated that between 10,472 and 14,168 shares will be acquired by the
MRP, assuming the issuance of between 261,800 and 354,200 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 $50.00 per share, Home
Savings would contribute between $523,600 and $708,400, 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 the Stock Option
Plan does not acquire sufficient shares to satisfy options granted under the
Stock Option Plan, the Holding Company will reserve authorized but unissued
shares for this purpose. See "MANAGEMENT OF HOME 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 Home Savings from
the proceeds of the Conversion. It is estimated that between 26,180 and 35,420
shares will be acquired by the Stock Option Plan, assuming the issuance of
between 261,800 and 354,200 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 $50.00 per share, the Holding Company or
Home Savings would contribute between $1,309,000 and $1,771,000, respectively,
to the Stock Option Plan for this purpose.
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
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 Home Savings, capital requirements, regulatory
limitations, the Holding Company's and Home 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, Home Savings has agreed with the
FDIC that, within the first year after completion of the Conversion, neither the
Holding Company nor Home 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
Home Savings to the Holding Company, if any. Consequently, future declarations
of cash dividends by the Holding Company may depend upon dividend payments by
Home Savings to the Holding Company, which payments are subject to various
restrictions. Under current North Carolina regulations, Home 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, Home Savings will be required, under existing regulations, to
obtain the prior written approval of the Administrator before it can declare and
pay a cash dividend on its capital stock in an amount in
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<PAGE>
excess of one-half of the greater of (i) its net income for the most recent
fiscal year, or (ii) the average of its net income after dividends for the most
recent fiscal year and not more than two of the immediately preceding fiscal
years, if applicable. See "SUPERVISION AND REGULATION -- Regulation of Home
Savings -- Restrictions on Dividends and Other Capital Distributions." As a
result of this limitation, if Home 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 dividend in excess of $462,000 without the approval of the Administrator.
As a converted institution, Home 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 Home
Savings to pay dividends to the Holding Company without incurring a recapture
tax.
MARKET FOR COMMON STOCK
Neither the Holding Company nor Home Savings has ever issued stock
before, and, due to the relatively small size of the offering, it is unlikely
that an active and liquid trading market will develop. Upon the consummation of
the Conversion, the Holding Company will review the eligibility of the Common
Stock for quotation on the Nasdaq SmallCap Market. In the event that the Common
Stock is eligible for quotation on the Nasdaq SmallCap Market, the Holding
Company will apply to have the Common Stock quoted on the Nasdaq SmallCap
Market. There can be no assurance, however, that any such application will be
approved or that the Common Stock will be quoted on the Nasdaq SmallCap Market.
If the Common Stock is quoted on the Nasdaq SmallCap Market, Trident Securities
intends to act as a market maker and to encourage at least one other market
maker to make a market in the Common Stock. In the event the Common Stock does
not qualify for quotation on the Nasdaq SmallCap Market, the Holding Company
intends to list the Common Stock over-the-counter through the National Daily
Quotation System "Pink Sheets" published by the National Quotation Bureau, Inc.,
and the Holding Company intends to request Trident Securities undertake to match
offers to buy and offers to sell the Common Stock. There can be no assurance
that timely or accurate quotations will be available in the "Pink Sheets." In
addition, the existence of a public trading market will depend upon the presence
in the market of both willing buyers and willing sellers at any given time. Due
to the small number of shares of Common Stock being offered in the Conversion
and the concentration of ownership, it is unlikely that an active or liquid
trading market for the Common Stock will develop and be maintained. Further,
the absence of an active and liquid trading market may make it difficult to sell
the Common Stock and may have an adverse effect on the price of the Common
Stock. Purchasers should consider the potentially illiquid and long-term nature
of their investment in the shares offered hereby.
CAPITALIZATION
The following tables present the historical capitalization of Home
Savings at June 30, 1996 and the pro forma capitalization of the Holding Company
at such date after giving effect to the sale of the Common Stock and application
of the assumptions set forth under "PRO FORMA DATA," assuming that 261,800,
308,000, 354,200 and 407,330 shares of Common stock are sold at $50.00 per share
(the minimum, midpoint, maximum and 15% above the maximum of the current
Valuation Range). A change in the number of shares issued in the Conversion may
materially affect such pro forma capitalization. See "USE OF PROCEEDS" and
"THE CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered."
32
<PAGE>
<TABLE>
<CAPTION>
The Holding Company Pro Forma Capitalization at June 30, 1996
Based Upon Sale of
-----------------------------------------------------------------------------
261,800 308,000 354,200 407,330
shares at a shares at a shares at a shares at a
Historical price of price of price of price of
Capitalization $50.00 per share $50.00 per share $50.00 per share $50.00 per share(1)
--------------------- ----------------- ---------------- ---------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2) $69,669 $ 69,669 $ 69,669 $ 69,669 $ 69,669
======= ======== ======== ======== ========
Stockholders' equity
Common stock, no par
value:
Authorized shares:
20,000,000
Assumed outstanding
shares as shown in
column headings (3) $ -- $ 12,375 $ 14,619 $ 16,863 $ 19,445
Preferred stock:
Authorized shares: 5,000,000
No shares outstanding -- -- -- -- --
Additional paid-in capital
Less: Common stock to be
acquired by the MRP (4) -- (524) (616) (708) (815)
Less: Common stock to be
acquired by the ESOP (4) -- (1,047) (1,232) (1,417) (1,629)
Retained earnings (5) 11,245 11,245 11,245 11,245 11,245
------- -------- -------- -------- --------
Total $11,245 $ 22,049 $ 24,016 $ 25,983 $ 28,246
======= ======== ======== ======== ========
Total deposits and stockholders' equity $80,914 $ 91,718 $ 93,685 $ 95,652 $ 97,915
======= ======== ======== ======== ========
</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 Home Savings' stock option plan. See "MANAGEMENT OF
HOME 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 Home Savings. The Common Stock acquired by both the ESOP
and the MRP is reflected as a reduction of stockholders' equity. See
"MANAGEMENT OF HOME 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.
33
<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 $12,375,000 and $16,863,000 (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) 17.28%,
15.89%, 14.86% and 13.97% of the Common Stock sold in the Conversion at the
minimum, midpoint, maximum and 15% above the maximum, respectively, of the
Valuation Range will be sold to the ESOP, directors and executive officers and
their associates as defined in the Plan of Conversion (and 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 $368,000. Actual net proceeds may vary depending upon the number
of shares sold to the ESOP and to directors, executive officers and their
associates, the number of shares, if any, sold in the Syndicated Community
Offering pursuant to selected dealer arrangements and the actual expenses of the
Conversion. Payments for shares made through withdrawals from existing Home
Savings deposit accounts will not result in the receipt of new funds for
investment by Home 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 October 22, 1996 is from a minimum of $13,090,000 to a maximum of $17,710,000
with a midpoint of $15,400,000. 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 $20,366,500, 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 $10,804,000, $12,771,000, $14,738,000 and $17,001,000 (based upon
the issuance of 261,800, 308,000, 354,200 and 407,330 shares, respectively, at
$50.00 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
Home 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 Home 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.
34
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1996
--------------------------------------------------
261,800 308,000 354,200 407,330
shares at shares at shares at shares at
$50.00 $50.00 $50.00 $50.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (15% above Max.)
---------- ---------- ---------- ----------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 13,090 $ 15,400 $ 17,710 $ 20,367
Less Offering expenses and commissions (715) (781) (847) (922)
-------- -------- -------- --------
Estimated net conversion proceeds (1) 12,375 14,619 16,863 19,445
Less shares to be acquired by ESOP (2) (1,047) (1,232) (1,417) (1,629)
Less shares to be acquired by MRP (3) (524) (616) (708) (815)
-------- -------- -------- --------
Adjusted estimated net conversion proceeds $ 10,804 $ 12,771 $ 14,738 $ 17,001
======== ======== ======== ========
Pro forma net income:
Historical net income $ 677 $ 677 $ 677 $ 677
Pro Forma adjustments:
Pro forma income on net proceeds (1) 384 453 523 603
Pro forma ESOP adjustments (2) (64) (75) (86) (99)
Pro forma MRP adjustments (3) (64) (75) (86) (99)
-------- -------- -------- --------
Pro forma net income $ 933 $ 980 $ 1,028 $ 1,082
======== ======== ======== ========
Pro forma net income per share (5):
Historical net income per share $ 2.79 $ 2.37 $ 2.06 $ 1.79
Pro forma adjustments:
Pro forma income on net proceeds 1.57 1.58 1.59 1.59
Pro forma ESOP adjustments (2) (0.26) (0.26) (0.26) (0.26)
Pro forma MRP adjustments (3) (0.26) (0.26) (0.26) (0.26)
-------- -------- -------- --------
Pro forma net income per share $ 3.84 $ 3.43 $ 3.13 $ 2.86
======== ======== ======== ========
Ratio of price per share to pro forma income per share (5) 13.02 14.58 15.98 17.47
======== ======== ======== ========
Pro forma stockholders' equity (book value) (4):
Historical retained earnings $ 11,245 $ 11,245 $ 11,245 $ 11,245
Estimated net conversion proceeds 12,375 14,619 16,863 19,445
Less shares to be acquired by:
ESOP (2) (1,047) (1,232) (1,417) (1,629)
MRP (3) (524) (616) (708) (815)
-------- -------- -------- --------
Pro forma stockholders' equity (4) $ 22,049 $ 24,016 $ 25,983 $ 28,246
======== ======== ======== ========
Pro forma stockholders' equity per share (4):
Historical retained earnings $ 42.95 $ 36.51 $ 31.75 $ 27.60
Estimated net conversion proceeds 47.27 47.46 47.61 47.74
Less shares to be acquired by:
ESOP (2) (4.00) (4.00) (4.00) (4.00)
MRP (3) (2.00) (2.00) (2.00) (2.00)
-------- -------- -------- --------
Pro forma stockholders' equity per share (4) $ 84.22 $ 77.97 $ 73.36 $ 69.34
======== ======== ======== ========
Pro forma price to book value 59.37% 64.12% 68.16% 72.11%
======== ======== ======== ========
Number of shares used to calculate income per share (5) 242,950 285,824 328,698 378,002
======== ======== ======== ========
Number of shares used to calculate stockholders' equity
per share (4) 261,800 308,000 354,200 407,330
======== ======== ======== ========
</TABLE>
35
<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 in the open
market to be delivered upon the exercise of options. 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 40,733 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 $50.00 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 407,330 to 448,063 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 $2.76
compared with $2.86 if the Stock Option Plan did not exist. See
"MANAGEMENT OF HOME 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 HOME 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 HOME SAVINGS -- Proposed Management Recognition Plan."
(4) The retained earnings of Home Savings will be substantially restricted
after the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND REGULATION -
- Regulation of Home 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.
(6) Pro forma net earnings per share have been annualized for purposes of this
ratio.
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
Home 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, Home
Savings' net worth, computed in accordance with such requirements, was 14.44% of
total assets. In addition, Home 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, Home Savings exceeds the FDIC
Tier I and risk-based capital requirements and North Carolina capital
requirements on a historical and pro forma basis.
36
<PAGE>
The following table presents (i) Home Savings' historical regulatory
capital position on June 30, 1996 and (ii) Home 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.
37
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Regulatory Capital Position at June 30,1996
-----------------------------------------------------
Home Savings'
Historical 261,800 308,000
Regulatory Capital Shares sold at Shares sold at
Position at Price of $50.00 Price of $50.00
June 30, 1996 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 $11,208 13.79% $16,872 19.40% $17,902 20.34%
Tier 1 (leverage) capital requirement (2) 3,252 4.00% 3,479 4.00% 3,520 4.00%
-------- ----- ------- ------- ------- -----
Excess $ 7,956 9.79% $13,393 15.40% $14,382 16.34%
======== ===== ======= ======= ======= =====
Tier 1 risk based capital $11,208 26.47% $16,872 38.81% $17,902 40.98%
Tier 1 risk based capital requirement 1,694 4.00% 1,739 4.00% 1,747 4.00%
-------- ----- ------- ------- ------- -----
Excess $ 9,514 22.47% $15,133 34.81% $16,155 36.98%
========= ===== ======= ======= ======= =====
Total risk based capital $11,741 27.73% $17,405 40.04% $18,435 42.20%
Total risk based capital requirement 3,388 8.00% 3,478 8.00% 3,494 8.00%
--------- ----- ------- ------- ------- -----
Excess $ 8,353 19.73% $13,927 32.04% $14,941 34.20%
========= ===== ======= ======= ======= =====
NC regulatory capital $11,741 14.44% $17,405 20.01% $18,435 20.95%
NC regulatory capital requirement 4,065 5.00% 4,348 5.00% 4,400 5.00%
--------- ----- ------- ------- ------- -----
Excess $ 7,676 9.44% $13,057 15.01% $14,035 15.95%
========= ===== ======= ======= ======= =====
<CAPTION>
354,200 407,330
Shares sold at Shares sold at
Price of $50.00 Price of $50.00
per share per share
------------------- -------------------
Percent of Percent of
Regulatory Regulatory
Amount Assets (1) Amount Assets (1)
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Tier 1 (leverage) capital $18,931 21.26% $20,116 22.30%
Tier 1 (leverage) capital requirement (2) 3,561 4.00% 3,608 4.00%
------- ----- ------- -------
Excess $15,370 17.26% $16,508 18.30%
======= ===== ======= =======
Tier 1 risk based capital $18,931 43.14% $20,116 45.59%
Tier 1 risk based capital requirement 1,755 4.00% 1,765 4.00%
------- ----- ------- -------
Excess $17,176 39.14% $18,351 41.59%
======= ===== ======= =======
Total risk based capital $19,464 44.35% $20,649 46.80%
Total risk based capital requirement 3,511 8.00% 3,530 8.00%
------- ----- ------- -------
Excess $15,953 36.35% $17,119 38.80%
======= ===== ======= =======
NC regulatory capital $19,464 21.86% $20,649 22.89%
NC regulatory capital requirement 4,451 5.00% 4,511 5.00%
------- ----- ------- -------
Excess $15,013 16.86% $16,138 17.89%
======= ===== ======= =======
</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, Home Savings is subject to the
capital requirements of the FDIC and the Administrator. The FDIC requires
state-chartered savings banks, including Home 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, Home Savings has assumed that its leverage
capital requirement is 4% of total average assets.
38
<PAGE>
STOCK PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
Directors, officers and employees of Home 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--$50.00--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 Home 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 Home 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 308,000 shares of Common Stock will be issued and that sufficient shares
will be available to satisfy the subscriptions of Home 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 Purchased (1) Issued
- ---- ------------ ------------- -------------
<S> <C> <C> <C>
Henry H. Darr, Director $ 250,000 5,000 1.62%
James G. Hudson, Jr., Director, President, Chief
Executive Officer and Treasurer 200,000 4,000 1.30
John R. Hunnicutt, Director (2) 250,000 5,000 1.62
F. Stuart Kennedy, Director 250,000 5,000 1.62
Milton T. Riley, Jr., Director 250,000 5,000 1.62
Drema A. Michael, Secretary and Assistant Treasurer 15,000 300 0.10
---------- ------ ----
Total $1,215,000 24,300 7.89%
========== ====== ====
</TABLE>
- --------------------
(1) Subscriptions by the ESOP are not aggregated with shares of Common Stock
purchased by the executive officers and directors listed above. See
"MANAGEMENT OF HOME 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. It is expected that the ESOP will acquire 8% of the shares
issued in the Conversion. Recipients of shares under the ESOP will have
voting control over the shares allocated to them, and trustees of the ESOP
(directors of Home Savings) will have voting control over unallocated
shares. See "MANAGEMENT OF HOME SAVINGS -- Employee Stock Ownership Plan."
Under the proposed MRP, if approved by the stockholders of the Holding
Company, a number of shares equal to 4% of the shares issued in the
Conversion could be issued to directors and certain employees of Home
Savings. Such shares could be purchased in the open market or could be
issued out of authorized but unissued shares. Recipients of shares under
the MRP will have voting control over such shares regardless of whether
such shares have vested. See "MANAGEMENT OF HOME SAVINGS -- Proposed
Management Recognition Plan." Under the proposed Stock Option Plan, if
approved by the stockholders of the Holding Company, directors and certain
employees of Home Savings could receive options to purchase a number of
shares equal to 10% of the shares issued in the Conversion.
39
<PAGE>
Shares to fund such options could be acquired in the open market or could
be acquired through the issuance of authorized but unissued shares. If
shares are acquired in the open market and held by the Stock Option Plan
prior to the exercise of options under the Plan, holders of unexercised
options will have voting control over the shares held to fund their
options. See "MANAGEMENT OF HOME SAVINGS -- Proposed Stock Option Plan."
(2) Mr. Hunnicutt, who became a director in 1995, was not a depositor as of
March 31, 1995, and is not an Eligible Account Holder entitled to first
priority in the Subscription Offering.
Without the prior written consent of the Administrator, shares of Common
Stock purchased by directors or executive officers of Home 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 Home 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 is intended to assist in understanding the financial condition and
results of operations of Home Savings. The information contained in this section
should be read in conjunction with the Financial Statements, the accompanying
Notes to 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 Home Savings for the purpose of acquiring and holding all of
the outstanding stock of Home Savings to be issued in the Conversion. The
Holding Company's principal business activities after the Conversion are
expected to be conducted solely through Home Savings.
Home 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. Home Savings'
operations are affected to a much lesser degree by non-interest income, such as
transaction and other service fee income, and other sources of income. Home
Savings' principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, office occupancy costs, data processing
expenses and federal deposit insurance premiums.
Capital Resources and Liquidity
The objective of Home 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 Home
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.
40
<PAGE>
Home 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 and advances from the
FHLB of Atlanta. In recent years, advances from the FHLB of Atlanta have not
been a primary source of liquidity for Home Savings.
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. Home 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 Home Savings and the loan it
will make to the ESOP. In order to provide sufficient funds for its operations,
the Holding Company expects to retain at the Holding Company level and invest
50% of the net proceeds of the Conversion remaining after making the loan to the
ESOP. 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 Home
Savings. As a North Carolina-chartered stock savings bank, Home 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, Home Savings was in compliance
with all applicable capital requirements. In addition, for a period of five
years after the Conversion, Home 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 Home
Savings had been a stock institution at the end of fiscal 1996 and for the two
preceding years, it could not have paid a cash dividend in excess of $462,000
without approval of the Administrator. In connection with the Conversion, the
Holding Company and Home Savings have agreed with the FDIC that, within the
first year after completion of the Conversion, they will not pay any dividend or
make any distribution that represents, or is characterized as, or is treated for
tax purposes as a return of capital. In addition, after the Conversion, Home
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 Home Savings'
profitability, monitor its capital position and enhance its banking franchise.
Home 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. Home Savings' operations are
affected to a much lesser degree by non-interest income, such as transaction and
other service fee income, and other sources of income. Home Savings' net income
is also affected by, among other things, provisions for loan losses and
operating expenses. Home Savings' principal operating expenses, aside from
interest expense, consist of compensation and employee benefits, office
occupancy costs, data processing expenses and federal deposit insurance
premiums. Home Savings' results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government legislation and policies concerning monetary and
fiscal affairs, housing and financial institutions and the attendant actions of
regulatory authorities.
In guiding the operations of Home Savings, management has implemented
various strategies designed to continue the institution's profitability while
maintaining its safety and soundness. These strategies include: (i) emphasizing
one-to-four family residential lending; (ii) maintaining asset quality;
(iii) controlling operating expenses; and (iv) 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.
41
<PAGE>
Emphasis on One-to-Four Family Residential Housing. Historically, Home
Savings has been predominantly a one-to-four family residential lender. As of
June 30, 1996, approximately 75.4% of its loan portfolio, before net items, was
composed of permanent one-to-four family residential loans. As of such date, an
additional 8.0% of its loan portfolio, before net items, was composed of
construction loans and home equity loans. As a result, Home Savings has
developed expertise in mortgage loan underwriting and origination. Home Savings
has established methods to expand its loan originations through contacts with
realtors, homebuilders and past and present customers. The institution also uses
advertising and community involvement to gain exposure within the communities it
operates. As of June 30, 1996, approximately 29.6% of Home Savings' loan
portfolio, before net items, was composed of adjustable rate loans.
