<PAGE>
Filed Pursuant to Rule 424(B)(3)
Registration No. 333-35497
PROSPECTUS
CODDLE CREEK FINANCIAL CORP.
(Proposed Holding Company for Mooresville Savings Bank, Inc., SSB)
UP TO 674,475 SHARES OF COMMON STOCK
Coddle Creek Financial Corp., a North Carolina corporation (the "Company"),
is offering up to 674,475 shares of its common stock, no par value (the
"Common Stock"), in connection with the conversion of Mooresville Savings
Bank, SSB (the "Bank") from a North Carolina-chartered mutual savings bank to
a North Carolina-chartered stock savings bank (the "Conversion"). The purchase
price for the Common Stock is $50.00 per share. The minimum number of shares
that any subscriber may purchase is ten shares, for an aggregate minimum
purchase price of $500. As part of the Conversion, the Company will become the
sole stockholder and parent holding company of the Bank. See "THE CONVERSION".
Rights ("Subscription Rights") to subscribe for shares of Common Stock of the
Company in a subscription offering (the "Subscription Offering") have been
granted to certain depositors and borrowers of the Bank, the Bank's Employee
Stock Ownership Plan (the "ESOP") and certain others in accordance with the
Bank's Plan of Holding Company Conversion (the "Plan"). The Subscription
Offering will expire at 12:00 Noon, Eastern Time, on December 15, 1997, unless
extended by the Bank and the Company with the
(cover continued on next page)
--------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" BEGINNING ON PAGE 18.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC"), THE ADMINISTRATOR, SAVINGS INSTITUTIONS
DIVISION, NORTH CAROLINA DEPARTMENT OF COMMERCE (THE "ADMINISTRATOR"), ANY STATE
SECURITIES COMMISSION, OR THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE
"FDIC"); NOR HAS THE SEC, THE ADMINISTRATOR, ANY SUCH STATE COMMISSION, OR THE
FDIC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS (THE "PROSPECTUS").
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE
NOT INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
<TABLE>
<CAPTION>
================================================================================
ESTIMATED
UNDERWRITING,
MARKETING AND ESTIMATED NET
OTHER FEES AND CONVERSION
PURCHASE PRICE EXPENSES(3) PROCEEDS(4)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share at Minimum............. $50.00 $1.88 $48.12
- ------------------------------------------------------------------------------
Per Share at MidPoint............ $50.00 $1.76 $48.24
- ------------------------------------------------------------------------------
Per Share at Maximum............. $50.00 $1.67 $48.33
- ------------------------------------------------------------------------------
Per Share at Maximum, as adjust-
ed.............................. $50.00 $1.59 $48.41
- ------------------------------------------------------------------------------
Total at Minimum(1).............. $21,675,000 $815,180 $18,258,820
- ------------------------------------------------------------------------------
Total at Midpoint(1)............. $25,500,000 $897,800 $21,542,200
- ------------------------------------------------------------------------------
Total at Maximum(1).............. $29,325,000 $980,420 $24,825,580
- ------------------------------------------------------------------------------
Total at Maximum, as adjust-
ed(2)........................... $33,723,750 $1,075,433 $28,601,467
================================================================================
</TABLE>
(1) Determined in accordance with an independent appraisal prepared by JMP
Financial, Inc. ("JMP Financial") dated September 2, 1997, and updated as
of October 17, 1997, which states that the estimated aggregate pro forma
market value of the Company and the Bank ranged from $21,675,000 to
$29,325,000 ("Valuation Range") or between 433,500 and 586,500 shares of
Common Stock at the purchase price of $50.00 per share, which is the
amount to be paid for each share of Common Stock purchased in the
Offerings (as hereinafter defined). See "THE CONVERSION--Purchase Price of
Common Stock and Number of Shares Offered."
(2) As adjusted to give effect to an increase in the number of shares that
could be sold in the Conversion due to an increase of up to 15% above the
maximum of the Valuation Range and the related increase of up to 15% above
the maximum number of shares which may be offered in the Conversion at
such maximum, without the resolicitation of subscribers or any right to
cancel or modify subscription orders, to reflect changes in market and
financial conditions following commencement of the Subscription Offering.
(3) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of approximately
$387,000 (including reimbursable out-of-pocket expenses to be paid to
Trident Securities, Inc.) and management and marketing fees and
commissions to be paid to Trident Securities, Inc. Total fees and
commissions to be paid to Trident Securities, Inc. are estimated to be
between $428,180 and $688,433 at the minimum and maximum, as adjusted, of
the Valuation Range, respectively. See "PRO FORMA DATA" for the
assumptions used to arrive at these estimates. Trident Securities, Inc.
may be deemed to be an underwriter, and such fees may be deemed to be
underwriting fees. The Bank and the Company have agreed to indemnify
Trident Securities, Inc. against certain claims or liabilities, including
claims under the Securities Act of 1933, as amended. See "THE CONVERSION--
Marketing Arrangements."
(4) Includes estimated net proceeds from the sale of 8% of the shares to be
issued which are to be purchased by the Bank's Employee Stock Ownership
Plan (the "ESOP") with funds loaned to the ESOP by the Company. Actual net
proceeds may vary substantially from the estimated amount, depending upon
the number of shares sold respectively in the Subscription Offering, any
Community Offering and any Syndicated Community Offering (as hereinafter
defined), actual expenses and other factors. See "USE OF PROCEEDS",
"CAPITALIZATION", "PRO FORMA DATA" and "THE CONVERSION--Purchase Price of
Common Stock and Number of Shares Offered."
TRIDENT SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 22, 1997.
<PAGE>
approval of the Administrator (the "Expiration Time"). In the event such an
extension is approved, subscribers would be resolicited and would be given the
opportunity to increase (subject to maximum purchase limitations), decrease
(subject to minimum purchase limitations) or rescind their subscriptions. If a
subscriber fails to respond to the resolicitation by the end of the
resolicitation period, the subscription of such subscriber will be cancelled,
funds submitted with the subscription will be refunded promptly with interest
at the Bank's passbook savings rate, and holds on accounts from which
withdrawals were designated will be released. Any such solicitation will be by
means of an amended prospectus filed with the SEC. See "THE CONVERSION--
Offering of Common Stock" and "--Purchase Price of Common Stock and Number of
Shares Offered." Subscription Rights are not transferable; persons who attempt
to transfer Subscription Rights may lose their right to purchase Common Stock
and may be subject to other sanctions. See "The Conversion--Certain
Restrictions on Transfer of Subscription Rights; False or Misleading Order
Forms."
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale in a community offering (the "Community Offering") to
members of the general public with priority being given to natural persons
residing in Iredell, Mecklenburg, Lincoln, Catawba, Rowan, and Cabarrus
counties, North Carolina (the "Local Community"), including IRAs, Keogh
accounts and similar retirement accounts established for the benefit of
natural persons who are residents of the Local Community. The Community
Offering, if one is held, may begin at any time thereafter, and may terminate
at the Expiration Time or at any time thereafter, but not later than January
29, 1998, unless further extended with the consent of the Administrator. See
"THE CONVERSION--Community Offering."
It is anticipated that any shares of Common Stock not subscribed for in the
Subscription and Community Offerings will be offered to certain members of the
general public on a best efforts basis through a selected dealers arrangement
(the "Syndicated Community Offering"). The Subscription, Community and
Syndicated Community Offerings are referred to collectively as the
"Offerings." The Bank and the Company have engaged Trident Securities, Inc.
("Trident Securities") as financial advisor and to assist in the sale of
shares of Common Stock, on a best efforts basis, in the Offerings. Trident
Securities is under no obligation to purchase any shares of Common Stock in
any of the Offerings. See "THE CONVERSION--Marketing Arrangements."
The Boards of Directors and management of the Bank and the Company make no
recommendation concerning whether any person or entity should purchase shares
of Common Stock. Subscribers are urged to consult with their own financial
advisors with respect to suitability of an investment in the Common Stock.
Trident Securities has not prepared any fairness opinion with respect to the
terms of the Offerings or any opinion with respect to the price at which
shares of Common Stock may trade. See "RISK FACTORS--Best Efforts Offering."
The sale of the Common Stock in the Subscription Offering, and in the
Community and Syndicated Community Offerings, if necessary, must be completed
within 45 days after the Expiration Time unless such period is extended with
the approval of the Administrator. In the event such an extension is approved,
subscribers would be resolicited. Subject to the foregoing, an executed Stock
Order Form, once received by the Bank, is irrevocable and may not be modified,
amended or rescinded without the consent of the Bank. See "THE CONVERSION--
Exercise of Subscription Rights and Purchases in the Community Offering."
The Conversion and the acceptance of subscriptions are, among other things,
contingent upon approval of the Conversion by the Bank's members at a special
meeting scheduled to be held on December 16, 1997 (the "Special Meeting") and
upon the sale of shares of Common Stock for an aggregate purchase price of not
less than $21,675,000 nor more than $33,723,750. See "THE CONVERSION--Offering
of Common Stock."
The Company, as a newly organized company, has never issued capital stock,
and consequently, there is no established market for the Common Stock at this
time. Following the completion of the offering, it is anticipated that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board. Trident Securities is
expected to make a market in the Common Stock, by developing and maintaining
historical stock trading records, soliciting potential buyers and sellers of
shares and attempting to match buy and sell orders. In connection with its
market making activities, Trident may buy or sell shares from time to time for
its own account. However, Trident Securities will not be subject to any
obligation with respect to such efforts. If the Common Stock cannot be quoted
and traded on the OTC Electronic Bulletin Board, it is expected that the
transactions in the Common Stock will be reported in the pink sheets of the
National Quotation Bureau, Inc.
An active and liquid public trading market for the securities of any issuer,
including the Common Stock, depends upon the presence in the marketplace of
both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's offering (510,000 shares at the midpoint of
the Valuation Range), it is unlikely that a stockholder base large enough to
create an active trading market will develop and be maintained. Further, even
if a market develops, there can be no assurance that the shares of Common
Stock offered in the Conversion can be resold at or above the purchase price
after completion of the Conversion. Purchasers of Common Stock should consider
the potentially illiquid and long-term nature of their investment in the
shares being offered hereby. See "MARKET FOR COMMON STOCK."
A Stock Information Center has been established at the Bank's headquarters
office at 347 North Main Street, Mooresville, North Carolina, in an area
separate from the Bank's banking operations. The telephone number of the Stock
Information Center is (704) 660-0408.
2
<PAGE>
Mooresville Savings Bank
Mooresville, North Carolina
[MAP APPEARS HERE]
3
<PAGE>
THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN
"RISK FACTORS" BEGINNING ON PAGE 18 OF THIS PROSPECTUS.
SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information and financial statements
appearing elsewhere herein. Certain terms used in this summary are defined
elsewhere herein.
Coddle Creek Financial Corp. The Company is a North Carolina corporation
recently organized by the Board of Directors of
the Bank to acquire all of the capital stock that
the Bank will issue upon its conversion from the
mutual to stock form of ownership. The conversion
of the Bank to stock form, the issuance of the
Bank's capital stock to the Company, and the offer
and sale of the Common Stock of the Company are
referred to in this Prospectus as the
"Conversion." The Company has not yet engaged in
any business. Upon completion of the Conversion,
its business will initially consist solely of
owning the Bank, investing the proceeds of the
Conversion that are retained by the Company and
holding the indebtedness to be outstanding from
the ESOP. The Company has received the approval of
the Administrator and the Board of Governors of
the Federal Reserve System (the "Federal Reserve")
to acquire the Bank.
The executive office of the Company is located at
347 North Main Street, Mooresville, North
Carolina, and its telephone number is (704)
664-4888.
Mooresville Savings Bank, SSB The Bank is a North Carolina-chartered mutual
savings bank headquartered in Mooresville, North
Carolina and has been in operation since 1937. The
Bank has been a member of the Federal Home Loan
Bank ("FHLB") system, and its deposits have been
federally insured since 1947. The Bank's deposits
are now insured by the Savings Association
Insurance Fund (the "SAIF") of the FDIC to the
maximum amount permitted by law.
The Bank conducts business through three full
service offices in Mooresville, Cornelius and
Huntersville, North Carolina. The Bank's primary
market area consists of the communities within an
approximately 15-mile radius of its Mooresville
office, which includes portions of Iredell,
Mecklenburg, Lincoln, Catawba, Rowan and Cabarrus
counties in North Carolina. At June 30, 1997, the
Bank had total assets of $114.2 million, net loans
of $100.5 million, deposits of $95.9 million and
retained earnings of $14.7 million.
The Bank is primarily engaged in the business of
attracting deposits from the general public and
using such deposits to make mortgage loans secured
by one-to-four family residential real estate
located in the Bank's primary market area. The
Bank also makes equity line of credit loans,
commercial loans, construction loans, loans
secured by deposit accounts, and various types of
secured and unsecured consumer loans. The Bank is
a portfolio lender in that it does not originate
its fixed or adjustable rate loans for sale in the
secondary market. See "BUSINESS OF THE BANK." The
Bank has been and intends to continue to be a
community-oriented financial institution offering
a variety of financial services to meet the needs
of the communities it serves.
