<PAGE>
As filed with the Securities and Exchange Commission on February 7, 1997
Registration No. 333-16335
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
NEWSOUTH BANCORP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 6035 56-1999749
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification number)
</TABLE>
1311 Carolina Avenue
Washington, North Carolina 27889
(919) 946-4178
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
THOMAS A. VANN, President
NewSouth Bancorp, Inc.
1311 Carolina Avenue
Washington, North Carolina 27889
(919) 946-4178
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Gary R. Bronstein, Esquire
Joel E. Rappoport, Esquire
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, D.C. 20036
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this registration statement becomes effective.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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NEWSOUTH BANCORP, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item and Caption Prospectus Heading
---------------- ------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Forepart of Registration Statement; Front Cover
Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................... Front Cover Page; Back Cover Page; Additional
Information
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges................ Prospectus Summary; Risk Factors
4. Use of Proceeds.............................. Use of Proceeds
5. Determination of Offering Price.............. Cover Page; The Conversion -- Stock Pricing and
Number of Shares to be Issued
6. Dilution..................................... Not applicable
7. Selling Security Holders..................... Not applicable
8. Plan of Distribution......................... Front Cover Page; The Conversion -- General;
-- Offering of Common Stock; -- Community
Offering; --Syndicated Community Offering;
-- Plan of Distribution and Marketing Agent
9. Description of Securities to be
Registered.................................. Description of Capital Stock
10. Interests of Named Experts and Counsel....... Legal Opinions; Tax Opinions; Experts
11. Information with Respect to the Registrant
(a) Description of Business................. NewSouth Bancorp, Inc.; Home Savings Bank, SSB,
NewSouth Bank; Business of the Company; Business of
the Bank
(b) Description of Property................. Business of the Bank -- Offices and Other Material
Properties
(c) Legal Proceedings....................... Business of the Bank -- Legal Proceedings
(d) Market Price and Dividends.............. Front Cover Page; Dividend Policy; Market for the
Common Stock
(e) Financial Statements.................... Index to Consolidated Financial Statements
(f) Selected Financial Data................. Selected Consolidated Financial Information and
Other Data
(g) Supplementary Financial Information..... Not applicable
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(i) Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................... Not applicable
(j) Directors and Executive Officers........ Management of the Company; Management of the Bank
(k) Executive Compensation.................. Management of the Bank -- Executive
Compensation; -- Director Compensation; -- Certain
Benefit Plans and Agreements
(l) Security Ownership of Certain Beneficial
Owners and Management................... Proposed Management Purchases
(m) Certain Relationships and Related
Transactions............................ Management of the Bank -- Transactions with
Management
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Not applicable
</TABLE>
<PAGE>
PROSPECTUS
NEWSOUTH BANCORP, INC.
(Holding Company For
Home Savings Bank, Inc., SSB,
To Become NewSouth Bank)
Up to 2,530,000 Shares of Common Stock
$15.00 Per Share
Minimum Purchase 25 Shares
NewSouth Bancorp, Inc., a Delaware corporation (the "Company"), is offering
up to 2,530,000 shares, subject to adjustment, of its common stock, par value
$.01 per share (the "Common Stock"), in connection with the conversion of Home
Savings Bank, SSB, Washington, North Carolina (the "Bank"), from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank to be known as Home Savings Bank, Inc., SSB (the "Converted Bank")
and the issuance of the Converted Bank's capital stock to the Company pursuant
to the Bank's Plan of Conversion (the "Plan"). The conversion of the Bank to the
Converted Bank, the acquisition of control of the Converted Bank by the Company
and the
(continued on following page)
For information on how to subscribe, call the Stock Information Center
at (919) ___-____.
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER
THE DISCUSSION UNDER "RISK FACTORS" BEGINNING ON PAGE 20.
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS
ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR
ANY OTHER GOVERNMENTAL AGENCY, INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE
LOSS OF PRINCIPAL, AND ARE NOT GUARANTEED BY THE COMPANY OR THE BANK.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE ADMINISTRATOR, SAVINGS INSTITUTIONS DIVISION, NORTH
CAROLINA DEPARTMENT OF COMMERCE (THE "ADMINISTRATOR"), THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY STATE SECURITIES COMMISSION, NOR HAS SUCH
COMMISSION, ADMINISTRATOR OR CORPORATION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
=============================================================================================================================
Estimated Fees
and Expenses,
Including
Underwriting
Purchase Discounts and Estimated Net
Price (1) Commissions (2) Proceeds (3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share (4).................................. $15.00 $.49 $14.51
- -----------------------------------------------------------------------------------------------------------------------------
Total Minimum.................................. $28,050,000 $1,001,000 $27,049,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Midpoint................................. $33,000,000 $1,085,000 $31,915,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Maximum.................................. $37,950,000 $1,169,000 $36,781,000
- -----------------------------------------------------------------------------------------------------------------------------
Total Maximum, as adjusted (5)................. $43,642,500 $1,266,000 $42,376,500
=============================================================================================================================
</TABLE>
(1) The estimated aggregate value of the Common Stock is based on an
independent appraisal by Ferguson & Co., LLP ("Ferguson") as of December
13, 1996. Based on such appraisal, the Company has determined to offer
2,530,000 shares, subject to adjustment, at a purchase price of $15.00 per
share (the "Purchase Price"). The final aggregate value will be determined
at the time of closing of the Stock Conversion and is subject to change
due to changing market conditions and other factors.
(2) Includes estimated printing, postage, legal, accounting and miscellaneous
expenses which will be incurred in connection with the Conversion. Also
includes estimated fees, sales commissions and reimbursable expenses to be
paid to Trident Securities, Inc. ("Trident Securities") in connection with
the Subscription and Community Offerings, estimated to be $546,160
assuming the sale of 2,200,000 shares at the midpoint of the Estimated
Valuation Range (defined herein). The actual fees and expenses may vary
from the estimates. See "Pro Forma Data" for the assumptions used to
arrive at these estimates. Trident Securities may be deemed to be an
underwriter, and certain amounts to be paid to Trident Securities may be
deemed to be underwriting compensation for purposes of the Securities Act
of 1933, as amended. The Company and the Bank have agreed to indemnify
Trident Securities against certain liabilities arising out of its services
as financial and sales advisor.
(3) Includes the ESOP's expected purchase of 8% of the shares sold in the
Stock Conversion with funds borrowed from the Company. Does not reflect a
possible purchase by a management recognition plan of a number of
additional newly issued shares equal to up to 4% of the shares to be
issued in the Stock Conversion with funds contributed by the Converted
Bank. See "Capitalization" and "Pro Forma Data."
(4) Based on the midpoint of the Estimated Valuation Range. At the minimum,
maximum and 15% above the maximum of the Estimated Valuation Range,
estimated fees and expenses, including underwriting discounts and
commissions, are expected to be $.54, $.46 and $.44, respectively, and the
estimated net proceeds per share are expected to be $14.46, $14.54 and
$14.56, respectively.
(5) Gives effect to an increase in the number of shares which could occur
without a resolicitation of subscribers or any right of cancellation due
to an increase in the Estimated Valuation Range of up to 15% above the
maximum of the Estimated Valuation Range to reflect changes in market and
financial conditions. See "The Conversion -- Stock Pricing and Number of
Shares to be Issued."
TRIDENT SECURITIES, INC.
The date of this Prospectus is ____________, 1997
<PAGE>
(continued from preceding page)
issuance and sale of up to 2,530,000 shares of Common Stock are collectively
referred to herein as the "Stock Conversion." Immediately following completion
of the Stock Conversion, the Bank intends to convert from a North Carolina-
chartered stock savings bank to a North Carolina commercial bank (the "Bank
Conversion") to be known as "NewSouth Bank" (the "Commercial Bank"). The Stock
Conversion and the Bank Conversion are referred to collectively herein as the
"Conversion."
The shares of the Common Stock are being offered pursuant to
nontransferable subscription rights ("Subscription Rights") in the following
order of priority: (i) depositors of the Bank as of June 30, 1992 with a $50.00
minimum deposit at that date ("Eligible Account Holders"); (ii) the Company's
Employee Stock Ownership Plan (the "ESOP") (a tax-qualified employee stock
benefit plan of the Company, as defined in the Plan); (iii) depositors of the
Bank with $50.00 or more on deposit as of ____________, 1996 ("Supplemental
Eligible Account Holders"); and (iv) certain depositors and borrowers as of
____________, 1997 ("Other Members") in a subscription offering (the
"Subscription Offering"). Subscription Rights received in any of the foregoing
categories will be subordinated to the Subscription Rights received by those in
a prior category. Subscription Rights are not transferable, and persons who
attempt to transfer or sell their Subscription Rights may lose the right to
subscribe for stock in the Stock Conversion and may be subject to other
sanctions and penalties. The Company may offer any shares of Common Stock not
subscribed for in the Subscription Offering in a community offering (the
"Community Offering") to certain members of the general public to whom the
Company delivers a copy of this Prospectus and a stock order form (the "Stock
Order Form"), with preference given to natural persons and trusts of natural
persons who are permanent "residents" of Beaufort, Craven, Lenoir, Nash,
Pasquotank and Pitt Counties in North Carolina (the "Local Community"). For
information regarding the term "resident," as used in relation to the preference
afforded natural persons and trusts of natural persons in the Local Community,
see "The Conversion -- Offering of Common Stock." The Bank and the Company may,
in their absolute discretion, reject orders in the Community Offering in whole
or in part. It is anticipated that shares of the Common Stock not otherwise
subscribed for in the Subscription and Community Offerings may be offered at the
discretion of the Company to certain members of the general public as part of a
community offering on a best efforts basis by a selling group of selected
broker-dealers to be managed by Trident Securities (the "Syndicated Community
Offering"). Neither Trident Securities nor any selected broker-dealers will have
any obligation to purchase any shares of the Common Stock. See "The Conversion--
Offering of Common Stock," " -- Subscription Rights," " -- Community Offering,"
and " - - Syndicated Community Offering."
The total number of shares to be issued in the Stock Conversion may be
significantly increased or decreased to reflect market and financial conditions
at the completion of the Stock Conversion. The aggregate purchase price of all
shares of the Common Stock will be based on the estimated pro forma market value
of the Bank, as converted, as determined by an independent appraisal. All shares
of the Common Stock will be sold for $15.00 per share (the "Purchase Price").
Except for the ESOP, which intends to purchase 8% of the total number of shares
of Common Stock issued in the Stock Conversion, no Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member, including individuals on a
joint account, may purchase in their capacity as such in the Subscription
Offering more than 20,000 shares, or $300,000, of Common Stock. No person,
including associates of and persons acting in concert with such person, may
purchase in the Community Offering more than 20,000 shares, or $300,000, of
Common Stock. No person or entity, together with associates or persons acting in
concert, may purchase more than 40,000 shares, or $600,000, of the Common Stock
in the Stock Conversion. No person may purchase fewer than 25 shares. The
maximum purchase limitation may be increased to up to 5% of the total number of
shares of Common Stock offered in the Stock Conversion.
(continued on following page)
2
<PAGE>
(continued from preceding page)
The Subscription Offering will expire at 12:00 Noon, Eastern Time, on
_____________, 1997, unless extended by the Company for up to an additional 45
days. The Community Offering, if any, may commence without notice at any time
after the commencement of the Subscription Offering and may terminate at any
time without notice, but may not terminate later than __________, 1997.
Subscription Rights are exercisable by completing and returning to any office of
the Bank a Stock Order Form, together with full payment, or appropriate
instructions authorizing withdrawal of such an amount from existing accounts at
the Bank. An executed Stock Order Form, once received by the Bank, may not be
modified, amended or rescinded without the consent of the Bank. Subscriptions
paid by check, cash or money order will be held in a separate account at the
Bank established specifically for this purpose, and interest will be paid at the
Bank's passbook rate from the date payment is received until the Stock
Conversion is completed or terminated. In the case of payments to be made
through withdrawal from deposit accounts at the Bank, all sums authorized for
withdrawal will continue to earn interest at the contract rate until the date of
the completion of the Stock Conversion. If the Stock Conversion is not completed
within 45 days after the last day of the Subscription Offering (which date will
be no later than __________, 1997) and the Administrator consents to an
extension of time to complete the Stock Conversion, subscribers will be required
to affirmatively reconfirm their subscriptions prior to the expiration of the
resolicitation offering or their subscription funds will be promptly refunded
with interest, or subscribers will be permitted to modify or cancel their
subscriptions. If the Stock Conversion is not completed within such period or
extended period, all funds held will be promptly returned together with accrued
interest, and all withdrawal authorizations will be terminated. Such extensions
may not go beyond __________, 1999. See "The Conversion -- Purchases in
Subscription and Community Offerings."
The Bank has retained Trident Securities, a broker-dealer registered with
the Securities and Exchange Commission ("SEC") and a member of the National
Association of Securities Dealers, Inc. ("NASD") to provide financial and sales
assistance in connection with the Subscription and Community Offerings. Trident
Securities has agreed to use its best efforts to assist the Company and the Bank
with the sale of the Common Stock in the Subscription Offering and the Community
Offering, if any.
The Company has never issued capital stock to the public. Consequently,
there is no established market for the Common Stock. The Company has received
conditional approval to have its Common Stock listed on the Nasdaq National
Market under the symbol "NSBC". There can be no assurance that an active and
liquid trading market for the Common Stock will develop or that, if developed,
it will continue, nor is there any assurance that persons purchasing shares of
Common Stock will be able to sell them at or above the Purchase Price.
3
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[MAP]
4
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the more detailed information and the Financial Statements and
accompanying Notes appearing elsewhere in this Prospectus.
NewSouth Bancorp, Inc.
The Company was incorporated under the laws of the State of Delaware in October
1996 at the direction of the Board of Directors of the Bank for the purpose of
serving as a holding company of the Converted Bank upon its conversion from
mutual to stock form, and of the Commercial Bank following the Bank Conversion.
The Company has received approval from the Administrator, and has applied for
approval from the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"), to acquire control of the Converted Bank and the Commercial
Bank subject to satisfaction of certain conditions. Prior to the Conversion, the
Company has not engaged and will not engage in any material operations. Upon
consummation of the Stock Conversion, the Company will have no significant
assets other than the outstanding capital stock of the Converted Bank (or,
following the Bank Conversion, the Commercial Bank), a portion of the net
proceeds of the Stock Conversion and a note receivable from the ESOP. Upon
consummation of the Conversion, the Company's principal business will be
overseeing and directing the business of the Commercial Bank and investing the
net Stock Conversion proceeds retained by it.
Following the Conversion, the Board of Directors intends to manage the Company
to promote the long-term best interests of the Company and its stockholders.
Initially following the Conversion, the Company will have capital in excess of
the level required to support its current asset size and level of operations,
and the Bank's business plan is to pursue a strategy of conservative, long-term
growth through competing for loans and deposits in its market area, establishing
new branch offices or making selective acquisitions of other financial
institutions or branches of other institutions. The Boards of Directors of the
Company and the Bank currently have no specific plans regarding new branch
offices or acquisitions of other financial institutions or branches. With
respect to the evaluation of any business combination or tender or exchange
offer that may be presented in the future, the Company's Certificate of
Incorporation directs the Board of Directors to consider, in addition to the
adequacy of the amount to be paid in connection with any such transaction,
certain specified factors and any other factors the Board deems relevant,
including (i) the social and economic effects of the transaction on the Company
and its subsidiaries, employees, depositors, loan and other customers, creditors
and other elements of the communities in which the Company and its subsidiaries
operate or are located; (ii) the business and financial condition and earnings
prospects of the acquiring person or entity; and (iii) the competence,
experience and integrity of the acquiring person or entity and its or their
management. See "Risk Factors -- Uncertainty as to Existence of Growth
Opportunities" and "Certain Anti-Takeover Provisions in the Certificate of
Incorporation and Bylaws -- Board Consideration of Certain Nonmonetary Factors
in the Event of an Offer by Another Party."
Home Savings Bank, SSB
The Bank is a North Carolina-chartered mutual savings bank headquartered in
Washington, North Carolina and serving northeastern North Carolina. The Bank was
chartered by the State of North Carolina in 1902 under the name The Home
Building and Loan Association. The Bank received federal insurance of its
deposit accounts in 1959. In 1992, the Bank converted to a North
Carolina-chartered savings bank, at which time it adopted its present name of
Home Savings Bank, SSB. At September 30, 1996, the Bank had total assets of
$194.1 million, total deposits of $171.2 million and retained income,
substantially restricted, of $18.3 million.
5
<PAGE>
Historically, the Bank operated as a traditional savings and loan association,
emphasizing the origination of loans secured by one- to four-family
("single-family") residences. Beginning in the early 1980's, the Board of
Directors determined that the Bank's market area was not adequately served by
the existing financial institutions and there was local demand for commercial
real estate, commercial business and consumer loans. As a result, the Board of
Directors determined to refocus the Bank's strategy. Pursuant to this strategy,
while continuing to pursue its existing business of originating single-family
residential mortgage loans, the Bank took advantage of the business
opportunities identified by the Board of Directors by gradually expanding into
commercial real estate, commercial business and consumer lending. In furtherance
of this strategy, the Bank recruited experienced commercial real estate,
commercial business and consumer lending officers and developed commercial real
estate, commercial business and consumer loan products. As a result of these
efforts over the years, at September 30, 1996, the Bank had commercial real
estate, commercial business and consumer loans totaling $31.2 million, $10.3
million and $37.4 million, respectively, which represented 17.9%, 6.0% and
21.5%, respectively, of total loans. At September 30, 1996, $94.8 million, or
54.6% of total loans, consisted of residential real estate mortgage loans.
In addition, since the late 1980's, mortgage banking activities have constituted
an increasingly significant business activity for the Bank. The Bank's mortgage
banking activities consist of originating single-family residential mortgage
loans and primarily selling those loans for cash to the Federal Home Loan
Mortgage Corporation ("FHLMC"), with servicing retained. On occasion, the Bank
also will swap single-family residential mortgage loans with the FHLMC, while
retaining servicing, in exchange for mortgage-backed securities backed by those
loans. At September 30, 1996, the Bank had $21.6 million of loans available for
sale and $253.7 million of loans serviced for others. The Bank earned servicing
income of $632,000 on its portfolio of loans serviced for others for the year
ended September 30, 1996.
Following the Conversion, management intends to continue to follow its current
strategy of seeking growth opportunities through increasing its portfolio of
commercial real estate, commercial business and consumer loans while continuing
to pursue single-family residential mortgage loan origination and mortgage
banking activities.
The Bank is subject to examination and comprehensive regulation by the Federal
Deposit Insurance Corporation ("FDIC") and the Administrator, and the Bank's
savings deposits are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF"), which is administered by the FDIC. The Bank is a member
of and owns capital stock in the Federal Home Loan Bank ("FHLB") of Atlanta,
which is one of 12 regional banks in the FHLB System. The Bank is further
subject to regulations of the Federal Reserve Board governing reserves to be
maintained and certain other matters. Regulations significantly affect the
operations of the Bank. See "Regulation -- Depository Institution Regulation."
NewSouth Bank
Upon consummation of the Bank Conversion, the Commercial Bank will succeed to
all of the assets and liabilities of the Converted Bank (which, pursuant to the
Stock Conversion, will have succeeded to all of the assets and liabilities of
the Bank). Following the Conversion, management intends to continue to follow
the Bank's current strategy of seeking growth opportunities through increasing
its portfolio of commercial real estate, commercial business and consumer loans
while continuing to pursue single-family residential mortgage loan origination
and mortgage banking activities.
6
<PAGE>
The deposits of the Commercial Bank will continue to be insured by the SAIF of
the FDIC, and, as such, the Commercial Bank will continue to be subject to
regulation and supervision by the FDIC. The Commercial Bank will not be subject
to regulation and supervision by the Administrator. Rather, the primary
regulator of the Commercial Bank will be the State Banking Commission of North
Carolina (the "Commission"; as used herein, the Commission refers to the State
Banking Commission of North Carolina as well as the State Banking Commissioner
of North Carolina, whose powers are exercised under the supervision of the
Commission.) In addition, the Commercial Bank will remain a member of the FHLB
of Atlanta. For information regarding regulations applicable to the Converted
Bank and the Commercial Bank, see "Regulation."
The Conversion
The Board of Directors of the Bank adopted the Plan, which provides for both the
Stock Conversion and the Bank Conversion. Pursuant to the Stock Conversion, the
Bank will convert from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank, and the Converted Bank will operate as a
wholly owned subsidiary of a newly organized holding company formed by the Bank.
Upon consummation of the Stock Conversion, the Converted Bank will issue all of
its outstanding capital stock to the Company in exchange for a portion of the
net proceeds from the sale of the Common Stock in the Stock Conversion.
Thereafter, pursuant to the Bank Conversion, the Converted Bank will convert to
a North Carolina commercial bank.
The Administrator has approved the Plan, subject to member approval and
satisfaction of certain other conditions. The Administrator has also approved
the Company's application to acquire all of the capital stock of the Converted
Bank, and thereby become a savings and loan holding company, as part of the
Stock Conversion. The FDIC has issued a notification that it does not intend to
object to the Stock Conversion, subject to the satisfaction of certain
conditions. The Commission has conditionally approved the conversion of the
Converted Bank to the Commercial Bank, and the Company has applied to the
Federal Reserve Board for approval to own all of the capital stock of the
Commercial Bank and thereby become a bank holding company following completion
of the Bank Conversion.
The Conversion is subject to certain conditions, including the prior approval of
the Plan at a special meeting of members to be held on _____________, 1997 (the
"Special Meeting").
The portion of the net proceeds from the sale of Common Stock in the Stock
Conversion to be distributed to the Converted Bank by the Company will
substantially increase the Converted Bank's (and the Commercial Bank's) capital
position, which will in turn increase the amount of funds available for lending
and investment and provide greater resources to support the Bank's operations.
The holding company structure will provide greater flexibility than the Bank
alone would have for diversification of business activities and expansion.
Management believes that this increased capital will enable the Converted Bank
(and the Commercial Bank) to compete more effectively with other types of
financial services organizations. In addition, the Conversion will enhance the
future access of the Company and the Converted Bank (and the Commercial Bank) to
the capital markets and will afford depositors and others the opportunity to
become stockholders of the Company and thereby participate in any future growth
of the Converted Bank and the Commercial Bank.
7
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Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the Common
Stock to be issued in the Stock Conversion be consistent with an independent
appraisal of the estimated pro forma market value of the Common Stock following
the Stock Conversion. Ferguson, a firm experienced in valuing savings
institutions, has made an independent appraisal of the estimated aggregate pro
forma market value of the Common Stock to be issued in the Stock Conversion.
Ferguson has determined that as of December 13, 1996 such estimated pro forma
market value was $33,000,000. The resulting valuation range in Ferguson's
appraisal, which under applicable regulations extends 15% below and above the
estimated value, is from $28,050,000 to $37,950,000 (the "Estimated Valuation
Range"). The Company, in consultation with its advisors, has determined to offer
the shares of Common Stock in the Stock Conversion at the Purchase Price of
$15.00 per share. Such appraisal is not intended and must not be construed as a
recommendation of any kind as to the advisability of purchasing such shares or
as any form of assurance that, after the Stock Conversion, such shares may be
resold at or above the Purchase Price. The appraisal considered a number of
factors and was based upon estimates derived from those factors, all of which
are subject to change from time to time. In preparing the valuation, Ferguson
relied upon and assumed the accuracy and completeness of financial and
statistical information provided by the Bank and the Company. Ferguson did not
verify the financial statements provided or independently value the assets of
the Bank. The appraisal will be further updated immediately prior to the
completion of the Stock Conversion and could be increased to up to $43,642,500
without a resolicitation of subscribers based on market and financial conditions
at the completion of the Stock Conversion. Ferguson received a fee of $35,000
for its appraisal and for assisting in the preparation of the Company's business
plan.
The total number of shares to be issued in the Stock Conversion may be increased
or decreased without a resolicitation of subscribers so long as the aggregate
purchase price is not less than the minimum or more than 15% above the maximum
of the Estimated Valuation Range. Based on the Purchase Price of $15.00 per
share, the total number of shares which may be issued without a resolicitation
of subscribers is from 1,870,000 to 2,909,500. For further information, see "The
Conversion -- Stock Pricing and Number of Shares to be Issued."
The Subscription, Community and Syndicated Community Offerings
The shares of Common Stock to be issued in the Stock Conversion are being
offered at the Purchase Price of $15.00 per share in the Subscription Offering
pursuant to nontransferable Subscription Rights in the following order of
priority: (i) Eligible Account Holders (i.e., depositors whose accounts in the
Bank totaled $50.00 or more on June 30, 1992); (ii) the ESOP (i.e., the
Company's tax-qualified stock benefit plan); (iii) Supplemental Eligible Account
Holders (i.e., depositors whose accounts in the Bank totaled $50.00 or more on
__________, 1996, other than Eligible Account Holders); and (iv) Other Members
(i.e., certain depositors and borrower members of the Bank as of ____________,
1997, other than Eligible Account Holders and Supplemental Eligible Account
Holders). Subscription Rights received in any of the foregoing categories will
be subordinated to the Subscription Rights received by those in a prior
category. If all the shares of Common Stock offered in the Subscription Offering
are purchased by Eligible Account Holders, then the ESOP will purchase shares in
the open market following consummation of the Stock Conversion and will not
purchase newly issued shares from the Company. The Board of Directors of the
Bank selected June 30, 1992 as the Eligibility Record Date because it believed
that first priority in the Subscription Offering should be accorded the Bank's
longstanding customers who maintained accounts
8
<PAGE>
with the Bank prior to the inflow of considerable deposits from individuals who
opened deposit accounts in the Bank for the purpose of obtaining subscription
rights for the purchase of conversion stock in the event the Bank determined to
convert to stock form. In making this decision, the Board of Directors
considered the interests of all members and determined that it was in the best
interests of the Bank and all the members to ensure that the Bank's longstanding
customers, which are the customers that supported the Bank during the past when
savings institutions were not highly regarded, will have preference in the
Subscription Offering over speculative depositors. While the Board realizes that
many of the Bank's customers opening deposits subsequent to the Eligibility
Record Date are valued customers, the Board of Directors balanced the interests
of longstanding customers with those of recent customers and concluded that the
fairest decision was to ensure that the longstanding customers received priority
in the Subscription Offering by setting the Eligibility Record Date at June 30,
1992. The Board of Directors also considered the fact that recent customers
would continue to receive Subscription Rights in the Subscription Offering as
Supplemental Eligible Account Holders or Other Members.
The Company may offer any shares of Common Stock not subscribed for in the
Subscription Offering at the same price in the Community Offering to members of
the general public to whom the Company delivers a copy of this Prospectus and
the Stock Order Form. In the Community Offering, preference will be given to
natural persons and trusts of natural persons who are permanent residents of the
Local Community. Subscription Rights will expire if not exercised by 12:00 Noon,
Eastern Time, on _____________, 1997, unless extended (the "Expiration Date").
The Company and the Bank reserve the absolute right to accept or reject any
orders in the Community Offering, in whole or in part, either at the time of
receipt of an order or as soon as practicable following the Expiration Date.
It is anticipated that shares of Common Stock not otherwise subscribed for in
the Subscription Offering and Community Offering, if any, may be offered at the
discretion of the Company to certain members of the general public as part of a
Syndicated Community Offering on a best efforts basis by a selling group of
selected broker-dealers to be managed by Trident Securities. See "The Conversion
- -- Syndicated Community Offering." The Subscription and Community Offerings and
Syndicated Community Offering are referred to collectively herein as the
"Offerings."
The Bank and the Company have engaged Trident Securities to consult with and
advise the Company and the Bank with respect to the Offerings, and Trident
Securities has agreed to solicit subscriptions for shares of Common Stock in the
Offerings. Trident Securities will receive sales commissions with respect to
shares sold in the Subscription Offering and the Community and Syndicated
Community Offerings, if any. The Company and the Bank have agreed to indemnify
Trident Securities against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Trident
Securities has not prepared or delivered any opinion or recommendation with
respect to the suitability of the Common Stock or the appropriateness of the
amount of Common Stock to be issued in the Stock Conversion. The engagement of
Trident Securities by the Bank and the work performed pursuant to such
engagement, including any due diligence investigation, should not be construed
by purchasers of the Common Stock as constituting an opinion or recommendation
relating to investment in the Common Stock offered hereby.
9
<PAGE>
See "Risk Factors - - No Opinion or Recommendation by Sales Agent; Best Efforts
Offering" and "The Conversion --Plan of Distribution and Marketing Agent."
The Bank has established a Stock Information Center, which will be managed by
Trident Securities, to coordinate the Offerings, including tabulation of orders
and answering questions about the Offerings by telephone. All subscribers will
be instructed to mail payment to the Stock Information Center or deliver payment
directly to any full-service office of the Bank. Payment for shares of Common
Stock may be made by cash (if delivered in person), check or money order or by
authorization of withdrawal from deposit accounts maintained with the Bank
(without penalty for early withdrawal). Such funds will not be available for
withdrawal and will not be released until the Stock Conversion is completed or
terminated. See "The Conversion -- Subscriptions for Stock in Subscription and
Community Offerings."
Non-transferability of Subscription Rights
Applicable federal regulations provide that prior to the completion of the Stock
Conversion, no person shall transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the Subscription
Rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Persons violating such prohibition may lose their right to
subscribe for stock in the Stock Conversion and may be subject to sanctions by
the Administrator or the FDIC. Each person exercising Subscription Rights will
be required to certify that his or her purchase of Common Stock is solely for
the purchaser's own account and that there is no agreement or understanding
regarding the sale or transfer of such shares.
Purchase Limitations
No person may purchase fewer than 25 shares in the Offerings. The ESOP may
purchase up to an aggregate of 10% of the shares of the Common Stock to be
issued in the Stock Conversion and is expected to purchase 8% of such shares.
With the exception of the ESOP, no Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member, including individuals on a joint
account, may purchase in their capacity as such in the Subscription Offering
more than 20,000 shares, or $300,000, of Common Stock. No person, including
associates of and persons acting in concert with such person, may purchase in
the Community Offering more than 20,000 shares, or $300,000, of Common Stock.
The maximum number of shares that may be purchased in the Stock Conversion by
any person, together with associates or a group of persons acting in concert,
currently is 40,000 shares, or $600,000, of the Common Stock offered in the
Stock Conversion. The Board of Directors may increase or decrease the purchase
limitation at any time, subject to any required regulatory approval. In the
event of an oversubscription, shares will be allocated as provided in the Plan.
See "The Conversion -- Subscription Rights," -- Community Offering" and " --
Syndicated Community Offering." In the event of an increase in the total number
of shares up to 15% above the maximum of the Estimated Valuation Range, the
additional shares may be distributed and allocated without the resolicitation of
subscribers. See "The Conversion -- Limitations on Purchase of Shares."
Insider Participation
The directors and executive officers of the Bank have indicated their intention
to purchase an aggregate of approximately $3.2 million of Common Stock (212,000
shares, or 11.3%, 9.6%, 8.4% and 7.3%, respectively, of the shares to be issued
in the Stock Conversion at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range). There is no agreement among the
officers and directors and their affiliates regarding their purchases of Common
Stock.
10
<PAGE>
Potential Benefits of
Conversion to
Management
ESOP. The ESOP intends to purchase an aggregate of 8% of the shares of Common
Stock issued in the Stock Conversion ($2.2 million and $3.0 million of Common
Stock based on the issuance of the minimum of 1,870,000 shares and the maximum
of 2,530,000 shares, respectively, or $3.5 million based on the issuance of
2,909,500 shares at 15% above the maximum of the Estimated Valuation Range). For
additional information, see "Management of the Bank -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan."
Employment and Change-in-Control Protective Agreements. Employment and
change-in-control protective agreements with certain management officials
provide for benefits and cash payments in the event of a change in control of
the Company or the Bank. The aggregate payments that would be made to the
executive officers named in the employment and change-in-control protective
agreements assuming termination of employment under the circumstances described
in those agreements at September 30, 1996 would have been approximately
$583,026. These provisions may have the effect of increasing the cost of
acquiring the Company, thereby discouraging future attempts to take over the
Company or the Bank. See "Management of the Bank -- Certain Benefit Plans and
Agreements -- Employment Agreements" and "-- Change-in-Control Protective
Agreements."
Option Plan. Following consummation of the Stock Conversion, the Company intends
to submit for stockholder consideration a stock option and incentive plan for
the benefit of the directors, officers and key employees of the Company and the
Bank (the "Option Plan"), pursuant to which the Company intends to reserve a
number of authorized but unissued shares of Common Stock equal to an aggregate
of 10% of the Common Stock issued in the Stock Conversion (253,000 shares at the
maximum of the Estimated Valuation Range; 290,950 shares at 15% above the
maximum of the Estimated Valuation Range) for issuance pursuant to stock options
and stock appreciation rights. While no consideration has been given to the
amount of shares granted to any employee under the Option Plan, consistent with
applicable regulations, if the Option Plan is to be implemented within one year
following completion of the Stock Conversion, no employee will receive grants
exceeding 25% of the shares available under the Option Plan, and non-employee
directors will not receive grants individually exceeding 5% of the shares
available under the Option Plan or 30% in the aggregate. The value of any
options granted under the Option Plan will be determined based on the increase,
if any, in the market value of the Common Stock compared to the exercise price
of the options. The exercise price of any options granted under the Option Plan
will be not less than fair market value on the date of grant. If the Option Plan
is to be implemented within one year following completion of the Stock
Conversion, all awards under the Option Plan will vest over a period of time at
a rate not greater than 20% per year. If the Option Plan is implemented more
than one year after completion of the Stock Conversion, awards under the Option
Plan would vest over a period of time at a rate not greater than 33.3% per year.
The Company currently intends to submit the Option Plan to stockholders at a
meeting to be held not earlier than six months after the Stock Conversion. See
"Management of the Bank -- Certain Benefit Plans and Agreements -- Stock Option
and Incentive Plan." At any time following consummation of the Stock Conversion,
the Bank or the Company may contribute sufficient funds to a grantor trust to
purchase, and such trust may purchase, a number of shares of Common Stock equal
to 10% of the shares issued in the Stock Conversion. Such shares would be held
by the trust for issuance to option holders upon the exercise of options in the
event the Option Plan is implemented. Whether such shares are
11
<PAGE>
purchased, and the timing of such purchases, will depend on market and other
conditions and the alternative uses of capital available to the Company.
Management Recognition Plan. Following consummation of the Stock Conversion, the
Company intends to submit for stockholder consideration a Management Recognition
Plan for the benefit of the directors and officers of the Company and the Bank
(the "MRP"). It is expected that the MRP will be submitted to stockholders for
approval at the same time as the Option Plan.
At any time following consummation of the Stock Conversion, the MRP is expected
to purchase a number of shares of Common Stock either from the Company or in the
open market equal to an aggregate of 4% of the Common Stock issued in the Stock
Conversion (101,200 shares at the maximum of the Estimated Valuation Range;
116,380 at 15% above the maximum of the Estimated Valuation Range). Whether such
shares purchased will be purchased in the open market or newly issued by the
Company, and the timing of such purchases, will depend on market and other
conditions and the alternative uses of capital available to the Company. While
no consideration has been given to the number of shares to be awarded to any
employee under the MRP, consistent with applicable regulations, if the MRP is to
be implemented within one year following completion of the Stock Conversion, no
employee will receive grants exceeding 25% of the shares available under the
MRP, and no non-employee director will receive grants individually exceeding 5%
of the shares available under the MRP or 30% in the aggregate. The actual value
of any awards made under the MRP will depend upon, among other factors, the
market value of the Common Stock at the time of award and upon payment. At the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, the reduction to stockholders' equity to fund the MRP would be $1.1
million, $1.3 million, $1.5 million and $1.7 million, respectively, assuming
purchases were made at the $15.00 per share Purchase Price. If the MRP is to be
implemented within one year following completion of the Stock Conversion, all
awards under the MRP will be payable over a period of time, at a rate not
greater than 20% per year. See "Management of the Bank -- Certain Benefit Plans
and Agreements -- Management Recognition Plan."
Prospectus Delivery and Procedure for Purchasing Shares
To ensure that each subscriber receives a Prospectus at least 48 hours prior to
the Expiration Date in accordance with Rule 15c2-8 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), no Prospectus will be mailed any
later than five days prior to the Expiration Date or hand delivered any later
than two days prior to such date. Execution of a Stock Order Form will confirm
receipt or delivery in accordance with Rule 15c2-8. Stock Order Forms will be
distributed only with a Prospectus. The executed Stock Order Form must be
accompanied by payment by check, money order, bank draft or withdrawal
authorization to an existing account at the Bank. No photocopies or faxes of
Stock Order Forms or payment by wire transfer will be accepted.
To ensure that Eligible Account Holders, Supplemental Eligible Account Holders
and Other Members are properly identified as to their stock purchase priorities,
as well as for purposes of allocating shares based on subscribers' deposit
balances in the event of oversubscription, such persons must list all of their
deposit accounts at the Bank on the Stock Order Form. Failure to list all such
deposit accounts may result in the inability of the Company or the Bank to fill
all or part of a subscription order. Neither the Company, the Bank nor any of
their agents shall be responsible for any
12
<PAGE>
order on which all deposit accounts of the subscriber have not been fully and
accurately disclosed.
Use of Proceeds
The amount of proceeds from the sale of the Common Stock in the Stock Conversion
will depend upon the total number of shares actually sold, the numbers of shares
of Common Stock sold in the Subscription Offering and the Community Offering and
Syndicated Community Offering, if any, and the actual expenses of the
Conversion. As a result, the actual net proceeds from the sale of the Common
Stock cannot be determined until the Stock Conversion is completed. Based on the
sale of $33.0 million of Common Stock at the midpoint of the Estimated Valuation
Range, the net proceeds are estimated to be approximately $32.0 million. It is
anticipated, however, that the net proceeds will be between approximately $27.0
million and $36.8 million if the aggregate purchase price is within the
Estimated Valuation Range and that the net proceeds will be approximately $42.4
million if the aggregate purchase price is increased to 15% above the maximum of
the Estimated Valuation Range. See "Pro Forma Data."
The Company has received Administrator approval to purchase all of the capital
stock of the Converted Bank to be issued in the Stock Conversion in exchange for
at least 50% of the net proceeds after deducting the cost of the ESOP loan.
Assuming the sale of 2,200,000 shares of the Common Stock at the midpoint of the
Estimated Valuation Range and the purchase of 8% of such shares by the ESOP, the
Bank would receive $14.6 million in cash, and the Company would retain
approximately $14.6 million in cash and $2.6 million in the form of a note
receivable from the ESOP. The ESOP note receivable will be for a ten year term
and carry an interest rate, which adjusts annually, equal to the prime rate as
published in The Wall Street Journal.
--- ---- ------ -------
The proceeds retained by the Company after funding the ESOP initially will be
invested in short-term and intermediate-term securities (less than ten years to
maturity), including cash and cash equivalents and U.S. government and agency
obligations. Also, such proceeds will be available for a variety of corporate
purposes, including funding the MRP, if the MRP is implemented, future
acquisitions and diversification of business, additional capital contributions,
dividends to stockholders and future repurchases of the Common Stock to the
extent permitted by applicable regulations. The Company currently has no
specific plans, intentions, arrangements or understandings regarding any
acquisitions or repurchases. In addition, such funds will be available to be
loaned to the Bank if necessary in the event and to the extent loan growth
exceeds deposit growth or for other corporate purposes. Subject to regulatory
and other considerations, the Company intends to establish a quarterly cash
dividend following the Conversion at an initial quarterly rate of approximately
$0.10 per share (or an annual rate of $0.40 per share, or approximately 2.7%
based on the $15.00 per share Purchase Price), commencing during the first full
calendar quarter subsequent to the Stock Conversion. See "-- Dividends" and
"Dividend Policy." A portion of the net proceeds may be used to acquire shares
of Common Stock pursuant to the MRP or to purchase shares to be held by a
grantor trust for issuance to option holders upon the exercise of options in the
event the Option Plan is implemented. See "Management of the Bank -- Certain
Benefit Plans and Agreements -- 1996 Stock Option Plan" and "-- Management
Recognition Plan."
13
<PAGE>
The Company has no specific plans regarding possible stock repurchases during
the first year following the Stock Conversion.
The Company has agreed with the FDIC not to make a tax-free cash distribution to
stockholders for a period of one year following consummation of the Stock
Conversion. In addition, the Company has agreed with the FDIC not to file a
private letter ruling request with the Internal Revenue Service regarding the
tax-free nature of a possible one time cash distribution to Company stockholders
for a period of one year following consummation of the Stock Conversion.
The proceeds contributed to the Converted Bank (and the Commercial Bank) will
substantially increase the capital of the Converted Bank (and the Commercial
Bank). The Converted Bank (and the Commercial Bank) ultimately intends to use
such funds for general corporate purposes, including the origination of loans
and other investments. It is expected that in the interim all or part of the
proceeds will be invested in short-term and intermediate-term securities,
including cash and cash equivalents and U.S. government and agency obligations.
Market for the Common Stock
The Company, as a newly organized company, has never issued capital stock, and
consequently there is no current established market for its Common Stock. The
Company has received approval to have the Common Stock listed on the Nasdaq
National Market under the symbol "NSBC," conditioned upon completion of the
Stock Conversion and satisfaction of Nasdaq National Market entry requirements.
Trident Securities has advised the Company that it intends to act as a market
maker for the Common Stock, but is not obligated to do so. In addition, Trident
Securities and the Company will seek to encourage and assist at least one other
market maker to make a market in the Common Stock. The Company believes it will
be successful in finding a second market maker. No assurance can be given,
however, that an active and liquid market for the Common Stock will develop.
Further, no assurance can be given that an investor will be able to sell the
Common Stock at or above the Purchase Price after the Stock Conversion. See
"Market for Common Stock."
Dividends
Subject to regulatory and other considerations, the Company intends to establish
a quarterly cash dividend following the Conversion at an initial quarterly rate
of approximately $0.10 per share (or an annual rate of $0.40 per share, or
approximately 2.7% based on the $15.00 per share Purchase Price), commencing
during the first full calendar quarter subsequent to the Stock Conversion.
However, declarations of dividends by the Board of Directors will depend upon a
number of factors, including investment opportunities available to the Company
or the Bank, capital requirements, regulatory limitations, including the
liquidation account, the Company's and the Bank's financial condition and
results of operations, tax considerations and general economic conditions. No
assurance can be given 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 addition, from time to time in an effort to
manage capital to a reasonable level, the Board may determine if it is prudent
to pay periodic special cash dividends. Periodic special cash dividends, if
paid, may be paid in addition to, or in lieu of, regular cash dividends. Like
all possible dividends, there can be no assurance that periodic special cash
dividends will be paid or that, if paid, will continue to be paid.
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be considered
by prospective investors.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
Selected Financial Condition Data
The following is a summary of selected consolidated financial information
and other data of Home Savings Bank, SSB and does not purport to be complete and
is qualified in its entirety by reference to the detailed information and
Consolidated Financial Statements and accompanying Notes appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets...................... $ 194,139 $ 177,704 $ 165,996 $ 146,012 $ 121,227
Loans receivable, net.............
Held for sale................... 21,627 19,507 16,095 55,031 41,667
Held for investment............. 134,054 125,034 119,584 63,505 54,815
Cash.............................. 8,577 1,786 4,813 5,473 3,318
Investment securities:
Available for sale.............. 8,107 -- -- -- --
Held to maturity................ -- 3,002 1,004 1,004 3,997
Mortgage-backed securities:
Available for sale.............. 14,797 9,072 9,194 16,083 13,447
Held to maturity................ -- 13,213 9,341 -- --
Deposits.......................... 171,213 153,457 131,592 103,645 92,444
Borrowed money (1)................ 1,040 4,000 16,500 26,500 15,500
Retained income, substantially
restricted (2).................. 18,347 17,688 15,620 13,383 10,791
</TABLE>
- -------------
(1) Consists of retail repurchase agreements at September 30, 1996 and FHLB
advances at September 30, 1995, 1994, 1993 and 1992.
(2) Consists of retained earnings, substantially restricted, and, at
September 30, 1996 and 1995, net unrealized gains on securities available
for sale.
Selected Operations Data
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income.............................. $ 15,349 $ 14,385 $ 11,811 $ 10,462 $ 10,245
Interest expense............................. 8,105 7,344 5,204 4,524 5,412
--------- --------- --------- --------- ---------
Net interest income before provision for
loan losses................................. 7,244 7,041 6,607 5,938 4,833
Provision for loan losses.................... 511 20 210 548 914
--------- --------- --------- --------- ---------
Net interest income.......................... 6,733 7,021 6,397 5,390 3,919
Noninterest income........................... 1,833 1,502 1,652 3,006 1,754
Noninterest expenses......................... 7,295 (1) 5,660 4,801 3,738 2,837
--------- --------- --------- --------- ---------
Income before income taxes and
cumulative effect of change in method
of accounting for income taxes.............. 1,271 2,863 3,248 4,658 2,836
Income taxes................................. 451 998 1,261 2,065 1,347
--------- --------- --------- --------- ---------
Income before cumulative effect of
change in method of accounting for income
taxes....................................... 820 1,865 1,987 2,593 1,489
Cumulative effect of change in method
of accounting for income taxes.............. -- -- 250 -- --
--------- --------- --------- --------- ---------
Net income................................... $ 820 $ 1,865 $ 2,237 $ 2,593 $ 1,489
========= ========= ========= ========= =========
</TABLE>
- -------------
(1) Includes a charge of $946,000 representing a special FDIC assessment of
65.7 basis points on the Bank's deposits held as of March 31, 1995
pursuant to legislation enacted to recapitalize the SAIF.
15
<PAGE>
Selected Financial Ratios and Other Data
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
---------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (net income divided
by average total assets)........................ .45% (1) 1.07% 1.28% (2) 1.93% 1.29%
Return on average retained income
(net income divided by average
retained income)................................ 4.45 (1) 11.17 13.38 (2) 19.17 13.86
Interest rate spread (combined weighted
average interest rate earned less
combined weighted average interest
rate cost)...................................... 3.72 3.84 4.25 4.67 4.12
Net interest margin (net interest income
divided by average interest-earning assets)..... 4.12 4.21 4.48 4.46 4.16
Ratio of average interest-earning assets
to average interest-bearing liabilities......... 108.52 108.40 106.58 107.44 107.26
Ratio of noninterest expense to average
total assets.................................... 3.97 (1) 3.26 3.08 2.56 2.34
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period................................ .62 .42 .31 .62 .69
Nonperforming loans to total loans
at end of period................................ .66 .47 .25 .77 .86
Allowance for loan losses to total
loans at end of period.......................... 1.51 1.30 1.46 1.56 1.40
Allowance for loan losses to nonperforming
loans at end of period.......................... 227.37 275.62 583.19 202.30 162.22
Provision for loan losses to total loans ......... .32 .01 .15 .46 .95
Net charge-offs to average loans
outstanding..................................... .02 .09 .06 -- --
Capital Ratios:
Retained income to total assets at
end of period................................... 9.45 9.95 9.41 9.17 8.90
Average retained income to average total
assets.......................................... 10.05 9.61 9.54 9.10 8.85
</TABLE>
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Number of:
Loans outstanding (3).............................. 6,093 4,911 4,473 4,235 4,157
Deposit accounts................................... 15,404 13,794 11,377 9,276 8,482
Offices open:
Full service...................................... 8 8 6 6 5
Loan production................................... 3 2 2 2 1
Loans serviced for others............................ $253,682 $229,635 $205,141 $161,674 $112,767
</TABLE>
- ------------
(1) Includes a charge of $946,000 ($582,000 after taxes) representing a
special FDIC assessment of 65.7 basis points on the Bank's deposits held
as of March 31, 1995 pursuant to legislation enacted to recapitalize the
SAIF. Without such charge, for the year ended September 30, 1996, return
on average assets, return on average retained income and ratio of
noninterest expense to average total assets would have been .76%, 7.60%
and 3.46%, respectively.
(2) Before cumulative effect of change in method of accounting for income
taxes.
(3) Includes real estate mortgage loans, secured and unsecured consumer and
commercial loans and credit card loans.
16
<PAGE>
RECENT DEVELOPMENTS
The following is a summary of selected consolidated financial
information and other data of Home Savings Bank, SSB and does not purport to be
complete and is qualified in its entirety by reference to the detailed
information and Consolidated Financial Statements and accompanying Notes
appearing elsewhere in this Prospectus. Selected financial information at
December 31, 1996 and operating data for the three months ended December 31,
1996 and 1995 have been derived from unaudited financial statements. In the
opinion of management of the Bank, 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 December 31, 1996 are not necessarily
indicative of the results which may be expected for any other period.
Selected Financial Condition Data
<TABLE>
<CAPTION>
At December At September
31, 1996 30, 1996
--------------- ---------------
(In thousands)
<S> <C> <C>
Total assets................................... $ 199,056 $ 194,139
Loans receivable, net:
Held for sale................................ 24,736 21,627
Held for investment.......................... 137,033 134,054
Cash........................................... 5,892 8,577
Investment securities:
Available for sale........................... 5,118 8,107
Held to maturity............................. -- --
Mortgage-backed securities:
Available for sale........................... 18,669 14,797
Held to maturity............................. -- --
Deposits....................................... 176,310 171,213
Borrowed money (1)............................. 705 1,040
Retained income, substantially
restricted (2)............................... 18,943 18,347
</TABLE>
- ------------
(1) Consists of retail repurchase agreements.
(2) Consists of retained earnings, substantially restricted and net
unrealized gains on securities available for sale.
Selected Operations Data
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Interest income..................................... $ 4,083 $ 3,814
Interest expense.................................... 2,087 2,069
---------- ----------
Net interest income before
provision for loan losses......................... 1,996 1,745
Provision for loan losses........................... 107 88
---------- ----------
Net interest income................................. 1,889 1,657
Noninterest income.................................. 370 517
Noninterest expenses................................ 1,468 1,415
---------- ----------
Income before income taxes.......................... 791 759
Income taxes........................................ 310 255
---------- ----------
Net income.......................................... $ 481 $ 504
========== ==========
</TABLE>
17
<PAGE>
Selected Financial Ratios and Other Data
<TABLE>
<CAPTION>
At or for the
Three Months Ended
December 31,
1996 1995
---- ----
<S> <C> <C>
Performance Ratios: (1)
Return on average assets (net income divided
by average total assets)....................... .98% 1.13%
Return on average retained income
(net income divided by average
retained income)............................... 10.32 11.18
Interest rate spread (the difference
between the average yield on
interest-earning assets and
the average cost of interest-bearing
liabilities)................................... 3.96 3.66
Net interest margin (net interest income
divided by average interest-earning
assets)........................................ 4.25 4.09
Ratio of average interest-earning assets
to average interest-bearing liabilities........ 107.58 108.76
Ratio of noninterest expense to average
total assets................................... 2.99 3.19
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period............................... .41 .88
Nonperforming loans to total loans
at end of period............................... .50 1.07
Allowance for loan losses to total
loans at end of period......................... 1.51 1.44
Allowance for loan losses to nonperforming
loans at end of period......................... 302.72 133.97
Provision for loan losses to total loans(1) ...... .26 .24
Net charge-offs to average loans
outstanding.................................... .05 .08
Capital Ratios:
Retained income to total assets at
end of period.................................. 9.52 10.36
Average retained income to average total
assets......................................... 9.48 10.15
</TABLE>
- ----------
(1) Performance ratios for the three month periods have been annualized and
are not necessarily indicative of the results that may be achieved for
the entire year.
18
<PAGE>
Comparison of Financial Condition at December 31, 1996 and September 30, 1996
The Bank's total assets increased by $5.0 million, or 2.5%, to $199.1
million at December 31, 1996 from $194.1 million at September 30, 1996. Asset
growth during the period was funded by an increase of $5.1 million in deposits,
as deposits increased to $176.3 million at December 31, 1996 from $171.2 million
at September 30, 1996.
Cash, investment and mortgage-backed securities decreased by $1.8
million to $29.7 million at December 31, 1996 from $31.5 million at
September 30, 1996. This decrease was used to fund the growth in total loans
receivable, in conjunction with the above referenced deposit growth, and to fund
daily operations in the ordinary course of business. Loans receivable increased
by $6.1 million, or 3.9%, to $161.8 million at December 31, 1996 from $155.7
million at September 30, 1996. Retained earnings increased by $596,000, or 3.2%,
to $18.9 million at December 31, 1996 from $18.3 million at September 30, 1996,
as a result of the $481,000 net income for the period and a $115,000 increase in
net unrealized gains on securities available for sale.
Comparison of Operating Results for the Three Months Ended December 31, 1996 and
1995
Net income for the three months ended December 31, 1996 was $481,000,
compared to $504,000 for the three months ended December 31, 1995, representing
a decrease of $23,000, or 4.6%. The decrease in net income for the three months
ended December 31, 1996 is partially attributable to a $19,000 increase in the
provision for loan losses, which provision totalled $107,000 in the 1996 period
compared to $88,000 in the 1995 period. Net interest income before provision for
loan losses increased by $251,000 during the three months ended December 31,
1996 to $2.0 million from $1.7 million for the three months ended December 31,
1995.
Noninterest income decreased by $147,000 to $370,000 for the three
months ended December 31, 1996 from $517,000 for the three months ended December
31, 1995. Gains from the sales of mortgage loans and mortgage-backed securities
declined to $8,000 for the 1996 period from $194,000 for the 1995 period.
Noninterest expense increased by $53,000, or 3.7%, for the three months
ended December 31, 1996 as compared to the three months ended December 31, 1995.
While compensation and employee benefits increased by $110,000, or 11.8%, for
the 1996 period as compared to the 1995 period, Federal deposit insurance
premiums declined by $88,000 in 1996 compared to 1995. Subject to the Deposit
Insurance Funds Act of 1996 (DIFA), the Bank received a full refund of its
Federal deposit insurance premium assessment for the three months ended December
31, 1996. The Bank's deposit insurance premium rate was 23 cents per $100 of
deposits for the 1995 period. Under the recently enacted legislation, both BIF
and SAIF members will be assessed an amount for the Financing Corporation Bond
payments. BIF members will be assessed approximately 1.3 basis points while the
SAIF rate will be approximately 6.4 basis points until January 1, 2000. At that
time, BIF and SAIF members will begin pro rata sharing of the payment at an
expected rate of 2.43 basis points. This revised deposit insurance rate
structure will enable the Bank to recognize a substantial reduction in deposit
insurance premiums going forward. Other noninterest expenses, including premises
and equipment, advertising, and office supplies, remained relatively constant
from period to period.