Maintenance of Asset Quality. At June 30, 1996, Home Savings' ratio of
nonperforming assets to total assets was 0.76%. Since June 30, 1990, annual net
loan charge-offs have averaged 0.05% of average loans outstanding. Home Savings
has attempted to maintain asset quality through its underwriting and collection
procedures.
Monitoring of Interest-Rate Risk. Although Home Savings' has a significant
"negative gap" and its net interest income would likely be negatively impacted
by increases in interest rates, management considers its interest rate exposure
to be at an acceptable level, given Home Savings' historical operating results
and capital position. However, in order to reduce the impact on Home Savings'
net interest income resulting from changes in interest rates, as described
below, management has implemented several strategies. See "-- Interest Rate
Risk."
Control of General and Administrative Expenses. Home Savings closely
monitors its general and administrative expenses and seeks to control them while
maintaining the necessary personnel to properly serve its customers. Since June
30, 1991, Home Savings' ratio of general and administrative expenses to average
assets has averaged 1.28%.
Interest Rate Risk
Home Savings' asset/liability management, or interest rate risk
management, program is focused primarily on evaluating and managing the
composition of its assets and liabilities in view of various interest rate
scenarios. Factors beyond Home Savings' control, such as market interest rates
and competition, may also have an impact on Home Savings' interest income and
interest expense.
In the absence of other factors, the yield or return associated with Home
Savings' earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and conversely interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.
Therefore, by controlling the increases and decreases in its interest income and
interest expense which are brought about by changes in market and interest
rates, Home Savings can significantly influence its net interest income.
Interest Rate Gap Analysis. As a part of Home Savings' interest rate risk
management policy, Home Savings calculates an interest rate "gap." Interest rate
"gap" analysis is a common, though imperfect, measure of interest rate risk,
which measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the
amounts of such assets and liabilities that are subject to repricing. 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 declining interest rate environment, an
institution with a negative gap would generally be expected, absent the effects
of other factors, to experience a lower decrease in the yield of its assets
relative to the cost of its liabilities and its income should be positively
affected. Conversely, the cost of funds for an institution with a negative gap
would generally be expected to increase more quickly than the yield on its
assets in a rising interest rate environment, and such institution's net
interest income generally would be expected to be adversely affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "positive gap."
42
<PAGE>
Home Savings' one year interest sensitivity gap as a percentage of total
interest-earning assets at June 30, 1996 was a negative 48.86%. At June 30,
1996, Home Savings' three year and five-year cumulative interest sensitivity
gaps as a percentage of total interest-earning assets were a negative 49.45% and
negative 40.77%, respectively.
The following table sets forth the amounts 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. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liability. Loans with adjustable rates are shown as being
due at the end of the next upcoming adjustment period. Passbook accounts, money
market deposit accounts and negotiable order of withdrawal or other transaction
accounts are assumed to be subject to immediate repricing and depositor
availability and have been placed in the shortest period. In making the gap
computations, none of the assumptions sometimes made regarding prepayment rates
and deposit decay rates have been used for any other interest-earning assets or
interest-bearing liabilities. In addition, the table does not reflect scheduled
principal payments which will be received throughout the lives of the loans. The
interest rate sensitivity of Home Savings' assets and liabilities illustrated in
the following table would vary substantially if different assumptions were used
or if actual experience differs from that indicated by such assumptions.
<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 $ 10,129 $ 15 $ -- $ -- $10,144
Fixed rate residential 1-4 family 735 560 1,229 30,906 33,430
Other secured - real estate - fixed -- 45 45 4,582 4,672
Other secured - real estate - adjustable 6,930 -- -- -- 6,930
Other loans 50 257 242 -- 549
Interest-bearing deposits 3,645 -- -- -- 3,645
Investments 3,807 4,657 5,296 4,805 18,565
FHLB common stock -- -- -- 614 614
-------- -------- -------- ------- -------
Total interest-earning assets $ 25,296 $ 5,534 $ 6,812 $ 40,907 $ 78,549
======== ======== ========== ========= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement accounts $ 4,984 $ -- $ -- $ -- $ 4,984
NOW and money market checking accounts 12,548 -- -- -- -- 12,548
Non-interest-bearing accounts 116 -- -- -- 116
Certificate accounts 46,026 5,995 -- -- 52,021
-------- -------- -------- ------- -------
Total interest-bearing liabilities $ 63,674 $ 5,995 $ -- $ -- $69,669
======== ======== ========== ========= =======
INTEREST SENSITIVITY GAP PER PERIOD $(38,378) $ (461) $ 6,812 $40,907 $ 8,880
CUMULATIVE INTEREST SENSITIVITY GAP $(38,378) $(38,839) $(32,027) $ 8,880 $ 8,880
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL
INTEREST-EARNING ASSETS (48.86)% (49.45)% (40.77)% 11.31% 11.31%
CUMULATIVE INTEREST-EARNING ASSETS AS A
PERCENTAGE OF INTEREST-BEARING LIABILITIES 39.73% 44.25% 54.03% 112.75% 112.75%
</TABLE>
Net Portfolio Value and Net Interest Income Analysis. In addition to the
interest rate gap analysis as discussed above, management monitors Home Savings'
interest rate sensitivity through the use of a model which
43
<PAGE>
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 Home Savings' NPV and net
interest income of instantaneous and permanent 100 to 400 basis point increases
and decreases in market interest rates.
The following table presents information regarding possible changes in
Home Savings' NPV as of June 30, 1996, based on information provided by the FHLB
of Atlanta's interest rate risk model.
<TABLE>
<CAPTION>
Change in Net Portfolio Value
Interest Rates ---------------------------------------------
in Basis Points
(Rate Shock) Amount $ Change % Change
- --------------- ------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Up 400 $4,976 $(6,508) (57)%
Up 300 6,687 (4,797) (42)
Up 200 8,399 (3,085) (27)
Up 100 9,941 (1,543) (13)
Static 11,484 -- --
Down 100 12,918 1,434 12
Down 200 14,353 2,869 25
Down 300 15,470 3,986 35
Down 400 16,587 5,103 44
</TABLE>
The following table presents the predicted effects, based on the FHLB of
Atlanta's interest rate risk model, on Home Savings' net interest income as of
June 30, 1996 of instantaneous and permanent 100 to 400 basis point changes in
market interest rates.
44
<PAGE>
<TABLE>
<CAPTION>
Change in Net Interest Income
Interest Rates ------------------------------------
in Basis Points
(Rate Shock) Amount $Change %Change
- --------------- ------ ------- -------
<S> <C> <C> <C>
(Dollars in Thousands)
Up 400 $1,265 $(778) (38)%
Up 300 1,484 (559) (27)
Up 200 1,704 (339) (17)
Up 100 1,873 (170) (8)
Static 2,043 -- --
Down 100 2,213 170 8
Down 200 2,383 340 17
Down 300 2,509 466 23
Down 400 2,636 593 29
</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.
The tables set forth above indicate that, in the event of a 200 basis
point decrease in interest rates, Home Savings would be expected to experience a
25% increase in NPV and a 17% increase in net interest income. In the event of a
200 basis point increase in interest rates, Home Savings would be expected to
experience a 27% decrease in NPV and a 17% 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 interest rate caps
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.
Home Savings' net income during recent periods has been negatively
impacted by increasing interest rates, and its net income in the near future is
likely to be reduced if interest rates increase. However, management did not
view Home Savings' interest rate sensitivity position at June 30, 1996 to be
unacceptable in view of Home Savings' historical results of operations and
highly capitalized position. Nevertheless, in order to maintain its interest
rate risk position within levels management believes to be acceptable, Home
Savings has begun (i) attempting to originate adjustable rate loans when market
conditions permit, (ii) maintaining a short-term investment portfolio; and
(iii) attempting to lengthen
45
<PAGE>
deposit maturities. In addition, checking and transaction accounts are
generally considered to be less interest rate sensitive deposits. As a result,
Home Savings has begun to emphasize the origination of those accounts - even
though an increase in such accounts will not improve Home Savings' one year
interest rate sensitivity gap, as Home Savings presently computes its interest
rate gap, because, for purposes of such computation, all of such accounts are
assumed to reprice within one year.
Home Savings does not originate its fixed rate or adjustable rate loans
for sale, or sell its loans, in the secondary market. This tends to increase its
exposure to interest rate risk.
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
average balances of Home 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). Nonaccruing loans were included
in the computation of average balances.
46
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30, 1996 Year Ended June 30, 1995 Year Ended June 30, 1994
---------------------------- ----------------------------------- ------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- -------- -------- --------- ----------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing balances $ 6,913 $ 336 4.86% $ 1,789 $ 82 4.59% $ 5,178 $ 154 2.99%
Investments 15,354 949 6.18% 15,974 879 5.50% 13,362 697 5.21%
Loans 54,066 4,584 8.48% 53,718 4,410 8.21% 53,301 4,486 8.42%
------- ------ ------ ------- ------ ------- ------
Total interest-earning
assets 76,333 5,869 7.69% 71,481 5,371 7.51% 71,841 5,337 7.43%
Other assets 2,084 2,083 1,747
------- ------- -------
Total assets $78,417 $73,564 $73,588
======= ======= =======
Interest-bearing liabilities:
Deposits $67,042 3,540 5.28% $63,210 2,788 4.41% $64,074 2,487 3.88%
------ ------ ------
Other liabilities 440 286 370
Retained earnings 10,935 10,068 9,144
------- ------- -------
Total liabilities and
retained earnings $78,417 $73,564 $73,588
======= ======= =======
Net interest income and
interest rate spread $2,329 2.41% $2,583 3.10% $2,850 3.55%
====== ------ ====== ========
Net yield on average
interest-earning assets 3.05% 3.61% 3.97%
------
Ratio of average interest-
earning assets to average
interest-bearing liabilities 113.86% 113.08% 112.12%
</TABLE>
47
<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.
48
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
June 30, 1996 vs. 1995 June 30, 1995 vs. 1994 June 30, 1994 vs. 1993
--------------------------- ----------------------------- ---------------------------
Increase (Decrease) Due To Increase (Decrease) Due To Increase (Decrease) Due To
--------------------------- ----------------------------- ---------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
--------- ------- ------- -------- -------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest income:
Interest-bearing balances $242 $ 11 $ 253 $(129) $ 56 $ (73) $ (8) $ 6 $ (2)
Investments (36) 105 69 140 43 183 215 (69) 146
Loans 29 146 175 35 (111) (76) 87 (296) (209)
---- ----- ----- ----- ----- ----- ------ ----- -----
Total interest income 235 262 497 46 (12) 34 294 (359) (65)
Interest expense:
Deposits 186 566 752 (36) 337 301 138 (388) (250)
---- ----- ----- ----- ----- ----- ------ ----- -----
Net interest income $ 49 $(304) $(255) $ 82 $(349) $(267) $ 156 $ 29 $ 185
==== ===== ===== ===== ===== ===== ====== ===== =====
</TABLE>
49
<PAGE>
Comparison of Financial Condition at June 30, 1996, 1995 and 1994
Home Savings has experienced consistent moderate asset growth as total
assets have increased from $73.8 million at June 30, 1994 to $75.5 million at
June 30, 1995, to $81.3 million at June 30, 1996. Net loans receivable have
remained relatively unchanged, increasing from $53.8 million at June 30, 1994 to
$54.0 million at June 30, 1995, to $55.2 million at June 30, 1996, as loan
demand has not maintained pace with Home Savings' deposit growth. During the
same period, investments increased from $18.0 million at June 30, 1994 to $18.9
million at June 30, 1995, to $22.8 million at June 30, 1996.
Deposits increased from $63.9 million at June 30, 1994 to $64.4
million at June 30, 1995, to $69.7 million at June 30, 1996. This increase in
deposits provided funds to support the growth in investments described in the
preceding paragraph.
Retained earnings totalled $9.6 million, $10.6 million and $11.2
million at June 30, 1994, 1995 and 1996, respectively. At June 30, 1996, Home
Savings was required to maintain net worth to total assets of 5% under the
Administrator's regulations, and Home Savings had net worth of $11.7 million, or
net worth to total assets of 14.4%. Additionally, at June 30, 1996, Home Savings
had Tier 1 risk adjusted capital, leverage capital and total risk-based capital
of $11.2 million, $11.2 million and $11.7 million, respectively, exceeding the
regulatory capital requirements by $9.5 million, $8.0 million and $8.4 million,
respectively.
Comparison of Results of Operations for the Years Ended June 30, 1996, 1995, and
1994
Net Income. Home Savings' net income for the years ended June 30,
1996, 1995 and 1994 was $677,000, $921,000 and $1.2 million, respectively. Net
income was positively affected in 1994 by an overall sustained downward trend in
interest rates. Home Savings recorded its highest historical level of net
income in fiscal 1994, with net interest income also at an historic high, before
trending downward in fiscal 1995. This decline in net interest income, combined
with an increase in general and administrative expenses and losses arising from
the sales of certain investments, is primarily responsible for the decrease in
net income in fiscal 1995. During fiscal 1996, net interest income continued to
decline and, combined with another increase in general and administrative
expenses and an increase in the provision for loan losses, was responsible for a
decline in net income.
Net Interest Income. Net interest income decreased to $2.3 million in
fiscal 1996 from $2.6 million in fiscal 1995 and $2.9 million in fiscal 1994.
This trend in net interest income reflects the trend in interest rate spread,
which was 2.41% during fiscal 1996, 3.10% during fiscal 1995 and 3.55% during
fiscal 1994. Because Home Savings' deposits are more rate sensitive than are
its interest-earning assets, particularly its loan portfolio, interest margins
generally increase during periods of declining rates and decrease during periods
of increasing rates. During the second half of the fiscal 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
maintained since that time. The reversal in the rate trend in fiscal 1994 had
begun to negatively impact or increase interest costs during the latter part of
that fiscal year, but on balance for fiscal 1994 the decrease in interest costs
was substantially larger than the decrease in interest income. The impact of
increasing rates was more dramatic in fiscal 1995, as an increase in interest
income of $34,000 was more than offset by an increase in interest costs of
$301,000. During fiscal 1996, interest costs increased by $752,000, while
interest income only increased by $497,000.
Provision for Loan Losses. The provision for loan losses was
$165,000, $105,000, and $114,000 for the years ended June 30, 1996, 1995, and
1994, respectively. The provisions and the resulting loan loss allowances are
amounts management believes will be adequate to absorb possible losses on
existing loans. At June 30, 1996, 1995, and 1994, Home Savings' loan loss
allowances totalled $533,000, $401,000 and $295,000, respectively, representing
187.0%, 47.68% and 18.38%, respectively, of nonperforming loans at such dates.
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. Home Savings experienced net loan charge-
50
<PAGE>
offs of $33,000 and $18,000 during the years ended June 30, 1996, and 1994,
respectively, as compared with a net recovery of loans previously charged off of
$1,000 during the year ended June 30, 1995.
Other Income. Other income decreased to $15,000 in fiscal 1995 from
$40,000 in fiscal 1994, principally as a result of losses of $37,000 from sales
of investments, as management sold certain lower yielding investments in light
of an expected continued rise in market interest rates. Other income increased
to $35,000 in fiscal 1996 as there were no losses from investments in fiscal
1996.
General and Administrative Expenses. General and administrative
expenses increased to $1,170,000 in fiscal 1996 from $979,000 in fiscal 1995 and
$910,000 in fiscal 1994, representing increases of $191,000 and $69,000 for
1996, and 1995, respectively. The primary reasons for the increase in 1996 was
an $80,000 provision for losses on foreclosed real estate and a $68,000 increase
in personnel costs. The 1995 increase was principally attributable to increases
in personnel costs of $53,000. Personnel costs rose in 1996 and 1995 as a
result of a combination of normal compensation adjustments and increased costs
for fringe benefits.
Income Taxes. Income tax expense decreased to $352,000 in fiscal 1996
from $593,000 in fiscal 1995 and $694,000 in fiscal 1994. The fluctuations were
primarily attributable to corresponding fluctuations 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. The assessment, estimated at
$409,000, was accrued as an expense during the quarter ended September 30, 1996.
As a result of this expense, Home Savings experienced a net loss for that fiscal
quarter. See "RECENT DEVELOPMENTS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RECENT DEVELOPMENTS," "RISK FACTORS -- Recapitalization of SAIF, its Impact on
SAIF Premiums and One-Time Recapitalization Fee" and "SUPERVISION AND REGULATION
- -- Regulation of Home Savings -- Insurance of Deposit Accounts."
Recapture of Bad Debt Reserves
Recent enacted federal legislation has repealed the reserve method of
accounting for thrift loan debt reserves and would require 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, a special provision suspends recapture of post-1987 excess reserves
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, Home Savings' post-1987 excess reserves
amounted to approximately $264,000. See "RISK FACTORS -- Increased Tax
Liability Resulting From Recapture of Bad Debt Reserves" and "TAXATION --
Federal Income Taxation."
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein 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 Home Savings' operations. Unlike most
industrial companies, nearly all the assets and liabilities of Home Savings are
monetary in nature. As a result, interest rates have a greater impact on Home
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
51
<PAGE>
Impact of New Accounting Standards
Accounting for Postretirement and Postemployment Benefits. Statement
of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions," was issued by the Financial
Accounting Standards Board ("FASB") in December 1990. The statement is
effective for fiscal years beginning after December 15, 1992, except that the
application of the statement for certain small nonpublic enterprises such as
Home Savings and certain other entities is delayed to fiscal years beginning
after December 15, 1994. SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," was issued by the FASB in November 1992. The
statement is effective for fiscal years beginning after December 15, 1994. The
statements generally require a calculation of the actuarial present value of
anticipated benefits to be provided and an accrual and allocation of those
benefits through a charge to operating expense in the periods in which employees
must render the services to receive such benefits. Currently, Home Savings does
not offer any postretirement benefit plans or postemployment benefit plans.
However, in the future, such plans may be offered and the provisions of SFAS
Nos. 106 and 112 would apply.
Disclosure about Fair Value of Financial Instruments. SFAS No. 107,
"Disclosure about Fair Value of Financial Instruments," was issued by the 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. Home 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
Home 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. Home Savings
adopted the provisions of SFAS No. 121 on July 1, 1996 and management does not
believe the adoption of this statement will have a material effect on Home
Savings' financial position or results of operations.
Mortgage Servicing Rights. In May 1995, the FASB issued SFAS 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, Home 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 loan. Management has determined that the effect of
adoption on Home Savings' financial condition and results of operations would be
immaterial.
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
does not believe that adoption of SFAS No. 125 will have a material impact on
Home Savings' financial condition or results of operations.
Accounting for Stock-Based Compensation. In November 1995, the FASB
issued SFAS No. 123, "Accounting for Awards of Stock-Based Compensation to
Employees." SFAS No. 123 is effective for years beginning after
December 15, 1995. Earlier application is permitted. The statement defines a
fair value-based method of accounting for an employee stock option or similar
equity instrument, encourages all entities to adopt that method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method
52
<PAGE>
of accounting for all of their employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those plans
using the intrinsic value-based method of accounting prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"). Under the
fair value-based method, compensation cost is measured at the grant date based
on the value of the award and is recognized over the service period, which is
usually the vesting period. Under the intrinsic value-based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock. Most fixed stock option plans - the most common type of
stock compensation plan - have no intrinsic value at grant date, and under
Opinion 25 no compensation cost is recognized for them. Compensation cost is
recognized for other types of stock-based compensation plans under Opinion 25,
including plans with variable, usually performance-based, features. This
statement requires that an employer's financial statements include certain
disclosures about stock-based employee compensation arrangements regardless of
the method used to account for them. Management has not determined when it will
adopt the provisions of SFAS No. 123 and has not estimated the effect of
adoption on Home Savings' financial condition or results of operations.
Accounting for Employee Stock Ownership Plans. The Accounting
Standards Division of the AICPA 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 such
shares. To the extent that the fair value of the ESOP shares, 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 Home 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 Home 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 Home 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 it 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 Home Savings.