4
<PAGE>
Highlights of the Bank's operations include:
. Profitability. For the six months ended June
30, 1997 and for the fiscal years ended
December 31, 1996 and 1995 and the nine
months ended December 31, 1994, the Bank had
net income of $287,000, $721,000, $780,000
and $675,000, respectively, and a return on
average assets of .51%, .66%, .75% and .68%,
respectively. Future profitability of the
Bank will be affected by changes in market
interest rates and other factors. See "RISK
FACTORS."
. Capital Position. As of June 30, 1997, the
Bank's ratios of Tier I capital to total
assets and total capital to risk-weighted
assets were 12.85% and 25.06%, respectively,
which substantially exceeded the FDIC's
requirements. On such date, the Bank's ratio
of net worth to total assets, calculated
under the Administrator's regulations, was
13.39%, which substantially exceeded the
North Carolina requirement. See "SUPERVISION
AND REGULATION -- Regulation of the Bank --
Capital Requirements Applicable to the
Bank."
. Emphasis on One-to-Four Family Residential
Lending. Historically, the Bank has been
predominantly a one-to-four family
residential lender. As of June 30, 1997,
82.07% of the Bank's loan portfolio, before
net items, was composed of permanent
one-to-four family residential loans and
11.19% of its loan portfolio, before net
items, was composed of construction and
equity line loans.
. Asset Quality. On June 30, 1997 and December
31, 1996, the Bank's ratio of nonperforming
assets to total assets was .96% and 1.11%,
respectively, which is higher than national
and regional peer group levels. See
"BUSINESS OF THE BANK -- Lending Activities
-- Nonperforming Assets and Asset
Classification."
. Interest Rate Risk. The Bank has a
significant amount of interest rate risk. As
of June 30, 1997, the Bank's one-year
interest sensitivity gap was a negative
28.18% of total interest-earning assets, and
its three year cumulative interest
sensitivity gap was a negative 42.60%. Other
modeling used by the Bank indicates that, as
of June 30, 1997, its net portfolio value
(present values of cash flows from assets,
liabilities and off-balance sheet items)
could decrease by 22.85% in the event of an
instantaneous and permanent 200 basis point
increase in market interest rates and could
increase by 9.77% in the event of a 200
basis point decrease in market interest
rates. Such modeling also indicates that, as
of June 30, 1997, such a 200 basis point
increase in market interest rates would
result in a 7.00% decrease in net interest
income and that a 200 basis point decrease
in such rates would result in a 7.97%
increase in net interest income. See "RISK
FACTORS -- Potential Impact of Changes in
Interest Rates" and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Asset/Liability
Management."
. Unpredictability of Earnings. The earnings
of financial institutions can be
significantly impacted by changes in
interest income and by the interest
sensitivity of its assets and liabilities.
As is described above, the
5
<PAGE>
Bank's asset/liability structure presents a
significant amount of interest rate risk,
and the Bank's earnings have been slightly
reduced during periods of increasing
interest rates and are likely to be
significantly and negatively impacted if
interest rates increase. The Bank has not
established a consistent source of
noninterest income to stabilize its net
income. As a result, the Bank's earnings are
significantly tied to market interest rates
and are, therefore, not highly predictable.
. Nonconforming Loans. The Bank originates
loans with the intention that they will not
be sold in the secondary market. As of June
30, 1997, the Bank had $25.8 million in
adjustable rate nonconforming mortgage loans
and $60.2 million in fixed rate
nonconforming mortgage loans. Although
management believes that many of such loans
could be saleable to investors, some of such
loans could be sold only after incurring
certain costs and/or discounting the
purchase price; as a result, the Bank's loan
portfolio may be less liquid. See "RISK
FACTORS -- Risk Associated with
Nonconforming Loans" and "BUSINESS OF THE
BANK -- Lending Activities -- Origination
and Sale of Loans."
. Management Experience. The Bank's six
current directors have an average tenure of
18 years on the Bank's Board. In addition,
the Bank's three executive officers have 70
years of combined service with the Bank.
Turnover is low with other staff members as
well, with such persons having an average of
ten years tenure with the Bank. Management
is actively involved in community activities
and has important business ties in the
Bank's primary market area.
The Conversion The Bank was organized and has operated as a
traditional savings institution. It recognizes
that the banking and financial services industries
are in the process of fundamental changes,
reflecting changes in the local, national and
international economies, technological changes and
changes in state and federal laws. As a result,
for several years the Bank has been studying the
environment in which it operates and its strategic
options.
As a result of its study of its strategic options,
the Bank adopted the Plan, which provides for
conversion of the bank from a North
Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank. The Bank
believes that converting the bank from the mutual
to stock form and organizing the Company will
provide increased flexibility for the Bank and the
Company to react to changes in their operating
environment.
Consummation of the Conversion is contingent upon
receipt of the approvals of the Administrator and
the Federal Reserve which are necessary for the
Company to acquire the Bank and the approvals of
the FDIC and the Administrator which are necessary
for the Bank to convert from mutual to stock form.
The Administrator has conditionally approved the
Conversion and the Company's acquisition
application, subject to approval by the Bank's
members and satisfaction of certain other
conditions. The Federal Reserve has conditionally
approved the Company's acquisition application,
subject to the satisfaction of certain conditions.
The FDIC has issued a notice of non-objection with
respect to the Conversion, subject to certain
conditions. See "THE CONVERSION -- General."
6
<PAGE>
If the Conversion is not approved by the Bank's
members, the Bank will remain a North
Carolina-chartered mutual savings bank, all
subscription funds will be returned, and all
deposit withdrawal authorizations will be
canceled.
Assuming the consummation of the Conversion, the
Company and the Bank intend to pursue a business
strategy to remain an independent financial
institution with the goal of enhancing shareholder
value over the long term. Neither the Company nor
the Bank has any existing plan to consider any
business combination, and neither company has any
agreement or understanding with respect to any
possible business combination.
The Offerings Pursuant to the Plan, between 433,500 shares and
674,475 shares of Common Stock are being offered
by the Company at the price of $50.00 per share in
the Subscription Offering to the following persons
in the following order of priority: (i) the Bank's
depositors as of December 31, 1995 who had
aggregate deposits at the close of business on
such date of at least $50 ("Eligible Account
Holders"); (ii) the Bank's Employee Stock
Ownership Plan (the "ESOP"); (iii) the Bank's
depositors as of September 30, 1997 (the
"Supplemental Eligibility Record Date"), who had
aggregate deposits at the close of business on
such date of at least $50 ("Supplemental Eligible
Account Holders"); (iv) the Bank's depositor and
borrower members as of November 5, 1997, who are
not Eligible Account Holders or Supplemental
Eligible Account Holders ("Other Members"); and
(v) directors, officers and employees of the Bank
who are not Eligible Account Holders, Supplemental
Eligible Account Holders or Other Members.
Beneficial owners of individual retirement
accounts ("IRAs"), Keogh savings accounts and
other similar retirement accounts have been deemed
to be holders of such accounts for purposes of the
exercise of Subscription Rights. See "THE
CONVERSION -- Subscription Offering."
Shares of Common Stock not subscribed for in the
Subscription Offering will be offered in a
Community Offering to members of the general
public, with priority given to natural persons or
trusts of natural persons who are residents of the
Local Community, including IRAs, Keogh accounts
and similar retirement accounts established for
the benefit of natural persons who are residents
of the Local Community. The Company and the Bank
have the absolute right to reject orders in the
Community Offering in whole or in part. See "THE
CONVERSION -- Community Offering." If there is a
Community Offering, it is anticipated that all
shares of Common Stock not purchased in the
Community Offering will be offered for sale by the
Company to the general public in the Syndicated
Community Offering. See "THE CONVERSION --
Syndicated Community Offering."
The Subscription Offering and Subscription Rights
in the Subscription Offering expire at the
Expiration Time, which is 12:00 Noon., Eastern
Time, on December 15, 1997, unless extended. The
Community Offering, if any, may commence at any
time after the commencement of the Subscription
Offering and may terminate at the Expiration Time
or at any time thereafter, but not later than
January 29, 1998, unless extended with the
approval of the Administrator.
Stock Purchase Limitations The maximum aggregate number of shares of Common
Stock for which any (i) person or entity (other
than the ESOP), (ii) persons or entities
exercising Subscription Rights through a single
account or (iii) persons "acting in concert" (as
defined in the Plan), may subscribe in the
Offerings is 6,000 shares. In addition,
7
<PAGE>
no person or entity, or group of persons or
entities acting in concert, together with any
"associate" (as defined in the Plan), may
subscribe for more than 12,000 shares of Common
Stock sold in the Conversion. However, the Bank's
Board of Directors has the right, at any time
prior to completion of the Conversion, to decrease
the maximum purchase limitations to an amount not
less than 1% of the shares issued in the
Conversion or increase such maximum purchase
limitations to an amount up to 5% of the shares
issued in the Conversion. The ESOP may purchase up
to 8% of the shares of Common Stock issued in the
Conversion (between 34,680 and 53,958 shares
assuming the issuance of between 433,500 and
674,475 shares). If because there is an
oversubscription or for any other reason the ESOP
is unable to purchase in the aggregate up to 8% of
the shares of Common Stock issued in the
Conversion, it is expected that the ESOP will
purchase shares of Common Stock in the open market
so that after such purchases a number of shares of
Common Stock up to 8% of the number of shares
issued in the Conversion will have been acquired
by the ESOP. See "RISK FACTORS -- Cost of ESOP."
No person or entity may subscribe for less than
ten shares of Common Stock, or an aggregate dollar
amount of less than $500.
Subscription Rights;
Purchase of Shares Subscription Rights are exercisable and purchases
may be made in the Offerings only by returning the
original of the stock order form and form of
certification accompanying this Prospectus (the
"Stock Order Forms") properly completed with full
payment for the aggregate dollar amount of Common
Stock desired. Stock Order Forms and required
payments for purchases in the Subscription
Offering must be received prior to the deadlines
designated for the Subscription and Community
Offerings. Payment may be made in cash, by check,
bank draft, negotiable order of withdrawal or
money order, or by authorization of withdrawal
from certain deposit accounts maintained with the
Bank. Persons wishing to use their Bank IRA's to
purchase shares of Common Stock must visit the
Stock Information Center on or before December 8,
1997 in order for the necessary paperwork for such
purchases to be completed and executed prior to
the Expiration Time. See "THE CONVERSION --
Exercise of Subscription Rights and Purchases in
the Community Offering."
Non-transferability of
Subscription Rights The Subscription Rights granted under the Plan are
non-transferable. Subscription Rights may be
exercised only by the person to whom they are
issued and only for his or her own account.
Persons exercising Subscription Rights are
required to certify that they are purchasing
shares for their own accounts within the purchase
limitations set forth in the Plan and that they
have no agreement or understanding for the sale or
transfer of such shares. See "THE CONVERSION --
Certain Restrictions on Transfer of Subscription
Rights; False or Misleading Order Forms."
Appraisal The Plan requires that the aggregate purchase
price of the Common Stock be based upon an
independent valuation of the estimated aggregate
pro forma market value of the Company and the
Bank. JMP Financial, Inc., of Grosse Pointe Park,
Michigan ("JMP Financial"), an independent
financial consulting firm, has advised the Bank
and the Company that in its opinion, at October
17, 1997, the Valuation Range of the aggregate
estimated pro forma market value of the Company
and the Bank was from $21,675,000 to $29,325,000.
The appraisal will be reviewed and, if
appropriate, revised by JMP Financial upon
conclusion of the Offerings. The appraisal by JMP
Financial is not intended and should not be
construed as a recommendation of any kind as to
the advisability of purchasing the Common
8
<PAGE>
Stock. See "MARKET FOR COMMON STOCK," "PRO FORMA
DATA" and "THE CONVERSION -- Purchase Price of
Common Stock and Number of Shares Offered."
Stock Pricing and Number
of Shares to be Offered The purchase price of the Common Stock offered in
the Subscription Offering and the price at which
the Common Stock is sold in the Community and
Syndicated Community Offerings, if any, will be
$50.00 per share. The aggregate dollar amount of
Common Stock that may be sold in the Conversion
will be determined by the Board of Directors of
the Bank and the Company based upon the
independent appraisal of the pro forma market
value of the Company and the Bank prepared by JMP
Financial. Depending on market and financial
conditions following commencement of the
Subscription Offering, the number of shares
offered and sold in the Conversion may be
increased or decreased. With the consent of the
Administrator and the FDIC and in order to reflect
changes in market and financial conditions
following commencement of the Subscription
Offering, the aggregate purchase price of the
shares of Common Stock issued in the Conversion
may be increased, without any solicitation of
subscriptions or right to cancel, rescind or
change subscription orders, to up to 15% above the
maximum of the Valuation Range. However, the
aggregate dollar amount of Common Stock that may
be sold in the Conversion will not be more than
$33,723,750 or less than $21,675,000 without a
resolicitation of subscribers. Any change in the
total dollar amount of the Offerings outside of
the current Valuation Range will be subject to the
receipt of an updated appraisal confirming such
valuation and regulatory approvals. See "THE
CONVERSION -- Purchase Price of Common Stock and
Number of Shares Offered."
Use of Proceeds The net proceeds from the sale of the Common Stock
in the Conversion, including shares purchased by
the ESOP with funds loaned by the Company, are
estimated to be between $18,258,820 and
$24,825,580, depending upon the actual expenses of
the Conversion and other factors. See "PRO FORMA
DATA." The Company intends to use a portion of the
net proceeds of the Offerings (estimated between
$1,734,000 and $2,697,900 assuming the ESOP's
purchase of between 34,680 and 53,958 shares at
$50.00 per share) to fund the loan made to the
ESOP to purchase shares of Common Stock in the
Conversion. After deducting the amount of such
loan from the proceeds, the Company is expected to
retain approximately 50% of the remaining net
proceeds from the issuance of the Common Stock.