19
<PAGE>
RISK FACTORS
Before investing in the shares of the Common Stock offered by this
Prospectus, prospective investors should carefully consider the matters
presented below.
Anticipated Low Return on Equity Following Conversion
For the year ended September 30, 1996, the Bank's ratio of average
retained income to average assets was 10.1%. On a pro forma basis, for the year
ended September 30, 1996, assuming the sale of the midpoint of 2,200,000 shares
of Common Stock in the Stock Conversion at the beginning of the year, the Bank's
ratio of average retained earnings to average assets would have been 21.9%. With
such a high capital position as a result of the Stock Conversion, it is doubtful
that the Company will be able to quickly deploy the capital raised in the Stock
Conversion by increasing its deposits and loans and thereby generate earnings to
support its high level of capital, and, as a result, it is expected that the
Company's return on equity initially will be lower than historical levels and
will be below industry norms. Consequently, investors expecting a return on
equity which will meet or exceed industry standards for the foreseeable future
should carefully evaluate and consider the risk of a subpar return on equity.
Risks Related to Commercial Real Estate, Commercial Business and Consumer
Lending
Historically, the Bank operated as a traditional savings and loan
association, emphasizing the origination of loans secured by single-family
residences. Beginning in the early 1980's, the Board of Directors determined
that the Bank's market area was not adequately served by the existing financial
institutions and there was local demand for commercial real estate, commercial
business and consumer loans. As a result, the Board of Directors determined to
refocus the Bank's strategy. Pursuant to this strategy, while continuing to
pursue its existing business of originating single-family residential mortgage
loans, the Bank took advantage of the business opportunities identified by the
Board of Directors by gradually expanding into commercial real estate,
commercial business and consumer lending. In furtherance of this strategy, the
Bank recruited experienced commercial real estate, commercial business and
consumer lending officers and developed commercial real estate, commercial
business and consumer loan products. As a result of these efforts over the
years, at September 30, 1996, the Bank had commercial real estate, commercial
business and consumer loans totaling $31.2 million, $10.3 million and $37.4
million, respectively, which represented 17.9%, 6.0% and 21.5%, respectively, of
total loans. At September 30, 1996, $94.8 million, or 54.6% of total loans,
consisted of residential real estate mortgage loans.
While commercial real estate, commercial business and consumer loans are
generally more interest rate sensitive and carry higher yields than do
residential mortgage loans, they generally carry a higher degree of credit risk
than residential mortgage loans. Consequently, the diversification of the Bank's
and the Commercial Bank's loan portfolio may alter the Commercial Bank's risk
profile. See "Business of the Bank -- Lending Activities -- Commercial Business
Lending" and "-- Consumer and Other Lending." Management believes it has the
necessary experience for the expansion of commercial business and consumer
lending activities. See "Management of the Bank." Nevertheless, the Bank's
provisions for loan losses may increase in the future as it implements the Board
of Directors' strategy of seeking growth opportunities through increasing its
portfolio of commercial real estate, commercial business and consumer loans
while continuing to pursue residential mortgage loan origination and mortgage
banking activities.
Commercial real estate lending entails significant additional risks as
compared with single-family residential property lending. Commercial real estate
loans typically involve larger loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans typically is dependent
on the successful operation of the real estate project, retail establishment or
business. These risks can be significantly affected by supply and demand
conditions in the market for office, retail and residential space, and, as such,
may be subject to a greater extent to adverse conditions in the economy
generally. To minimize these risks, the Bank generally limits itself to its
market area or to borrowers with which it has prior experience or who are
otherwise known to the Bank. It has been the Bank's policy to obtain annual
financial statements of the business of the borrower or the project for which
20
<PAGE>
commercial real estate loans are made. In addition, in the case of commercial
mortgage loans made to a partnership or a corporation, the Bank seeks, whenever
possible, to obtain personal guarantees and annual financial statements of the
principals of the partnership or corporation.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. The Bank will
seek to minimize these risks through its underwriting guidelines, which may
require certain safeguards, such as that the loan be supported by adequate cash
flow of the borrower, profitability of the business, collateral and personal
guarantees of the individuals in the business. In addition, the Bank generally
limits this type of lending to its market area and to borrowers with whom it has
prior experience or who are otherwise well known to the Bank.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans which are unsecured or secured by rapidly
depreciable assets. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by events such as job loss, divorce, illness or personal
bankruptcy. See "Business of the Bank -- Lending Activities -- Consumer and
Other Lending."
Uncertainty as to Existence of Growth Opportunities
In order to fully deploy post-Stock Conversion capital, if sufficient
growth opportunities are not available in its market area, the Bank may seek to
expand into suitable market areas by either establishing one or more new
branches or by acquiring another financial institution or branches of another
financial institution. The Company's ability to expand internally by
establishing new branch offices is dependent on its ability to identify
advantageous branch office locations and generate new deposits and loans from
those locations that will create an acceptable level of net income for the
Company. At the same time, the Company's ability to grow through selective
acquisitions of other financial institutions or branches of such institutions is
dependent on successfully identifying, acquiring and integrating such
institutions or branches. There can be no assurance the Company will be able to
generate internal growth or to identify attractive acquisition candidates,
acquire such candidates on favorable terms or successfully integrate any
acquired institutions or branches into the Company.
Effect on Operations of Dependence on Primary Market Area
The Bank's primary market area consists of Beaufort, Craven, Lenoir,
Nash, Pasquotank and Pitt Counties in North Carolina, which are the counties in
which the Bank's offices are located. As of September 30, 1996, Management
estimates that more than 95% of deposits and 90% of loans came from its primary
market area. Although the economy of the Bank's primary market area is
diversified, with employment distributed among manufacturing, agriculture and
non-manufacturing activities, the unemployment rate in the Bank's primary market
area is below the national average, though higher than the unemployment rate for
the State of North Carolina. According to data provided by a private marketing
firm, the Bank estimates the population of its primary market area to be
approximately 430,000. This compares to a population of approximately 400,000 in
1990. The average household income of the Bank's primary market area is
approximately $26,746, as compared to $30,562 for North Carolina as a whole.
Because of the Bank's concentration of business activities in its primary market
area, its financial condition and results of operations will depend upon
economic conditions in its primary market area.
Strong Competition Within the Bank's Market Area
Competition in the banking and financial services industry is intense.
In its market area, the Bank competes with commercial banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors
21
<PAGE>
have substantially greater resources and lending limits than the Bank and may
offer certain services that the Bank does not or cannot provide. The
profitability of the Bank depends upon its continued ability to successfully
compete in its market area. See "Business of the Bank -- Competition."
Potentially Adverse Impact of Interest Rates and Economic Conditions
The results of operations of the Bank are materially affected by
general economic conditions, the monetary and fiscal policies of the federal
government and the regulatory policies of governmental authorities. The results
of operations of the Bank depend to a large extent on its level of "net interest
income," which is the difference between interest income on interest-earning
assets, such as loans, mortgage-backed securities and investment securities, and
interest expense on interest-bearing liabilities, such as savings deposits and
borrowings. The Bank has attempted to manage the sensitivity of its earnings to
interest rate fluctuations by, among other measures, selling newly originated
30-year fixed-rate residential mortgage loans in the secondary market,
emphasizing adjustable-rate or short-term fixed-rate loans and investment
securities and other loans such as commercial business loans and consumer loans
that adjust more rapidly to changes in interest rates. Nevertheless, a sustained
increase in market interest rates could adversely affect the Bank's earnings.
General economic conditions also affect the credit quality of the
Bank's assets. During periods of adverse economic conditions and depending on
the extent to which the income and assets of the borrowers are affected by the
declining economic conditions, the ability of the Bank's borrowers to repay
loans may be affected. Prevailing economic conditions particularly affect
commercial real estate, commercial business and consumer loans. See "-- Risks
Related to Commercial Business and Consumer Lending", "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" and "-- Interest Rate Sensitivity Analysis" and "Business of the
Bank -- Lending Activities."
Certificate of Incorporation, Bylaw and Statutory Provisions That Could
Discourage Hostile Acquisitions of Control
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage nonnegotiated takeover attempts that certain
stockholders might deem to be in their interests or through which stockholders
might otherwise receive a premium for their shares over the then current market
price and that may tend to perpetuate existing management. These provisions
include: the classification of the terms of the members of the Board of
Directors; supermajority provisions for the approval of certain business
combinations; elimination of cumulative voting by stockholders in the election
of directors; certain provisions relating to meetings of stockholders;
restrictions on the acquisition of the Company's equity securities; and
provisions allowing the Board of Directors to consider nonmonetary factors in
evaluating a business combination or a tender or exchange offer. The provisions
in the Company's Certificate of Incorporation requiring a supermajority vote for
the approval of certain business combinations and containing restrictions on
acquisitions of the Company's equity securities provide that the supermajority
voting requirements or acquisition restrictions do not apply to business
combinations or acquisitions meeting specified Board of Directors approval
requirements. The Certificate of Incorporation also authorizes the issuance of
1,000,000 shares of serial preferred stock as well as additional shares of
Common Stock up to a total of 8,000,000 outstanding shares. These shares could
be issued without stockholder approval on terms or in circumstances that could
deter a future takeover attempt.
In addition, Delaware law provides for certain restrictions on
acquisition of the Company, and federal and North Carolina laws contain various
restrictions on acquisitions of control of savings institutions, banks and their
holding companies, particularly during the period following a conversion to
stock form.
The Certificate of Incorporation, Bylaw and statutory provisions, as
well as certain other provisions of state and federal law and certain provisions
in the Company's and the Bank's employee benefit plans and employment agreements
and change in control severance agreements, may have the effect of discouraging
or preventing a future takeover attempt in which stockholders of the Company
otherwise might receive a substantial premium for their shares over then current
market prices. For a detailed discussion of those provisions, see "Management of
the Bank -
22
<PAGE>
- - Certain Benefit Plans and Agreements," "Description of Capital Stock,"
"Certain Restrictions on Acquisition of the Company, the Converted Bank and the
Commercial Bank" and "Certain Anti-Takeover Provisions in the Certificate of
Incorporation and Bylaws."
Potential Impact on Voting Control of Purchases by Management
As a result of the level of Common Stock expected to be owned by
management subsequent to the Stock Conversion as a result of individual
purchases, as well as purchases by the MRP and the Option Plan and allocations
under the ESOP, management could benefit from certain statutory and regulatory
provisions, as well as certain provisions in the Company's Certificate of
Incorporation and Bylaws, that may tend to promote the continuity of existing
management. Specifically, it is currently expected that directors and executive
officers will subscribe for approximately 212,000 shares, or 9.6%, of the Common
Stock (assuming the sale of 2,200,000 shares at the midpoint of the Estimated
Valuation Range). The ESOP's purchase of 8% of the Common Stock and the MRP's
expected purchase of 88,000 shares, or 4%, of the Common Stock could increase
the estimated percentage of the Common Stock management will initially control
to 21.6% of all shares outstanding (assuming the sale of 2,200,000 shares at the
midpoint of the Estimated Valuation Range and assuming the shares purchased by
the MRP are purchased in the open market). If all of the options currently
expected to be available for grant under the Option Plan (options for 220,000
shares at the midpoint of the Estimated Valuation Range) were exercised (which
is not anticipated), the percentage of shares controlled by such persons would
be 31.6% of the total number of shares of Common Stock outstanding. Management
will thus have a very substantial interest in the Company and could, if each
member of management were to act consistently with each other, have significant
influence over the outcome of any stockholder vote requiring a majority vote and
in the election of directors, and could have veto power in matters requiring the
approval of 80% of the Company's outstanding Common Stock, such as certain
business combinations. Management might thus have the power to authorize actions
that may be viewed as contrary to the best interests of non-affiliated holders
of the Common Stock and might have veto power over actions that such holders may
deem to be in their best interests. See "Proposed Management Purchases,"
"Management of the Bank -- Certain Benefit Plans and Agreements," "The
Conversion -- Regulatory Restrictions on Acquisition of the Common Stock,"
"Certain Restrictions on Acquisition of the Company, the Converted Bank and the
Commercial Bank" and "Certain Anti-Takeover Provisions in the Certificate of
Incorporation and Bylaws."
Effect of Regulatory Changes on Operations
The Bank is subject to extensive regulation, supervision and
examination by the Administrator and the FDIC. Such regulation and supervision
establishes a comprehensive framework of activities in which a savings
institution may engage and is intended primarily for the protection of
depositors and the SAIF, which is administered by the FDIC. Following the
Conversion, the Commercial Bank will be subject to the regulation and
supervision of the Commission and the FDIC, and the Company will be subject to
regulation and supervision by the Federal Reserve Board. The regulatory
structure gives the regulatory authorities extensive discretion in connection
with their supervisory and enforcement activities. Any change in such
regulation, whether by the Commission, the FDIC, the Federal Reserve Board or
the U.S. Congress, could have a significant impact on the Commercial Bank and
its operations. See "Regulation."
Valuation Not Indicative of Future Price of Common Stock
The final aggregate purchase price of the Common Stock in the Stock
Conversion will be based upon an independent appraisal. Such valuation is not
intended, and must not be construed, as a recommendation of any kind as to the
advisability of purchasing such shares of Common Stock. Because such valuation
is necessarily based upon estimates and projections of a number of matters, all
of which are subject to change from time to time, no assurance can be given that
persons purchasing shares of Common Stock in the Stock Conversion will
thereafter be able to sell such shares at or above the Purchase Price. See "The
Conversion -- Stock Pricing and Number of Shares to be Issued."
23
<PAGE>
Possible Negative Income Tax Consequences of Distribution of Subscription Rights
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are deemed to have an
ascertainable value, the receipt of such rights would be taxable to recipients
who exercise the Subscription Rights in an amount equal to such value, and the
Bank could recognize a gain on such distribution. Whether Subscription Rights
are considered to have ascertainable value is an inherently factual
determination. The Bank has received an opinion of Ferguson that such rights
have no value. The opinion of Ferguson is not binding on the IRS. See "The
Conversion -- Effect of Conversion to Stock Form on Depositors and Borrowers of
the Bank -- Tax Effects."
Possible Dilutive Effect of MRP and Stock Options
It is expected that following the consummation of the Stock Conversion
the Company will adopt the Option Plan and the MRP, both of which would be
subject to stockholder approval, and that such plans would be considered and
voted upon at a meeting of the Company's stockholders to be held not less than
six months after the Stock Conversion. Under the MRP, employees and directors
could be awarded an aggregate amount of Common Stock equal to 4% of the shares
issued in the Stock Conversion, and under the Option Plan, employees and
directors could be granted options to purchase an aggregate amount of Common
Stock equal to 10% of the shares issued in the Stock Conversion at exercise
prices equal to the market price of the Common Stock on the date of grant. Under
the MRP and Option Plan, the shares issued to directors and employees could be
newly issued shares or shares purchased in the open market. In the event the
shares issued under the MRP and the Option Plan consist of newly issued shares
of Common Stock, the interests of existing stockholders would be diluted. If the
shares to fund the MRP and Option Plan are assumed to come from newly issued
shares purchased directly from the Company, and further assuming that all
options granted under the Option Plan are exercised, existing stockholders'
ownership interests will be diluted by 12.3%. At the midpoint of the Estimated
Valuation Range, if all shares under the MRP and the Option Plan were newly
issued and the exercise price for the option shares were equal to the Purchase
Price per share in the Stock Conversion, the number of outstanding shares of
Common Stock would increase from 2,200,000 to 2,508,000, pro forma stockholders'
equity per share of the outstanding Common Stock at September 30, 1996 would
have been $20.30, compared with $21.05 without such plans, and pro forma net
income per share of the outstanding Common Stock for the year ended September
30, 1996 would have been $.70, compared with $.72 without such plans. See "Pro
Forma Data" and "Management of the Bank -- Certain Benefit Plans and Agreements
- -- Management Recognition Plan" and "-- Stock Option and Incentive Plan."
Potential Cost of ESOP and MRP
It is anticipated that the ESOP will purchase 8% of the Common Stock
sold in the Conversion with funds borrowed from the Company. The cost of
acquiring the ESOP shares will be $2,244,000, $2,640,000, $3,036,000 and
$3,491,400 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively. In addition, it is possible that,
following the Stock Conversion, and subject to regulatory and stockholder
approval, the Company will implement the MRP, under which employees and
directors could be awarded (at no cost to them) an aggregate amount of Common
Stock equal to 4% of the shares issued in the Stock Conversion. Assuming the
sale in the Stock Conversion of the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, and assuming the shares of Common
Stock to be awarded under the MRP cost the Purchase Price of $15.00 per share,
the reduction to stockholders' equity of funding the MRP would be $1,122,000,
$1,320,000, $1,518,000 and $1,745,700, respectively.
ESOP Compensation Expense
Under American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," an employer is required to record compensation expense in an
amount equal to the fair value of shares committed to be released to employees
from an employee stock ownership plan. If shares of Common Stock appreciate in
value over time, the adoption of SOP 93-6 may increase compensation expense
relating to the ESOP to be established in connection with the Stock Conversion
as
24
<PAGE>
compared with prior guidance which required the recognition of compensation
expense based on the cost of shares acquired by the ESOP. It is impossible to
determine at this time the extent of such impact on future net income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of New Accounting Standards -- Accounting for Employee
Stock Ownership Plans."
Absence of Market for Common Stock
The Company and the Bank have never issued capital stock. The Company
has received conditional approval to have its Common Stock listed on the Nasdaq
National Market under the symbol "NSBC" upon completion of the Stock Conversion.
For initial and continued inclusion for listing on Nasdaq, the Company must have
two active and registered active market makers. Trident Securities has advised
the Company that it will act as a market maker for the Common Stock, but is not
obligated to do so. In addition, Trident Securities and the Company will seek to
encourage and assist at least one other market maker to make a market in the
Common Stock. The Company believes it will be successful in finding a second
market maker. The development of a public trading market depends upon the
existence of willing buyers and sellers, the presence of which is not within the
control of the Company or the Bank. Because there can be no assurance that
buyers and sellers of the Common Stock can be readily matched, investors may
wish to consider the potential illiquid and long-term nature of an investment in
the Common Stock. There can be no assurance that an active and liquid trading
market for the Common Stock will develop, or once developed, will continue, nor
any assurances that purchasers of the Common Stock will be able to sell their
shares at or above the Purchase Price. The absence of a liquid and active
trading market, or the discontinuance thereof, may have an adverse effect on
both the price and the liquidity of the Common Stock. See "Market for the Common
Stock."
No Opinion or Recommendation by Sales Agent; Best Efforts Offering
The Bank has engaged Trident Securities to consult with and advise the
Bank with respect to the Stock 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 Stock Conversion. Trident Securities has not
prepared or delivered any opinion or recommendation with respect to the
suitability of the Common Stock or the appropriateness of the amount of Common
Stock to be issued in the Stock Conversion. The engagement of Trident Securities
by the Bank and the work performed pursuant to such engagement, including any
due diligence investigation, should not be construed by purchasers of the Common
Stock as constituting an opinion or recommendation relating to investment in the
Common Stock offered hereby.
Risk of Loss of Principal
The shares of Common Stock offered by this Prospectus are not savings
accounts or deposits and are not insured or guaranteed by the FDIC, the SAIF or
any other governmental agency, and involve investment risk, including the
possible loss of principal.
NEWSOUTH BANCORP, INC.
NewSouth Bancorp, Inc. was incorporated under the laws of the State of
Delaware in November 1996 at the direction of the Board of Directors of the Bank
for the purpose of serving as a bank holding company of the Commercial Bank
following the Bank Conversion. The Company has applied to the Federal Reserve
Board for approval to retain control of the Commercial Bank following the Bank
Conversion. Prior to the Conversion, the Company has not engaged and will not
engage in any material operations. Upon consummation of the Conversion, the
Company will have no significant assets other than the outstanding capital stock
of the Converted Bank (and the Commercial Bank following the Bank Conversion),
up to 50% of the net proceeds of the Stock Conversion (after deducting amounts
infused into the Bank and used to fund the ESOP) and a note receivable from the
ESOP. Upon consummation of the Conversion, the Company's principal business will
be overseeing the business of the Commercial Bank and investing the portion of
the net Stock Conversion proceeds retained by it.
25
<PAGE>
As a holding company, the Company will have greater flexibility than
the Bank to diversify its business activities through existing or newly formed
subsidiaries or through acquisition of or merger with other financial
institutions, although the Company currently does not have any plans,
agreements, arrangements or understandings with respect to any such acquisitions
or mergers. After the Stock Conversion and the Bank Conversion, the Company will
be classified as a bank holding company and will be subject to regulation by the
Federal Reserve Board.
Following the Conversion, the Board of Directors intends to manage the
Company to promote the long-term best interests of the Company and its
stockholders. Initially following the Conversion, the Company will have capital
in excess of the level required to support its current asset size and level of
operations, and the Bank's business plan is to pursue a strategy of
conservative, long-term growth through competing for loans and deposits in its
market area, establishing new branch offices or making selective acquisitions of
other financial institutions or branches of other institutions. The Boards of
Directors of the Company and the Bank currently have no specific plans regarding
new branch offices or acquisitions of other financial institutions or branches.
With respect to the evaluation of any business combination or tender or exchange
offer that may be presented in the future, the Company's Certificate of
Incorporation directs the Board of Directors to consider, in addition to the
adequacy of the amount to be paid in connection with any such transaction,
certain specified factors and any other factors the Board deems relevant,
including (i) the social and economic effects of the transaction on the Company
and its subsidiaries, employees, depositors, loan and other customers, creditors
and other elements of the communities in which the Company and its subsidiaries
operate or are located; (ii) the business and financial condition and earnings
prospects of the acquiring person or entity; and (iii) the competence,
experience and integrity of the acquiring person or entity and its or their
management. See "Risk Factors -- Uncertainty as to Existence of Growth
Opportunities" and "Certain Anti-Takeover Provisions in the Certificate of
Incorporation and Bylaws -- Board Consideration of Certain Nonmonetary Factors
in the Event of an Offer by Another Party."
The Company's executive offices are located at 1311 Carolina Avenue,
Washington, North Carolina 27889- 2047, and its main telephone number is (919)
946-4178.
HOME SAVINGS BANK, SSB
The Bank is a North Carolina-chartered mutual savings bank
headquartered in Washington, North Carolina and serving northeastern North
Carolina. The Bank was chartered by the State of North Carolina in 1902 under
the name The Home Building and Loan Association. The Bank received federal
insurance of its deposit accounts in 1959. In 1992, the Bank converted to a
North Carolina-chartered savings bank, at which time it adopted its present name
of Home Savings Bank, SSB. At September 30, 1996, the Bank had total assets of
$194.1 million, total deposits of $171.2 million and retained income,
substantially restricted, of $18.3 million.
The Bank's principal business consists of attracting deposits from the
general public and investing these funds in loans secured by first mortgages on
owner-occupied, single-family residences in the Bank's market area, commercial
real estate loans, commercial business loans and consumer loans, and, to a
lesser extent, multi-family residential real estate loans. Historically, the
Bank operated as a traditional savings and loan association, emphasizing the
origination of loans secured by single-family residences. Beginning in the early
1980's, the Board of Directors determined that the Bank's market area was not
adequately served by the existing financial institutions and there was local
demand for commercial real estate, commercial business and consumer loans. As a
result, the Board of Directors determined to refocus the Bank's strategy.
Pursuant to this strategy, while continuing to pursue its existing business of
originating single-family residential mortgage loans, the Bank took advantage of
the business opportunities identified by the Board of Directors by gradually
expanding into commercial real estate, commercial business and consumer lending.
In furtherance of this strategy, the Bank recruited experienced commercial real
estate, commercial business and consumer lending officers and developed
commercial real estate, commercial business and consumer loan products. As a
result of these efforts over the years, at September 30, 1996, the Bank had
commercial real estate, commercial business and consumer loans totaling $31.2
million, $10.3 million and $37.4 million, respectively, which represented 17.9%,
6.0% and 21.5%, respectively, of total loans. At September 30, 1996, $94.8
million, or 54.6% of total loans, consisted of residential real estate mortgage
loans.
26
<PAGE>
In addition, since the late 1980's, mortgage banking activities have
constituted an increasingly significant business activity for the Bank. The
Bank's mortgage banking activities consist of originating single-family
residential mortgage loans and primarily selling those loans for cash to the
FHLMC, with servicing retained. On occasion, the Bank also will swap
single-family residential mortgage loans with the FHLMC, while retaining
servicing, in exchange for mortgage-backed securities backed by those loans. At
September 30, 1996, the Bank had $21.6 million of loans available for sale and
$253.7 million of loans serviced for others. The Bank earned servicing income of
$632,000 on its portfolio of loans serviced for others for the year ended
September 30, 1996.
Following the Conversion, management intends to continue to follow its
current strategy of seeking growth opportunities through increasing its
portfolio of commercial real estate, commercial business and consumer loans
while continuing to pursue single-family residential mortgage loan origination
and mortgage banking activities.
The Bank derives its income principally from interest earned on loans
and investments and, to a lesser extent, loan servicing and other fees and gains
on the sale of loans and investments. The Bank's principal expenses are interest
expense on deposits and borrowings and noninterest expense such as compensation
and employee benefits, office occupancy expenses and other miscellaneous
expenses. Funds for these activities are provided principally by deposits,
repayments of outstanding loans and investments and operating revenues.
The Bank's executive offices are located at 1311 Carolina Avenue,
Washington, North Carolina 27889-2047, and its main telephone number is (919)
946-4178.
NEWSOUTH BANK
Upon consummation of the Bank Conversion, the Commercial Bank will
succeed to all of the assets and liabilities of the Converted Bank (which,
pursuant to the Stock Conversion will have succeeded to all of the assets and
liabilities of the Bank). Following the Conversion, management intends to
continue to follow the Bank's current strategy of seeking growth opportunities
through increasing its portfolio of commercial real estate, commercial business
and consumer loans while continuing to pursue single-family residential mortgage
loan origination and mortgage banking activities.
The deposits of the Commercial Bank will continue to be insured by the
SAIF of the FDIC, and, as such, the Commercial Bank will continue to be subject
to regulation and supervision by the FDIC. The Commercial Bank will not be
subject to regulation and supervision by the Administrator. Rather, the primary
regulator of the Commercial Bank will be the Commission. In addition, the
Commercial Bank will remain a member of the FHLB of Atlanta. For information
regarding regulations applicable to the Converted Bank and the Commercial Bank,
see "Regulation."
USE OF PROCEEDS
The amount of proceeds from the sale of the Common Stock in the Stock
Conversion will depend upon the total number of shares actually sold in the
Subscription Offering and the Community Offering and the Syndicated Community
Offering, if any, and the actual expenses of the Stock Conversion. As a result,
the actual net proceeds from the sale of the Common Stock cannot be determined
until the Stock Conversion is completed. Based on the sale of $33.0 million of
Common Stock at the midpoint of the Estimated Valuation Range, the net proceeds
from the sale of the Common Stock are estimated to be approximately
$31.9 million. The Company has received regulatory approval from the
Administrator to purchase all of the capital stock of the Converted Bank to be
issued in the Stock Conversion in exchange for at least 50% of the net proceeds
after deducting the cost of the ESOP loan. Based on the foregoing assumption and
the purchase of 8% of the shares to be issued in the Stock Conversion by the
ESOP, the Bank would receive approximately $14.6 million in cash, and the
Company would retain approximately $14.6 million in cash and $2.6 million in the
form of a note receivable from the ESOP. The ESOP note receivable will be for a
ten year term and carry an interest rate, which adjusts annually, equal to the
prime rate as published in The Wall Street Journal.
--- ---- ------ -------
27
<PAGE>
The proceeds retained by the Company, after funding the ESOP, initially
will be invested in short-term and intermediate-term securities including cash
and cash equivalents and U.S. government and agency obligations. Such proceeds
will be available for a variety of corporate purposes, including funding the
MRP, if implemented, future acquisitions and diversification of business,
additional capital contributions, dividends to stockholders and future
repurchases of the Common Stock to the extent permitted by applicable
regulations. The Company currently has no specific plans, intentions,
arrangements or understandings regarding acquisitions, capital contributions or
repurchases. In addition, such funds will be available to be loaned to the Bank
if necessary in the event and to the extent loan growth exceeds deposit growth
or for other corporate purposes. Subject to regulatory and other considerations,
the Company intends to establish a quarterly cash dividend following the
Conversion at an initial quarterly rate of approximately $0.10 per share (or an
annual rate of $0.40 per share, or approximately 2.7% based on the $15.00 per
share Purchase Price), commencing during the first full calendar quarter
subsequent to the Stock Conversion. "See Dividend Policy." Due to the limited
nature of the Company's business activities, the Company believes that the net
proceeds retained after the Stock Conversion, earnings on such proceeds and
payments on the ESOP note receivable will be adequate to meet the Company's
financial needs until dividends are paid by the Converted Bank (or Commercial
Bank); however, no assurance can be given that the Company will not have a need
for additional funds in the future. For additional information, see "Regulation
- -- Depository Institution Regulation -- Dividend Restrictions." A portion of the
net proceeds may be used to acquire shares of Common Stock pursuant to the MRP
or to purchase shares to be held by a grantor trust for issuance to option
holders upon the exercise of options in the event the Option Plan is
implemented. See "Management of the Bank -- Certain Benefit Plans and Agreements
- -- 1996 Stock Option Plan" and "-- Management Recognition Plan."
The Company has no specific plans regarding possible stock repurchases
during the first year following the Stock Conversion.
The Company has agreed with the FDIC not to make a tax-free cash
distribution to stockholders for a period of one year following consummation of
the Stock Conversion. In addition, the Company has agreed with the FDIC not to
file a private letter ruling request with the Internal Revenue Service regarding
the tax-free nature of a possible one-time cash distribution to Company
stockholders for a period of one year following consummation of the Stock
Conversion.
The proceeds contributed to the Converted Bank will ultimately become
part of the Converted Bank's (or Commercial Bank's) general corporate funds to
be used for its business activities, including making loans and investments.
Initially, it is expected that the proceeds will be invested in short-term and
intermediate-term securities including cash and cash equivalents and U.S.
government and agency obligations. The Converted Bank (or Commercial Bank)
ultimately plans to use such proceeds primarily to originate loans in the
ordinary course of business.
DIVIDEND POLICY
The payment of cash dividends on the Common Stock will be subject to
the requirements of applicable law and the determination by the Board of
Directors of the Company that the net income, capital and financial condition of
the Company, industry trends and general economic conditions justify the payment
of dividends. Subject to regulatory and other considerations, the Company
intends to establish a quarterly cash dividend following the Conversion at an
initial quarterly rate of approximately $0.10 per share (or an annual rate of
$0.40 per share, or approximately 2.7% based on the $15.00 per share Purchase
Price), commencing during the first full calendar quarter subsequent to the
Stock Conversion. In addition, from time to time in an effort to manage capital
to a reasonable level, the Board may determine if it is prudent to pay periodic
special cash dividends. Periodic special cash
28
<PAGE>
dividends, if paid, may be paid in addition to, or in lieu of, regular cash
dividends. Like all possible dividends, there can be no assurance that periodic
special cash dividends will be paid or that, if paid, will continue to be paid.
In addition, because the Company initially will have no significant
source of income other than dividends from the Converted Bank and the Commercial
Bank and earnings from investment of the net proceeds of the Stock Conversion
retained by the Company, the payment of dividends by the Company will depend in
part upon the amount of the net proceeds from the Conversion retained by the
Company and the Company's earnings thereon and the receipt of dividends from the
Converted Bank and the Commercial Bank, which is subject to various tax and
regulatory restrictions on the payment of dividends. Dividend payments by the
Company are subject to regulatory restriction under Federal Reserve Board policy
as well as to limitations under applicable provisions of Delaware corporate law.
The Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board's
view that a bank holding company should pay cash dividends only to the extent
that the company's net income for the past year is sufficient to cover both the
cash dividends and a rate of earning retention that is consistent with the
company's capital needs, asset quality and overall financial condition. The
Federal Reserve Board also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, the Federal Reserve Board may prohibit a bank holding
company from paying any dividends if the holding company's bank subsidiary is
classified as "undercapitalized". See "Regulation -- Regulation of the Company
Following the Bank Conversion -- Dividends." Under Delaware law, dividends may
be paid out of surplus or, if there is no surplus, out of net profits for the
fiscal year in which the dividend is declared and for the preceding fiscal year.
The payment of dividends from the Converted Bank (or the Commercial Bank) is
subject to various tax and regulatory restrictions. See "Regulation --
Depository Institution Regulation -- Dividend Restrictions."
As noted above, the Company will purchase all of the capital stock of
the Bank to be issued in the Stock Conversion in exchange for at least 50% of
the net proceeds from the sale of the Common Stock in the Stock Conversion after
deducting the cost of the ESOP loan. Subject to the provisions of Delaware
General Corporation Law noted above, the full amount retained by the Company
less amounts required to fund the ESOP in the Stock Conversion will be available
for the payment of dividends.
MARKET FOR THE COMMON STOCK
The Company has never issued capital stock to the public. Consequently,
there is no established market for the Common Stock. The Company has received
conditional approval to have its Common Stock listed on the Nasdaq National
Market under the symbol "NSBC". For initial and continued inclusion for listing
on Nasdaq, the Company must have two active and registered active market makers.
Trident Securities has advised the Company that it will act as a market maker
for the Common Stock, but is not obligated to do so. In addition, Trident
Securities and the Company will seek to encourage and assist at least one other
market maker to make a market in the Common Stock. Making a market involves
maintaining bid and ask quotations and being able, as principal, to effect
transactions in reasonable quantities at those quoted prices, subject to various
securities laws and other regulatory requirements. It is impossible to ascertain
whether a second market maker will make a market in the Common Stock. There can
be no assurance that the Common Stock will in fact be listed on Nasdaq or that
it will trade on Nasdaq. The development of a liquid public market depends on
the existence of willing buyers and sellers, the presence of which is not within
the control of the Company or the Bank. Accordingly, the number of active buyers
and sellers of the Common Stock at any particular time may be limited. Under
such circumstances, investors in the Common Stock could have difficulty
disposing of their shares and should not view the Common Stock as a short-term
investment. Accordingly, there can be no assurance that an active and liquid
trading market for the Common Stock will develop or that, if developed, it will
continue, nor is there any assurance that persons purchasing shares of Common
Stock will be able to sell them at or above the Purchase Price. While the
Company has received conditional approval to have the Common Stock listed on the
Nasdaq National Market, no assurance can be given that it will in fact be listed
on the Nasdaq National Market or that it will trade on the Nasdaq National
Market.
29
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization, including deposits, of the Bank at September 30, 1996 and the
pro forma consolidated capitalization of the Company giving effect to the sale
of the Common Stock at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range based upon the assumptions set forth under "Pro
Forma Data" and below. Depending on market and financial conditions, the total
number of shares to be issued in the Stock Conversion may be significantly
increased or decreased above or below the midpoint of the Estimated Valuation
Range. No resolicitation of subscribers and other purchasers will be made unless
the aggregate purchase price of the Common Stock sold in the Stock Conversion is
below the minimum of the Estimated Valuation Range or is more than 15% above the
maximum of the Estimated Valuation Range. A change in the number of shares to be
issued in the Stock Conversion may materially affect the Company's pro forma
capitalization. See "Pro Forma Data" and "The Conversion -- Stock Pricing and
Number of Shares to be Issued."
<TABLE>
<CAPTION>
Pro Forma Consolidated Capitalization of
Capitalization the Company at September 30, 1996 Based on the Sale of
of the --------------------------------------------------------
Bank at 1,870,000 Shares 2,200,000 Shares 2,530,000 Shares
September 30, at $15.00 at $15.00 at $15.00
1996 Per Share Per Share Per Share
------------- -------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Deposits (1)............................................ $ 171,213 $ 171,213 $ 171,213 $ 171,213
Other borrowings........................................ 1,040 1,040 1,040 1,040
--------- ---------- ---------- ----------
Total deposits and borrowed funds................... $ 172,253 $ 172,253 $ 172,253 $ 172,253
========= ========== ========== ==========
Capital stock:
Preferred stock, $.01 par value per share:
authorized - 1,000,000 shares;
assumed outstanding - none........................ $ -- $ -- $ -- $ --
Common Stock, $.01 par value per share
authorized - 8,000,000 shares;
shares to be outstanding - as shown (2)(3)........ -- 19 22 25
Paid-in capital (2)(3)............................... -- 27,030 31,893 36,756
Less: Common Stock acquired by ESOP (4)............. -- (2,244) (2,640) (3,036)
Common stock acquired by MRP (3)............ -- (1,122) (1,320) (1,518)
Retained income -- substantially restricted (5)...... 18,306 18,306 18,306 18,306
Unrealized gains on available-for-sale securities,
net of tax........................................ 41 41 41 41
--------- ---------- ---------- ----------
Total stockholders' equity (6).................. $ 18,347 $ 42,030 $ 46,302 $ 50,574
========= ========== ========== ==========
<CAPTION>
2,909,500 Shares
at $15.00
Per Share
----------------
<S> <C>
Deposits (1)........................................... $ 171,213
Other borrowings....................................... 1,040
----------
Total deposits and borrowed funds.................. $ 172,253
==========
Capital stock:
Preferred stock, $.01 par value per share:
authorized - 1,000,000 shares;
assumed outstanding - none....................... $ --
Common Stock, $.01 par value per share
authorized - 8,000,000 shares;
shares to be outstanding - as shown (2)(3)....... 29
Paid-in capital (2)(3).............................. 42,348
Less: Common Stock acquired by ESOP (4)............ (3,491)
Common stock acquired by MRP (3)........... (1,746)
Retained income -- substantially restricted (5)..... 18,306
Unrealized gains on available-for-sale securities,
net of tax....................................... 41
----------
Total stockholders' equity (6)................. $ 55,487
==========
</TABLE>
(footnotes on following page)
30
<PAGE>
_____________________________
(1) Does not reflect withdrawals from savings accounts for the purchase of
Common Stock in the Stock Conversion; any withdrawals will reduce pro
forma deposits by the amount of such withdrawals.
(2) Does not reflect additional shares of Common Stock that possibly could
be purchased by participants in the Option Plan, if implemented, under
which directors, executive officers and other employees could be
granted options to purchase an aggregate amount of Common Stock equal
to 10% of the shares issued in the Stock Conversion (220,000 shares at
the midpoint of the Estimated Valuation Range) at exercise prices equal
to the market price of the Common Stock on the date of grant.
Implementation of the Option Plan will require regulatory and
stockholder approval. See "Management of the Bank -- Certain Benefit
Plans and Agreements -- Stock Option and Incentive Plan" and "Risk
Factors -- Dilutive Effect of MRP and Stock Options."
(3) Assumes a number of shares of Common Stock equal to 4% of the Common
Stock to be sold in the Stock Conversion will be purchased by the MRP
through open market purchases. The dollar amount of the Common Stock to
be purchased by the MRP is based on the $15.00 per share Purchase Price
in the Stock Conversion and represents unearned compensation and is
reflected as a reduction of capital. Such amount does not reflect
possible increases or decreases in the value of such stock relative to
the Purchase Price in the Stock Conversion. As the Bank accrues
compensation expense to reflect the vesting of such shares pursuant to
the MRP, the charge against capital will be reduced accordingly.
Implementation of the MRP will require regulatory and stockholder
approval. If the shares to fund the MRP are assumed to come from
authorized but unissued shares purchased by the MRP from the Company at
the Purchase Price within the year following the Stock Conversion, at
the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, the number of outstanding shares would be
1,944,800, 2,288,000, 2,631,200 and 3,025,880, respectively, and total
stockholders' equity would be $43.2 million, $47.6 million, $52.1
million and $57.2 million, respectively. As a result of the MRP
acquiring authorized but unissued shares from the Company,
stockholders' ownership in the Company would be diluted by
approximately 3.85%. See "Management of the Bank -- Certain Benefit
Plans and Agreements -- Management Recognition Plan," "Pro Forma Data"
and "Risk Factors -- Dilutive Effect of MRP and Stock Options."
(4) Assumes 8% of the shares of Common Stock to be sold in the Stock
Conversion are purchased by the ESOP, and that the funds used to
purchase such shares are borrowed from the Company out of net proceeds.
Although repayment of such debt will be secured solely by the shares
purchased by the ESOP, the Bank expects to make discretionary
contributions to the ESOP in an amount at least equal to the principal
and interest payments on the ESOP debt. The approximate amount expected
to be borrowed by the ESOP is not reflected in this table as borrowed
funds but is reflected as a reduction of capital. As the Bank accrues
compensation expense to reflect the allocation of such shares pursuant
to the ESOP, the charge against capital will be reduced accordingly.
See "Management of the Bank -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
(5) The retained income of the Bank is substantially restricted. All
capital distributions by the Bank are subject to regulatory
restrictions tied to its regulatory capital level. In addition, after
the Stock Conversion, the Bank will be prohibited from paying any
dividend that would reduce its regulatory capital below the amount in
the liquidation account to be provided for the benefit of the Bank's
Eligible Account Holders and Supplemental Eligible Account Holders at
the time of the Stock Conversion and adjusted downward thereafter. See
"Regulation -- Depository Institution Regulation -- Dividend
Restrictions" and "The Conversion -- Effect of Conversion to Stock Form
on Depositors and Borrowers of the Bank -- Liquidation Account."
(6) Pro forma stockholders' equity information is not intended to represent
the fair market value of the Common Stock, the current value of the
Bank's assets or liabilities or the amounts, if any, that would be
available for distribution to stockholders in the event of liquidation.
Such pro forma data may be materially affected by a change in the
number of shares to be sold in the Stock Conversion and by other
factors.
31
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The Bank 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. In addition, the Bank 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 1 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 1 capital to
risk-weighted assets equal at least 4% and (ii) the ratio of total capital to
risk-weighted assets equal at least 8%.
After the Bank Conversion, the Commercial Bank will continue to be
subject to the FDIC's capital requirements and the Company and the Commercial
Bank also will be required to satisfy Federal Reserve Board capital
requirements, which are similar but not identical to the FDIC's capital
requirements. The following table sets forth the Bank's historical capital
position relative to the various minimum Administrator and FDIC capital
regulatory requirements to which it is currently subject. The next table sets
forth the Bank's historical capital position and thereafter presents pro forma
data relative to such Federal Reserve Board capital requirements to which the
Commercial Bank will be subject. Pro forma data assumes that the Common Stock
has been sold as of September 30, 1996 at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range. For additional information
regarding the financial condition of the Bank and the assumptions underlying the
pro forma capital calculations set forth below, see "Use of Proceeds,"
"Capitalization" and "Pro Forma Data" and the financial statements and related
notes appearing elsewhere herein.
<TABLE>
<CAPTION>
Historical at
September 30, 1996
---------------------------
Percent of
Amount Assets(1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tier 1/leverage capital................................................ $ 18,306 9.60%
Tier 1/leverage capital requirement.................................... 7,625 4.00
-------- -----
Excess............................................................... $ 10,681 5.60%
======== =====
Tier 1 risk-based capital.............................................. $ 18,306 13.97%
Tier 1 risk-based capital requirement.................................. 5,242 4.00
-------- -----
Excess............................................................... $ 13,064 9.97%
======== =====
Total risk-based capital............................................... $ 19,954 15.23%
Total risk-based capital requirement................................... 10,484 8.00
-------- -----
Excess............................................................... $ 9,470 7.23%
======== =====
North Carolina regulatory capital...................................... $ 19,954 10.28%
North Carolina regulatory capital requirement.......................... 9,705 5.00
-------- -----
Excess............................................................... $ 10,249 5.28%
======== =====
</TABLE>
- --------------
(1) The ratio of leverage capital is based on quarterly average assets for
the year ended September 30, 1996. Tier 1 risk-based capital and total
risk-based capital is based on risk-weighted assets at
September 30, 1996. The North Carolina regulatory capital requirement
is based on total assets at September 30, 1996.
32
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Capital of the Commercial Bank as of
-----------------------------------------------
Commercial Bank's Historical September 30, 1996 Based on the Sale of (1):
Capital at September --------------------------------------------
30, 1996 Assuming 1,870,000 Shares 2,200,000 Shares
Federal Reserve Board at $15.00 at $15.00
Capital Requirements Per Share Per Share
---------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Amount Assets (2) Amount Assets (2) Amount Assets (2)
------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Capital under general accepted
accounting principles.................... $ 18,347 9.45% $ 27,384 13.33% $ 29,025 13.99%
====== ===== ====== ===== ====== =====
............................................
Tier 1 (core) to total assets............... $ 18,306 9.43% $ 27,343 13.31% $ 28,984 13.97%
Tier 1 (core) capital requirement (3)....... 7,764 4.00 8,215 4.00 8,297 4.00
----- ----- ------ ----- ------ -----
Excess................................... $ 10,542 5.43% $ 19,128 9.31% $ 20,687 9.97%
====== ===== ====== ===== ====== =====
Tier 1 (core) capital to risk-weighted
assets................................... $ 18,306 13.97% $ 27,343 20.86% $ 28,984 22.12%
Tier 1 (core) capital requirement........... 5,242 4.00 5,242 4.00 5,242 4.00
----- ----- ------ ----- ------ -----
Excess................................... $ 13,064 9.97% $ 22,101 16.86% $ 23,742 18.12%
====== ===== ====== ===== ====== =====
Total capital to risk-weighted assets $ 19,954 15.23% $ 28,991 22.12% $ 30,632 23.37%
Total capital requirement................... 10,484 8.00 10,484 8.00 10,484 8.00
------ ----- ------ ----- ------ ------
Excess................................... $ 9,470 7.23% $ 18,507 14.12% $ 20,148 15.37%
===== ===== ====== ===== ====== ======
<CAPTION>
Pro Forma Capital of the Commercial Bank as of
-----------------------------------------------
September 30, 1996 Based on the Sale of (1):
--------------------------------------------
2,530,000 Shares 2,909,500 Shares
at $15.00 at $15.00
Per Share Per Share
---------------------- ----------------------
Percent of Percent of
Amount Assets (2) Amount Assets (2)
------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Capital under general accepted
accounting principles.................. $ 30,666 14.64% $ 32,553 15.37%
====== ====== ====== ======
..........................................
Tier 1 (core) to total assets............. $ 30,625 14.62% $ 32,512 15.35%
Tier 1 (core) capital requirement (3)..... 8,378 4.00 8,472 4.00
------ ----- ------ -----
Excess................................. $ 22,247 10.62% $ 24,040 11.35%
====== ===== ====== =====
Tier 1 (core) capital to risk-weighted
assets................................. $ 30,625 23.37% $ 32,512 24.81%
Tier 1 (core) capital requirement......... 5,242 4.00 5,242 4.00
------ ----- ------ -----
Excess................................. $ 25,383 19.37% $ 27,270 20.81%
====== ===== ====== =====
Total capital to risk-weighted assets $ 32,273 24.63% $ 34,160 26.07%
Total capital requirement................. 10,484 8.00 10,484 8.00
------ ----- ------ -----
Excess................................. $ 21,789 16.63% $ 23,676 18.07%
====== ===== ====== =====
</TABLE>
- ------------------------
(1) Assumes the Company will purchase all of the capital stock of the
Converted Bank to be issued in the Stock Conversion in exchange for 50%
of the net proceeds. Assumes net proceeds distributed to the Company or
the Converted Bank (and the Commercial Bank) initially are invested in
short-term U.S. government securities with a 0% risk-weighting. Assumes
8% of the Common Stock to be sold in the Stock Conversion is acquired
by the ESOP, and that the funds used to acquire such shares are
borrowed from the Company. Although repayment of such debt will be
secured solely by the Common Stock purchased by the ESOP, the Converted
Bank (and the Commercial Bank) expects to make discretionary
contributions to the ESOP in an amount at least equal to the principal
and interest payments on the ESOP debt. As a result, the table assumes
a reduction to the Commercial Bank's pro forma capital and regulatory
capital to reflect the cost of funding the ESOP. Assumes the cost of
funding the MRP will be paid by the Bank.
(2) Based on the Bank's total assets determined under generally accepted
accounting principles for capital as determined under generally
accepted accounting principles and Tier 1 capital purposes, and
risk-weighted assets for the purpose of the risk-based capital
requirements.
(3) Assumes a core capital requirement of 4% adjusted total assets, though
such level may be increased by the Federal Reserve Board to as high as
5%. See "Regulation -- Depository Institution Regulation -- Capital
Requirements."
33
<PAGE>
PRO FORMA DATA
The following table sets forth the actual and, after giving effect to
the Stock Conversion for the period and at the date indicated, pro forma
consolidated income, stockholders' equity and other data of the Bank prior to
the Stock Conversion and of the Company following the Stock Conversion.
Unaudited pro forma consolidated income and related data have been calculated
for the year ended September 30, 1996 as if the Common Stock had been sold at
the beginning of the year, and the estimated net proceeds had been invested at
5.70% at the beginning of the fiscal year. The foregoing yield approximates the
yield on the one-year U.S. Treasury bill at September 30, 1996. (While
applicable regulations provide for the use of a yield representing the
arithmetic average of the average yield on the Bank's interest-earning assets
and the average cost of deposits, the Bank believes that the one-year Treasury
bill rate represents a more realistic yield on its investments). The pro forma
after-tax yield for the Company and the Bank is assumed to be 3.51% for the year
ended September 30, 1996, based on the estimated combined state and federal tax
rate of 38.5% for that period. No effect has been given in the pro forma
stockholders' equity calculations for the assumed earnings on the net proceeds.
The pro forma income and related data set forth below do not reflect accruals to
be made by the Bank with regard to certain employee benefit plans to be adopted
in connection with, and subsequent to, the Stock Conversion. See "Management of
the Bank -- Certain Benefit Plans and Agreements."
Set forth below are the estimated net proceeds to the Company, assuming
the sale of the Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range. The actual net proceeds from the sale
of the Common Stock cannot be determined until the Conversion is completed.
However, net proceeds set forth on the following table are estimated based upon
the following assumptions: (i) 100% of the shares of Common Stock will be sold
in the Subscription and Community Offerings and the Syndicated Community
Offering as follows: (a) 8% will be sold to the ESOP and 200,000 shares will be
sold to directors and officers of the Bank and their associates and to
employees, for which commissions will not be paid; and (b) the remaining shares
will be sold to others in the Subscription and Community Offerings; and (ii)
other Conversion expenses, not including sales commissions, will be
approximately $579,000. The foregoing assumptions regarding estimated purchases
in the Subscription and Community Offerings and Syndicated Community Offering
are based on reasonable market assumptions, market conditions, consultations
between the Bank and Trident Securities and planned purchases by the ESOP.
Actual expenses may vary from those estimated.
<TABLE>
<CAPTION>
Maximum as
Minimum of Midpoint of Maximum of adjusted, of
1,870,000 Shares 2,200,000 Shares 2,530,000 Shares 2,909,500 Shares
at $15.00 at $15.00 at $15.00 at $15.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Gross proceeds........................ $ 28,050 $ 33,000 $ 37,950 $ 43,643
Less: Estimated expenses............. (1,001) (1,085) (1,169) (1,266)
---------- ---------- ---------- ----------
Estimated net proceeds................ 27,049 31,915 36,781 42,377
Less:
ESOP funded by the Company......... (2,244) (2,640) (3,036) (3,491)
MRP................................ (1,122) (1,320) (1,518) (1,746)
---------- ---------- ---------- ----------
Estimated investable net proceeds..... $ 23,683 $ 27,955 $ 32,227 $ 37,140
========== ========== ========== ==========
</TABLE>
34
<PAGE>
The stockholders' equity and related data presented herein are not
intended to represent the fair market value of the Common Stock, the current
value of assets or liabilities, or the amounts, if any, that would be available
for distribution to stockholders in the event of liquidation. For additional
information regarding the liquidation account, see "The Conversion -- Effect of
Conversion to Stock Form on Depositors and Borrowers of the Bank -- Liquidation
Account." The pro forma income and related data derived from the assumptions set
forth above should not be considered indicative of the actual results of
operations of the Converted Bank (or the Commercial Bank) and the Company for
any current or future period. Such pro forma data may be materially affected by
a change in the number of shares to be issued in the Stock Conversion and other
factors. See "The Conversion -- Stock Pricing and Number of Shares to be
Issued."