Initially, the Holding Company will neither own nor lease any property, but will
instead use the premises, equipment and furniture of Home 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 Home 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 may 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 or their branches. The Holding
Company has no current plans with respect to any such acquisitions, however.
Existing management of the Holding Company believes that it is in the best
interest of the Holding Company and its shareholders for the Holding Company to
remain an independent company.
BUSINESS OF HOME SAVINGS
General
Home 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. Home Savings makes one-to-four family residential real
estate loans, loans secured by multi-family residential and commercial real
property, construction loans and home equity line of credit loans. Home Savings
also makes a limited number of loans which are not secured by real property,
such as
53
<PAGE>
loans secured by pledged deposit accounts and various types of consumer loans.
Home Savings' primary source of revenue is interest income from its lending
activities. Home 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, and
transaction and fee income from its lending and deposit activities. The major
expenses of Home Savings are interest on deposits and general and administrative
expenses such as employee compensation and benefits, federal deposit insurance
premiums, data processing expenses and occupancy expenses.
As a North Carolina-chartered savings bank, Home Savings is subject to
examination and regulation by the FDIC and the Administrator. Upon consummation
of the Conversion, Home Savings, as a subsidiary of the Holding Company, will be
subject to indirect regulation by the Federal Reserve. The business and
regulation of Home 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 Home Savings."
Market Area
Home Savings' primary market area consists of the communities in a 10-
mile radius around its office in Thomasville, North Carolina. This area
includes portions of Davidson, Randolph and Guilford counties in North Carolina.
Employment in Home Savings' primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. The High Point-Thomasville area of North Carolina is considered
to be the furniture capital of the world, so the economy of Home Savings'
primary market area is greatly affected by the furniture and home furnishings
industry. Thomasville Furniture Industries, Inc. is the largest employer in
Thomasville. Other major employers include Community General Hospital and
Parkdale Mills. Based upon 1995 comparative data, Home Savings had 15.7% of the
deposits in Thomasville and 5.5% of the deposits in Davidson County. Employment
in the Davidson County, North Carolina area as of April, 1996 was strong, with
an unemployment rate below that of North Carolina and national averages.
Comparative data indicates that the income levels in Davidson County and in
Thomasville are below national and North Carolina averages. From 1990 to 1994,
population in Davidson County increased by 6.4%, which was above national and
North Carolina averages, while the population of Thomasville increased by 5.3%
which was below the North Carolina average of 5.5%. Thomasville has a sizable
elderly population, and as a predominantly middle class manufacturing community,
Thomasville's residents have less formal education than residents of Davidson
County and North Carolina as a whole. As a result, comparative data indicates
that as of 1990 the medium home value in Thomasville was only $48,200, well
below the Davidson County average of $60,800, the North Carolina average of
$65,800 and the national average of $79,090.
Lending Activities
General. Home Savings' primary source of revenue is interest and fee
income from its lending activities, consisting primarily of mortgage loans for
the purchase or refinancing of one-to-four family residential real property
located in its primary market area. Home Savings also makes loans secured by
multi-family and commercial properties, construction loans, home equity loans,
savings account loans and various types of consumer loans. Only 1% of Home
Savings' loan portfolio, before net items, is not secured by real estate. On
June 30, 1996, Home Savings' largest single outstanding loan had a balance of
approximately $725,000. In addition to interest earned on loans, Home Savings
receives fees in connection with loan originations, loan servicing, loan
modifications, late payments, loan assumptions and other miscellaneous services.
Home Savings generally does not sell its loans; both fixed and adjustable rate
loans are originated with the intention that they will be held in Home Savings'
loan portfolio.
Loan Portfolio Composition. Home Savings' net loan portfolio totalled
approximately $55.2 million at June 30, 1996 representing 67.9% of Home Savings'
total assets at such date. At June 30, 1996, 75.4% of Home Savings' loan
portfolio, before net items, was composed of one-to four-family residential
mortgage loans. Multi-family residential and commercial real estate loans
represented 15.6% of Home Savings' loan portfolio, before net items, on such
date. Construction loans and home equity loans represented 6.2% and 1.8%,
respectively, of Home Savings' loan portfolio,
54
<PAGE>
before net items, on such date. As of June 30, 1996, 29.6% of the loans in Home
Savings' loan portfolio had adjustable interest rates.
The following table sets forth the composition of Home Savings' loan
portfolio by type of loan at the dates indicated.
55
<PAGE>
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One-to four-family residential $43,574 78.95% $41,006 75.91% $41,082 76.36%
Multi-family residential and commercial 9,012 16.33% 10,039 18.58% 9,990 18.57%
Construction 3,596 6.52% 3,111 5.76% 3,608 6.70%
Home equity lines of credit 1,021 1.85% 1,136 2.10% 924 1.72%
------- ------ ------- ------ ------- ------
Total real estate loans 57,203 103.65% 55,292 102.35% 55,604 103.35%
------- ------ ------- ------ ------- ------
Other loans:
Consumer loans 322 0.58% 335 0.62% 557 1.03%
Loans secured by deposits 227 0.41% 252 0.47% 358 0.67%
------- ------ ------- ------ ------- ------
Total other loans 549 0.99% 587 1.09% 915 1.70%
------- ------ ------- ------ ------- ------
Total loans 57,752 104.64% 55,879 103.44% 56,519 105.05%
Less:
Construction loans in process 1,764 3.19% 1,215 2.25% 2,178 4.05%
Deferred loan origination fees 263 0.48% 243 0.45% 244 0.45%
Allowance for loan losses 533 0.97% 401 0.74% 295 0.55%
------- ------ ------- ------ ------- ------
$55,192 100.00% $54,020 100.00% $53,802 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
56
<PAGE>
The following table sets forth the time to contractual maturity of
Home 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
-------- --------- ---------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Real estate loans:
Adjustable rate residential 1-4 family $10,129 $ 15 $ $ $10,144
Fixed rate residential 1-4 family 735 560 -- -- 33,430
Other real estate loans - adjustable 6,930 -- 1,229 30,906 6,930
Other real estate loans - fixed -- 45 -- -- 4,672
45 4,582
Other loans 50 257 242 -- 549
Less:
Allowance for loan losses (533) -- -- -- (533)
------- ---- ------ ------- -------
$17,311 $877 $1,516 $35,488 $55,192
======= ==== ====== ======= =======
</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
------- ----------
(In Thousands)
<S> <C> <C>
Real estate loans $32,695 $15
Other loans 5,171 --
------- ---
$37,866 $15
======= ===
</TABLE>
Origination and Sale of Loans. Historically, Home Savings has
generally not originated its one-to-four family residential mortgage or other
loans with the intention that they will be sold in the secondary market.
Although Home Savings believes that many of its one-to-four family residential
loans could be sold in the secondary market, some of such loans could be sold
only after Home Savings incurred certain costs and/or discounted the purchase
price. As a result, Home Savings' loan portfolio is less liquid than would be
the case if it was composed entirely of loans originated in conformity with
secondary market requirements.
The table below sets forth Home Savings' loan origination, purchase
and sale activity and loan portfolio repayment experience during the periods
indicated.
57
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------
1996 1995 1994
---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Loans receivable, net, beginning of period $ 54,020 $53,802 $ 53,566
-------- ------- --------
Loan originations:
One-to four-family residential 10,399 5,370 10,530
Multi-family residential and commercial 1,322 1,415 1,116
Construction 1,277 1,497 1,284
Home equity lines of credit 189 295 395
Consumer loans 229 272 279
Loans secured by deposits 212 224 383
-------- ------- --------
Total loan originations 13,628 9,073 13,987
-------- ------- --------
Loans purchased 0 0 0
Loan sales 0 0 0
Principal repayments (12,305) (8,750) (13,622)
Other changes, net (1) (151) (105) (129)
-------- ------- --------
Loans receivable, net, end of period $ 55,192 $54,020 $ 53,802
======== ======= ========
</TABLE>
(1) Includes changes in deferred loan fees and the allowance for loan losses.
58
<PAGE>
One-to-Four Family Residential Real Estate Lending. Home 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 Home Savings' emphasis on being a community-oriented financial
institution, it is and has been Home Savings' strategy to focus its lending
efforts in its primary market area. On June 30, 1996, approximately 75.4% of
Home 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,
23.3% had adjustable interest rates.
Home Savings originates conventional mortgage loans secured by owner
occupied property in amounts of up to 97% 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
maximum term for fixed rate loans is 15 years, and the maximum term for
adjustable rate loans is 25 years. Home Savings also makes fixed rate loans
requiring a balloon payment at the end of 10 years and having a 30-year
amortization schedule. The interest rates on adjustable rate loans are
generally adjustable every year and are tied to the one-year United States
treasury bill rate. The loans have rate caps which limit the amount of changes
at the time of each adjustment and over the lives of the loans. Home Savings
offers loans which require monthly payments and loans which require payments
every two weeks, in which event the payment is drafted from an existing Home
Savings deposit account.
Adjustable rate loans are generally considered to involve a greater
degree of credit 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 Home Savings' mortgage loan portfolio have due on sale provisions
allowing Home 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 25 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.
Home Savings generally requires title insurance for its one-to-four
family residential loans. Home 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, Home Savings had $9.0 million outstanding in 79 loans secured by
multi-family residential and commercial properties, comprising approximately
15.6% of its loan portfolio, before net items, as of that date. These loans are
secured by apartments, office, retail and other commercial real estate and by
church properties in Home Savings' primary market area and have fixed and
adjustable interest rates. These loans generally do not exceed 75% of the
appraised value of the real estate securing the loans. Multi-family residential
loans have terms of up to 20 years, if the interest rate is adjustable, or 15
years, if the interest rate is fixed. Commercial real estate loans have terms
of up to 15 years if the interest rate is adjustable, or 10 years, if the
interest rate is fixed. The adjustable rate loans generally use the same index
and rate change limitations and are as used in one-to-four family residential
lending. See "-- One-to-Four Family Residential Real Estate Lending." Home
Savings generally requires title insurance in connection with its multi-family
residential and commercial real estate loans. Home 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 the replacement cost of the improvements on the property securing
the loans, whichever is greater.
Loans secured by multi-family and commercial real estate generally are
larger than one-to-four family residential loans and involve greater
concentration of assets and 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
59
<PAGE>
adverse conditions in the real estate market or the economy in general. Since
commercial lending is frequently secured by leased or operating commercial
properties, repayment frequently depends upon the results of operations of the
tenant or operating entity. Multi-family and residential and commercial loans
also generally involve more specialized and complicated underwriting decisions
than one-to-four family residential real estate lending. Home Savings intends
to continue to make significant amounts of multi-family residential and
commercial real estate loans.
Construction Lending. Home Savings makes construction loans for the
construction of single-family dwellings, and for the construction of multi-
family and commercial buildings. The aggregate outstanding balance of such
loans on June 30, 1996 was approximately $3.6 million, representing
approximately 6.2% of Home Savings' loan portfolio, before net items, and
included construction loans in process of approximately $1.8 million. Some of
these loans were made to persons who are constructing properties for the purpose
of occupying them; others 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 one-to-four family residential loans.
Construction loans for one-to-four family real estate to be occupied
by the borrower generally have a maximum loan-to-value ratio of 80% of the
appraised value of the property. Other construction loans are made at loan to
value ratios of up to 75%. Title insurance is generally required for
construction loans. In addition, Home Savings generally requires builders risk
or casualty insurance (and, if appropriate, flood insurance) on such loans.
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, Home Savings had approximately
$1.0 million in home equity line of credit loans, representing approximately
1.8% of its loan portfolio, before net items. In addition, at such date, Home
Savings had unfunded home equity lines of credit totalling $523,000. Home
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 10 years. Home equity lines of credit are generally
secured by subordinate liens against residential real property. Home Savings
requires title opinions from attorneys in connection with these loans. Home
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 80% of the value
of the real estate security. Because home equity loans involve revolving lines
of credit which can be drawn over a period of time, Home 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.
Consumer Loans. Home Savings offers various consumer loans, including
home improvement loans, automobile loans and other secured loans. Home Savings
generally does not make unsecured loans. At June 30, 1996, Home Savings'
consumer loan portfolio totalled $322,000, representing 0.56% of its total 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. Home improvement 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
60
<PAGE>
secured by any prior liens, and have terms of no more than 10 years. 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.
Loans Secured by Deposits. Home Savings also offers loans secured by
deposit accounts. At June 30, 1996, such loans totalled $227,000, representing
0.39% of Home Savings' loan portfolio, before net items. The interest rates on
these loans are variable and are generally 2% above the interest rate being paid
on the deposit account serving as collateral. 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, Home Savings assesses the
applicant's ability to make principal and interest payments on the loan and the
value of the property securing the loan. Home Savings obtains detailed written
loan applications to determine the borrower's ability to repay and verifies
responses on the loan application through the use of credit reports, financial
statements, and other confirmations. Under current practice, the responsible
officer or loan officer of Home Savings analyzes the loan application and the
property involved, and an appraiser inspects and appraises the property. Home
Savings generally requires independent fee appraisals on loans originated
primarily on the basis of real estate collateral. Home Savings also obtains
information concerning the income, financial condition, employment and the
credit history of the applicant.
All real estate loans, except home equity loans, must be approved by
Home Savings' loan committee which includes three members of its Board of
Directors. Home equity and consumer loans, up to specified limits, may be
approved by loan officers. All loans must be reported to the Board of Directors
monthly.
Normally, upon approval of a residential mortgage loan application,
Home Savings gives a commitment to the applicant that it will make the approved
loan at a stipulated rate any time within a 45-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, Home Savings had $1.8 million in such unfunded mortgage loan commitments.
In addition, on such date Home Savings had $1.8 million in undisbursed
construction loans and $523,000 in unfunded commitments for unused lines of
credit.
Interest Rates, Terms, Points and Fees. Interest rates and fees
charged on Home Savings' loans are affected primarily by the market demand for
loans, competition, the supply of money available for lending purposes and Home
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, Home 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 Home Savings.
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 Home 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. If a
delinquency is not cured, Home 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, Home 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 Home Savings in an effort to recover its
investment. As of June 30, 1996, Home Savings recorded
61
<PAGE>
$333,000 in 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.
See Note A to "Notes to Financial Statements."
Interest on loans is recorded as borrowers' monthly payments become
due. Accrual of interest on loans is suspended when interest becomes 90 days
past due or earlier when, in management's judgment, doubts exist as to the
collectibility of additional interest. Interest more than 90 days past due is
reserved. Loans begin accruing interest again when interest is brought current.
The following table sets forth information with respect to
nonperforming assets identified by Home Savings, including nonaccrual loans and
real estate owned at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans $ 285 $ 841 $1,605 $1,601 $ 557
Foreclosed real estate 333 71 111 193 161
----- ----- ------ ------ -----
Total non-performing assets $ 618 $ 912 $1,716 $1,794 $ 718
===== ===== ====== ====== =====
Non-performing assets to total assets 0.76% 1.21% 2.32% 2.53% 1.09%
===== ===== ====== ====== =====
</TABLE>
During the fiscal year ended June 30, 1996, gross interest income of $25,000
would have been recorded on nonperforming assets if such assets had been current
in accordance with their terms and had been outstanding throughout the period or
since origination, if held for part of such period. The amount of gross
interest income actually recorded on such nonperforming assets during such
period was $14,000.
Applicable regulations require Home 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 well-
defined weakness with possible risk of loss if the deficiency is 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." 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, Home Savings had approximately $284,000 of loans
internally classified as "substandard," no loans classified as "doubtful" and no
loans classified as "loss." Total classified loans as of June 30, 1995 and 1994
were approximately $931,000 and approximately $1.9 million, 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,
62
<PAGE>
or writes down the balance of, the asset. Home 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.
Home 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, Home Savings' watch list consisted of four loans with an
aggregate outstanding balance of $65,000.
Allowance for Loan Losses. In originating loans, Home 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, Home 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 Home 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 Home Savings'
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30
-----------------------------------
1996 1995 1994
---------- ------------ ---------
<S> <C> <C> <C>
Balance at beginning of period $ 401 $ 295 $ 198
----- ----- -----
Loans charged off:
Real estate 32 1 90
Other 2 -- 14
----- ----- -----
Total loans charged off 34 1 104
Recoveries:
Real estate - 1 84
Other 1 1 3
----- ----- -----
Net loans charged off (recovered) 33 (1) 17
----- ----- -----
Provision for loan losses 165 105 114
----- ----- -----
Balance at end of period $ 533 $ 401 $ 295
===== ===== =====
Ratio of net charge-offs (recoveries) to
average loans outstanding during the 0.06% --% 0.03%
period ===== ===== =====
</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.
63
<PAGE>
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ------------------------------- ---------------------------------
Percent of Amount Percent of Amount Percent of Amount
Allowance of Loans Allowance of Loans Allowance of Loans
Amount of to Total to Gross Amount of to Total to Gross Amount of to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans Allowance Allowance Loans
--------- ---------- -------- --------- ---------- -------- --------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to four-family
residential $225 42.21% 75.45% $164 40.90% 73.38% $123 41.69% 72.69%
Multi-family residential
and commercial 110 20.64% 15.60% 100 24.94% 17.97% 75 25.42% 17.68%
Construction 17 3.19% 6.23% 19 4.74% 5.57% 14 4.75% 6.38%
Home equity lines of credit 10 1.88% 1.77% 11 2.74% 2.03% 9 3.05% 1.63%
---- ------ ------ ---- ------ ------ ---- ------ ------
Total real estate loans 362 67.92% 99.05% 294 73.32% 98.95% 221 74.91% 98.38%
---- ------ ------ ---- ------ ------ ---- ------ ------
Other loans:
Consumer loans 11 2.06% 0.56% 12 2.99% 0.60% 13 4.41% 0.99%
Loans secured by deposits -- 0.00% 0.39% -- 0.00% 0.45% -- 0.00% 0.63%
---- ------ ------ ---- ------ ------ ---- ------ ------
Total other loans 11 2.06% 0.95% 12 2.99% 1.05% 13 4.41% 1.62%
---- ------ ------ ---- ------ ------ ---- ------ ------
Unallocated 160 30.02% -- 95 23.69% -- 61 20.68% --
---- ------ ------ ---- ------ ------ ---- ------ ------
Total allowance for loan $533 100.00% 100.00% $401 100.00% 100.00% $295 100.00% 100.00%
losses ==== ====== ====== ==== ====== ====== ==== ====== ======
</TABLE>
64
<PAGE>
Investment Securities
Interest and dividend income from investment securities generally
provides the second largest source of income to Home Savings after interest on
loans. In addition, Home Savings receives interest income from deposits in
other financial institutions. At June 30, 1996, Home Savings' investment
portfolio totalled approximately $22.8 million and consisted of U.S. government
and agency securities, mortgage-backed securities, municipal bonds, interest-
earning deposits in other financial institutions, and stock of the Federal Home
Loan Mortgage Corporation and Federal Home Loan Bank of Atlanta.
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 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, Home Savings had no trading securities.
Home 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 $202,874,
net of related deferred tax assets of $104,511, 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, Home 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, Home Savings is required to
maintain an investment in stock of the FHLB of Atlanta equal to the greater of
1% of Home 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, Home Savings' investment in stock of the
FHLB of Atlanta was $614,000.
North Carolina regulations require Home Savings to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. See "SUPERVISION AND REGULATION -- Regulation of Home Savings --
Liquidity." Home Savings is also permitted to make certain other securities
investments.
Home Savings' current investment policy provides that investment
decisions will be made by James G. Hudson, Jr., President, Chief Executive
Officer and Treasurer, and ratified by the Board of Directors. The investment
policy provides that the objectives of the investment portfolio are to: (i)
provide and maintain liquidity within regulatory guidelines, (ii) maintain a
balance of high quality, diversified investments, (iii) provide collateral for
pledging requirements, (iv) serve as a counter-cyclical balance to earnings, (v)
maximize returns without sacrificing liquidity and safety, (vi) purchase
securities and originate loans for investment purposes only, (vii) invest the
majority of Home
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<PAGE>
Savings' funds in first mortgage loans, Federal Home Loan Mortgage Corporation
participation certificates and United States government and agency obligations,
and (viii) to hold securities until maturity unless it is financially feasible
to do otherwise.