The Company will initially invest these proceeds
primarily in interest-earning deposits, U.S.
government, federal agency and other marketable
securities and mortgage-backed securities. See
"USE OF PROCEEDS."
The remainder of the net proceeds from the sale of
the Common Stock will be paid by the Company to
the Bank in exchange for all of the capital stock
of the Bank. The net proceeds paid to the Bank
will become part of the Bank's general funds, and
will initially be invested in mortgage and other
loans, and investments consisting primarily of
U.S. government and federal agency obligations,
interest-earning deposits and other marketable
securities in accordance with the Bank's lending
and investment policies.
Net proceeds will also be used for other general
corporate purposes. The Bank and the Company may
consider opening one or more branch offices in its
primary market area and other nearby communities,
and such proceeds could be used for
9
<PAGE>
such purposes. However, the Company and the Bank
have no current plans to open any additional
office.
The Company and the Bank have no present intention
to file consolidated tax returns which will
preserve for the Company the ability to use a
portion of the proceeds to make a return of
capital in the future. However, the Company has
not made any decision to pay such a return of
capital. The Company and the Bank have agreed to
notify the FDIC before making a return of capital
during the first three years following the
Conversion. See "DIVIDEND POLICY."
At any time following Company stockholder approval
of the Bank's Management Recognition Plan Trust
(the "MRP Trust"), the MRP Trust may acquire a
number of shares of Common Stock equal to 4% of
the number of shares issued in the Conversion. See
"MANAGEMENT OF THE BANK -- Proposed Management
Recognition Plan." 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. Such shares may either be acquired in the
open market or acquired through the Company's
issuance of authorized but unissued shares. In the
event shares are acquired in the open market, the
funds for such purchase may be provided by the
Bank from the proceeds of the Conversion. It is
estimated that between 17,340 and 23,460 shares
will be acquired by the MRP Trust, assuming the
issuance of between 433,500 and 586,500 shares in
the Conversion. If all such shares were acquired
by the MRP Trust in the open market, and if such
shares were acquired at a price of $50.00 per
share, the Bank would contribute between $867,000
and $1,173,000, respectively, to the MRP Trust for
this purpose. Additional shares would be acquired
if the number of shares issued in the Conversion
exceeds 586,500, and the price per share paid by
the MRP Trust could be more or less than $50.00
per share, either of which would change the total
contribution to the MRP Trust. See "RISK FACTORS
-- Cost and Possible Dilutive Effect of the MRP
Trust and Stock Option Plan" and "MANAGEMENT OF
THE BANK -- Proposed Management Recognition Plan."
No awards will be made under the MRP until the MRP
is approved by the Company's stockholders.
Dividends Following the Conversion, the Company currently
expects to pay quarterly cash dividends on the
Common Stock. Annual dividends are expected to be
approximately $1.00 per share. In addition, the
Company may determine from time to time that it is
prudent to pay special cash dividends. Payment of
dividends will be subject to determination and
declaration by the Company's Board of Directors.
The Board of Directors will periodically review
its dividend policy in view of the operating
results and financial condition of the Company and
the Bank, net worth and capital requirements,
regulatory restrictions, tax consequences,
industry standards, and general economic
conditions, and it will authorize cash dividends
to be paid if it deems such payment appropriate
and in compliance with applicable law. There can
be no assurance that dividends will in fact be
paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in
future periods. Also, there are certain regulatory
limits on the Company's ability to pay dividends
and the Bank's ability to pay dividends to the
Company. See "DIVIDEND POLICY" and "SUPERVISION
AND REGULATION -- Regulation of the Bank --
Restrictions on Dividends and Other Capital
Distributions." In addition, see "TAXATION" for a
discussion of federal income tax provisions that
may limit the ability of the Bank to pay dividends
to the Company without incurring a recapture tax.
10
<PAGE>
Market for Common Stock The Company, as a newly organized company, has
never issued capital stock, and consequently,
there is no market for the Common Stock at this
time. Trident Securities is expected to make a
market in the Common Stock, by developing and
maintaining historical stock trading records,
soliciting potential buyers and sellers of shares
and attempting to match buy and sell orders. In
connection with its market making activities,
Trident may buy or sell shares from time to time
for its own account. However, Trident Securities
will not be subject to any obligation with respect
to such efforts. It is anticipated that the Common
Stock will be traded on the over-the-counter
market with quotations available through the OTC
Electronic Bulletin Board. A public market having
the desirable characteristics of depth, liquidity
and orderliness will depend upon the presence in
the market place of both willing buyers and
willing sellers at any given time. No assurance
can be given that an active trading market will
develop and be maintained. See "MARKET FOR COMMON
STOCK."
Stock Ownership
by Management The directors and executive officers of the
Company and of the Bank and their associates
currently anticipate subscribing for Common Stock
in the aggregate amount of $2,600,000, or 52,000
shares. As a result, such persons anticipate
subscribing for 12.00% to 8.87% of the shares of
Common Stock issued in the Conversion based upon
the minimum and maximum of the Valuation Range,
respectively. See "ANTICIPATED STOCK PURCHASES BY
MANAGEMENT." In addition, it is expected that the
ESOP will subscribe for 8% of the shares of Common
Stock issued in the Conversion (between 34,680 and
53,958 shares, assuming the issuance of between
433,500 and 674,475 shares). See "MANAGEMENT OF
THE BANK -- Employee Stock Ownership Plan." It is
expected that directors and certain employees of
the Company and the Bank will also receive
restricted stock grants under the MRP for a number
of shares of Common Stock equal to 4% of the
number of shares issued in the Conversion and will
receive options under the Stock Option Plan to
purchase a number of shares of Common Stock equal
to 10% of the number of shares issued in the
Conversion, if such plans are approved by the
stockholders of the Company at a meeting of
stockholders following the Conversion. See "--
Benefits to Directors and Officers" and
"MANAGEMENT OF THE BANK" -- Proposed Management
Recognition Plan" and "-- Proposed Stock Option
Plan."
If (i) the Stock Option Plan is approved by the
stockholders of the Company within one year after
the Conversion and all of the stock options which
could be granted to directors and executive
officers under the Stock Option Plan are granted
and exercised and all option shares are acquired
in the open market, (ii) the MRP is approved by
the stockholders of the Company within one year
after the Conversion, all of the MRP shares which
could be granted to directors and executive
officers are granted and issued and all such
shares are acquired in the open market, (iii) the
ESOP acquires 8% of the shares issued in the
Conversion and none of such shares are allocated,
and (iv) the Company did not issue any additional
shares of its Common Stock, the shares held by
directors and executive officers and their
associates as a group, including (a) shares
purchased outright in the Conversion, (b) shares
purchased by the ESOP, (c) shares purchased
pursuant to the Stock Option Plan and (d) shares
granted under the MRP, would give such persons
effective control over as much as 31.34% or
28.21%, at the minimum and maximum of the
Valuation Range, respectively, of the Common Stock
issued and outstanding.
11
<PAGE>
Benefits to Directors
and Executive Officers In connection with the Conversion, certain
benefits will be provided to directors, officers
and employees of the Bank.
Employment Agreements. In connection with the
Conversion, the Bank expects to enter into
employment agreements with George W. Brawley, Jr.,
President and Chief Executive Officer, Dale W.
Brawley, Executive Vice President and Treasurer,
and Billy R. Williams, Secretary and Controller.
The employment agreements provide for initial
annual salaries of $139,200, $84,000 and $56,400
for Mr. G. Brawley, Mr. D. Brawley and Mr.
Williams, respectively. See "MANAGEMENT OF THE
BANK -- Employment Agreements." Mr. G. Brawley,
Mr. D. Brawley and Mr. Williams, along with all
other employees, are also eligible to receive
holiday bonuses as declared by the Bank's Board of
Directors. During the fiscal year ended December
31, 1996, the Bank's employees received holiday
bonuses based on a percentage basis, depending on
the employee's salary. See "MANAGEMENT OF THE BANK
-- Bonus Compensation."
Severance Plan. In connection with the Conversion,
the Bank plans to adopt a Severance Plan for the
benefit of its employees, including officers who
at the time of a "change in control" (as defined
in the Severance Plan), have a remaining term
under their employment agreement of two years or
less. The Severance Plan provides that in the
event there is a change in control and (i) the
employment of any full time employee of the Bank
is terminated in connection with, or within 24
months after the change in control, other than for
cause, or (ii) an employee terminates his or her
employment following a decrease in the level of
such employee's annual base salary rate or a
transfer of such employee to a location more than
40 miles distant from the employee's primary work
station within 24 months after a change in
control, the employee shall be entitled to a
severance benefit equal to the greater of (a) an
amount equal to two weeks' salary at the
employee's existing salary rate multiplied times
the employee's years of service or (b) the amount
of one month's salary at the employee's salary
rate at the time of termination, subject to a
maximum payment equal to one half of the
employee's annual salary. See "MANAGEMENT OF THE
BANK -- Severance Plan."
ESOP. In connection with the Conversion, the Bank
has established the ESOP. As part of the
Conversion, the ESOP intends to borrow funds from
the Company and to use such funds to purchase 8%
of the shares of Common Stock to be issued in the
Conversion, estimated to be between 34,680 and
53,958 shares, assuming the issuance of between
433,500 and 674,475 shares. See "MANAGEMENT OF THE
BANK -- Employee Stock Ownership Plan."
MRP. Pursuant to the MRP, which is expected to be
adopted by the Boards of Directors of the Company
and the Bank, directors and certain employees of
the Bank could receive restricted stock grants of
a number of shares of Common Stock equal to 4% of
the shares issued in the Conversion (between
17,340 and 23,460 shares, assuming the issuance of
between 433,500 and 586,500 shares). Assuming that
the shares issued pursuant to the MRP had a value
of $50.00 per share, such shares would have a
value of between $867,000 and $1,173,000.
Recipients of restricted stock under the MRP will
not have to pay for their restricted shares.
Under applicable regulations, if the proposed MRP
is submitted to and approved by the stockholders
of the Company within one year after consummation
of the Conversion, (i) no employee of the Bank
(including Mr. G. Brawley, Mr. D.
12
<PAGE>
Brawley and Mr. Williams) could receive more than
25% of the shares issued under the MRP, or 5,865
shares, assuming the issuance of 586,500 shares in
the Conversion, (ii) the five non-employee
directors of the Bank could receive restricted
stock grants for an aggregate of not more than 25%
of the shares issued under the MRP, or 5,865
shares, assuming the issuance of 586,500 shares in
the Conversion and (iii) none of the five
non-employee directors of the Bank could receive
individually more than 5% of the shares issued
under the MRP, or 1,173 shares, assuming the
issuance of 586,500 shares in the Conversion.
Assuming the MRP shares had a value of $50.00 per
share, 5,865 shares would have a value of $293,250
and 1,173 shares would have a value of $58,650. If
the MRP is submitted to and approved by the
Company's stockholders more than one year after
consummation of the Conversion, the regulatory
percentage limitations set forth above would not
apply.
The MRP will only be implemented if approved by
the stockholders of the Company at a meeting of
stockholders to be held no sooner than six months
following the Conversion. See "MANAGEMENT OF THE
BANK -- Proposed Management Recognition Plan."
Stock Options. Pursuant to the Stock Option Plan
which is expected to be adopted by the Boards of
Directors of the Company and the Bank, directors
and certain employees of the Bank could receive
options to purchase a number of shares of Common
Stock equal to 10% of the shares issued in the
Conversion (between 43,350 and 58,650 shares,
assuming the issuance of between 433,500 and
586,500 shares).
Under applicable regulations, if the proposed
Stock Option Plan is submitted to and approved by
the stockholders of the Company within one year
after consummation of the Conversion, (i) no
employee of the Bank (including Mr. G. Brawley,
Mr. D. Brawley and Mr. Williams) could receive
more than 25% of the options issued under the
Stock Option Plan, or options to purchase 14,663
shares, assuming the issuance of 586,500 shares in
the Conversion, (ii) the five non-employee
directors of the Bank could not receive in the
aggregate more than 25% of the options issued
under the Stock Option Plan, or options to
purchase 14,663 shares, assuming the issuance of
586,500 shares in the Conversion, and (iii) none
of the five non-employee directors of the Bank
could receive individually more than 5% of the
options issued under the Stock Option Plan, or
options to purchase 2,933 shares, assuming the
issuance of 586,500 shares in the Conversion. If
the Stock Option Plan is submitted to and approved
by the Company's stockholders more than one year
after consummation of the Conversion, the
regulatory percentage limitations set forth above
would not apply.
The Stock Option Plan will only be implemented if
approved by the stockholders of the Company at a
meeting of stockholders to be held no sooner than
six months following the Conversion. The exercise
price of the options will be the fair market value
of the Common Stock at the time the options are
granted (which will be after the Stock Option Plan
is approved by the Company's stockholders), and
the options will have terms of ten years or less.
Recipients of options under the Stock Option Plan
will not have to pay for the options issued to
them. See "MANAGEMENT OF THE BANK -- Proposed
Stock Option Plan."