35
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended September 30, 1996
---------------------------------------------------------
1,870,000 2,200,000 2,530,000 2,909,500
Shares Shares Shares Shares
at $15.00 at $15.00 at $15.00 at $15.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross offering proceeds................................ $ 28,050 $ 33,000 $ 37,950 $ 43,643
Less estimated offering expenses....................... (1,001) (1,085) (1,169) (1,266)
---------- --------- ---------- ----------
Estimated net offering proceeds..................... 27,049 31,915 36,781 42,377
Less: ESOP funded by the Company...................... (2,244) (2,640) (3,036) (3,491)
MRP............................................. (1,122) (1,320) (1,518) (1,746)
---------- --------- ---------- ----------
Estimated investable net proceeds................... $ 23,683 $ 27,955 $ 32,227 $ 37,140
========== ========= ========== ==========
Net income:
Historical net income (1)........................... $ 820 $ 820 $ 820 $ 820
Pro forma income on investable net proceeds......... 830 980 1,130 1,302
Pro forma ESOP adjustment (2)....................... (138) (162) (187) (215)
Pro forma MRP adjustment (3)........................ (138) (162) (187) (215)
---------- --------- ---------- ----------
Total........................................... $ 1,374 $ 1,476 $ 1,576 $ 1,692
========== ========= ========== ==========
Net income per share: (4)
Historical net income (1)........................... $ 0.47 $ 0.40 $ 0.35 $ 0.30
Pro forma income on investable net proceeds......... 0.48 0.48 0.48 0.48
Pro forma ESOP adjustment (2)....................... (0.08) (0.08) (0.08) (0.08)
Pro forma MRP adjustment (3)........................ (0.08) (0.08) (0.08) (0.08)
---------- --------- ---------- ----------
Total........................................... $ 0.79 $ 0.72 $ 0.67 $ 0.62
========== ========= ========== ==========
Weighted average number of shares outstanding
for earnings per share calculations (2)............. 1,735,360 2,041,600 2,347,840 2,700,016
Stockholders' equity: (5)
Historical......................................... $ 18,347 $ 18,347 $ 18,347 $ 18,347
Estimated net proceeds (3)......................... 27,049 31,915 36,781 42,377
Less: Common Stock acquired by ESOP (2)............ (2,244) (2,640) (3,036) (3,491)
Common Stock acquired by MRP (3)............. (1,122) (1,320) (1,518) (1,746)
---------- --------- ---------- ----------
Total........................................... $ 42,030 $ 46,302 $ 50,574 $ 55,487
========== ========= ========== ==========
Stockholders' equity per share: (4)(5)
Historical.......................................... $ 9.81 $ 8.34 $ 7.25 $ 6.31
Estimated net proceeds (3).......................... 14.46 14.51 14.54 14.56
Less: Common Stock acquired by ESOP (2)............ (1.20) (1.20) (1.20) (1.20)
Common Stock acquired by MRP (3)............. (0.60) (0.60) (0.60) (0.60)
---------- --------- ---------- ----------
Total........................................... $ 22.47 $ 21.05 $ 19.99 $ 19.07
========== ========= ========== ==========
Number of shares outstanding for
stockholders' equity per share calculations......... 1,870,000 2,200,000 2,530,000 2,909,500
Offering price as a percentage of pro forma
stockholders' equity per share...................... 66.74% 71.27% 75.04% 78.65%
========== ========= ========== ==========
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended September 30, 1996
---------------------------------------------------------
1,870,000 2,200,000 2,530,000 2,909,500
Shares Shares Shares Shares
at $15.00 at $15.00 at $15.00 at $15.00
Per Share Per Share Per Share Per Share
--------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Ratio of offering price to pro forma
net income per share................................ 18.99x 20.83x 22.39x 23.81x
========== ========= ========== ==========
(Footnotes on succeeding page)
</TABLE>
37
<PAGE>
- --------------------
(1) Historical net income and historical net income per share include an
after-tax charge of $582,000 taken during the year ended September 30,
1996 representing a one-time special assessment of 65.7 basis points on
the Bank's deposits held as of March 31, 1995 pursuant to legislation
enacted to recapitalize the SAIF. If the one-time special assessment
had been excluded, at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, pro forma net income per
share would have been $1.13, $1.01, $.92 and $.84, respectively.
(2) Assumes 8% of the shares to be sold in the Stock Conversion are
purchased by the ESOP under all circumstances, and that the funds used
to purchase such shares are borrowed from the Company. The approximate
amount expected to be borrowed by the ESOP is not reflected as a
liability but is reflected as a reduction of capital. Although
repayment of such debt will be secured solely by the shares purchased
by the ESOP, the Converted Bank (and the Commercial Bank) expects to
make discretionary contributions to the ESOP in an amount at least
equal to the principal and interest payments on the ESOP debt. Pro
forma net income has been adjusted to give effect to such
contributions, based upon a fully amortizing debt with a ten-year term.
Because the Company will be providing the ESOP loan, only principal
payments on the ESOP loan are reflected as employee compensation and
benefits expense. For purposes of this table the Purchase Price of
$15.00 was utilized to calculate the ESOP expense. The Bank intends to
record compensation expense related to the ESOP in accordance with
AICPA SOP No. 93-6. As a result, to the extent the value of the Common
Stock appreciates over time, compensation expense related to the ESOP
will increase. SOP 93-6 also changes the earnings per share
computations for leveraged ESOPs to include as outstanding only shares
that have been committed to be released to participants. For purposes
of the preceding table, it was assumed that 10% of the ESOP shares
purchased in the Stock Conversion were committed to be released. See
"Management of the Bank -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
(3) Assumes a number of shares of Common Stock equal to 4% of the Common
Stock to be sold in the Stock Conversion will be purchased by the MRP
in the open market following the Stock Conversion. The dollar amount of
the Common Stock to be purchased by the MRP is based on the Purchase
Price in the Stock Conversion and represents unearned compensation and
is reflected as a reduction of capital. Such amount does not reflect
possible increases or decreases in the value of such stock relative to
the Purchase Price in the Stock Conversion. As the Converted Bank (and
the Commercial Bank) accrues compensation expense to reflect the
vesting of such shares pursuant to the MRP, the charge against capital
will be reduced accordingly. Implementation of the MRP would require
stockholder approval at a meeting of the Company's stockholders. If the
shares to be purchased by the MRP were newly issued shares purchased
from the Company by the MRP at the Purchase Price rather than shares
purchased in the open market, at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, pro forma
stockholders' equity per share would have been $22.19, $20.81, $19.80
and $18.91, respectively, and pro forma net income per share would have
been $.78, $.71, $.67 and $.62, respectively. As a result of the MRP
acquiring authorized but unissued shares from the Company,
stockholders' ownership interests in the Company would be diluted by
approximately 3.85%. See "Management of the Bank -- Certain Benefit
Plans and Agreements -- Management Recognition Plan" and "Risk
Factors -- Dilutive Effect of MRP and Stock Options."
(4) It is expected that following the consummation of the Stock Conversion
the Company will adopt the Option Plan, which would be subject to
stockholder approval. Upon approval of the Option Plan, employees and
directors could be granted options to purchase an aggregate amount of
Common Stock equal to 10% of the shares issued in the Stock Conversion
at exercise prices equal to the market price of the Common Stock on the
date of grant. In the event the shares issued under the Option Plan
consist of newly issued shares of Common Stock and all options
available for award under the Option Plan were awarded, the interests
of existing stockholders would be diluted. At the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range, if
all shares under the Option Plan were newly issued and the exercise
price for the option shares were equal to the Purchase Price in the
Conversion, the number of outstanding shares of Common Stock would
increase to 2,057,000, 2,420,000, 2,783,000 and 3,200,450,
respectively, net income per share would be $.77, $.70, $.66 and $.62,
respectively, and stockholders' equity per share would have been
$21.80, $20.50, $19.54 and $18.70, respectively.
(5) Consolidated stockholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The amounts
shown do not reflect the federal income tax consequences of the
potential restoration to income of the bad debt reserves for income tax
purposes, which would be required in the event of liquidation. The
amounts shown also do not reflect the amounts required to be
distributed in the event of liquidation to eligible depositors from the
liquidation account which will be established upon the consummation of
the Stock Conversion. Pro forma stockholders' equity information is not
intended to represent the fair market value of the Common Stock, the
current value of the Bank's assets or liabilities or the amounts, if
any, that would be available for distribution to stockholders in the
event of liquidation. Such pro forma data may be materially affected by
a change in the number of shares to be sold in the Stock Conversion and
by other factors.
38
<PAGE>
PROPOSED MANAGEMENT PURCHASES
The following table sets forth information regarding the approximate
number of shares of the Common Stock intended to be purchased by each of the
directors and executive officers of the Bank and by all directors and executive
officers as a group, including their associates. For purposes of the following
table, it has been assumed that 2,200,000 shares of the Common Stock will be
sold at $15.00 per share, the midpoint of the Estimated Valuation Range (see
"The Conversion -- Stock Pricing and Number of Shares to be Issued") and that
sufficient shares will be available to satisfy subscriptions in all
categories.
<TABLE>
<CAPTION>
Percent Aggregate Purchase
Total of Price of
Name and Position Shares Total Proposed Purchases
----------------- ------ ----- ------------------
<S> <C> <C> <C>
Frederick H. Howdy, Director
and Chairman of the Board 40,000 1.8% 600,000
Linley H. Gibbs, Jr., Director
and Vice Chairman of the Board 20,000 .9 300,000
Thomas A. Vann, Director and President 40,000 1.8 600,000
Edmund T. Buckman, Jr., Director 40,000 1.8 600,000
Fred N. Holscher, Director 13,333 .6 200,000
Charles E. Parker, Jr., Director 20,000 .9 300,000
Marshall T. Singleton, Director 20,000 .9 300,000
All directors and executive officers, as a
group (14 persons) and their associates 212,000 9.6 3,180,000
ESOP (1) 176,000 8.0 2,640,000
MRP (2) 88,000 4.0 1,320,000
------- ----- ----------
Total (3) 476,000 21.6% $7,140,000
======= ===== ==========
</TABLE>
- ----------------
(1) Consists of shares that could be allocated to participants in the ESOP,
under which executive officers and other employees would be allocated
in the aggregate 8% of the Common Stock issued in the Stock Conversion.
See "Management of the Bank -- Certain Benefit Plans and Agreements --
Employee Stock Ownership Plan."
(2) Consists of shares that are expected to be awarded to participants in
the MRP, if implemented, under which directors, executive officers and
other employees would be awarded an aggregate number of shares equal to
4% of the Common Stock sold in the Stock Conversion. The dollar amount
of the Common Stock to be purchased by the MRP is based on the Purchase
Price in the Conversion and does not reflect possible increases or
decreases in the value of such stock relative to the Purchase Price per
share in the Stock Conversion. Implementation of the MRP would require
stockholder approval. See "Management of the Bank -- Certain Benefit
Plans and Agreements -- Management Recognition Plan." Such shares could
be newly issued shares or shares purchased in the open market following
implementation of the MRP, in the sole discretion of the Company's
Board of Directors. The percentage shown assumes the shares are
purchased in the open market. If all shares acquired by the MRP are
newly issued shares, the percentage of the outstanding Common Stock
owned by the MRP would be 3.85%. Any sale of newly issued shares to the
MRP would be dilutive to existing stockholders. See "Risk Factors --
Possible Dilutive Effect of MRP and Stock Options."
(3) Does not include shares that possibly would be purchased by
participants in an Option Plan, intended to be implemented, under which
directors, executive officers and other employees would be granted
options to purchase an aggregate amount of Common Stock equal to 10% of
the shares issued in the Stock Conversion at exercise prices equal to
the market price of the Common Stock on the date of grant. Shares
issued pursuant to the exercise of options could be from treasury stock
or newly issued shares. Implementation of the Option Plan would require
regulatory and stockholder approval. See "Management of the Bank --
Certain Benefit Plans and Agreements -- Stock Option and Incentive
Plan."
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has only recently been formed and, accordingly, has no
results of operations at this time. As a result, this discussion relates to the
financial condition and results of operations of the Bank. The business of the
Bank consists principally of attracting deposits from the general public and
using such deposits to originate secured and unsecured commercial and consumer
loans, permanent mortgage and construction loans secured by single-family
residences, credit cards and other loans. The Bank's profitability depends
primarily on its net interest income which is the difference between the income
it receives on its loan and investment portfolios and its cost of funds, which
consists of interest paid on deposits and borrowed funds. Net interest income is
also affected by the relative amounts of interest-earning assets and
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest bearing liabilities, any positive interest rate spread will generate
net interest income. To a lesser extent, the Bank's profitability also is
affected by the level of noninterest income and expenses. Noninterest income
consists of fees on loans, customer service charges, gain from sale of loans and
other miscellaneous income. Noninterest expenses consist of personnel, occupancy
related expenses, federal deposit insurance premiums, data processing,
advertising and other operating expenses.
The operations of the Bank are influenced significantly by local
economic conditions and by policies of financial institution regulatory
authorities. The Bank's cost of funds is influenced by interest rates on
competing investments and by rates offered on similar investments by competing
financial institutions in the Bank's market area, as well as general market
interest rates. Lending activities are affected by the demand for financing of
real estate and other types of loans, which in turn is affected by the interest
rates at which such financing may be offered.
The Bank's business emphasis has been to operate as a well-capitalized,
profitable and independent community-oriented financial institution dedicated to
providing quality customer service. The Bank is committed to meeting the
financial needs of the communities in which it operates. Management believes
that the Bank can be more effective in servicing its customers than many of its
nonlocal competitors because of the Bank's ability to quickly and effectively
provide senior management responses to customer needs and inquiries. The Bank's
ability to provide these services is enhanced by the stability of the Bank's
senior management team.
Liquidity and Capital Resources
Following the completion of the Stock Conversion, the Company initially
will have no business other than that of the Converted Bank (and the Commercial
Bank) and investing the net Stock Conversion proceeds retained by it. Management
believes that the net proceeds to be retained by the Company, earnings on such
proceeds and principal and interest payments on the ESOP loan, together with
dividends that may be paid from the Converted Bank (or the Commercial Bank) to
the Company following the Stock Conversion, will provide sufficient funds for
its initial operations and liquidity needs; however, no assurance can be given
that the Company will not have a need for additional funds in the future. The
Converted Bank (and the Commercial Bank) will be subject to certain regulatory
limitations with respect to the payment of dividends to the Company. See
"Dividend Policy" and "Regulation -- Depository Institution Regulation --
Dividend Restrictions." The Company intends to lend a portion of the net
proceeds retained from the Stock Conversion to the ESOP to permit its purchase
of Common Stock in the Stock Conversion. See "Use of Proceeds."
At September 30, 1996, the Bank had retained income of $18.3 million
compared to $17.7 million at September 30, 1995. The Bank reported net income
for the year ended September 30, 1996 of $820,000, as compared to $1.9 million
and $2.2 million for the years ended September 30, 1995 and 1994, respectively.
At September 30, 1996 and 1995, the Bank had a capital to total assets ratio of
9.5% and 10.0%, respectively. At September 30, 1996, the Bank had Tier 1
leverage capital, Tier 1 risk-based capital, and total risk-based capital of
$18.3 million, $18.3 million and $20.0 million, respectively.
40
<PAGE>
At September 30, 1996, the Bank exceeded all regulatory minimum capital
requirements. For a detailed discussion of the Administrator's and FDIC's
regulatory capital requirements, and for a tabular presentation of the Bank's
compliance with such requirements, see "Regulation -- Depository Institution
Regulation -- Capital Requirements."
For additional information regarding the Bank's actual, pro forma and
minimum required capital ratios at September 30, 1996, see "Historical and Pro
Forma Regulatory Capital Compliance." The Converted Bank (and the Commercial
Bank) will, as a result of the Stock Conversion, have substantially increased
capital. There can be no assurance, however, that the Company's sources of funds
will be sufficient to satisfy the liquidity needs of the Company in the future.
The Bank's primary sources of funds are deposits, principal and
interest payments on loans, proceeds from the sale of loans, and to a lesser
extent, advances from the FHLB of Atlanta. While maturities and scheduled
amortization of loans are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and local competition.
The primary investing activities of the Bank have been the origination
of loans and the purchase of investment securities. During the years ended
September 30, 1996, 1995 and 1994, the Bank had $130.2 million, $93.4 million
and $152.0 million, respectively, of loan originations. During the years ended
September 30, 1996 and 1995, the Bank purchased investment securities in the
amounts of $6.0 million and $3.0 million, respectively. No investment securities
were purchased during the year ended September 30, 1994. The primary financing
activities of the Bank are the attraction of savings deposits and obtaining FHLB
advances.
The Administrator's regulations require savings banks to maintain
liquid assets equal to at least 10% of total assets. The computation of
liquidity under the Administrator's Regulations allows the inclusion of
investments with readily marketable value, including investments with maturities
in excess of five years. The Bank's average liquidity ratios were 13.6%, 12.6%,
and 12.8% for the years ended September 30, 1996, 1995, and 1994, respectively.
The Bank's most liquid assets are cash and cash equivalents. The levels of these
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. At September 30, 1996 and 1995, cash and
cash equivalents totaled $8.6 million and $1.8 million, respectively. The Bank
has other sources of liquidity if a need for additional funds arises. During the
years ended September 30, 1996 and 1995, the Bank sold loans totaling $53.0
million and $43.6 million, respectively. Additional sources of funds include
FHLB of Atlanta advances. At September 30, 1996, the Bank had no outstanding
FHLB advances, compared to $4.0 million of FHLB of Atlanta advances at September
30, 1995. At September 30, 1996, the Bank had $1.0 million of retail repurchase
agreements, while no retail repurchase agreements were outstanding at September
30, 1995. Other sources of liquidity include investment and mortgage-backed
securities designated as available for sale, which totaled $22.9 million at
September 30, 1996.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. At September 30, 1996, certificates of deposit
which are scheduled to mature within one year totaled $111.2 million. Management
believes that a significant portion of such deposits will remain with the Bank.
Asset/Liability Management
The Bank strives to achieve consistent net interest income and reduce
its exposure to adverse changes in interest rates by matching the terms to
repricing of its interest-sensitive assets and liabilities. Factors beyond the
Bank's control, such as market interest rates and competition, may also have an
impact on the Bank's interest income and interest expense.
In the absence of any other factors, the overall yield or return
associated with the Bank's 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
41
<PAGE>
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 interest rates, the Bank can significantly influence
its net interest income.
The President of the Bank reports to the Board of Directors on a
regular basis on interest rate risk and trends, as well as liquidity and capital
ratios and requirements. The Board of Directors reviews the maturities of the
Bank's assets and liabilities and establishes policies and strategies designed
to regulate the Bank's flow of funds and to coordinate the sources, uses and
pricing of such funds. The first priority in structuring and pricing the Bank's
assets and liabilities is to maintain an acceptable interest rate spread while
reducing the net effects of changes in interest rates. The Bank's management is
responsible for administering the policies and determinations of the Board of
Directors with respect to the Bank's asset and liability goals and strategies.
Management's principal strategy in managing the Bank's interest rate
risk has been to increase interest rate sensitive assets such as commercial
business loans and consumer loans. At September 30, 1996, the Bank had $10.3
million of commercial business loans and $37.4 million of consumer loans, which
amounted to 6.0% and 21.5%, respectively, of the Bank's gross loan portfolio. In
addition, in managing its portfolio of investment securities and mortgage-backed
securities, the Bank in recent periods has emphasized the purchase of short-term
securities so as to reduce the Bank's exposure to increases in interest rates.
In addition, at September 30, 1996, the Bank had $21.6 million of loans held for
sale, and, pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities", the Bank has classified investment securities and
mortgage-backed securities with an aggregate amortized cost of $22.8 million and
an aggregate carrying value of $22.9 million as available for sale as of
September 30, 1996. The Bank is holding these loans, investment securities and
mortgage-backed securities as available for sale so that they may be sold if
needed for liquidity or asset and liability management purposes.
Management also has shortened the average repricing period of its
assets by emphasizing the origination of short-term, fixed-rate or
adjustable-rate residential mortgage loans. At September 30, 1996, the Bank held
approximately $45.6 million of adjustable-rate residential mortgage loans, which
represented approximately 26.3% of the Bank's gross loan portfolio. Depending on
conditions existing at a given time, as part of its interest rate risk
management strategy, the Bank may sell newly originated fixed-rate residential
mortgage loans with original maturities of 10 years or more in the secondary
market.
Interest Rate Sensitivity Analysis
Management measures the Bank's interest rate risk by computing
estimated changes in net interest income and the net portfolio value ("NPV") of
its cash flows from assets, liabilities and off-balance sheet items in the event
of a range of assumed changes in market interest rates. These computations
estimate the effect on the Bank's net interest income and NPV of sudden and
sustained 1% to 4% increases and decreases in market interest rates. The Bank's
Board of Directors has adopted an interest rate risk policy which establishes
maximum decreases in the Bank's estimated net interest income of 3.0%, 6.0%,
9.0% and 11.9% in the event of 1%, 2%, 3% and 4% increases and decreases in the
market interest rates, respectively. Limits have also been established for
changes in NPV of decreases of 15%, 36%, 61% and 90% in the event of 1%, 2%, 3%
and 4% increases in market interest rates, respectively, and decreases of 17%,
36%, 56% and 83% in the event of 1%, 2%, 3% and 4% decreases in market interest
rates, respectively. The following table presents the Bank's projected change in
net interest income and NPV for the various rate shock levels at September 30,
1996.
42
<PAGE>
<TABLE>
<CAPTION>
Change Net Portfolio Value Net Interest Income
------ ------------------- -------------------
in Rates $ Amount $ Change % Change $ Amount $ Change % Change
- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
+ 400 bp $ 12,757 $(11,217) (46.8)% $ 6,961 $ (358) (4.9)%
+ 300 bp 15,776 (8,198) (34.2) 7,082 (237) (3.2)
+ 200 bp 18,784 (5,190) (21.6) 7,202 (117) (1.6)
+ 100 bp 21,384 (2,590) (10.8) 7,261 (58) (.8)
0 bp 23,974 -- -- 7,319 -- --
- - 100 bp 25,903 1,929 8.0 7,336 17 .2
- - 200 bp 27,831 3,857 16.1 7,353 34 .5
- - 300 bp 28,998 5,024 21.0 7,333 14 .2
- - 400 bp 30,164 6,190 25.8 7,312 (7) .0
</TABLE>
The above table indicates that at September 30, 1996, in the event of
sudden and sustained increases in prevailing market interest rates, the Bank's
estimated net interest income and NPV would be expected to decrease, and that in
the event of sudden and sustained decreases in prevailing market interest rates,
the Bank's estimated net interest income and NPV would be expected to increase.
The Bank's Board of Directors reviews the Bank's net interest income and NPV
position quarterly, and, if estimated changes in net interest income and NPV are
not within the targets established by the Board, the Board may direct management
to adjust its asset and liability mix to bring interest rate risk within Board
approved targets. At September 30, 1996, the Bank's estimated changes in net
interest income and NPV were within the targets established by the Board of
Directors.
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
contemplate any actions the Bank may undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented
in the computation of estimated net interest income and NPV. For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in differing degrees 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, certain
assets, such as adjustable-rate loans, which represent the Bank's primary loan
product, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. In addition, the proportion of
adjustable-rate loans in the Bank's portfolio could decrease in future periods
if market interest rates remain at or decrease below current levels due to
refinance 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 repay
their adjustable-rate debt may decrease in the event of an interest rate
increase.
Analysis of Net Interest Income
Net interest income represents the difference between income derived
from interest-earning assets and the interest expense 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
volume of interest-earning assets and interest-bearing liabilities.
43
<PAGE>
The following table sets forth certain information relating to the
Bank's statements of financial condition and the statements of income for the
years ended September 30, 1996, 1995, and 1994 and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields
and costs are derived by dividing income or expense by the average balance of
assets and liabilities, respectively, for the periods shown. Average balances
are derived from month end balances. Management does not believe that the use of
month end balances instead of average daily balances has caused any material
difference in the information presented. The average balances of loans
receivable include loans on which the Bank has discontinued accruing interest.
The yields and costs include fees which are considered adjustments to
yields.
<TABLE>
<CAPTION>
At September 30, 1996 1996
------------------------ ------------------------------
Average
Yield/ Average Yield/
Balance Cost Balance Interest Cost
------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........................ $ 155,681 8.82% $ 148,538 $ 13,431 9.04%
Investment securities................... 8,107 6.28 5,236 311 5.94
Mortgage-backed securities.............. 14,797 7.35 16,881 1,247 7.39
Other interest-earning assets........... 7,053 6.06 5,349 361 6.75
---------- ------ --------- --------- ------
Total interest-earning assets ........ 185,638 8.49 176,004 15,350 8.72
Non-interest-earning assets............... 8,501 7,579
---------- ---------
Total assets.......................... $ 194,139 $ 183,583
========== =========
Interest-bearing liabilities:
Deposits................................ $ 171,213 4.82 $ 159,304 7,939 4.98
FHLB advances........................... -- -- 2,250 145 6.44
Other interest-bearing liabilities...... 1,040 4.51 629 21 3.34
---------- ------ --------- --------- ------
Total interest-bearing liabilities.... 172,253 4.82 162,183 8,105 5.00
Non-interest-bearing liabilities.......... 3,539 2,958
---------- ---------
Total liabilities..................... 175,792 165,141
Retained income........................... 18,347 18,442
---------- ---------
Total liabilities and retained income. $ 194,139 $ 183,583
========== =========
Net interest income....................... $ 7,245
=========
Interest rate spread (1).................. 3.67% 3.72%
====== ======
Net yield on interest-earning assets 4.12%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities. 107.77% 108.52%
====== ======
<CAPTION>
Year Ended September 30,
1995 1994
-----------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........................ $141,088 $ 12,511 8.87% $ 122,593 $ 10,016 8.17%
Investment securities................... 2,090 143 6.84 1,004 81 8.07
Mortgage-backed securities.............. 19,404 1,413 7.28 21,020 1,540 7.33
Other interest-earning assets........... 4,539 318 7.01 2,877 174 6.05
-------- --------- ------ --------- --------- ------
Total interest-earning assets ........ 167,121 14,385 8.61 147,494 11,811 8.01
--------- ---------
Non-interest-earning assets............... 6,587 8,169
-------- ---------
Total assets.......................... $173,708 $ 155,663
======== =========
Interest-bearing liabilities:
Deposits................................ $142,283 6,610 4.65 $ 119,360 4,416 3.70
FHLB advances........................... 11,833 730 6.17 19,000 786 4.14
Other interest-bearing liabilities...... 48 4 8.33 25 2 8.00
-------- --------- ------ --------- --------- ------
Total interest-bearing liabilities.... 154,164 7,344 4.76 138,385 5,204 3.76
Non-interest-bearing liabilities.......... 2,848 2,429
-------- ---------
Total liabilities..................... 157,012 140,814
Retained income........................... 16,696 14,849
-------- ---------
Total liabilities and retained income. $173,708 $ 155,663
======== =========
Net interest income....................... $ 7,041 $ 6,607
========= =========
Interest rate spread (1).................. 3.85% 4.25%
====== ======
4.21% 4.48%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities. 108.40% 106.58%
====== ======
</TABLE>
- ----------------
(1) Represents the difference between the average yield on interest-earnings
assets and the average cost of interest-bearing liabilities.
44
<PAGE>
Net interest income can also be analyzed in terms of the impact of
changing interest rates on interest-earning assets and interest-bearing
liabilities and the changing volume or amount of these assets and liabilities.
The following table represents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. For each category of interest-earning asset and interest-
bearing liability, information is provided on changes attributable to: (i)
changes in volume (changes in volume multiplied by old rate); (ii) changes in
rate (change in rate multiplied by old volume); (iii) changes in rate-volume
(changes in rate multiplied by the changes in volume); and (iv) net change (the
sum of the previous columns).
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
---------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------- ----------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income:
Loans receivable................ $ 660 $ 246 $ 13 $ 919 $1,511 $ 855 $ 129 $2,495
Investment securities........... 215 (19) (28) 168 88 (12) (14) 62
Mortgage-backed securities...... (184) 21 (3) (166) (118) (10) 1 (127)
Other interest-earning assets... 57 (12) (2) 43 101 28 15 144
----- ------- ----- ------- ------ ------- ------ ------
Total interest-earning assets. 748 236 (20) 964 1,582 861 131 2,574
----- ------- ----- ------- ------ ------- ------ ------
Interest expense:
Deposits........................ 791 481 57 1,329 848 1,129 217 2,194
FHLB advances................... (591) 32 (26) (585) (297) 386 (145) (56)
Other interest-bearing
liabilities................... 48 (2) (29) 17 2 -- -- 2
----- ------- ----- ------- ------ ------- ------ ------
Total interest-bearing
liabilities................ 248 511 2 761 553 1,515 72 2,140
----- ------- ----- ------- ------ ------- ------ ------
Change in net interest income..... $ 500 $ (275) $ (22) $ 203 $1,029 $ (654) $ 59 $ 434
===== ======= ===== ======= ====== ======= ====== ======
</TABLE>
Results of Operations
Comparison of Financial Condition at September 30, 1996 and 1995
Total assets increased 9.2% to $194.1 million at September 30, 1996
from $177.7 million at September 30, 1995. Assets invested in mortgage, consumer
and commercial loans (net of loans-in-process, deferred fees and loan loss
reserves) increased by 7.7%, to $155.7 million at September 30, 1996 from $144.5
million at September 30, 1995. Investment securities and mortgage-backed
securities decreased by 9.5% between the periods, to $22.9 million at September
30, 1996 from $25.3 million at September 30, 1995.
In order to take advantage of generally higher loan yields as well as
shorter terms, the Bank has increased its emphasis on the origination of both
secured and unsecured commercial and consumer loans. Prior to 1994, a majority
of the loans originated by the Bank were mortgage loans secured by single-family
residences. From time to time, the Bank sells selected mortgage loans in the
secondary market in order to reduce interest rate and credit risk, while
retaining servicing to generate additional fee income.
45
<PAGE>
Total residential real estate mortgage loans decreased 7.1% to $94.8
million at September 30, 1996 from $102.1 million at September 30, 1995.
Consumer loans increased 26.1% to $37.4 million at September 30, 1996 from $29.7
million at September 30, 1995. Commercial real estate loans increased 42.4% to
$31.2 million at September 30, 1996 from $21.9 million at September 30, 1995,
and commercial business loans increased 179.3% to $10.3 million at September 30,
1996 from $3.7 million at September 30, 1995. During fiscal 1996, the Bank
originated $76.3 million of residential real estate mortgage loans, compared to
$59.2 million of such originations during fiscal 1995. The Bank sold $53.0
million of real estate loans during fiscal 1996, compared to $43.6 million
during fiscal 1995. Loans serviced for others increased to $253.7 million at
September 30, 1996 from $229.6 million at September 30, 1995. Commercial real
estate, commercial business and consumer loan originations increased 57.5% to
$53.8 million during fiscal 1996 from $34.2 million during fiscal 1995, as the
Bank continues to place an emphasis on structuring itself as a commercial
banking entity.
Deposits for the period increased by 11.6%, to $171.2 million at
September 30, 1996 from $153.5 million at September 30, 1995. The number of
deposit accounts grew to 15,404 at September 30, 1996 from 13,794 at September
30, 1995. Total capital for the period increased by 3.7%, to $18.3 million at
September 30, 1996 from $17.7 million at September 30, 1995. At September 30,
1996, the ratio of capital to total assets was 9.5%, compared to 10.0% at
September 30, 1995.
Comparison of Operating Results for the Years Ended September 30, 1996 and 1995
Net Income. Net income decreased by $1.0 million to $820,000 for the
year ended September 30, 1996 from $1.9 million for the year ended September 30,
1995. The principal reasons for this decrease are the results of a special
assessment on deposit insurance premiums, increased provisions for possible loan
losses and accelerated depreciation on certain fixed assets, all of which are
discussed below.
Interest Income. Interest income increased $964,000, or 6.7%, to $15.3
million for fiscal 1996 from $14.4 million for fiscal 1995. This increase
resulted from an increase in interest income on loans and investments and higher
yields due to a rising interest rate environment. Interest on loans increased by
$920,000, or 7.2%, to $13.4 million in fiscal 1996 from $12.5 million in fiscal
1995. This increase was due to a 17 basis point increase in the average yield on
loans to 9.04% for fiscal 1996 from 8.87% for fiscal 1995. In addition, there
was an increase of $7.5 million in the average balance of loans outstanding
between the two periods. The average yield on total average interest-earning
assets of $176.0 million was 8.7% for 1996 compared to an 8.6% average yield on
$167.1 million of total average interest earning assets for 1995.
Interest Expense. Interest expense for the year ended September 30,
1996 increased by $761,000, or 10.4%, to $8.1 million, from $7.3 million for
fiscal 1995. The increase resulted from a rise in general market interest rates
and was also influenced by an increase in the volume of deposits. Average
deposits increased $17.0 million, or 11.9%, to $159.3 million for fiscal 1996
from $142.3 million for fiscal 1995. The average cost of interest-bearing
liabilities increased to 5.0% for 1996 from 4.8% for 1995, and average
interest-bearing liabilities increased to $162.2 million for fiscal 1996 from
$154.2 million for fiscal 1995.
Net Interest Income. Net interest income increased by $203,000, or
2.9%, to $7.2 million for the year ended September 30, 1996, from $7.0 million
for the year ended September 30, 1995.
Provision for Loan Losses. The Bank maintains an allowance for losses
on loans based upon management's evaluation of risks in the loan portfolio, the
Bank's past loan loss experience, and current and expected future economic
conditions. The Bank provided $511,000 and $20,000 for loan losses during the
years ended September 30, 1996 and 1995, respectively. The allowance for loan
losses was $2.4 million at September 30, 1996 compared to $1.9 million at
September 30, 1995. The ratio of the allowance for loan losses to total loans,
net of loans in process and deferred loan fees, was 1.5% at September 30, 1996
compared to 1.3% at September 30, 1995. The
46
<PAGE>
increased provisions were necessary to support the growth and risks associated
with the emphasis placed upon commercial and consumer lending.
The Bank uses a systematic approach in determining the adequacy of its
loan loss allowance and the necessary provision for loan losses, through a
classification of assets program, whereby the loan portfolio is reviewed
generally and delinquent loan accounts are analyzed individually, on a quarterly
basis. Consideration is given to the account status, payment history, ability to
repay and probability of repayment, and loan-to-value percentages. As a result
of this review and analysis, loans are classified in the appropriate categories
applicable to their circumstances. After reviewing current economic conditions,
changes in delinquency status, and actual loan losses incurred by the Bank,
management establishes an appropriate reserve percentage applicable to each
category of assets, and provision for loan losses is recorded when necessary to
bring the allowance to a level consistent with this analysis. Historically, the
Bank's ratio of nonperforming loans to total loans has been lower in comparison
to its peers, while the ratio of its allowance for loan losses to nonperforming
loans has been higher in comparison to its peers. The ratio of nonperforming
loans to total loans was 0.7% at September 30, 1996 and 0.5% at September 30,
1995.
Noninterest Income. Noninterest income totaled $1.8 million for the
year ended September 30, 1996 and $1.5 million for the year ended September 30,
1995. Noninterest income consists of fees and service charges earned on loans,
service charges on deposit accounts, gains for sale of loans, and other
miscellaneous income. Gains from sales of loans increased to $423,000 for fiscal
1996 from $312,000 for fiscal 1995, as the volume of loans sold increased to
$53.0 million for 1996 from $43.6 million for 1995. Servicing fee income on
loans serviced for others increased to $632,000 for fiscal 1996 from $582,000
for fiscal 1995.
Noninterest Expense. Noninterest expenses increased 28.9% in fiscal
1996 to $7.3 million, from $5.7 million in fiscal 1995. The ratio of these
expenses to gross income was 42.4% in fiscal 1996 compared to 35.6% in fiscal
1995. The largest single component of these expenses, compensation and fringe
benefits, increased 4.0% in fiscal 1996 to $3.6 million from $3.4 million for
fiscal 1995. These increases are a result of the growth in personnel and
management required to support the 16.9% growth in assets from September 30,
1994 to September 30, 1996.
Federal deposit insurance premiums increased by $995,000 to $1.3
million for the year ended September 30, 1996 from $305,000 for the year ended
September 30, 1995. During the year ended September 30, 1996, the Bank incurred
a one-time FDIC assessment of $946,000 to capitalize the SAIF insurance fund up
to required reserve ratios. The assessment was based upon 65.7 cents per $100 of
SAIF deposits as of March 31, 1995. During fiscal 1996, the Bank has also paid
continuing SAIF insurance premiums at a rate of 23 cents per $100 of SAIF
deposits. However, that rate will drop to 6.4 cents per $100 effective January
1, 1997 through December 31, 1999 and to 2.4 cents per $100 thereafter. This
revised deposit insurance rate structure will enable the Bank to recognize a
substantial reduction in deposit insurance premiums going forward.
Premises and equipment expense increased by $255,000 to $798,000 for
the year ended September 30, 1996 from $543,000 for September 30, 1995. During
the year ended September 30, 1996 the Bank recognized accelerated depreciation
of $225,000 on certain fixed assets with no future value due to obsolescence or
excessive use.
Income Taxes. The provision for income taxes decreased to $451,000 for
fiscal 1996 from $998,000 for fiscal 1995. The Bank's effective income tax rate
was 35.4% for the year ended September 30, 1996 and 34.9% for the year ended
September 30, 1995.
Comparison of Financial Condition at September 30, 1995 and 1994
Total assets increased 7.1% to $177.7 million at September 30, 1995
from $166.0 million at September 30, 1994. Assets invested in mortgage, consumer
and commercial loans (net of loans-in-process, deferred fees and loan loss
reserves) increased by 6.5% to $144.5 million at September 30, 1995 from $135.7
million at September 30,
47
<PAGE>
1994. Investment securities and mortgage-backed securities increased by 29.4% to
$25.3 million at September 30, 1995 from $19.5 million at September 30, 1994.
Total residential real estate mortgage loans decreased 5.8% to $102.1
million at September 30, 1995 from $108.4 million at September 30, 1994.
Consumer loans increased 34.1% to $29.7 million at September 30, 1995 from $22.1
million at September 30, 1994. Commercial real estate loans increased 28.0% to
$21.9 million at September 30, 1995 from $17.1 million at September 30, 1994,
and commercial business loans increased 108.1% to $3.7 million at September 30,
1995 from $1.8 million at September 30, 1994. During fiscal 1995, the Bank
originated $59.2 million of residential real estate mortgage loans compared to
$123.9 million during fiscal 1994. This decrease was attributable mainly to an
increase in market rates during 1995 and a dramatic reduction in the amount of
refinancing that occurred during fiscal 1994. The Bank sold $43.6 million of
real estate loans during fiscal 1995 compared to $88.5 million during fiscal
1994. Loans serviced for others increased to $229.6 million at September 30,
1995 from $205.1 million at September 30, 1994. Commercial real estate,
commercial business and consumer loan originations increased 21.7% to $34.2
million during fiscal 1995 from $28.1 million during fiscal 1994.
Deposits increased by 16.6% to $153.5 million at September 30, 1995
from $131.6 million at September 30, 1994. The number of deposit accounts grew
to 13,794 at September 30, 1995 from 11,377 at September 30, 1994. Total capital
increased by 13.2%, to $17.7 million at September 30, 1995 from $15.6 million at
September 30, 1994. At September 30, 1995, the ratio of capital to total assets
was 10.0%, compared to 9.4% at September 30, 1994.
Comparison of Operating Results for the Years Ended September 30, 1995 and 1994
Net Income. Net income decreased by $16.6% to $1.9 million for the year
ended September 30, 1995 from $2.2 million for the year ended September 30,
1994. The adoption of Financial Accounting Standards Board ("FASB") Statement
No. 109, "Accounting for Income Taxes" ("SFAS No. 109"), resulted in the
recognition of an additional $250,000 in income for the year ended September 30,
1994 and represents the cumulative effect on prior years of adopting SFAS No.
Statement 109.
Interest Income. Interest income increased $2.6 million or 21.8% to
$14.4 million for 1995 from $11.8 million for 1994. This increase resulted from
an increase in interest income on loans and investments and higher yields due to
a rising interest rate environment. Interest on loans increased by $2.5 million,
or 24.9%, to $12.5 million for fiscal 1995. This increase was due to a 70 basis
point increase in the average yield on loans to 8.87% for fiscal 1995 from 8.17%
for fiscal 1994. There was an increase of $18.5 million in the average balance
of loans outstanding between the two periods. The average yield on total average
interest earning assets of $167.1 million was 8.6% for fiscal 1995 compared to
an 8.0% average yield on $147.5 million of total average interest earning assets
for fiscal 1994.
Interest Expense. Interest expense for the year ended September 30,
1995 increased $2.1 million, or 41.1%, to $7.3 million for fiscal 1995 from $5.2
million for fiscal 1994. The increase resulted from a rise in general market
interest rates and was also influenced by an increase in the volume of deposits.
Average deposits increased $22.9 million, or 19.2%, to $142.3 million for fiscal
1995 from $119.4 million for fiscal 1994. The average cost of interest-bearing
liabilities increased to 4.8% for fiscal 1995 from 3.8% for fiscal 1994, and
average interest-bearing liabilities increased to $154.2 million for fiscal 1995
from $138.4 million for fiscal 1994.
Net Interest Income. Net interest income for the year ended September
30, 1995 increased by $434,000, or 6.6%, to $7.0 million from $6.6 million for
the year ended September 30, 1994. The principal reason for the increase in net
interest income was an improvement in the Bank's ratio of average
interest-earning assets to average interest-bearing liabilities to 108.4% for
fiscal 1995 from 106.6% for fiscal 1994.
48
<PAGE>
Provision for Loan Losses. The Bank maintains an allowance for losses
on loans based upon management's evaluation of risks in the loan portfolio, the
Bank's past loan loss experience, and current and expected future economic
conditions. The Bank provided $20,000 and $210,000 for loan losses during the
years ended September 30, 1995 and 1994, respectively. The allowance for loan
losses was $1.9 million at September 30, 1995 compared to $2.0 million at
September 30, 1994. The ratio of nonperforming loans to total loans was 0.5% at
September 30, 1995 and 0.3% at September 30, 1994.
Noninterest Income. Noninterest income totaled $1.5 million for the
year ended September 30, 1995 and $1.7 million for the year ended September 30,
1994. Noninterest income consists of fees and service charges earned on loans,
service charges on deposit accounts, gains from sale of loans, and other
miscellaneous income. Gains from sales of loans declined to $312,000 for fiscal
1995 from $581,000 for fiscal 1994 as the volume of loans sold declined to $43.6
million for fiscal 1995 from $88.5 million for fiscal 1994. Servicing fee income
on loans serviced for others increased to $582,000 for fiscal 1995 from $580,000
for fiscal 1994.
Noninterest Expense. Noninterest expenses increased 17.9% in fiscal
1995 to $5.7 million, from $4.8 million in fiscal 1994. The ratio of these
expenses to gross income was 35.6% in fiscal 1995 compared to 35.7% in fiscal
1994. The principal reasons for these increases were costs associated with the
expansion of the Bank's retail branch network and its lending and deposit-taking
activities, expenditures to upgrade the systems required to support the Bank's
greater volume of business, the renovation and occupancy of a new operations
center and continuing deposit insurance premium assessments. The largest single
component of these expenses, compensation and fringe benefits, increased 24.2%
in fiscal 1995 to $3.4 million from $2.8 million for fiscal 1994. These
increases are a result of the growth in personnel and management required to
support the 21.7% growth in assets from September 30, 1993 to September 30,
1995.
Income Taxes. The provision for income taxes decreased to $998,000 for
fiscal 1995 from $1.3 million for fiscal 1994. The Bank's effective income tax
rate was 34.9% for the year ended September 30, 1995 and 36.0% for the year
ended September 30, 1994. Effective October 1, 1993, the Bank adopted SFAS No.
109. The implementation of SFAS No. 109 resulted in an increase in net income of
$250,000 for the year ended September 30, 1994.
Impact of Inflation and Changing Prices
The financial statements of the Bank and accompanying footnotes have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without 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 the Bank's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Bank are monetary. As a
result, interest rates have a greater impact on the Bank's 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.
Impact of Recent Accounting Standards
Effective October 1, 1993, the Bank adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
This statement requires that all deferred tax asset and liability balances be
determined by application to temporary differences of the tax rate expected to
be in effect when taxes will become payable or receivable. Temporary differences
are differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements that will result in taxable or
deductible amounts in future years. Net income for the year ended September 30,
1994 includes income of $250,000 which represents the net change in deferred
taxes as of October 1, 1993. Such amount has been reflected separately in the
consolidated statement of operations as a cumulative effect on prior years of a
change in accounting principle.
49
<PAGE>
Statement of Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting by Creditors for Impairment of a Loan", requires measurement of
potential losses on impaired loans. SFAS No. 114 provides guidance on methods of
calculating losses associated with impaired loans. The FASB has issued Statement
of Financial Accounting Standard No. 118 which amends SFAS No. 114 to allow a
creditor to use existing methods of recognizing interest income on an impaired
loan. The Bank adopted these standards effective on October 1, 1995. Because the
Bank historically has not had significant amounts of impaired loans, management
does not believe SFAS No. 114 will have a significant effect on its financial
condition or results of operations in the future.
The FASB issued Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investment in Debt and Equity Securities" ("SFAS No.
115"). This Statement addresses the accounting and reporting for investments in
equity securities that have readily determinable fair values, and all
investments in debt securities. SFAS No. 115 requires classification of
investments into three categories. Debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held to
maturity and must be reported at amortized cost. Debt and equity securities that
are bought and held principally for the purpose of selling them in the near term
are classified as trading and must be reported at fair value, with unrealized
gains and losses included in earnings. All other debt and equity securities must
be considered available for sale and must be reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholder's equity (net of tax effects). All securities presently
owned by the Bank are categorized as available for sale, and management does not
expect SFAS No. 115 to have a material effect on the Bank's financial position
or results of operations.
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. The Bank plans to adopt the provisions of SFAS No. 121 on October
1, 1996 and management does not believe the adoption of this statement will have
a material effect on the Bank's financial position or results of operations.
The FASB has issued Statement of Financial Accounting Standards No. 122
("SFAS No. 122"), "Accounting for Mortgage Servicing Rights," which is effective
for fiscal years beginning after December 15, 1995. SFAS No. 122 amends certain
portions of SFAS No. 65 by eliminating the accounting distinction between rights
to service mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. SFAS No. 122
requires the costs of acquiring loans, whether purchased or originated, to be
allocated to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values, if determinable. Any
costs allocated to mortgage servicing rights should be recognized as a separate
asset and amortized over the period of estimated net servicing income. All
capitalized mortgage servicing rights should be evaluated for impairment based
on their fair value. Management does not believe that the implementation of SFAS
No. 122 will materially affect the financial condition or results of operations
of the Bank.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 "Accounting for Awards of Stock-Based Compensation to
Employees" ("SFAS No. 123"). 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 and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("Opinion 25"). Under the fair value
based method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period. Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount an employee must pay to acquire the
stock. Most fixed stock option plans -- the most common type of stock
compensation plan -- have no intrinsic value at grant date, and under Opinion 25
no compensation cost is recognized for them. Compensation cost is recognized for
other types of stock based
50
<PAGE>
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 the Company's financial
condition or results of operations.
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 15, 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 will, among other things, change the measure of compensation
recorded by employers from the cost of ESOP shares to the fair value of employee
stock ownership plan 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 the Company's financial
statements.
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors of
the Bank in October 1996 for the purpose of becoming a holding company to own
all of the outstanding capital stock of the Bank. Upon completion of the Stock
Conversion, the Bank will become a wholly owned subsidiary of the Company. For
additional information, see "NewSouth Bancorp, Inc."
The Company currently is not an operating company. Following the
Conversion, the Company will be engaged primarily in the business of directing,
planning and coordinating the business activities of the Bank. In the future,
the Company may become an operating company or acquire or organize other
operating subsidiaries, including other financial institutions, though there are
no current plans in this regard. Initially, the Company will not maintain
offices separate from those of the Bank or employ any persons other than its
officers who will not be separately compensated for such service.
BUSINESS OF THE BANK
General
The Bank's principal business consists of attracting deposits from the
general public and investing these funds in loans secured by first mortgages on
owner-occupied, single-family residences in the Bank's market area, commercial
real estate loans, commercial business loans and consumer loans, and, to a
lesser extent, multi-family residential real estate loans.
The Bank derives its income principally from interest earned on loans
and investments and, to a lesser extent, loan servicing and other fees and gains
on the sale of loans and investments. The Bank's principal expenses are interest
expense on deposits and borrowings and noninterest expense such as compensation
and employee benefits, office occupancy expenses and other miscellaneous
expenses. Funds for these activities are provided principally by deposits,
borrowings, repayments of outstanding loans and investments and operating
revenues.
Market Area
Although the Bank makes loans and obtains deposits throughout eastern
and northeastern North Carolina, the Bank's primary market area consists of
Beaufort, Craven, Lenoir, Nash, Pasquotank and Pitt Counties in North Carolina,
which are the counties in which the Bank's offices are located. At September 30,
1996, management estimates that more than 95% of deposits and 90% of loans came
from its primary market area.
51
<PAGE>
The economy of the Bank's primary market area is diversified, with
employment distributed among manufacturing, agriculture and non-manufacturing
activities. Major employers in the area include Weyerhaeuser Company, Dupont,
East Carolina University and Pitt Memorial Hospital. The unemployment rate in
the Bank's market area is below the national average, though higher than the
unemployment rate for the State of North Carolina.
According to data provided by a private marketing firm, the Bank
estimates the population of its primary market area to be approximately 430,000.
This compares to a population of approximately 400,000 in 1990. The average
household income of the Bank's primary market area is approximately $26,746, as
compared to $30,562 for North Carolina as a whole.
Lending Activities
General. The Bank's gross loan portfolio totaled $173.7 million at
September 30, 1996, representing 89.5% of total assets at that date. It is the
Bank's policy to concentrate its lending within its market area. At September
30, 1996, $58.6 million, or 33.7% of the Bank's gross loan portfolio, consisted
of single-family, residential mortgage loans. The Bank's construction loans
totaled $35.2 million, or 20.3% of the Bank's gross loan portfolio, at September
30, 1996. The Bank also originates a significant amount of commercial real
estate loans. At September 30, 1996, commercial real estate loans amounted to
$31.2 million, or 17.9% of the Bank's gross loan portfolio. In recent years, the
Bank has sought to increase originations of commercial business loans and
consumer loans. At September 30, 1996, commercial business loans totaled $10.3
million, or 6.0% of the Bank's gross loan portfolio, and consumer loans totaled
$37.4 million, or 21.5% of the Bank's gross loan portfolio. To a lesser extent,
the Bank also originates multi-family residential real estate loans and
commercial real estate loans. At September 30, 1996, multi-family residential
real estate loans amounted to $1.0 million, or 0.6% of the Bank's gross loan
portfolio.
52
<PAGE>
Loan Portfolio Composition. The following table sets forth selected
data relating to the composition of the Bank's loan portfolio by type of loan at
the dates indicated. At September 30, 1996, the Bank had no concentrations of
loans exceeding 10% of gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- --------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans:
Single-family residential.................. $ 58,576 33.7% $ 67,736 43.0% $ 74,364 49.8%
Multi-family residential................... 998 .6 2,315 1.5 2,412 1.6
Construction............................... 35,240 20.3 32,062 20.4 31,663 21.2
-------- ------- --------- ------- -------- ------
Total residential mortgage loans......... 94,814 54.6 102,113 64.9 108,439 72.6
-------- ------- --------- ------- -------- ------
Commercial loans:
Commercial real estate..................... 31,168 17.9 21,890 13.9 17,098 11.4
Commercial business........................ 10,328 6.0 3,698 2.4 1,777 1.2
-------- ------- --------- ------- -------- -----
Total commercial loans................... 41,496 23.9 25,588 16.3 18,875 12.6
-------- ------- ---------- ------- -------- -----
Consumer loans:
Automobile................................. 4,185 2.4 2,532 1.6 1,986 1.3
Savings account loans...................... 549 .3 661 .4 454 .3
Home equity loans.......................... 17,949 10.3 15,514 9.9 11,930 8.0
Other...................................... 14,740 8.5 10,977 6.9 7,767 5.2
-------- ------- --------- ------- -------- -------
Total consumer loans..................... 37,423 21.5 29,684 18.8 22,137 14.8
-------- ------- --------- ------- -------- -------
Total.................................. 173,733 100.00% 157,385 100.00% 149,451 100.00%
--------- ====== --------- ====== -------- ======
Less:
Loans in process........................... 15,245 10,626 11,506
Deferred fees and discounts................ 456 341 289
Allowance for loan losses.................. 2,351 1,877 1,977
-------- --------- --------
Total.................................... $155,681 $ 144,541 $135,679
======== ========= ========
</TABLE>
53
<PAGE>
Loan Maturities. The following table sets forth certain information at
September 30, 1996 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity, including scheduled
repayments of principal. Demand loans, loans having no stated schedule of
repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table does not include any estimate of prepayments which
significantly shorten the average life of mortgage loans and may cause the
Bank's repayment experience to differ from that shown below. Loan balances are
net of loans in process.
<TABLE>
<CAPTION>
Due During the Year Ending Due After Due After
September 30, 3 Through 5 Through
------------------------------ 5 Years After 10 Years After
1997 1998 1999 September 30, 1996 September 30, 1996
------ ------ ------- ------------------ ------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Residential mortgage loans..... $ 16,790 $ 2,056 $ 2,233 $ 4,982 $ 15,236
Commercial (1)................. 4,993 5,462 5,976 13,694 9,849
Consumer....................... 3,756 4,070 4,462 7,023 4,058
-------- -------- -------- --------- ---------
Total..................... $ 25,539 $ 11,588 $ 12,671 $ 25,699 $ 29,143
======== ======== ======== ========= =========
<CAPTION>
Due After
10 Through Due After 15
15 Years After Years After
September 30, 1996 September 30, 1996 Total
------------------ ------------------ ---------
<S> <C> <C> <C>
Residential mortgage loans..... $ 13,791 $ 26,436 $ 81,524
Commercial (1)................. -- -- 39,974
Consumer....................... 6,402 7,219 36,990
---------- ---------- ----------
Total..................... $ 20,193 $ 33,655 $ 158,488
========== ========== ==========
</TABLE>
- ---------------
(1) Includes commercial real estate and commercial business loans.
The following table sets forth at September 30, 1996 the dollar amount
of all loans due one year or more after September 30, 1996 which have
predetermined interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
(In thousands)
<S> <C> <C>
Residential mortgage loans......................... $ 30,897 $ 33,837
Commercial (1)..................................... 10,843 24,138
Consumer........................................... 11,389 21,845
----------- -----------
Total.......................................... $ 53,129 $ 79,820
=========== ===========
</TABLE>
--------------
(1) Includes commercial real estate and commercial business loans.
54
<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans can be substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare a loan immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase when current mortgage loan market rates
are substantially higher than rates on existing mortgage loans and, conversely,
decrease when current mortgage loan market rates are substantially lower than
rates on existing mortgage loans.
Originations, Purchases and Sales of Loans. The Bank generally has
authority to originate and purchase loans secured by real estate located
throughout the United States. Consistent with its emphasis on being a
community-oriented financial institution, the Bank concentrates its lending
activities in its market area.