The following table sets forth certain information regarding Home Savings'
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities $ 6,988 $ 6,021 $ --
Mortgage-backed securities 3,801 2,389 --
Municipal bonds 603 -- --
FHLMC stock 315 254 --
------- ------- ---------
Total securities available for sale 11,707 8,664 --
------- ------- ---------
Securities held to maturity:
U.S. government and agency securities 6,477 4,756 13,059
Mortgage-backed securities -- -- 2,822
Municipal bonds 380 377 --
FHLMC stock -- -- 14
------- ------- -------
Total securities held to maturity 6,857 5,133 15,895
------- ------- -------
Total investment securities 18,564 13,797 15,895
Interest-earning balances in other banks 3,645 4,441 1,503
Federal Home Loan Bank stock 614 614 614
------- ------- -------
Total investments $22,823 $18,852 $18,012
======= ======= =======
</TABLE>
At June 30, 1996, the market value of Home Savings' investment
securities available for sale and held to maturity were $11.7 million and $6.8
million, respectively.
The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of Home
Savings' investment portfolio as of June 30, 1996.
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<PAGE>
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Five Years After Five Years
------------------- -------------------- --------------------- ---------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities $2,006 5.65% $ 4,982 6.38% $ -- -- $ -- --
Mortgage-backed securities -- -- -- -- 2,492 7.06% 1,309 7.51%
Municipal bonds -- -- 603 4.80% -- -- -- --
FHLMC stock -- -- -- -- -- -- 315 1.41%
Securities held to maturity:
U.S. government and agency
securities 1,801 6.12% 4,676 6.52% -- -- -- --
Municipal bonds -- -- -- -- -- -- 330 6.22%
Other:
Interest-earning balances in
other banks 3,645 5.35% -- -- -- -- -- --
Federal Home Loan Bank stock -- -- -- -- -- -- 614 7.25%
------ ----- ------- ----- ------ ----- ------ -----
$7,452 5.62% $10,261 6.35% $2,492 7.06% $2,618 6.52%
====== ===== ======= ===== ====== ===== ====== =====
<CAPTION>
Total
--------------------
Carrying Average
Value Yield
--------- -------
<S> <C> <C>
Securities available for sale:
U.S. government and agency
securities $6,998 6.17%
Mortgage-backed securities 3,801 7.22%
Municipal bonds 603 4.80%
FHLMC stock 315 1.41%
Securities held to maturity:
U.S. government and agency
securities 6,477 6.41%
Municipal bonds 380 6.22%
Other:
Interest-earning balances in
other banks 3,645 5.35%
Federal Home Loan Bank stock 614 7.25%
------- -----
$22,823 6.21%
====== =====
</TABLE>
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<PAGE>
Deposits and Borrowings
General. Deposits are the primary source of Home Savings' funds for
lending and other investment purposes. In addition to deposits, Home 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. Home Savings attracts both short-term and long-term
deposits from the general public by offering a variety of accounts and rates.
Home Savings offers passbook savings accounts, statement savings accounts,
negotiable order of withdrawal accounts, money market demand accounts, non-
interest-bearing accounts, and fixed interest rate certificates with varying
maturities. At June 30, 1996, 74.67% of Home Savings' deposits consisted of
certificate accounts, 7.15% consisted of passbook and statement savings
accounts, 18.01% consisted of interest-bearing transaction accounts and 0.17%
consisted of noninterest-bearing transaction accounts. Deposit flows are
greatly influenced by economic conditions, the general level of interest rates,
competition, and other factors, including the restructuring of the thrift
industry. Home Savings' savings deposits traditionally have been obtained
primarily from its primary market area. Home Savings utilizes traditional
marketing methods to attract new customers and savings deposits, including print
media advertising and direct mailings. Home Savings does not advertise for
deposits outside of its local market area or utilize the services of deposit
brokers.
The following table sets forth information relating to Home Savings'
deposit flows during the periods shown and deposits at the end of such periods.
<TABLE>
<CAPTION>
At or for the Year
Ended June 30,
--------------------------
1996 1995 1994
------- -------- -------
(In Thousands)
<S> <C> <C> <C>
Total deposits at beginning of period $64,448 $63,937 $62,129
Net increase (decrease) before interest
credited 3,224 (990) 405
Interest credited 1,997 1,501 1,403
------- ------- -------
Total deposits at end of period $69,669 $64,448 $63,937
======= ======= =======
</TABLE>
The following table sets forth certain other information regarding
Home Savings' savings deposits at the dates indicated.
68
<PAGE>
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1995
--------------------------- ---------------------------------
Weighted Weighted
Average % of Average % of
Amount Rate Total Amount Rate Total
-------- --------- ------- -------- --------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Passbook and statement accounts $ 4,984 3.00% 7.15% $ 5,248 3.00% 8.14%
NOW accounts 2,718 2.75% 3.90% 1,885 2.75% 2.93%
Money market demand accounts 9,830 4.05% 14.11% 10,498 3.68% 16.29%
Non-interest bearing accounts 116 -- 0.17% 299 -- 0.46%
------- ------ ------- ------
Total demand deposits 17,648 3.53% 25.33% 17,930 3.32% 27.82%
------- ------ ------- ------
Certificate accounts with original maturities of:
6 months 9,698 5.09% 13.92% 10,026 5.93% 15.56%
12 months 16,043 5.64% 23.03% 13,944 5.54% 21.64%
18 months 967 5.92% 1.39% 969 5.23% 1.50%
24 months 1,867 5.86% 2.68% 1,781 5.45% 2.76%
30 months 889 5.87% 1.28% 984 5.03% 1.53%
36 months 4,380 5.62% 6.29% 3,725 5.38% 5.78%
IRA certificates 4,483 5.98% 6.43% 3,624 5.35% 5.62%
Jumbo ($100,000 or more) 13,694 5.74% 19.66% 11,465 6.01% 17.79%
------- ------ ------- ------
Total certificates 52,021 5.61% 74.67% 46,518 5.69% 72.18%
------- ------ ------- ------
Total deposits $69,669 5.09% 100.00% $64,448 5.03% 100.00%
======= ==== ====== ======= ==== ======
<CAPTION>
June 30, 1994
-----------------------------------
Weighted
Average % of
Amount Rate Total
------- --------- -------
<S> <C> <C> <C>
Demand accounts:
Passbook and statement accounts 5,660 3.00% 8.85%
NOW accounts 1,973 2.75% 3.00%
Money market demand accounts 13,060 3.23% 20.43%
Non-interest bearing accounts 106 -% .16%
------ ------
Total demand deposits 20,799 3.11% 32.53%
------ ------
Certificate accounts with original maturities of:
6 months 9,248 3.69% 14.46%
12 months 14,593 4.08% 22.82%
18 months 915 4.26% 1.43%
24 months 964 4.89% 1.51%
30 months 1,088 4.95% 1.70%
36 months 3,414 3.32% 5.34%
IRA certificates 3,724 4.41% 5.83%
Jumbo ($100,000 or more) 9,192 4.20% 14.38%
------ ------
Total certificates 43,138 4.19% 67.47%
------ ------
Total deposits $63,937 3.84% 100.00%
======= ==== ======
</TABLE>
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<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 Total
------------------ ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted
Amount Rate Amount Rate Amount Rate Amount Rate
------- --------- ------ --------- ------ --------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts with original maturities of:
6 months $ 9,698 5.09% $ -- -- $ -- -- $ 9,698 5.09%
12 months 16,043 5.64% -- -- -- -- 16,043 5.64%
18 months 701 6.11% 266 5.41% -- -- 967 5.92%
24 months 1,144 5.82% 723 5.93% -- -- 1,867 5.86%
30 months 48 5.25% 383 6.27% 458 5.60% 889 5.87%
36 months 2,491 4.78% 458 6.17% 1,431 6.90% 4,380 5.62%
IRA certificates 2,573 6.20% 1,910 5.68% -- -- 4,483 5.98%
Jumbo ($100,000 or more) 13,328 5.71% 66 6.61% 300 7.00% 13,694 5.74%
------- ------ ------ -------
$46,026 5.57% $3,806 5.84% $2,189 6.64% $52,021 5.61%
======= ==== ====== ==== ====== ==== ======= =====
</TABLE>
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<PAGE>
Based upon historical experience, Home 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 $13.7
million, representing 26.3% of all certificates of deposit on such date.
Management believes that most of these deposits are held by long-time, local
customers of Home Savings. 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 $ 3,356
Over 3 months through 6 months 7,996
Over 6 months through 12 months 1,976
Over 12 months 366
-------
Total $13,694
=======
</TABLE>
Borrowings. Although it has not done so in several years, Home
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, Home 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, Home Savings had no outstanding borrowings.
Subsidiaries
As a North Carolina-chartered savings bank, Home 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 Home Savings
to exceed an investment of 3% of assets must receive prior approval of the FDIC.
Home Savings has one subsidiary which is not active and has never engaged in any
business.
Properties
The following table sets forth the location of Home Savings'
headquarters office in Thomasville, North Carolina, as well as certain other
information relating to this office as of June 30, 1996:
<TABLE>
<CAPTION>
Net Book
Value of
Property or Owned or
Improvements Leased
------------ --------
<S> <C> <C>
22 Winston Street
Thomasville, North Carolina 27360 $624,380 Owned
</TABLE>
The total net book value of Home Savings' furniture, fixtures and
equipment at June 30, 1996 was $123,785.
Legal Proceedings
From time to time, Home Savings is a party to legal proceedings which
arise in the ordinary course of its business. Most commonly, such proceedings
are commenced by Home Savings to enforce obligations owed to it. From
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<PAGE>
time to time, claims are asserted against Home Savings directly or as defenses
and counterclaims in actions filed by Home Savings. At this time, Home 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
Home 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. As of June 30, 1996, there were eight depository institutions with 13
offices in Thomasville, North Carolina. Based upon 1995 comparative data, Home
Savings had 15.7% of the deposits in Thomasville, and 5.5% of the deposits in
Davidson County. Home 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 Home 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.
Home Savings experiences strong competition for real estate loans from
other savings institutions, commercial banks, and mortgage banking companies.
Home 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 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, Home Savings had 11 full-time employees. Home
Savings provides its employees with basic and major medical insurance, life
insurance, sick leave and vacation benefits. In addition, Home Savings
maintains a defined benefit pension plan which covers all full time employees of
at least 21 years of age who have completed five months continuous service. See
"MANAGEMENT OF HOME SAVINGS -- Pension Plan" and Note G of the "Notes to
Financial Statements."
In connection with the Conversion, Home Savings has adopted the ESOP,
which will provide benefits to employees of Home Savings. See "MANAGEMENT OF
HOME SAVINGS -- Employee Stock Ownership Plan." Also, the Boards of Directors
of the Holding Company and Home 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 HOME
SAVINGS -- Proposed Management Recognition Plan" and "--Proposed Stock Option
Plan."
Employees are not represented by any union or collective bargaining
group, and Home Savings considers its employee relations to be good.
TAXATION
Federal Income Taxation
Savings institutions such as Home 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
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<PAGE>
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 exceed 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 savings accounts and
property used in the conduct of its business. In addition, it had to meet
certain other supervisory tests and operate principally for the purpose of
acquiring savings and investing in loans.
Institutions which became ineligible to use the percentage of income
method had to change to either the reserve method or the specific charge-off
method that applied to banks. Large thrift institutions, those generally
exceeding $500 million in assets, had to convert to the specific charge-off
method. In computing its bad debt reserve for federal income taxes, Home
Savings elected to use the reserve method in fiscal years 1994, 1995, and 1996.
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. Home 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, 1996
includes approximately $1.5 million for which no provision for federal income
tax has been made.
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, Home
Savings' post-1987 excess reserves amounted to approximately $264,000. A
special provision suspends recapture of post-1987 excess reserves for up to two
years if, during those years, the institution satisfies a "residential loan
requirement." This requirement 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."
Home 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
73
<PAGE>
calculated by adding certain tax preference items and making certain adjustments
to the corporation's regular taxable income. Preference items and adjustments
generally applicable to financial institutions include, but are not limited to,
the following: (i) the excess of the bad debt deduction over the amount that
would have been allowable on the basis of actual experience; (ii) interest on
certain tax-exempt bonds issued after August 7, 1986; and (iii) 75% of the
excess, if any, of a corporation's adjusted earnings and profits over its AMTI
(as otherwise determined with certain adjustments). Net operating loss
carryovers, subject to certain adjustments, may be utilized to offset up to 90%
of the AMTI. Credit for AMT paid may be available in future years to reduce
future regular federal income tax liability. Home Savings has not been subject
to the AMT in recent years.
Home Savings' federal income tax returns have not been audited in the
last ten 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
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 Home Savings to be issued in
the Conversion. As a 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
74
<PAGE>
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 provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
As a result of the Holding Company's ownership of Home 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. 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 and other
intangible assets. The remainder ("Tier II capital") may consist of a limited
amount of subordinated debt, certain hybrid capital instruments and other debt
securities, perpetual preferred stock, and a limited amount of the general loan
loss allowance. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I (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.
Dividend and Repurchase Limitations. In connection with the
Conversion, Home Savings has agreed with the FDIC that, during the first year
after consummation of the Conversion, neither the Holding Company nor Home
Savings will 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. In addition, the Holding Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any 12 months period unless the Holding Company (i) both before
and after the redemption satisfies capital requirements for "well capitalized"
state member banks; (ii) received a one or two rating in its last examination;
and (iii) is not the subject of any unresolved
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supervisory issues. Although the payment of dividends and repurchase of stock
by the Holding Company are subject to the requirements and limitations of North
Carolina corporate law, except as set forth in this paragraph, neither the
Administrator nor the FDIC have promulgated any regulations specifically
limiting the right of the Holding Company to pay dividends and repurchase
shares. However, the ability of the Holding Company to pay dividends or
repurchase shares may be dependent upon the Holding Company's receipt of
dividends from Home Savings. Home Savings' ability to pay dividends is limited.
See " -- Regulation of Home Savings -- Restrictions on Dividends and Other
Capital Distributions."
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Holding Company's application to acquire control of Home
Savings, the Holding Company was required to execute a Capital Maintenance
Agreement whereby it has agreed to maintain Home Savings' capital in an amount
sufficient to enable Home 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
restrictions, annual and periodic reporting and other requirements of the
Exchange Act will be applicable to the Holding Company.
Regulation of Home 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 Home Savings, will continue to be subject to changes in applicable
statutes and regulations from time to time.
Home 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.
Home 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 Home
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 Home 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.
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The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between Home Savings and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of Home 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, Home 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 from an affiliate, the purchase of, or an
investment in, the securities of an affiliate, the acceptance of securities of
an affiliate as collateral for a loan or extension of credit to any person, or
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
Further, current federal law has extended to savings banks the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who,
directly or indirectly, own more than 10% of any class of voting securities of a
savings bank, and certain affiliated entities of any of the foregoing, may not
exceed, together with all other outstanding loans to such person and affiliated
entities, the savings bank's loans-to-one borrower limit as established by
federal law (as discussed below). Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers or stockholders who own more than 10% of a savings bank, and
their respective affiliates, unless such loan is approved in advance by a
majority of the 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 based on
underwriting standards not less stringent than those applied in comparable
transactions with other persons, and made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal risk of repayment or present other unfavorable features.
Insurance of Deposit Accounts. The FDIC administers two separate
deposit insurance funds. The SAIF maintains a fund to insure the deposits of
institutions the deposits of which were insured by the Federal Savings and Loan
Insurance Corporation (the "FSLIC") prior to the enactment of FIRREA, and the
BIF maintains a fund to insure the deposits of institutions the deposits of
which were insured by the FDIC prior to the enactment of FIRREA. Home Savings is
a member of the SAIF of the FDIC.
As a SAIF-insured institution, Home 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.
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As a result of subsequent changes to the assessment schedule,
financial institutions such as Home 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. Home Savings paid deposit insurance premiums of $149,000 and
$145,000 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 Home 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 SAIF-
insured institutions, except those in higher risk categories, will pay deposit
insurance premiums equal to approximately 6.4 cents per $100 of insured domestic
deposits. This premium differential is expected to exist until at least January
1, 1999.
The above-described comprehensive continuing appropriations bill
enacted on September 30, 1996 also provides for a one-time assessment on SAIF
members to recapitalize the SAIF. The assessment is 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, net of any income tax benefit. The one-time
assessment, based on Home Savings' deposits as of March 31, 1995, is expected to
be payable prior to December, 1996. The assessment, estimated at $409,000, was
accrued as an expense during the quarter ended September 30, 1996. As a result
of this expense, Home Savings experienced a net loss for that fiscal quarter.
See "RECENT DEVELOPMENTS," and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT
DEVELOPMENTS."
Community Reinvestment Act. Home 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 Home Savings' last compliance examination, Home Savings
received a "satisfactory" rating with respect to CRA compliance. Home 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 Home 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 Home Savings. The FDIC requires
Home 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
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1% or 2% above the stated minimum, with an absolute minimum leverage ratio of
not less than 4%. The FDIC also requires Home 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, Home Savings complied with each of the capital
requirements of the FDIC and the Administrator. For a description of Home
Savings' required and actual capital levels on June 30, 1996, see "HISTORICAL
AND PRO FORMA CAPITAL COMPLIANCE."
The 1991 Banking Law required each federal banking agency to revise
its risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risk of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages. On August 2, 1995, the federal
banking agencies issued a joint notice of adoption of final risk based capital
rules to take account of interest rate risk. The final regulation required an
assessment of the need for additional capital on a case-by-case basis,
considering both the level of measured exposure and qualitative risk factors.
The final rule also stated an intent to, in the future, establish an explicit
minimum capital charge for interest rate risk based on the level of a bank's
measured interest rate risk exposure.
Effective June 26, 1996, the federal banking agencies issued a joint
policy statement announcing the agencies' election not to adopt a standardized
measure and explicit capital charge for interest rate risk at that time.
Rather, the policy statement (i) identifies the main elements of sound interest
rate risk management, (ii) describes prudent principles and practices for each
of those elements, and (iii) describes the critical factors affecting the
agencies' evaluation of a bank's interest rate risk when making a determination
of capital adequacy. The joint policy statement is not expected to have a
material impact on Home Savings' management of interest rate risk.
In December 1994, the FDIC adopted a final rule changing its risk-
based capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives - interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterparty, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. Home Savings does not
anticipate that this rule will have a material effect upon its financial
condition or results of operations.
Loans to One Borrower. Home 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
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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 Home
Savings had to any one borrower was $1.1 million. Home 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 Home 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,
Home Savings is required to own capital stock in the FHLB of Atlanta in an
amount at least equal to the greater of 1% of the aggregate principal amount of
its unpaid residential mortgage loans, home purchase contracts and similar
obligations at the end of each calendar year, or 5% of its outstanding advances
(borrowings) from the FHLB of Atlanta. On June 30, 1996, Home Savings was in
compliance with this requirement with an investment in FHLB of Atlanta stock of
$614,000.
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, Home 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 an insured institution, such as Home Savings, 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 generally
presumed to have been acquired, subject to rebuttal, upon the acquisition of
more than 10% of any class of voting stock. Such acquisitions of control may be
disapproved if it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings bank or
prejudice the interests of its depositors; or (iii) the competency, experience
or integrity of the acquiring person or the proposed management personnel
indicates that it would not be in the interest of the depositors or the public
to permit the acquisition of control by such person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of Home
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 Home 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 Home Savings by a corporation whose ownership is or
will be substantially the same as the ownership of Home Savings, provided that
the offer or acquisition is made more than one year following the
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consummation of the Conversion. The regulation provides that within one year
following the Conversion, the Administrator would approve the acquisition of
more than 10% of beneficial ownership only to protect the safety and soundness
of the institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Holding
Company and Home Savings or the Boards of Directors of the Holding Company and
Home 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 Home Savings and the
public interests will not be adversely affected.