13
<PAGE>
Income Tax Consequences
of Subscription Rights If the Subscription Rights granted in connection
with the Conversion were deemed to have an
ascertainable value, receipt of such rights would
be taxable to recipients who exercise such
Subscription Rights, either as ordinary income or
capital gain, in an amount not in excess of such
value. Whether such Subscription Rights are
considered to have any ascertainable value is an
inherently factual determination. The Bank has
received an opinion from JMP Financial stating
that the Subscription Rights do not have any
ascertainable value. The opinion of JMP Financial
is not binding on the Internal Revenue Service
("IRS"). See "THE CONVERSION -- Income Tax
Consequences."
Anti-Takeover Provisions The Articles of Incorporation and Bylaws of the
Company and the Bank contain certain restrictions
that are intended to discourage non-negotiated
attempts to acquire control of the Company or the
Bank. The Board of Directors of the Company
believes that these provisions encourage potential
acquirors to negotiate directly with the Board of
Directors. However, these provisions may
discourage an attempt to acquire control of the
Company which stockholders might deem to be in
their best interests or in which they might
receive a premium over the then market price of
their shares. These provisions may also render the
removal of a director or the entire Board of
Directors of the Company more difficult and may
deter or delay changes in control which have not
received the requisite approval of the Company's
Board of Directors. Other factors, such as voting
control of directors and officers and agreements
with employees, may also have an anti-takeover
effect. See "RISK FACTORS -- Anti-Takeover
Considerations" and "ANTI-TAKEOVER PROVISIONS
AFFECTING THE COMPANY AND THE BANK."
Risk Factors Special attention should be given to the "RISK
FACTORS" section of this Prospectus, which
discusses the possible effects of changes in
interest rates on the Bank and the thrift industry
in general, anticipated low return on equity
following the Conversion, the limited market for
the Common Stock, the cost of the ESOP, the cost
and possible dilutive effect of the MRP and stock
option plan, potential financial institution
regulation and legislation, competition, the risk
associated with the Bank's nonconforming loans,
the concentration of large residential mortgage
loans in the Lake Norman area, certain
anti-takeover considerations, and certain other
matters that potential purchasers should consider
before deciding whether to subscribe for the
Common Stock offered hereby.
14
<PAGE>
SELECTED FINANCIAL
AND OTHER DATA OF THE BANK
Set forth below are summaries of historical financial and other data of
the Bank. This information is derived in part from, and should be read in
conjunction with, the Financial Statements and Notes to Financial Statements of
the Bank presented elsewhere herein and with the section of this Prospectus
entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
At or for the Six Months At or for the Year
Ended June 30, At or for the Year Ended December 31, Ended March 31,
-------------------------- --------------------------------------- --------------------
1997/8/ 1996/8/ 1996/8/ 1995/8/ 1994/2/,/8/ 1994/9/ 1993/9/
---- ---- ---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Financial condition data:
Total assets $114,162 $109,427 $112,552 $108,033 $ 99,966 $ 98,869 $100,048
Investments/1/ 10,032 11,750 10,889 13,903 14,220 16,585 16,760
Loans receivable, net/3/ 100,506 94,134 97,951 90,555 82,453 79,031 80,189
Deposits 95,872 92,949 93,785 92,103 85,105 84,863 87,222
Retained earnings 14,691 14,039 14,412 13,726 12,883 12,208 11,414
Operating data/2/:
Interest income $ 4,433 $ 4,257 $ 8,679 $ 7,946 $ 5,544 $ 7,386 $ 8,135
Interest expense 2,366 2,310 4,658 4,416 2,607 3,804 4,614
-------- -------- -------- -------- -------- -------- --------
Net interest income 2,067 1,947 4,021 3,530 2,937 3,582 3,521
Provision for loan losses 230 -- -- 12 18 103 126
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 1,837 1,947 4,021 3,518 2,919 3,479 3,395
Non-interest income 87 104 200 190 149 233 238
Non-interest expense 1,428 1,365 3,146 2,624 2,032 2,578 2,160
-------- -------- -------- -------- -------- -------- --------
Income before income taxes 496 686 1,075 1,084 1,036 1,134 1,473
Income tax expense 209 257 354 304 361 418 542
-------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of a
change in accounting principle 287 429 721 780 675 716 931
Cumulative effect on prior years of
changing to a different method of
accounting for income taxes -- -- -- -- -- 78 --
-------- -------- -------- -------- -------- -------- --------
Net income $ 287 $ 429 $ 721 $ 780 $ 675 $ 794 $ 931
======== ======== ======== ======== ======== ======== ========
Other selected data:
Number of outstanding loans 2,497 2,480 2,476 2,432 2,281 2,259 2,479
Number of deposit accounts 7,728 7,783 7,752 7,730 7,248 7,599 7,831
Number of full-service offices open 3 3 3 3 3 3 3
Return on average assets/4/ 0.51% 0.79% 0.66% 0.75% 0.68% 0.80% 0.92%
Return on average equity/4/ 3.99% 6.25% 5.37% 6.05% 5.55% 6.72% 8.50%
Average equity to average assets 12.76% 12.62% 12.27% 12.37% 12.21% 11.88% 10.87%
Interest rate spread/5/ 3.10% 2.96% 3.08% 2.85% 3.53% 3.25% 3.09%
Net yield on average interest-
earning assets/6/ 3.77% 3.64% 3.74% 3.49% 4.05% 4.16% 3.61%
Average interest-earning assets
to average interest-bearing
liabilities 115.25% 115.93% 115.21% 114.59% 114.44% 111.90% 110.82%
Ratio of non-interest expense to
average total assets/4/ 2.53% 2.51% 2.88% 2.52% 2.04% 2.59% 2.14%
Nonperforming assets to total assets/7/ 0.96% 1.09% 1.11% 1.11% 1.18% 2.33% 2.56%
Nonperforming loans to total loans/7/ 1.05% 1.21% 1.23% 1.25% 1.37% 2.80% 3.12%
Allowance for loan losses to total loans 0.61% 0.42% 0.40% 0.44% 0.48% 0.49% 0.36%
Allowance for loan losses to
nonperforming loans/7/ 56.24% 32.72% 31.11% 32.95% 33.67% 16.75% 11.22%
Provision for loan losses to total
loans receivable, net/4/ 0.46% 0.00% 0.00% 0.01% 0.03% 0.13% 0.16%
Net charge-offs to average loans
outstanding 0.00% 0.00% 0.01% 0.01% 0.01% 0.01% 0.07%
Retained earnings to total assets 12.87% 12.83% 12.80% 12.71% 12.89% 12.35% 11.41%
</TABLE>
15
<PAGE>
- ---------------------------------------
(1) Includes interest-bearing deposits, certificates of deposit, FHLB stock and
investment securities.
(2) The operating data for December 31, 1994 is for the nine-month period
beginning April 1, 1994 and ending December 31, 1994 due to change in year
ends.
(3) Loans, net, represents gross loans less net deferred loan fees, undisbursed
loan funds and allowance for loan losses.
(4) Annualized for the six months ended June 30, 1997 and 1996 and the nine
months ended December 31, 1994.
(5) The interest rate spread represents the difference between the weighted-
average yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities.
(6) The net yield on average interest-earning assets represents net interest
income as a percent of average interest-earning assets.
(7) Nonperforming assets include nonaccrual loans and accruing loans past due
90 days or more.
(8) Ratios are derived from monthly balances except for ratios derived from
period-end balances and are annualized where appropriate. Management does
not believe the use of month-end balances has caused a material difference
in the information provided.
(9) Ratios are derived from quarterly balances except for ratios derived from
period-end balances and are annualized where appropriate. Management does
not believe the use of quarter-end balances has caused a material difference
in the information provided.
RECENT DEVELOPMENTS
The following table sets forth certain selected financial data of the
Bank at and for the period indicated. Financial data at September 30, 1997 and
for the three months ended September 30, 1997 and 1996 are unaudited. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals, except for the special SAIF assessment in 1996 and additional expense
to terminate the defined benefit plan in 1997) necessary for a fair presentation
have been included. The results of operations and other data for the three
months ended September 30, 1997 are not necessarily indicative of the results of
operations for the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
At At
September 30, December 31,
1997 1996
--------------- --------------
(Dollars in Thousands)
<S> <C> <C>
Financial Condition Data:
Total assets $ 114,276 $ 112,552
Investments/1/ 9,292 10,889
Loans receivable, net/2/ 100,659 97,951
Deposits 96,098 93,785
Retained earnings 14,738 14,412
<CAPTION>
For the Three Months
Ended September 30,
-------------------------------------
1997 1996
------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Operating Data:
Interest income $ 2,248 $ 2,224
Interest expense 1,204 1,173
--------- ---------
Net interest income 1,044 1,051
Provision for loan losses 10 -
--------- ---------
Net interest income after provision for loan losses 1,034 1,051
Non-interest income 51 46
Non-interest expense 1,016 1,251
--------- ---------
Income (loss) before income taxes (credits) 69 (154)
Income tax expense (credits) 22 (51)
--------- ---------
Net income (loss) $ 47 $ (103)
========= =========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended September 30,
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Other Selected Data:
Number of outstanding loans 2,552 2,558
Number of deposit accounts 7,473 7,572
Number of full-service offices open 3 3
Return on average assets/3/ 0.16% (0.37%)
Return on average equity/3/ 1.27% (2.91%)
Average equity to average assets 12.89% 12.77%
Interest rate spread/4/ 2.84% 2.98%
Net yield on average interest-earning assets/5/ 3.78% 3.92%
Average interest-earning assets to average
interest-bearing liabilities 115.18% 115.05%
Ratio of non-interest expense to average total assets/3/ 3.55% 4.51%
Non-performing assets to total assets/6/ 0.88% 0.85%
Non-performing loans to total loans/6/ 0.98% 0.98%
Allowance for loan losses to total loans 0.61% 0.40%
Allowance for loan losses to non-performing loans/6/ 62.67% 41.30%
Provision for loan losses to total loans receivable, net/3/ 0.04% 0.00%
Net charge-offs to average loans outstanding 0.01% 0.00%
Retained earnings to total assets 12.90% 12.80%
</TABLE>
- ---------------------------------------
(1) Includes interest-bearing deposits, certificates of deposit, FHLB stock,
and investment securities.
(2) Loans, net, represents gross loans less net deferred loan fees, undisbursed
loan funds and allowance for loan losses.
(3) Annualized for the three months ended September 30, 1997 and 1996.
(4) The interest rate spread represents the difference between the
weighted-average yield on interest-earning assets and the weighted-average
cost of interest-bearing liabilities.
(5) The net yield on average interest-earning assets represents net interest
income as a percentage of average interest-earning assets.
(6) Non-performing assets include nonaccrual loans and accruing loans past due
90 days or more and real estate acquired in settlement of loans.
(7) Ratios other than period-end ratios are based on average monthly balances.
Management's Discussion and Analysis of Recent Developments
Total assets of the Bank increased by $1.7 million from December 31, 1996,
and totalled $114.2 million at September 30, 1997. Net loans receivable
increased by $2.7 million to $100.7 million at September 30, 1997 from $98.0
million at December 31, 1996. Deposits increased by $2.3 million to $96.1
million at September 30, 1997 from $93.8 million at December 31, 1996. Total
investments decreased by $1.6 million to $9.3 million at September 30, 1997 from
$10.9 million at December 31, 1996, primarily due to a decrease in interest-
bearing deposit accounts. Equity increased by $326,000 to $14.7 million at
September 30, 1997, which is attributable to the Bank's earnings of $334,000,
offset by unrealized losses on securities available for sale, net of tax, of
$8,000 during the nine months ended September 30, 1997.
At September 30, 1997, the Bank's capital, including the equity component
of unrealized gain on available for sale securities, net of tax, totalled $14.7
million. The Bank's capital as a percentage of assets was 12.9% at September 30,
1997, and was in excess of the regulatory capital requirements at such date.
The Bank had $983,000 of nonperforming loans at September 30, 1997,
compared to $954,000 at September 30, 1996. A loan loss provision of $100,000
was charged to expense for the three months ended September 30, 1997. The
allowance for loan losses totalled $616,000 at September 30, 1997.
17
<PAGE>
Net income for the three months ended September 30, 1997 was $47,000,
compared to a net loss of $(103,000) during the same quarter of 1996. Net
interest income totalled $1.04 million for the quarter ended September 30, 1997,
as compared to $1.05 million for the same quarter in 1996. There were no
significant variations in net interest income or non-interest income between the
three-month periods ended September 30, 1997 and 1996.
Non-interest expense decreased $235,000 to $1.0 million for the three
months ended September 30, 1997, compared to $1.3 million for the same period
ended September 30, 1996. A one-time expense of $210,000 increased compensation
expense during the quarter ended September 30, 1997 due to the termination of
the Bank's defined benefit pension plan. Additionally, a one-time special
assessment to recapitalize the SAIF insurance fund of $520,000 was charged to
expense during the quarter ended September 30, 1996. There were no significant
variations in the other non-interest expense categories between the three-month
periods ended September 30, 1997 and 1996.
RISK FACTORS
The following factors, in addition to the information presented
elsewhere in this Prospectus, should be considered by investors before deciding
whether to purchase the Common Stock offered hereby.