The following table sets forth certain information with respect to the
Bank's loan origination, purchase and sale activity for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1996 1995 1994
--------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Residential mortgage loans:
Single-family residential.................................. $ 39,333 $ 27,643 $ 77,005
Multi-family residential................................... 45 -- 657
Construction............................................... 36,964 31,556 46,236
Commercial loans (1)......................................... 31,144 15,780 17,693
Consumer loans............................................... 22,684 18,388 10,361
--------- -------- ---------
Total loans originated.................................... $ 130,170 $ 93,367 $ 151,952
========= ======== =========
Loans purchased................................................ $ -- $ -- $ --
--------- -------- ---------
Total loans purchased..................................... $ -- $ -- $ --
========= ======== =========
Loans sold:
Whole loans.................................................. $ 53,033 $ 43,609 $ 88,529
Participation loans.......................................... -- -- --
--------- -------- ---------
Total loans sold.......................................... $ 53,033 $ 43,609 $ 88,529
========= ======== =========
</TABLE>
- ---------------
(1) Includes commercial real estate and commercial business loans.
The Bank's loan originations are derived from a number of sources,
including referrals from depositors and borrowers, repeat customers,
advertising, calling officers as well as walk-in customers. The Bank's
solicitation programs consist of advertisements in local media, in addition to
participation in various community organizations and events. Real estate loans
are originated by the Bank's loan personnel. All of the Bank's loan personnel
are salaried, and though the Bank does not compensate loan personnel on a
commission basis for loans originated, it does pay commissions on loan fees
generated. With the exception of applications for boat or recreational vehicle
loans, which may be originated on an indirect basis through an arrangement with
two dealers, loan applications are accepted at the Bank's offices. In addition,
the Bank has several salaried loan originators who travel to meet prospective
borrowers and take applications. In all cases, the Bank has final approval of
the application. Historically, the Bank generally has not purchased loans.
However, the Bank may in the future consider making limited loan purchases,
including purchases of commercial loans.
In recent years, the Bank has sold a significant amount of fixed-rate,
single-family mortgage loans that it originated. During the years ended
September 30, 1996, 1995 and 1994, the Bank sold $53.0 million, $43.6 million
55
<PAGE>
and $88.5 million, respectively, of such loans. Such loans are sold in the
secondary market to the FHLMC. The Bank generally retains servicing on loans
sold.
Loan Underwriting Policies. The Bank's lending activities are subject
to the Bank's written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Bank's Board of Directors and its
management. Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. All mortgage loans are presented weekly to a loan committee of
the Board of Directors of the Bank made up of three outside directors who serve
on a rotating basis. Neither the President nor the Chairman of the Board serves
on the loan committee. Individual officers of the Bank have been granted
authority by the Board of Directors to approve consumer and commercial loans up
to varying specified dollar amounts, depending upon the type of loan. In
addition, committees of loan officers have loan authorities greater than
individual authorities. These authorities are based on aggregate borrowings of
an individual or entity. All loans to a single borrower aggregating in excess of
$500,000 must be approved by the full Board of Directors. On a monthly basis,
the full Board of Directors reviews the actions taken by the loan committee.
Applications for single-family real estate loans are underwritten and
closed in accordance with the standards of FHLMC. Generally, upon receipt of a
loan application from a prospective borrower, a credit report and verifications
are ordered to verify specific information relating to the loan applicant's
employment, income and credit standing. If a proposed loan is to be secured by a
mortgage on real estate, an appraisal of the real estate is usually undertaken
either by an appraiser approved by the Bank and licensed by the State of North
Carolina or by qualified Bank personnel. In the case of single-family
residential mortgage loans, except when the Bank becomes aware of a particular
risk of environmental contamination, the Bank generally does not obtain a formal
environmental report on the real estate at the time a loan is made. A formal
environmental report may be required in connection with nonresidential real
estate loans.
It is the Bank's policy to record a lien on the real estate securing a
loan and to obtain title insurance which insures that the property is free of
prior encumbrances and other possible title defects. Borrowers must also obtain
hazard insurance policies prior to closing and, when the property is in a flood
plain as designated by the Department of Housing and Urban Development, pay
flood insurance policy premiums.
With respect to single-family residential mortgage loans, the Bank
makes a loan commitment of between 30 and 60 days for each loan approved. If the
borrower desires a longer commitment, the commitment may be extended for good
cause and upon written approval. Fees of between $150 and $400 are charged in
connection with the issuance of a commitment letter. The interest rate is
guaranteed for the commitment period.
The Bank is permitted to lend up to 95% of the lesser of the appraised
value or the purchase price of the real property securing a mortgage loan.
However, if the amount of a residential loan originated or refinanced exceeds
80% of the appraised value, the Bank's policy generally is to obtain private
mortgage insurance at the borrower's expense on that portion of the principal
amount of the loan that exceeds 80% of the appraised value of the property. The
Bank will make a single-family residential mortgage loan with up to a 95%
loan-to-value ratio if the required private mortgage insurance is obtained. The
Bank generally limits the loan-to-value ratio on commercial real estate mortgage
loans to 80%, although the loan-to-value ratio on commercial real estate loans
in limited circumstances has been as high as 85%. The Bank limits the
loan-to-value ratio on multi-family residential real estate loans to 80%.
Under applicable law, with certain limited exceptions, loans and
extensions of credit by a savings institution to a person outstanding at one
time and not fully secured by collateral having a market value at least equal to
the amount of the loan or extension of credit shall not exceed 15% of net worth.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. Applicable law additionally
authorizes savings institutions to make loans to one borrower, for any purpose:
(i) in an amount not to exceed
56
<PAGE>
$500,000; (ii) in an amount not to exceed the lesser of $30,000,000 or 30% of
net worth to develop residential housing, provided (a) the purchase price of
each single-family dwelling in the development does not exceed $500,000 and (b)
the aggregate amount of loans made under this authority does not exceed 150% of
net worth; or (iii) loans to finance the sale of real property in satisfaction
of debts previously contracted in good faith, not to exceed 50% of net worth.
Under these limits, the Bank's loans to one borrower were limited to $2.8
million at September 30, 1996. At that date, the Bank had no lending
relationships in excess of the loans-to-one-borrower limit. Notwithstanding the
statutory loans-to-one-borrower limitations, the Bank has a self imposed loans-
to-one-borrower limit, which currently is $2.2 million. At September 30, 1996,
the Bank's largest lending relationship was a $1.9 million relationship
consisting of five commercial real estate loans. All loans within this
relationship were current and performing in accordance with their terms at
September 30, 1996.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
Single-Family Residential Real Estate Lending. The Bank historically
has been and continues to be an originator of single-family, residential real
estate loans in its market area. At September 30, 1996, single-family,
residential mortgage loans, excluding home improvement loans, totaled $58.6
million, or 33.7% of the Bank's gross loan portfolio.
The Bank originates fixed-rate mortgage loans at competitive interest
rates. At September 30, 1996, $49.2 million, or 51.9%, of the Bank's gross loan
portfolio was comprised of fixed-rate mortgage loans. Generally, the Bank
retains fixed-rate mortgages with maturities 15 years or less while fixed-rate
loans with longer maturities may be retained in portfolio or sold in the
secondary market.
The Bank also offers adjustable-rate residential mortgage loans. The
adjustable-rate loans currently offered by the Bank have interest rates which
adjust every one, three or five years from the closing date of the loan or on an
annual basis commencing after an initial fixed-rate period of one, three or five
years in accordance with a designated index (the primary index utilized by the
Bank is the weekly average yield on U.S. Treasury securities adjusted to a
constant comparable maturity equal to the loan adjustment period, as made
available by the Federal Reserve Board (the "Treasury Rate")), plus a stipulated
margin. The Bank offers adjustable-rate loans that meet FHLMC standards, as well
as loans that do not meet such standards. The Bank's adjustable-rate
single-family residential real estate loans that do not meet FHLMC standards
have a cap of generally 2% on any increase in the interest rate at any
adjustment date, and include a cap on the maximum interest rate over the life of
the loan, which cap generally is 3% to 4.5% above the initial rate. In return
for providing a relatively low cap on interest rate increases over the life of
the loan, the Bank's adjustable-rate loans provide for a floor on the minimum
interest rate over the life of the loan, which floor generally is .125% below
the initial rate. Further, the Bank generally does not offer "teaser" rates
i.e., initial rates below the fully indexed rate, on such loans. The
adjustable-rate mortgage loans offered by the Bank that do conform to FHLMC
standards have a cap of 6% above the initial rate over the life of a loan but do
not include a floor, may be offered with a teaser rate and have a 25 basis point
lower margin above the index on which the interest rate is based. All of the
Bank's adjustable-rate loans require that any payment adjustment resulting from
a change in the interest rate of an adjustable-rate loan be sufficient to result
in full amortization of the loan by the end of the loan term and, thus, do not
permit any of the increased payment to be added to the principal amount of the
loan, or so-called negative amortization. At September 30, 1996, $45.6 million,
or 48.1%, of the Bank's single-family residential mortgage loans were
adjustable-rate loans.
The retention of adjustable-rate loans in the Bank's portfolio helps
reduce the Bank's exposure to increases or decreases in prevailing market
interest rates. However, there are unquantifiable credit risks resulting from
potential increases in costs to borrowers in the event of upward repricing of
adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in
57
<PAGE>
interest costs to borrowers. Further, although adjustable-rate loans allow the
Bank to increase the sensitivity of its interest-earning assets to changes in
interest rates, the extent of this interest sensitivity is limited by the
initial fixed-rate period before the first adjustment and the lifetime interest
rate adjustment limitations. Accordingly, there can be no assurance that yields
on the Bank's adjustable-rate loans will fully adjust to compensate for
increases in the Bank's cost of funds.
Construction Lending. The Bank also offers residential and commercial
construction loans, with a substantial portion of such loans originated to date
being for the construction of owner-occupied, single-family dwellings in the
Bank's primary market area. Residential construction loans are offered primarily
to individuals building their primary or secondary residence, as well as to
selected local developers to build single-family dwellings. Generally, loans to
owner/occupants for the construction of owner-occupied, single-family
residential properties are originated in connection with the permanent loan on
the property and have a construction term of six to 18 months. Such loans are
offered on a fixed-rate or adjustable-rate basis. Interest rates on residential
construction loans made to the owner/occupant have interest rates during the
construction period of 1% above the rate offered by the Bank on the permanent
loan product selected by the borrower. Upon completion of construction, the
permanent loan rate will be set at the rate then offered by the Bank on that
permanent loan product, except that if the permanent loan rate would be above
the construction loan rate then the borrower can maintain the same rate as on
the construction loan. Interest rates on residential construction loans to
builders are set at the prime rate plus a margin of between .75% and 1% or at
the Treasury Rate plus a margin of between 3% and 4.5%, and adjust annually.
Interest rates on commercial construction loans are based on the prime rate plus
a negotiated margin of between 0% and 1% and adjust annually, with construction
terms generally not exceeding 18 months. Advances are made on a percentage of
completed basis. At September 30, 1996, $35.2 million, or 20.3%, of the Bank's
gross loan portfolio consisted of construction loans, virtually all of which was
secured by single-family residences.
Prior to making a commitment to fund a loan, the Bank requires both an
appraisal of the property by appraisers approved by the Board of Directors and a
study of the feasibility of the proposed project. The Bank also reviews and
inspects each project at the commencement of construction and either weekly or
biweekly during the term of the construction loan. The Bank generally charges a
1% construction fee and a $400 commitment fee on construction loans.
Construction financing generally is considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate and the borrower is unable to meet the Bank's requirements of putting
up additional funds to cover extra costs or change orders, then the Bank will
demand that the loan be paid off and, if necessary, institute foreclosure
proceedings, or refinance the loan. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with collateral having a value which is insufficient to assure full repayment.
The Bank has sought to minimize this risk by limiting construction lending to
qualified borrowers (i.e., borrowers who satisfy all credit requirements and
whose loans satisfy all other underwriting standards which would apply to the
Bank's permanent mortgage loan financing for the subject property) in the Bank's
market area. On loans to builders, the Bank works only with selected builders
with whom it has experience and carefully monitors the creditworthiness of the
builders.
Multi-Family Residential and Commercial Real Estate Lending. The Bank
originates commercial real estate loans, as well as a limited amount of
multi-family residential real estate loans, generally limiting such originations
to loans secured by properties in its primary market area and to borrowers with
whom it has other loan relationships. The Bank's multi-family residential loan
portfolio consists primarily of loans secured by small apartment buildings, and
the commercial real estate loan portfolio includes loans to finance the
acquisition of small office buildings and commercial and industrial buildings.
Such loans generally range in size from $1.0 million to $3.4 million. At
September 30, 1996, the Bank's multi-family residential and commercial real
estate loans totaled $1.0 million and
58
<PAGE>
$31.2 million, respectively, which amounted to 0.6% and 17.9%, respectively, of
the Bank's gross loan portfolio. Multi-family and commercial real estate loans
are originated either for 15 year terms with interest rates that adjust every
one, three or five years based on either the prime rate as quoted in The Wall
Street Journal plus a negotiated margin of between 0% and 1% for shorter term
loans or, for longer term loans, or the Treasury Rate plus a negotiated margin
of between 3% and 4.5%, or on a fixed-rate basis with interest calculated on a
15 year amortization schedule with a balloon payment due after five years.
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential property
lending. Multi-family residential and commercial real estate loans typically
involve larger loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans typically is dependent on the successful
operation of the real estate project, retail establishment or business. These
risks can be significantly affected by supply and demand conditions in the
market for office, retail and residential space, and, as such, may be subject to
a greater extent to adverse conditions in the economy generally. To minimize
these risks, the Bank generally limits itself to its market area or to borrowers
with which it has prior experience or who are otherwise known to the Bank. It
has been the Bank's policy to obtain annual financial statements of the business
of the borrower or the project for which commercial or multi-family residential
real estate loans are made. In addition, in the case of commercial mortgage
loans made to a partnership or a corporation, the Bank seeks, whenever possible,
to obtain personal guarantees and annual financial statements of the principals
of the partnership or corporation.
Commercial Lending. The Bank's commercial loans consist of loans
secured by commercial real estate and commercial business loans, which are not
secured by real estate. For a discussion of the Bank's commercial real estate
lending see "-- Multi-Family and Commercial Real Estate Lending."
In the last four years, the Bank has emphasized commercial business
lending. The Bank originates commercial business loans to small and medium sized
businesses in its market area. The Bank's commercial borrowers are generally
small businesses engaged in manufacturing, distribution or retailing, or
professionals in healthcare, accounting and law. Commercial business loans are
generally made to finance the purchase of inventory, new or used equipment or
commercial vehicles and for short-term working capital. Such loans generally are
secured by equipment and inventory, and, if possible, cross-collateralized by a
real estate mortgage, although commercial business loans are sometimes granted
on an unsecured basis. Such loans generally are made for terms of five years or
less, depending on the purpose of the loan and the collateral, with loans to
finance operating expenses made for one year or less, with interest rates that
adjust at least annually at a rate equal to the prime rate as stated in The Wall
--- ----
Street Journal plus a margin of between 0% and 2%. Generally, commercial loans
- ------ -------
are made in amounts ranging between $5,000 and $250,000. At September 30, 1996,
commercial business loans totaled $10.3 million, or 6.0% of the Bank's gross
loan portfolio.
The Bank underwrites its commercial business loans on the basis of the
borrower's cash flow and ability to service the debt from earnings rather than
on the basis of underlying collateral value, and the Bank seeks to structure
such loans to have more than one source of repayment. The borrower is required
to provide the Bank with sufficient information to allow the Bank to make its
lending determination. In most instances, this information consists of at least
two years of financial statements, a statement of projected cash flows, current
financial information on any guarantor and any additional information on the
collateral. For loans with maturities exceeding one year, the Bank requires that
borrowers and guarantors provide updated financial information at least annually
throughout the term of the loan.
The Bank's commercial business loans may be structured as term loans or
as lines of credit. Commercial business term loans are generally made to finance
the purchase of assets and have maturities of five years or less. Commercial
business lines of credit are typically made for the purpose of providing working
capital and are usually approved with a term of 12 months and are reviewed at
that time to see if extension is warranted. The Bank also
59
<PAGE>
offers both commercial and standby letters of credit for its commercial
borrowers. Commercial letters of credit are written for a maximum term of one
year. The terms of standby letters of credit generally do not exceed one year.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. The Bank seeks
to minimize these risks through its underwriting guidelines, which require that
the loan be supported by adequate cash flow of the borrower, profitability of
the business, collateral and personal guarantees of the individuals in the
business. In addition, the Bank limits this type of lending to its market area
and to borrowers with which it has prior experience or who are otherwise well
known to the Bank.
Consumer Lending. In recent years, the Bank has been successful in its
strategy of increasing its portfolio of consumer loans. The consumer loans
originated by the Bank include automobile loans, savings account loans, home
equity loans and miscellaneous other consumer loans, including unsecured loans.
At September 30, 1996, the Bank's consumer loans totaled $37.4 million, or 21.5%
of the Bank's gross loan portfolio.
The Bank's automobile loans are generally underwritten in amounts up to
90% of the lesser of the purchase price of the automobile or, with respect to
used automobiles, the loan value as published by the National Automobile Dealers
Association. The terms of most such loans do not exceed 60 months. The Bank
requires that the vehicles be insured and the Bank be listed as loss payee on
the insurance policy.
The Bank makes savings account loans for up to 90% of the depositor's
savings account balance. The interest rate is normally 3% above the annual
percentage yield paid on the savings account, and the account must be pledged as
collateral to secure the loan. Interest generally is billed on a quarterly
basis. At September 30, 1996, loans on savings accounts totaled $549,000, or
0.3% of the Bank's total loan portfolio.
At September 30, 1996, the Bank had approximately $17.9 million in home
equity line of credit loans, representing approximately 10.3% of its gross loan
portfolio. The Bank's home equity lines of credit have adjustable interest rates
tied to the prime interest rate plus a margin. The home equity lines of credit
require monthly payments until the loan is paid in full. Home equity lines of
credit are generally secured by subordinate liens against residential real
property. The Bank requires that fire and extended coverage casualty insurance
(and, if appropriate, flood insurance) be maintained in an amount at least
sufficient to cover its loan. Home equity loans are generally limited so that
the amount of such loans, along with any senior indebtedness, does not exceed
85% of the value of the real estate security.
The Bank recently began offering credit card loans through its
participation as a Visa and MasterCard issuer. Management believes that
providing credit card services to its customers helps the Bank remain
competitive by offering customers an additional service, and the Bank does not
actively solicit credit card business beyond its customer base and market area.
The rate currently charged by the Bank on its credit card loans ranges from
11.3% to 17.3%, and the Bank is permitted to change the interest rate on 30 days
notice. Processing of bills and payments is contracted to an outside servicer.
At September 30, 1996, the Bank had a commitment to fund an aggregate of $1.3
million of credit card loans, which represented the aggregate credit limit on
credit cards, and had $218,000 of credit card loans outstanding, representing
0.1% of its gross loan portfolio. The Bank intends to continue and expand credit
card lending, but estimates that at current levels of credit card loans, it
makes little or no monthly profit net of service expenses and write-offs.
Consumer lending affords the Bank the opportunity to earn yields higher
than those obtainable on single-family residential lending. However, consumer
loans entail greater risk than do residential mortgage loans, particularly in
the case of loans which are unsecured (as is the case with credit card loans) or
secured by rapidly depreciable assets such as automobiles. Repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss
60
<PAGE>
or depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer and
credit card loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by events
such as job loss, divorce, illness or personal bankruptcy. Further, the
application of various state and federal laws, including federal and state
bankruptcy and insolvency law, may limit the amount which may be recovered. In
underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income and ability to repay the loan, and the
value of the collateral.
Loan Fees and Servicing. The Bank receives fees in connection with late
payments and for miscellaneous services related to its loans. The Bank also
charges fees in connection with loan originations. These fees can consist of
origination, discount, construction and/or commitment fees, depending on the
type of loan. The Bank generally does not service loans for others except as set
forth below and except for mortgage loans originated and sold by the Bank with
servicing retained.
In addition, the Bank has developed a program to originate loans for a
local credit union. The Bank receives a $600 origination fee for each loan as
well as an annual servicing fee of .375% of the loan amount. All of these loans
are funded and closed in the name of the credit union. The Bank has explored the
possibility of developing similar arrangements with other institutions, although
none are currently planned.
Nonperforming Loans and Other Problem Assets. It is management's policy
to continually monitor its loan portfolio to anticipate and address potential
and actual delinquencies. When a borrower fails to make a payment on a loan, the
Bank takes immediate steps to have the delinquency cured and the loan restored
to current status. Loans which are delinquent more than 15 days incur a late fee
of 4% of the monthly payment of principal and interest due. As a matter of
policy, the Bank will contact the borrower after the loan has been delinquent 15
days. If payment is not promptly received, the borrower is contacted again, and
efforts are made to formulate an affirmative plan to cure the delinquency.
Generally, after any loan is delinquent 45 days or more, a default letter is
sent to the borrower. If the default is not cured after 30 days, formal legal
proceedings are commenced to collect amounts owed.
Loans generally are placed on nonaccrual status, and accrued but unpaid
interest is reversed, when, in management's judgment, it is determined that the
collectibility of interest, but not necessarily principal, is doubtful.
Generally, this occurs when payment is delinquent in excess of 90 days. Consumer
loans are generally charged off, or any expected loss is reserved for, after
they become more than 120 days past due. All other loans are charged off when
management concludes that they are uncollectible. See Note 1 of Notes to
Financial Statements.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate acquired through foreclosure until such time as it is
sold and is recorded at the lower of the estimated fair value of the underlying
real estate or the carrying amount of the loan. Costs relating to holding or
improving such real estate are charged against income in the current period. Any
required write-down of the loan to its fair value less estimated selling costs
upon foreclosure is charged against the allowance for loan losses. See Note 1 of
Notes to Financial Statements.
61
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. At the dates shown, the Bank had no
restructured loans within the meaning of Statement of Financial Accounting
Standards No. 15.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------
1996 1995 1994
------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Residential mortgage:
Single-family.............................................. $ 376 $ 413 $ 286
Multi-family............................................... -- -- --
Construction............................................... 647 248 --
Commercial real estate....................................... -- -- --
Commercial business.......................................... 8 -- --
Consumer..................................................... 3 20 53
------ ------- -------
Total...................................................... $1,034 $ 681 $ 339
====== ======= =======
Accruing loans which are contractually past due
90 days or more:
Residential mortgage:
Single-family.............................................. $ -- $ -- $ --
Multi-family............................................... -- -- --
Construction............................................... -- -- --
Commercial real estate....................................... -- -- --
Commercial business.......................................... -- -- --
Consumer..................................................... -- -- --
------ ------- -------
Total...................................................... $ -- $ -- $ --
====== ======= =======
Total nonperforming loans.................................. $1,034 $ 681 $ 339
====== ======= =======
Percentage of total loans, net................................. .66% .47% .25%
====== ======= =======
Real estate owned.............................................. $ 179 $ 69 $ 180
====== ======= =======
Loans modified in troubled debt restructuring.................. $ -- $ -- $ --
====== ======= =======
</TABLE>
During the year ended September 30, 1996, gross interest income of
approximately $44,000 would have been recorded on loans accounted for on a
nonaccrual basis if the loans had been current throughout this period. Interest
on such loans included in income during the period amounted to approximately
$25,000.
At September 30, 1996, the Bank had no loans not classified as
non-accrual, 90 days past due or restructured where known information about
possible credit problems of borrowers caused management to have serious concerns
as to the ability of the borrowers to comply with present loan repayment terms
and may result in disclosure as non-accrual, 90 days past due or restructured.
At September 30, 1996, an analysis of the Bank's portfolio did not
reveal any impaired loans that needed to be classified under SFAS No. 114 or
118.
At September 30, 1996, the Bank had $1.0 million of nonaccrual loans,
which consisted of eight single-family residential real estate loans totaling
$376,000, five single-family residential construction loans totaling $647,000,
an $8,000 commercial business loan and two consumer loans totaling $3,000.
62
<PAGE>
At September 30, 1996, the Bank had $179,000 of real estate owned,
which consisted of two single-family residences.
Classified Assets. Federal regulations require that the Bank classify
its assets on a regular basis. In addition, in connection with examinations of
insured institutions, examiners have authority to identify problem assets and if
appropriate, classify them in their reports of examination. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Assets classified
as substandard or doubtful require a savings institution to establish general
allowances for loan losses. If an asset or portion thereof is classified loss, a
savings institution must either establish a specific allowance for loss in the
amount of the portion of the asset classified loss, or charge off such amount.
The Bank regularly reviews its assets to determine whether any assets require
classification or re-classification. At September 30, 1996, the Bank had $1.7
million in classified assets, $484,000 in assets classified as special mention,
$1.2 million in assets classified as substandard, $4,000 in assets classified as
doubtful and $13,000 in assets classified as loss.
Allowance for Loan Losses. The Bank's policy is to establish reserves
for estimated losses on delinquent loans when it determines that losses are
expected to be incurred on such loans. The allowance for losses on loans is
maintained at a level believed adequate by management to absorb potential losses
in the portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income.
Although management believes it uses the best information available to
make determinations with respect to the allowances for losses and believes such
allowances are adequate, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations. Management anticipates that the
Bank's provisions for loan losses will increase in the future as it implements
the Board of Directors' strategy of continuing existing lines of business while
gradually expanding commercial business and consumer lending, which loans
generally entail greater risks than single-family residential mortgage loans.
Banking regulatory agencies, including the FDIC, have adopted a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. This policy includes an arithmetic
formula for checking the reasonableness of an institution's allowance for loan
loss estimate compared to the average loss experience of the industry as a
whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
12 months given the facts and circumstances as of the evaluation date. This
amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
63
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1996 1995 1994
------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period................................. $ 1,877 $ 1,977 $ 1,843
------- ------- -------
Loans charged-off:
Residential mortgage:
Single-family.............................................. $ 44 $ 20 $ 10
Multi-family............................................... -- -- --
Construction............................................... -- -- --
Commercial real estate....................................... -- 76 --
Commercial business.......................................... -- -- --
Consumer..................................................... 19 26 68
------- ------- -------
Total charge-offs.............................................. 63 122 78
------- ------- -------
Recoveries:
Residential real estate mortgage:
Single-family residential.................................. 25 -- --
Multi-family residential................................... -- -- --
Construction............................................... -- -- --
Commercial real estate....................................... -- -- --
Commercial business.......................................... -- -- --
Consumer..................................................... 1 2 2
------- ------- -------
Total recoveries............................................... 26 2 2
------- ------- -------
Net loans charged-off.......................................... 37 120 76
------- ------- -------
Provision for loan losses...................................... 511 20 210
------- ------- -------
Balance at end of period....................................... $ 2,351 $ 1,877 $ 1,977
======= ======= =======
Ratio of net charge-offs to average
loans outstanding during the period.......................... .02% .09% .06%
======= ======= =======
</TABLE>
64
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- ---------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage.................... $ 1,037 54.6% $ 1,041 64.9% $ 1,137 72.6%
Commercial (1).......................... 879 23.9 517 16.3 497 12.6
Consumer................................ 435 21.5 319 18.8 343 14.8
-------- ------- ------- ------- ------- -------
Total allowance for loan losses..... $ 2,351 100.00% $ 1,877 100.00% $ 1,977 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
- ---------------
(1) Includes commercial real estate and commercial business loans.
Investment Activities
General. Interest income from mortgage-backed securities and investment
securities generally provides the second largest source of income to the Bank
after interest on loans. The Bank's Board of Directors has authorized investment
in U.S. Government and agency securities, state government obligations,
municipal securities, obligations of the FHLB, mortgage-backed securities issued
by FNMA and FHLMC and any other securities authorized by the Administrator as
permissible investments. The Bank's objective is to use such investments to
reduce interest rate risk, enhance yields on assets and provide liquidity. At
September 30, 1996, the Bank's mortgage-backed securities and investment
securities portfolio amounted to $14.8 million and $8.1 million, respectively.
At such date, the Bank had an unrealized gain of $41,000, net of deferred taxes,
with respect to its securities, all of which are classified as available for
sale.
Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in the Bank's investment
policy. The Bank performs analyses on mortgage-backed securities and investment
securities prior to forming mortgage pools and on an ongoing basis to determine
the impact on earnings and market value under various interest rate and
prepayment conditions. Securities purchases are subject to the oversight of the
Bank's Investment Committee consisting of four directors and are reviewed by the
Board of Directors on a monthly basis. The Bank's President has authority to
make specific investment decisions within the parameters determined by the Board
of Directors.
Mortgage-Backed Securities. At September 30, 1996, the Bank's
mortgage-backed securities amounted to $14.8 million, or 7.6% of total assets.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on
which are passed from the mortgage originators through intermediaries that pool
and repackage the participation interest in the form of securities to investors
such as the Bank. Such intermediaries may include quasi-governmental agencies
such as FHLMC, FNMA and GNMA which guarantee the payment of principal and
interest to investors. Mortgage-backed securities generally increase the quality
of the Bank's assets by virtue of the guarantees that back them, are more liquid
than individual mortgage loans and may be used to collaterize borrowings or
other obligations of the Bank. At September 30, 1996, all of the Bank's
mortgage-backed securities were backed by loans originated by the Bank and
swapped with the FHLMC in exchange for such mortgage-backed securities.
65
<PAGE>
The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 FHLBs and federally insured savings institutions. The FHLMC
issues participation certificates backed principally by conventional mortgage
loans. The FHLMC guarantees the timely payment of interest and the ultimate
return of principal on participation certificates. The FNMA is a private
corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. FHLMC and FNMA securities are not
backed by the full faith and credit of the United States, but because the FHLMC
and the FNMA are U.S. Government-sponsored enterprises, these securities are
considered to be among the highest quality investments with minimal credit
risks.
The GNMA is a government agency within the Department of Housing and
Urban Development which is intended to help finance government-assisted housing
programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and
the timely payment of principal and interest on GNMA securities is guaranteed by
the GNMA and backed by the full faith and credit of the U.S. Government.
Because the FHLMC, the FNMA and the GNMA were established to provide
support for low- and middle- income housing, there are limits to the maximum
size of loans that qualify for these programs. The limit for FNMA and FHLMC
currently is $207,000.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and having varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or
adjustable-rate loans. As a result, the risk characteristics of the underlying
pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment
risk, are passed on to the certificate holder. The life of a mortgage-backed
pass-through security thus approximates the life of the underlying mortgages.
The Bank's mortgage-backed securities portfolio consists of investments in
mortgage-backed securities backed by fixed-rate mortgage loans originated by the
Bank and swapped with the FHLMC for mortgage-backed securities.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings of the Bank in the event that the Bank determined to
utilize borrowings as a source of funds. Mortgage-backed securities issued or
guaranteed by the FNMA or the FHLMC (except interest-only securities or the
residual interests in CMOs) are weighted at no more than 20% for risk-based
capital purposes, compared to a weight of 50% to 100% for residential loans. See
"Regulation -- Regulation of the Bank -- Capital Requirements."
At September 30, 1996, mortgage-backed securities with an amortized
cost of $14.8 million and a carrying value of $14.8 million were held as
available for sale, and no mortgage-backed securities were classified as held to
maturity. Mortgage-backed securities which are held to maturity are carried at
cost, adjusted for the amortization of premiums and the accretion of discounts
using a method which approximates a level yield. Mortgage-backed securities
classified as available for sale are carried at fair value. Unrealized gains and
losses on available for sale mortgage-backed securities are recognized as direct
increases or decreases in equity, net of applicable income taxes. See Notes 1
and 4 of the Notes to Consolidated Financial Statements. At September 30, 1996,
the Bank's mortgage-backed securities had a weighted average yield of 7.37%.
At September 30, 1996, the weighted average contractual maturity of the
Bank's fixed-rate mortgage-backed securities was approximately 16 years. The
actual maturity of a mortgage-backed security varies, depending on when the
mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and the
amortization of the premium or accretion of the discount related to the
mortgage-backed security. Premiums and discounts on mortgage-backed securities
are amortized or accreted over the estimated term of the securities using a
level yield method. The
66
<PAGE>
prepayment assumptions used to determine the amortization period for premiums
and discounts can significantly affect the yield of the mortgage-backed
security, and these assumptions are reviewed periodically to reflect the actual
prepayment. The actual prepayments of the underlying mortgages depend on many
factors, including the type of mortgage, the coupon rate, the age of the
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates. The
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of
prepayments. During periods of falling mortgage interest rates, prepayments
generally increase, and, conversely, during periods of rising mortgage interest
rates, prepayments generally decrease. If the coupon rate of the underlying
mortgage significantly exceeds the prevailing market interest rates offered for
mortgage loans, refinancing generally increases and accelerates the prepayment
of the underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable-rate mortgage-backed securities.
Investment Securities. The Bank's investment securities consist
primarily of securities issued by the U.S. Treasury and federal and state
government agency obligations. At September 30, 1996, the Bank's entire
portfolio of investment securities was classified available for sale and
amounted to $8.1 million, including gross unrealized gains of $81,000. The Bank
attempts to maintain a high degree of liquidity in its investment securities
portfolio by choosing those that are readily marketable. As of September 30,
1996, the estimated weighted average life of the Bank's investment securities
portfolio was approximately 2 years. In addition, at September 30, 1996, the
Bank had $1.3 million of FHLB stock.
The following table sets forth the carrying value of the Bank's
investment securities and mortgage-backed securities portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities....................... $ 5,107 $ -- $ --
State government obligations................................ 3,000 -- --
Mortgage-backed securities.................................. 14,797 9,072 9,194
-------- -------- --------
Total.................................................... 22,904 9,072 9,194
Securities held to maturity:
U.S. government and agency securities and other............. -- 3,002 1,004
FHLB stock.................................................. 1,288 1,288 1,249
Mortgage-backed securities.................................. -- 13,213 9,341
-------- -------- --------
Total.................................................... 1,288 17,503 11,594
-------- -------- --------
Total.................................................. $ 24,192 $ 26,575 $ 20,788
======== ======== ========
</TABLE>
67
<PAGE>
The following table sets forth the scheduled maturities, carrying
values, amortized cost and average yields for the Bank's investment securities
and mortgage-backed securities portfolio at September 30, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
------------------ ------------------ ------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities.................. $ 2,036 6.50% $ 3,071 7.125% $ -- -- %
State government obligations... 3,000 5.30 -- -- -- --
Mortgage-backed securities..... -- -- -- -- 3,813 7.01
Securities held to maturity:
FHLB stock (1)................. -- -- -- -- -- --
--------- ---- ---------------- --------- ----
Total....................... $ 5,036 5.78% $ 3,071 7.125% $ 3,813 7.01%
========= ==== ========== ===== ========= ====
<CAPTION>
More than Ten Years Total Investment Portfolio
------------------- ----------------------------
Carrying Average Carrying Amortized Average
Value Yield Value Cost Yield
-------- -------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities.................. $ -- -- % $ 5,107 $ 5,025 6.87%
State government obligations... -- -- 3,000 3,000 5.30
Mortgage-backed securities..... 10,984 7.49 14,797 14,812 7.37
Securities held to maturity:
FHLB stock (1)................. 1,288 7.30 1,288 1,288 7.30
--------- ---- --------- --------- ----
Total....................... $ 12,272 7.47% $ 24,192 $ 24,125 7.01%
========= ==== ========= ========= ====
</TABLE>
- ----------------
(1) As a member of the FHLB of Atlanta, the Bank is required to maintain
an investment in FHLB stock, which has no stated maturity.
68
<PAGE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending, investment activities and general operational purposes. In addition to
deposits, the Bank derives funds from loan principal and interest repayments,
maturities of investment securities and mortgage-backed securities and interest
payments thereon. Although loan repayments are a relatively stable source of
funds, deposit inflows and outflows are 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, or
on a longer term basis for general operational purposes. The Bank has access to
borrow from the FHLB of Atlanta. The Converted Bank and the Commercial Bank will
continue to have access to FHLB of Atlanta advances.
Deposits. The Bank attracts deposits principally from within its market
area by offering a variety of deposit instruments, including checking accounts,
money market accounts, statement and passbook savings accounts, Individual
Retirement Accounts, and certificates of deposit which range in maturity from
seven days to five years. Deposit terms vary according to the minimum balance
required, the length of time the funds must remain on deposit and the interest
rate. Maturities, terms, service fees and withdrawal penalties for its deposit
accounts are established by the Bank on a periodic basis. The Bank reviews its
deposit pricing on a weekly basis. In determining the characteristics of its
deposit accounts, the Bank considers the rates offered by competing
institutions, lending and liquidity requirements, growth goals and federal
regulations. Management believes it prices its deposits comparably to rates
offered by its competitors. The Bank does not accept brokered deposits.
The Bank attempts to compete for deposits with other institutions in
its market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Bank seeks to meet
customers' needs by providing convenient customer service to the community,
efficient staff and convenient hours of service. Substantially, all of the
Bank's depositors are North Carolina residents. To provide additional
convenience, the Bank participates in the HONOR Automatic Teller Machine network
at locations throughout the United States, through which customers can gain
access to their accounts at any time. To better serve its customers, the Bank
has installed automatic teller machines at four office locations.
69
<PAGE>
Savings deposits in the Bank at September 30, 1996 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
Weighted
Average
Interest Minimum Minimum Balances (in Percentage of
Rate Term Category Amount Thousands) Total Savings
- -------- ------- -------- ------- ------------ -------------
<C> <C> <S> <C> <C> <C>
Demand deposits:
.61% None NOW accounts $ 100 $ 17,079 9.98%
4.20 None Money market 100 10,256 5.99
---------- -------
Total demand deposits 27,335 15.97
---------- -------
2.00 Savings accounts 100 7,020 4.10
<CAPTION>
Certificates of Deposit
-----------------------
<C> <C> <S> <C> <C> <C>
4.01 3 months or less Fixed-term, fixed-rate 1,000 4,734 2.76
4.83 6 months Fixed-term, fixed-rate 1,000 8,821 5.15
4.89 7 months Fixed-term, fixed-rate 1,000 3,445 2.01
5.66 9 months Fixed-term, fixed-rate 1,000 35,962 21.00
5.24 12 months Fixed-term, fixed-rate 1,000 36,753 21.47
5.93 14 months Fixed-term, fixed-rate 1,000 2,772 1.62
6.02 15-72 months Fixed-term, fixed-rate 1,000 44,371 25.92
---------- -------
Total certificates of deposit 136,858 79.93
---------- -------
Total deposits $ 171,213 100.00%
========== ======
</TABLE>
70
<PAGE>
The following tables set forth the distribution of the Bank's deposit
accounts at the dates indicated, the weighted average interest rates and the
change in dollar amounts for each category of deposits presented. Management
does not believe that the use of year-end balances instead of average balances
resulted in any material difference in the information presented.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------
1996 1995
-------------------------------------------- ---------------------------------------------
Weighted Weighted
% of Average Increase % of Average Increase
Amount Deposits Rate (Decrease) Amount Deposits Rate (Decrease)
------ -------- --------- ---------- ------ -------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
NOW........................ $ 17,079 9.98% .61% $ 5,327 $ 11,752 7.66% .93% $ 1,929
Money market............... 10,256 5.99 4.20 6,055 4,201 2.74 2.87 (1,856)
Savings accounts............. 7,020 4.10 2.00 130 6,890 4.49 2.43 (147)
-------- ------- ---- --------- --------- ------- ---- --------
Total................... 34,355 20.07 1.96 11,512 22,843 14.89 1.74 (74)
Certificate accounts:
Less than 12 months (1).... 52,962 30.92 5.32 11,565 41,397 26.97 5.81 6,715
12 - 14 months (1)......... 39,525 23.09 5.29 (13,479) 53,004 34.54 6.05 1,494
14 - 72 months (1)......... 44,371 25.92 6.02 8,158 36,213 23.60 6.06 13,730
-------- ------ ---- --------- --------- ------ ---- --------
Total................... 136,858 79.93 5.54 6,244 130,614 85.11 5.98 21,939
-------- ------ ---- --------- --------- ------ ---- --------
Total deposits............... $171,213 100.00% 4.82% $ 17,756 $ 153,457 100.00% 5.35% $ 21,865
======== ====== ==== ========= ========= ====== ==== ========
<CAPTION>
At September 30,
-------------------------------
1994
-------------------------------
Weighted
% of Average
Amount Deposits Rate
------ -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Demand accounts:
NOW........................ $ 9,823 7.47% 1.04%
Money market............... 6,057 4.60 3.03
Savings accounts............. 7,037 5.35 2.41
-------- ------- ----
Total................... 22,917 17.42 1.99
Certificate accounts:
Less than 12 months (1).... 34,682 26.35 4.37
12 - 14 months (1)......... 51,510 39.14 4.30
14 - 72 months (1)......... 22,483 17.09 5.19
-------- ------ ----
Total................... 108,675 82.58 4.51
-------- ------ ----
Total deposits............... $131,592 100.00% 4.07%
======== ====== ====
</TABLE>
- ----------------
(1) Original term.
71
<PAGE>
The following table sets forth the time deposits in the Bank classified
by rates at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1996 1995 1994
------ ------ -----
(In thousands)
<S> <C> <C> <C>
2 - 3.99%.................................................... $ 1,737 $ 2,903 $ 28,240
4 - 5.99%.................................................... 102,731 74,435 79,336
6 - 7.99%.................................................... 32,390 53,276 626
8 - and over................................................. -- -- 473
---------- ---------- ----------
$ 136,858 $ 130,614 $ 108,675
========== ========== ==========
</TABLE>
The following table sets forth the amount and maturities of time
deposits at September 30, 1996.
<TABLE>
<CAPTION>
Weighted Average
Maturity Period Amount Due Rate
--------------- ---------- ----------------
(In Thousands)
<S> <C> <C>
One year or less....................................$ 111,256 5.44%
1-2 years........................................... 24,446 5.95
2-3 years........................................... 256 4.98
After 3 years....................................... 900 6.53
--------- ----
Total..........................................$ 136,858 5.54%
========== ====
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more (in thousands) by time remaining until maturity as
of September 30, 1996. At such date, such deposits represented 12.0% of total
deposits and had a weighted average rate of 5.68%.
<TABLE>
<CAPTION>
Maturity Period
---------------
<S> <C>
Three months or less....................... $ 4,082
Over three through six months.............. 5,213
Over six through 12 months................. 8,171
Over 12 months............................. 3,100
----------
Total.................................. $ 20,566
==========
</TABLE>
At September 30, 1996, mortgage-backed securities with a carrying value
of $2.1 million were pledged as collateral for deposits from public entities.
72
<PAGE>
The following table sets forth the savings activities of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1996 1995 1994
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Net increase (decrease) before interest credited............... $ 11,826 $ 16,933 $ 24,833
Interest credited.............................................. 5,930 4,932 3,114
-------- --------- ---------
Net increase (decrease) in savings deposits................ $ 17,756 $ 21,865 $ 27,947
======== ========= =========
</TABLE>
In the unlikely event the Bank is liquidated after the Stock
Conversion, depositors will be entitled to full payment of their deposit
accounts prior to any payment being made to the sole stockholder of the
Converted Bank or the Commercial Bank, which is the Company.
Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending, investments and general operating activities.
The Bank is authorized, however, to use advances from the FHLB of Atlanta to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements. The FHLB of Atlanta functions as a central reserve bank providing
credit for savings institutions and certain other member financial institutions.
As a member of the FHLB System, the Bank is required to own stock in the FHLB of
Atlanta and is authorized to apply for advances. Advances are pursuant to
several different programs, each of which has its own interest rate and range of
maturities. The Bank has a Blanket Agreement for advances with the FHLB under
which the Bank may borrow up to 25% of assets subject to normal collateral and
underwriting requirements. Advances from the FHLB of Atlanta are secured by the
Bank's stock in the FHLB of Atlanta and other eligible assets. During the years
ended September 30, 1996, 1995 and 1994, the Bank's borrowings consisted of FHLB
advances and, during the year ended September 30, 1996, retail repurchase
agreements. The Bank will remain as a member of the FHLB system following the
Bank Conversion.
The Bank also utilized retail repurchase agreements to a limited extent
during fiscal 1996. Retail repurchase agreements represent agreements to sell
securities under terms which require the Bank to repurchase the same or
substantially similar securities by a specified date. The Bank did not have any
such agreements at September 30, 1995. The Bank did not utilize such agreements
during fiscal 1995 or 1994.
The following table sets forth certain information regarding short-term
borrowings by the Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At or for the
Year Ended September 30,
--------------------------
1996 1995
------ ------
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances........................................... -- $ 4,000
Federal funds purchased and securities
sold under repurchase agreements...................... $ 1,040 --
Weighted average rate paid on:
FHLB advances........................................... -- 7.27%
Federal funds purchased and securities
sold under agreements to repurchase................... 4.31% --
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
For the Year
Ended September 30,
--------------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
FHLB advances........................................... $ 7,000 $21,000
Federal funds purchased and securities
sold under repurchased agreements..................... 1,040 --
<CAPTION>
For the Year
Ended September 30,
--------------------------
1996 1995
------ ------
(In thousands)
<S> <C> <C>
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances........................................... $ 2,250 $11,521
Federal funds purchased and securities
sold under repurchase agreements...................... 582 --
Approximate weighted average rate paid on: (1)
FHLB advances........................................... 6.83% 6.54%
Federal funds purchased and securities
sold under agreements to repurchase................... 4.44 --
</TABLE>
- ---------------
(1) Based on month-end balances.
Subsidiary Activities
In prior years, the Bank had one subsidiary, Tidewater Financial
Services Corporation, a North Carolina corporation, which has been inactive
during the past three years. This subsidiary was dissolved effective September
30, 1996.
Competition
The Bank faces strong competition in originating real estate,
commercial business and consumer loans and in attracting deposits. The Bank
competes for real estate and other loans principally on the basis of interest
rates, the types of loans it originates, the deposit products it offers and the
quality of services it provides to borrowers. The Bank also competes by offering
products which are tailored to the local community. Its competition in
originating real estate loans comes primarily from other savings institutions,
commercial banks, mortgage bankers and mortgage brokers. Commercial banks,
credit unions and finance companies provide vigorous competition in consumer
lending. Competition may increase as a result of the continuing reduction of
restrictions on the interstate operations of financial institutions.
The Bank attracts its deposits through its branch offices primarily
from the local communities. Consequently, competition for deposits is
principally from other savings institutions, commercial banks, credit unions and
brokers in the Bank's primary market area. The Bank competes for deposits and
loans by offering what it believes to be a variety of deposit accounts at
competitive rates, convenient business hours, a commitment to outstanding
customer service and a well-trained staff. The Bank believes it has developed
strong relationships with local realtors and the community in general.
74
<PAGE>
Management considers its primary market area for gathering deposits and
originating loans to be Beaufort, Craven, Lenoir, Nash, Pasquotank and Pitt
Counties in northeastern North Carolina, which are the counties in which the
Bank's offices are located. The Bank originates loans throughout northeastern
North Carolina. Based on data provided by a private marketing firm, the Bank
estimates that at June 30, 1995, it had 3.85% of deposits held by all banks and
savings institutions in its market area.
Offices and Other Material Properties
The following table sets forth the location and certain additional
information regarding the Bank's office at September 30, 1996.
<TABLE>
<CAPTION>
Book Value at
Year Owned or September 30, Approximate
Opened Leased 1996 Square Footage
------ -------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Main Office:
1311 Carolina Avenue
Washington, NC 27889 1986 Owned $ 651 10,200
Branch Offices:
300 North Market Street
Washington, NC 27889 1959 Owned 130 4,680
301 E. Arlington Blvd.
Greenville, NC 27835 1993 Owned 322 2,600
604 E. Ehringhaus Street
Elizabeth City, NC 27906 1980 Owned 186 2,500
827 Hardee Road
Kinston, NC 28501 1996 Leased -- 2,000
1725 Glenburnie Road
New Bern, NC 28561 1990 Owned 347 2,600
202 Craven Street
New Bern, NC 28560 1995 Leased 45 2,500
300 Sunset Avenue
Rocky Mount, NC 27804 1994 Owned 338 4,948
Loan Production Offices:
109 Market Street
Louisburg, NC 27549 1995 Leased -- 1,000
624 Village Road
Shallotte, NC 28470 1996 Leased -- 768
6800 Wrightsville Avenue
Suite 23 1995 Leased -- 692
Wilmington, NC 28406
Operations Center:
239 West Main Street
Washington, NC 27889 1994 Owned 342 7,600
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Book Value at
Year Owned or September 30, Approximate
Opened Leased 1996 Square Footage
------ -------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Future Branch Site
Cypress Landing
Chocowinity, NC Owned 126
Taberna
New Bern, NC Owned 176
</TABLE>
The book value of the Bank's investment in premises and equipment was
$2.9 million at September 30, 1996. See Note 5 to Consolidated Financial
Statements.
Employees
As of September 30, 1996, the Bank had 113 full-time and 7 part-time
employees, none of whom were represented by a collective bargaining agreement.
Management considers the Bank's relationships with its employees to be good.
Legal Proceedings
From time to time, the Bank is a party to various legal proceedings
incident to its business. At September 30, 1996, there were no legal proceedings
to which the Company or the Bank was a party, or to which any of their property
was subject, which were expected by management to result in a material loss to
the Company or the Bank. There are no pending regulatory proceedings to which
the Company, the Bank or its subsidiaries is a party or to which any of their
properties is subject which are currently expected to result in a material loss.
REGULATION
Depository Institution Regulation
General. The Bank is a North Carolina-chartered savings bank and a
member of the FHLB of Atlanta and its deposits are insured by the FDIC through
the SAIF. As a North Carolina savings bank, the Bank is subject to regulation
and supervision by the Administrator and the FDIC and to North Carolina and FDIC
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities and general investment
authority. The Administrator and the FDIC periodically examine the Bank for
compliance with various regulatory requirements and for safe and sound
operations. The FDIC also has the authority to conduct special examinations of
the Bank because its deposits are insured by the SAIF. The Bank must file
reports with the Administrator describing its activities and financial condition
and must obtain the approval from the Administrator and the FDIC prior to
entering into certain transactions, such as mergers with, or acquisitions of,
other depository institutions.
Upon consummation of the Bank Conversion, the Commercial Bank will be a
North Carolina commercial bank and its deposit accounts will continue to be
insured by the SAIF. The Commercial Bank will be subject to supervision,
examination and regulation by the Commissioner (rather than the Administrator)
and the FDIC and to North Carolina and federal statutory and regulatory
provisions governing such matters as capital standards, mergers, subsidiary
investments and establishment of branch offices, and it will remain subject to
the FDIC's authority to conduct special examinations. The Commercial Bank will
be required to file reports with the Commissioner and the FDIC concerning its
activities and financial condition and will be required to obtain regulatory
approvals prior to entering into certain transactions, including mergers with,
or acquisitions of, other depository institutions.
76
<PAGE>
As a federally insured depository institution, the Bank is, and the
Converted Bank and the Commercial Bank will be, subject to various regulations
promulgated by the Federal Reserve Board, including Regulation B (Equal Credit
Opportunity), Regulation D (Reserve Requirements), Regulations E (Electronic
Fund Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of
Funds and Collection of Checks) and Regulation DD (Truth in Savings).
The system of regulation and supervision applicable to the Bank, the
Converted Bank and the Commercial Bank establishes a comprehensive framework for
the operations of the Bank, the Converted Bank and the Commercial Bank and is
intended primarily for the protection of the FDIC and the depositors of the
Bank, the Converted Bank and the Commercial Bank. Changes in the regulatory
framework could have a material effect on the Bank, the Converted Bank and the
Commercial Bank and their respective operations that in turn, could have a
material effect on the Company.
Capital Requirements. The Federal Reserve Board and the FDIC have
established guidelines with respect to the maintenance of appropriate levels of
capital by bank holding companies with consolidated assets of $150 million or
more and state non-member banks, respectively. The regulations impose two sets
of capital adequacy requirements: minimum leverage rules, which require bank
holding companies and state non-member banks to maintain a specified minimum
ratio of capital to total assets, and risk-based capital rules, which require
the maintenance of specified minimum ratios of capital to "risk-weighted"
assets. The regulations of the FDIC and the Federal Reserve Board require bank
holding companies and state non-member banks, respectively, to maintain a
minimum leverage ratio of "Tier 1 capital" to total assets of 3.0%. Tier 1
capital is the sum of common stockholders' equity, certain perpetual preferred
stock (which must be noncumulative with respect to banks), including any related
surplus, and minority interests in consolidated subsidiaries; minus all
intangible assets (other than certain purchased mortgage servicing rights and
purchased credit card receivables), identified losses and investments in certain
subsidiaries. As a SAIF-insured, state-chartered bank, the Bank must also deduct
from Tier 1 capital an amount equal to its investments in, and extensions of
credit to, subsidiaries engaged in activities that are not permissible for
national banks, other than debt and equity investments in subsidiaries engaged
in activities undertaken as agent for customers or in mortgage banking
activities or in subsidiary depository institutions or their holding companies.
Although setting a minimum 3.0% leverage ratio, the capital regulations state
that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. Any bank or bank holding companies experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve Board has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital to total assets in making an
overall assessment of capital.
In addition to the leverage ratio, the regulations of the Federal
Reserve Board and the FDIC require bank holding companies and state-chartered
nonmember banks to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of at least 8.0% of which at least four percentage points
must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus
Tier 2 or supplementary capital items which include allowances for loan losses
in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock
and preferred stock with a maturity of 20 years or more and certain other
capital instruments. The includible amount of Tier 2 capital cannot exceed the
institution's Tier 1 capital. Qualifying total capital is further reduced by the
amount of the bank's investments in banking and finance subsidiaries that are
not consolidated for regulatory capital purposes, reciprocal cross-holdings of
capital securities issued by other banks and certain other deductions. The
risk-based capital regulations assign balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items to one of four broad risk
weight categories. The aggregate dollar amount of each category is multiplied by
the risk weight assigned to that category based principally on the degree of
credit risk associated with the obligor. The sum of these weighted values equals
the bank holding company or the bank's risk-weighted assets.
77
<PAGE>
The federal bank regulators, including the Federal Reserve Board and
the FDIC, have proposed to revise their risk-based capital requirements to
ensure that such requirements provide for explicit consideration of interest
rate risk. Under the proposed rule, a bank's interest rate risk exposure would
be quantified using either the measurement system set forth in the proposal or
the bank's internal model for measuring such exposure, if such model is
determined to be adequate by the bank's examiner. If the dollar amount of a
bank's interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank would be required under the
proposed rule to hold additional capital equal to the dollar amount of the
excess. Management of the Bank has not determined what effect, if any, the
FDIC's proposed interest rate risk component would have on the Bank's capital if
adopted as proposed. The FDIC has adopted a regulation that provides that the
FDIC may take into account whether a bank has significant risks from
concentrations of credit or nontraditional activities in determining the
adequacy of its capital. The Bank has not been advised that it will be required
to maintain any additional capital under this regulation. The proposed interest
rate risk component would not apply to bank holding companies on a consolidated
basis.