Liquidity. Home 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, Home Savings' liquidity
ratio, calculated in accordance with North Carolina regulations, was
approximately 24.3%.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that Home 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 Home
Savings is and continues to be in compliance with fully phased-in capital
standards. National banks are generally not permitted to hold equity investments
other than shares of service corporations and certain federal agency securities.
Moreover, the activities in which service corporations for savings banks are
permitted to engage are limited to those of service corporations for national
banks.
Savings banks are also required to notify the FDIC at least 30 days
prior to the establishment or acquisition of any subsidiary, or at least 30 days
prior to conducting any such new activity. Any such activities must be conducted
in accordance with the regulations and orders of the FDIC and the Administrator.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds").
1991 Banking Law. The 1991 Banking Law became effective on December
19, 1991. Among other things, the 1991 Banking Law provided increased funding
for the BIF and provided for expanded regulation of depository institutions and
their affiliates, including bank holding companies.
The 1991 Banking Law provided the federal banking agencies with broad
powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers will depend upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under the FDIC regulations applicable to Home 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
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required by generally accepted accounting principles. The FDIC issued a final
rule, effective July 2, 1993, implementing those provisions.
The 1991 Banking Law further requires the federal banking agencies to
develop regulations requiring disclosure of contingent assets and liabilities
and, to the extent feasible and practicable, supplemental disclosure of the
estimated fair market value of assets and liabilities. The 1991 Banking Law also
requires annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small, well-
capitalized institutions and state chartered institutions examined by state
regulators. Moreover, the 1991 Banking Law, as modified by the Federal Housing
Enterprises Financial Security and Soundness Act, requires the federal banking
agencies to set operational and managerial, asset quality, earnings and stock
valuation standards for insured depository institutions and depository
institution holding companies, as well as compensation standards (but not dollar
levels of compensation) for insured depository institutions that prohibit
excessive compensation, fees or benefits to officers, directors, employees, and
principal stockholders. In July 1992, the federal banking agencies issued a
joint advance notice of proposed rulemaking soliciting comments on all aspects
of the implementation of these standards in accordance with the 1991 Banking
Law, including whether the compensation standards should apply to depository
institution holding companies. An interagency notice of proposed rulemaking was
issued in November 1993. However, sections of the Riegle Community Development
and Regulatory Improvement Act of 1994 will affect the nature and scope of the
proposed regulations, and eliminates the requirement that the regulations apply
to depository institution holding companies.
The foregoing necessarily is a general description of certain
provisions of the 1991 Banking Law and does not purport to be complete.
Interstate Banking. A bank holding company 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 holding company's subsidiaries are located,
unless the acquisition is specifically authorized by the statutes of the state
in which the target bank is located. However, in September 1994, Congress passed
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The Interstate Banking Act permitted adequately
capitalized bank holding companies 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 Home 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, additional legislation may be enacted in North
Carolina in reaction to the Interstate Banking Act or what impact such
legislation or the Interstate Banking Act might have upon Home Savings.
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<PAGE>
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in Section 39 of the 1991 Banking Law which
required the banking regulatory agencies to promulgate regulations governing
such topics as internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation and fees and other matters
those agencies determine to be appropriate. The legislation exempts bank
holding companies from these provisions and requires the agencies to prepare
guidelines, as opposed to regulations, dealing with these areas. It also gives
more discretion to the banking regulatory agencies in prescribing standards for
banks' asset quality, earnings and stock valuation.
The Interstate Banking Act also expands current exemptions from the
requirement that banks be examined on a 12-month cycle. Exempted banks will be
inspected every 18 months. Other provisions address paperwork reduction and
regulatory improvements, small business and commercial real estate loan
securitization, truth-in-lending amendments regarding high cost mortgages,
strengthening of the independence of certain financial regulatory agencies,
money laundering, flood insurance reform and extension of certain statutes of
limitations.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution. Under FDIC regulations, stock repurchases may be made
during the first year after the Conversion only after receipt of FDIC approval.
In addition, Home 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 Home Savings' conversion from
mutual to stock ownership.
In connection with the Conversion, Home Savings has agreed with the
FDIC that, during the first year after the Conversion, neither the Holding
Company nor Home Savings will pay any dividend or make any other distribution to
stockholders 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, Home 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 Office of Thrift Supervision ("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
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<PAGE>
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, Home 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 Home 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 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.
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<PAGE>
MANAGEMENT OF THE HOLDING COMPANY
The Board of Directors of the Holding Company currently consists of
five directors: Henry H. Darr, James G. Hudson, Jr., John R. Hunnicutt, F.
Stuart Kennedy and Milton T. Riley, Jr. Each of these persons is also a
director of Home Savings, and biographical information with respect to each is
set forth under "MANAGEMENT OF HOME SAVINGS -- Directors." Each director is
elected for a one-year term. However, at such time, if any, 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 Home 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>
James G. Hudson, Jr. 56 President, Chief Executive
Officer and Treasurer
John E. Todd 50 Vice President
Drema A. Michael 43 Secretary and Assistant
Treasurer
</TABLE>
Biographical information with respect to each of these officers is set
forth below under "MANAGEMENT OF HOME SAVINGS -- Executive Officers." There are
no other employees of the Holding Company. No officer, director or employee of
the Holding Company has received remuneration from the Holding Company to date,
and it is currently expected that no compensation will be paid by the Holding
Company after the Conversion. Information concerning the principal occupations
and employment of, and compensation paid by Home Savings to, the directors and
executive officers of the Holding Company is set forth under "MANAGEMENT OF HOME
SAVINGS." See "MANAGEMENT OF HOME SAVINGS -- Employment Agreement" and "--
Special Termination Agreements" for a description of certain agreements expected
to be entered into with the executive officers of the Holding Company and Home
Savings.
MANAGEMENT OF HOME SAVINGS
Directors
The direction and control of Home Savings, as a mutual North Carolina-
chartered savings bank, has been vested in its five-member Board of Directors
elected by the depositor and borrower members of Home Savings. Upon conversion
of Home Savings to capital stock form, each director of Home Savings immediately
prior to the Conversion will continue to serve as a director of Home Savings as
a stock institution. All directors currently serve for one-year terms. Home
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 Home Savings, and the Holding Company will elect the
directors of Home Savings. The Holding Company now plans to nominate and re-
elect all members of Home 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 Home Savings.
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<PAGE>
<TABLE>
<CAPTION>
Age on
June 30, Principal Occupation Director
Name 1996 During Last Five Years Since
- ---- ---------- ---------------------- --------
<S> <C> <C> <C>
Henry H. Darr. 55 President, J. L. Darr & Son, 1980
Inc.
James G. Hudson, Jr. 56 President, Chief Executive 1972
Officer and Treasurer of Home
Savings
John R. Hunnicutt 60 President, McThom, Inc. and 1995
McLex, Inc., licensees of
McDonalds Corporation
F. Stuart Kennedy 70 Chairman of the Board, Rex Oil 1971
Company
Milton T. Riley, Jr. 59 Personal investments; until 1992
1992, partner with Dixon, Odom
& Co., certified public
accountants
Mr. Darr and Mr. Kennedy are cousins.
</TABLE>
Board Meetings and Committees
Home 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 three committees to whom certain responsibilities
have been delegated - an Executive Committee, an Audit Committee, and a Loan
Committee. No director except Henry H. Darr 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.
During fiscal 1996, Home Savings formed an Executive Committee which
is composed of directors Kennedy, Riley and Hudson. 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. The Executive Committee
met one time during the year ended June 30, 1996.
Home Savings' Audit Committee is composed of director Riley and Drema
H. Michael, Home Savings' Secretary and Assistant Treasurer. This committee is
responsible for meeting with and retaining independent auditors, overseeing the
adequacy of internal controls, insuring compliance with Home 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 two times.
Home Savings' Loan Committee is composed of any three directors of
Home Savings and meets on an as needed basis to approve loans underwritten by
Home Savings' loan officers. During the fiscal year ended June 30, 1996, the
loan committee met 17 times.
Directors' Fees
For their service on Home Savings' Board of Directors, all members of
Home Savings' Board of Directors receive $800 per meeting attended. In
addition, all non-employee directors who serve on Board committees receive $150
per meeting for their service. Board fees are subject to adjustment annually.
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
Home Savings has three executive officers. The following table sets
forth certain information with respect to such executive officers:
<TABLE>
<CAPTION>
Age on Positions and Occupations Employed By
Name June 30, 1996 During Last Five Years Home Savings Since
- ---- ------------- ------------------------- ------------------
<S> <C> <C> <C>
James G. Hudson, Jr. 56 President, Chief Executive 1972
Officer and Treasurer
John E. Todd 50 Vice President 1979
Drema A. Michael 43 Secretary and Assistant 1974
Treasurer
</TABLE>
Executive Compensation
The following table sets forth for the fiscal year ended June 30, 1996
certain information as to the cash compensation earned by (i) the chief
executive officer of Home Savings and (ii) all other executive officers of Home
Savings whose cash compensation exceeded $100,000 (there were none), for
services in all capacities.
<TABLE>
<S> <C> <C> <C> <C>
Other Annual
Name and Compensation All Other
Principal Position Salary Bonus ($)/2/ Compensation
------------------ ------ ----- ------------ ------------
James G. Hudson, Jr. $91,800 $13,745/1/ --- $31,000/3/
President, Chief Executive
Officer, Treasurer and
Director
</TABLE>
- --------------------
/1/ Includes $10,283 in bonuses paid under Home Savings' bonus
compensation plan and $3,462 in holiday bonuses. See "--Bonus
Compensation."
/2/ 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. Hudson.
/3/ Includes (a) directors' fees of $9,000; and (b) $22,000 accrued under
supplemental income agreements established for the benefit of Mr.
Hudson.
The Board of Directors of Home Savings does not have a compensation
committee. Home Savings' full board of directors determines the compensation of
the executive officers. The salaries of each of the executive officers is
determined based upon the executive officer's contributions to Home Savings'
overall profitability, maintenance of regulatory compliance standards,
professional leadership, and management effectiveness in meeting the needs of
day to day operations. The Board of Directors also compares the compensation of
Home Savings' executive officers with compensation paid to executives of
comparable financial institutions in North Carolina and executives of other
businesses in Home Savings' market area. Mr. Hudson participates in the
deliberations of the Board of Directors regarding compensation of executive
officers other than himself. He does not participate in the discussion or
decisions regarding his own compensation.
Bonus Compensation
Home Savings has approved a bonus compensation plan pursuant to which
James G. Hudson, Jr., President, Chief Executive Officer and Treasurer, receives
bonus compensation equal to 1% of Home Savings' income before taxes and John E.
Todd, Vice President, and Drema A. Michael, Secretary and Assistant Treasurer,
are each entitled to receive bonuses equal to 0.5% of Home Savings' income
before taxes. During the fiscal years ended June 30, 1996, 1995 and 1994, the
bonuses paid to Mr. Hudson totalled $10,283, $15,861 and $18,909, respectively;
and the bonuses paid to each
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<PAGE>
of Mr. Todd and Ms. Michael totalled $5,142, $7,932 and $9,454, respectively. In
addition, employees receive annual discretionary holiday bonuses, which during
the fiscal years 1996, 1995 and 1994 totalled $13,000, $12,000 and $11,300, in
the aggregate for all employees. As is the case with Home Savings' compensation
arrangements in general, Home Savings' bonus compensation plan is subject to
regulatory oversight and, therefore, could be changed in the future in response
to regulatory requirements or otherwise.
Pension Plan
Home Savings maintains a non-contributory defined benefit pension plan
("Pension Plan") for the benefit of all of its employees who have completed five
(5) months of service and who are at least twenty-one (21) years of age. Under
the Pension Plan, Home Savings annually contributes an actuarially determined
amount to provide a benefit for each participant at retirement.
Participants are fully vested in amounts contributed to the Pension
Plan on their behalf by Home Savings after completing six (6) years of service,
as follows: 1 year of service, 0%; 2 years, 20%; 3 years, 40%; 4 years, 60%;
5 years, 80%; 6 years or more, 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 Pension Plan is the later of (a) age
65 or (b) the fifth anniversary of the date an employee first became a
participant in the Pension Plan ("Normal Retirement Age"). Subject to certain
restrictions on maximum benefits required by federal law, upon reaching Normal
Retirement Age, each participant will receive a retirement benefit in the form
of a straight life annuity, with 120 months guaranteed, determined pursuant to a
formula which takes into consideration a participant's "average monthly
compensation," years of service with Home Savings, and the participant's
expected benefits from Social Security. For purposes of the Pension Plan, a
participant's "average monthly compensation" is defined as his or her
compensation converted to a monthly amount and then averaged over the five (5)
consecutive plan years which produce the highest monthly average within the last
ten (10) completed years of participation. The plan also offers early retirement
to participants who have completed twenty (20) years of service and who are at
least fifty-five (55) years of age.
The following table shows the retirement benefit payable for a range
of compensation and years of service for a person who retires at Normal
Retirement Age. These are hypothetical benefits based upon the plan's normal
benefit formula.
<TABLE>
<CAPTION>
Earnings Credited for
Retirement Benefits Years of Service at Normal Retirement
--------------------- -----------------------------------------------
<S> <C> <C> <C> <C>
10 20 30 35
-- -- -- --
$ 25,000............... $ 3,453 $ 6,906 $10,359 $11,050
$ 35,000............... 5,269 10,537 15,806 16,860
$ 45,000............... 7,235 14,470 21,705 23,152
$ 55,000............... 9,201 18,402 27,603 29,444
$ 65,000............... 11,167 22,335 33,502 35,736
$ 75,000............... 13,134 26,267 39,401 42,028
$100,000............... 18,049 36,099 54,148 57,758
$125,000............... 22,965 45,930 68,895 73,488
$150,000............... 28,173 55,761 83,934 89,218
</TABLE>
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<PAGE>
The benefits listed above are annual amounts and are based on the assumption
that the participant is age 65. As of June 30, 1996, James G. Hudson, Jr. had
23 years of service under the Pension Plan.
Supplemental Income Plans
Home Savings has entered into two separate Supplemental Income
Agreements with James G. Hudson, Jr., President, Chief Executive Officer and
Treasurer. These agreements provide that Mr. Hudson will receive certain
specified monthly payments for 15 years upon reaching 65 years of age. In the
event of Mr. Hudson's death before all payments have been made, benefits would
be payable to designated beneficiaries. In addition, if Mr. Hudson should die
prior to reaching 65 years of age, certain monthly payments would be made for a
15-year period to designated beneficiaries. In the event Mr. Hudson terminates
his employment, for reasons other than death, prior to reaching 65 years of age,
the monthly retirement benefit payment would be reduced. The benefits payable
under the Supplemental Income Agreements are funded by the purchase of life
insurance. During the fiscal year ended June 30, 1996, Home Savings accrued
$22,000 towards the cost of the benefits to be provided to Mr. Hudson under the
supplemental income plans.
Other Benefits
Home Savings provides its employees with group medical, dental, life
and disability insurance benefits. Employees are also provided with vacation,
holiday and sick leave.
Employment Agreement
In connection with the Conversion, Home Savings will enter into an
employment agreement with James G. Hudson, Jr., President, Chief Executive
Officer and Treasurer, in order to establish his duties and compensation and to
provide for his continued employment with Home Savings. The agreement will
provide for an initial annual base salary of $93,600. The agreement will
provide for an initial term of employment of three years. Commencing on the
first anniversary date and continuing on each anniversary date thereafter,
following a performance evaluation of the employee, the agreement may be
extended for an additional year so that the remaining term shall be three years
unless written notice of non-renewal is given by the Board of Directors. The
agreement also provides that base salary shall be reviewed by the Board of
Directors not less often than annually. In the event of a change in control (as
defined below), Mr. Hudson's base salary shall be increased by at least 6%
annually and the agreement will automatically be extended so that it will have a
three year term after the change in control. In addition, the employment
agreement provides for possible profitability and discretionary bonuses and
participation in all other pension, profit-sharing or retirement plans
maintained by Home Savings or by the Holding Company for employees of Home
Savings, as well as fringe benefits normally associated with Mr. Hudson's
office. It is now expected that Mr. Hudson will continue to be eligible to
receive bonuses under the existing bonus compensation plan for executive
officers, as such plan may be amended in the future. See " -- Bonus
Compensation." It is not now contemplated that Mr. Hudson will receive
additional discretionary bonuses, other than holiday bonuses computed on the
same basis as those paid to other employees. The employment agreement provides
that it may be terminated by Home Savings for cause, as defined in the
agreement, and that it may otherwise be terminated by Home Savings (subject to
vested rights) or by Mr. Hudson.
The employment agreement provides that the nature of Mr. Hudson's
compensation, duties or benefits cannot be diminished following a change in
control of Home 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 Home
Savings, or acquires in any manner control of the election of a majority of the
directors of either the Holding Company or Home Savings, (ii) either the Holding
Company or Home Savings consolidates or merges with or into another corporation,
association or entity, or is otherwise reorganized, where neither the Holding
Company nor Home
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<PAGE>
Savings is the surviving corporation in such transaction, or (iii) all or
substantially all of the assets of either the Holding Company or Home Savings
are sold or otherwise transferred to, or are acquired by, any other entity or
group.
The employment agreement could have the effect of making it less
likely that Home Savings or the Holding Company will be acquired by another
entity. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME
SAVINGS -- The Holding Company -- Anti-Takeover Effect of Employment Agreement,
Special Termination Agreements and Benefit Plans."
Special Termination Agreements
In connection with the Conversion, the Holding Company will enter into
special termination agreements with John E. Todd, Vice President of Home
Savings, and Drema A. Michael, Secretary and Assistant Treasurer of Home
Savings. Such agreements are intended to ensure that Home Savings will be able
to maintain a stable and competent management base after the Conversion. The
continued success of Home Savings depends, to a significant degree, on the skill
and competence of its officers.
The special termination agreements provide for payment to the covered
officer only in the event of a change in control of the Holding Company or Home
Savings followed by termination of the officer's employment by Home Savings
within 24 months for other than "cause," as such term is defined in the
agreements, or in the event there are certain specified changes in the officer's
employment circumstances within 24 months following a change in control of Home
Savings or the Holding Company and the officer terminates his or her employment.
In the event of such a termination of employment, the officer is entitled to
payment in an amount equal to two times his or her salary and bonuses for income
tax purposes for the most recent calendar year, payable in a lump sum or in
equal monthly payments. The initial term of each of these agreements is for a
period commencing upon the effective date of the Conversion and ending three
calendar years later. At the end of each anniversary date of the agreements,
they may be extended for another year so that the remaining term shall be three
years unless written notice of non-renewal is given by the Holding Company's
Board of Directors. For purposes of the special termination agreements, "change
in control" has the same meaning as in the employment agreement to be entered
into with Mr. Hudson. See "-- Employment Agreement." If a change in control
and such a termination occurred during calendar year 1996, Mr. Todd and Ms.
Michael would be entitled to receive $121,654 and $114,394, respectively, under
their special termination agreements.
The special termination agreements could have the effect of making it
less likely that Home Savings or the Holding Company will be acquired by another
entity. See "RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND HOME
SAVINGS -- The Holding Company -- Anti-Takeover Effect of Employment Agreement,
Special Termination Agreements and Benefit Plans."
Severance Plan
In connection with the Conversion, Home 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 Home Savings or the Holding Company and (i) Home Savings
or any successor of Home Savings terminates the employment of any full time
employee of Home 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 Home 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 Home 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 the employee's annual salary. Officers of Home 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
Home Savings has established the ESOP for its eligible employees. The
ESOP will become effective upon the Conversion. Employees with one year of
service with Home 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 20,944 and 28,336 shares
assuming the issuance of between 261,800 and 354,200 shares. If, because of an
oversubscription for 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 Home 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 Home 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. Home 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 Home 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 Home 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 certain employees of
Home Savings with an ownership interest in the Holding Company in a manner
designed to encourage such persons to continue their service to Home Savings.