Potential Impact of Changes in Interest Rates
The results of operations of the Bank, as with savings institutions
generally, are dependent to a large degree on its net interest income, which is
generally the difference between interest income from loans and investments and
interest expense on deposits and borrowings. The Bank's interest income and
interest expense are significantly affected by general economic conditions and
by policies of the federal government and various regulatory agencies.
In recent years, the assets of many savings institutions, including the
Bank, have been negatively "gapped"--which means that the dollar amount of
interest-bearing liabilities which reprice within specific time periods, either
through maturity or rate adjustment, exceeds the dollar amount of
interest-earning assets which reprice within such time periods. As a result, the
net interest income of these savings institutions, including the Bank, would be
expected to be negatively impacted by increases in interest rates.
In addition to the interest rate gap analysis discussed above, the
Bank's management monitors interest rate sensitivity through the use of a model
which estimates the change in net portfolio value ("NPV") and net interest
income in response to a range of assumed changes in market interest rates. NPV
is the present value of expected cash flows from assets, liabilities and
off-balance sheet items. The model estimates the effect on the Bank's NPV and
net interest income of instantaneous and permanent 100 to 200 basis point
increases and decreases in market interest rates. The Bank's Board of Directors
has established maximum acceptable decreases in NPV and net interest income for
various rate scenarios. Computations as of June 30, 1997, indicated that a 200
basis point increase in interest rates could result in a 22.85% decrease in the
Bank's NPV but that a 200 basis point decrease in interest rates could result in
a 9.77% increase in the Bank's NPV. Such computations also indicate that the
same 200 basis point increase in interest rates could result in a 7.00% decrease
in net interest income and that the 200 basis point decrease in interest rates
could result in a 7.97% increase in net interest income. Computations of the
prospective effects of hypothetical interest rate changes in determining the
effect on NPV and net interest income are based on numerous assumptions,
including relative levels of market interest rates, loan prepayments and deposit
decay and should not be relied upon as indicative of actual results. Further,
such computations and the gap computations described above do not incorporate
any actions management may undertake in response to changes in interest rates.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION -- Asset/Liability Management."
At June 30, 1997, the Bank's cumulative one year gap as a percentage of
total interest-earning assets was a negative 28.18%, and its cumulative three
year gap as a percentage of total interest-earning assets was a negative 42.60%,
which is significantly higher than comparable financial institutions. The Bank's
computes its gap position using certain loan prepayment, deposit decay and other
assumptions. The results of the Bank's gap computations could be substantially
different if other assumptions were used.
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The computations described above indicate that the Bank's asset and
liability structure presents significant interest rate risk and that the Bank's
portfolio value and net interest income would be negatively impacted by
increases in interest rates. In order to mitigate and manage interest rate risk,
the Bank has adopted the following policies: (i) investing excess liquidity in
shorter term or adjustable rate instruments, with maturities or repricing
periods of three years or less; (ii) promoting mortgage loans with bi-weekly
payment options, ten-year balloons, or 15-year amortizations; (iii) promoting
adjustable rate equity line of credit loans; (iv) promoting longer term
certificates of deposit; (v) increasing the level of interest-earning assets
relative to interest-bearing liabilities; and (vi) maintaining a relatively low
level of operating expenses and non-earning assets.
The Bank's results of operations will continue to be significantly
affected by changes in interest rates due, among other factors, to (i) the fact
that a large percentage of the Bank's adjustable rate assets reprice only once a
year, (ii) the fact that the Bank originates significant amounts of fixed rate
mortgage loans and does not sell such loans in the secondary market, (iii) the
fact that a large percentage of the Bank's deposit accounts are subject to
immediate repricing or to repricing within one year, (iv) the fact that the
Bank's interest-earning assets and interest-bearing liabilities reprice at
different times and with different frequencies, (v) the effects of periodic and
lifetime interest rate caps on the Bank's interest-earning assets, (vi) the fact
that interest rates on the Bank's assets and liabilities respond differently to
economic, market and competitive factors, (vii) the fact that sustained high
levels of interest rates may adversely affect real estate and lending markets in
general, and (viii) the fact that the Bank has an insignificant amount of
non-interest income. Changes in the level of interest rates also can affect the
amount of loans originated by the Bank. In addition, changes in interest rates
can result in disintermediation, which is the flow of funds away from banks into
direct investments, such as U.S. government and corporate securities, and other
investment vehicles which, because of the absence of federal deposit insurance
premiums and reserve requirements, generally can pay higher rates of interest
than financial institutions. The Bank does not originate its fixed rate or
adjustable rate loans for sale, or sell its loans in the secondary market, and
this tends to increase its exposure to interest rate risk. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
Asset/Liability Management."
Risk Associated with Nonconforming Loans
Historically, the Bank has not originated its one-to-four family loans
with the intention that they will be sold in the secondary market. The Bank
generally originates loans satisfying its underwriting requirements which are
tailored for its local community. Specifically, the Bank does not obtain
property surveys, uses in-house appraisers only for loans under $250,000 and
sometimes accepts higher than normal debt-to-income ratios and may waive other
Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage
Association ("FNMA") requirements on a case-by-case basis. As a result, such
loans are not readily saleable in the secondary market and the Bank's loan
portfolio is less liquid than would be the case if it was composed of loans
originated in conformity with secondary market requirements. In addition, loans
which are not originated in conformity with the purchase requirements of FHLMC
and FNMA, or nonconforming loans, are generally thought to have greater risks of
default and nonperformance. See "BUSINESS OF THE BANK -- Origination and Sale of
Loans." These loans satisfy a need in the Bank's local community and generally
produce a higher yield than would be produced by conforming loans. At June 30,
1997, the Bank had $86.0 million in nonconforming loans, which constituted
81.95% of its loan portfolio, before net items.
The Bank plans to continue to originate a significant amount of
nonconforming loans. Therefore, in periods of economic downturn, the Bank's
level of nonperforming assets may be greater than its peer group.
Risk Associated with Concentration of Large Residential Mortgage Loans
As of June 30, 1997, the Bank has 48 loan relationships with individual
borrowers in excess of $200,000, totaling approximately $12.4 million or 11.81%
of the Bank's total loan portfolio. The principal balance of five individual
loans exceeds $350,000, with the largest single loan balance of approximately
$495,000. The majority of these loans are secured by residential real estate
located near or on Lake Norman, North Carolina, which is located in parts of
Catawba, Iredell, Lincoln and Mecklenburg counties. While these loans are
performing according to the terms of their loan documents, an economic downturn
in the Bank's primary market area, in which Lake Norman is located, could have
an adverse effect on the performance of these loans.
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Anticipated Low Return on Equity Following Conversion
The Bank's return on equity was below industry standards for the six
months ended June 30, 1997. At June 30, 1997, the Bank's ratio of average equity
to average assets was 12.76%. On a pro forma basis at June 30, 1997, assuming
the sale of 510,000 shares of Common Stock in the Conversion, the Bank's ratio
of equity to assets would have been 19.97%. With its higher capital position as
a result of the Conversion, it is doubtful that the Bank will be able to quickly
deploy the capital raised in the Conversion in loans and other assets in a
manner consistent with its business plan and operating philosophies and in a
manner which will generate earnings to support its high capital position. The
cost of the implementation of an ESOP, MRP and Stock Option Plan following the
Conversion are also expected to reduce the Company's return on equity. As a
result, it is expected that the Bank's return on equity initially will be below
industry norms. Consequently, investors expecting a return on equity which will
meet or exceed industry norms for the foreseeable future should carefully
evaluate and consider the risk that such returns will not be achieved.
Following the Conversion, the Company may consider plans to reduce
capital if the opportunities to deploy it are not found. Such plans may include
payment of cash dividends and repurchasing shares. Any such steps would be taken
based on conditions as they exist following the Conversion and in compliance
with applicable regulations which limit the Company's ability to pay dividends
and repurchase its stock. See "USE OF PROCEEDS," "DIVIDEND POLICY" and
"SUPERVISION AND REGULATION -- Regulation of the Company -- General" and "--
Dividend Limitations" and "SUPERVISION AND REGULATION -- Regulation of the Bank
- -- Restrictions on Dividends and Other Capital Distributions."
Limited Market for the Common Stock
The Company, as a newly organized company, has never issued capital
stock, and consequently, there is no established market for the Common Stock at
this time. Following the completion of the offering, it is anticipated that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board. Trident Securities is
expected to make a market in the Common Stock, by developing and maintaining
historical stock trading records, soliciting potential buyers and sellers of
shares and attempting to match buy and sell orders. In connection with its
market making activities, Trident may buy or sell shares from time to time for
its own account. However, Trident Securities will not be subject to any
obligation with respect to such efforts. If the Common Stock cannot be quoted
and traded on the OTC Electronic Bulletin Board, it is expected that the
transactions in the Common Stock will be reported in the pink sheets of the
National Quotation Bureau, Inc.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's offering (510,000 shares at the midpoint of the
Valuation Range), it is unlikely that a stockholder base large enough to create
an active trading market will develop and be maintained. Further, even if a
market develops, there can be no assurance that the shares of Common Stock
offered in the Conversion can be resold at or above the purchase price after
completion of the Conversion. Purchasers of Common Stock should consider the
potentially illiquid and long-term nature of their investment in the shares
being offered hereby. The aggregate price of the Common Stock is based upon an
independent appraisal of the pro forma market value of the Common Stock.
However, there can be no assurance that an investor will be able to sell the
Common Stock purchased in the Conversion at or above the purchase price.
Cost of ESOP
It is expected that the ESOP will purchase 8% of the shares of Common
Stock issued in the Conversion with funds borrowed from the Company. See
"MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan." Assuming the issuance
of 510,000 shares in the Conversion, it is expected that 40,800 shares will be
purchased by the ESOP, which--if such shares are acquired at $50.00 per
share--would have a value of $2,040,000. If, because there is an
oversubscription for shares of Common Stock or for any other reason, the ESOP is
unable to purchase in the Conversion 8% of the total number of shares offered in
the Conversion, then the Board of Directors of the Company may approve the
purchase by the ESOP in the open market after the Conversion, of such shares as
are necessary for the ESOP to own a number of shares equal to 8% of the shares
of Common Stock issued in the Conversion. In such event, the actual cost of the
ESOP may be
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more or less than the amounts set forth above because the ESOP will be
purchasing its shares in the open market and the price paid for its shares will
depend upon the price at which shares can be acquired in the open market. The
purchase of Common Stock by the ESOP will reduce the pro forma stockholders'
equity of the Bank.
In November 1993, the American Institute of Certified Public
Accountants approved Statement of Position ("SOP") 93-6, "Employers' Accounting
for Employee Stock Ownership Plans." SOP 93-6, among other things, changes the
measure of compensation recorded by employers from the cost of ESOP shares to
the fair value of ESOP shares. Since the fair value of the shares following the
Offerings cannot be predicted, the Bank cannot reasonably estimate the impact of
SOP 93-6 on its financial statements. While an increase in such fair value will
cause an increase in ESOP-related expenses for accounting purposes, an increase
in the fair value of the shares should not increase the actual out-of-pocket
cost to the Bank of the ESOP. Also, earnings per share will be increased as a
result of the implementation of SOP 93-6 because only shares which have been
committed to be released by the ESOP are included as outstanding shares in the
computation. See "PRO FORMA DATA."
Cost and Possible Dilutive Effect of the MRP and Stock Option Plan
It is expected that the stockholders of the Company will be asked to
approve the Stock Option Plan and the MRP at a meeting of stockholders after the
Conversion. Under the MRP, directors and certain employees of the Bank are
expected to be awarded an aggregate amount of Common Stock equal to 4% of the
shares issued in the Conversion. Under the Stock Option Plan, directors and
certain employees of the Bank are expected to be granted options to purchase an
aggregate amount of Common Stock equal to 10% of the shares issued in the
Conversion at exercise prices equal to the market price of the Common Stock on
the date of grants. Shares issued to directors and certain employees under the
MRP and the Stock Option Plan may be from authorized but unissued shares of
Common Stock or they may be purchased in the open market. In the event the
shares issued under the MRP and the Stock Option Plan consist of newly issued
shares of Common Stock, the interests of existing stockholders would be diluted.
If 586,500 shares of the Common Stock are issued in the Conversion, it is
expected that options to acquire 58,650 shares of the Common Stock could be
granted under the Stock Option Plan, and awards of an additional 23,460 shares
could be made under the MRP. At the maximum of the Valuation Range, if all
shares under the MRP and the Stock Option Plan were newly issued, the exercise
price was $50.00 for the shares issued pursuant to the options, and all of the
options were exercised, the number of outstanding shares of Common Stock would
increase from 586,500 to 668,610, the pro forma book value per share of the
outstanding Common Stock at June 30, 1997 would have been $65.25 compared with
$69.38 if such plans did not exist, and the unannualized pro forma net income
per share of the outstanding Common Stock for the six months ended June 30, 1997
would have been $1.00 compared with $1.19 if such plans did not exist. The cost
of the shares acquired by the MRP will be expensed over any vesting period set
forth in the MRP. If 586,500 shares of Common Stock are issued in the Conversion
and the MRP acquired 23,460 shares at a cost of $50.00 per share, the total
annual pre-tax expense of the MRP would be $234,600 per year assuming a straight
line amortization method over a five-year life. See "PRO FORMA DATA" and
"MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan" and
"-- Proposed Stock Option Plan."