In addition to FDIC regulatory capital requirements, the Administrator
requires that net worth equal at least 5% of total assets. Intangible assets
must be deducted from net worth and assets when computing compliance with this
requirement.
At September 30, 1996, the Bank complied with each of the capital
requirements of the FDIC and the Administrator. For a description of the Bank's
required and actual capital levels on September 30, 1996, see "Historical and
Pro Forma Regulatory Capital Compliance."
Following the Bank Conversion, the Commercial Bank will be subject to
the Commissioner's capital surplus regulation which requires commercial banks to
maintain a capital surplus of at least 50% of common capital. Common capital is
defined as the total of the par value of shares times the number of shares
outstanding.
Prompt Corrective Regulatory Action. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking
regulators are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
"significantly undercapitalized" institution may be subject to regulatory
demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior regulatory approval and the institution is prohibited
from making payments of principal or interest on its subordinated debt. If an
institution's ratio of tangible capital to total assets falls below a "critical
capital level," the institution will be subject to conservatorship or
receivership within 90 days unless periodic determinations are made that
forbearance from such action would better protect the deposit insurance fund.
Federal banking regulators have adopted regulations implementing the
prompt corrective action provisions of FDICIA. Under these regulations, the
federal banking regulators will generally measure a depository institution's
capital adequacy on the basis of the institution's total risk-based capital
ratio (the ratio of its total capital to risk- weighted assets), Tier 1
risk-based capital ratio (the ratio of its core capital to risk-weighted assets)
and leverage ratio (the ratio of its core capital to adjusted total assets).
Under the regulations, an institution that is not subject to an
78
<PAGE>
order or written directive by its primary federal regulator to meet or maintain
a specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
An "adequately capitalized" depository institution is an institution that does
not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 risk-based capital ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the depository institution has a composite 1 CAMEL rating). An "undercapitalized
institution" is a depository institution that has (i) a total risk-based capital
ratio less than 8.0%; or (ii) a Tier 1 risk- based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or less than 3.0% if the
institution has a composite 1 CAMEL rating). A "significantly undercapitalized"
institution is defined as a depository institution that has: (i) a total risk-
based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio
of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" institution is defined as a depository institution that has a
ratio of "tangible equity" to total assets of less than 2.0%. Tangible equity is
defined as core capital plus cumulative perpetual preferred stock (and related
surplus) less all intangibles other than qualifying supervisory goodwill and
certain purchased mortgage servicing rights. The appropriate federal banking
agency may reclassify a well capitalized depository institution as adequately
capitalized and may require an adequately capitalized or undercapitalized
institution to comply with the supervisory actions applicable to institutions in
the next lower capital category (but may not reclassify a significantly
undercapitalized institution as critically under-capitalized) if it determines,
after notice and an opportunity for a hearing, that the institution is in an
unsafe or unsound condition or that the institution has received and not
corrected a less-than-satisfactory rating for any CAMEL rating category. At
September 30, 1996, the Bank was classified as "well capitalized" under FDIC
regulations, and management of the Bank believes that the Commercial Bank will,
immediately after the Conversion, also be classified as "well-capitalized."
Safety and Soundness Guidelines. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency was required to establish safety and soundness
standards for institutions under its authority. The interagency guidelines
require depository institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature and
scope of the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The guidelines further provide that depository
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss, and should take into account factors such as comparable compensation
practices at comparable institutions. If the appropriate federal banking agency
determines that a depository institution is not in compliance with the safety
and soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A depository institution must
submit an acceptable compliance plan to its primary federal regulator within 30
days of receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Bank already substantially meets all the standards adopted in
the interagency guidelines, and therefore does not believe that implementation
of these regulatory standards will materially affect the operations of the Bank
or the Commercial Bank.
Community Reinvestment Act. The Bank, like other financial
institutions, is subject to the Community Reinvestment Act ("CRA"). The purpose
of the CRA is to encourage financial institutions to help meet the credit needs
of their entire communities, including the needs of low-and moderate-income
neighborhoods. During the Bank's last compliance examination, the Bank received
an "outstanding" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve Board and the FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and, 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
79
<PAGE>
performance in meeting community credit needs. Under the regulations, a 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
quantitative 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."
Federal Home Loan Bank System. The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily for member
institutions. As a member of the FHLB of Atlanta, the Bank is required to
acquire and hold shares of capital stock in the FHLB of Atlanta in an amount at
least equal to 1% of the aggregate unpaid principal of its home mortgage loans,
home purchase contracts, and similar obligations at the beginning of each year,
or 1/20 of its advances (borrowings) from the FHLB of Atlanta, whichever is
greater. The Bank was in compliance with this requirement with investment in
FHLB of Atlanta stock at September 30, 1996 of $1.3 million. The FHLB of Atlanta
serves as a reserve or central bank for its member institutions within its
assigned district. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It offers advances to members in
accordance with policies and procedures established by the FHFB and the Board of
Directors of the FHLB of Atlanta. Long-term advances may only be made for the
purpose of providing funds for residential housing finance. At September 30,
1996, the Bank had no long-term advances or short-term advances outstanding from
the FHLB of Atlanta. Upon completion of the Bank Conversion, the Commercial Bank
will continue to be a member of the FHLB of Atlanta.
Reserves. Pursuant to regulations of the Federal Reserve Board, the
Bank must maintain average daily reserves against their transaction accounts. No
reserves are required to be maintained on the first $4.3 million of transaction
accounts, reserves equal to 3% must be maintained on the next $52.0 million of
transaction accounts, plus 10% on the remainder. This percentage is subject to
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of September 30, 1996,
the Bank met its reserve requirements.
Upon consummation of the Bank Conversion, the Commercial Bank will be
subject to the reserve requirements of North Carolina commercial banks. North
Carolina law requires state non-member banks to maintain, at all times, a
reserve fund in an amount set by regulation of the Commission.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of
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institutions that pose a substantial probability of loss to the deposit
insurance fund unless effective corrective action is taken. The assessment rate
for SAIF members had ranged from 0.23% of deposits for well capitalized
institutions in Subgroup A to 0.31% of deposits for undercapitalized
institutions in Subgroup C while assessments for over 90% of the BIF members had
been the statutory minimum of $2,000. Recently enacted legislation provided for
a one-time assessment of 65.7 basis points of insured deposits as of March 31,
1995, that fully capitalized the SAIF and had the effect of reducing future SAIF
assessments. Accordingly, although the special assessment resulted in a one-time
charge to the Bank of approximately $946,000 pre-tax, the recapitalization of
the SAIF had the effect of reducing the Bank's and the Commercial Bank's future
deposit insurance premiums to the SAIF. Under the recently enacted legislation,
both BIF and SAIF members will be assessed an amount for the Financing
Corporation Bond payments. BIF members will be assessed approximately 1.3 basis
points while the SAIF rate will be approximately 6.4 basis points until January
1, 2000. At that time, BIF and SAIF members will begin pro rata sharing of the
payment at an expected rate of 2.43 basis points.
Although the Commercial Bank, as a North Carolina commercial bank,
would qualify for insurance of deposits by the BIF of the FDIC, substantial
entrance and exit fees apply to conversions from SAIF to BIF insurance.
Accordingly, following the Bank Conversion, the Commercial Bank will remain a
member of the SAIF, which will insure the deposits of the Commercial Bank to a
maximum of $100,000 for each depositor. Because the Converted Bank (and the
Commercial Bank) will continue to be a SAIF member, its deposit insurance
assessments will be determined on the same basis as the deposit insurance
assessments paid by the Bank.
Liquidity Requirements. FDIC policy requires that banks maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state, or federal agency
obligations) in an amount which it deems adequate to protect safety and
soundness of the bank. The FDIC currently has no specific level which it
requires. Under the FDIC's calculation method, management calculated the Bank's
liquidity ratio as 13.9% of total assets at September 30, 1996, which management
believes is adequate.
The Bank also 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 regulations allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily ascertainable market value, including investments
with maturities in excess of five years. At September 30, 1996, the Bank's
liquidity ratio was in excess of the North Carolina regulations.
Dividend Restrictions. Under FDIC regulations, the Bank is prohibited
from making any capital distributions if after making the distribution, the Bank
would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier
1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less
than 4.0%.
Earnings of the Bank appropriated to bad debt reserves and deducted for
Federal income tax purposes are not available for payment of cash dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings removed from the pre-1988
reserves for such distributions. The Bank intends to make full use of this
favorable tax treatment and does not contemplate use of any earnings in a manner
which would create federal tax liabilities.
The Bank may not pay dividends on its capital stock if its regulatory
capital would thereby be reduced below the amount then required for the
liquidation account established for the benefit of certain depositors of the
Bank at the time of the Stock Conversion.
The Company is subject to limitations on dividends imposed by the
Federal Reserve Board. See "--Regulation of the Company Following the
Conversion -- Dividends."
Limits on Loans to One Borrower. The Bank generally is subject to both
FDIC regulations and North Carolina law regarding loans to any one borrower,
including related entities. Under applicable law, with certain
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limited exceptions, loans and extensions of credit by a savings institution to a
person outstanding at one time and not fully secured by collateral having a
market value at least equal to the amount of the loan or extension of credit
shall not exceed 15% of net worth. Loans and extensions of credit fully secured
by readily marketable collateral may comprise an additional 10% of net worth.
Applicable law additionally authorizes savings institutions to make loans to one
borrower, for any purpose: (i) in an amount not to exceed $500,000; (ii) in an
amount not to exceed the lesser of $30,000,000 or 30% of net worth to develop
residential housing, provided (a) the purchase price of each single-family
dwelling in the development does not exceed $500,000 and (b) the aggregate
amount of loans made under this authority does not exceed 150% of net worth; or
(iii) loans to finance the sale of real property in satisfaction of debts
previously contracted in good faith, not to exceed 50% of net worth. Under these
limits, the Bank's loans to one borrower were limited to $2.8 million at
September 30, 1996. At that date, the Bank had no lending relationships in
excess of the loans-to-one-borrower limit. Notwithstanding the statutory loans-
to-one-borrower limitations, the Bank has a self imposed loans-to-one-borrower
limit, which currently is $2.2 million. At September 30, 1996, the Bank's
largest lending relationship was a $1.9 million relationship consisting of five
commercial real estate loans. All loans within this relationship were current
and performing in accordance with their terms at September 30, 1996.
Following the Bank Conversion, the Commercial Bank will be subject to
North Carolina statutory law with respect to limits on loans to one borrower
which are substantially the same as those for the Bank.
Transactions with Related Parties. Transactions between a state
non-member bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a state non-member bank is any company or
entity which controls, is controlled by or is under common control with the
state non-member bank. In a holding company context, the parent holding company
of a state non-member bank (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution or state non-member bank. Generally, Sections 23A and 23B (i) limit
the extent to which an institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
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 (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no state non-member bank may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the state non-member
bank.
State non-member banks also are subject to the restrictions contained
in Section 22(h) of the Federal Reserve Act and the Federal Reserve's Regulation
O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer and to
a greater than 10% stockholder of a state non-member bank and certain affiliated
interests of such persons, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
savings institution, and their respective affiliates, unless such loan is
approved in advance by a majority of the board of directors of the institution
with any "interested" director not participating in the voting. Regulation O
prescribes 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 capital and surplus (up to $500,000). Further,
Section 22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
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State non-member banks also are subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers and the restrictions of 12 U.S.C. (S). 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, requires approval by the board of directors of a depository
institution for extension of credit to executive officers of the institution,
and imposes reporting requirements for and additional restrictions on the type,
amount and terms of credits to such officers. Section 1972 (i) prohibits a
depository institution from extending credit to or offering any other services,
or fixing or varying the consideration for such extension of credit or service,
on the condition that the customer obtain some additional service from the
institution or certain of its affiliates or not obtain services of a competitor
of the institution, subject to certain exceptions, and (ii) prohibits extensions
of credit to executive officers, directors, and greater than 10% stockholders of
a depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
Restrictions on Certain Activities. Under FDICIA, state-chartered banks
with deposits insured by the FDIC are generally prohibited from acquiring or
retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner. State-
chartered banks are also prohibited from engaging as principal in any type of
activity that is not permissible for a national bank and subsidiaries of state-
chartered, FDIC-insured state banks may not engage as principal in any type of
activity that is not permissible for a subsidiary of a national bank unless in
either case the FDIC determines that the activity would pose no significant risk
to the appropriate deposit insurance fund and the bank is, and continues to be,
in compliance with applicable capital standards.
The FDIC has adopted regulations to clarify the foregoing restrictions
on activities of FDIC-insured state-chartered banks and their subsidiaries.
Under the regulations, the term activity refers to the authorized conduct of
business by an insured state bank and includes acquiring or retaining any
investment other than an equity investment. An activity permissible for a
national bank includes any activity expressly authorized for national banks by
statute or recognized as permissible in regulations, official circulars or
bulletins or in any order or written interpretation issued by the Office of the
Comptroller of the Currency ("OCC"). In its regulations, the FDIC indicates that
it will not permit state banks to directly engage in commercial ventures or
directly or indirectly engage in any insurance underwriting activity other than
to the extent such activities are permissible for a national bank or a national
bank subsidiary or except for certain other limited forms of insurance
underwriting permitted under the regulations. Under the regulations, the FDIC
permits state banks that meet applicable minimum capital requirements to engage
as principal in certain activities that are not permissible to national banks
including guaranteeing obligations of others, activities which the Federal
Reserve Board has found by regulation or order to be closely related to banking
and certain securities activities conducted through subsidiaries.
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.
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Regulation of the Company Following the Bank Conversion
General. Upon consummation of the Bank Conversion, the Company, as the
sole shareholder of the Bank, will become a bank holding company and will
register as such with the Federal Reserve Board. Bank holding companies are
subject to comprehensive regulation by the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and the regulations of the
Federal Reserve Board. As a bank holding company, the Company will be required
to file with the Federal Reserve Board annual reports and such additional
information as the Federal Reserve Board may require, and will be subject to
regular examinations by the Federal Reserve Board. The Federal Reserve Board
also has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under the BHCA, a bank holding company must obtain Federal Reserve
Board approval before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. Satisfactory
financial condition, particularly with respect to capital adequacy, and a
satisfactory CRA rating generally are prerequisites to obtaining federal
regulatory approval to make acquisitions.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the Federal Reserve Board includes, among other things, operating a savings
institution, mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance agent
for certain types of credit-related insurance; leasing property on a
full-payout, non-operating basis; selling money orders, travelers' checks and
United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers. The Company
has no present plans to engage in any of these activities.
Under the BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of the
BHCA, "control" is defined as ownership of more than 25% of any class of voting
securities of the Company or the Bank, the ability to control the election of a
majority of the directors, or the exercise of a controlling influence over
management or policies of the Company or the Bank. In addition, the Change in
Bank Control Act and the related regulations of the Federal Reserve Board
require any person or persons acting in concert (except for companies required
to make application under the BHCA), to file a written notice with the Federal
Reserve Board before such person or persons may acquire control of the Company
or the Bank. The Change in Bank Control Act defines "control" as the power,
directly or indirectly, to vote 25% or more of any voting securities or to
direct the management or policies of a bank holding company or an insured bank.
The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See " -- Depository Institution Regulation -- Capital
Requirements."
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Act") was enacted to ease restrictions on
interstate banking. Effective September 29, 1995, the Act allows the Federal
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Reserve Board to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Act also prohibits the Federal Reserve Board from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. The Act does not affect the
authority of states to limit the percentage of total insured deposits in the
state which may be held or controlled by a bank or bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, the Act authorizes the federal banking agencies,
effective June 1, 1997, to approve interstate merger transactions without regard
to whether such transaction is prohibited by the law of any state, unless the
home state of one of the banks opts out of the Act by adopting a law after the
date of enactment of the Act and prior to June 1, 1997 that applies equally to
all out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. North Carolina has enacted legislation permitting interstate
banking transactions. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above.
The Act authorizes the FDIC to approve interstate branching de novo by
state banks only in states which specifically allow for such branching. The
Riegle-Neal Act also requires the appropriate federal banking agencies to
prescribe regulations by June 1, 1997 which prohibit any out-of-state bank from
using the interstate branching authority primarily for the purpose of deposit
production. These regulations must include guidelines to ensure that interstate
branches operated by an out-of-state bank in a host state are reasonably helping
to meet the credit needs of the communities which they serve.
Dividends. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the company's capital needs, asset quality and overall
financial condition. The Federal Reserve Board also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board pursuant to FDICIA, the Federal
Reserve Board may prohibit a bank holding company from paying any dividends if
the holding company's bank subsidiary is classified as "undercapitalized". See
"-- Depository Institution Regulation -- Prompt Corrective Regulatory Action."
Bank holding companies are required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the their
consolidated retained earnings. The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would constitute an
unsafe or unsound practice or would violate any law, regulation, Federal Reserve
Board order, or any condition imposed by, or written agreement with, the Federal
Reserve Board.
Federal Securities Law
The 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 Stock Conversion. Upon completion of the
Stock Conversion, the Common Stock will be registered with the SEC under the
Securities
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Exchange Act of 1934, as amended (the "Exchange Act"). The Company will then be
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the Exchange Act.
The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by persons
who are not affiliates of the Company may be resold without registration. Shares
purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Company or (ii) the average
weekly volume of trading in such shares during the preceding four calendar
weeks. Provision may be made in the future by the Company to permit affiliates
to have their shares registered for sale under the Securities Act under certain
circumstances. There are currently no demand registration rights outstanding.
However, in the event the Company at some future time determines to issue
additional shares from its authorized but unissued shares, the Company might
offer registration rights to certain of its affiliates who want to sell their
shares.
TAXATION
General
The Bank files a federal income tax return based on a fiscal year
ending September 30.
Federal Income Taxation
Savings institutions such as the Bank are subject to the provisions of
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") in
the same general manner as other corporations. Through tax years beginning
before December 31, 1995, institutions such as the Bank which met certain
definitional tests and other conditions prescribed by the Internal Revenue Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and "nonqualifying loans", which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon actual loss experience (the
"experience method") or a percentage of taxable income determined without regard
to such deduction (the "percentage of taxable income method"). Under the
experience method, the bad debt deduction for an addition to the reserve for
qualifying real property loans was an amount determined under a formula based
generally on the bad debts actually sustained by a savings institution over a
period of years. Under the percentage of taxable income method, the bad debt
reserve deduction for qualifying real property loans was computed as 8% of a
savings institution's taxable income, with certain adjustments. The Bank
generally elected to use the method which has resulted in the greatest
deductions for federal income tax purposes in any given year.
Legislation that is effective for tax years beginning after December
31, 1995 requires institutions to recapture into taxable income over a six
taxable year period the portion of the tax loan reserve that exceeds the
pre-1988 tax loan loss reserve. The Bank will no longer be allowed to use the
reserve method for tax loan loss provisions, but would be allowed to use the
experience method of accounting for bad debts. There will be no future effect on
net income from the recapture because the taxes on these bad debts reserves has
already been accrued as a deferred tax liability.
The Bank's federal income tax returns have been audited through the
year ended September 30, 1992.
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For additional information, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Impact of New Accounting
Standards" and the financial statements and related notes appearing elsewhere
herein.
State Income Taxation
Under North Carolina law, the corporate income tax currently is 7.75%
of federal taxable income as computed under the Internal Revenue Code, subject
to certain prescribed adjustments. This rate will be reduced to 7.50% for 1997,
7.25% for 1998, 7.00% for 1999 and 6.9% for 2000 and thereafter. 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. An annual state franchise tax is imposed at a rate
of .15% applied to the greatest of the institutions (i) capital stock, surplus
and undivided profits, (ii) investment in tangible property in North Carolina or
(iii) appraised valuation of property in North Carolina.
For additional information regarding taxation, see Notes 1 and 9 of
Notes to Consolidated Financial Statements.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company consists of the same individuals
who serve as directors of the Bank. Their biographical information is set forth
under "Management of the Bank -- Directors." The Board of Directors of the
Company is divided into three classes. Directors of the Company will serve for
three year terms or until their successors are elected and qualified, with
approximately one-third of the directors being elected at each annual meeting of
stockholders, beginning with the first annual meeting of stockholders following
the Stock Conversion. Messrs. Vann and Gibbs have terms of office expiring at
the 1998 annual meeting, Messrs. Parker and Singleton have terms of office
expiring at the 1999 annual meeting, and Messrs. Howdy, Buckman and Holscher
have terms of office expiring at the 2000 annual meeting. Under the Company's
bylaws, no person over 80 years of age shall be eligible for election or
appointment to the Company's Board of Directors, and no director may serve after
the annual meeting of stockholders immediately following reaching 80 years of
age.
The following individuals hold the offices in the Company set forth
below opposite their names.
Name Title
---- -----
Thomas A. Vann President
William L. Wall Executive Vice President and Chief
Operating Officer
Kristie W. Hawkins Treasurer and Controller
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors of the Company.
Since the formation of the Company, none of the executive officers,
directors or other personnel have received remuneration from the Company.
Information concerning the principal occupations and employment of the directors
and executive officers of the Company during the past five years is set forth
under "Management of the Bank -- Directors" and "-- Executive Officers Who Are
Not Directors." Executive officers and directors of the Company will be
compensated as described below under "Management of the Bank."
MANAGEMENT OF THE BANK
Directors
Because the Bank is a mutual savings bank, its members have elected its
Board of Directors. Upon completion of the Stock Conversion, the directors of
the Bank immediately prior to the Stock Conversion will
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continue to serve as directors of the Converted Bank and then the Commercial
Bank. Currently, the term of each director is one year, and all of the members
of the Board of Directors stand for election each year. This will continue to be
the case for the Commercial Bank following the Bank Conversion. Because the
Company will own all the issued and outstanding capital stock of the Commercial
Bank following the Conversion, the Board of Directors of the Company will elect
the directors of the Commercial Bank.
The following table sets forth certain information with respect to the
individuals who serve currently as members of the Bank's Board of Directors.
There are no arrangements or understandings between the Bank and any director
pursuant to which such person has been elected a director of the Bank, and no
director is related to any other director or executive officer by blood,
marriage or adoption.
<TABLE>
<CAPTION>
Age at
September 30,
Name 1996 Director Since Term to Expire
- ---- ------- -------------- --------------
<S> <C> <C> <C>
Edmund T. Buckman, Jr. 70 1975 1997
Linley H. Gibbs, Jr. 65 1985 1997
Fred N. Holscher 48 1985 1997
Frederick H. Howdy 64 1975 1997
Charles E. Parker, Jr. 60 1971 1997
Marshall T. Singleton 57 1990 1997
Thomas A. Vann 47 1979 1997
</TABLE>
Presented below is certain information concerning the directors of the
Bank. Unless otherwise stated, all directors have held the positions indicated
for at least the past five years.
Edmund T. Buckman, Jr. has been retired since 1994. Prior to his
retirement, Mr. Buckman was the owner of Buckman Auto Supply in Washington,
North Carolina.
Linley H. Gibbs, Jr. has been retired since 1992. Prior to his
retirement, Mr. Gibbs served as a general manager with Hamilton Beach, an
appliance manufacturing company in Washington, North Carolina.
Fred N. Holscher is a partner with the Washington, North Carolina law
firm of Rodman, Holscher, Francisco & Peck, P.A. and has been with the firm
since 1973.
Frederick H. Howdy is President of Drs. Freshwater and Howdy P.A., a
dental health care corporation of North Carolina. Prior to that, he was a
dentist in Washington, North Carolina for 36 years.
Charles E. Parker, Jr. is a Vice President of the Robinson Insurance
Agency in New Bern. He joined the agency in 1989.
Marshall T. Singleton has been a co-owner of B.E. Singleton & Sons, a
highway construction firm since 1960.
Thomas A. Vann joined the Bank in 1972 as Assistant Manager. Mr. Vann
was promoted to a number of positions prior to becoming President of the Bank in
1977.
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<PAGE>
Executive Officers Who Are Not Directors
The following sets forth information with respect to executive officers
of the Bank who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
Age at
September 30,
Name 1996 Title with the Bank
- ---- ------------ -------------------
<S> <C> <C>
William L. Wall 50 Executive Vice President and Chief Operating Officer
John B. Burgess, Sr. 60 Senior Vice President -- Commercial Lending and
Credit Administration
William R. Outland 59 Vice President -- Consumer Lending
Walter P. House 51 Vice President -- Mortgage Operations
Sherry L. Correll 41 Vice President -- Savings and Deposit Administration
Mary R. Boyd 46 Vice President -- Loan Servicing
Kristie W. Hawkins 31 Treasurer, Controller
</TABLE>
William L. Wall joined the Bank in 1993 as a Vice President and City
Executive in the Rocky Mount office. Mr. Wall was promoted in 1995 to Executive
Vice President and Chief Operating Officer. He also serves as the Bank's
Secretary. Prior to joining the Bank, Mr. Wall was employed from 1977 to 1993
with Pioneer Savings Bank in Rocky Mount, North Carolina, serving most recently
as Senior Vice President and Chief Financial Officer.
John B. Burgess, Sr. joined the Bank in October, 1992 and currently
serves as Senior Vice President of Commercial Lending and Credit Administration.
Prior to joining the Bank, Mr. Burgess served as Executive Vice President of
Unity Bank in Rocky Mount, North Carolina.
William R. Outland has served as the Bank's Vice President of Consumer
Lending since he joined the Bank in 1983.
Walter P. House joined the Bank in 1990 and currently serves as Vice
President of Mortgage Operations.
Sherry L. Correll is currently the Vice President of Savings and
Deposit Administration. She joined the Bank in 1985.
Mary R. Boyd has been with the Bank since 1983 and currently serves as
a Vice President - Loan Servicing.
Kristie W. Hawkins joined the Bank in 1982. Prior to being promoted to
her current position of Controller and Treasurer, she served as the Bank's
Assistant Treasurer and Secretary as well as accounting department supervisor.
Committees of the Board of Directors
The Board of Directors of the Bank meets monthly and may have
additional special meetings. During the year ended September 30, 1996, the Board
met 14 times. No director attended fewer than 75% in the aggregate of the total
number of Board meetings held during the year ended September 30, 1996 and the
total number of meetings held by committees on which he served during such
fiscal year. The Bank's Board of Directors has standing Audit, Executive and
Nominating Committees.
The Board of Directors' Audit Committee consists of Directors Buckman,
Singleton and Parker, who serves as Chairperson. The Audit Committee did not
meet during the year ended September 30, 1996, but the full Board of Directors
met once as the Audit Committee during the year ended September 30, 1996. The
function of the Audit Committee is to examine and approve the audit report
prepared by the independent auditors of the Bank, to review
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<PAGE>
and recommend the independent auditors to be engaged by the Bank, to review the
internal audit function and internal accounting controls, and to review and
approve audit policies.
The Board of Directors' Executive Committee consists of Directors Vann,
Holscher, Gibbs and Howdy who serves as Chairperson. The Executive Committee,
among other things, evaluates the compensation and benefits of the directors,
officers and employees, recommends changes, and monitors and evaluates employee
performance. The Executive Committee reports its evaluations and findings to the
full Board of Directors and all compensation decisions are ratified by the full
Board of Directors. Directors of the Bank who also are officers of the Bank
abstain from discussion and voting on matters affecting their compensation. The
Executive Committee is empowered to exercise all of the authority of the Board
when the Board is not in session. The Executive Committee met seven times during
the fiscal year ended September 30, 1996.
Board of Directors' Nominating Committee consists of Directors Howdy,
Holscher, Singleton and Vann who serves as Chairperson. The Committee met once
during the year ended September 30, 1996 for the purpose of considering
potential nominees to the Board of Directors. Following the Conversion, it is
expected that the Company's full Board of Directors will act as a nominating
committee for selecting the management nominees for election as directors of the
Company in accordance with the Company's Bylaws. In its deliberations, the
Board, functioning as a nominating committee, considers the candidate's
knowledge of the banking business and involvement in community, business and
civic affairs, and also considers whether the candidate would provide for
adequate representation of its market area.
In addition to the above listed committees, the Bank also has Funding,
CRA, Investment, Bonus, Expansion and Loan Committees.
Executive Compensation
The following table sets forth the cash and noncash compensation for
the last fiscal year awarded to or earned by the President. No other executive
officer of the Company earned salary and bonus in fiscal 1996 exceeding $100,000
for services rendered in all capacities to the Bank.
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------------------
Name and Fiscal Other Annual All Other
Principal Position Year Salary Bonus Compensation (1) Compensation
- ------------------ ---- ------ ----- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Thomas A. Vann 1996 $135,000 $55,000 -- 12,675 (2)
President
</TABLE>
- ---------------
(1) Executive officers of the Bank receive indirect compensation in the
form of certain perquisites and other personal benefits. The amount of
such benefits received by the named executive officer in fiscal 1996
did not exceed 10% of the executive officer's salary and bonus.
(2) Includes $4,469 in matching contributions under the Bank's 401(k) Plan
and $8,206 in Board of Directors and Committee fees.
Director Compensation
Each member of the Bank's Board of Directors receives a fee of $1,150
per each regular and special Board meeting attended and $75 for each Board
committee meeting attended. Directors also will participate in certain benefit
plans of the Company and the Bank. See " -- Certain Benefit Plans and
Agreements."
90
<PAGE>
Certain Benefit Plans and Agreements
In connection with the Stock Conversion, the Company's and the Bank's
Boards of Directors have approved certain stock incentive plans and employment
and severance and other agreements. In addition, the Bank has an existing
defined contribution plan and defined benefit plan, as well as director
retirement and deferred compensation plans, which will remain in effect after
the Stock Conversion.
Basis for Awards of Benefits and Compensation. The Company's and the
Bank's Boards of Directors have evaluated and approved the terms of the
employment agreement, severance agreements, and other benefits described below.
In its review of the benefits and compensation of the executive officers and the
terms of the employment agreement and severance agreements, the Boards of
Directors considered a number of factors, including the experience, tenure and
ability of the executive officers, their performance for the Bank during their
tenure and the various legal and regulatory requirements regarding the levels of
compensation which may be paid to employees of savings associations.
91
<PAGE>
The following table summarizes existing and proposed plans and
agreements in which directors, including the executive officer named in the
table under " -- Executive Compensation," will participate following the Stock
Conversion. With respect to the named executive officer, the table does not
include benefit plans such as the proposed ESOP and the existing Thrift Plan and
Pension Plan which are generally available to all full-time employees. A
narrative description of each plan and agreement follows the table.
<TABLE>
<CAPTION>
==================================================================================================================================
Benefit Plan or Agreement(1)
==================================================================================================================================
Directors'
Stock Option Management Supplemental Supplemental Deferred
Name of Director or and Incentive Recognition Income Income Plan Compensation
Executive Officer Plan(2) Plan(2) Agreement Agreement Plan Agreement
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Edmund T. Buckman, Jr. X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Linley H. Gibbs, Jr. X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Fred N. Holscher X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Frederick H. Howdy X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Charles E. Parker, Jr. X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Marshall T. Singleton X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Thomas A. Vann X X X X X
==================================================================================================================================
<CAPTION>
========================================================================================================
========================================================================================================
Directors'
Directors' Deferred
Name of Director or Retirement Payment Employment
Executive Officer Plan Agreement Agreement Agreements
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Edmund T. Buckman, Jr. X X
- --------------------------------------------------------------------------------------------------------
Linley H. Gibbs, Jr. X X
- --------------------------------------------------------------------------------------------------------
Fred N. Holscher X X
- --------------------------------------------------------------------------------------------------------
Frederick H. Howdy X X
- --------------------------------------------------------------------------------------------------------
Charles E. Parker, Jr. X X
- --------------------------------------------------------------------------------------------------------
Marshall T. Singleton X
- --------------------------------------------------------------------------------------------------------
Thomas A. Vann X X X
========================================================================================================
</TABLE>
(1) X indicates that the Director or named Executive Officer participates
in the indicated plan or agreement.
(2) Assuming the plan is approved by the Company's stockholders. Awards
under these plans have not yet been determined.
92
<PAGE>
Thrift Plan. The Bank maintains a defined contribution plan (the
"Thrift Plan"), which is designed to qualify under Sections 401(a) and 401(k) of
the Code. An employee is eligible to participate in the Thrift Plan on or after
having attained age 21 and having worked one year from the date of hire (or
during a calendar year). The Thrift Plan permits each participant to make
before-tax contributions, through regular salary reduction, in amounts ranging
between 1% and 15% of the participant's monthly salary. The Bank makes monthly
contributions, matching 50% of each participant's before-tax contributions (up
to 6%) of his or her compensation, subject to discrimination rules applicable to
highly compensated individuals. Participants are at all times 100% vested in
their contributions to the Thrift Plan. They become 25% vested in the employer
contributions upon completion of each of four years of service, provided that
they become 100% vested upon their termination of employment due to death,
disability or attainment of age 65. Benefits are paid at the time of a
participant's death, retirement, disability or termination of employment and,
under limited circumstances, may be withdrawn prior to the participant's
termination of service. Account balances are paid upon the participant's
election, either in a lump sum or in installments. Contributions are not taxable
to participating employees until such funds are distributed to them. The
earnings attributable to a participant's account accumulate tax free until they
are distributed to the participant or his or her beneficiary. The Thrift Plan is
being amended in connection with the Stock Conversion to allow participants to
direct that all or part of their account balances be invested in Common Stock.
Voting rights for such stock, to be held in trust for participants, will be
exercisable by the participants. The Thrift Plan is intended to comply with all
the rights and protection afforded employees pursuant to the Employee Retirement
Income Security Act of 1974, as amended.
Pension Plan. The Bank sponsors a defined benefit plan (the "Pension
Plan") in which employees who have one year of service and have reached age 21
are eligible to participate. Participating employees become 100% vested in their
right to benefits upon completing five years of service, except that
participants become 100% vested upon attaining age 65, regardless of years of
service. If vested, a participant in the Pension Plan will receive, after
completion of 30 or more years of service, an annual normal retirement benefit
at age 65 equal to the sum of (a) 37.5% of the participant's average salary over
his highest five years of compensation up to the "covered compensation level"
(as defined in the Pension Plan), plus (b) 52.5% of the participant's average
salary of his highest five years of compensation over the covered compensation
level. Upon termination of employment at or after age 65 before completion of 30
years of service, the retirement benefit will be multiplied by the ratio the
employee's actual years of service bear to 30 years. On an actuarially reduced
basis, the Pension Plan also provides for both early retirement benefits,
beginning at age 55, and death benefits. The Bank makes all contributions to the
Pension Plan. For the year ended September 30, 1996, the Pension Plan was fully
funded, and the Bank was not required to make any contribution. At September 30,
1996, Mr. Vann had approximately 24 years of credited service under the Pension
Plan. As of September 30, 1996, the expected annual benefit payable to Mr. Vann
at normal retirement age (65) was $40,800.
The following table illustrates annual pension benefits at age 65 under
the Pension Plan at various levels of compensation and years of service,
assuming 100% vesting of benefits and retirement at September 30, 1996. All
retirement benefits illustrated in the table below are without regard to any
Social Security benefits to which a participant might be entitled. The Pension
Plan is not subject to offset for Social Security benefits.
<TABLE>
<CAPTION>
Years of Service
Average Final -------------------------------------------------------------------------
Compensation 15 20 25 30 35
------------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
125,000 $30,700 $41,000 $51,200 $61,500 $61,500
150,000 37,300 49,700 62,200 74,600 74,600
175,000 43,900 58,500 73,100 87,700 87,700
200,000 50,400 67,200 84,100 100,900 100,900
225,000 57,000 76,000 95,000 114,000 114,000
250,000 63,600 84,700 105,900 127,100 127,100
300,000 76,700 102,200 127,800 153,400 153,400
</TABLE>
93
<PAGE>
1996 Stock Option Plan. The Board of Directors of the Company intends
to submit the Option Plan for approval to stockholders at a meeting which is
expected to be held not earlier than six months following completion of the
Stock Conversion. No options shall be awarded under the Option Plan unless
stockholder approval is obtained.
The purpose of the Option Plan is to provide additional incentive to
directors and employees by facilitating their purchase of Common Stock. The
Option Plan will have a term of 10 years from the date of its approval by the
Company's stockholders, after which no awards may be made, unless the plan is
earlier terminated by the Board of Directors of the Company. Pursuant to the
Option Plan, a number of shares equal to 10% of the shares of Common Stock that
are issued in the Stock Conversion would be reserved for future issuance by the
Company, in the form of newly issued shares or treasury shares or shares held in
a grantor trust, upon exercise of stock options ("Options"). If Options should
expire, become unexercisable or be forfeited for any reason without having been
exercised or having become vested in full, the shares of Common Stock subject to
such Options would be available for the grant of additional Options under the
Option Plan, unless the Option Plan shall have been terminated.
It is expected that the Option Plan will be administered by a committee
(the "Option Committee") of at least two directors of the Company who (i) are
designated by the Board of Directors and (ii) are Non-employee Directors within
the meaning of the federal securities laws. It is expected that the Option
Committee initially will consist of the full Board of Directors. The Option
Committee will select the employees to whom Options are to be granted, the
number of shares to be subject to such Options, and the terms and conditions of
such Options (provided that any discretion exercised by the Option Committee
must be consistent with the terms of the Option Plan). Options will be available
for grants to directors and key employees of the Company and any subsidiaries,
except that non-employee directors will not be eligible to receive discretionary
Options. Although no specific award determinations have been made, consistent
with applicable regulations, if the Option Plan is implemented within one year
following completion of the Stock Conversion, no employee will receive Options
covering more than 25% of the shares reserved for issuance under the Option
Plan, and non-employee directors will not receive awards individually exceeding
5% of the shares available under the MRP or 30% in the aggregate. The initial
grant of Options under the Option Plan is expected to occur on the date the
Option Plan receives stockholder approval.
It is intended that Options granted under the Option Plan will
constitute both incentive stock options (Options that afford favorable tax
treatment to recipients upon compliance with certain restrictions pursuant to
Section 422 of the Code and that do not result in tax deductions to the Company
unless participants fail to comply with Section 422 of the Code) ("ISOs"), and
Options that do not so qualify ("Non-ISOs"). The exercise price for Options may
not be less than 100% of the fair market value of the shares on the date of the
grant. The Option Plan permits the Option Committee to impose transfer
restrictions, such as a right of first refusal, on the Common Stock that
optionees may purchase. Options may be transferred to family members or trusts
under specified circumstances, but may not otherwise be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution.
No Option shall be exercisable after the expiration of ten years from
the date it is granted; provided, however, that in the case of any employee who
owns more than 10% of the outstanding Common Stock at the time an ISO is
granted, the option price for the ISO shall not be less than 110% of the fair
market value of the shares on the date of the grant, and the ISO shall not be
exercisable after the expiration of five years from the date it is granted. If
the Option Plan is implemented within one year after completion of the Stock
Conversion, Options are expected to become exercisable at the rate of 20% per
year, beginning one year from the date of grant. If an optionee dies or
terminates service due to disability while serving as an employee or
non-employee director, all unvested Options will become 100% vested and
immediately exercisable. If the Option Plan is implemented more than one year
after the completion of the Stock Conversion, (i) each Option is expected to
become exercisable at the rate of 33 1/3% per year, beginning one year from the
grant date, and (ii) the Options may also accelerate to 100% upon an optionee's
retirement or termination of service in connection with a change in control. An
otherwise unexpired Option shall, unless otherwise determined by the Option
Committee, cease to be exercisable upon (i) an employee's termination of
employment for "just cause" (as defined in the Option Plan), (ii) the date three
months after an employee terminates service for a reason other than just cause,
death, or disability, (iii) the date one year
94
<PAGE>
after an employee terminates service due to disability, or (iv) the date two
years after termination of such service due to the employee's death. Options
granted to non-employee directors will automatically expire one year after
termination of service on the Board of Directors (two years in the event of
death and disability).
The Company will receive no monetary consideration for the granting of
Options under the Option Plan, and will receive no monetary consideration other
than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option exercise price may be paid in cash or Common
Stock or a combination of cash and Common Stock. Upon an optionee's exercise of
any Option, the Company intends to pay the optionee a cash amount equal to any
dividends declared on the underlying shares between the date of grant and the
date of exercise of the Option. The exercise of Options will be subject to such
terms and conditions established by the Option Committee as are set forth in a
written agreement between the Option Committee and the optionee (to be entered
into at the time an Option is granted). In the event that the fair market value
per share of the Common Stock falls below the option price of previously granted
Options, the Option Committee will have the authority, with the consent of the
optionee, to cancel outstanding Options and to reissue new Options at the then
current fair market price per share of the Common Stock.
At any time following consummation of the Stock Conversion, the Bank or
the Company may contribute sufficient funds to a grantor trust to purchase, and
such trust may purchase, a number of shares of Common Stock equal to 10% of the
shares issued in the Stock Conversion. Such shares would be held by the trust
for issuance to option holders upon the exercise of options in the event the
Option Plan is implemented. Whether such shares are purchased, and the timing of
such purchases, will depend on market and other conditions and the alternative
uses of capital available to the Company.
Employee Stock Ownership Plan. The Company's Board of Directors has
adopted an employee stock ownership plan ("ESOP"), effective as of October 1,
1996. Employees of the Company and its subsidiaries who have attained age 21 and
completed one year of service will be eligible to participate in the ESOP,
provided that any employee who is employed full-time on the closing date of the
Stock Conversion will automatically become a participant on October 1, 1996.
Directors who are not employees will not participate in the ESOP. The Company
will submit an application to the IRS for a letter of determination as to the
tax-qualified status of the ESOP. Although no assurances can be given, the
Company expects the ESOP to receive a favorable letter of determination from the
IRS.
The ESOP is to be funded by contributions made by the Company or the
Bank in cash or shares of Common Stock. The ESOP intends to borrow funds from
the Company in an amount sufficient to purchase 8% of the Common Stock issued in
the Stock Conversion. This loan will be secured by the shares of Common Stock
purchased and earnings thereon. Shares purchased with such loan proceeds will be
held in a suspense account for allocation among participants as the loan is
repaid. The Bank expects to contribute sufficient funds to the ESOP to repay
such loan over a ten-year period, plus such other amounts as the Company's Board
of Directors may determine in its discretion.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of their annual wages subject
to federal income tax withholding, plus any amounts withheld under a plan
qualified under Sections 125 or 401(k) of the Code and sponsored by the Company
or the Bank. Participants must be employed at least 500 hours in a plan year in
order to receive an allocation. Each participant's vested interest under the
ESOP is determined according to the following schedule: 0% for less than three
years of service with the Company or the Bank; 100% for three or more years of
service. For vesting purposes, a year of
95
<PAGE>
service means any plan year in which an employee completes at least 1,000 hours
of service (whether before or after the ESOP's October 1, 1996 effective date).
Vesting accelerates to 100% upon a participant's attainment of age 65, death or
disability or a change in control. Forfeitures will be reallocated to
participants on the same basis as other contributions. Benefits are payable upon
a participant's retirement, death, disability or separation from service and
will be paid in a lump sum in whole shares of Common Stock (with cash paid in
lieu of fractional shares). Benefits paid to a participant in Common Stock that
is not publicly traded on an established securities market will be subject both
to a right of first refusal by the Company and to a put option by the
participant. Dividends paid on allocated shares are expected to be paid to
participants, and dividends on unallocated shares are expected to be used to
repay the ESOP loan.
It is expected that the Company will administer the ESOP and that
Directors Gibbs, Holscher, and Howdy will be appointed as trustees of the ESOP
(the "ESOP Trustees"). The ESOP Trustees must vote all allocated shares held in
the ESOP in accordance with the instructions of the participants. Unallocated
shares and allocated shares for which no timely direction is received will be
voted by the ESOP Trustees in the same proportion as the participant-directed
voting of allocated shares.
Management Recognition Plan. The Company's Board of Directors intends
to submit the MRP for approval to stockholders at a meeting of the Company's
stockholders, which is expected to be held not earlier than six months following
completion of the Stock Conversion. The purpose of the MRP is to enable the
Company and the Bank to retain personnel of experience and ability in key
positions of responsibility. Those eligible to receive benefits under the MRP
will be such directors and key employees as are selected by a committee the
Company's Board of Directors (the "MRP Committee"). It is expected that the MRP
Committee will initially consist of the Company's full Board of Directors. The
Company's directors are expected to act by majority as trustees of the trust
associated with the MRP (the "MRP Trust"). The trustees of the MRP Trust (the
"MRP Trustees") will have the responsibility to hold and invest all funds
contributed to the MRP Trust. Shares held in the MRP Trust will be voted by the
MRP Trustees in the same proportion as the trustee of the Company's ESOP trust
votes Common Stock held therein, and will be distributed as the award vests.
At any time following consummation of the Stock Conversion, the Bank or
the Company will contribute sufficient funds to the MRP Trust so that the MRP
Trust can purchase a number of shares of Common Stock equal to up to a 4% of the
number of shares of Common Stock issued in the Stock Conversion. Whether such
shares purchased will be purchased in the open market or newly issued by the
Company, and the timing of such purchases, will depend on market and other
conditions and the alternative uses of capital available to the Company. The
compensation expense for the Company for MRP awards will equal the fair market
value of the Common Stock on the date of the grant pro rated over the years
during which vesting occurs. The shares awarded pursuant to the MRP will be in
the form of awards which may be transferred to family members or trusts under
specified circumstances, but may not otherwise be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution. If the MRP is implemented within one year
following completion of the Stock Conversion, the MRP awards will be payable
over a period specified by the Board of Directors, which shall not be faster
than 20% per year, beginning one year from the date of the award. Participants
in the MRP may elect to defer all or a percentage of their MRP awards that would
have otherwise been transferred to the participants upon the vesting of said
awards. Dividends on unvested shares will be held in the MRP trust for payment
as vesting occurs. All shares subject to an MRP award held by a participant
whose service with the Company or the Bank terminates due to death or
disability, shall be deemed 100% vested as of the participant's last day of
service with the Bank or Company. If the MRP is implemented more than one year
after the closing of the Stock Conversion, it is expected that the awards will
also become 100% vested upon a participant's retirement or termination of
service with the Bank or the Company in connection with a change in control of
the Bank or the Company. If a participant terminates employment for reasons
other than death or disability (or retirement or a change in control, if
applicable), he or she forfeits all rights to the allocated shares under
restriction.
The Company's Board of Directors can terminate the MRP at any time,
and, if it does so, any shares not allocated will revert to the Company.
Although no specific award determinations have been made, if the MRP is
implemented within one year following consummation of the Stock Conversion, no
employee will receive MRP
96
<PAGE>
awards covering more than 25% of the shares reserved for issuance under the MRP,
and non-employee directors will not receive awards individually exceeding 5% of
the shares available under the MRP or 30% in the aggregate. The initial grant of
awards under the MRP is expected to occur on the date the MRP receives
stockholder approval. No awards shall be made prior to stockholder approval of
the MRP.
Director Retirement and Deferred Compensation Plans. The Bank has
entered into a Supplemental Income Agreement (as amended, the "SIA") with
Director Vann. Pursuant to the terms of the SIA, Mr. Vann may elect to defer a
portion of his cash compensation on a monthly basis. Upon the earlier of Mr.
Vann's (i) attainment of age 65 ("SIA Retirement Age") and (ii) the date of Mr.
Vann's retirement before the SIA Retirement Age but after attaining age 55 and
completing at least 29 years of service with the Bank ("SIA Early Retirement
Date"), the Bank shall pay Mr. Vann (in lieu of cash compensation otherwise
receivable) an amount equal to $19,250 ("SIA Retirement Amount") annually for a
period of 15 years. This amount shall be increased by 5% for every full year of
service after July 1, 1990, provided that there will be no increases in benefits
(i) after Mr. Vann reaches age 65 and (ii) for more than 10 years of additional
service.
In the event of Mr. Vann's death after becoming entitled to receive the
SIA Retirement Amount but before any payments have been made, his beneficiary
shall receive all remaining payments. In the event of Mr. Vann's death prior to
attaining age 65, the Bank will pay his beneficiary $19,250 annually for 15
years. In the event of Mr. Vann's termination of employment by reason other than
death, retirement upon attaining age 65, or upon the occurrence of the SIA Early
Retirement Date, Mr. Vann (or his beneficiary) shall be entitled to receive, on
the earlier of his attainment of age 65 and his death, a percentage of the SIA
Retirement Amount. This percentage will be based on Mr. Vann's full years of
service up to the date of his termination, beginning with 0% for less than 20
years of service, and increased in 5% increments (from 50% to 100%) for every
year of service thereafter, starting with 50% at 20 years of service up to 100%
for 29 years of service. In the event that Mr. Vann's employment terminates for
any reason other than his death, or retirement on the SIA Early Retirement Date
prior to the time he is first entitled to receive payments under the SIA, Mr.
Vann shall be entitled to receive such percentages of his SIA Retirement Amount,
as discussed above, when he reaches age 55 or on upon his death, whichever is
earlier. In the event that a termination of protected employment occurs (i) on
or before the SIA Retirement Date or SIA Early Retirement Date and (ii)
following a "change in control" (as defined below), then Mr. Vann shall be
deemed to have retired as of the SIA Early Retirement Date, except that the SIA
Early Retirement Date shall be deemed to be the date of the change in control.
The Bank has entered into a Supplemental Income Plan Agreement (as
amended, the "SIPA") with Director Vann. Pursuant to the terms of SIPA, if Mr.
Vann retires from employment with the Bank either at or after the age of 65 (the
"Retirement Date") or at or after age 55 with at least 10 years of service with
the Bank after January 1, 1994 (the "Early Retirement Date"), the Bank shall
pay, in equal monthly installments, a minimum sum of $40,000 ("SIPA Retirement
Amount") per annum for a period of 15 years. This amount shall increase by 5%
for each full year of service completed by Mr. Vann after January 1, 1994.
In the event of Mr. Vann's death after becoming entitled to receive
payments but before all payments have been made, the Bank will make the
remaining payments to his designated beneficiary. In the event of Mr. Vann's
death before the Retirement Date or Early Retirement Date, the Bank shall make
payments in the same manner as if he had retired. In the event that Mr. Vann
terminates his service for reasons other than (i) his retirement on the Early
Retirement Date, (ii) a change in control, (iii) "termination of protected
employment" (as defined below), or (iv) his death, and the termination occurs
before he is entitled to receive payments, Mr. Vann shall be entitled to receive
a percentage of his SIPA Retirement Amount upon his attainment of age 55 or
prior death. This percentage will be based on Mr. Vann's full years of service
after January 1, 1994, and increased in 10% increments (from 10% to 100%) for
every year of service after January 1994, starting with 10% at one year of
service up to 100% for 10 years of service. Payments shall be made in equal
monthly installments. In the event that, prior to the Retirement Date or Early
Retirement Date, a "termination of protected employment" occurs following a
change in control, Mr. Vann shall be deemed to have retired as of his Early
Retirement Date, and the Early Retirement Date shall be considered the date of
the change in control.
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The Bank has entered into a Directors' Deferred Compensation Plan
Agreement (as amended, the "Agreement") with each of Directors Buckman, Howdy,
Gibbs, Parker, Singleton, Holscher and Vann (the "Directors"). Pursuant to the
terms of the Agreements, the Directors have agreed to defer the receipt of their
Directors' fees in the amount of $350 per month, beginning on January 1, 1994
and ending on December 31, 1998. In exchange for the agreement to defer fees,
the Directors shall receive certain retirement benefits (described below) upon
the later to occur of their 65th birthday and January 1, 1999 (the "Qualifying
Date"). Upon the Qualifying Date, the Bank shall pay a Director a certain amount
("Deferred Amount") per month for 120 months. The Deferred Amount for Directors
Buckman, Howdy, Gibbs, Parker, Singleton, Holscher and Vann equals $513, $942,
$942, $1,533, $1,975, $4,088, and $4,818, respectively.
In the event of a Director's death after becoming entitled to receive
the Deferred Amount but before all of the payments have been made, the Bank
shall make the remaining payments to the Director's beneficiary. Similarly, in
the event of a Director's death while serving as a Director but before the
Qualifying Date, the Bank will pay the Deferred Amount per month for 120 months
to the Director's beneficiary. In the event that a Director voluntarily resigns
after January 1, 1996 but before the Qualifying Date, then the Director will
receive a percentage of the monthly Deferred Amount. This percentage varies
among the different Agreements, but is generally determined by a formula based
on the Director's full years of service after January 1, 1994. The Deferred
Amounts generally vest over a period of five to ten years under the different
Agreements. In the event that the Director's service is terminated on or before
the Qualifying Date for a reason other than death or voluntary resignation, then
he shall be paid the vested monthly Deferred Amount, and the Qualifying Date
shall be deemed to be the date of the Director's termination of service.
The Bank has entered into a Directors' Retirement Plan Agreement, as
amended ("Retirement Plan") with Directors Buckman, Howdy, Parker, Singleton,
Holscher, Gibbs and Vann. Under the terms of the Retirement Plan, the Bank will
pay a director a monthly amount (the "Retirement Plan Amount") for a period of
120 months beginning upon the later to occur of the director's 70th birthday and
January 1, 1999 ("Retirement Plan Qualifying Date"). Under the Retirement Plan,
Directors Vann, Buckman, Howdy, Parker, Singleton, Holscher and Gibbs each will
receive $2,000 per month.
In the event of a director's death prior to January 1, 1999, the Bank
will pay the Retirement Plan Amount on a monthly basis for a period of 120
months to the director's beneficiary. Similarly, in the event of a director's
death after becoming entitled to receive the payments under the Retirement Plan
but before all payments have been made, the Bank shall pay the remaining amounts
to the director's beneficiary. In the event that the director voluntarily
resigns prior to January 1, 1999, the director shall be entitled to receive a
percentage of the monthly Retirement Plan Amount. This percentage varies among
the different Retirement Plan agreements, but is generally determined by a
formula based on the director's full years of service after January 1, 1994. The
Retirement Plan Amounts generally vest over a period of five to ten years under
the different agreements. In the event that on or before the Retirement Plan
Qualifying Date the director's service is terminated for any reason within 24
months following a change in control, the Bank will pay the director the monthly
Retirement Plan Amount for a period of 120 months.