All directors and certain employees of Home Savings would receive benefits under
the MRP. Upon stockholder approval of the MRP, the Holding Company and Home
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. Recipients would not be required to pay for shares issued to them
under the MRP. Assuming the issuance of 354,200 shares in the Conversion and
receipt of stockholder approval, 14,168 shares would be issued pursuant to the
MRP. 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, (i) no employee of Home Savings (including Mr.
Hudson, Mr. Todd and Ms. Michael) could receive more than 25% of the shares
issued under the MRP, or 3,542 shares, assuming the issuance of 354,200 shares
in the Conversion, (ii) the four non-employee directors of Home Savings could
receive restricted stock grants for an aggregate of not more than 20% of the
shares issued under the MRP, or 2,833 shares, assuming the issuance of 354,200
shares in the Conversion and (iii) none of the four non-employee directors of
Home Savings could receive individually more than 5% of the shares issued under
the MRP, or 708 shares, assuming the issuance of 354,200 shares in the
Conversion. If the MRP is submitted to and approved by the Holding Company's
stockholders more than one year after consummation of the Conversion, the
regulatory percentage limitations set forth above would not apply.
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 Home Savings. In such event, it is expected that "change in control"
would have the same meaning as is set forth in the employment agreement with
James G. Hudson, Jr. See "-- Employment Agreement."
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 Home 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 recipient would be required to
repay all dividends received with respect to shares that did not become vested.
It is expected that the MRP will provide that it cannot be terminated upon a
change in control of the Holding Company or Home Savings unless the acquiror
provides for an equivalent benefit.
If the MRP is approved by the stockholders, Home 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 Home Savings and as an incentive for their continued
performance.
Proposed Stock Option Plan
The Boards of Directors of the Holding Company and Home 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 Plan (less any shares acquired by
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the Stock Option Plan in the open market). Assuming the issuance of between
261,800 and 354,200 shares in the Conversion, an aggregate of between 26,180 and
35,420 shares of Common Stock would be reserved for issuance and/or purchased in
the open market to be issued upon the exercise of options granted under the
Stock Option Plan.
Assuming the Stock Option Plan is approved by the stockholders of the
Holding Company, the Stock Option Plan would be administered by a committee of
the Holding Company's Board of Directors. Options granted under the Stock
Option Plan will have an option exercise price of not less than the fair market
value of the Common Stock on the date the options are granted. Options granted
under the Stock Option Plan will have a term of ten years, will not be
transferable except upon death and will continue to be exercisable upon
retirement, death or disability. Options granted under the Stock Option Plan
will have a vesting schedule which will provide that 20% of the options granted
would vest and become nonforfeitable on the first anniversary of the date of the
option grant and 20% will vest and become nonforfeitable on each subsequent
anniversary date, so that the options would be completely vested at the end of
five years after the date of the option grant. Options will become 100% vested
upon death or disability. In addition, if the Stock Option Plan is submitted to
and approved by the Holding Company's stockholders more than one year after
consummation of the Conversion, the Stock Option Plan may provide that options
will become automatically vested upon retirement or upon a change in control of
the Holding Company or Home Savings. In such event, it is expected that "change
in control" would have the same meaning as is set forth in the employment
agreement with James G. Hudson, Jr. See "-- Employment Agreement." The Stock
Option Plan will provide that the Plan cannot be terminated upon a change in
control of the Holding Company or Home Savings unless the acquiror provides for
an equivalent benefit to holders of unvested options.
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, (i) no employee of Home Savings
(including Mr. Hudson, Mr. Todd and Ms. Michael) could receive more than 25% of
the options issued under the Stock Option Plan, or options to purchase 8,855
shares, assuming the issuance of 354,200 shares in the Conversion, (ii) the four
non-employee directors of Home Savings could receive not more than 20% of the
options issued under the Stock Option Plan, or options to purchase 7,084 shares,
assuming the issuance of 354,200 shares in the Conversion, and (iii) none of the
four non-employee directors of Home Savings could receive individually more than
5% of the options issued under the Stock Option Plan, or options to purchase
1,771 shares, assuming the issuance of 354,200 shares in the Conversion. 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
regulatory percentage limitations set forth above would not apply.
Options granted to employees under the Stock Option Plan may be
"incentive stock options" which are designed to result in beneficial tax
treatment to the employee but no tax deduction to the Holding Company or Home
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 Home Savings) as to the voting of all shares of Common Stock
held by the trustees to satisfy vested and unvested options which have been
granted to the optionee. In the event a tender offer is made for shares held by
the trustees to satisfy vested and unvested options granted to an optionee, the
optionee will be able to instruct the trustees' response. Any shares held by
the trustees to satisfy options not yet granted shall be voted or tendered by
the trustees in their discretion.
It is expected that the Stock Option Plan will provide that any cash
dividends or other distributions paid or made with respect to shares of Common
Stock held by the trustees in trust under the Stock Option Plan, plus earnings
on such amounts, less amounts retained by the trustees to pay the expenses of
such trust, will be paid by the trustees to the Holding Company.
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 Home Savings and as an incentive for their continued performance. No cash
consideration will be paid for the options.
Certain Indebtedness and Transactions of Management
Home Savings makes loans to executive officers and directors of Home
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 Home Savings from making loans to
executive officers and directors of Home Savings on terms more favorable than
could be obtained by persons not affiliated with Home Savings. Home 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
$415,000 and represents 1.6% of pro forma consolidated stockholders' equity of
the Holding Company at June 30, 1996, assuming the sale of 354,200 shares of
Common Stock.
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.
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
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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 Home Savings.
See "DIVIDEND POLICY," "SUPERVISION AND REGULATION -- Regulation of Home 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
corporate laws 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 Home 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
HOME 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 HOME SAVINGS -- The Holding Company
- -- Restrictions in Articles of Incorporation and Bylaws" and "-- Regulatory
Restrictions."
Home Savings
Common Stock. After consummation of the Conversion, Home Savings will
be authorized to issue 100,000 shares of common stock, no par value ("Home
Savings Common Stock"). The Home Savings Common Stock will
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represent nonwithdrawable capital, will not be an account of an insurable type,
and will not be insured by the FDIC or any other governmental entity.
Dividends. The payment of dividends by Home Savings is subject to
limitations which are imposed by North Carolina law and regulations. See
"DIVIDEND POLICY" and "SUPERVISION AND REGULATION -- Regulation of Home Savings
- -- Restrictions on Dividends and Other Capital Distributions." In addition,
federal income tax law considerations may affect the ability of Home Savings to
pay dividends and make other capital distributions. See "TAXATION." The
holders of Home Savings Common Stock will be entitled to receive and share
ratably in such dividends on the Home Savings Common Stock as may be declared by
the Board of Directors of Home Savings out of funds legally available therefor,
subject to applicable statutory and regulatory restrictions.
Voting Rights. As a mutual North Carolina-chartered savings bank,
Home Savings currently has no stockholders, and voting rights in Home Savings
are currently held by Home Savings' members (depositors and borrowers). Members
elect Home 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 Home
Savings, will possess the exclusive voting rights with respect to the Home
Savings Common Stock, will elect Home 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 Home
Savings' Board of Directors. The holders of Home Savings Common Stock will have
no right to vote their shares cumulatively in the election of directors of Home
Savings.
Liquidation Rights. After the Conversion, in the event of any
liquidation, dissolution or winding up of Home Savings, the Holding Company, as
holder of all of Home Savings' outstanding capital stock, would be entitled to
receive all remaining assets of Home Savings available for distribution, after
payment of or making of adequate provisions for, all debts and liabilities of
Home 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 Home Savings Common Stock will not
be entitled to preemptive rights with respect to any shares which may be issued
by Home Savings.
Restrictions on Acquisition. Acquisitions of Home 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 HOME SAVINGS -- Home Savings."
ANTI-TAKEOVER PROVISIONS AFFECTING THE HOLDING COMPANY AND HOME 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
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to be in their best interests or pursuant to which stockholders would receive a
substantial premium for their shares over the current market prices. Therefore,
the existence of such anti-takeover provisions in fact may not always be in the
best interests of all shareholders. Stockholders who might desire to
participate in such a takeover not supported by management 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. Nevertheless, the
Boards of Directors of Home 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 five, but such number may be changed by
resolution of the Board of Directors. These provisions have the effect of
enabling the Board of Directors to elect directors friendly to management in the
event of a non-negotiated takeover attempt and may make it more difficult for a
person seeking to acquire control of the Holding Company to gain majority
representation on the Board of Directors in a relatively short period of time.
The Holding Company believes these provisions to be important to continuity in
the composition and policies of the Board of Directors.
The Articles of Incorporation provide that, 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.
The Articles of Incorporation and Bylaws of the Holding Company
provide that directors may be removed prior to the end of their term only for
cause.
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
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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
certain employees and other appropriate purposes. However, issuance of
additional authorized shares may also have the effect of impeding or deterring
future attempts to gain control of the Holding Company.
The Board of Directors also has sole authority to determine the terms
of any one or more series of preferred stock, including voting rights,
conversion rates, dividend rights, and liquidation preferences, which could
adversely affect the voting power of the holders of the Common Stock and
discourage an attempt to acquire control of the Holding Company. The Board of
Directors does not intend to issue any preferred stock, except on terms which it
deems to be in the best interests of the Holding Company and its stockholders.
However, the Board of Directors has the power, to the extent consistent with its
fiduciary duties, to issue preferred stock to persons friendly to management or
otherwise in order to impede attempts by third parties to acquire voting control
of the Holding Company and to impede other transactions not favored by
management. The Board of Directors currently has no plans for the issuance of
additional shares of Common Stock (except for such shares as may be necessary to
fund the MRP and the Stock Option Plan) or of shares of preferred stock.
Director Nominations. The Bylaws of the Holding Company require a
stockholder who intends to nominate a candidate for election to the Board of
Directors at a stockholders' meeting to give written notice to the Secretary of
the Holding Company at least 50 days (but not more than 90 days) in advance of
the date of the meeting at which such nominations will be made. The nomination
notice is also required to include specified information concerning the nominee
and the proposing stockholder. The Board of Directors of the Holding Company
believes that it is in the best interests of the Holding Company and its
stockholders to provide sufficient time for the Board of Directors to study all
nominations and to determine whether to recommend to the stockholders that such
nominees be considered.
Supermajority Voting Provisions. The Holding Company's Articles of
Incorporation require the affirmative vote of 75% of the outstanding shares
entitled to vote to approve a merger, consolidation, or other business
combination, unless the transaction is approved, prior to consummation, by the
vote of at least 75% of the number of the Continuing Directors (as defined in
the Articles of Incorporation) on the Holding Company's Board of Directors.
"Continuing Directors" generally includes all members of the Board of Directors
who are not affiliated with any individual, partnership, trust or other person
or entity (or the affiliates and associates of such person or entity) which is a
beneficial owner of 10% or more of the voting shares of the Holding Company.
This provision could tend to make the acquisition of the Holding Company more
difficult to accomplish without the cooperation or favorable recommendation of
the Holding Company's Board of Directors.
Anti-Takeover Effect of Employment Agreement, Special Termination
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 HOME 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 Home Savings and for voting control by
directors and certain 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 HOME 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
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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 30.58% or 28.16%, at the minimum and
maximum of the Valuation Range, respectively, of the Common Stock issued and
outstanding.
The existence of the employment agreement and special termination
agreements with employees could make a business combination with Home Savings
more costly and could discourage such transactions. See "MANAGEMENT OF HOME
SAVINGS -- Employment Agreement" and "MANAGEMENT OF HOME SAVINGS -- Special
Termination Agreements."
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 Home Savings or the
Board of Directors of the Holding Company and Home 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 Home 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 Home 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."
Home Savings
Upon consummation of the Conversion, Home Savings will become a
wholly-owned subsidiary of the Holding Company, and, consequently, restrictions
on the acquisition of Home Savings would have a more limited effect than if Home
Savings' common stock were held directly by the stockholders purchasing in the
Conversion. However, restrictions on the acquisition of Home Savings may
discourage takeover attempts of the Holding Company in order to gain immediate
control of Home Savings.
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Regulatory Restrictions. The Administrator and the Federal Reserve
have conditionally approved the Holding Company's acquisition of all of the
stock of Home 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
Home 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 Home 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 Home Savings by a corporation whose ownership is or
will be substantially the same as the ownership of Home Savings, provided that
the offer or acquisition is made more than one year following the consummation
of the Conversion. Similarly, Federal Reserve approval is required before any
person or entity may acquire "control" of Home Savings. See "-- The Holding
Company-- Regulatory Restrictions."
Board of Directors. The amended Articles of Incorporation of Home
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
five, but such number may be changed by resolution of the Board of Directors.
This provision has the effect of enabling the Board of Directors to elect
directors friendly to management in the event of a non-negotiated takeover
attempt. Home 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 Home Savings to gain majority representation on the Board of Directors in a
relatively short period of time. Home Savings believes these provisions to be
important to continuity in the composition and policies of its Board of
Directors.
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THE CONVERSION
THE BOARD OF DIRECTORS OF HOME 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 HOME 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
Home Savings was organized and has operated 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 Home Savings has been
studying the environment in which it operates and its strategic options.
As a result of its study of its strategic options, Home Savings
adopted the Plan of Conversion. Home Savings believes that converting the bank
from the mutual to stock form and organizing the Holding Company will provide
increased flexibility for Home Savings and the Holding Company to react to
changes in their operating environment, regardless of the strategies ultimately
chosen.
The existing management of Home Savings and the Holding Company
believes that it will be in the best interests of Home Savings, the Holding
Company and the stockholders of the Holding Company for the Holding Company to
remain an independent financial institution. Assuming the consummation of the
Conversion, the Holding Company and Home Savings intend to pursue the business
strategy described in this Prospectus with the goal of enhancing shareholder
value over the long term. Neither the Holding Company nor Home Savings has any
existing plan to consider any business combination, and neither company has any
agreement or understanding with respect to any possible business combination.
The Board of Director's adoption of the Plan of Conversion is subject
to approval by the members of Home Savings and receipt of required regulatory
approvals. Pursuant to the Plan of Conversion, Home 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 Home Savings. By letter dated
November 8, 1996, the Administrator approved the Plan of Conversion, subject to
approval by the members of Home Savings and satisfaction of certain other
conditions. The Special Meeting will be held on December 12, 1996 for the
purpose of considering approval of the Plan of Conversion.
Consummation of the Conversion is contingent also upon receipt of the
approvals of the Federal Reserve and the Administrator for the Holding Company
to acquire Home 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 November 27, 1996. Finally,
consummation of the Conversion is contingent upon receipt from the FDIC of a
final non-objection letter with respect to the transaction. The FDIC has issued
a conditional notification that it does not intend to object to the Conversion.
The following is a summary of all material provisions of the Plan of
Conversion. It is qualified in its entirety by the provisions of the Plan of
Conversion, which contains a more detailed description of the terms of the
Conversion. The Plan of Conversion is attached as Attachment I to Home Savings'
Proxy Statement for the Special Meeting which has been delivered to all members
of Home Savings. The Plan of Conversion can also be obtained by written request
from Home Savings. See "ADDITIONAL INFORMATION."
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Purposes of Conversion
Home 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, Home 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 Home Savings, including (i) a
larger capital base for Home Savings' operations, (ii) an enhanced future access
to capital markets and (iii) an opportunity for depositors of Home Savings to
become stockholders of the Holding Company.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Holding Company's Articles of Incorporation will permit
the Holding Company, subject to market conditions, to raise additional equity
capital through further sales of securities. Following the Conversion, the
Holding Company will also be able to use stock-related incentive programs to
attract, retain and provide incentives for qualified directors and executive and
other personnel of the Holding Company and Home Savings. See "MANAGEMENT OF
HOME SAVINGS --Employee Stock Ownership Plan," "-- Proposed Management
Recognition Plan" and "-- Proposed Stock Option Plan."
Formation of the Holding Company will provide greater flexibility than
Home Savings would otherwise have to expand and 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 plans, arrangements,
understandings or agreements regarding any such business combinations.
Effects of Conversion
General. Each person with a deposit account in Home Savings has pro
rata rights, based upon the balance in his or her account, in the net worth of
Home 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, Home Savings' depositors can realize value with respect to their
interests only in the unlikely event that Home 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 Home Savings' conversion to stock form, its Certificate of
Incorporation will be amended to authorize the issuance of permanent
nonwithdrawable capital stock to represent the ownership of Home 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 Home 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 Home Savings.
Voting Rights. Under Home Savings' current Certificate of
Incorporation and Bylaws, deposit account holders and borrowers have voting
rights with respect to certain matters relating to Home Savings, including the
election of directors. After the Conversion, (i) neither deposit account
holders nor borrowers will have voting rights with respect to Home Savings and
will therefore not be able to elect directors of Home Savings or control its
affairs; (ii) voting rights with respect to Home Savings will be vested in the
Holding Company as the sole stockholder of Home 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 Company's stockholders. For a
description of the voting rights of the holders of Common Stock, see
"DESCRIPTION OF CAPITAL STOCK."
Deposit Accounts and Loans. The account balances, interest rates and
other terms of deposit accounts at Home 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 Home Savings to withdraw funds to
pay for his or her Common Stock).
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Furthermore, the Conversion will not affect any loan account, the balances,
interest rates, maturities or other terms of these accounts, or the obligations
of borrowers under their individual contractual arrangements with Home Savings.
Continuity. Home 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 office
operated by the existing management and employees of Home Savings.
Liquidation Rights. In the unlikely event of a complete liquidation
of Home 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 Home Savings, each holder of a deposit
account in Home Savings would receive such holder's pro rata share of any assets
of Home 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
Home 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 Home 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, Home 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 Home 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 Home 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 Home 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 September 30, 1996 (the Supplemental Eligibility Record Date),
respectively. Each initial subaccount balance will be the amount determined by
multiplying the total opening balance in the Liquidation Account by the
Qualifying Deposit (a deposit of at least $50 as of the Eligibility Record Date
or Supplemental Eligibility Record Date, as applicable) of such deposit account
divided by the total of all Qualifying Deposits on that date. If the amount in
the deposit account on any subsequent annual closing date of Home 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 Supplemental
Eligible Account Holders are satisfied would be distributed to the Holding
Company, as sole stockholder of Home Savings.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with another FDIC-insured depository institution, whether or not
Home 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
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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 ($50.00) 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 December 11, 1996, unless, with the approval of the
Administrator, the offering period is extended by the Holding Company and Home
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 January 25, 1997, 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 Home Savings' members.
Subscription Offering
In accordance with North Carolina conversion regulations, non-
transferable Subscription Rights have been granted under the Plan of Conversion
to the following persons in the following order of priority: (i) Home 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) Home Savings' Supplemental
Eligible Account
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Holders, who are depositors as of September 30, 1996 who had Qualifying Deposits
on such date; (iv) Home Savings' Other Members, who are depositor and borrower
members as of October 25, 1996, the voting record date for the Special Meeting,
who are not Eligible Account Holders or Supplemental Eligible Account Holders;
and (v) directors, officers and employees of Home 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 20 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 for 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.
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 20 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 Home Savings as of
October 25, 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-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.
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Employees, Officers, and Directors. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, Home
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 Davidson County 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 at
the Expiration Time or at any time thereafter, but no later than January 25,
1997, 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 Home 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 Home 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 Home 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 Home 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 Home Savings and the Holding Company in the
entire amount of such order up to a number of shares no greater than 5,000
shares, which number shall be determined by the Board of Directors of Home
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.
Syndicated Community Offering
The Plan of Conversion provides that, if necessary, all shares of
Common Stock not purchased in the Subscription and Community Offerings, if any,
may be offered for sale to the general public in a Syndicated Community Offering
through a syndicate of registered broker-dealers as selected dealers ("Selected
Dealers") to be formed and managed by Trident Securities acting as agent of the
Holding Company in the sale of the Common Stock. The Holding Company and Home
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
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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 $50.00 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 Home 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 Home Savings and the Holding Company, but
in no case later than January 25, 1997.