Anti-Takeover Considerations
Provisions in the Articles of Incorporation and Bylaws. The Company's
Articles of Incorporation and Bylaws contain certain provisions that may
discourage attempts to acquire control of the Company that are not negotiated
with the Company's Board of Directors. These provisions may result in the
Company being less attractive to a potential acquiror and may result in
stockholders receiving less for their shares than otherwise might be available
in the event of a takeover attempt. In addition, these provisions may have the
effect of discouraging takeover attempts that some stockholders might deem to be
in their best interests, including takeover proposals in which stockholders
might receive a premium for their shares over the then-current market price, as
well as making it more difficult for individual stockholders or a group of
stockholders to elect directors or to remove incumbent management. The Company's
Board of Directors believes, however, that these provisions are in the best
interests of the Company and its stockholders because such provisions encourage
potential acquirors to negotiate directly with the Board of Directors, which the
Board of Directors believes is in the best position to act on behalf of all
stockholders.
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These provisions include, among others, that (1) the Board of Directors
has the authority to change the number of directors within a range from five to
15; (2) stockholders who intend to nominate a candidate for election to the
Board of Directors must give advance notice to the Secretary of the Company; (3)
terms for directors will be staggered at any time that the number of directors
exceeds nine; (4) certain merger, consolidation, or other business combinations
(as defined in the Articles of Incorporation) must receive the affirmative vote
of at least 75% of the Continuing Directors (as defined in the Articles of
Incorporation); (5) special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer, the President or by the
Board of Directors and (6) directors may be removed from office prior to the end
of their term only for cause.
In addition, the Articles of Incorporation do not provide for
cumulative voting for any purpose. As a result, a majority of shareholders will
be able to approve matters presented to the shareholders for consideration,
except such matters as require more than a majority vote for approval. The
Company's Articles of Incorporation state that the Board of Directors, without
the approval of the stockholders, may authorize the issuance of shares of
preferred stock with such voting rights, designations, preferences, limitations
and relative rights as the Board of Directors shall determine. As a result, the
Board of Directors has the power, to the extent consistent with its fiduciary
duties, to issue preferred stock to persons friendly to management or otherwise
in order to impede attempts by third parties to acquire voting control of the
Company and to impede other transactions not favored by management. The amended
Certificate of Incorporation and Bylaws of the Bank upon its conversion to stock
form also contain certain provisions that might discourage potential takeover
attempts of the Bank. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND
THE BANK."
Regulatory Provisions. Regulations of the Administrator contain
provisions that, for a period of three years after the Conversion is
consummated, prohibit any person from directly or indirectly acquiring or
offering to acquire beneficial ownership of more than 10% of any class of equity
security of the Company or the Bank, with certain exceptions, without the prior
approval of the Administrator. If any person should acquire beneficial ownership
of more than 10% of any class of equity security without prior approval, any
shares beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted in connection with any matter submitted
to the stockholders for a vote. Regulations provide that the Administrator will
give his approval of such an acquisition during the first year after the
Conversion only to protect the safety and soundness of the Company and the Bank.
Approval will be given during the second and third years after the Conversion
upon a finding by the Administrator that (i) the acquisition is necessary to
protect the safety and soundness of the Company and the Bank or the Board of
Directors of the Company supports the acquisition and (ii) the acquiror is of
good character and integrity and possesses satisfactory managerial skills, after
the acquisition the acquiror will be a source of financial strength to the
Company and the Bank, and the interests of the public will not be adversely
affected by the acquisition. Approval is not required for (i) any offer with a
view toward public resale made exclusively to the 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 Conversion. See
"ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK."
The Change in Bank Control Act, together with North Carolina
regulations, require that the consent of the Administrator and Federal Reserve
be obtained prior to any person or company acquiring "control" of a savings bank
or a savings bank holding company. Control is conclusively presumed to exist if,
among other things, an individual or company acquires the power, directly or
indirectly, to direct the management or policies of the 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 (i) the issuer's
securities are registered under Section 12 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as the Company's securities will be, or
(ii) the person would be the single largest stockholder. Restrictions applicable
to the operations of bank holding companies and conditions imposed by the
Federal Reserve in connection with its approval of such acquisitions may deter
potential acquirors from seeking to obtain control of the Company. See
"SUPERVISION AND REGULATION -- Regulation of the Company."
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<PAGE>
Voting Control of Officers, Directors and Employees. Directors and
executive officers of the Bank and the Company and their associates expect to
purchase approximately 12.00% to 8.87% of the shares of Common Stock issued in
the Conversion based upon the minimum and the maximum of the Valuation Range,
respectively. See "ANTICIPATED STOCK PURCHASES BY MANAGEMENT."
In addition, it is expected that the ESOP will acquire a number of
shares equal to 8% of the shares issued in the Conversion. Employees will vote
the shares allocated to them under the ESOP. The ESOP trustees (directors of the
Bank) will vote unallocated shares, and allocated shares for which no voting
instructions have been received, in their discretion, subject to the provisions
of the Employee Retirement Income Security Act of 1974, as amended.
Under the proposed MRP, if approved by the stockholders of the Company,
a number of shares equal to 4% of the shares issued in the Conversion could be
issued to directors and certain employees of the Bank. Such shares could be
purchased in the open market or could be issued out of authorized but unissued
shares. Recipients of shares under the MRP will have voting control over such
shares regardless of whether such shares have vested. See "MANAGEMENT OF THE
BANK -- Proposed Management Recognition Plan." Under the proposed Stock Option
Plan, if approved by the stockholders of the Company, directors and certain
employees of the Bank could receive options to purchase a number of shares equal
to 10% of the shares issued in the Conversion. Shares to fund such options could
be acquired in the open market or could be acquired through the issuance of
authorized but unissued shares. See "MANAGEMENT OF THE BANK -- Proposed Stock
Option Plan."
If (i) the Stock Option Plan is approved by the stockholders of the
Company within one year after the Conversion and all of the stock options which
could be granted to directors and executive officers under the Stock Option Plan
are granted and all option shares are acquired in the open market, (ii) the MRP
is approved by the stockholders of the Company within one year after the
Conversion, all of the MRP shares which could be granted to directors and
executive officers are granted and issued and all such shares are acquired in
the open market, (iii) the ESOP acquires 8% of the shares issued in the
Conversion and none of such shares are allocated, and (iv) the Company did not
issue any additional shares of its Common Stock, the shares held by directors
and executive officers and their associates as a group, including (a) shares
purchased outright in the Conversion, (b) shares purchased by the ESOP, (c)
shares purchased pursuant to the Stock Option Plan and (d) shares granted under
the MRP, would give such persons effective control over as much as 31.34% or
28.21%, at the minimum and maximum of the Valuation Range, respectively, of the
Common Stock issued and outstanding.
Because the Company's Articles of Incorporation requires the
affirmative vote of 75% of the outstanding shares entitled to vote in order to
approve certain mergers, consolidations or other business combinations, the
directors, officers and employees, as a group, could potentially block such
transactions. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK
- -- The Company -- Supermajority Voting Provisions."
Agreements With Employees. In connection with the Conversion, the Bank
will enter into employment agreements with George W. Brawley, Jr., President and
Chief Executive Officer, Dale W. Brawley, Executive Vice President and
Treasurer, and Billy R. Williams, Secretary and Controller. See "MANAGEMENT OF
THE BANK -- Employment Agreements." In addition, the Bank intends to adopt a
Severance Plan which would benefit its employees in the event there is a change
in control of the Company or the Bank. See "MANAGEMENT OF THE BANK -- Severance
Plan." The existence of the employment agreements and severance plan may tend to
discourage mergers, consolidations, acquisitions or other transactions that
would result in a change in control of the Company or the Bank. See
"ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK -- The Company --
Anti-Takeover Effect of Employment Agreements and Benefit Plans."
Financial Institution Regulation and Possible Legislation
The Bank is subject to extensive regulation and supervision as a North
Carolina-chartered savings bank. In addition, the Company, as a bank holding
company, is subject to extensive regulation and supervision. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Administrator, the Federal Reserve, the FDIC, the North Carolina General
Assembly or the U.S. Congress, could have a material impact on the Company, the
Bank, or the Conversion.
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The U.S. Congress is expected to consider legislation that may
eliminate the thrift industry as a separate industry. The Deposit Insurance
Funds Act of 1996 ("DIF Act") provides that the Savings Association Insurance
Fund ("SAIF") will be merged with the Bank Insurance Fund ("BIF") on January 1,
1999, but only if there are no thrift institutions in existence. The DIF Act
requires the Treasury Department to study the development of a common charter
for banks and thrifts and to submit a report of its finding to Congress, which
the Treasury Department has done, the Company cannot predict whether any
legislation will result from this process or what any such legislation may
provide. If Congress does not act to end the separate existence of the thrift
industry, the merger of the SAIF and BIF contemplated by the DIF Act will not
occur, without some amendment of the DIF Act. Although the SAIF currently meets
its statutory reserve ratios, there can be no assurance that it will continue to
do so. The financial burden of any future recapitalization of the SAIF, if
imposed solely on insured savings associations, would fall on a smaller
assessment base than in the past. This could increase the burden on individual
institutions, including the Bank. See "REGULATION AND SUPERVISION."
Because the Bank is a North Carolina-chartered state savings bank, any
federal legislation providing for a common charter for banks and thrifts is not
expected to apply directly to the Bank. However, in addition to eliminating a
separate thrift industry, Congress is expected to consider legislation that will
restructure the banking and financial services industries generally. While such
legislation may not affect the Bank or the Company directly, it may restructure
the regulatory and competitive environments in which they operate. The Company
cannot predict the effects of such restructuring.
Competition
The Bank's market area is a highly competitive market, and the Bank
faces significant competition both in attracting deposits and in originating
loans. The Bank faces direct competition from a number of financial
institutions, many with a state-wide or regional presence, and, in some cases, a
national presence. Competition arises from other savings institutions,
commercial banks, credit unions and other providers of financial services, many
of which are significantly larger than the Bank and, therefore, have greater
financial and marketing resources than the Bank. Management estimates that,
based upon 1996 comparative data, the Bank had 22% of the deposits in
Mooresville and 7.2% of the deposits in Iredell County. See "BUSINESS OF THE
BANK -- Competition."
Best Efforts Offering
The Bank has engaged Trident Securities to consult with and advise the
Bank with respect to the Conversion and to assist, on a best-efforts basis, in
connection with the solicitation of subscriptions and purchase orders for shares
of Common Stock in the Offerings. Trident Securities is under no obligation to
purchase any shares of Common Stock in any of the Offerings. Trident Securities
has not prepared or delivered any opinion or recommendation with respect to the
appropriateness of the amount of Common Stock to be issued in the Conversion.
Trident Securities has not prepared any fairness opinion with respect to the
terms of the Offerings or any opinion with respect to the price at which shares
of Common Stock may trade.
CODDLE CREEK FINANCIAL CORP.
The Company was incorporated under North Carolina law in August 1997 at
the direction of the Bank for the purpose of acquiring and holding all of the
outstanding capital stock of the Bank to be issued in connection with the
Conversion. The Company has received conditional approval from the Federal
Reserve and the Administrator to become a bank holding company and as such will
be subject to regulation by the Federal Reserve and the Administrator. The
Company structure will give the Company greater flexibility than the Bank
currently has to expand and diversify its business activities, although there
are no current plans regarding expansion or diversification. See "SUPERVISION
AND REGULATION -- Regulation of the Company."
Prior to completion of the Conversion, the Company will not own any
material assets or transact any material business. Upon completion of the
Conversion, on an unconsolidated basis, the Company will have no significant
assets other than the stock of the Bank acquired in the Conversion, the loan
receivable with respect to the loan made to the ESOP to enable the ESOP to
purchase shares of Common Stock in the Conversion, and the portion of the net
proceeds from the
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sale of Common Stock in the Conversion which are retained by it. The Company
will have no significant liabilities upon completion of the Conversion. The
management of the Company is set forth under "MANAGEMENT OF THE COMPANY." The
executive office of the Company is located at the headquarters office of the
Bank at 347 North Main Street, Mooresville, North Carolina.
The existing management of the Company believes that it will be in the
best interests of the Company, the Bank and the Company's stockholders for the
Company to remain an independent company.
MOORESVILLE SAVINGS BANK, SSB
The Bank is a North Carolina-chartered mutual savings bank. The Bank
was organized in 1937 and has been a member of the FHLB system since that time.
Its deposits have been federally insured since 1947. The deposits of the Bank
are insured by the SAIF of the FDIC to the maximum amount permitted by law.
The Bank is a member of the FHLB of Atlanta, which is one of the twelve
regional banks for federally insured savings institutions and other eligible
members comprising the FHLB system. As a North Carolina-chartered savings bank,
the Bank is regulated by the Administrator. The Bank is also subject to
regulations of the FDIC with respect to certain other matters and, as a
subsidiary of the Company, will be indirectly subject to regulation by the
Federal Reserve. See "SUPERVISION AND REGULATION -- Regulation of the Company"
and "-- Regulation of the Bank."
The Bank conducts business through its three full service offices in
Mooresville, Cornelius and Huntersville, North Carolina. The Bank's primary
market area encompasses the communities within an approximately 15-mile radius
of its Mooresville office, which includes portions of Iredell, Mecklenburg,
Lincoln, Catawba, Rowan and Cabarrus counties in North Carolina. At June 30,
1997, the Bank had total assets of $114.2 million, net loans of $100.5 million,
deposits of $95.9 million and retained earnings of $14.7 million.