The Bank has entered into a deferred compensation agreement entitled
Director's Deferred Payment Agreement (as amended, the "Payment Agreement") with
Directors Buckman, Howdy, Gibbs, Parker, Holscher and Vann. Under the terms of
each Payment Agreement, a director deferred receipt of his director's fees in an
amount equivalent to $291.66 per month over a six-year period. In addition, Mr.
Vann has agreed to defer receipt of his director's fees in the amount of $220.35
per month from September 1, 1995 until the end of his term as a director. In
exchange for the agreement to defer receipt of his director's fees, a director
will receive, upon the earlier of the director's 65th birthday or termination of
service as a director for any reason on or after attaining age 55, a certain
amount ("Payment") per month for a period of 120 months. Directors Buckman,
Howdy, Gibbs, Parker, Holscher, and Vann will receive a monthly Payment of
$1,054, $1,726, $1,610, $2,748, $3,628, and $8,256, respectively.
In the event of a director's death after becoming entitled to receive
monthly Payments but before all Payments have been made, the Bank will pay all
remaining amounts to the director's beneficiary. Similarly, in the event of the
director's death prior to the commencement of his monthly Payments, the Bank
will pay a monthly
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amount for 120 months to the director's beneficiary. In the event that prior to
the commencement of the monthly Payments a director's service is terminated for
any reason other than death, then the director will be entitled to begin
receiving his Payments (beginning on a date to be determined by the Bank, but
not later than the first day of the sixth month following the month in which the
director's 55th birthday, or if earlier, death, occurs).
With respect to all of the deferred compensation and retirement
arrangements discussed above, the timing of the first payments under the
agreements shall be determined by the Bank, provided that such payments shall
commence no later than the first day of the sixth month following the month in
which the event triggering the distribution occurred. In addition, each
arrangement provides that within ten business days after a change in control,
the Bank shall fund, or cause to be funded, a trust in an amount equal to the
present value of all benefits that may become payable under the respective
arrangements, unless the recipient of the benefits has provided a release of any
claims under the agreement. With respect to the above plans and agreements,
"change in control" generally refers to the acquisition, by any person or
entity, of the ownership or power to vote more than 25% of the Bank's or
Company's voting stock, the control of the election of a majority of the Bank's
or the Company's directors, or the exercise of a controlling influence over the
management or policies of the Bank or the Company. In addition, a change in
control occurs when, during any consecutive two-year period, directors of the
Company or the Bank at the beginning of such period ("Continuing Directors")
cease to constitute at least two-thirds of the Board of Directors of the Company
or the Bank, unless the election of replacement directors was approved by at
least two-thirds of the Continuing Directors then in office. "Termination of
protected employment" generally refers to an employee's termination of
employment without just cause, or the employee's voluntary termination of
employment for certain events which have not been consented to in advance by the
employee, including but not limited to a material reduction in base compensation
as in effect on the date of a change in control, the failure of the Bank to
maintain existing or substantially similar employee benefit plans, the
assignment of duties and responsibilities which are other than those normally
associated with the employee's position, a material reduction in the employee's
authority and responsibility, and the failure to elect or re-elect the employee
to the Board of Directors, if he has served on the Board during the term of the
applicable agreement or plan.
With the exception of the Retirement Plan and the SIPA, the cost of
which is funded through payments by the Bank, the cost of all of the director
retirement and deferred compensation plans described above is funded through
deferral of compensation or Board of Director fees otherwise payable to the
beneficiary under the plan or agreement. The deferred amounts are then used to
purchase insurance, and dividends on such insurance in turn are utilized to
purchase additional insurance, which will provide the funds necessary to meet
the Bank's obligations under the plans and agreements when such obligations
become due. The Board of Directors periodically reviews its insurance coverage
to ensure that the coverage is adequate to reimburse the Bank for its
anticipated expenses under the plans and agreements. If the insurance coverage
is found to be inadequate as to a covered director, the Board of Directors may
require the director to defer additional sums to reimburse the Bank for the
purchase of additional insurance or may reduce the retirement benefit.
Under the director retirement and deferred compensation plans,
directors are considered general creditors of the Bank with respect to
retirement benefits and will receive such benefits only if the Bank continues to
be solvent or, if the Bank is insolvent, only to the extent funds remain
following full payment to priority creditors such as depositors and secured
creditors.
Employment Agreements. The Company and the Bank intend to enter into
employment agreements (the "Employment Agreements") under which Thomas A. Vann
(the "Employee") would serve as President of the Bank and President of the
Company. In such capacities, the Employee is responsible for overseeing all
operations of the Bank and the Company, and for implementing the policies
adopted by the Boards of Directors. Such Boards believe that the Employment
Agreements assure fair treatment of the Employee in his career with the Company
and the Bank by assuring him of some financial security. The proposed Employment
Agreements will require FDIC approval prior to becoming effective.
The Employment Agreements will become effective on the date of
completion of the Stock Conversion and will provide for a term of three years,
with an annual base salary equal to the Employee's existing base salary rate
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in effect on the date of Stock Conversion. On each anniversary date of the
commencement of the Employment Agreements, the term of the Employee's employment
will be extended for an additional one-year period beyond the then effective
expiration date, upon a determination by the Board of Directors that the
performance of the Employee has met the required performance standards and that
such Employment Agreements should be extended. The Employment Agreements provide
the Employee with a salary review by the Board of Directors not less often than
annually, as well as with inclusion in any discretionary bonus plans, retirement
and medical plans, customary fringe benefits, vacation and sick leave. The
Employment Agreements shall terminate upon the Employee's death, may terminate
upon the Employee's disability and is terminable by the Bank for "just cause"
(as defined in the Employment Agreements). In the event of termination for just
cause, no severance benefits are available. If the Company or the Bank
terminates the Employee without just cause, the Employee will be entitled to a
continuation of his salary and benefits from the date of termination through the
remaining term of the Employment Agreements plus an additional 12 month's salary
and, at the Employee's election, either continued participation in benefits
plans which the Employee would have been eligible to participate in through the
Employment Agreements' expiration date or the cash equivalent thereof. If the
Employment Agreements are terminated due to the Employee's "disability" (as
defined in the Employment Agreements), the Employee will be entitled to a
continuation of his salary and benefits through the date of such termination,
including any period prior to the establishment of the Employee's disability. In
the event of the Employee's death during the term of the Employment Agreements,
his estate will be entitled to receive his salary through the last day of the
calendar month in which the Employee's death occurred. The Employee is able to
voluntarily terminate his Employment Agreements by providing 90 days' written
notice to the Boards of Directors of the Bank and the Company, in which case the
Employee is entitled to receive only his compensation, vested rights, and
benefits up to the date of termination.
In the event of (i) the Employee's involuntary termination of
employment other than for "just cause" during the period beginning six months
before a change in control and ending on the later of the second anniversary of
the change in control or the expiration date of the Employment Agreements (the
"Protected Period"), (ii) the Employee's voluntary termination within 90 days of
the occurrence of certain specified events occurring during the Protected Period
which have not been consented to by the Employee, or (iii) the Employee's
voluntary termination of employment for any reason within the 30-day period
beginning on the date of the change in control, the Employee will be paid within
10 days of such termination (or the date of the change in control, whichever is
later) an amount equal to the difference between (i) 2.99 times his "base
amount," as defined in Section 280G(b)(3) of the Internal Revenue Code, and (ii)
the sum of any other parachute payments, as defined under Section 280G(b)(2) of
the Internal Revenue Code, that the Employee receives on account of the change
in control. "Change in control" generally refers to the acquisition, by any
person or entity, of the ownership or power to vote more than 25% of the Bank's
or Company's voting stock, the control of the election of a majority of the
Bank's or the Company's directors, or the exercise of a controlling influence
over the management or policies of the Bank or the Company. In addition, under
the Employment Agreements, a change in control occurs when, during any
consecutive two-year period, directors of the Company or the Bank at the
beginning of such period cease to constitute two-thirds of the Board of
Directors of the Company or the Bank, unless the election of replacement
directors was approved by a two-thirds vote of the initial directors then in
office. The Employment Agreement with the Bank provides that within 10 business
days of a change in control, the Bank shall fund, or cause to be funded, a trust
in the amount of 2.99 times the Employee's base amount, that will be used to pay
the Employee amounts owed to him. The aggregate payment that would be made to
Mr. Vann assuming his termination of employment under the foregoing
circumstances at September 30, 1996 would have been approximately $412,620.
These provisions may have an anti-takeover effect by making it more expensive
for a potential acquiror to obtain control of the Company. For more information,
see "Certain Anti-Takeover Provisions in the Certificate of Incorporation and
Bylaws -- Additional Anti-Takeover Provisions." In the event that the Employee
prevails over the Company and the Bank, or obtains a written settlement, in a
legal dispute as to the Employment Agreement, he will be reimbursed for his
legal and other expenses.
Change-in-Control Protective Agreements. The Company and the Bank
intend to enter into severance agreements (the "Severance Agreements") with
Officers Boyd, Correll, Hawkins, House, and Outland (collectively, the
"Employees"). The Severance Agreements will have a term beginning on the date of
completion of the Stock Conversion and ending on the earlier of (a) 12 months
after the date of completion of the Stock Conversion, and (b) the date on which
one of the Employees terminates employment with the Bank, provided that an
Employee shall be
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entitled to collect severance benefits under the Severance Agreement in the
event of the Employee's (a) voluntary termination of employment (i) within 30
days following a change in control or (ii) within 90 days of certain specified
events that both occur during the Protected Period and constitute Good Reason,
or (b) involuntary termination of employment for any reason other than "just
cause" during the Protected Period. "Change in control," "Good Reason," and
"Protected Period" have the same meaning under the Severance Agreements and the
Employment Agreements (see above). On each annual anniversary date from the date
of commencement of the Severance Agreements, the term of the Severance
Agreements may be extended for additional one-year periods beyond the then
effective expiration date upon a determination by the Board of Directors that
the performance of these individuals has met the required performance standards
and that such Severance Agreements should be extended.
In the event an Employee becomes entitled to receive severance
benefits, the Employee will be paid within 10 days of the later of his or her
last day of employment and a change in control. Such amount shall be equal to
the difference between (i) a number (either 0.5 or 1.0) times his or her "base
amount" as defined in Section 280G(b)(3) of the Internal Revenue Code, and (ii)
the sum of any other parachute payments, as defined under Section 280G(b)(2) of
the Internal Revenue Code, that he or she receives on account of the change in
control.
The Severance Agreements with the Bank provide that within 10 business
days of a change in control, the Bank shall fund, or cause to be funded, a trust
in the amount necessary to pay amounts owed to the Employees as a result of the
change in control. The amount to be paid to an Employee from this trust upon his
or her termination is determined according to the procedures outlined in the
Severance Agreements, and any money not paid to the Employee is returned to the
Bank.
The aggregate payments that would be made to Officers Boyd, Correll,
Hawkins, House, and Outland, assuming termination of employment under the
foregoing circumstances at September 30, 1996 would have been approximately
$170,406. These provisions may have an anti-takeover effect by making it more
expensive for a potential acquiror to obtain control of the Company. For more
information, see "Certain Anti-Takeover Provisions in the Charter and Bylaws --
Additional Anti-Takeover Provisions." In the event that one of these Employees
prevails over the Bank in a legal dispute as to the Severance Agreement, he or
she will be reimbursed for legal and other expenses.
Transactions with Management
The Bank offers loans to its directors and officers. These loans
currently are made in the ordinary course of business with the same collateral,
interest rates and underwriting criteria as those of comparable transactions
prevailing at the time and do not involve more than the normal risk of
collectibility or present other unfavorable features. Under current law, the
Bank's loans to directors and executive officers are required to be made on
substantially the same terms, including interest rates, as those prevailing for
comparable transactions and must not involve more than the normal risk of
repayment or present other unfavorable features. Furthermore, all loans to such
persons must be approved in advance by a disinterested majority of the Board of
Directors. At September 30, 1996, the Bank's loans to directors and executive
officers totaled $877,000, or 4.8% of the Bank's retained income, at that date.
THE CONVERSION
The Board of Directors of the Bank and the Administrator have approved
the Plan, subject to the Plan's approval by the members of the Bank entitled to
vote on the matter and subject to the satisfaction of certain other conditions.
Such approval by the Administrator, however, does not constitute a
recommendation or endorsement of the Plan.
General
On September 19, 1996, the Board of Directors of the Bank unanimously
adopted, subject to approval by the Administrator and the members of the Bank,
and to the nonobjection by the FDIC, the Plan, pursuant to which the Bank would
convert from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank, and immediately thereafter convert to a
North Carolina commercial bank under the name "NewSouth
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Bank" as a wholly owned subsidiary of the Company. The Administrator has
approved the Plan subject to, among other things, approval of the Plan by the
members of the Bank. In addition, the FDIC has issued its conditional non-
objection to the Plan and the Stock Conversion. A Special Meeting of the Bank's
members has been called for the purpose of approving the Plan, which meeting is
to be held on _____________, 1997.
The Stock Conversion will be accomplished through the amendment of the
Bank's existing North Carolina mutual Certificate of Incorporation and Bylaws to
read in the form of North Carolina stock Articles of Incorporation and Bylaws to
authorize the issuance of capital stock by the Converted Bank, the issuance of
all the Converted Bank's capital stock to be outstanding upon consummation of
the Stock Conversion to the Company and the offer and sale of the Common Stock
of the Company. Upon issuance of the Converted Bank's shares of capital stock to
the Company, the Converted Bank will be a wholly owned subsidiary of the
Company. Immediately following consummation of the Stock Conversion, the Board
of Directors of the Bank intends to effectuate the Bank Conversion by converting
the Converted Bank to the Commercial Bank. Upon completion of the Bank
Conversion, the Commercial Bank will be a wholly owned subsidiary of the
Company.
The Company has applied to the Federal Reserve Board for approval to
become the holding company of the Converted Bank subject to the satisfaction of
certain conditions and to acquire all of the common stock of the Converted Bank
to be issued in the Stock Conversion in exchange for at least 50% of the net
proceeds from the sale of Common Stock in the Stock Conversion. The Stock
Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock to be issued by the Company pursuant to the Plan. The
Bank has received approval from the Administrator and the Commission, subject to
certain conditions, of the conversion of the Converted Bank to a North Carolina
commercial bank, and the Company has applied to the Federal Reserve Board for
approval of the Company's continued ownership of 100% of the stock of the
Commercial Bank following the Bank Conversion.
The aggregate purchase price of the Common Stock to be issued in the
Stock Conversion will be within the Estimated Valuation Range of between
$28,050,000 and $37,950,000, which may be increased to $43,642,500, based upon
an independent appraisal of the estimated pro forma market value of the Common
Stock prepared by Ferguson. All shares of the Common Stock to be issued and sold
in the Stock Conversion will be sold at the same price. The independent
appraisal will be updated, if necessary, and the final price of the shares of
the Common Stock will be determined at the completion of the Subscription and
Community Offerings. Ferguson is experienced in the valuation and appraisal of
financial institutions. For additional information, see " -- Stock Pricing and
Number of Shares to be Issued."
The following is a brief summary of material aspects of the Conversion.
The summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available for inspection at any office of the Bank
and at the office of the Administrator. The Plan is also filed as an exhibit to
the Registration Statement of which this Prospectus is a part, copies of which
may be obtained from the SEC. See "Additional Information."
Offering of Common Stock
Under the Plan, the Company is offering shares of the Common Stock
first to the Bank's Eligible Account Holders, second to the ESOP, third to
Supplemental Eligible Account Holders and fourth to its Other Members who are
not Eligible Account Holders or Supplemental Eligible Account Holders in the
Subscription Offering. Subscription Rights received in any of the foregoing
categories will be subordinated to the Subscription Rights received by those in
a prior category. To the extent shares remain available for purchase after the
Subscription Offering, the Company may offer any such remaining shares to the
general public in the Community Offering. In the Community Offering, preference
will be given to natural persons and trusts of natural persons who are permanent
residents of the Local Community. The term "resident" as used in relation to the
preference afforded natural persons in the Local Community means any natural
person who occupies a dwelling within the Local Community, has an intention to
remain within the Local Community for a period of time (manifested by
establishing a physical, ongoing, nontransitory presence within the Local
Community) and continues to reside in the Local Community at the time of the
Subscription and Community Offerings. The Bank may utilize deposit or loan
records or such other evidence provided to it to make the determination whether
a person is residing in the Local Community. To the extent the
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person is a corporation or other business entity, the principal place of
business or headquarters shall be within the Local Community. To the extent the
person is a personal benefit plan, the circumstances of the beneficiary shall
apply with respect to this definition. In the case of all other benefit plans,
circumstances of the beneficiary shall be examined for purposes of this
definition. In all cases, however, such determination shall be in the sole
discretion of the Bank. The occurrence of the Community Offering is subject to
the availability of shares of the Common Stock for purchase after satisfaction
of all subscriptions in the Subscription Offering. Additionally, all purchases
in the Community Offering are subject to the maximum and minimum purchase
limitations set forth in the Plan and the right of the Company to reject any
such orders, in whole or in part.
As part of the Community Offering, the Plan provides that, if feasible,
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 selected dealers to be formed and managed by Trident
Securities.
If the Community Offering is determined not to be feasible, the Bank
will immediately consult with the regulatory authorities to determine the most
viable alternative available to effect the completion of the Stock Conversion.
Should no viable alternative exist, the Bank may terminate the Stock Conversion
with the concurrence of the FDIC and the Administrator. The Plan provides that
the Conversion must be completed within 12 months after approval of the Plan at
the Special Meeting, which time period may be extended up to an additional 12
months by amendment to the Plan. In the event that the Stock Conversion is not
effected, the Bank will remain a North Carolina-chartered mutual savings bank,
all subscription funds will be promptly returned to subscribers with interest
earned thereon and all withdrawal authorizations will be cancelled. The
completion of the Subscription and Community Offerings are subject to market
conditions and other factors beyond the Bank's control. No assurance can be
given as to the length of time after approval of the Plan at the Special Meeting
that will be required to complete the sale of the Common Stock to be offered in
the Stock Conversion. If delays are experienced, significant changes may occur
in the estimated pro forma market value of the Company and the Converted Bank
(and Commercial Bank) upon consummation of the Stock Conversion, together with
corresponding changes in the offering price and the net proceeds realized from
the sale of the Common Stock. The Bank would also incur substantial additional
printing, legal and accounting expenses in completing the Stock Conversion. In
the event the Stock Conversion is terminated, the Bank would be required to
charge all Stock Conversion expenses against current income.
Business Purposes
The Bank's Board of Directors has formed the Company to serve upon
consummation of the Conversion as a holding company with the Converted Bank
(and, following the Bank Conversion, the Commercial Bank) as its subsidiary. The
portion of the net proceeds from the sale of the Common Stock in the Stock
Conversion to be distributed to the Converted Bank (and the Commercial Bank) by
the Company will substantially increase the Converted Bank's (and the Commercial
Bank's) capital position which will in turn increase the amount of funds
available for lending and investment and provide greater resources to support
both current operations and future expansion by the Commercial Bank, although
there are no current agreements or understandings for such expansion. The
holding company structure will provide greater flexibility than the Bank alone
would have for diversification of business activities and geographic expansion.
Management believes that this increased capital and operating flexibility will
enable the Commercial Bank to compete more effectively with other types of
financial services organizations. In addition, the Conversion will also enhance
the future access of the Company and the Commercial Bank to the capital markets.
The Bank's Board of Directors has undertaken the Bank Conversion to
allow the Bank to continue to pursue its expanding lines of business. The Bank
intends to emphasize commercial real estate, commercial business and consumer
loans. See "Summary -- Home Savings Bank, SSB" and "Risk Factors -- Risks
Related to Commercial Business and Consumer Lending." This strategy can be more
effectively developed if the Bank operated under regulatory requirements
applicable to a North Carolina commercial bank rather than a North
Carolina-chartered savings bank. See "Regulation -- Depository Institution
Regulation."
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After completion of the Stock Conversion, the unissued Common Stock and
preferred stock authorized by the Company's Certificate of Incorporation will
permit the Company, subject to market conditions, to raise additional equity
capital through further sales of securities and to issue securities in
connection with possible acquisitions. At the present time, the Company has no
plans with respect to additional offerings of securities, other than the
issuance of additional shares under the MRP or Option Plan, if implemented.
Following completion of the Stock Conversion, the Company also will be able to
use stock-related incentive programs to attract and retain executive and other
personnel for itself and its subsidiaries. See "Management of the Bank --
Certain Benefit Plans and Agreements."
Effect of Conversion to Stock Form on Depositors and Borrowers of the Bank
General. Each depositor in a mutual savings institution such as the
Bank has both a deposit account and a pro rata ownership interest in the
retained earnings of that institution based upon the balance in his or her
deposit account. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from such deposit account. Any
other depositor who opens a deposit account obtains a pro rata interest in the
retained earnings of the institution without any additional payment beyond the
amount of the deposit. A depositor who reduces or closes his or her account
receives a portion or all of the balance in the account but nothing for his or
her ownership interest, which is lost to the extent that the balance in the
account is reduced.
Consequently, depositors normally do not have a way to realize the
value of their ownership, which has realizable value only in the unlikely event
that the mutual institution is liquidated. In such event, the depositors of
record at that time, as owners, would share pro rata in any residual retained
earnings after other claims are paid.
Upon consummation of the Stock Conversion, permanent nonwithdrawable
capital stock will be created to represent the ownership of the institution. The
stock is separate and apart from deposit accounts and is not and cannot be
insured by the FDIC. Transferable certificates will be issued to evidence
ownership of the stock, which will enable the stock to be sold or traded, if a
purchaser is available, with no effect on any account held in the Bank. Under
the Plan, all of the capital stock of the Converted Bank will be acquired by the
Company in exchange for a portion of the net proceeds from the sale of the
Common Stock in the Stock Conversion. The Common Stock will represent an
ownership interest in the Company and will be issued upon consummation of the
Stock Conversion to persons who elect to participate in the Stock Conversion by
purchasing the shares being offered.
Continuity. During the Conversion process, the normal business of the
Bank of accepting deposits and making loans will continue without interruption.
The Converted Bank will continue to be subject to regulation by the
Administrator and the FDIC, and the Commercial Bank will be subject to
regulation by the Commission and the FDIC, and FDIC insurance of accounts will
continue without interruption. After the Conversion, the Converted Bank and the
Commercial Bank will continue to provide services for depositors and borrowers
under current policies and by its present management and staff.
The Board of Directors serving the Bank at the time of the Conversion
will serve as the Board of Directors of the Converted Bank, and then the
Commercial Bank after the Bank Conversion. The Board of Directors of the Company
will consist of the individuals currently serving on the Board of Directors of
the Bank. All officers of the Bank at the time of the Conversion will retain
their positions with the Converted Bank, and then the Commercial Bank, after the
Conversion.
Voting Rights. Upon the completion of the Conversion, depositor and
borrower members as such will have no voting rights in the Converted Bank, the
Commercial Bank or the Company and, therefore, will not be able to elect
directors of the Converted Bank, the Commercial Bank or the Company or to
control their affairs. Currently these rights are accorded to depositors of the
Bank. Subsequent to the Stock Conversion, voting rights will be vested
exclusively in the stockholders of the Company which, in turn, will own all of
the stock of the Converted Bank and, following the Bank Conversion, the
Commercial Bank. Each holder of Common Stock shall be entitled to vote on any
matter to be considered by the stockholders of the Company, subject to the
provisions of the Company's Certificate of Incorporation.
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After the Bank Conversion, holders of Savings Accounts in and obligors
on loans of the Converted Bank and the Commercial Bank will not have voting
rights in the Commercial Bank. Exclusive voting rights with respect to the
Company shall be vested in the holders of the Common Stock. Holders of Savings
Accounts in and obligors on loans of the Converted Bank and the Commercial Bank
will not have any voting rights in the Company except and to the extent that
such persons become stockholders of the Company, and the Company will have
exclusive voting rights with respect to the Converted Bank's and the Commercial
Bank's capital stock.
Deposit Accounts and Loans. The Bank's deposit accounts, the balances
of individual accounts and existing federal deposit insurance coverage will not
be affected by the Conversion. Furthermore, the Conversion will not affect the
loan accounts, the balances of these accounts and the obligations of the
borrowers under their individual contractual arrangements with the Bank.
Tax Effects. The Bank has received an opinion from its special counsel,
Housley Kantarian & Bronstein, P.C., Washington, D.C., as to the material
federal income tax consequences of the Conversion to the Bank and the Commercial
Bank, and as to the generally applicable material federal income tax
consequences of the Conversion to the Bank's account holders and to persons who
purchase Common Stock in the Stock Conversion. The opinion provides that the
Conversion will constitute one or more reorganizations for federal income tax
purposes under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as
amended ("Internal Revenue Code"). Among other things, the opinion also provides
that: (i) no gain or loss will be recognized by the Bank in its mutual or stock
form by reason of the Stock Conversion; (ii) no gain or loss will be recognized
by its account holders upon the issuance to them of accounts in the Converted
Bank in stock form immediately after the Stock Conversion, in the same dollar
amounts and on the same terms and conditions as their accounts at the Bank
immediately prior to the Stock Conversion; (iii) the tax basis of each account
holder's interest in the liquidation account will be equal to the value, if any,
of that interest; (iv) the tax basis of the Common Stock purchased in the Stock
Conversion will be equal to the amount paid therefor increased, in the case of
Common Stock acquired pursuant to the exercise of Subscription Rights, by the
fair market value, if any, of the Subscription Rights exercised; (v) the holding
period for the Common Stock purchased in the Stock Conversion will commence upon
the exercise of such holder's Subscription Rights and otherwise on the day
following the date of such purchase; (vi) gain or loss will be recognized to
account holders upon the receipt of liquidation rights or the receipt or
exercise of Subscription Rights in the Stock Conversion, to the extent such
liquidation rights and Subscription Rights are deemed to have value, as
discussed below; and (vii) as a result of the recently enacted Public Law
104-188, the Bank and its successors (including the Converted Bank and the
Commercial Bank) will be required to recapture the applicable excess reserves
into gross income ratably over a six taxable year period. The applicable excess
reserves are the excess, if any, of (1) the balance of its reserves as of the
close of its last taxable year beginning before January 1, 1996, over (2) the
greater of the balance of (a) its pre-1988 reserves, or (b) what the Bank's
reserves would have been at the close of its last taxable year beginning before
January 1, 1996, had the Bank always used the experience method (the six-year
average method).
The opinion of Housley Kantarian & Bronstein, P.C. is based in part
upon, and subject to the continuing validity in all material respects through
the date of the Conversion of, various representations of the Bank and upon
certain assumptions and qualifications, including that the Conversion is
consummated in the manner and according to the terms provided in the Plan. Such
opinion is also based upon the Internal Revenue Code, regulations now in effect
or proposed thereunder, current administrative rulings and practice and judicial
authority, all of which are subject to change and such change may be made with
retroactive effect. Unlike private letter rulings received from the Internal
Revenue Service ("IRS"), an opinion is not binding upon the IRS and there can be
no assurance that the IRS will not take a position contrary to the positions
reflected in such opinion, or that such opinion will be upheld by the courts if
challenged by the IRS.
Housley Kantarian & Bronstein, P.C. has advised the Bank that an
interest in a liquidation account has been treated by the IRS, in a series of
private letter rulings which do not constitute formal precedent, as having
nominal, if any, fair market value and therefore it is likely that the interests
in the liquidation account established by the Bank as part of the Stock
Conversion will similarly be treated as having nominal, if any, fair market
value. Accordingly, it is likely that such depositors of the Bank who receive an
interest in such liquidation account established by the Bank pursuant to the
Stock Conversion will not recognize any gain or loss upon such receipt.
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Housley Kantarian & Bronstein, P.C. has further advised the Bank that
the federal income tax treatment of the receipt of Subscription Rights pursuant
to the Stock Conversion is uncertain, and recent private letter rulings issued
by the IRS have been in conflict. For instance, the IRS adopted the position in
one private ruling that Subscription Rights will be deemed to have been received
to the extent of the minimum pro rata distribution of such rights, together with
the rights actually exercised in excess of such pro rata distribution, and with
gain recognized to the extent of the combined fair market value of the pro rata
distribution of Subscription Rights plus the Subscription Rights actually
exercised. Persons who do not exercise their Subscription Rights under this
analysis would recognize gain upon receipt of rights equal to the fair market
value of such rights, regardless of exercise, and would recognize a
corresponding loss upon the expiration of unexercised rights that may be
available to offset the previously recognized gain. Under another IRS private
ruling, Subscription Rights were deemed to have been received only to the extent
actually exercised. This private ruling required that gain be recognized only if
the holder of such rights exercised such rights, and that no loss be recognized
if such rights were allowed to expire unexercised. There is no authority that
clearly resolves this conflict among these private rulings, which may not be
relied upon for precedential effect. However, based upon express provisions of
the Internal Revenue Code and in the absence of contrary authoritative guidance,
Housley Kantarian & Bronstein, P.C. has provided in its opinion that gain will
be recognized upon the receipt rather than the exercise of Subscription Rights.
Further, also based upon a published IRS ruling and consistent with recognition
of gain upon receipt rather than exercise of the Subscription Rights, Housley
Kantarian & Bronstein, P.C. has provided in its opinion that the subsequent
exercise of the Subscription Rights will not give rise to gain or loss.
Regardless of the position eventually adopted by the IRS, the tax consequences
of the receipt of the Subscription Rights will depend, in part, upon their
valuation for federal income tax purposes.
If the Subscription Rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders and other eligible members who exercise their
Subscription Rights, even though such persons would have received no cash from
which to pay taxes on such taxable income. The Bank could also recognize a gain
on the distribution of such Subscription Rights in an amount equal to their
aggregate value. In the opinion of Ferguson, whose opinion is not binding upon
the IRS, the Subscription Rights do not have any value, based on the fact that
such rights are acquired by the recipients without cost, are non-transferable
and of short duration and afford the recipients the right only to purchase
shares of the Common Stock at a price equal to its estimated fair market value,
which will be the same price as the price paid by purchasers in the Community
Offering for unsubscribed shares of Common Stock. Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members are encouraged to
consult with their own tax advisors as to the tax consequences in the event that
the Subscription Rights are deemed to have a fair market value. Because the fair
market value, if any, of the Subscription Rights issued in the Stock Conversion
depends primarily upon the existence of certain facts rather than the resolution
of legal issues, Housley Kantarian & Bronstein, P.C., has neither adopted the
opinion of Ferguson as its own nor incorporated such opinion of Ferguson in its
opinion issued in connection with Conversion.
The Bank has also obtained an opinion from Coopers & Lybrand L.L.P. to
the effect that the tax effects of the Conversion under North Carolina tax laws
will be substantially the same as described above with respect to federal income
tax laws.
THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH MAY
BE RELEVANT TO EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ACCOUNT HOLDER AND
OTHER MEMBER ENTITLED TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH
AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS,
INSURANCE COMPANIES AND ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS AND OTHER MEMBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE ACCOUNT
HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER AND OTHER MEMBER IS URGED TO
CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH
FEDERAL AND STATE INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND
CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND
ALSO AS TO ANY OTHER TAX CONSEQUENCES ARISING OUT OF THE CONVERSION.
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Liquidation Account. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each holder of a deposit account in the
Bank would receive his pro rata share of any assets of the Bank remaining after
payment of claims of all creditors (including the claims of all depositors to
the withdrawal value of their accounts). His pro rata share of such remaining
assets would be the same proportion of such assets as the value of his deposit
account was to the total of the value of all deposit accounts in the Bank at the
time of liquidation.
After the Stock Conversion, each deposit account holder on a complete
liquidation would have a claim of the same general priority as the claims of all
other general creditors of the Bank. Therefore, except as described below, his
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. He would have no interest in the value of the Bank above that
amount.
The Plan provides for the establishment, upon the completion of the
Stock Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the net worth of the Bank as of the date of its latest statement of financial
condition contained in the final Prospectus. Each Eligible Account Holder (a
person with a deposit account in the Bank on June 30, 1992) and each
Supplemental Eligible Account Holder (a person with a qualifying deposit in the
Bank on ______________, 1996) would be entitled, on a complete liquidation of
the Converted Bank (or the Commercial Bank) after completion of the Stock
Conversion, to an interest in the liquidation account. Each Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account held in the Bank on June 30, 1992 and each Supplemental Eligible
Account Holder would have an initial interest in such liquidation account for
each qualifying deposit held in the Bank on ______________, 1996. The interest
as to each qualifying deposit account would be in the same proportion of the
total liquidation account as the balance of such qualifying deposit account was
to the balance in all deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such date. However, if the amount in
the qualifying deposit account on any annual closing date (September 30) of the
Bank subsequent to the relevant eligibility date is less than the amount in such
account on the relevant eligibility date, or any subsequent closing date, then
the Eligible Account Holder's or Supplemental Eligible Account Holder's interest
in the liquidation account would be reduced from time to time by an amount
proportionate to any such reductions, and such interest would cease to exist if
he ceases to maintain an account at the Converted Bank or Commercial Bank that
has the same Social Security number as appeared on his account(s) at the
relevant eligibility date. The interest in the liquidation account would never
be increased, notwithstanding any increase in the related deposit account after
the Stock Conversion.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were satisfied would
be distributed to the entity or persons holding the Bank's capital stock at that
time.
The Bank Conversion shall not be deemed to be a complete liquidation of
the Converted Bank for purposes of the distribution of the liquidation account.
Upon consummation of the Bank Conversion, the liquidation account, and all
rights and obligations of the Converted Bank in connection therewith, shall be
assumed by the Commercial Bank.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with an FDIC-insured institution in which the Bank is not the
surviving insured institution would not be considered to be a "liquidation"
under which distribution of the liquidation account could be made. In such a
transaction, the liquidation account would be assumed by the surviving
institution.
The creation and maintenance of the liquidation account will not
restrict the use or application of any of the capital accounts of the Bank,
except that the Bank may not declare or pay a cash dividend on, or repurchase
any of, its capital stock if the effect of such dividend or repurchase would be
to cause its retained earnings to be reduced below the aggregate amount then
required for the liquidation account.
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Subscription Rights
Nontransferable Subscription Rights to subscribe for shares of the
Common Stock have been issued to all persons entitled to subscribe for stock in
the Subscription Offering at no cost to such persons. The amount of the Common
Stock which these parties may subscribe for will be determined, in part, by the
total stock to be issued, and the availability of stock for purchase under the
categories set forth in the Plan.
Preference categories have been established for the allocation of the
Common Stock to the extent that shares are available. These categories are as
follows:
Subscription Category No. 1 is reserved for the Bank's
Eligible Account Holders, i.e., qualifying depositors of the Bank on
June 30, 1992, who, including individuals on a joint account, will each
receive nontransferable Subscription Rights to subscribe for Common
Stock in the Subscription Offering up to $300,000. See "-- Limitations
on Purchases of Shares." If the exercise of Subscription Rights in this
category results in an oversubscription, shares shall be allocated
among subscribing Eligible Account Holders so as to permit each such
Eligible Account Holder, to the extent possible, to purchase a number
of shares sufficient to make his total allocation equal 100 shares or
the amount subscribed for, whichever is less. Any shares not so
allocated shall be allocated among the subscribing Eligible Account
Holders on an equitable basis related to the amounts of their
respective qualifying deposits, as compared to the total qualifying
deposits of all subscribing Eligible Account Holders. To ensure a
proper allocation of Common Stock, each Eligible Account Holder must
list on his Stock Order Form all accounts in which he has an ownership
interest. Failure to list all such deposit accounts may result in the
inability of the Company or the Bank to fill all or part of a
subscription order. Neither the Company, the Bank nor any of their
agents shall be responsible for orders on which all deposit accounts
have not been fully and accurately disclosed. A qualifying deposit is
the amount (required to be at least $50.00) contained in a deposit
account in the Bank on June 30, 1992. Subscription Rights received by
directors and officers of the Bank and their associates in this
category based on their increased deposits in the Bank in the one-year
period preceding June 30, 1992 are subordinated to the Subscription
Rights of other Eligible Account Holders. The Board of Directors of the
Bank selected June 30, 1992 as the Eligibility Record Date because it
believed that first priority in the Subscription Offering should be
accorded the Bank's longstanding customers who maintained accounts with
the Bank prior to the inflow of considerable deposits from individuals
who opened deposit accounts in the Bank for the purpose of obtaining
subscription rights for the purchase of conversion stock in the event
the Bank determined to convert to stock form. In making this decision,
the Board of Directors considered the interests of all members and
determined that it was in the best interests of the Bank and all the
members to ensure that the Bank's longstanding customers, which are the
customers that supported the Bank during the past when savings
institutions were not highly regarded, will have preference in the
Subscription Offering over speculative depositors. While the Board
realizes that many of the Bank's customers opening deposits subsequent
to the Eligibility Record Date are valued customers, the Board of
Directors balanced the interests of longstanding customers with those
of recent customers and concluded that the fairest decision was to
ensure that the longstanding customers received priority in the
Subscription Offering by setting the Eligibility Record Date at June
30, 1992. The Board of Directors also considered the fact that recent
customers would continue to receive Subscription Rights in the
Subscription Offering as Supplemental Eligible Account Holders or Other
Members.
Subscription Category No. 2 is reserved for the Bank's
tax-qualified employee stock benefit plans, i.e., the ESOP, which shall
receive nontransferable Subscription Rights to purchase in the
aggregate up to 10% of the shares issued in the Stock Conversion and
which is expected to purchase 8% of the Common Stock offered in the
Stock Conversion. If all the shares of Common Stock offered in the
Subscription Offering are purchased by Eligible Account Holders, then
the ESOP will purchase shares in the open
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market following consummation of the Stock Conversion and will not
purchase newly issued shares from the Company.
Subscription Category No. 3 is reserved for the Bank's
Supplemental Eligible Account Holders, i.e., qualifying depositors of
the Bank on the last day of the calendar quarter preceding the
Administrator's approval of the Plan (________________) who, including
individuals on a joint account, will each receive nontransferable
Subscription Rights to subscribe for Common Stock in the subscription
offering up to $300,000. See " -- Limitations on Purchases of Shares."
If the exercise of Subscription Rights in this category results in an
oversubscription, shares shall be allocated among subscribing
Supplemental Eligible Account Holders, so as to permit each such
Supplemental Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his total allocation
equal 100 shares or the amount subscribed for, whichever is less, and
any shares not so allocated shall be allocated among the subscribing
Supplemental Eligible Account Holders on an equitable basis related to
the amounts of their respective qualifying deposits, as compared to the
total qualifying deposits of all subscribing Supplemental Eligible
Account Holders. To ensure a proper allocation of Common Stock, each
Supplemental Eligible Account Holder must list on his Stock Order Form
all accounts in which he has an ownership interest. Failure to list all
such deposit accounts may result in the inability of the Company or the
Bank to fill all or part of a subscription order. Neither the Company,
the Bank nor any of their agents shall be responsible for orders on
which all deposit accounts have not been fully and accurately
disclosed. A qualifying deposit is the amount (required to be at least
$50.00) contained in a deposit account in the Bank on _______________,
1996. Subscription Rights received by directors and officers of the
Bank and their associates in this category based on their increased
deposits in the Bank in the one-year period preceding ____________,
1996 are subordinated to the Subscription Rights of other Supplemental
Eligible Account Holders. Subscriptions in this Category No. 3 will be
filled only to the extent that there are sufficient shares of Common
Stock remaining after satisfaction of subscriptions by Category Nos. 1
and 2.
Subscription Category No. 4 is reserved for Other Members,
i.e., certain depositors and borrowers who are members of the Bank as
of the Voting Record Date entitled to vote at the Special Meeting but
who are not Eligible Account Holders or Supplemental Eligible Account
Holders. To the extent then available following subscriptions by
Eligible Account Holders, tax-qualified employee stock benefit plans
and Supplemental Eligible Account Holders, Other Members, including
individuals on a joint account, will receive, without payment therefor,
nontransferable Subscription Rights to subscribe for Common Stock in
the Subscription Offering up to $300,000. See "-- Limitations on
Purchases of Shares." In the event that Other Members subscribe for a
number of shares which, when added to the shares subscribed for by
Eligible Account Holders, tax-qualified employee stock benefit plans
and Supplemental Eligible Account Holders, is in excess of the total
number of shares offered in the Stock Conversion, the subscriptions of
such Other Members will be allocated pro rata among subscribing Other
Members on an equitable basis as determined by the Board of Directors.
The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for the Common Stock pursuant to the Plan reside. However, no person will be
offered or allowed to purchase any Common Stock under the Plan if he resides in
a foreign country or in a state of the United States with respect to which any
or all of the following apply: (i) a small number of persons otherwise eligible
to subscribe for shares under the Plan reside in such state or foreign country;
(ii) the granting of Subscription Rights or the offer or sale of shares of
Common Stock to such persons would require the Company or the Bank or their
employees to register, under the securities laws of such state, as a broker,
dealer, salesman or agent or to register or otherwise qualify its securities for
sale in such state or foreign country; and (iii) such registration or
qualification would be impracticable for reasons of cost or otherwise. No
payments will be made in lieu of the granting of Subscription Rights to any such
person.
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Community Offering
To the extent shares remain available for purchase after the
Subscription Offering, the Company may offer any such remaining shares of the
Common Stock to members of the general public to whom the Company delivers a
copy of this Prospectus and a Stock Order Form in the Community Offering. The
occurrence of the Community Offering is subject to the availability of shares of
Common Stock for purchase after satisfaction of all orders received in the
Subscription Offering. The Community Offering, if any, may terminate at any time
without notice, but may not terminate later than ______________, 1997. The right
of any person to purchase shares in the Community Offering, if any, is subject
to the absolute right of the Company and the Bank to accept or reject such
purchases in whole or in part. The Company presently intends to terminate the
Community Offering, if any, as soon as it has received orders for all shares
available for purchase in the Stock Conversion.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, there will be no Community Offering. In the event an
insufficient number of shares are available to fill orders in the Community
Offering, the available shares will be allocated by the Company in its
discretion so that a preference shall be given to natural persons and trusts of
natural persons who are permanent residents of the Local Community. Orders
received in the Community Offering shall be allocated on an equal number of
shares per order until all orders have been filled, with a preference given to
permanent residents of the Local Community. If the Community Offering extends
beyond 45 days following the expiration of the Subscription Offering,
subscribers will have the right to increase, decrease or rescind subscriptions
for stock previously submitted. Purchasers in the Community Offering, together
with their associates and groups acting in concert, are each eligible to
purchase up to $300,000 of the Common Stock issued in the Stock Conversion.
Except as noted below, cash and checks received in the Community
Offering will be placed in segregated savings accounts (each insured by the FDIC
up to the applicable $100,000 limit) established specifically for this purpose.
Interest will be paid on orders made by check, in cash or by money order at the
Bank's passbook rate from the date the payment is received by the Company until
the consummation of the Stock Conversion. In the event that the Stock Conversion
is not consummated for any reason, all funds submitted pursuant to the Community
Offering will be promptly refunded with interest as described above.
Syndicated Community Offering
As part of the Community Offering, 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
selected dealers to be formed and managed by Trident Securities. The Syndicated
Community Offering, if any, will be conducted to achieve the widest distribution
of Common Stock subject to the Company and the Bank having the right to reject
orders in whole or in part in their sole discretion in the Syndicated Community
Offering. Neither Trident Securities nor any registered broker-dealer shall have
any obligation to take or purchase any shares of the Common Stock in the
Syndicated Community Offering. Common Stock sold in the Syndicated Community
Offering will be sold at the same price as in the Subscription and Community
Offerings.
Individual purchasers in the Syndicated Community Offering may purchase
up to $300,000 of the Common Stock in the Stock Conversion with any associate or
group of persons acting in concert. The Bank shall be directly responsible for
the payment of selling commissions to other NASD firms and licensed brokers
participating in the Syndicated Community Offering. Other firms may participate
under selected dealers agreements, and Trident Securities and such selected
dealers may receive fees aggregating up to a maximum of 5.0% of the amount of
the stock sold by the selected dealers in the Syndicated Community Offering.
During the Syndicated Community Offering, selected dealers may only
solicit indications of interest from their customers to place orders with the
Company as of a certain date ("Order Date") for the purchase of shares of common
Stock. When and if Trident Securities and the Company believe that enough
indications and orders have been received in the Offerings to consummate the
Stock 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
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their customers. Selected dealers will send confirmations of the orders to such
customers on the next business day after the Order Date. Selected dealers may
debit the accounts of their customers on a date which will be three business
days from the Order Date ("Settlement 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 Settlement Date. On the
Settlement Date, selected dealers will remit funds to the account that the
Company established for each selected dealer. After payment has been received by
the Company from selected dealers, funds will earn interest at the Bank's
passbook savings rate until the consummation of the Stock Conversion. In the
event the Stock Conversion is not consummated as described above, funds with
interest will be returned promptly to the selected dealers, who, in turn, will
promptly credit its customers' brokerage account.
The Syndicated Community Offering, if any, will terminate no more than
45 days following the completion of the Subscription Offering, unless extended
by the Company with the approval of the Administrator. In the event the
Community Offering is extended beyond 45 days following the expiration of this
Subscription Offering, subscribers will have the right to increase, decrease or
rescind subscriptions for stock previously submitted. The Syndicated Community
Offering may run concurrently with the Subscription and Community Offerings or
subsequent to such offerings.
Subscriptions for Stock in Subscription and Community Offerings
Expiration Date. The Subscription Offering will expire at 12:00 Noon,
Eastern Time, on _____________, 1997 unless extended by the Board of Directors
of the Bank for up to an additional 45 days, to no later than __________, 1997.
Such date and time are referred to herein as the "Expiration Date." Subscription
rights not exercised prior to the Expiration Date will be void. The Community
Offering, if any, may terminate at any time without notice, but may not
terminate later than __________, 1997.
Orders will not be executed by the Company until at least the minimum
number of shares of Common Stock offered hereby have been subscribed for or
sold. If all shares of Common Stock have not been subscribed for or sold within
45 days of the end of the Subscription Offering (unless such period is extended
with consent of the Administrator), all funds delivered to the Company pursuant
to the Subscription Offering will be promptly returned to the subscribers with
interest and all charges to savings accounts will be rescinded.
Use of Stock Order Forms and Certification Forms. Rights to subscribe
may only be exercised by completion of Stock Order Forms and certification
forms. Any person receiving a Stock Order Form who desires to subscribe for
shares of stock must do so prior to the Expiration Date by delivering (by mail
or in person) to the office of the Bank a properly executed and completed Stock
Order Form and certification form, together with full payment for all shares for
which the subscription is made. All checks or money orders must be made payable
to "NewSouth Bancorp, Inc." No photocopies or faxes of Stock Order Forms or
payment by wire transfer will be accepted. The Stock Order Form and
certification form must be received by the Expiration Date. All subscription
rights under the Plan will expire on the Expiration Date, whether or not the
Company has been able to locate each person entitled to such subscription
rights. Once tendered, subscription orders cannot be revoked.
Each subscription right may be exercised only by the person to whom it
is issued and only for his or her own account. The subscription rights granted
under the Plan are nontransferable; persons who attempt to transfer their
subscription rights may lose the right to subscribe for stock in the Stock
Conversion and may be subject to other sanctions and penalties imposed by the
Administrator. Each person subscribing for shares is required to represent to
the Company that he or she is purchasing such shares for his or her own account
and that he or she has no agreement or understanding with any other person for
the sale or transfer of such shares.
In the event Stock Order Forms (i) are not delivered and are returned
to the Company by the United States Postal Service or the Company is unable to
locate the addressee, or (ii) are not returned or are received after the
Expiration Date, or (iii) are defectively completed or executed, or (iv) are not
accompanied by the full required payment for the shares subscribed for
(including instances where a savings account or certificate balance from which
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withdrawal is authorized is insufficient to fund the amount of such required
payment), the Subscription Rights of the person to whom such rights have been
granted will lapse as though such person failed to return the completed Stock
Order Form within the time period specified. However, the Company or the Bank
may, but will not be required to, waive any irregularity on any Stock Order Form
or require the submission of corrected Stock Order Forms or the remittance of
full payment for subscribed shares by such date as the Company or the Bank may
specify. The interpretation by the Company and the Bank of the terms and
conditions of the Plan and of the Stock Order Form will be final.
Payment for Shares. Payment for all subscribed shares of Common Stock
will be required to accompany all completed Stock Order Forms for subscriptions
to be valid. Payment for subscribed shares may be made (i) in cash, if delivered
in person, (ii) by check or money order, or (iii) by authorization of withdrawal
from deposit accounts maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the Stock Order Form. Once such a
withdrawal has been authorized, none of the designated withdrawal amount may be
used by a subscriber for any purpose other than to purchase stock for which
subscription has been made while the Plan remains in effect. In the case of
payments authorized to be made through withdrawal from deposit accounts, all
sums authorized for withdrawal will continue to earn interest at the contract
rate until the date of consummation of the sale. In the case of payments made in
cash or by check or money order such funds will be placed in a single segregated
savings account established specifically for this purpose (with the account as a
whole insured by the FDIC up to the applicable $100,000 limit) and interest will
be paid at the Bank's passbook rate from the date payment is received until the
Stock Conversion is completed or terminated. Interest penalties for early
withdrawal applicable to certificate accounts will not apply to withdrawals
authorized for the purchase of shares; however, if a partial withdrawal results
in a certificate account with a balance less than the applicable minimum balance
requirement, the certificate evidencing the remaining balance will earn interest
at the Bank's passbook rate subsequent to the withdrawal. An executed Stock
Order Form, once received by the Company, may not be modified, amended or
rescinded without the consent of the Company, unless the Stock Conversion is not
completed within 45 days of the termination of the Subscription Offering. If an
extension of the period of time to complete the Stock Conversion is approved by
the Administrator, subscribers will be resolicited and must affirmatively
reconfirm their orders prior to the expiration of the resolicitation offering,
or their subscription funds will be promptly refunded. Subscribers may also
modify or cancel their subscriptions. Interest will be paid on such funds at the
Bank's passbook rate during the 45-day period and any approved extension period.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of Common Stock in the Subscription and Community Offerings,
provided that such IRAs are not maintained at the Bank. Persons with IRAs
maintained at the Bank must have their accounts transferred to an unaffiliated
institution or broker to purchase shares of Common Stock in the Subscription and
Community Offerings. Depositors interested in using funds in an Bank IRA to
purchase Common Stock should contact the Bank's Stock Information Center at
(919) ___--____ as soon as possible so that the necessary forms may be forwarded
for execution and returned prior to the Expiration Date of the Subscription
Offering.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes, but may pay for such shares upon consummation of the
Subscription and Community Offerings, if all shares are sold, or upon
consummation of any subsequent offering, if shares remain to be sold in such an
offering.
Shares Purchased. Certificates representing shares of the Common Stock
will be delivered to subscribers as soon as practicable after closing of the
Stock Conversion.
Plan of Distribution and Marketing Agent
Officers of the Bank are available at the Bank's office to provide
offering materials to prospective investors, to answer their questions (but only
to the extent such information is derived from this Prospectus) and to receive
completed Stock Order Forms and certification forms from prospective investors
interested in subscribing for shares
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of the Common Stock. None of the Bank's directors, officers or employees will
receive any commissions or other compensation for their efforts in connection
with sales of shares of the Common Stock. Although information regarding the
stock offering is available at the Bank's office, an investment in the Common
Stock is not a deposit, and the Common Stock is not federally insured.
The directors, officers and employees of the Bank who will be involved
in selling stock are expected to be exempt from the requirement to register with
the SEC as broker-dealers within the meaning of Rule 3a4-1 under the Exchange
Act. Such persons will qualify under the safe harbor provisions of that rule on
the basis of paragraphs (a)(4)(ii) and/or (iii), i.e., management of the Bank
expects that such persons either (x) will perform substantial duties for the
Company in its business, will not otherwise be broker-dealers and are not
expected to participate in another offering in the next twelve months or (y)
will limit their activities to preparing written communications, responding to
customer inquiries and/or performing ministerial/clerical functions.
The Bank and the Company have engaged Trident Securities as financial
advisor to provide sales assistance in connection with the Subscription and
Community Offerings of the Common Stock. The services of Trident Securities will
include, but are not limited to, (i) training and educating the Bank's employees
who will be performing certain ministerial functions in the Subscription and
Community Offerings regarding the mechanics and regulatory requirements of the
stock sales process and the solicitation of proxies from members, (ii) providing
employees to staff the Stock Information Center, assisting Bank customers and
interested stock purchasers and keeping records of orders for shares of Common
Stock, and (iii) supervising the Bank's sales efforts, including preparation of
marketing materials. For all its services rendered in the Stock Conversion,
Trident Securities will receive a commission equal to 1.85% of the aggregate
dollar amount of Common Stock sold in the Subscription and Community Offerings,
excluding any shares of stock sold to the Bank's directors, executive officers,
and the ESOP. Additionally, commissions will be excluded on shares sold to
"associates" (as defined in the Plan) of the Bank's directors and executive
officers. In the event Common Stock is sold by other NASD member firms under
selected dealer's agreements, the aggregate commissions to be received by
Trident Securities and selected dealers would be up to a maximum of 5.0% of the
amount of Common Stock sold by such selected dealers. Trident Securities will
also be reimbursed for its reasonable out-of-pocket expenses in an amount not to
exceed $7,500 and its legal fees in an amount not to exceed $25,000. The Company
and the Bank have agreed to indemnify Trident Securities for reasonable costs
and expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act.
Stock Pricing and Number of Shares to be Issued
Ferguson, which is experienced in the evaluation and appraisal of
savings institutions involved in the conversion process, has been retained by
the Bank to prepare an appraisal of the estimated pro forma market value of the
Common Stock to be sold pursuant to the Stock Conversion. Prior to the
Conversion, the Bank did not have any business relationship with Ferguson.