Fractional Shares
In making allocations in the event of oversubscriptions, all
computations will be rounded down to the nearest whole share; no fractional
shares will be issued. Excess and other amounts sent by subscribers which are
not used to satisfy subscriptions will be refunded with interest at Home
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 $50.00
per share. The purchase price was determined by the Boards of Directors of the
Holding Company and Home Savings in consultation with Home Savings' financial
advisor and sales agent, Trident Securities, and was based upon a number of
factors. The North Carolina regulations governing conversions of North
Carolina-chartered mutual savings banks to stock form require that the aggregate
purchase price of the shares of Common Stock of the Holding Company sold in
connection with the Conversion be equal to not less than the minimum, nor more
than the maximum, of the Valuation Range which is established by an independent
appraisal in the Conversion and is described below; provided, however, that with
the consent of the Administrator and the FDIC the aggregate purchase price of
the Common Stock sold may be increased to up to 15% above the maximum of the
Valuation Range, without a resolicitation of subscribers or any right to cancel,
rescind or change subscription orders, to reflect changes in market and
financial conditions following commencement of the Subscription Offering.
FDIC rules with respect to appraisals require that the independent
appraisal must include a complete and detailed description of the elements of
the appraisal report, justification for the methodology employed and sufficient
support for the conclusions reached. The appraisal report must include a full
discussion of each peer group member and documented analytical evidence
supporting variances from peer group statistics. The appraisal report must also
include a complete analysis of the converting institution's pro forma earnings,
which should include the institution's full potential once it fully deploys the
capital from the conversion pursuant to its business plan.
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Home Savings has retained JMP Financial, an independent appraisal firm
experienced in the valuation and appraisal of savings institutions and their
holding companies, to prepare an appraisal of the pro forma market value of Home
Savings and the Holding Company and to assist Home Savings in preparing a
business plan. For its services in determining such valuation and assisting
with the business plan, JMP Financial will receive an aggregate fee of $30,000,
plus $2,500 for each written opinion or update of its appraisal, and will be
reimbursed for its out-of-pocket expenses.
JMP Financial has informed Home Savings that its appraisal has been
made in reliance upon the information contained in this Prospectus, including
the financial statements of Home Savings. JMP Financial has further informed
Home 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 Home Savings; (ii) the economic
and demographic conditions in Home Savings' existing market area; (iii) certain
historical, financial and other information relating to Home Savings; (iv) the
proposed dividend policy of the Holding Company; (v) a comparative evaluation of
the operating and financial statistics of Home 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 JMP
Financial believes to be comparable in relevant respects to the Holding Company
and Home Savings and general conditions in the markets for such securities. In
addition, JMP Financial has advised Home Savings that it has considered the
effect of the Conversion on the net worth and earnings potential of the Holding
Company and Home Savings.
On the basis of its consideration of the above factors, JMP Financial
has advised Home Savings that, in its opinion, at October 22, 1996, the
Valuation Range of Home Savings and the Holding Company was from a minimum of
$13,090,000 to a maximum of $17,710,000, with a midpoint of $15,400,000. Based
upon such valuation and a purchase price for shares offered in the Conversion of
$50.00 per share, the number of shares to be offered ranges from a minimum of
261,800 shares to a maximum of 354,200 shares, with a midpoint of 308,000
shares.
The Board of Directors of Home Savings has reviewed the methodology
and assumptions used by JMP Financial 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, JMP Financial will confirm or update
its valuation of the estimated aggregate pro forma market value of Home 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 $20,366,500 (407,330 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, JMP Financial confirms to Home 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 JMP Financial to conclude that the aggregate
purchase price of the Common Stock sold in the Conversion is incompatible with
its estimate of the aggregate pro forma market value of Home Savings and the
Holding Company at the conclusion of the Offerings. If the aggregate pro forma
market value of Home 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 than 15% above the maximum of the Valuation Range), then such pro forma
market value will determine the number of shares of Common Stock to be sold in
the Conversion. If there has occurred a change in the aggregate pro forma
market value of Home 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.
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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 Home 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 Home 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 JMP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
Common Stock. JMP Financial did not independently verify the financial
statements and other information provided by Home Savings, nor did JMP Financial
value independently the assets or liabilities of Home Savings. The valuation
considers Home Savings as a going concern and should not be considered as an
indication of the liquidation value of Home 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 JMP Financial 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
original signed Stock Order Form, accompanied by the required payment for the
aggregate dollar amount of Common Stock desired or appropriate instructions
authorizing withdrawal from one or more Home Savings deposit accounts (other
than negotiable order of withdrawal accounts or other demand deposit accounts),
must be received by Home Savings by the Expiration Time, which is 12:00 noon,
Eastern Time, on December 11, 1996. Subscription Rights (i) for which Home
Savings does not receive original signed Stock Order Forms by the Expiration
Time (unless such time is extended), or (ii) for which Stock Order Forms are
executed defectively or are not accompanied by full payment (or appropriate
withdrawal instructions) for subscribed shares, will expire whether or not Home
Savings has been able to locate the persons entitled to such rights. Copies of
the Stock Order Form, including copies sent by facsimile, will not be accepted.
In order to purchase in the Community Offering, the Stock Order Form,
accompanied by the required payment for the aggregate dollar amount of Common
Stock desired or appropriate instructions authorizing withdrawal from one or
more Home Savings deposit accounts (other than negotiable order of withdrawal
accounts or other demand deposit accounts), must be received by Home 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.
Persons wishing to use funds in a Home Savings IRA to purchase Common
Stock must visit the Stock Information Center on or before December 4, 1996 in
order to complete that purchase so that the necessary forms may be forwarded for
execution and returned prior to the Expiration Time.
An executed Stock Order Form once received by Home Savings, may not be
modified, amended or rescinded without the consent of Home Savings. Home
Savings has the right to extend the subscription period subject to applicable
regulations, unless otherwise ordered by the Administrator, or to waive or
permit correction of incomplete or improperly executed Stock Order Forms, but
does not represent that it will do so.
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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. Complete payment must accompany all
completed Stock Order Forms submitted in the Subscription and Community
Offerings in order for subscriptions to be valid. See "-- Purchase Price of
Common Stock and Number of Shares Offered."
Payment for shares will be permitted to be made by any of the
following means: (i) in cash, if delivered in person to either office of Home
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 Home Savings (other than a negotiable order of withdrawal
account or other demand deposit account). Stock Order Forms directing that
payment for shares be made by authorization of withdrawal will be accepted only
if, at the time the Stock Order Form is received, there exists sufficient funds
in the account from which withdrawal is authorized to pay the full purchase
price for the number of shares ordered. Payment may not be made by wire
transfer. In order to ensure proper identification of Subscription Rights and
proper allocations in the event of an oversubscription, it is the responsibility
of subscribers to provide correct account verification information on the Stock
Order Form. Stock Order Forms submitted by unauthorized purchasers or in
amounts exceeding purchase limitations will not be honored.
For purposes of determining the withdrawal balance of deposit accounts
from which withdrawals have been authorized, such withdrawals will be deemed to
have been made upon receipt of appropriate authorization therefor, but interest
will be paid by Home 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 Home Savings on payments for Common Stock
made in cash or by check, bank draft, negotiable order of withdrawal or money
order at Home 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 Home Savings until consummation or termination of the Conversion.
Home 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. Home Savings may not knowingly lend funds or otherwise extend
credit to any person to purchase Common Stock. After amounts submitted for
payment are applied to the purchase price for shares sold, they will no longer
earn interest, and they will not be insured by the FDIC or any other government
agency or other entity.
The Stock Order Forms contain appropriate means by which authorization
of withdrawals from deposit accounts may be made to pay for subscribed shares.
Once such a withdrawal has been authorized, none of the designated withdrawal
amount may be withdrawn (except by Home 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 Home Savings' passbook savings rate.
Upon completion or termination of the Conversion, Home 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 Home 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.
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Delivery of Stock Certificates
Certificates representing Common Stock issued in the Conversion will
be mailed by the Holding Company's transfer agent to persons entitled thereto at
the address of such persons appearing on the Stock Order Form as soon as
practicable following consummation of the Conversion. Any certificates returned
as undeliverable will be held by the Holding Company until claimed by persons
legally entitled thereto or otherwise disposed of in accordance with applicable
law. Until certificates for Common Stock are available and delivered to
subscribers, subscribers may not be able to sell the shares of Common Stock for
which they have subscribed, even though trading of the Common Stock may have
commenced.
Persons in Non-Qualified or Foreign Jurisdictions
The Holding Company will make reasonable efforts to comply with the
securities laws of all states of the United States in which Eligible Account
Holders, Supplemental Eligible Account Holders, or Other Members entitled to
subscribe for shares of Common Stock reside. However, no shares of Common Stock
or Subscription Rights under the Plan of Conversion will be offered or sold in a
foreign country, or in a state in the United States (i) where a small number of
persons otherwise eligible to subscribe for shares under the Plan of Conversion
reside or (ii) if the Holding Company determines that compliance with the
securities laws of such state would be impracticable for reasons of cost or
otherwise, including, but not limited to, a requirement that the Holding
Company, Home 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
Home Savings has retained Trident Securities to consult with and
advise Home 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
is headquartered in Raleigh, North Carolina, and its telephone number is (919)
781-8900. Trident Securities will assist Home 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
Home 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, Home Savings has agreed to pay Trident
Securities (a) a management fee equal to 1% 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. Home Savings has also agreed to pay to
Selected Dealers, if any, negotiated commissions. Home Savings has paid Trident
Securities $10,000 toward amounts due to such agent.
Home 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 Home 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 $10,000. Total fees and commissions to Trident
Securities are expected to be between $347,000 and $554,000 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.
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Sales of Common Stock will be made primarily by registered
representatives affiliated with Trident Securities or by the broker-dealers
managed by Trident Securities. In addition, subject to applicable law,
executive officers of the Holding Company and Home Savings may participate in
the solicitation of offers to purchase Common Stock. Other employees of Home
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 to purchase Common Stock or provide advice regarding the purchase of
Common Stock. A Stock Information Center will be established in Home Savings'
office, in an area separate from Home 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 Home
Savings' office and will be promptly forwarded to the Stock Information Center
for processing. Sales of Common Stock by registered representatives will be
made from the Stock Information Center. In addition, Home 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 Home 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 Home Savings employees to participate in the sale of Common Stock. No
officer, director or employee of the Holding Company or Home 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 10 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 (i) any person or entity, (ii) persons or
entities exercising Subscription Rights through a single account or (iii) group
of persons or entities otherwise acting in concert, is 5,000 shares; provided,
however, that the ESOP may purchase up to 8% of the number of shares offered in
the Conversion (28,336 shares, assuming the issuance of 354,200 shares). In
addition, no person or entity, or group of persons or entities acting in
concert, together with any associates (as defined in the Plan of Conversion),
may subscribe for more than 7,000 shares of Common Stock sold in the Conversion.
Any shares held by the ESOP and attributed to a natural person shall not be
aggregated with other shares purchased directly by or otherwise attributable to
that natural person. The Board of Directors of Home Savings may in its absolute
discretion (i) reduce the above-described 5,000 and 7,000 share maximum purchase
limitations to an amount not less than 1% of the number of shares offered and
sold in the Conversion or (ii) increase such 5,000 and 7,000 share maximum
purchase limitations 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 Home Savings' Board of Directors may occur at any time prior to consummation
of the Conversion, either before or after the Special Meeting on December 12,
1996. In the event the 5,000 or 7,000 share maximum purchase limitation is
increased, any subscriber or group of subscribers in the Subscription, Community
or Syndicated Community Offering who has subscribed for the maximum amount which
is increased, 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:
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(i) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a
director or officer of Home Savings, the Holding Company or any
subsidiary of Home Savings or of the Holding Company;
(ii) any corporation or organization (other than Home Savings, the
Holding Company or a majority-owned subsidiary of Home 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 stock benefit plan or any
charitable trust which is exempt from federal taxation pursuant
to Section 501(c)(3) of the Code.
For purposes of the foregoing limitations, (i) directors and officers
of Home 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 Home 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 Home 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 Home 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, Home Savings will continue to operate
as a North Carolina-chartered mutual savings bank, all subscription funds will
be promptly returned with interest at Home 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 Home Savings.
All interpretations by Home 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. Home Savings and the Holding Company may reject Stock Order
Forms that are not properly completed. However, the Holding Company and Home
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 Home Savings' Board of Directors
at any time prior
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to the Special Meeting, and at any time thereafter by a two-thirds vote of Home
Savings' Board of Directors with the concurrence of the Administrator. If Home
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 Home Savings' Board of Directors at any time prior to the Special
Meeting and may be terminated by a two-thirds vote of Home 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.
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.
Home Savings reserves the right to make an independent investigation
of any facts or circumstances brought to its attention that indicate or tend to
indicate that one or more persons acting independently or as a group acting in
concert may be attempting to violate or circumvent the regulatory prohibition on
transferability of Subscription Rights. The nature and extent of such
investigation will be at Home Savings' sole discretion and Home Savings may
require a holder of Subscription Rights to provide certified affidavits and
other documentation to satisfy Home Savings that its Plan of Conversion and
North Carolina and federal conversion regulations regarding nontransferability
are not being subverted by actions of holders of Subscription Rights. In
extreme cases Home Savings reserves the right to seek legal advice from the
General Counsel for the Administrator as to compliance with all regulations
governing the Conversion, including the nontransferability of Subscription
Rights.
The Plan of Conversion provides that, if Home 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 Home 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
Home 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 Home Savings and no gain or
loss will be recognized by Home Savings either in its mutual or stock form; (ii)
no gain or loss will be recognized by Home Savings upon the purchase of Home
Savings' stock by the Holding Company or upon the sale by the Holding Company of
its Common Stock; (iii) no gain or loss will be recognized by Home Savings'
depositors with respect to their deposit accounts at Home Savings as a
consequence of the Conversion; (iv) the tax basis of depositors' deposit
accounts at Home Savings will not be changed as a result of the Conversion; (v)
assuming the Subscription Rights have no value, no gain or loss will be
recognized by Eligible Account Holders, Supplemental Eligible Account Holders,
Other Members, or directors, officers and employees of Home Savings upon either
the issuance to them of the Subscription Rights or the exercise or lapse
thereof; (vi) 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; (vii) assuming the Subscription Rights have no
value, the tax basis for Common Stock purchased in the Conversion will be the
amount paid therefor; and (viii) the tax basis of interests in the Liquidation
Account will be zero. Home 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.
114
<PAGE>
Several of the foregoing legal opinions are premised on the assumption
that the Subscription Rights will have no value. Home Savings has been advised
by JMP Financial that, in its opinion, the Subscription Rights will not have any
ascertainable 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 JMP
Financial is not binding on the IRS and if the Subscription Rights were
ultimately determined to have ascertainable value, recipients of Subscription
Rights would have to include in gross income an amount equal to the value of the
Subscription Rights received by them. The basis of the Common Stock purchased
pursuant to Subscription Rights would be increased by the amount of income
realized with respect to the receipt or exercise of the Subscription Rights.
Moreover, recipients of Subscription Rights could then have to report the
transaction to the IRS. Each Eligible Account Holder, Supplemental Eligible
Account Holder, Other Member or other recipient of Subscription Rights is
encouraged to consult with his, her or its own tax advisor as to the tax
consequences in the event the Subscription Rights are deemed to have
ascertainable value.
No legal opinion has been or will be received with respect to any tax
consequences of the Conversion not specifically described above, including the
tax consequences to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members, other recipients of Subscription Rights or purchasers of
Common Stock under the laws of any other state, local or foreign taxing
jurisdiction to which they may be subject. Special counsel expresses no opinion
regarding the value of the Subscription Rights.
LEGAL OPINIONS
The validity of the issuance of the Common Stock in the Conversion has
been passed upon for the Holding Company by its special counsel, Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P., Greensboro, North Carolina, which firm has
also rendered its opinion to Home 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 Thacher Proffitt & Wood, Washington, D.C.
EXPERTS
The Financial Statements of Home 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.
JMP Financial has consented to being named as an expert herein and to
the summary herein of its appraisal report as to the estimated pro forma market
value of Home 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.
115
<PAGE>
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.
Home 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 JMP
Financial's appraisal, may be inspected at the office of the Administrator,
Savings Institutions Division, North Carolina Department of Commerce, Tower
Building, Suite 301, 1110 Navaho Drive, Raleigh, North Carolina 27609. Copies
of the Plan of Conversion, which includes a copy of Home 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 Home Savings and may be obtained by writing to Home Savings at
Post Office Box 989, Thomasville, North Carolina 27361-0989; Attention: James
G. Hudson, Jr., President, or by telephoning Home Savings at (910) 475-4663. A
copy of JMP Financial's independent appraisal is also available for inspection
at the Stock Information Center.
116
<PAGE>
Index to Financial Statements
Page
----
Independent Auditors' Report F-1
Financial Statements:
Statements of Financial Condition at June 30, 1996 and 1995 F-2
Statements of Operations for the Years Ended June 30, 1996,
1995 and 1994 F-3
Statements of Retained Earnings for the Years Ended June 30,
1996, 1995 and 1994 F-4
Statements of Cash Flows for the Years Ended June 30, 1996,
1995 and 1994 F-5
Notes to 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
Financial Statements of Home 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.
117
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Home Savings, SSB
Thomasville, North Carolina
We have audited the accompanying statements of financial condition of Home
Savings, SSB as of June 30, 1996 and 1995 and the related statements of
operations, retained earnings, and cash flows for each of the three years in
the period ended June 30, 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Home Savings, SSB at June 30,
1996 and 1995, and the results of its operations and its 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 financial statements, on July 1, 1994, the Bank
changed its method of accounting for investment securities to adopt the
provisions of Statement of Financial Accounting Standards No. 115.
/s/ Dixon, Odom & Co., L.L.P.