The Bank is a community-oriented financial institution which offers a
variety of financial services to meet the needs of the communities it serves.
The Bank is principally engaged in the business of attracting deposits from the
general public and using such deposits to make one-to-four family residential
real estate loans, multi-family residential and commercial loans, construction
loans, equity line of credit loans, other secured and unsecured consumer loans
and other investments.
Revenues of the Bank are derived primarily from interest on loans. The
Bank also receives interest income from its investments and interest-earning
deposit balances. The Bank also receives non-interest income from transaction
and service fees and other sources. The major expenses of the Bank are interest
on deposits and general and administrative expenses such as compensation and
employee benefits, federal deposit insurance premiums, data processing expenses
and occupancy and related expenses.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Conversion is completed, it is presently
estimated that such net proceeds will be between $18,258,820 and $24,825,580,
based on the current Valuation Range. If the gross proceeds of the shares sold
are increased to 15% above the maximum of the Valuation Range, it is estimated
that net proceeds will equal $28,601,467. See "PRO FORMA DATA" for the
assumptions used to arrive at these amounts. The actual net proceeds may vary
materially from the estimated amounts described herein. The estimated amount of
net proceeds includes proceeds from the sale of the shares which are expected to
be purchased by the ESOP in the Subscription Offering at $50.00 per share with
funds borrowed from the Company. The amount loaned to the ESOP to enable such
purchases is estimated to range from $1,734,000 (if 433,500 shares are issued)
to $2,697,900 (if 674,475 shares are issued). If for any reason the ESOP is
unable to purchase its shares in the Subscription Offering, the ESOP is expected
to purchase its shares in the open market--in which event the cost of the
purchases may be higher or lower
25
<PAGE>
because the purchase price per share may be higher or lower than $50.00. See
"MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan."
After first deducting the amount of the net proceeds used by the
Company to make the loan to the ESOP (estimated to range from $1,734,000 to
$2,697,900), it is expected that the Company will retain approximately 50% of
the remaining net proceeds of the Offerings and will pay the balance of the net
proceeds to the Bank in exchange for all of the common stock of the Bank to be
issued in connection with the Conversion. The Company expects to use the portion
of the net proceeds it retains for working capital and investment purposes. The
Company does not expect to have significant operating expenses and anticipates
that it will initially invest the net proceeds it retains primarily in
interest-earning deposits, U.S. government, federal agency and other marketable
securities and mortgage-backed securities. The types and amounts of such
investments will vary from time to time based upon the interest rate
environment, asset/liability mix considerations and other factors.
Net proceeds paid to the Bank initially will become part of the Bank's
general funds and will be invested primarily in mortgage, consumer and other
loans, and investments consisting primarily of interest-earning deposit
balances, U.S. government and federal agency obligations and other marketable
securities in accordance with the Bank's lending and investment policies. The
relative amounts to be invested in each of these types of investments will
depend upon loan demand, rates of return and asset/liability matching
considerations at the time the investments are to be made. Management is not
able to predict the yields which will be produced by the investment of the
proceeds of the Offerings because such yields will be significantly influenced
by general economic conditions and the interest rate environment existing at the
time the investments are made. Remaining net proceeds paid to the Bank will be
used for general corporate purposes.
The proceeds of the Offerings will result in an increase in the Bank's
net worth and regulatory capital and may enhance the potential for growth
through increased lending and investment activities, branch expansion,
additional ATMs or otherwise. The net proceeds retained by the Company could be
used to support the future expansion of operations of the Company through the
opening of one or more branch offices in or near the Bank's primary market area.
The Company has no current plans to open any additional office. Payments for
shares of Common Stock of the Company made through the withdrawal of existing
deposit accounts at the Bank will not result in the receipt of new funds for
investment by the Bank.
Upon completion of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Based upon facts and circumstances which may arise following the
Conversion, the Board of Directors may determine to repurchase stock in the
future. Such facts and circumstances may include but are not limited to (i)
market and economic factors such as the price at which the Common Stock is
trading, the volume of trading, the attractiveness of other investment
alternatives in terms of the rates of return and risks involved in the
investments, (ii) the ability to increase the book value and earnings per share
of the remaining outstanding shares, and improve the Company's return on equity;
(iii) the reduction of dilution to stockholders caused by having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iv) any other circumstances in which repurchases would
be in the best interests of the Company and its stockholders.
Any stock repurchases will be subject to the determination of the Board
of Directors that both the Company and the Bank will be capitalized in excess of
applicable regulatory requirements after any such repurchases and that capital
will be adequate taking into account, among other things, the level of
nonperforming assets and other risks, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. Federal regulations
require that, subject to certain exceptions, the Company must obtain approval of
the Federal Reserve prior to repurchasing Common Stock in excess of 10% of its
net worth during any twelve-month period. See "SUPERVISION AND REGULATION --
Regulation of the Company -- Dividend and Repurchase Limitations."
The Company and the Bank have no present intention to file consolidated
tax returns which will preserve for the Company the ability to use a portion of
the proceeds to make a return of capital in the future. However, the Company has
not made any decision to pay such a return of capital. The Company and the Bank
have agreed to notify the FDIC before making a return of capital during the
first three years following the Conversion. See "DIVIDEND POLICY."
26
<PAGE>
At any time following approval of the MRP by the Company's
stockholders, it is expected that the MRP may acquire a number of shares of
Common Stock equal to 4% of the number of shares issued in the Conversion. See
"MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan." Such shares
may be acquired in the open market or acquired through the Company's issuance of
authorized but unissued shares. In the event shares are acquired in the open
market, the funds for such purchase may be provided by the Bank from the
proceeds of the Conversion. It is estimated that between 17,340 and 23,460
shares may be acquired by the MRP Trust, assuming the issuance of between
433,500 and 586,500 shares, respectively, in the Conversion. If all such shares
were acquired by the MRP in the open market, and if such shares were acquired at
a price of $50.00 per share, the Bank would contribute between $867,000 and
$1,173,000, respectively, to the MRP for this purpose.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare quarterly dividends on the Common Stock, subject to
statutory and regulatory requirements. The Company expects to pay annual
dividends on the Common Stock at a rate of $1.00 per share which is equal to 2%
of the offering price for the Common Stock in the Conversion. In addition, the
Board of Directors may determine from time to time that it is prudent to pay
special nonrecurring cash dividends. Special cash dividends, if paid, may be in
addition to, or in lieu of, regular cash dividends. The Company's Board of
Directors will periodically review its policy concerning dividends. Declarations
of dividends, if any, by the Board of Directors will depend upon a number of
factors, including investment opportunities available to the Company and the
Bank, capital requirements, regulatory limitations, the Company's and the Bank's
results of operations and financial condition, tax considerations and general
economic conditions. Upon review of such considerations, the Board of Directors
of the Company may authorize dividends to be paid in the future if it deems such
payment appropriate and in compliance with applicable law and regulation. No
assurances can be given that any dividends will in fact be paid on the Common
Stock or, if dividends are paid, that they will not be reduced or discontinued
in the future.
In connection with the Conversion, the Bank has agreed with the FDIC
that, within the first three years after completion of the Conversion, neither
the Company nor the Bank will pay any taxable dividend or make any taxable
distribution in excess of their current and retained earnings. The Company and
the Bank have agreed to notify the FDIC before making a return of capital during
the first three years following the Conversion.
The sources of income to the Company initially will consist of earnings
on the capital retained by the Company and dividends paid by the Bank to the
Company, if any. Consequently, future declarations of cash dividends by the
Company may depend upon dividend payments by the Bank to the Company, which
payments are subject to various restrictions. Under current North Carolina
regulations, the Bank could not declare or pay a cash dividend if the effect
thereof would be to reduce its net worth to an amount which is less than the
minimum required by the FDIC and the Administrator. In addition, for a period of
five years after the consummation of the Conversion, the Bank will be required,
under existing regulations, to obtain the prior written approval of the
Administrator before it can declare and pay a cash dividend on its capital stock
in an amount in excess of one-half of the greater of (i) its net income for the
most recent fiscal year, or (ii) the average of its net income after dividends
for the most recent fiscal year and not more than two of the immediately
preceding fiscal years, if applicable. See "SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions." As a result of this limitation, if the Bank had been a stock
institution at the end of fiscal 1996 and for the two preceding fiscal years, it
could not have paid a dividend in excess of $362,000 without the approval of the
Administrator.
As a converted institution, the Bank also will be subject to the
regulatory restriction that it will not be permitted to declare or pay a
dividend on or repurchase any of its capital stock if the effect thereof would
be to cause its regulatory capital to be reduced below the amount required for
the liquidation account established in connection with the Conversion. See "THE
CONVERSION -- Effects of Conversion -- Liquidation Rights" and "-- Liquidation
Rights After the Conversion." Also, see "TAXATION -- Federal Income Taxation"
for a discussion of federal income tax provisions that may limit the ability of
the Bank to pay dividends to the Company without incurring a recapture tax.
27
<PAGE>
MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital
stock, and consequently, there is no established market for the Common Stock at
this time. Following the completion of the offering, it is anticipated that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board. Trident Securities is
expected to make a market in the Common Stock, by developing and maintaining
historical stock trading records, soliciting potential buyers and sellers of
shares and attempting to match buy and sell orders. In connection with its
market making activities, Trident may buy or sell shares from time to time for
its own account. However, Trident Securities will not be subject to any
obligation with respect to such efforts. If the Common Stock cannot be quoted
and traded on the OTC Electronic Bulletin Board, it is expected that the
transactions in the Common Stock will be reported in the pink sheets of the
National Quotation Bureau, Inc.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's offering (510,000 shares at the midpoint of the
Valuation Range), it is unlikely that a stockholder base large enough to create
an active trading market will develop and be maintained. Further, even if a
market develops, there can be no assurance that the shares of Common Stock
offered in the Conversion can be resold at or above the purchase price after
completion of the Conversion. Purchasers of Common Stock should consider the
potentially illiquid and long-term nature of their investment in the shares
being offered hereby. The aggregate price of the Common Stock is based upon an
independent appraisal of the pro forma market value of the Common Stock.
However, there can be no assurance that an investor will be able to sell the
Common Stock purchased in the Conversion at or above the purchase price.
CAPITALIZATION
The following tables present the historical capitalization of the Bank
at June 30, 1997 and December 31, 1996 and the pro forma capitalization of the
Company at such dates after giving effect to the sale of the Common Stock and
application of the assumptions set forth under "PRO FORMA DATA," assuming that
433,500, 510,000, 586,500 and 674,475 shares of Common stock are sold at $50.00
per share (the minimum, midpoint, maximum and 15% above the maximum of the
current Valuation Range). A change in the number of shares issued in the
Conversion may materially affect such pro forma capitalization. See "USE OF
PROCEEDS" and "THE CONVERSION -- Purchase Price of Common Stock and Number of
Shares Offered."
28
<PAGE>
<TABLE>
<CAPTION>
Historical
Capitalization
--------------
(In Thousands)
<S> <C>
Deposits $ 95,872
Advances from FHLB 1,000
--------
Deposits and advances from FHLB/(2)/ $ 96,872
========
Stockholders' equity
Common stock, no par value:
Authorized shares: 20,000,000
Assumed outstanding shares as shown in
column headings $ --
Preferred stock:
Authorized shares: 5,000,000
No shares outstanding
Additional paid-in capital --
Less: Common stock to be acquired by the MRP/(3)/ --
Less: Common stock to be acquired by the ESOP/(3)/ --
Retained earnings/(4)/ 14,691
--------
Total $ 14,691
========
Total deposits and stockholders' equity $111,563
========
<CAPTION>
Company Pro Forma Capitalization at June 30, 1997
Based Upon Sale of
---------------------------------------------------------------------------
433,500 510,000 586,500 674,475
shares at a shares at a shares at a shares at a
price of price of price of price of
$50.00 per share $50.00 per share $50.00 per share $50.00 per share/(1)/
---------------- ---------------- ---------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C>
Deposits $ 95,872 $ 95,872 $ 95,872 $ 95,872
Advances from FHLB 1,000 1,000 1,000 1,000
-------- -------- -------- --------
Deposits and advances from FHLB/(2)/ $ 96,872 $ 96,872 $ 96,872 $ 96,872
======== ======== ======== ========
Stockholders' equity
Common stock, no par value:
Authorized shares: 20,000,000
Assumed outstanding shares as shown in
column headings $ 20,860 $ 24,602 $ 28,345 $ 32,649
Preferred stock:
Authorized shares: 5,000,000
No shares outstanding
Additional paid-in capital -- -- -- --
Less: Common stock to be acquired by the MRP/(3)/ (867) (1,020) (1,173) (1,349)
Less: Common stock to be acquired by the ESOP/(3)/ (1,734) (2,040) (2,346) (2,698)
Retained earnings/(4)/ 14,691 14,691 14,691 14,691
-------- -------- -------- --------
Total $ 32,950 $ 36,233 $ 39,517 $ 43,293
======== ======== ======== ========
Total deposits and stockholders' equity $129,822 $133,105 $136,389 $140,165
======== ======== ======== ========
</TABLE>
- -------------------------------
(1) Represents the number of shares of Common Stock that would be issued in the
Conversion after giving effect to a 15% increase in maximum valuation in
the Valuation Range.