Ferguson will receive a fixed fee of $35,000 for its appraisal services and the
preparation of a business plan. The Bank has agreed to indemnify Ferguson under
certain circumstances against any losses, damages, expenses or liability arising
out of the Bank's engagement of Ferguson for the appraisal.
Ferguson has determined as of December 13, 1996 that the estimated pro
forma market value of the stock to be issued by the Company in the Stock
Conversion was $33,000,000. In determining the reasonableness and adequacy of
the appraisal submitted by Ferguson, the Boards of Directors of the Bank and the
Company reviewed with Ferguson the methodology and the appropriateness of
assumptions used by Ferguson in preparing the appraisal. The Company, in
consultation with Trident Securities, has determined to offer the shares in the
Stock Conversion at the Purchase Price of $15.00 per share. The price per share
was determined based on a number of factors, including the market price per
share of the stock of other financial institutions. With the consent of the
Administrator and the FDIC, however, the appraiser may establish a range of
value for the stock of approximately 15% on either side of the estimated value
to allow for fluctuations in the aggregate value of the stock due to changes in
the market and other factors from the time of commencement of the Subscription
Offering until completion of
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the Community Offering. Accordingly, Ferguson has established a range of value
of from $28,050,000 to $37,950,000 for the Stock Conversion. Ferguson will
either confirm the continuing validity of its appraisal or provide an updated
appraisal immediately prior to the completion of the Stock Conversion.
The appraisal has been prepared by Ferguson in reliance upon the
information contained in this Prospectus, including the Financial Statements.
Ferguson also considered the following factors, among others: the present and
projected operating results and financial condition of the Bank and the economic
and demographic conditions in the Bank's and the Company's existing market area;
certain historical, financial and other information relating to the Bank and the
Company; a comparative evaluation of the operating and financial statistics of
the Bank and the Company with those of other similarly situated savings
institutions located in North Carolina and other regions of the United States;
the aggregate size of the offering of Common Stock; the impact of the Stock
Conversion on the Bank's and the Company's net worth and earnings potential; the
proposed dividend policy of the Company and the Bank; and the trading market for
securities of comparable institutions and general conditions in the market for
such securities.
Should it be determined at the close of the offering that the aggregate
pro forma market value of the Common Stock is higher or lower than $33.0
million, but is nonetheless within the Estimated Valuation Range or within 15%
above the maximum of such range, the Company will make an appropriate adjustment
by raising or lowering by no more than 15% the total number of shares being
offered (within a range from 1,870,000 shares to 2,909,500 shares). Unless
permitted by the Company or otherwise required by the FDIC or the Administrator,
no resolicitation of subscribers and other purchasers will be made because of
any such change in the number of shares to be issued unless the aggregate
purchase price of the Common Stock sold in the Stock Conversion is below the
minimum of the Estimated Valuation Range or is more than $43,642,500 (i.e., 15%
above the maximum of the Estimated Valuation Range). If the aggregate purchase
price falls outside the range of from $28,050,000 to $43,642,500, subscribers
and other purchasers will be resolicited and given the opportunity to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation, or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate. Subscribers will also be given the opportunity to increase,
decrease or rescind their orders. Any change in the Estimated Valuation Range
must be approved by the Administrator. The establishment of any new price range
may be effected without a resolicitation of votes from the Bank's members to
approve the Plan.
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the valuation, Ferguson has relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Bank and the Company. Ferguson did not independently verify the financial
statements and other information provided by the Bank and the Company, nor did
Ferguson value independently the assets and liabilities of the Bank and the
Company. The valuation considers the Bank and the Company only as a going
concern and should not be considered as an indication of the liquidation value
of the Bank and the 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 the Common Stock will thereafter be able to sell such shares at
prices equal to or above the price or prices paid for it. Copies of the
appraisal report of Ferguson setting forth the method and assumptions for such
appraisal are on file and available for inspection at the offices set forth in
"Additional Information" and at the office of the Bank. Further, any subsequent
updated appraisal also will be filed with the SEC and will be available for
inspection.
Limitations on Purchase of Shares
The Plan provides for certain additional limitations to be placed upon
the purchase of shares by eligible subscribers and others in the Stock
Conversion. Each subscriber must subscribe for a minimum of 25 shares. The ESOP
may purchase up to an aggregate of 10% of the shares of the Common Stock to be
issued in the Stock Conversion and is expected to purchase 8% of such shares.
Except for the ESOP, which intends to purchase 8% of the total number of shares
of Common Stock issued in the Stock Conversion, no Eligible Account Holder,
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Supplemental Eligible Account Holder or Other Member, including individuals on a
joint account, may purchase in their capacity as such in the Subscription
Offering more than 20,000 shares, or $300,000, of Common Stock. No person,
including associates of and persons acting in concert with such person, may
purchase in the Community Offering more than 20,000 shares, or $300,000, of
Common Stock. No person, including associates of and persons acting in concert
with such person (other than the ESOP), may purchase in the Stock Conversion
more than $600,000, or 40,000 shares of Common Stock. Shares purchased by the
ESOP and attributable to a participant thereunder shall not be aggregated with
shares purchased by such participant or any other purchaser of Common Stock in
the Stock Conversion. For purposes of the Plan, the directors of the Company and
the Bank are not deemed to be associates or a group acting in concert solely by
reason of their Board membership.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Bank's
members, purchase limitations may be increased or decreased at the sole
discretion of the Company and the Bank at any time. If such amount is increased,
subscribers for the maximum amount will be given the opportunity to increase
their subscriptions up to the then applicable limit, subject to the rights and
preferences of any person who has priority Subscription Rights. In the event
that the purchase limitation is decreased after commencement of the Subscription
and Community Offerings, the orders of any person who subscribed for the maximum
number of shares of Common Stock shall be decreased by the minimum amount
necessary so that such person shall be in compliance with the then maximum
number of shares permitted to be subscribed for by such person.
The term "associate" of a person is defined to mean: (i) any
corporation or organization (other than the Bank, the Company, or a
majority-owned subsidiary of the Bank or the Company) of which such person is an
officer or partner or is directly or indirectly the beneficial owner of 10% or
more of any 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 a trustee or in a similar fiduciary capacity, provided, however, such term
shall not include any employee stock benefit plan of the Bank in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; and (iii) any relative or spouse of such person, or
any relative of such spouse, who either has the same home as such person or who
is a director of the Bank or the Company or any of their subsidiaries. Directors
are not treated as associates solely because of their Board membership.
Each person purchasing Common Stock in the Stock Conversion shall be
deemed to confirm that such purchase does not conflict with the purchase
limitations under the Plan or otherwise imposed by law, rule or regulation. In
the event that such purchase limitations are violated by any person (including
any associate or group of persons affiliated or otherwise acting in concert with
such person), the Company shall have the right to purchase from such person at
the aggregate purchase price all shares acquired by such person in excess of
such purchase limitations or, if such excess shares have been sold by such
person, to receive the difference between the aggregate purchase price paid for
such excess shares and the price at which such excess shares were sold by such
person. This right of the Company to purchase such excess shares shall be
assignable by the Company. In addition, persons who violate the purchase
limitations may be subject to sanctions and penalties imposed by the
Administrator.
Stock purchased pursuant to the Stock Conversion will be freely
transferable, except for shares purchased by directors and officers of the Bank
and the Company. See "-- Limitations on Resales by Management."
In addition, under guidelines of the National Association of Securities
Dealers, Inc. ("NASD"), members of the NASD and their associates are subject to
certain restrictions on the transfer of securities purchased in accordance with
Subscription Rights and to certain reporting requirements upon purchase of such
securities.
Depending upon market conditions, the Boards of Directors of the
Company and the Bank, with the approval of the Administrator, may increase or
decrease any of the above purchase limitations. In the event of such an increase
or decrease, no further approval of members of the Bank would be required. North
Carolina regulations authorize a plan of conversion to provide a maximum
purchase limitation of a percentage not to exceed 5% except for tax-qualified
employee stock benefit plans which may purchase in the aggregate not more than
10%.
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Regulatory Restrictions on Acquisition of the Common Stock
Applicable regulations prohibit any person from making an offer,
announcing an intent to make an offer, entering into any other arrangement to
purchase Common Stock or acquiring Common Stock or Subscription Rights in the
Company from another person prior to completion of the Stock Conversion.
Further, no person may make an offer or announcement of an offer to purchase
shares or actually acquire shares in the Company for a period of three years
from the date of the completion of the Stock Conversion, if, upon the completion
of such offer or acquisition, that person would become the beneficial owner of
more than 10% of the Company's outstanding stock, without the prior written
approval of the Administrator. The Administrator has defined the word "person"
to include any individual, group acting in concert, corporation, partnership,
association, joint stock company, trust, unincorporated organization or similar
company, a syndicate or any group formed for the purpose of acquiring, holding
or disposing of securities of an insured institution. However, offers made
exclusively to the Company or underwriters or members of a selling group acting
on behalf of the Company for resale to the general public are excepted.
Moreover, when any person, directly or indirectly, acquires beneficial ownership
of more than 10% of the Company's capital stock following the Stock Conversion
within such three-year period without the prior approval of the Administrator,
the Company's Common Stock beneficially owned by such person in excess of 10%
shall not be counted as shares entitled to vote and shall not be voted by any
person or counted as voting shares in connection with any matter submitted to
the stockholders for a vote. The Certificate of Incorporation of the Company
include a similar 10% beneficial ownership limitation. See "Certain Anti-
Takeover Provisions in the Certificate of Incorporation and Bylaws."
In addition to the foregoing restrictions, any person or group of
persons acting in concert who propose to acquire 10% or more of the Company's
outstanding shares will be presumed under Administrator or Federal Reserve Board
regulations, as the case may be, to be acquiring control of the Company and will
be required to submit prior notice to the Administrator or the Federal Reserve
Board under the Change in Bank Control Act and the Federal Reserve Board
regulations thereunder. Furthermore, following the Bank Conversion, the
acquisition of control of the Company by any company will be subject to the
prior approval of the Federal Reserve Board under the Bank Holding Company Act.
See "Certain Restrictions on Acquisition of the Company, the Converted Bank and
the Bank."
Restrictions on Repurchase of Stock
Upon consummation of the Bank Conversion, the Company's ability to
repurchase its capital stock will be governed by the Federal Reserve Board's
regulations. Under the Federal Reserve Board's regulations, any bank holding
company that is not well-capitalized and not in generally satisfactory condition
must notify the Federal Reserve Board before purchasing or redeeming its equity
securities if the gross consideration for the purchase or redemption, when
aggregated with the net consideration paid by the company for all purchases and
redemptions during the preceding 12 months, is equal to 10% or more of the
company's consolidated retained earnings. The Federal Reserve Board may
disapprove a proposed purchase or redemption if it finds that the proposal would
constitute an unsafe or unsound practice or would violate any directive of,
condition imposed by or written agreement with, the Federal Reserve Board. Under
the Federal Reserve Board's regulations, no such prior notice of repurchases is
required to be given by a bank holding company that has received one of the two
highest examination ratings at its most recent supervisory inspection, is not
the subject of any unresolved supervisory issues and is, and after giving effect
to the proposed repurchase will continue to be, well-capitalized. The Company
has no specific plans regarding possible stock repurchases during the first year
following the Stock Conversion.
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Limitations on Resales by Management
Shares of the Common Stock purchased by directors or officers of the
Company and the Bank in the Stock Conversion will be subject to the restriction
that such shares may not be sold for a period of one year following completion
of the Stock Conversion, except in the event of the death of the original
purchaser or in any exchange of such shares in connection with a merger or
acquisition of the Company approved by the applicable regulatory authorities.
Accordingly, shares of the Common Stock issued by the Company to directors and
officers shall bear a legend giving appropriate notice of the restriction
imposed upon it and, in addition, the Company will give appropriate instructions
to the transfer agent for the Common Stock with respect to the applicable
restriction for transfer of any restricted stock. Any shares issued to directors
and officers as a stock dividend, stock split or otherwise with respect to
restricted stock shall be subject to the same restrictions. Shares acquired
otherwise than in the Stock Conversion, such as under the Company's Option Plan,
would not be subject to such restrictions. To the extent directors and officers
are deemed affiliates of the Company, all shares of the Common Stock acquired by
such directors and officers will be subject to certain resale restrictions and
may be resold pursuant to Rule 144 under the Securities Act. See "Regulation --
Regulation of the Company -- Federal Securities Law."
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by the
Bank will be final. The Plan provides that the Bank's Board of Directors shall
have the sole discretion to interpret and apply the provisions of the Plan to
particular facts and circumstances and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to giving preference in the Community Offering to natural persons
and trusts of natural persons who are permanent residents of the Local
Community, and any and all interpretations, applications and determinations made
by the Board of Directors in good faith and on the basis of such information and
assistance as was then reasonably available for such purpose shall be conclusive
and binding upon the Bank and its members and subscribers in the Subscription
and Community Offerings, subject to the authority of the FDIC and the
Administrator.
The Plan provides that, if deemed necessary or desirable by the Board
of Directors, the Plan may be substantively amended by a two-thirds vote of the
Board of Directors at any time prior to submission of the Plan and proxy
materials to the Bank's members. After submission of the Plan and proxy
materials to the members, the Plan may be amended by a two-thirds vote of the
Board of Directors at any time prior to the Special Meeting and at any time
following the Special Meeting with the concurrence of the FDIC and the
Administrator. In its discretion, the Board of Directors may modify or terminate
the Plan upon the order of the regulatory authorities without a resolicitation
of proxies or another Special Meeting. However, any modification of the Plan
resulting in a material change in the terms of the Conversion would require a
resolicitation of proxies and another meeting of stockholders.
The Plan further provides that in the event that mandatory new
regulations pertaining to conversions are adopted by the FDIC, the
Administrator, the Commission, the Federal Reserve Board or any successor agency
prior to completion of the Conversion, the Plan will be amended to conform to
such regulations without a resolicitation of proxies or another Special Meeting.
In the event that such new conversion regulations contain optional provisions,
the Plan may be amended to utilize such optional provisions at the discretion of
the Board of Directors without a resolicitation of proxies or another Special
Meeting. By adoption of the Plan, the Bank's members will be deemed to have
authorized amendment of the Plan under the circumstances described above.
Conditions and Termination
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total outstanding votes of
the members of the Bank and the sale of all shares of the Common Stock within 12
months following approval of the Plan by the members, which time period may be
extended an additional 12 months by an amendment to the Plan. If these
conditions are not satisfied, the Plan will be terminated, and the Bank will
continue its business in the mutual form of organization. The Plan may be
terminated by the Board of Directors at any time prior to the Special Meeting
and, with the approval of the FDIC and the Administrator, by the Board of
Directors at any time thereafter.
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CERTAIN RESTRICTIONS ON ACQUISITION OF THE COMPANY,
THE CONVERTED BANK AND THE COMMERCIAL BANK
Conversion Regulations
Applicable North Carolina regulations provide that for a period of
three years following the Stock 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 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 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 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 Company by a
corporation whose ownership is or will be substantially the same as the
ownership of the Company, provided that the offer or acquisition is made more
than one year following the consummation of the Stock Conversion. The regulation
provides that within one year following the Stock 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 Stock Conversion, the Administrator may approve such an
acquisition upon a finding that (i) the acquisition is necessary to protect the
safety and soundness of the Company and the Bank or the Board of Directors of
the Company and the Bank 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 Company and the Bank and
the public interests will not be adversely affected.
Change in Bank Control Act and Bank Holding Company Act
The Change in Bank Control Act, together with North Carolina
regulations, require that the consent of the Administrator and Federal Reserve
Board 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. The consent of the Commission and the Federal Reserve Board is
required to be obtained prior to any person or company acquiring "control" of a
North Carolina-chartered commercial bank. 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 Company or
the Bank 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 Board in connection with its approval of such acquisitions may deter
potential acquirors from seeking to obtain control of the Company. See
"Regulation -- Regulation of the Company Following the Stock Conversion" and "--
Regulation of the Company Following the Bank Conversion."
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Delaware General Corporation Law
The Delaware General Corporation Law ("DGCL") contains a statute
designed to provide Delaware corporations with additional protection against
hostile takeovers. The takeover statute, which is codified in Section 203 of the
DGCL, among other things, prohibits the Company from engaging in certain
business combinations (including a merger) with a person who is the beneficial
owner of 15% or more of the Company's outstanding voting stock (an "Interested
Stockholder") during the three-year period following the date such person became
an Interested Stockholder. This restriction does not apply if (1) before such
person became an Interested Stockholder, the Board of Directors approved the
transaction in which the Interested Stockholder became an Interested Stockholder
or approved the business combination; or (2) upon consummation of the
transaction which resulted in the stockholder's becoming an Interested
Stockholder, the Interested Stockholder owned at least 85% of the voting stock
of the Company outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding, those shares owned by
(i) persons who are directors and also officers and (ii) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date, the business combination is
approved by the Board of Directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least two-thirds of the outstanding voting stock which is not owned by the
Interested Stockholder. The Company may exempt itself from the requirements of
the statute by adopting an amendment to its Certificate of Incorporation. At the
present time, the Board of Directors does not intend to propose any such
amendment.
CERTAIN ANTI-TAKEOVER PROVISIONS
IN THE CERTIFICATE OF INCORPORATION AND BYLAWS
While the Boards of Directors of the Bank and the Company are not aware
of any effort that might be made to obtain control of the Company after the
Conversion, the Board of Directors, as discussed below, believes that it is
appropriate to include certain provisions as part of the Company's Certificate
of Incorporation to protect the interests of the Company and its stockholders
from hostile takeovers which the Board of Directors might conclude are not in
the best interests of the Converted Bank or the Commercial Bank, the Company or
the Company's stockholders. These provisions may have the effect of discouraging
a future takeover attempt which is not approved by the Board of Directors but
which individual stockholders may deem to be in their best interests or in which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such provisions also
will render the removal of the current Board of Directors or management of the
Company more difficult.
The following discussion is a general summary of certain provisions of
the Certificate of Incorporation and Bylaws of the Company which may be deemed
to have such an "anti-takeover" effect. The description of these provisions is
necessarily general and reference should be made in each case to the Certificate
of Incorporation and Bylaws of the Company. For information regarding how to
obtain a copy of these documents without charge, see "Additional Information."
Classified Board of Directors and Related Provisions
The Company's Certificate of Incorporation provide that the Board of
Directors is to be divided into three classes which shall be as nearly equal in
number as possible. The directors in each class will hold office following their
initial appointment to office for terms of one year, two years and three years,
respectively, and, upon reelection, will serve for terms of three years
thereafter. Each director will serve until his or her successor is elected and
qualified. The Certificate of Incorporation provide that a director may be
removed only for cause and only by the affirmative vote of the holders of at
least 80% of the outstanding shares entitled to vote.
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A classified board of directors could make it more difficult for
stockholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Since the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the shareholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year. In the absence of the provisions of the Certificate of
Incorporation classifying the Board, all of the directors would be elected each
year.
Management of the Company believes that the staggered election of
directors tends to promote continuity of management because only one-third of
the Board of Directors is subject to election each year. Staggered terms
guarantee that in the ordinary course approximately two-thirds of the Directors,
or more, at any one time have had at least one year's experience as Directors of
the Corporation, and moderate the pace of changes in the Board of Directors by
extending the minimum time required to elect a majority of Directors from one to
two years.
Stockholder Vote Required to Approve Business Combinations with Principal
Stockholders
The Company's Certificate of Incorporation require the approval of the
holders of (i) at least 80% of the Company's outstanding shares of voting stock,
and (ii) at least a majority of the Company's outstanding shares of voting
stock, not including shares deemed beneficially owned by a "Related Person," to
approve certain "Business Combinations" as defined therein, and related
transactions. Under Delaware law, absent this provision, Business Combinations,
including mergers, consolidations and sales of substantially all of the assets
of the Company must, subject to certain exceptions, be approved by the vote of
the holders of at least a majority of the outstanding shares of the Common
Stock. For a discussion of an exception to the majority approval requirement
under Delaware law, see "Certain Restrictions on Acquisition of the Company, the
Converted Bank and the Commercial Bank -- Delaware General Corporation Law." The
increased voting requirements in the Company's Certificate of Incorporation
apply in connection with business combinations involving a "Related Person,"
except in cases where the proposed transaction has been approved in advance by
two-thirds of those members of the Company's Board of Directors who are
unaffiliated with the Related Person and who were directors prior to the time
when the Related Person became a Related Person (the "Continuing Directors").
The term "Related Person" is defined to include any individual, corporation,
partnership or other entity or affiliate thereof which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
Common Stock of the Company. A "Business Combination" is defined to include (i)
any merger or consolidation of the Company with or into a Related Person; (ii)
any sale, lease exchange, transfer, or other disposition of all or a substantial
part of the assets of the Company or of a subsidiary to a Related Person (the
term "substantial part" is defined to include more than 25% of the Company's
total assets); (iii) any merger or consolidation of a Related Person with or
into the Company or a subsidiary of the Company; (iv) any sale, lease, exchange,
transfer or other disposition of all or any substantial part of the assets of a
Related Person to the Company or a subsidiary of the Company; (v) the issuance
of any securities of the Company or a subsidiary of the Company to a Related
Person; (vi) the acquisition by the Company or a subsidiary of the Company of
any securities of the Related Person; (vii) any reclassification of the Common
Stock, or any recapitalization involving the Common Stock; and (viii) any
agreement, contract or other arrangement providing for any of the above
transactions.
Limitations on Call of Meetings of Stockholders
The Company's Certificate of Incorporation provides that special
meetings of stockholders may only be called by the Company's Board of Directors
or an appropriate committee appointed by the Board of Directors. Stockholders
are not authorized to call a special meeting, and stockholder action may be
taken only at a special or annual meeting of stockholders and not by written
consent.
Absence of Cumulative Voting
The Company's Certificate of Incorporation provides that there shall
not be cumulative voting by stockholders for the election of the Company's
directors. The absence of cumulative voting rights effectively means
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that the holders of a majority of the shares voted at a meeting of stockholders
may, if they so choose, elect all directors of the Company to be elected at that
meeting, thus precluding minority stockholder representation on the Company's
Board of Directors.
Restrictions on Acquisitions of Securities
The Certificate of Incorporation provides that for a period of three
years from the effective date of the Stock Conversion, no person may directly or
indirectly offer to acquire or acquire the beneficial ownership of more than 10%
of any class of the equity security of the Company, unless such offer or
acquisition shall have been approved in advance by a two-thirds vote of the
Company's Continuing Directors. This provision does not apply to any employee
stock benefit plan of the Company or to an underwriter or member of an
underwriting or selling group involving the public sale or resale of securities
of the Company or a subsidiary thereof; provided, that upon completion of the
sale or resale, no such underwriter or member of the selling group is a
beneficial owner of more than 10% of any class of equity securities of the
Company. In addition, during such three-year period, no shares beneficially
owned in violation of the foregoing percentage limitation, as determined by the
Company's Board of Directors, shall be entitled to vote in connection with any
matter submitted to stockholders for a vote. Additionally, the Certificate of
Incorporation provides for further restrictions on voting rights of shares owned
in excess of 10% of any class of equity security of the Company beyond three
years after the Stock Conversion. Specifically, the Certificate of Incorporation
provides that if, at any time after three years from the Bank's conversion to
stock form, any person acquires the beneficial ownership of more than 10% of any
class of equity security of the Company, then, with respect to each vote in
excess of 10%, the record holders of voting stock of the Company beneficially
owned by such person shall be entitled to cast only one-hundredth of one vote
with respect to each vote in excess of 10% of the voting power of the
outstanding shares of voting stock of the Company which such record holders
would otherwise be entitled to cast without giving effect to the provision, and
the aggregate voting power of such record holders shall be allocated
proportionately among such record holders. An exception from the restriction is
provided if the acquisition of more than 10% of the securities received the
prior approval by a two-thirds vote of the Company's Continuing Directors. Under
the Company's Certificate of Incorporation, the restriction on voting shares
beneficially owned in violation of the foregoing limitations is imposed
automatically. In order to prevent the imposition of such restrictions, the
Board of Directors must take affirmative action approving in advance a
particular offer to acquire or acquisition. Unless the Board took such
affirmative action, the provision would operate to restrict the voting by
beneficial owners of more than 10% of the Company's Common Stock in a proxy
contest.
Board Consideration of Certain Nonmonetary Factors in the Event of an Offer by
Another Party
The Certificate of Incorporation of the Company directs the Board of
Directors, in evaluating a Business Combination or a tender or exchange offer,
to consider, in addition to the adequacy of the amount to be paid in connection
with any such transaction, certain specified factors and any other factors the
Board deems relevant, including (i) the social and economic effects of the
transaction on the Company and its subsidiaries, employees, depositors, loan and
other customers, creditors and other elements of the communities in which the
Company and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity;
and (iii) the competence, experience and integrity of the acquiring person or
entity and its or their management. By having the standards in the Certificate
of Incorporation of the Company, the Board of Directors may be in a stronger
position to oppose any proposed Business Combination or tender or exchange offer
if the Board concludes that the transaction would not be in the best interest of
the Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
The Board of Directors feels a responsibility for maintaining the
financial and business integrity of the Company. Savings institutions and banks
and their holding companies occupy positions of special trust in the communities
they serve. They also provide opportunities for abuse by those who are not of
sufficient experience or competence or financial means to act professionally and
responsibly with respect to management of a financial institution. It is of
concern to the Company that it be managed in the interest of the communities
that it serves and that it and its subsidiary bank maintain its integrity as an
institution.
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One effect of this provision might be to encourage consultation by an
offeror with the Board of Directors prior to or after commencing a tender offer
in an attempt to prevent a contest from developing. This provision thus may
strengthen the Board of Directors' position in dealing with any potential
offeror which might attempt to effect a takeover of the Company. The provision
will not make a Business Combination regarded by the Board of Directors as being
in the interests of the Company more difficult to accomplish, but it will permit
the Board of Directors to determine whether a Business Combination or tender or
exchange offer is not in the interests of the Company (and thus to oppose it) on
the basis of various factors deemed relevant.
Authorization of Preferred Stock
The Company's Certificate of Incorporation authorizes the issuance of
up to 1,000,000 shares of preferred stock, which conceivably could represent an
additional class of stock required to approve any proposed acquisition. The
Company is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the powers, designations, preferences and relative,
participating, optional and other special rights of such shares, including
voting rights and conversion rights. Issuance of the preferred stock could
adversely affect the relative voting rights of holders of the Common Stock. In
the event of a proposed merger, tender offer or other attempt to gain control of
the Company that the Board of Directors did not approve, it might be possible
for the Board of Directors to authorized the issuance of a series of preferred
stock with rights and preferences that would impede the completion of such a
transaction. An effect of the possible issuance of preferred stock, therefore,
may be to deter a future takeover attempt. The Board of Directors has no present
plans or understandings for the issuance of any preferred stock and does not
intend to issue any preferred stock except on terms which the Board of Directors
deems to be in the best interests of the Company and its stockholders. This
preferred stock, none of which has been issued by the Company, together with
authorized but unissued shares of Common Stock (the Certificate of Incorporation
authorizes the issuance of up to 8,000,000 shares of Common Stock), also could
represent additional capital required to be purchased by the acquiror.
Procedures for Stockholder Nominations
The Company's Certificate of Incorporation provides that any
stockholder desiring to make a nomination for the election of directors or a
proposal for new business at a meeting of stockholders must submit written
notice to the Secretary of the Company not less than 30 or more than 60 days in
advance of the meeting. The Certificate of Incorporation further provides that
if a stockholder seeking to make a nomination or a proposal for new business
fails to follow the prescribed procedures, the chairman of the meeting may
disregard the defective nomination or proposal. Management believes that it is
in the best interests of the Company and its stockholders to provide sufficient
time to enable management to disclose to stockholders information about a
dissident slate of nominations for directors. This advance notice requirement
may also give management time to solicit its own proxies in an attempt to defeat
any dissident slate of nominations should management determine that doing so is
in the best interest of stockholders generally. Similarly, adequate advance
notice of stockholder proposals will give management time to study such
proposals and to determine whether to recommend to the stockholders that such
proposals be adopted.
Amendment of Bylaws
The Company's Certificate of Incorporation provides that the Company's
Bylaws may be amended either by a two-thirds vote of the Company's Board of
Directors or by the affirmative vote of the holders of not less than 80% of the
outstanding shares of the Company's stock entitled to vote generally in the
election of directors, after giving effect to any limits on voting rights.
Absent this provision, Delaware law provides that a corporation's bylaws may be
amended by the holders of a majority of the votes cast at a meeting where a
quorum is present. The Company's Bylaws contain numerous provisions concerning
the Company's governance, such as fixing the number of directors and determining
the number of directors constituting a quorum. By reducing the ability of a
potential corporate raider to make changes in the Company's Bylaws and to reduce
the authority of the Board of Directors or impede its ability to manage the
Company, this provision could have the effect of discouraging a tender offer or
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other takeover attempt where the ability to make fundamental changes through
bylaw amendments is an important element of the takeover strategy of the
acquiror.
Amendment of Certificate of Incorporation
The Company's Certificate of Incorporation provides that specified
provisions contained in the Certificate of Incorporation may not be repealed or
amended except upon the affirmative vote of not less than 80% of the outstanding
shares of the Company's stock entitled to vote generally in the election of
directors, after giving effect to any limits on voting rights. This requirement
exceeds the majority vote of the outstanding stock that would otherwise be
required by Delaware law for the repeal or amendment of a provision of the
Certificate of Incorporation. The specific provisions are those (i) governing
the calling of special meetings, the absence of cumulative voting rights and the
requirement that stockholder action be taken only at annual or special meetings,
(ii) requiring written notice to the Company of nominations for the election of
directors and new business proposals, (iii) governing the number of the
Company's Directors, the filling of vacancies on the Board of Directors and
classification of the Board of Directors, (iv) providing the mechanism for
removing directors, (v) limiting the acquisition of 10% or more of the capital
stock of the Company (except, with the prior approval of the Continuing
Directors of the Company), (vi) governing the requirement for the approval of
certain Business Combinations involving a "Related Person," (vii) regarding the
consideration of certain nonmonetary factors in the event of an offer by another
party, (viii) providing for the indemnification of directors, officers,
employees and agents of the Company, (ix) pertaining to the elimination of the
liability of the directors to the Company and its stockholders for monetary
damages, with certain exceptions, for breach of fiduciary duty, and (x)
governing the required stockholder vote for amending the Certificate of
Incorporation or Bylaws of the Company. This provision is intended to prevent
the holders of less than 80% of the outstanding stock of the Company from
circumventing any of the foregoing provisions by amending the Certificate of
Incorporation to delete or modify one of such provisions. This provision would
enable the holders of more than 20% of the Company's voting stock to prevent
amendments to the Company's Certificate of Incorporation or Bylaws, even if such
amendments were favored by the holders of a majority of the voting stock.
Benefit Plans
In addition to the provisions of the Company's Certificate of
Incorporation and Bylaws described above, certain benefit plans of the Company
and the Converted Bank (or the Commercial Bank) adopted in connection with the
Conversion contain provisions which also may discourage hostile takeover
attempts which the Boards of Directors of the Converted Bank (or the Commercial
Bank) might conclude are not in the best interests of the Company, the Converted
Bank (or the Commercial Bank) or the Company's stockholders. For a description
of the benefit plans and the provisions of such plans relating to changes in
control of the Company or the Converted Bank (or the Commercial Bank), see
"Management of the Bank -- Certain Benefit Plans and Agreements."
The Purpose of and Anti-Takeover Effect of the Company's Certificate of
Incorporation and Bylaws
The Boards of Directors of the Company and the Bank believe that the
provisions described above reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with and
approved by its Board of Directors. These provisions will also assist the
Company and the Converted Bank (or the Commercial Bank) in the orderly
deployment of the net proceeds of the Stock Conversion into productive assets
during the initial period after the Stock Conversion. The Boards of Directors of
the Company and the Bank believe these provisions are in the best interests of
the Converted Bank (and the Commercial Bank) and of the Company and its
stockholders. In the judgment of the Boards of Directors of the Company and the
Bank, the Company's Board of Directors is in the best position to consider all
relevant factors and to negotiate for what is in the best interests of the
stockholders and the Company's other constituents. Accordingly, the Boards of
Directors of the Company and the Bank believe that it is in the best interests
of the Company and its stockholders to encourage potential acquirors to
negotiate directly with the Company's Board of Directors, and that these
provisions will encourage such negotiations and discourage nonnegotiated
takeover attempts. It is also the view of the Board of Directors of the
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Company that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of the
Company and which is in the best interests of all stockholders.
Attempts to acquire control of financial institutions and their holding
companies have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to stockholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Company and
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, stockholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining stockholders. The concentration of control that could result from a
tender offer or other takeover attempt could also deprive the Company's
remaining stockholders of certain protective provisions of the Exchange Act.
Despite the belief of the Company and the Bank as to the benefits to
stockholders of these provisions of the Company's Certificate of Incorporation
and Bylaws, these provisions may also have the effect of discouraging
a future takeover attempt which would not be approved by the Company's Board of
Directors but pursuant to which the stockholders may receive a substantial
premium for their shares over then current market prices. As a result,
stockholders who might desire to participate in such a transaction may not have
any opportunity to do so. Such provisions will also render the removal of the
Company's Board of Directors and management more difficult and may tend to
stabilize the Company's stock price, thus limiting gains which might otherwise
be reflected in price increases due to a potential merger or acquisition. The
Board of Directors, however, has concluded that the potential benefits of these
provisions outweigh the possible disadvantages. Pursuant to applicable
regulations, at any annual or special meeting of its stockholders after the
Stock Conversion, the Company may adopt additional Certificate of Incorporation
provisions regarding the acquisition of its equity securities that would be
permitted to a Delaware corporation. The Company and the Bank do not presently
intend to propose the adoption of further restrictions on the acquisition of the
Company's equity securities.
DESCRIPTION OF CAPITAL STOCK
General
The Company is authorized to issue 8,000,000 shares of Common Stock and
1,000,000 shares of serial preferred stock, $0.01 par value per share. The
Company currently expects to issue between 1,870,000 and 2,530,000 shares,
subject to adjustment, of the Common Stock and no shares of serial preferred
stock in the Stock Conversion. If the Option Plan is adopted and implemented,
the Company will reserve for future issuance under the Option Plan an amount of
authorized but unissued shares of Common Stock equal to 10% of the shares to be
issued in the Stock Conversion. The capital stock of the Company will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC or any other federal or state governmental
agency.
Common Stock
Voting Rights. Each share of the Common Stock will have the same
relative rights and will be identical in all respects with every other share of
the Common Stock. The holders of the Common Stock will possess
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exclusive voting rights in the Company, except to the extent that shares of
serial preferred stock issued in the future may have voting rights, if any. Each
holder of shares of the Common Stock will be entitled to one vote for each share
held of record on all matters submitted to a vote of holders of shares of the
Common Stock. For information regarding a possible reduction in voting rights,
see "Certain Anti-Takeover Provisions in the Certificate of Incorporation and
Bylaws --Restrictions on Acquisitions of Securities."
Dividends. The Company may, from time to time, declare dividends to the
holders of the Common Stock, who will be entitled to share equally in any such
dividends. For information as to cash dividends, see "Dividend Policy",
"Regulation -- Depository Institution Regulation -- Dividend Restrictions" and
"Taxation."
Liquidation. In the event of any liquidation, dissolution or winding up
of the Converted Bank (or the Commercial Bank), the Company, as holder of all of
the Converted Bank's (or Commercial Bank's) capital stock, would be entitled to
receive all assets of the Converted Bank (or the Commercial Bank) after payment
of all debts and liabilities of the Converted Bank (or the Commercial Bank) and
after distribution of the balance in the liquidation account to Eligible Account
Holders and Supplemental Eligible Account Holders. In the event of a
liquidation, dissolution or winding up of the Company, each holder of shares of
the Common Stock would be entitled to receive, after payment of all debts and
liabilities of the Company, a pro rata portion of all assets of the Company
available for distribution to holders of the Common Stock. If any serial
preferred stock is issued, the holders thereof may have a priority in
liquidation or dissolution over the holders of the Common Stock. The Bank
Conversion shall not be considered a "liquidation" of the Converted Bank, and
the Commercial Bank will continue to maintain the liquidation account
established by the Converted Bank in the Stock Conversion according to the same
terms.
Restrictions on Acquisition of the Common Stock. For information
regarding limitations on acquisition of shares of the Common Stock, see "Certain
Restrictions on Acquisition of the Company, the Converted Bank and the
Commercial Bank," "Certain Anti-Takeover Provisions in the Certificate of
Incorporation and Bylaws" and "The Conversion -- Regulatory Restrictions on
Acquisition of the Common Stock."
Other Characteristics. Holders of the Common Stock will not have
preemptive rights with respect to any additional shares of the Common Stock
which may be issued. The Common Stock is not subject to call for redemption, and
the outstanding shares of the Common Stock, when issued and upon receipt by the
Company of the full purchase price therefor, will be fully paid and
nonassessable.
Transfer Agent and Registrar. The transfer agent and registrar for the
Common Stock will be Registrar & Transfer Co., Cranford, New Jersey.
Serial Preferred Stock
None of the 1,000,000 authorized shares of serial preferred stock of
the Company will be issued in the Stock Conversion. After the Stock Conversion
is completed, the Board of Directors of the Company will be authorized to issue
serial preferred stock and to fix and state voting powers, designations,
preferences or other special rights of such shares and the qualifications,
limitations and restrictions thereof. The serial preferred stock may rank prior
to the Common Stock as to dividend rights or liquidation preferences, or both,
and may have full or limited voting rights. The Board of Directors has no
present intention to issue any of the serial preferred stock. Should the Board
of Directors of the Company subsequently issue serial preferred stock, no holder
of any such stock shall have any preemptive right to subscribe for or purchase
any stock or any other securities of the Company other than such, if any, as the
Board of Directors, in its sole discretion, may determine and at such price or
prices and upon such other terms as the Board of Directors, in its sole
discretion, may fix.
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REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to the
Exchange Act upon the completion of the Stock Conversion and will not deregister
said shares for a period of at least three years following the completion of the
Stock Conversion. Upon such registration, the proxy and tender offer rules,
insider trading reporting and restrictions, annual and periodic reporting and
other requirements of the Exchange Act will be applicable. The Company intends
to have a fiscal year end of September 30.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the Company by
Housley Kantarian & Bronstein, P.C., Washington, D.C. Housley Kantarian &
Bronstein, P.C. has consented to the references herein to its opinion. Certain
legal matters will be passed upon for Trident Securities by Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P., Greensboro, North Carolina.
TAX OPINIONS
The federal income tax consequences of the Stock Conversion will be
passed upon by Housley Kantarian & Bronstein, P.C., Washington, D.C. Housley
Kantarian & Bronstein, P.C. has consented to the references herein to its
opinion. The North Carolina income tax consequences of the Stock Conversion will
be passed upon by Coopers & Lybrand L.L.P., which has consented to the
references herein to its opinion.
EXPERTS
The financial statements of Home Savings Bank, SSB at September 30,
1996 and 1995 and for the three years then ended have been included herein in
reliance upon the report of Coopers & Lybrand L.L.P., independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
Ferguson has consented to the publication herein of the summary of its
letter to the Bank setting forth its opinion as to the estimated pro forma
aggregate market value of the Common Stock to be issued in the Stock Conversion
and the value of Subscription Rights to purchase the Common Stock and to the use
of its name and statements with respect to it appearing herein.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
(File No. 333-16335) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. Such information may be inspected at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies may be obtained at prescribed rates
from the Public Reference Section of the SEC at 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 Company. The
address for the SEC's Website is "http://www.sec.gov". The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
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The Bank has filed an Application to Convert a Mutual Savings Bank to a
Stock Owned Savings Bank with the Administrator. Pursuant to the North Carolina
conversion regulations, this Prospectus omits certain information contained in
such Application. The Application, which contains a copy of Ferguson's
appraisal, may be inspected at the office of the Administrator, Savings
Institutions Division, North Carolina Department of Commerce, Tower Building,
Suite 301, 1110 Navaho Drive, Raleigh, North Carolina 27609. Copies of the Plan
of Conversion, which includes a copy of the Converted Bank's proposed Amended
and Restated Articles of Incorporation and Bylaws, are available for inspection
at each office of the Bank and may be obtained by writing to the Bank at 1311
Carolina Avenue, Washington, North Carolina 27889; Attention Thomas A. Vann,
President or by telephoning the Bank at (919) 946-4178. A copy of Ferguson's
independent appraisal is also available for inspection at the Stock Information
Center.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Accountants' Report F-1
Consolidated Statements of Financial Condition as of F-2
September 30, 1996 and 1995
Consolidated Statements of Operations for the Years Ended F-3
September 30, 1996, 1995 and 1994
Consolidated Statements of Retained Income for the Years Ended F-4
September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended F-5
September 30, 1996, 1995 and 1994
Notes to Financial Statements F-7
Schedules - All schedules are omitted because the required information is not
applicable or is presented in the financial statements or accompanying notes.
All financial statements of NewSouth Bancorp, Inc. have been omitted
because NewSouth Bancorp, Inc. has not yet issued any stock, has no assets and
no liabilities and has not conducted any business other than of an
organizational nature.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Home Savings Bank, SSB
Washington, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Home Savings Bank, SSB and subsidiary as of September 30, 1996 and 1995, and
the related consolidated statements of operations, retained income, and cash
flows for each of the years in the three year period then ended. 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Home Savings Bank, SSB
and subsidiary at September 30, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the years in the three year
period then ended in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Bank
changed its methods of accounting for securities and income taxes in 1995 and
1994, respectively. Additionally, the 1995 financial statements have been
revised for certain amounts related to other liabilities, as discussed in Note
7.
/s/ Coopers & Lybrand, LLP
Raleigh, North Carolina
October 18, 1996
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Cash and due from banks $ 2,811,326 $ 1,714,010
Interest-bearing deposits in financial institutions 5,765,251 71,676
Investment securities:
Available-for-sale 8,106,581 -
Held-to-maturity (estimated market value of $3,130,000 in 1995) - 3,001,640
Mortgage-backed securities:
Available-for-sale 14,797,424 9,071,836
Held-to-maturity (estimated market value of $13,114,000 in 1995) - 13,213,376
Loans receivable, net:
Held for sale 21,627,590 19,506,762
Held for investment 134,053,705 125,033,882
Premises and equipment, net 2,900,421 3,013,472
Income taxes refundable 385,373 -
Deferred income taxes 223,983 -
Real estate owned 178,509 68,555
Federal Home Loan Bank stock, at cost 1,287,500 1,287,500
Accrued interest receivable 1,382,569 1,243,022
Prepaid expenses and other assets 618,921 478,314
---------------- ----------------
Total assets $ 194,139,153 $ 177,704,045
================ ================
<CAPTION>
LIABILITIES AND RETAINED INCOME
<S> <C> <C>
Deposits:
Demand $ 27,334,469 $ 15,952,633
Savings 7,019,797 6,890,429
Time 136,859,020 130,613,966
---------------- ----------------
Total deposits 171,213,286 153,457,028
Borrowed money 1,039,608 4,000,000
Accrued interest payable 67,939 62,615
Income taxes payable - 75,720
Deferred income taxes - 321,162
Advance payments by borrowers for property taxes and
insurance 383,517 309,870
Other liabilities 3,088,232 1,789,581
---------------- ----------------
Total liabilities 175,792,582 160,015,976
Commitments and contingencies (Notes 4, 7, 8, 11, 13 and 14)
Retained income, substantially restricted 18,346,571 17,688,069
---------------- ----------------
Total liabilities and retained income $ 194,139,153 $ 177,704,045
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Consolidated Statements of Operations
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 13,430,797 $ 12,511,035 $ 10,016,284
Interest and dividends on investments and deposits 1,918,876 1,874,173 1,794,392
------------ ------------- -------------
Total interest income 15,349,673 14,385,208 11,810,676
------------ ------------- -------------
Interest expense:
Interest on deposits 7,939,014 6,610,023 4,415,762
Interest on borrowings 166,438 733,993 788,231
------------ ------------- -------------
Total interest expense 8,105,452 7,344,016 5,203,993
------------ ------------- -------------
Net interest income before provision for possible loan
losses 7,244,221 7,041,192 6,606,683
Provision for possible loan losses 511,000 20,000 210,000
------------ ------------- -------------
Net interest income 6,733,221 7,021,192 6,396,683
------------ ------------- -------------
Other income:
Loan fees and service charges 552,169 402,054 377,059
Loan servicing fees 631,866 581,844 580,273
Gain on sale of real estate, net 33,628 64,513 1,300
Gain on sale of mortgage loans and mortgage-
backed securities 423,113 312,325 580,663
Other income 191,768 141,613 113,118
------------ ------------- -------------
Total other income 1,832,544 1,502,349 1,652,413
------------ ------------- -------------
General and administrative expenses:
Compensation and fringe benefits 3,569,144 3,431,537 2,762,002
Federal insurance premiums 353,585 304,802 251,204
Insurance fund special assessment 946,020 - -
Premises and equipment 798,119 542,840 470,756
Advertising 102,762 93,634 80,602
Payroll and other taxes 286,949 259,786 247,863
Other 1,238,180 1,027,622 988,777
------------ ------------- -------------
Total general and administrative expenses 7,294,759 5,660,221 4,801,204
------------ ------------- -------------
Income before income taxes and cumulative effect of
change in method of accounting for income taxes 1,271,006 2,863,320 3,247,892
Income taxes 450,517 998,080 1,260,900
------------ ------------- -------------
Income before cumulative effect of change in method of
accounting for income taxes 820,489 1,865,240 1,986,992
Cumulative effect, at October 1, 1993, of change in
method of accounting for income taxes - - 250,000
------------ ------------- -------------
Net income $ 820,489 $ 1,865,240 $ 2,236,992
============ ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Consolidated Statements of Retained Income
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
gains
(losses) on
Retained securities
income, available-for-
substantially sale, net of
restricted taxes Total
------------- -------------- -------------
<S> <C> <C> <C>
Balance at October 1, 1993 $ 13,383,315 $ - $ 13,383,315
Net income 2,236,992 - 2,236,992
------------- -------------- -------------
Balance at September 30, 1994 15,620,307 - 15,620,307
Adjustment to October 1, 1994 balance for change in
method of accounting for securities, net of taxes - 46,431 46,431
Change in net unrealized gain on securities
available-for-sale, net of taxes - 156,091 156,091
Net income, as restated (Note 7) 1,865,240 - 1,865,240
------------- -------------- -------------
Balance at September 30, 1995 17,485,547 202,522 17,688,069
Change in net unrealized gains (losses) on securities
available-for-sale, net of taxes - (161,987) (161,987)
Net income 820,489 - 820,489
------------- -------------- -------------
Balance at September 30, 1996 $ 18,306,036 $ 40,535 $ 18,346,571
============= ============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended September 30, 1996 ,1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Operating activities:
Net income $ 820,489 $ 1,865,240 $ 2,236,992
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 511,000 20,000 210,000
Provision for loss on mortgage-backed securities
held for sale - - 8,415
Depreciation 449,104 228,684 183,771
Amortization (accretion) of discounts on securities 19,918 123 (375)
Provision for deferred income taxes (440,704) (241,196) 200,995
Gain on disposal of premises and equipment
and real estate acquired in settlement of loans (36,293) (64,432) (3,568)
Gain on sale of mortgage loans and mortgage-
backed securities (423,113) (312,325) (580,663)
Loan originations, net of principal repayments, of
loans held for sale (55,047,196) (47,101,448) (49,765,496)
Proceeds from principal repayments and sales of
mortgage-backed securities available-for-sale 8,832,521 2,877,591 12,685,406
Proceeds from sale of loans held for sale 51,656,899 37,707,880 74,135,564
Changes in assets and liabilities:
Accrued interest receivable (139,547) (224,259) (128,021)
Income taxes refundable (385,373) 259,334 (259,334)
Prepaid expenses and other assets (140,607) 139,817 51,786
Accrued interest payable 5,324 (40,069) (43,240)
Income taxes payable (75,720) 75,720 (308,541)
Other liabilities and advance payments 1,372,298 350,304 (98,897)
------------ ----------- -----------
Net cash provided by (used in) operating
activities 6,979,000 (4,459,036) 38,524,794
------------ ----------- -----------
Investing activities:
Proceeds from maturities of securities held-to-maturity 1,000,000 1,000,000 -
Proceeds from disposal of premises and equipment and
real estate acquired in settlement of loans 238,564 282,474 208,049
Purchases of investment securities (6,043,438) (3,001,857) -
Redemptions (purchases) of Federal Home Loan Bank
stock - (38,400) 125,900
Purchases of premises and equipment (351,588) (594,301) (917,643)
Loan originations, net of principal repayments of loans
held for investment (9,827,513) (5,580,606) (56,548,580)
------------ ----------- -----------
Net cash used in investing activities (14,983,975) (7,932,690) (57,132,274)
------------ ----------- -----------
</TABLE>
(Continued)
5
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
for the years ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Financing activities:
Net increase in deposit accounts $ 17,756,258 $ 21,864,747 $ 27,947,329
Proceeds from borrowings 25,039,608 42,000,000 71,500,000
Repayments of borrowings (28,000,000) (54,500,000) (81,500,000)
------------- ------------- -------------
Net cash provided by financing activities 14,795,866 9,364,747 17,947,329
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents 6,790,891 (3,026,979) (660,151)
Cash and cash equivalents, beginning of year 1,785,686 4,812,665 5,472,816
------------- ------------- -------------
Cash and cash equivalents, end of year $ 8,576,577 $ 1,785,686 $ 4,812,665
============= ============= =============
Supplemental disclosures:
Real estate acquired in settlement of loans $ 296,690 $ 110,636 $ 259,948
Exchange of loans for mortgage-backed securities $ 1,545,859 $ 6,288,164 $ 15,017,369
Proceeds from note payable for balance owed on
purchase of property $ - $ - $ 49,329
Unrealized securities gains (losses), net $ (161,987) $ 202,522 $ -
Transfers to securities held-to-maturity $ - $ 3,233,839 $ -
Transfers to securities available-for-sale $ 16,140,485 $ - $ -
Cash paid for interest $ 8,100,128 $ 7,384,085 $ 5,256,901
Cash paid for income taxes $ 1,327,315 $ 904,222 $ 1,273,949
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Home Savings Bank, SSB is a North Carolina chartered savings bank regulated
by the Federal Deposit Insurance Corporation and the North Carolina Savings
Institutions Administrator.
Effective September 30, 1996, Home Savings Bank, SSB dissolved its wholly-
owned subsidiary, Tidewater Financial Services Corporation. The results of
operations of the subsidiary are included through the date of dissolution in
these financial statements. Significant intercompany balances and
transactions were eliminated in consolidation.
The significant policies are summarized below:
a. Investments and Mortgage-Backed Securities - On October 1, 1994, the
------------------------------------------
Bank adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
(SFAS No. 115). Investments in certain securities are classified into
three categories and accounted for as follows: (1) debt securities that
the entity has the positive intent and the 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 unrealized gains and losses
included in earnings; (3) debt and equity securities not classified as
either held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a
separate component of equity. As of September 30, 1996, the Bank has
classified all investments as available-for-sale. During 1996 the Bank
transferred investments classified as held-to-maturity to available-for-
sale in accordance with a one-time amnesty on transfers provided by the
Financial Accounting Standards Board.
Premium and discounts on debt securities are recognized in interest
income on the level interest yield method over the period to maturity.
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by the issuers of
the securities. Premiums and discounts are amortized using the interest
method over the remaining period to contractual maturity, adjusted for
anticipated prepayments.
Gains and losses on the sale of securities are determined using the
specific identification method.
7
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
b. Loans Receivable Held for Investment - Loans receivable held for
------------------------------------
investment are stated at the amount of unpaid principal, reduced by an
allowance for loan losses and net deferred origination fees. Interest on
loans is accrued based on the principal amount outstanding and is
recognized on a level yield method. The accrual of interest is
discontinued, and accrued but unpaid interest is reversed when, in
management's judgment, it is determined that the collectibility of
interest, but not necessarily principal, is doubtful. Generally, this
occurs when payment is delinquent in excess of ninety days.
Loan origination fees are deferred, as well as certain direct loan
origination costs. Such costs and fees are recognized as an adjustment to
yield over the contractual lives of the related loans utilizing the
interest method.
Commitment fees to originate or purchase loans are deferred, and if the
commitment is exercised, recognized over the life of the loan as an
adjustment of yield. If the commitment expires unexercised, commitment
fees are recognized in income upon expiration of the commitment. Fees for
originating loans for other financial institutions are recognized as loan
fee income.
Effective October 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114 (SFAS No. 114), "Accounting by Creditors for
Impairment of a Loan," and Statement of Financial Accounting Standards
No. 118 (SFAS No. 118), "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure." A loan is considered impaired,
based on current information and events, if it is probable that the Bank
will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement.
Uncollaterlized loans are measured for impairment based on the present
value of expected future cash flows discounted at the historical
effective interest rate, while all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. The
adoption of SFAS 114 and 118 resulted in no additional provision for
credit losses, at October 1, 1995. At September 30, 1996 there were no
loans for which impairment was required to be recorded in accordance with
SFAS 114 and SFAS 118.
The Bank uses several factors in determining if a loan is impaired under
SFAS No. 114. The internal asset classification procedures include a
thorough review of significant loans and lending relationships and
include the accumulation of related data. This data includes loan payment
status, borrowers' financial data and borrowers' operating factors such
as cash flows, operating income or loss, etc.
8
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
c. Loans Held for Sale - Loans originated and intended for sale are carried
-------------------
at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
income. Gains and losses on sales of whole or participating interests in
real estate loans are recognized at the time of sale and are determined
by the difference between net sales proceeds and the Bank's basis of the
loans sold, adjusted for the present value of any yield differential
after allowing for a normal servicing fee in subsequent periods.
d. Allowance for Loan Losses - The allowance for loan losses is increased by
-------------------------
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is
based on the Bank's past loan loss experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and
current economic conditions. While management believes that it has
established the allowance in accordance with generally accepted
accounting principles and has taken into account the views of its
regulators and the current economic environment, there can be no
assurance that in the future the Bank's regulators or its economic
environment will not require further increases in the allowance.
e. Income Recognition on Impaired and Nonaccrual Loans - Loans, including
---------------------------------------------------
impaired loans, are generally classified as nonaccrual if they are past
due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process
of collection. If a loan or a portion of a loan is classified as doubtful
or is partially charged off, the loan is generally classified as
nonaccrual. Loans that are on a current payment status or past due less
than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a
sustained period of repayment performance (generally a minimum of six
months) by the borrower, in accordance with the contractual terms of
interest and principal.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to principal outstanding,
except in the case of loans with scheduled amortization where the payment
is generally applied to the oldest payment due. When the future
collectibility of the recorded loan balance is expected, interest income
may be recognized on a cash basis limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate.