High Point, North Carolina
July 17, 1996
----------
Page F-1
<PAGE>
HOME SAVINGS, SSB
STATEMENTS OF FINANCIAL CONDITION
June 30, 1996 and 1995
================================================================================
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Cash on hand and in banks $ 1,342,518 $ 1,172,327
Interest-bearing balances in other banks 3,644,859 4,441,361
Investment securities available for sale, at fair value (amortized cost of
$11,646,081 and $8,485,774 at June 30, 1996 and 1995,
respectively) (Note B) 11,707,105 8,664,147
Investment securities held to maturity, at amortized cost (fair value of
$6,839,969 and $5,165,480 at June 30, 1996 and 1995,
respectively) (Note B) 6,857,506 5,133,282
Loans receivable, net (Note C) 55,192,567 54,019,888
Accrued interest receivable 556,670 508,978
Premises and equipment, net (Note D) 748,165 758,851
Stock in the Federal Home Loan Bank of Atlanta, at cost 613,700 613,700
Foreclosed real estate 332,874 71,002
Other assets 308,118 123,986
------------ ------------
$ 81,304,082 $ 75,507,522
============ ============
LIABILITIES AND RETAINED EARNINGS
LIABILITIES
Deposit accounts (Note F) $ 69,669,236 $ 64,448,183
Accrued interest payable 116,236 103,543
Advance payment by borrowers for property taxes and insurance 105,870 99,976
Deferred income taxes - 23,132
Accrued expenses and other liabilities 167,494 192,768
------------ ------------
TOTAL LIABILITIES 70,058,836 64,867,602
Commitments and contingencies (Notes C and K)
Retained earnings - substantially restricted (Notes I and J) 11,245,246 10,639,920
------------ ------------
$ 81,304,082 $ 75,507,522
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-2
<PAGE>
HOME SAVINGS, SSB
STATEMENTS OF OPERATIONS
Years Ended June 30, 1996, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 4,584,446 $ 4,409,784 $ 4,485,940
Investments and deposits in other banks 1,284,181 961,373 851,388
------------- ------------- -------------
TOTAL INTEREST INCOME 5,868,627 5,371,157 5,337,328
INTEREST EXPENSE ON DEPOSIT
ACCOUNTS (Note F) 3,540,406 2,788,018 2,487,128
------------- ------------- -------------
NET INTEREST INCOME 2,328,221 2,583,139 2,850,200
PROVISION FOR LOAN LOSSES (Note C) 165,000 105,000 114,274
------------- ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,163,221 2,478,139 2,735,926
------------- ------------- -------------
OTHER INCOME (EXPENSES)
Service charges and other fees 29,846 31,776 35,491
Loss on sale of investments - (36,735) (5,194)
Gain on sale of foreclosed real estate - 1,656 6,948
Other 5,124 18,357 3,238
------------- ------------- -------------
34,970 15,054 40,483
------------- ------------- -------------
TOTAL INCOME 2,198,191 2,493,193 2,776,409
------------- ------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and benefits 570,773 503,094 449,614
Occupancy 81,021 84,694 85,358
Data processing expenses 91,444 87,400 87,540
Federal deposit insurance premiums 149,485 145,201 144,454
Provision for loss on foreclosed real estate 80,000 - -
Other expenses 197,096 158,988 143,472
------------- ------------- -------------
TOTAL GENERAL AND
ADMINISTRATIVE EXPENSES 1,169,819 979,377 910,438
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 1,028,372 1,513,816 1,865,971
INCOME TAXES (Note I) 351,600 592,600 694,300
------------- ------------- -------------
NET INCOME $ 676,772 $ 921,216 $ 1,171,671
============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-3
<PAGE>
HOME SAVINGS, SSB
STATEMENTS OF RETAINED EARNINGS
Years Ended June 30, 1996, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
BALANCE, BEGINNING $ 10,639,920 $ 9,610,272 $ 8,438,601
Initial effect of adoption of accounting change,
net of deferred income tax benefit of $104,511
(Note B) - (202,874) -
Unrealized gain (loss) on available for sale
securities, net of deferred income tax benefit
(charge) of $45,903 and $(174,452), respectively
(Note B) (71,446) 311,306 -
Net income 676,772 921,216 1,171,671
-------------- -------------- --------------
BALANCE, ENDING $ 11,245,246 $ 10,639,920 $ 9,610,272
============== ============== ==============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-4
<PAGE>
HOME SAVINGS, SSB
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 $ 676,772 $ 921,216 $ 1,171,671
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 44,429 35,661 44,668
Deferred income taxes (73,167) (38,469) (73,738)
Deferred compensation 22,000 25,000 25,000
Amortization of discounts and premiums on securities (5,414) 49,382 (58,019)
Provision for loan losses 165,000 105,000 114,274
Provision for loss on foreclosed real estate 80,000 - -
Loss on sale of investment securities - 36,735 5,194
Gain on sale of real estate acquired in foreclosure - (1,656) (6,948)
(Gain) loss on disposal of fixed assets (5,000) - 830
Stock dividends from Federal Home Loan Bank - - (23,900)
Change in assets and liabilities
Increase in accrued interest receivable (47,692) (22,931) (15,761)
Increase in accrued interest on savings accounts 12,693 31,300 23,178
Other (95,019) (94,107) 38,798
------------- ------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 774,602 1,047,131 1,245,247
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Available for sale investment securities (6,142,789) (2,481,094) -
Held to maturity investment securities (4,051,719) (1,445,216) (9,498,855)
Proceeds from maturities and calls of:
Available for sale investment securities 2,965,391 853,295 -
Held to maturity investment securities 2,350,000 3,300,000 4,092,528
Proceeds from sales of:
Available for sale investment securities - 1,962,500 -
Held to maturity investment securities - - 494,806
Net increase in loans (1,738,848) (348,024) (491,978)
Purchases of property and equipment (33,743) (23,012) (14,462)
Proceeds from sale of property and equipment 5,000 - -
Proceeds from sale of real estate acquired in
settlement of loans 59,297 66,156 154,374
------------- ------------- -------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (6,587,411) 1,884,605 (5,263,587)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits (281,884) (2,868,840) 175,479
Net increase in certificate accounts 5,502,937 3,379,977 1,632,126
Increase in advances from borrowers 5,894 27,297 9,627
Stock conversion costs incurred (40,449) - -
------------- ------------- -------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 5,186,498 538,434 1,817,232
------------- ------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-5
<PAGE>
HOME SAVINGS, SSB
STATEMENTS OF CASH FLOWS
Years Ended June 30, 1996, 1995 and 1994
================================================================================
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ (626,311) $ 3,470,170 $ (2,201,108)
CASH AND CASH EQUIVALENTS,
BEGINNING 5,613,688 2,143,518 4,344,626
------------- ------------- -------------
CASH AND CASH
EQUIVALENTS, ENDING $ 4,987,377 $ 5,613,688 $ 2,143,518
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 3,527,713 $ 2,756,718 $ 2,463,950
============= ============= =============
Income taxes $ 417,900 $ 718,925 $ 724,652
============= ============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Loans receivable transferred to real estate acquired in
settlement of loans $ 401,169 $ 25,002 $ 163,611
============= ============= =============
Unrealized gain (loss) on investment securities
available for sale, net of deferred income tax benefit
(charge) of $45,903 and $(69,941), respectively $ (71,446) $ 108,432 $ -
============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes. Page F-6
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Home Savings, SSB (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
financial statements.
Organization and Operations
- ---------------------------
Home Savings, SSB was chartered by the State of North Carolina in 1915. The Bank
maintains offices and conducts its primary business in Thomasville, Davidson
County, North Carolina. The Bank primarily engages in attracting savings
deposits from the general public and uses the funds to originate loans for the
purchase, financing or improvement of residential real estate. The Bank also
makes loans secured by deposit accounts, commercial real estate and consumer
products.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly sensitive to significant change relate
to the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
Investment 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.
- --------------------------------------------------------------------------------
Page F-7
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment Securities (Continued)
- ---------------------------------
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, 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 financial statements provides further information about the
effect of adopting SFAS No. 115.
Loans Receivable
- ----------------
Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
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>
HOME SAVINGS, SSB
NOTES TO 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>
HOME SAVINGS, SSB
NOTES TO 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 6,137 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 statements of operations, with differences between
taxes so computed and taxes payable under applicable statutes and regulations
classified as deferred taxes arising from timing differences.
Retirement Plan
- ---------------
The Bank has a noncontributory defined benefit pension plan covering
substantially all of its employees. The Bank's funding policy is to make the
annual contribution that is required by applicable regulations.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on hand and in banks and interest-bearing
balances in other banks with original maturities of three months or less.
- --------------------------------------------------------------------------------
Page F-10
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
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's financial statements.
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.
- --------------------------------------------------------------------------------
Page F-11
<PAGE>
HOME SAVINGS, SSB
NOTES TO 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 $202,874, net of
deferred tax benefits of $104,511, reported as a separate 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 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 $ 7,029,658 $ - $ 42,118 $ 6,987,540
Mortgage-backed securities 3,977,141 - 176,448 3,800,693
Equity securities 14,452 301,043 - 315,495
Municipal bonds 624,830 - 21,453 603,377
------------- ------------- ------------- -------------
$ 11,646,081 $ 301,043 $ 240,019 $ 11,707,105
============= ============= ============= =============
Securities held-to-maturity:
U. S. government securities and obligations
of U. S. government agencies $ 6,476,811 $ 1,949 $ 40,930 $ 6,437,830
Municipal bonds 380,695 21,444 - 402,139
------------- ------------- ------------- -------------
$ 6,857,506 $ 23,393 $ 40,930 $ 6,839,969
============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
Page F-12
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE B - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
June 30, 1995
---------------------------------------------------------------------
Gross 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 $ 6,017,028 $ 4,357 $ - $ 6,021,385
Mortgage-backed securities 2,454,294 314 65,534 2,389,074
Equity securities 14,452 239,236 - 253,688
------------- ------------- ------------- -------------
$ 8,485,774 $ 243,907 $ 65,534 $ 8,664,147
============= ============= ============= =============
Securities held-to-maturity:
U. S. government securities and obligations
of U. S. government agencies $ 4,756,312 $ 12,500 $ 15,234 $ 4,753,578
Municipal bonds 376,970 34,932 - 411,902
------------- ------------- ------------- -------------
$ 5,133,282 $ 47,432 $ 15,234 $ 5,165,480
============= ============= ============= =============
</TABLE>
The amortized cost and fair values of debt 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 $ 2,007,534 $ 2,005,935 $ 1,801,191 $ 1,801,995
Due after one year through five years 5,646,954 5,584,982 4,675,620 4,635,835
Due after ten years - - 380,695 402,139
Mortgage-backed securities 3,977,141 3,800,693 - -
------------- ------------- ------------- -------------
$ 11,631,629 $ 11,391,610 $ 6,857,506 $ 6,839,969
============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
Page F-13
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE B - INVESTMENT SECURITIES (Continued)
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 $ (307,385) $ 104,511 $ (202,874)
Unrealized appreciation on available-for-sale
securities during the year 485,758 (174,452) 311,306
------------- ------------- -------------
$ 178,373 $ (69,941) $ 108,432
============= ============= =============
</TABLE>
Proceeds from maturities of investment securities available for sale during the
year ended June 30, 1996 were $2,965,391.
Proceeds from maturities of investments securities held to maturity during the
year ended June 30, 1996 were $2,350,000.
Proceeds from sales and maturities of investment securities available for sale
during the year ended June 30, 1995 were $2,815,795. Gross losses of $36,735
were realized on those sales.
Proceeds from maturities of investments securities held to maturity during the
year ended June 30, 1995 were $3,300,000.
During the year ended June 30, 1994, the Bank sold securities for total proceeds
of $494,806, resulting in gross realized losses of $5,194.
Securities with a carrying value of $2,784,715 and $2,816,841 and a fair value
of $2,785,410 and $2,813,094 at June 30, 1996 and 1995, respectively, were
pledged to secure public monies on deposit as required by law.
- --------------------------------------------------------------------------------
Page F-14
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
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 $43,573,972 $41,006,594
Multi-family residential and commercial 9,012,000 10,039,100
Construction 3,595,650 3,110,600
Home equity lines of credit 1,021,508 1,135,685
----------- -----------
Total real estate loans 57,203,130 55,291,979
----------- -----------
Other loans:
Consumer loans 322,204 335,052
Loans secured by deposits 226,796 252,013
----------- -----------
Total other loans 549,000 587,065
----------- -----------
Total loans 57,752,130 55,879,044
Less:
Construction loans in process 1,764,112 1,214,802
Net deferred loan fees 262,548 243,307
Allowance for loan losses 532,903 401,047
----------- -----------
$55,192,567 $54,019,888
=========== ===========
</TABLE>
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 401,047 $ 294,562 $ 198,362
Provision for loan losses 165,000 105,000 114,274
Charge-offs (34,574) - (104,176)
Recoveries 1,430 1,485 86,102
------------- ------------- -------------
Balance at end of year $ 532,903 $ 401,047 $ 294,562
============= ============= =============
</TABLE>
At June 30, 1996 and 1995, respectively, the Bank had loans totaling
approximately $285,000 and $841,000 which were in a nonaccrual status.
- --------------------------------------------------------------------------------
Page F-15
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE C - LOANS RECEIVABLE (Continued)
At June 30, 1996, the Bank had mortgage loan commitments outstanding of
$1,804,400 and pre-approved but unused lines of credit totaling $523,271. 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.
The Bank has had loan transactions with its directors and executive officers.
Such loans were made in the ordinary course of business and also on
substantially the same terms and collateral as those comparable transactions
prevailing at the time and did not involve more than the normal risk of
collectibility or present other unfavorable features. A summary of related party
loan transactions is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Balance at beginning of year $ 415,028 $ 309,004
Additional borrowings 183,000 161,232
Loan repayments (182,771) (55,208)
-------------- --------------
Balance at end of year $ 415,257 $ 415,028
============== ==============
</TABLE>
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Land $ 61,203 $ 61,703
Building and improvements 735,416 735,416
Office furniture, fixtures and equipment 216,593 212,122
Automotive equipment 29,772 24,475
-------------- --------------
1,042,984 1,033,716
Accumulated depreciation (294,819) (274,865)
-------------- --------------
$ 748,165 $ 758,851
============== ==============
</TABLE>
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
- --------------------------------------------------------------------------------
Page F-16
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE F - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at June 30, 1996 and 1995 follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------- --------------------------------
Weighted Weighted
Balance Avg. Rate Balance Avg. Rate
--------------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Demand deposits:
Negotiable orders of withdrawal $ 2,718,489 2.75% $ 1,885,180 2.75%
Passbook and statement accounts 4,983,937 3.00 5,248,439 3.00
Money market checking 9,829,868 4.05 10,497,681 3.68
Non-interest-bearing checking 116,085 - 298,963 -
--------------- ---------------
17,648,379 3.53 17,930,263 3.32
Certificates of deposit 52,020,857 5.61 46,517,920 5.69
--------------- ---------------
Total deposit accounts $ 69,669,236 5.09% $ 64,448,183 5.03%
=============== ===============
</TABLE>
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 $ 32,011,695 $ 14,010,519 $ 46,022,214
July 1, 1997 - June 30, 1998 3,320,627 488,448 3,809,075
July 1, 1998 - June 30, 1999 1,756,776 432,792 2,189,568
--------------- --------------- ---------------
Total certificate accounts $ 37,089,098 $ 14,931,759 $ 52,020,857
=============== =============== ===============
</TABLE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Passbook and statement accounts $ 155,335 $ 160,155 $ 175,542
NOW accounts 49,077 46,579 44,102
Money market accounts 414,404 429,681 462,896
Certificates of deposit 2,927,930 2,157,269 1,810,072
--------------- --------------- ---------------
3,546,746 2,793,684 2,492,612
Penalties for early withdrawal 6,340 5,666 5,484
--------------- --------------- ---------------
$ 3,540,406 $ 2,788,018 $ 2,487,128
=============== =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
Page F-17
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE G - PENSION PLAN
The Bank established a pension plan for the benefit of its employees on March 1,
1973. The pension plan covers all full-time employees who have completed five
months continuous service with the Bank. The plan is funded by the purchase of
level premium insurance policies and an annual contribution to an auxiliary
fund.
The following is a summary of the plan's funded status as of June 30, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 310,252 $ 258,065
============== ==============
Accumulated benefits $ 310,877 $ 258,585
============== ==============
Projected benefits $ 603,526 $ 405,389
Plan assets, at fair value 360,060 164,120
-------------- --------------
Projected benefit obligation in excess of plan assets (243,466) (241,269)
Unrecognized transition account 183,214 191,002
Unrecognized prior service cost 75,590 (29,530)
Unrecognized net loss 43,928 33,484
-------------- --------------
Net pension asset (liability) $ 59,266 $ (46,313)
============== ==============
</TABLE>
Assumptions used in determining the funded status of the pension plan are as
follows for June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Discount rate 7.0% 7.0%
Rates of increase in compensation levels 6.0% 6.0%
Expected long-term rate of return on plan assets 7.0% 7.0%
</TABLE>
Net pension cost includes the following components:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Service cost $ 33,149 $ 25,899
Interest cost on projected benefit obligation 37,072 24,825
Actual return on assets (51,833) (1,415)
Other - net 44,248 (4,606)
-------------- --------------
Net periodic pension cost $ 62,636 $ 44,703
============== ==============
</TABLE>
- --------------------------------------------------------------------------------
Page F-18
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE H - DEFERRED COMPENSATION
The Bank has a deferred compensation plan for its chief executive officer. The
plan provides benefits upon disability, death or attainment of a certain age.
The Bank has made current provision for future payments under this plan, and the
related liability and deferred income tax benefits are included in the
accompanying financial statements. Expenses associated with this plan were
$22,000, $25,000 and $25,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
NOTE I - 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 operations, 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 $ 424,767 $ 631,069 $ 768,038
------------- ------------- -------------
Deferred tax expense (benefit)
Tax on temporary differences (119,070) 31,472 (73,738)
Less (benefit) charge on change in unrealized
gain on investment securities available for
sale allocated directly to retained earnings 45,903 (69,941) -
------------- ------------- -------------
Net deferred tax benefit included in operations (73,167) (38,469) (73,738)
------------- ------------- -------------
$ 351,600 $ 592,600 $ 694,300
============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
Page F-19
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE I - 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 $ 349,600 $ 515,000 $ 634,000
State income tax, net of federal tax benefit 2,000 52,000 60,300
Other - 25,600 -
------------- ------------- -------------
$ 351,600 $ 592,600 $ 694,300
============= ============= =============
</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:
Loan fees and costs $ 43,840 $ 74,013
Deferred compensation 65,322 58,000
Bad debt reserves 159,361 38,659
-------------- --------------
Gross deferred tax assets 268,523 170,672
Valuation allowance - -
-------------- --------------
Net deferred tax assets 268,523 170,672
-------------- --------------
Deferred tax liabilities relating to:
Property and equipment (43,715) (19,031)
FHLB stock dividends (104,832) (104,832)
Net unrealized gain on securities available for sale (24,038) (69,941)
-------------- --------------
Total deferred tax liabilities (172,585) (193,804)
-------------- --------------
Net deferred tax asset (liability) $ 95,938 $ (23,132)
============== ==============
</TABLE>
Retained earnings at June 30, 1996 include approximately $1,534,000 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 $598,000, has not been provided on such reserve.
- --------------------------------------------------------------------------------
Page F-20
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE J - 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 13.8% 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.
NOTE K - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its primary
lending area of Davidson County. 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 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 $ 1,804,400
Undisbursed construction loans 1,764,112
Undisbursed lines of credit 523,271
</TABLE>
NOTE L - DISCLOSURES ABOUT FAIR VALUES 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 judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
- --------------------------------------------------------------------------------
Page F-21
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE L - DISCLOSURES ABOUT FAIR VALUES 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 because of the short maturities of those instruments.
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 Receivable
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
discussed in Note K, it is not practicable to estimate the fair
value of future financing commitments.
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Page F-22
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE L - DISCLOSURES ABOUT FAIR VALUES 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 $ 4,987,377 $ 4,987,377
Investment securities 18,564,611 18,547,074
Loans 55,192,567 54,105,000
Accrued interest receivable 556,670 556,670
Stock in Federal Home Loan Bank of Atlanta 613,700 613,700
Financial liabilities:
Deposits $ 69,669,236 $ 69,274,000
</TABLE>
NOTE M - PLAN OF CONVERSION
On May 7, 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 would 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.
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Page F-23
<PAGE>
HOME SAVINGS, SSB
NOTES TO FINANCIAL STATEMENTS
June 30, 1996, 1995 and 1994
================================================================================
NOTE M - 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 $40,000 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 Bank's operations.
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Page F-24
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL OR ENTITY HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
ANY SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY CENTURY BANCORP, INC. OR HOME SAVINGS, SSB. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
ANY OF THE SECURITIES OFFERED HEREBY, OR ANY OTHER SECURITIES, TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF CENTURY BANCORP, INC. OR HOME SAVINGS, 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 Home Savings........................ 17
Recent Developments...................................................... 18
Management's Discussion and Analysis of Recent Developments.............. 20
Risk Factors............................................................. 21
Century Bancorp, Inc. ................................................... 28
Home Savings, SSB........................................................ 29
Use of Proceeds.......................................................... 29
Dividend Policy.......................................................... 31
Market for Common Stock.................................................. 32
Capitalization........................................................... 32
Pro Forma Data........................................................... 34
Historical and Pro Forma Capital Compliance.............................. 36
Stock Purchases by Directors and Executive Officers...................... 39
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 40
Business of the Holding Company.......................................... 53
Business of Home Savings................................................. 53
Taxation................................................................. 72
Supervision and Regulation............................................... 74
Management of the Holding Company........................................ 85
Management of Home Savings............................................... 85
Description of Capital Stock............................................. 94
Anti-Takeover Provisions Affecting the Holding Company and Home Savings.. 96
The Conversion........................................................... 101
Legal Opinions........................................................... 115
Experts.................................................................. 115
Registration Requirements................................................ 115
Additional Information................................................... 116
Index to Financial Statements............................................ 117
</TABLE>
---------------
UNTIL FEBRUARY 11, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGIS-
TERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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UP TO
407,330
SHARES
CENTURY BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
HOME SAVINGS, SSB)
COMMON STOCK
---------------
PROSPECTUS
---------------
TRIDENT SECURITIES, INC.
NOVEMBER 12, 1996
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