Receipts in excess of that amount are recorded as recoveries to the
allowance for loan losses until prior charge-offs have been fully
recovered.
9
<PAGE>
HOME SAVINGS BANK, SSB AND BANK SUBSIDIARY
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
f. Office Properties and Equipment - Provisions for depreciation of office
-------------------------------
properties and equipment, which are stated at cost, are computed by use
of straight-line and accelerated methods.
g. Real Estate Owned - Assets acquired through loan foreclosure or deed in
-----------------
lieu of foreclosure in settlement of mortgage loan indebtedness are
recorded as real estate owned at the lower of the estimated fair value of
the underlying real estate or the carrying amount of the loan. Costs to
maintain the assets and subsequent gains and losses attributable to their
disposal are included in other income and general and administrative
expenses. Property acquired by deed in lieu of foreclosure results when a
borrower voluntarily transfers title to the Bank in full settlement of
the related debt in an attempt to avoid foreclosure.
h. Investment in Federal Home Loan Bank Stock - The Bank is required to
------------------------------------------
invest in stock of the Federal Home Loan Bank of Atlanta (FHLB) in the
amount of 1% of its outstanding home loans or 5% of its outstanding
advances from the FHLB, whichever is greater. At both September 30, 1996
and 1995, the Bank owned 12,875 shares of the FHLB's $100 par value
capital stock.
i. Insurance of Accounts - Eligible savings accounts are insured up to
---------------------
$100,000 by the Savings Association Insurance Fund ("SAIF") which is
administered by the Federal Deposit Insurance Corporation ("FDIC").
j. Income Taxes - Effective October 1, 1993, the Bank adopted Statement of
------------
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for
Income Taxes." This statement requires that all deferred tax asset and
liability balances be determined by application to temporary differences
of the tax rate expected to be in effect when taxes will become payable
or receivable. Temporary differences are differences between tax basis of
assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future
years. Net income for the year ended September 30, 1994 includes income
of $250,000 which represents the net change in deferred taxes as of
October 1, 1993. Such amount has been reflected separately in the
consolidated statement of operations as a cumulative effect on prior
years of a change in accounting principle.
k. Cash and cash equivalents - Cash and cash equivalents include demand and
-------------------------
time deposits (with remaining maturities of ninety days or less at time
of purchase) at other financial institutions and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
l. Reclassifications - Certain items included in the 1995 and 1994 financial
-----------------
statements have been reclassified to conform to the 1996 presentation.
These reclassifications have no effect on the net income or retained
income previously reported.
10
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (Continued)
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.
2. INVESTMENT SECURITIES
At September 30, 1996 and 1995, the Bank has classified investment
securities in the consolidated financial statements according to
management's intent. Investment securities at September 30, 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Gross Unrealized Market
--------------------------
Cost Gains Losses Value
--------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
1996:
Available for sale:
U. S. government agency
obligations $ 5,025,160 $ 81,421 $ - $5,106,581
State and political
subdivisions 3,000,000 - - 3,000,000
----------- ---------- ---------- ----------
$ 8,025,160 $ 81,421 $ - $8,106,581
=========== ========== ========== ==========
1995:
Held to maturity:
U.S. government agency
obligations $ 3,001,640 $121,760 $ - $3,123,760
=========== ========== ========== ==========
</TABLE>
Investment securities at September 30, 1996 will mature on the following
schedule:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $5,023,891 $5,035,908
Due after one year through five years 3,001,269 3,070,673
---------- ----------
$8,025,160 $8,106,581
========== ==========
</TABLE>
During 1996 the Bank transferred securities classified as held-to-maturity
with an amortized cost of $3,001,578 to available-for-sale resulting in a
net unrealized gain of $191,078.
11
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
2. INVESTMENT SECURITIES (Continued)
The weighted average interest yield for investment securities was
approximately 6.51% and 6.50% at September 30, 1996 and 1995, respectively.
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities at September 30, 1996 and 1995 are classified in
the consolidated financial statements according to management's intent and
summarized as follows:
<TABLE>
<CAPTION>
Gross Unrealized Estimated
Amortized ----------------------- Market
Cost Gains Losses Value
------------ --------- ----------- -------------
<S> <C> <C> <C> <C>
1996:
Available-for-sale:
FHLMC participation
certificates, maturing from
years 2004 to 2025 $ 14,812,070 $ 143,156 $ 157,802 $ 14,797,424
============ ========= =========== ============
1995:
Available-for-sale:
FHLMC participation
certificates, maturing from
years 2006 to 2022 $ 8,738,632 $ 333,204 $ - $ 9,071,836
============ ========= =========== ============
Held-to-maturity:
FHLMC participation
certificates, maturing from
years 2003 to 2008 $ 13,213,376 $ 48,246 $ 147,622 $ 13,114,000
============ ========= =========== ============
</TABLE>
Mortgage-backed securities at September 30, 1996 will mature on the
following schedule:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
----------- -----------
<S> <C> <C>
Due after five years through ten years $ 3,806,887 $ 3,813,028
Due after ten years 11,005,183 10,984,396
----------- -----------
$14,812,070 $14,797,424
=========== ===========
</TABLE>
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.
Upon adoption of SFAS No. 115, the Bank classified mortgage-backed
securities with an amortized cost of $12,654,390 and an estimated fair
value of $11,934,085 as held-to-maturity. The remaining mortgage-backed
securities with an amortized cost of $5,889,347 were classified as
available-for-sale resulting in a net unrealized gain of $76,366.
During 1996 the Bank transferred securities classified as held-to-
maturity with an amortized cost of $12,977,136 to available-for-sale
resulting in a net unrealized loss of $29,307.
12
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
3. MORTGAGE-BACKED SECURITIES (Continued)
Mortgage-backed securities with a carrying value of $5,566,420, $776,757 and
$6,200,514 were sold during the years ended September 30, 1996, 1995, and
1994, respectively. Gross gains realized on the sales of mortgage-backed
securities were $146,723, $6,112 and $128,495 during 1996, 1995 and 1994,
respectively.
Mortgage-backed securities with a carrying value of approximately $2,089,000
and $2,708,000 were pledged as collateral for deposits from public entities
at September 30, 1996 and 1995, respectively.
The weighted average interest yield for mortgage-backed securities was
approximately 7.37% at September 30, 1996 and 7.98% at September 30, 1995.
4. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Mortgage loans $ 94,813,285 $ 102,113,233
Consumer loans 37,422,945 29,683,851
Commercial loans 41,496,450 25,587,596
------------- --------------
Total 173,732,680 157,384,680
Less:
Loans in process (15,244,463) (10,625,755)
Allowance for loan losses (2,351,309) (1,876,954)
Deferred loan fees (455,613) (341,327)
------------- --------------
Loans receivable, net $155,681,295 $ 144,540,644
============= ==============
Weighted average contractual yield 8.82% 8.64%
============= ==============
</TABLE>
At September 30, 1996, the Bank had entered into a security agreement with a
blanket floating lien pledging all of its real estate loans to secure actual
or potential borrowings from the Federal Home Loan Bank of Atlanta (See Note
8).
During 1996, 1995 and 1994, the Bank exchanged loans with outstanding
principal balances of $1,545,859, $6,288,164 and $15,017,369, respectively,
with the Federal Home Loan Mortgage Corporation ("FHLMC") for mortgage-
backed securities of equal value.
The Bank originates mortgage loans for portfolio investment or sale in the
secondary market. During the period of origination, mortgage loans are
designated as either held for sale or investment purposes. Transfers of
loans held for sale to the investment portfolio are recorded at the lower of
cost or market value on the transfer date. Loans receivable held for sale at
September 30, 1996 and 1995, are fixed rate mortgage loans with an estimated
market value of approximately $21,600,000, and $19,900,000, respectively.
13
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
4. LOANS RECEIVABLE (Continued)
Net gains on sales of loans receivable held for sale amounted to $276,390,
$306,213 and $452,168 during the years ended September 30, 1996, 1995 and
1994, respectively.
The changes in the allowance for loan losses for the years ended September
30, 1996, 1995, and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 1,876,954 $ 1,977,327 $ 1,843,446
Provisions for loan losses 511,000 20,000 210,000
Loans charged off (62,559) (122,000) (78,481)
Recoveries 25,914 1,627 2,362
------------ ------------ ------------
Balance at end of year $ 2,351,309 $ 1,876,954 $ 1,977,327
============ ============ ============
</TABLE>
The following is a summary of the principal balances of loans on nonccrual
status and loans past due ninety days or more:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Loans contractually past due 90 days
or more and/or on
nonaccrual status:
Residential $ 1,022,521 $ 660,432
Consumer and commercial 11,358 20,147
------------ ------------
Balance at end of year $ 1,033,879 $ 680,579
============ ============
</TABLE>
During the years ended September 30, 1996, 1995 and 1994, interest income of
approximately $44,000 $23,000 and $17,000, respectively, was not recorded
related to loans accounted for on a nonaccrual basis.
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 935,560 $ 634,079
Office buildings 2,488,976 2,488,976
Furniture, fixtures and equipment 1,073,120 1,166,989
Vehicles 174,343 190,540
------------ ------------
4,671,999 4,480,584
Less accumulated depreciation 1,771,578 1,467,112
------------ ------------
Total $ 2,900,421 $ 3,013,472
============ ============
</TABLE>
14
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
6. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ----------------------
Weighted Weighted
Average Balance Average Balance
Rate (in 000's) Rate (in 000's)
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Demand deposits:
NOW accounts .61% $ 17,079 .93% $ 11,752
Money market deposits 4.20% 10,256 2.87 4,201
------------ -----------
Total demand deposits 27,335 15,953
------------ -----------
Savings deposits - passbook 2.0% 7,020 2.43 6,890
------------ -----------
Certificates of deposit:
3 months or less 4.01% 4,734 3.90 4,774
6 months 4.83% 8,821 5.58 9,075
7 months 4.89% 3,445 5.81 9,675
9 months 5.66% 35,962 6.44 17,873
12 months 5.24% 36,753 6.04 51,838
14 months 5.93% 2,772 6.52 1,166
15-72 months 6.02% 44,371 6.06 36,213
------------ -----------
Total certificates of
deposit 5.54% 136,858 5.98 130,614
------------ -----------
Total deposits 4.82% $ 171,213 5.35% $ 153,457
============ ===========
</TABLE>
Certificate accounts at September 30, 1996 are summarized by maturity as
follows (in 000's):
<TABLE>
<CAPTION>
<S> <C>
Within one year $ 111,256
One year through three years 24,702
After three years 900
-----------
$ 136,858
===========
</TABLE>
Interest expense on deposits for the years ended September 30, 1996, 1995,
and 1994 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Demand deposits $ 305,475 $ 167,903 $ 263,166
Savings deposits 144,713 170,954 179,855
Certificates of deposit 7,488,826 6,271,166 3,972,741
----------- ----------- -----------
$ 7,939,014 6,610,023 $4,415,762
=========== =========== ===========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
15
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
Effective October 1, 1994, the Bank participates in a multiemployer defined
benefit pension plan which covers substantially all employees. Expenses of
the plan for the years ended September 30, 1996 and 1995 were $137,000 and
$123,154, respectively.
Before October 1, 1994, the Bank maintained a noncontributory defined
benefit pension plan ("the Plan") for substantially all employees. The
Bank's funding policy was to contribute amounts determined in accordance
with the minimum contributions requirements of the Internal Revenue Service
regulations. Expenses of the plan for the year ended September 30, 1994 were
$82,908.
Effective July 1, 1995, the Bank participates in a multiemployer defined
contribution plan which covers substantially all employees. Under the plan,
employees may contribute from 1% to 15% of compensation, subject to an
annual maximum as determined by the Internal Revenue Code. The Bank makes
matching contributions of 50% of employees' contributions up to 6% of the
employees' salaries. The plan provides that employees' contributions are
100% vested at all times and the Bank's contributions vest 25% for each year
of service. Until July 1, 1995, the Bank maintained a profit sharing 401(k)
plan. The expenses related to the Bank's contributions to these plans for
the years ended September 30, 1996, 1995 and 1994 were $46,171, $37,074 and
$28,722, respectively.
Directors and certain officers participate in deferred compensation plans.
These plans generally provide for fixed payments beginning at retirement.
These payments are earned over service periods of up to ten years, and can
include provisions for deferral of current payments. The expense related to
these plans during the years ended September 30, 1996, 1995 and 1994
aggregated $463,250, $582,022 and $235,180, respectively. The plans
generally include provisions for forfeitures of unvested portions of
payments, and vesting in the event of death or disability. During 1996 it
was discovered that the accrual for these plans was understated as of
September 30, 1995. The effect of this understatement was that other
liabilities were understated by $270,000, deferred tax assets were
understated by $100,000, income taxes payable were overstated by $30,000 and
income was overstated by $140,000 as of September 30, 1995. The previously
reported financial results for the year ended September 30, 1995 have been
restated for the effect of this error.
8. BORROWED MONEY
Borrowed money represents advances from the Federal Home Loan Bank of
Atlanta and repurchase agreements. Advances from the Federal Home Loan Bank
totaled $0 and $4,000,000 at September 30, 1996 and 1995, respectively.
During 1996 the Bank entered into repurchase agreements. At September 30,
1996 repurchase agreements outstanding had a rate of 4.31% and totaled
$1,039,608.
Repurchase agreements are collateralized by U.S. government agency
obligations with a principal balance of $2,000,000.
16
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
8. BORROWED MONEY (Continued)
The Bank has pledged all of its stock in the Federal Home Loan Bank of
Atlanta and entered into a security agreement with a blanket floating lien
pledging qualifying real estate loans, to secure actual or potential
borrowings, at least equal to 133-1/3% of the advances outstanding from the
FHLB. At September 30, 1996, the Bank had an additional $8 million of credit
available with the Federal Home Loan Bank of Atlanta.
9. INCOME TAXES
The components of income taxes for the years ended September 30, 1996, 1995
and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 766,558 $ 1,034,106 $ 652,390
State 124,663 205,170 157,515
-------- ---------- ----------
Total current 891,221 1,239,276 809,905
-------- ---------- ----------
Deferred:
Federal (360,903) (211,224) 368,495
State (79,801) (29,972) 82,500
-------- ---------- ----------
Total deferred (440,704) (241,196) 450,995
-------- ---------- ----------
Total $ 450,517 $ 998,080 $ 1,260,900
======== ========== ==========
</TABLE>
Reconciliations of expected income tax at the statutory Federal rate of 34%
with income tax expense for the years ended September 30, 1996, 1995 and
1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Expected income tax expense $ 432,142 $ 973,529 $ 1,104,283
State income taxes net of federal
income tax benefit 26,671 115,631 162,690
Rehabilitation credit - (28,666) -
Other (8,296) (62,414) (6,073)
-------- ---------- ----------
$ 450,517 $ 998,080 $ 1,260,900
======== ========== ==========
</TABLE>
17
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
9. INCOME TAXES (Continued)
The components of the net deferred income tax liability and asset are
as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred income tax assets:
Deferred directors' fees $ 443,911 $ 358,657
Bad debt reserve 331,007 193,221
Deferred employee benefits 136,284 81,215
----------- -----------
911,202 633,093
----------- -----------
Deferred income tax liabilities:
Loans mark-to-market adjustment (405,771) (464,264)
Depreciation and amortization (85,354) (167,324)
Unrealized gains on securities
available-for-sale (26,240) (130,682)
Deferred loan origination fees and
costs (47,519) (91,316)
FHLB stock (99,434) (99,434)
Other (22,901) (1,235)
----------- -----------
(687,219) (954,255)
----------- -----------
Net deferred income tax asset
(liability) $ 223,983 $ (321,162)
=========== ===========
</TABLE>
Retained income at September 30, 1996, includes approximately
$1,850,000 for which no deferred income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions for income tax purposes only. Reductions of the amount so
allocated for purposes other than tax bad debt losses or adjustments
arising from carryback of net operating losses would create income for
tax purposes only, which would be subject to the then current corporate
income tax rate.
During 1996, Congress enacted certain tax legislation that exempted
thrift institutions from being taxed on these pre-1987 bad debt
reserves. Further, the use of the reserve method is now required for
all thrifts. The Bank will be recapturing a portion of its bad debt
reserve created in prior years by using the percentage of taxable
income method. The Bank has previously recorded deferred tax
liabilities related to these excess reserves.
10. RETAINED INCOME
The Federal Deposit Insurance Corporation and the North Carolina
Savings Institutions Administrator promulgate capital regulations which
require the Bank to meet three separate capital standards: capital of
at least 5% of total assets, leverage capital of at least 4% of total
assets, and a risk-based capital requirement currently set at 8% of
risk-weighted assets. At September 30, 1996, the Bank met or exceeded
all of the current capital requirements and was classified as "well
capitalized". The Bank's actual capital ratios at September 30, 1996
were 9.60% - tier 1/leverage capital; 13.97% - tier 1 risk-based
capital; 15.23% - total risk-based capital; and 10.28% - North Carolina
regulatory capital. The Bank currently expects to continue to exceed
these minimums without altering current operations or strategy. Failure
to meet minimum capital requirements can initiate certain mandatory and
discretionary actions by regulators.
18
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
11. MORTGAGE BANKING ACTIVITIES
At September 30, 1996 and 1995, the Bank was servicing loans for others
amounting to $253,681,978 and $229,635,319, respectively. Servicing
loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income is recorded on the
accrual basis and includes servicing fees from investors and certain
charges collected from borrowers, such as late payment fees.
Effective October 1, 1996 the Bank will adopt Statement of Financial
Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage
Servicing Rights", an amendment to Statement of Financial Accounting
Standards No. 65. The impact of adopting this statement is not expected
to be material to the Bank's consolidated financial statements.
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
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 and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
borrower.
A summary of the contractual amounts of the Bank's exposure to
off-balance sheet risk as of September 30, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commitments to extend credit:
Commitments to originate loans $ 9,179,693 $ 8,522,230
Undrawn balances on lines of credit and undrawn
balances on credit reserves (overdraft protection) 16,899,367 12,862,753
------------ ------------
$ 26,079,060 $ 21,384,983
============ ============
</TABLE>
19
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK (Continued)
Included in the commitments to originate loans as of September 30, 1996
and 1995 are fixed interest rate loan commitments of $7,367,788 and
$6,751,022, respectively. The shorter duration of interest-sensitive
liabilities, to the extent they are used to fund these fixed-rate
loans, indicates that the Bank is exposed to interest rate risk
because, in a rising rate environment, liabilities will be repricing
faster at higher interest rates, thereby reducing the market value of
fixed-rate long-term assets and net interest income.
The Bank's lending is concentrated primarily in Beaufort, Craven, Nash,
Lenoir, Pasquotank, Pitt and surrounding counties in North Carolina.
Credit has been extended to certain of the Bank's customers through
multiple lending transactions.
13. LEASES
The Bank leases equipment and several of its facilities under various
operating leases. Several of these leases have renewal options.
As of September 30, 1996, future minimum rental payments under
these leases are as follows:
<TABLE>
<CAPTION>
Year ending September 30,
------------------------
<S> <C>
1997 $ 48,648
1998 39,833
1999 31,790
2000 19,031
----------
$ 139,302
==========
</TABLE>
Rent expense related to such leases amounted to approximately
$58,000, $38,000 and $33,000 in 1996, 1995 and 1994, respectively.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS No. 107), requires the
disclosure of estimated fair values for financial instruments. Quoted
market prices, if available, are utilized as an estimate of the fair
value of financial instruments. Because no quoted market prices exist
for a significant part of the Bank's financial instruments, the fair
value of such instruments has been derived based on management's
assumptions with respect to future economic conditions, the amount and
timing of future cash flows and estimated discount rates. Different
assumptions could significantly affect these estimates. Accordingly,
the net realizable value could be materially different from the
estimates presented below. In addition, the estimates are only
indicative of individual financial instruments' values and should not
be considered an indication of the fair value of the Bank taken as a
whole.
20
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
Fair values have been estimated using data which management considered
the best available, and estimation methodologies deemed suitable for
the pertinent category of financial instrument. The estimation
methodologies, resulting fair values, and recorded carrying amounts at
September 30, 1996 and 1995, were as follows:
Cash and cash equivalents are by definition short-term and do not
present any unanticipated credit issues. Therefore, the carrying
amount is a reasonable estimate of fair value. The estimated fair
values of investment securities and mortgage backed securities are
provided in Notes 2 and 3 to the financial statements. These are
based on quoted market prices, when available. If a quoted market
price is not available, fair value is estimated using quoted market
prices for similar securities.
The fair value of the net loan portfolio has been estimated using
present value cash flow discounted at an interest rate estimated
prepayment risk and credit loss factors, as follows.
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
1 - 4 family mortgages $ 80,982,405 $ 80,190,043 $ 88,225,994 $ 95,278,240
Consumer 36,263,680 36,595,184 28,445,093 28,529,491
Non-residential 38,896,068 38,896,068 20,732,913 20,732,913
-------------- -------------- -------------- --------------
$ 156,142,153 $ 155,681,295 $ 137,404,000 $ 144,540,644
============== ============== ============== ==============
</TABLE>
Fair value of deposit liabilities with no stated maturities has been
estimated to equal the carrying amount (the amount payable on demand),
totaling $34,354,266 and $22,843,062 in 1996 and 1995, respectively.
Under Statement 107, the fair value of deposits with no stated maturity
is equal to the amount payable on demand. Therefore, the fair value
estimates for these products do not reflect the benefits that the Bank
receives from the low-cost, long-term funding they provide. These
benefits are significant.
The fair value of certificates of deposits and advances from the
Federal Home Loan Bank is estimated by discounting the future cash
flows using the current rates offered for similar deposits and advances
with the same remaining maturities. The carrying value and estimated
fair values of certificates of deposit and Federal Home Loan Bank
advances at September 30, 1996 and 1995 are as follows:
21
<PAGE>
HOME SAVINGS BANK, SSB AND SUBSIDIARY
Notes to Consolidated Financial Statements
14. FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Certificates of deposits:
Carrying amount $ 136,859,020 $ 130,613,966
Estimated fair value 137,735,084 131,033,804
Advances from Federal Home Loan Bank:
Carrying amount - 4,000,000
Estimated fair value - 4,006,000
</TABLE>
The carrying amount of repurchase agreements approximates the fair
value. The interest rate on these agreements is a floating rate based
on the Federal funds daily rate.
There is no material difference between the carrying amount and
estimated fair value of off-balance sheet items totaling $26,079,060 in
1996 and $21,384,983 in 1995, which are primarily comprised of unfunded
loan commitments.
The Company's remaining assets and liabilities are not considered
financial instruments.
15. RECENT DEVELOPMENTS
In September 1996, the Bank's Board of Directors approved to convert
the Bank from a North Carolina - chartered mutual savings bank to a
North Carolina - chartered stock savings bank in connection with a
proposed initial public offering of common stock. Immediately following
completion of the stock conversion, the Bank intends to convert from a
North Carolina -chartered stock savings bank to a North Carolina
commercial bank to be known as "NewSouth Bank".
22
<PAGE>
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such information shall not be relied upon as having been authorized by the
Company, the Bank or Trident Securities, Inc. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby 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 qualified to do so, or to any person to whom it is unlawful.
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 the Company or the Bank since any of the dates as of which
information is furnished herein or since the date hereof.
Table of Contents
Page
----
Prospectus Summary.................................................
Selected Financial Information and Other Data......................
Risk Factors.......................................................
NewSouth Bancorp, Inc..............................................
Home Savings Bank, SSB.............................................
NewSouth Bank......................................................
Use of Proceeds....................................................
Dividend Policy....................................................
Market for the Common Stock........................................
Capitalization.....................................................
Historical and Pro Forma Regulatory Capital Compliance.............
Pro Forma Data.....................................................
Proposed Management Purchases......................................
Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................
Business of the Company............................................
Business of the Bank...............................................
Regulation.........................................................
Taxation...........................................................
Management of the Company..........................................
Management of the Bank.............................................
The Conversion.....................................................
Certain Restrictions on Acquisition of the Company, the
Converted Bank and the Commercial Bank............................
Certain Anti-takeover Provisions in the Certificate of
Incorporation and Bylaws..........................................
Description of Capital Stock.......................................
Registration Requirements..........................................
Legal Opinions.....................................................
Tax Opinion........................................................
Experts............................................................
Additional Information.............................................
Index to Consolidated Financial Statements.........................
Until ______________, 1997 (90 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
NEWSOUTH BANCORP, INC.
(Holding Company for
HOME SAVINGS BANK, INC., SSB
to become
NEWSOUTH BANK)
Up to 2,530,000 Shares
COMMON STOCK
------------
PROSPECTUS
------------
TRIDENT SECURITIES, INC.
____________, 1997
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
* Legal Fees and Expenses................................ $140,000
* Printing, Postage and Mailing.......................... 100,000
* Appraisal and Business Plan Fees and Expenses.......... 43,000
* Conversion Agent Fees and Expenses..................... 12,000
* Transfer Agent Fees and Stock Certificates............. 15,000
* Accounting Fees and Expenses........................... 75,000
* Blue Sky Filing Fees and Expenses
(including counsel fees).............................. 15,000
* Filing Fees (Administrator, Commissioner,
SEC, and NASD)....................................... 25,000
* Underwriter's Expenses................................. 40,000
* Other Expenses......................................... 114,370
--------
Total.................................................. $579,370**
========
- ----------
* Estimated.
** Does not include $506,160 in estimated underwriting fees. Calculation of the
underwriting fees assumes that the midpoint of the Estimated Valuation Range
is sold in the Stock Conversion, 8% of the stock is sold to the ESOP,
200,000 shares will be sold to directors and officers of the Bank, and all
the shares are sold in the Subscription Offering.
Item 14. Indemnification of Directors and Officers
Indemnification of Directors and Officers of the Company
Directors, officers and employees of the Company may be entitled to
benefit from the indemnification provisions contained in the Delaware General
Corporation Law (the "DGCL") and the Company's Certificate of Incorporation. The
general effect of these provisions is summarized below:
Delaware General Corporation Law
Section 145 of the DGCL permits a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding of any type, (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, may not, of itself, create a presumption that these standards
have not been met.
A Delaware corporation may also indemnify any person who was or is a
party or is threatened to be made a party to any proceeding by or in the right
of the corporation by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
II-1
<PAGE>
best interests of the corporation. However, no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought
determines upon application that such person is fairly and reasonably entitled
to be indemnified.
To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
proceeding described above indemnification against expenses (including
attorneys' fees) actually and reasonably incurred by him is mandatory.
Any determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) must be made
by a majority of the board of directors by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or proceeding,
or if such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or by the stockholders.
Expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of or proceeding upon receipt of an undertaking by or on behalf of such director
or officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation.
The indemnification and advancement of expenses provided by, or granted
pursuant to, the other subsections of this section is not exclusive.
In addition, a corporation shall have power to purchase and maintain
insurance against any liability of individuals whom the corporation is required
to indemnify.
Article XVII of the Company's Certificate of Incorporation sets forth
circumstances under which directors, officers, employees and agents may be
insured or indemnified against liability which they may incur in their
capacities as such.
ARTICLE XVII
Indemnification
A. Persons. The Corporation shall indemnify, to the extent provided
-------
in paragraphs B, D or F:
(1) any person who is or was a director, officer, employee, or
agent of the Corporation; and
(2) any person who serves or served at the Corporation's request
as a director, officer, employee, agent, partner or trustee of another
corporation, partnership, joint venture, trust or other enterprise.
B. Extent -- Derivative Suits. In case of a threatened, pending or
--------------------------
completed action or suit by or in the right of the Corporation against a person
named in paragraph A by reason of his holding a position named in paragraph A,
the Corporation shall indemnify him if he satisfies the standard in paragraph C,
for expenses (including attorneys' fees but excluding amounts paid in
settlement) actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit.
C. Standard -- Derivative Suits. In case of a threatened, pending
----------------------------
or completed action or suit by or in the right of the Corporation, a person
named in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
II-2
<PAGE>
(2) he acted in good faith in the transaction which is the subject of
the suit or action, and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XV) not approved by the board of directors. However, he shall not be
indemnified in respect of any claim, issue or matter as to which he has
been adjudged liable to the Corporation unless and only to the extent that
the court in which the suit was brought shall determine, upon application,
that despite the adjudication but in view of all the circumstances, he is
fairly and reasonably entitled to indemnity for such expenses as the court
shall deem proper.
D. Extent -- Nonderivative Suits. In case of a threatened, pending or
-----------------------------
completed suit, action or proceeding (whether civil, criminal, administrative or
investigative), other than a suit by or in the right of the Corporation,
together hereafter referred to as a nonderivative suit, against a person named
in paragraph A by reason of his holding a position named in paragraph A, the
Corporation shall indemnify him if he satisfies the standard in paragraph E, for
amounts actually and reasonably incurred by him in connection with the defense
or settlement of the nonderivative suit, including, but not limited to (i)
expenses (including attorneys' fees), (ii) amounts paid in settlement, (iii)
judgments, and (iv) fines.
E. Standard -- Nonderivative Suits. In case of a nonderivative suit, a
-------------------------------
person named in paragraph A shall be indemnified only if:
(1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of
the nonderivative suit and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation, including, but not
limited to, the taking of any and all actions in connection with the
Corporation's response to any tender offer or any offer or proposal of
another party to engage in a Business Combination (as defined in Article
XV) not approved by the board of directors and, with respect to any
criminal action or proceeding, he had no reasonable cause to believe his
conduct was unlawful. The termination of a nonderivative suit by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent shall not, in itself, create a presumption that the person
failed to satisfy the standard of this subparagraph E(2).
F. Determination That Standard Has Been Met. A determination that the
----------------------------------------
standard of paragraph C or E has been satisfied may be made by a court, or,
except as stated in subparagraph C(2) (second sentence), the determination may
be made by:
(1) the board of directors by a majority vote of a quorum consisting
of directors of the Corporation who were not parties to the action, suit or
proceeding; or
(2) independent legal counsel (appointed by a majority of the
disinterested directors of the Corporation, whether or not a quorum) in a
written opinion; or
(3) the stockholders of the Corporation.
G. Proration. Anyone making a determination under paragraph F may
---------
determine that a person has met the standard as to some matters but not as to
others, and may reasonably prorate amounts to be indemnified.
H. Advance Payment. The Corporation shall pay in advance any expenses
---------------
(including attorneys' fees) which may become subject to indemnification under
paragraphs A through G if:
(1) the board of directors authorizes the specific payment; and
II-3
<PAGE>
(2) the person receiving the payment undertakes in writing to repay
the same if it is ultimately determined that he is not entitled to
indemnification by the Corporation under paragraphs A through G.
I. Nonexclusive. The indemnification and advance payment of expenses
------------
provided by paragraphs A through H shall not be exclusive of any other rights to
which a person may be entitled by law, bylaw, agreement, vote of stockholders or
disinterested directors, or otherwise.
J. Continuation. The indemnification provided by this Article XVII shall
------------
be deemed to be a contract between the Corporation and the persons entitled to
indemnification thereunder, and any repeal or modification of this Article XVII
shall not affect any rights or obligations then existing with respect to any
state of facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts. The indemnification and advance payment provided by paragraphs A
through H shall continue as to a person who has ceased to hold a position named
in paragraph A and shall inure to his heirs, executors and administrators.
K. Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who holds or who has held any position named in paragraph
A, against any liability incurred by him in any such position, or arising out of
his status as such, whether or not the Corporation would have power to indemnify
him against such liability under paragraphs A through H.
L. Intention and Savings Clause. It is the intention of this Article
----------------------------
XVII to provide for indemnification to the fullest extent permitted by the
General Corporation Law of the State of Delaware, and this Article XVII shall be
interpreted accordingly. If this Article XVII or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee, and
agent of the Corporation as to costs, charges, and expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement with respect
to any action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including an action by or in the right of the Corporation to the
full extent permitted by any applicable portion of this Article XVII that shall
not have been invalidated and to the full extent permitted by applicable law. If
the General Corporation Law of the State of Delaware is amended, or other
Delaware law is enacted, to permit further or additional indemnification of the
persons defined in this Article XVII A, then the indemnification of such persons
shall be to the fullest extent permitted by the General Corporation Law of the
State of Delaware, as so amended, or such other Delaware law.
Indemnification of Directors and Officers of Home Savings Bank, Inc., SSB and
NewSouth Bank
The Amended and Restated Certificate of Incorporation of the Converted Bank
provide that, to the fullest extent permitted by the North Carolina Business
Corporation Act (the "NCBCA"), no person who serves as a director shall be
personally liable to the Converted Bank or any of its stockholders or otherwise
for monetary damages for breach of any duty as director. The Amended and
Restated Certificate of Incorporation of the Commercial Bank contains similar
provisions.
In addition, Article IX of the Amended and Restated Bylaws of the Converted
Bank state that any person who at any time serves or has served as a director or
officer of the Converted Bank, or who, while serving as a director or officer of
the Converted Bank, serves or has served at the request of the Converted Bank as
a director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or as a trustee or
administrator under an employee benefit plan, shall have a right to be
indemnified by the Converted Bank to the fullest extent permitted by law against
(a) reasonable expenses, including attorneys' fees, incurred by him in
connection with any threatened, pending or completed civil, criminal,
administrative, investigative, or arbitrative action, suit, or proceeding (and
any appeal therein), whether or not brought by or on behalf of the Converted
Bank, seeking to hold him liable by reason of the fact that he is or was acting
in such capacity, and (b) reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan) or penalty for which he may have become liable in any
such
II-4
<PAGE>
action, suit or proceeding, or in connection with a settlement approved by the
Board of Directors of any such action, suit or proceeding. Article IX of the
Amended and Restated Bylaws of the Commercial Bank contains similar provisions.
Sections 55-8-50 through 55-8-58 of the NCBCA contain provisions
prescribing the extent to which directors and officers shall or may be
indemnified. Section 55-8-51 of the NCBCA permits a corporation, with certain
exceptions, to indemnify a present or former director against liability if (i)
the director conducted himself in good faith, (ii) the director reasonably
believed (x) that the director's conduct in the director's official capacity
with the corporation was in its best interests and (y) in all other cases the
director's conduct was at least not opposed to the corporation's best interests,
and (iii) in the case of any criminal proceeding, the director had no reasonable
cause to believe the director's conduct was unlawful. A corporation may not
indemnify a director in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation or in
connection with a proceeding charging improper personal benefit to the director.
The above standard of conduct is determined by the board of directors, or a
committee or special legal counsel or the shareholders as prescribed in Section
55-8-55.
Sections 55-8-52 and 55-8-56 of the NCBCA require a corporation to
indemnify a director or officer in the defense of any proceeding to which the
director or officer was a party against reasonable expenses when the director or
officer is wholly successful in the director's or officer's defense, unless the
articles of incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if the director or officer is
adjudged fairly and reasonably so entitled under Section 55-8-54.
In addition, Section 55-8-57 permits a corporation to provide for
indemnification of directors, officers, employees or agents, in its articles of
incorporation or bylaws or by contract or resolution, against liability in
various proceedings and to purchase and maintain insurance policies on behalf of
these individuals.
The foregoing is only a general summary of certain aspects of Delaware and
North Carolina law dealing with indemnification of directors and officers and
does not purport to be complete. It is qualified in its entirety by reference to
the relevant statutes, which contain detailed specific provisions regarding the
circumstances under which and the person for whose benefit indemnifications
shall or may be made.
The Bank has a directors and officers liability insurance policy providing
for insurance against certain liabilities incurred by directors and officers of
the Bank while serving in their capacities as such.
Item 15. Recent Sales of Unregistered Securities.
Not applicable.
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as a part of this
registration statement are as follows:
(a) List of Exhibits
* 1.1 Engagement Letter with Trident Securities, Inc.
* 1.2 Form of Sales Agency Agreement with Trident Securities, Inc.
* 2 Plan of Conversion (Exhibit I to Proxy Statement filed as
Exhibit 99.2)
* 3.1 Certificate of Incorporation of NewSouth Bancorp, Inc.
II-5
<PAGE>
* 3.2 Bylaws of NewSouth Bancorp, Inc.
* 4 Form of Common Stock Certificate of NewSouth Bancorp, Inc.
* 5 Opinion of Housley Kantarian & Bronstein, P.C. regarding legality
of securities being registered
* 8.1 Federal Tax Opinion
* 8.2 State Tax Opinion
* 8.3 Opinion of Ferguson & Co., LLP as to the value of subscription
rights for tax purposes
* 10.1 Proposed NewSouth Bancorp, Inc. 1996 Stock Option Plan
* 10.2 Proposed NewSouth Bancorp, Inc. Management Recognition Plan and
Trust Agreement
* 10.3(a) Proposed Employment Agreement by and between NewSouth Bancorp,
Inc. and Thomas A. Vann
* 10.3(b) Proposed Employment Agreement by and between Home Savings Bank,
SSB and Thomas A. Vann
* 10.4 Proposed Change in Control Protective Agreements between Home
Savings Bank, SSB, NewSouth Bancorp, Inc. and Mary R. Boyd,
Sherry L. Correll, Kristie W. Hawkins, Walter P. House and
William R. Outland
* 10.5 Supplemental Income Agreements as Amended and Restated December
14, 1995 between Home Savings Bank, SSB and Sherry L. Correll,
William R. Outland and Thomas A. Vann and the 1996 Amendment
Thereto
* 10.6 Supplemental Income Plan Agreements as Amended and Restated
December 14, 1995 between Home Savings Bank, SSB and James F.
Buckman, Walter P. House, Thomas A. Vann and William L. Wall and
the 1996 Amendment Thereto
* 10.7 Home Savings Bank, SSB Director's Deferred Compensation Plan
Agreements as Amended and Restated December 14, 1995 with Edmund
T. Buckman, Jr., Linley H. Gibbs, Jr., Frederick N. Holscher,
Frederick H. Howdy, Charles E. Parker, Jr., Marshall T. Singleton
and Thomas A. Vann and the 1996 Amendment Thereto
* 10.8 Home Savings Bank, SSB Director's Retirement Plan Agreements as
Amended and Restated December 14, 1995 with Edmund T. Buckman,
Jr., Linley H. Gibbs, Jr., Frederick N. Holscher, Frederick H.
Howdy, Charles E. Parker, Jr. and Thomas A. Vann and the 1996
Amendment Thereto
* 10.9 Home Savings Bank, SSB Director's Retirement Payment Agreements
as Amended and Restated December 14, 1995 with Edmund T. Buckman,
Jr.,
II-6
<PAGE>
Linley H. Gibbs, Jr., Frederick N. Holscher, Frederick H. Howdy,
Charles E. Parker, Jr., and Thomas A. Vann and the 1996 Amendment
Thereto
10.10 Form of Home Savings Bank, SSB Director's Retirement Payment
Agreement with Marshall Singleton
* 23.1 Consents of Housley Kantarian & Bronstein, P.C. (contained in
opinion filed as Exhibit 8.1)
23.2 Consent of Coopers & Lybrand L.L.P.
* 23.3 Consent of Ferguson & Co., LLP
* 24 Power of Attorney (reference is made to the signature page)
* 27 Financial Data Schedule
* 99.1 Proposed Stock Order Form and Form of Certification
* 99.2 Proxy Statement for Special Meeting of Members of Home Savings
Bank, SSB; Form of Proxy
* 99.3 Miscellaneous Solicitation and Marketing Materials
* 99.4 Updated Appraisal Report
* 99.5 Engagement Letter with Ferguson & Co., LLP
- -------------------------
* Previously filed.
(b) Financial Statement Schedules.
No financial statement schedules are filed because the required information
is not applicable or is included in the consolidated financial statements or
related notes.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
II-7
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the questions whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Washington,
State of North Carolina, on February 5, 1997.
NEWSOUTH BANCORP, INC.
By: /s/ Thomas A. Vann
---------------------------------
Thomas A. Vann
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Thomas A. Vann President and Director February 5, 1997
- -------------------------------- (Principal Executive Officer)
Thomas A. Vann
/s/ William L. Wall Executive Vice President and February 5, 1997
- -------------------------------- Chief Operating Officer
William L. Wall (Principal Financial and Accounting
Officer)
* Director February 5, 1997
- --------------------------------
Edmund T. Buckman, Jr.
* Director February 5, 1997
- --------------------------------
Linley H. Gibbs, Jr.
* Director February 5, 1997
- --------------------------------
Frederick N. Holscher
* Director February 5, 1997
- --------------------------------
Frederick H. Howdy
* Director February 5, 1997
- --------------------------------
Charles E. Parker, Jr.
* Director February 5, 1997
- --------------------------------
Marshall T. Singleton
</TABLE>
By: /s/ Thomas A. Vann
----------------------------
Thomas A. Vann
Attorney-in-Fact
<PAGE>
DIRECTOR'S RETIREMENT PLAN AGREEMENT
THIS DIRECTOR'S RETIREMENT PLAN AGREEMENT (this "Agreement"), made and
entered into this ____ day of ____________, 1997, by and between Home Savings
Bank, SSB, an institution organized and existing under the laws of the State of
North Carolina (the "Bank"), and Marshall Singleton (the "Director").
W I T N E S S E T H:
WHEREAS, the Bank recognizes the valuable services heretofore performed for
it by the Director and wishes to encourage his further services and assist him
in providing for the contingencies of retirement and death;
WHEREAS, the parties hereto wish to provide the terms and conditions upon
which the Bank shall make certain payments to the Director or his designated
beneficiaries;
WHEREAS, the parties hereto intend that this Agreement be considered an
unfunded arrangement maintained to provide deferred compensation benefits for
the Director;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the parties hereto agrees as follows:
Section 1. Retirement Benefits. The Bank agrees that, except as otherwise
--------- -------------------
specifically provided herein, upon the later to occur of the Director's 70th
birthday and January 1, 2002 (the "Qualifying Date"), the Bank will pay the
Director $2,000.00 per month for a continuous period of 120 months. Such
continuous monthly installment payments shall commence on a date to be
determined by the Bank, but in no event later than the first day of the sixth
calendar month following the calendar month in which the Qualifying Date shall
occur.
Section 2. Pre-Retirement Death Benefits. Should the Director die while
--------- -----------------------------
serving as a director of the Bank and prior to the Qualifying Date, the Bank
will pay $2,000.00 per month for a continuous period of 120 months to such
beneficiary or beneficiaries as are designated by the Director to the Bank in
writing (the "Beneficiaries"). The first such monthly installment payment shall
be made on a date to be determined by the Bank, but in no event later than the
first day of the sixth calendar month following the calendar month in which the
Director died. Notwithstanding the foregoing, if the Director dies as a result
of suicide on or before January 1, 1999, no benefits of whatever nature shall be
payable to the Beneficiaries under this Agreement. In the event of the death of
the last living Beneficiary before all the unpaid payments shall have been made,
the balance of any payments which remain unpaid at the time of such
Beneficiary's death shall be commuted on the basis of six percent (6%) per annum
compounded interest and shall be paid in a single sum to the estate of the last
Beneficiary to die. In the absence of any such beneficiary designation, any
amount remaining unpaid at the Director's death shall be commuted on the basis
of six percent (6%) per annum compounded interest and shall be paid in a single
sum to the Director's estate.
<PAGE>
Section 3. Post-Retirement Death Benefits. In the event that the Director
--------- ------------------------------
should die after becoming entitled to receive monthly installment payments under
this Agreement but before all remaining installment payments have been made, the
Bank will pay all remaining installment payments to the Beneficiary or
Beneficiaries. In the event of the death of the last living Beneficiary before
all installment payments have been made, the balance of any payments which
remain unpaid at the time of such Beneficiary's death shall be commuted on the
basis of six percent (6%) per annum compounded interest and shall be paid in a
single sum to the estate of the last Beneficiary to die. In the absence of such
beneficiary designation, any payments remaining unpaid at the Director's death
shall be commuted on the basis of six percent (6%) per annum compounded interest
and shall be paid in a single a sum to the Director's estate.
Section 4. Termination Benefits. Should the Director voluntarily resign
--------- --------------------
as a director prior to the Qualifying Date, he or his Beneficiaries, as
applicable, shall be entitled to receive, commencing on a date to be determined
by the Bank, but in no event later than the first day of the sixth calendar
month following the month in which the earlier of the Director's death or 70th
birthday shall occur, the percentage of the amount of the monthly installment
payment stated in Section 1 of this Agreement determined under the following
table:
PERCENTAGE OF MONTHLY INSTALLMENT
PAYMENT STATED IN SECTION 1 OF THIS
FULL NUMBER OF YEARS SERVED AS AGREEMENT TO WHICH DIRECTOR IS
DIRECTOR AFTER JANUARY 1, 1997 ENTITLED
- ------------------------------ -----------------------------------
1 10%
2 20%
3 30%
4 40%
5 50%
6 60%
7 70%
8 80%
9 90%
10 100%
Section 5. Benefits Not Transferable. Neither the Director, his
--------- -------------------------
Beneficiaries nor any other person claiming any right or interest under this
Agreement through the Director or any Beneficiary shall have any right to
commute, assign, transfer or otherwise convey the right to receive any benefits
hereunder.
2
<PAGE>
Section 6. Binding Upon Successors. This Agreement and the Bank's
--------- -----------------------
obligations hereunder shall be binding upon the Bank's successors and permitted
assigns. The Bank may not assign its rights or obligations under this Agreement
without the Director's prior written consent. In addition, the Bank shall not
enter into any agreement providing for the merger of the Bank with and into
another business entity or the sale of more than a majority of the Bank's assets
to another business entity, person or group persons that does not specifically
provide that such successor by merger or purchaser(s) of assets shall assume and
satisfy each and every obligation of the Bank to the Director under this
Agreement. In the case of an asset sale, such assumption shall not relieve the
Bank of its liability to fulfill such obligations.
Except as otherwise provided in Section 1, 2, 3 or 4, as applicable,
in the event that, on or before the occurrence of the Qualifying Date, the
Director's service as director of the Bank is terminated for any reason
coincident with or within twenty-four (24) months following a Change in Control
as defined in Section 7 hereof, then the provisions of Section 1 shall be deemed
applicable except that the Qualifying Date shall be deemed to be the date that
such merger or asset sale shall be consummated.
Section 7. Benefits Payable Only From General Corporate Assets;
--------- ----------------------------------------------------
Unsecured General Creditors Status of Director. The payments to the Director or
- ----------------------------------------------
his Beneficiary or Beneficiaries hereunder shall be made from assets which for
all purposes shall continue to be a part of the general, unrestricted assets of
the Bank; no person shall have any interest in any such assets by virtue of the
provisions of this Agreement. The Bank's obligations hereunder shall be an
unfunded and unsecured promise to pay money in the future. To the extent that
any person acquires a right to receive payments from the Bank under the
provisions hereof, such right shall be no greater than the right of any
unsecured general creditor of the Bank; no such person shall have nor require
any legal or equitable right, interest or claim in or to any property or assets
of the Bank.
In the event that, in its discretion, the Bank purchases an insurance
policy or policies insuring the life of the Director (or any other property), in
order to allow the Bank to recover the cost of providing benefits, in whole or
in part, hereunder, neither the Director, nor any Beneficiary, shall have any
rights whatsoever therein or in the proceeds therefrom. The Bank shall be the
sole owner and beneficiary of such insurance policy and shall possess and may
exercise all incidents of ownership therein.
Notwithstanding any other provision of this Agreement that may be
contrary or inconsistent herewith, not later than ten business days after a
Change in Control (as defined in the last paragraph of this Section 7), the Bank
shall (i) deposit in a grantor trust (the "Trust") that is designed in
accordance with Revenue Procedure 92-64 and has a trustee independent of the
Bank, the Company and any successor to their interest, an amount equal to the
present value of all benefits that may become payable under this Agreement,
unless the Director has previously provided a written release of any claims
under this Agreement, and (ii) provide the trustee of the Trust with a written
direction to hold said amount and any investment return thereon in a
3
<PAGE>
segregated account for the benefit of the Director, and to follow the procedures
set forth in the next paragraph as to the payment of such amounts from the
Trust.
At any time or from time to time following the Change in Control, the
Director may provide the trustee of the Trust with a written schedule directing
that the trustee pay to the Director amounts designated in the schedule as being
payable pursuant to this Agreement. Within three business days after receiving
said notice, the trustee of the Trust shall send a copy of the notice to the
Bank via overnight and registered mail (return receipt requested). On the fifth
business day after mailing said notice to the Bank, the trustee of the Trust
shall pay the Director the amount designated therein in immediately available
funds, unless prior thereto the Bank provides the trustee with a written notice
directing the trustee to withhold such payment. In the latter event, the
trustee shall submit the dispute to non-appealable binding arbitration for a
determination of the amount payable to the Director pursuant to this Agreement,
and the costs of such arbitration (including any attorneys' fees incurred by the
Director) shall be paid by the Bank. The trustee shall choose the arbitrator to
settle the dispute, and such arbitrator shall be bound by the rules of the
American Arbitration Association in making his determination. The parties and
the trustee shall be bound by the results of the arbitration and, within three
days of the determination by the arbitrator, the trustee shall pay from the
Trust the amounts required to be paid to the Director and/or the Bank, and in no
event shall the trustee be liable to either party for making the payments as
determined by the arbitrator.
Upon receiving the Director's release of all claims under this
Agreement, the trustee of the Trust shall pay to the Bank or its successor in
interest the entire balance remaining in the segregated account maintained for
the benefit of the Director. The Director shall thereafter have no further
interest in the Trust pursuant to this Agreement.
For purposes of this Agreement, "Change in Control" shall mean any one
of the following events: (i) the acquisition of ownership, holding, or power to
vote more than 25% of the voting stock of the Bank or NewSouth Bancorp, Inc.
(the "Company"), (ii) the acquisition of the ability to control the election of
a majority of the Bank's or the Company's directors, (iii) the acquisition of a
controlling influence over the management or policies of the Bank or of the
Company by any person or by persons acting as a "group" (within the meaning of
Section 13(d) of the Securities Exchange Act of 1934), or (iv) during any period
of two consecutive years, individuals (the "Continuing Directors") who at the
beginning of such period constitute the Board of Directors of the Bank or of the
Company (the "Existing Board") cease for any reason to constitute at least two-
thirds thereof, provided that any individual whose election or nomination for
election as a member of the Existing Board was approved by a vote of at least
two-thirds of the Continuing Directors then in office shall be considered a
Continuing Director. Notwithstanding the foregoing, the Company's ownership of
the Bank shall not of itself constitute a Change in Control for purposes of the
Agreement. For purposes of this paragraph only, the term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein.
4
<PAGE>
Section 8. Additional Benefits. The benefits and rights provided
--------- -------------------
under this Agreement are independent of those benefits and rights provided under
other agreements between the parties hereto, and shall not affect, reduce or
diminish the right of Director to participate in any current or future benefit
plan or supplemental compensation arrangement.
Section 9. No Contract of Employment. Nothing contained herein shall
--------- -------------------------
be construed to be a contract of employment or as conferring upon the Director
the right to continue as a director of the Bank. It is expressly understood by
the parties hereto that this Agreement relates exclusively to supplemental
retirement payments for the Director, and is not intended to be an employment or
services agreement.
Section 10. Amendment. This Agreement may not be amended, altered or
---------- ---------
modified, except by a written instrument signed by the parties hereto or their
respective successors, and may not be otherwise terminated except as provided
herein.
Section 11. Governing Law. This Agreement, and the rights of the
---------- -------------
parties hereunder, shall be governed by and construed in accordance with the
laws of the State of North Carolina.
IN WITNESS WHEREOF, the parties have executed this Director's
Retirement Plan Agreement as of the day and year first above written.
HOME SAVINGS BANK, SSB
Attest:
By:
- ------------------------------ ------------------------
[Corporate Seal] Title:
---------------------
DIRECTOR:
(Seal)
---------------------------
5
<PAGE>
BENEFICIARY DESIGNATION FORM
As beneficiary to receive any death benefits payable on my behalf from Home
Savings Bank, SSB, 1311 Carolina Avenue, Washington, North Carolina 27889,
I designate the following:
NAME PRIMARY DATE OF BIRTH ADDRESS RELATIONSHIP
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CONTINGENT, if any
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note: If more than one primary beneficiary is named, the benefit will be paid
in equal shares to those living. Should the contingent beneficiaries be
eligible to receive the benefits, such benefits will be paid in equal shares to
such living contingent beneficiaries.
Each amount payable after my death shall be paid exclusively to the Primary
Beneficiary if living at the time such payments become due. The right is
reserved to the Primary Beneficiary to change contingent beneficiaries after my
death. For the purposes of this agreement, the term "contingent beneficiaries"
shall include any beneficiary who is not receiving payments. A new Contingent
beneficiary may be designated from time to time by filing at the Corporate
Headquarters of Home Savings Bank, SSB, 1311 Carolina Avenue, Washington, North
Carolina 27889, written notice thereof in such form as the Bank may require.
When such notice is received at the Corporate Headquarters of Home Savings Bank,
SSB, the change shall be effective on the date the notice was signed, whether or
not the Primary Beneficiary is living at the time of the receipt, but without
prejudice to Home Savings Bank, SSB on account of any payment made by it before
receipt of the written notice at its Corporate Headquarters.
Name of Spouse if not given above:
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Witness:
--------------------------------- ---------------------------------
Signature of Employee/Director
Date:
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Note: The original will be retained by Home Savings Bank, SSB, one copy by the
Employee/Director and one copy returned to Housley Kantarian & Bronstein, P.C.
6
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this amended registration statement of NewSouth
Bancorp, Inc. on Form S-1 of our report dated October 18, 1996 on our audits of
the consolidated financial statements of Home Savings Bank, SSB and Subsidiary.
We also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Raleigh, North Carolina
February 5, 1997