(2) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Any such withdrawals would reduce pro forma deposits by the
amount of such withdrawals.
(3) Assumes that 8% of the shares of Common Stock offered hereby will be
purchased by the ESOP in the Conversion. The funds used to acquire the ESOP
shares will be borrowed from the Company. Additionally, assumes that, after
the Conversion, a number of shares equal to 4% of the shares of Common
Stock offered hereby will be purchased by the MRP with funds contributed by
the Bank. The Common Stock acquired by both the ESOP and the MRP is
reflected as a reduction of stockholders' equity. See "MANAGEMENT OF THE
BANK -- Employee Stock Ownership Plan" and "-- Proposed Management
Recognition Plan."
(4) Retained earnings is net of unrealized holding gains or losses on
available-for-sale securities.
29
<PAGE>
<TABLE>
<CAPTION>
Historical
Capitalization
--------------
(In Thousands)
<S> <C>
Deposits $ 93,785
Advances from FHLB 2,000
---------
Deposits and advances from FHLB/(2)/ $ 95,785
=========
Stockholders' equity
Common stock, no par value:
Authorized shares: 20,000,000
Assumed outstanding shares as shown in
column headings $ --
Preferred stock:
Authorized shares: 5,000,000
No shares outstanding
Additional paid-in capital --
Less: Common stock to be acquired by the MRP/(3)/ --
Less: Common stock to be acquired by the ESOP/(3)/ --
Retained earnings/(4)/ 14,412
---------
Total $ 14,412
=========
Total deposits and stockholders' equity $110,197
========
<CAPTION>
Company Pro Forma Capitalization at December 31, 1996
Based Upon Sale of
----------------------------------------------------------------------------
433,500 510,000 586,500 674,475
shares at a shares at a shares at a shares at a
price of price of price of price of
$50.00 per share $50.00 per share $50.00 per share $50.00 per share/(1)/
---------------- ---------------- ---------------- -------------------
(In Thousands)
<S> <C> <C> <C> <C>
Deposits $ 93,785 $ 93,785 $ 93,785 $ 93,785
Advances from FHLB 2,000 2,000 2,000 2,000
--------- --------- --------- ---------
Deposits and advances from FHLB/(2)/ $ 95,785 $ 95,785 $ 95,785 $ 95,785
========= ========= ========= =========
Stockholders' equity
Common stock, no par value:
Authorized shares: 20,000,000
Assumed outstanding shares as shown in
column headings $ 20,860 $ 24,602 $ 28,345 $ 32,649
Preferred stock:
Authorized shares: 5,000,000
No shares outstanding
Additional paid-in capital -- -- -- --
Less: Common stock to be acquired by the MRP/(3)/ (867) (1,020) (1,173) (1,349)
Less: Common stock to be acquired by the ESOP/(3)/ (1,734) (2,040) (2,346) (2,698)
Retained earnings/(4)/ 14,412 14,412 14,412 14,412
Total $ 32,671 $ 35,954 $ 39,238 $ 43,014
========= ========= ========= =========
Total deposits and stockholders' equity $128,456 $131,739 $135,023 $138,799
========= ========= ========= =========
</TABLE>
- -------------------------------
(1) Represents the number of shares of Common Stock that would be issued in the
Conversion after giving effect to a 15% increase in maximum valuation in
the Valuation Range.
(2) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Any such withdrawals would reduce pro forma deposits by the
amount of such withdrawals.
(3) Assumes that 8% of the shares of Common Stock offered hereby will be
purchased by the ESOP in the Conversion. The funds used to acquire the ESOP
shares will be borrowed from the Company. Additionally, assumes that, after
the Conversion, a number of shares equal to 4% of the shares of Common
Stock offered hereby will be purchased by the MRP with funds contributed by
the Bank. The Common Stock acquired by both the ESOP and the MRP is
reflected as a reduction of stockholders' equity. See "MANAGEMENT OF THE
BANK -- Employee Stock Ownership Plan" and "-- Proposed Management
Recognition Plan."
(4) Retained earnings is net of unrealized holding gains or losses on
available-for-sale securities.
30
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $20,859,820 and $28,344,580 (including net
proceeds from shares expected to be purchased by the ESOP with funds borrowed
from the Company), based upon the following assumptions: (i) 19.97%, 18.20%,
16.87% and 15.71% of the Common Stock sold in the Conversion at the minimum,
midpoint, maximum and 15% above the maximum, respectively, of the Valuation
Range will be sold to the ESOP, directors and executive officers and their
associates (and that Trident Securities will not receive certain compensation
with respect to such sales), and none of the shares of Common Stock will be sold
in any Syndicated Community Offering pursuant to selected dealer agreements;
(ii) fees will be payable to Trident Securities with respect to the Subscription
and Community Offerings as described in "THE CONVERSION -- Marketing
Arrangements;" and (iii) Conversion expenses, excluding the fees and commissions
to Trident Securities, will be approximately $387,000. Actual net proceeds may
vary depending upon the number of shares sold to the ESOP and to directors,
executive officers and their associates, the number of shares, if any, sold in
the Syndicated Community Offering pursuant to selected dealer arrangements and
the actual expenses of the Conversion. Payments for shares made through
withdrawals from the existing Bank deposit accounts will not result in the
receipt of new funds for investment by the Bank. However, capital will increase
and interest-bearing liabilities will decrease by the amount of such
withdrawals. See "THE CONVERSION -- Purchase Price of Common Stock and Number of
Shares Offered."
Under the Plan, the Common Stock must be sold at an aggregate price
equal to not less than the minimum nor more than the maximum of the Valuation
Range based upon an independent appraisal. The Valuation Range as of June 30,
1997 is from a minimum of $21,675,000 to a maximum of $29,325,000 with a
midpoint of $25,500,000. However, with the consent of the Administrator and the
FDIC, the aggregate price of the Common Stock sold may be increased to up to 15%
above the maximum of the Valuation Range, or to $33,723,750, without a
resolicitation and without any right to cancel, rescind or change subscription
orders, to reflect changes in market and financial conditions following
commencement of the Subscription Offering. See "THE CONVERSION -- Purchase Price
of Common Stock and Number of Shares Offered."
Pro forma consolidated net earnings and book value of the Company at or
for the six months ended June 30, 1997 and the year ended December 31, 1996 have
been based upon the following assumptions: (i) the sale of shares of Common
Stock in connection with the Conversion occurred at January 1, 1997 for the six
months ended June 30, 1997, and at January 1, 1996 for the year ended December
31, 1996, and yielded net proceeds available for investment of approximately
$18,258,820, $21,542,200, $24,825,580 and $28,601,467 (based upon the issuance
of 433,500, 510,000, 586,500 and 674,475 shares, respectively, at $50.00 per
share) on such dates; and (ii) such net proceeds were invested on a consolidated
basis at the beginning of the period at a yield of 5.42%, which represents the
average one-year treasury rate for the last week of June 1997. The Company did
not use the arithmetic average of the Bank's weighted-average yield on
interest-earning assets and weighted-average interest rate paid on deposits
during the six months ended June 30, 1997 or the year ended December 31, 1996.
Management believes that the one-year Treasury rate is a more appropriate rate
for purposes of preparing the pro forma data because proceeds from the
Conversion are expected to be initially invested in instruments with similar
yields and maturities. The effect of withdrawals from deposit accounts for the
purchase of Common Stock has not been reflected. Such withdrawals have no effect
on pro forma stockholders' equity, and management does not believe that such
withdrawals will have a material impact on pro forma net earnings or pro forma
net earnings per share. In calculating pro forma net earnings for the six months
ended June 30, 1997 and year ended December 31, 1996, an effective combined
federal and state income tax rate of 39.00% has been assumed, resulting in a
yield after taxes of 3.31%. Historical and pro forma per share amounts have been
calculated by dividing the Bank's historical amounts and the Company's pro forma
amounts by the indicated number of shares of Common Stock, assuming that such
number of shares had been outstanding during the entire period.
The following pro forma information is not intended to represent the
market value of the Common Stock, the value of net assets and liabilities or of
future results of operations. The assumption regarding investment yields should
not be considered indicative of actual yields for future periods. The following
information is not intended to be used as a basis for projection of results of
operations for future periods.
31
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended June 30, 1997
-------------------------------------------------------------------
433,500 510,000 586,500
shares at shares at shares at 674,475
$50.00 $50.00 $50.00 shares at $50.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (15% above Max.)
------------ ------------ ------------ ----------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 21,675 $ 25,500 $ 29,325 $ 33,724
Less Offering expenses and commissions (815) (898) (980) (1,075)
---------- ----------- ----------- ----------
Estimated net conversion proceeds 20,860 24,602 28,345 32,649
Less shares to be acquired by ESOP/(1)/ (1,734) (2,040) (2,346) (2,698)
Less shares to be acquired by MRP/(2)/ (867) (1,020) (1,173) (1,349)
---------- ----------- ----------- ----------
Adjusted estimated net conversion proceeds $ 18,259 $ 21,542 $ 24,826 $ 28,602
========== =========== =========== ==========
Pro forma net income:
Historical net income $ 287 $ 287 $ 287 $ 287
Pro Forma adjustments:
Pro forma income on net proceeds 302 356 410 473
Pro forma ESOP adjustments/(1)/ (53) (62) (72) (82)
Pro forma MRP adjustments/(2)/ (53) (62) (72) (82)
---------- ----------- ----------- ----------
Pro forma net income $ 483 $ 519 $ 553 $ 596
========== =========== =========== ==========
Pro forma net income per share/(4)/:
Historical net income per share $ 0.72 $ 0.61 $ 0.52 $ 0.46
Pro forma adjustments:
Pro forma income on net proceeds 0.75 0.75 0.76 0.76
Pro forma ESOP adjustments/(1)/ (0.13) (0.13) (0.13) (0.13)
Pro forma MRP adjustments/(2)/ (0.13) (0.13) (0.13) (0.13)
---------- ----------- ----------- ----------
Pro forma net income per share $ 1.21 $ 1.10 $ 1.02 $ 0.96
========== =========== =========== ==========
Ratio of price per share to pro forma income
per share/(5)(6)/ 20.7X 22.7X 24.5X 26.0X
========== =========== =========== ==========
Pro forma stockholders' equity (book value)/(4)/:
Historical retained earnings $ 14,691 $ 14,691 $ 14,691 $ 14,691
Estimated net conversion proceeds 20,860 24,602 28,345 32,649
Less shares to be acquired by:
ESOP/(1)/ (1,734) (2,040) (2,346) (2,698)
MRP/(2)/ (867) (1,020) (1,173) (1,349)
---------- ----------- ----------- ----------
Pro forma stockholders' equity/(4)/ $ 32,950 $ 36,233 $ 39,517 $ 43,293
========== =========== =========== ==========
Pro forma stockholders' equity per share/(5)/:
Historical retained earnings $ 33.89 $ 28.81 $ 25.05 $ 21.78
Estimated net conversion proceeds 48.12 48.24 48.33 48.41
Less shares to be acquired by:
ESOP/(1)/ (4.00) (4.00) (4.00) (4.00)
MRP/(2)/ (2.00) (2.00) (2.00) (2.00)
---------- ----------- ----------- ----------
Pro forma stockholders' equity per
share/(4)/ $ 76.01 $ 71.05 $ 67.38 $ 64.19
========== =========== =========== ==========
Pro forma price to book value 65.78% 70.37% 74.21% 77.89%
========== =========== =========== ==========
Number of shares used to calculate income per
share/(5)/ 400,554 471,240 541,926 623,215
========== =========== =========== ==========
Number of shares used to calculate
stockholders' equity per share/(4)/ 433,500 510,000 586,500 674,475
========== =========== =========== ==========
</TABLE>
32
<PAGE>
- -----------------------------------------
(1) It is assumed that 8% of the shares of Common Stock in the Conversion
will be purchased by the ESOP. For purposes of this table, the funds
used to acquire such shares are assumed to have been loaned to the ESOP
by the Company. The amount loaned is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to
the ESOP over a ten-year period in an amount at least equal to the
principal and interest requirements of the loan. The Bank's total
annual payment of the ESOP loan is based upon ten equal annual
installments of principal. The pro forma net earnings assumes: (i) that
the Bank's contribution to the ESOP for the principal portion of the
debt service requirement for the six months ended June 30, 1997 and for
the year ended December 31, 1996 was made at the end of the period,
(ii) that 34,680, 40,800, 46,920 and 53,958 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
were committed to be released during the six months ended June 30, 1997
and the year ended December 31, 1996, respectively, at an average fair
value of $50.00 per share and were accounted for as a charge to expense
in accordance with Statement of Position ("SOP") No. 93-6, net of
income tax at an assumed combined federal and state rate of 39%. See
"MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan."
(2) It is assumed that the MRP will purchase a number of shares equal to 4%
of the shares of Common Stock issued in the Conversion for issuance to
directors, officers and employees, subject to approval by the Company's
stockholders. If the MRP is approved by the stockholders, the MRP
intends to acquire the Common Stock either through open market
purchases or from authorized but unissued shares of Common Stock of the
Company. Funds used by the MRP to purchase the shares will be
contributed to the MRP by the Bank. In calculating the pro forma effect
of the MRP, it is assumed that the required stockholder approval has
been received, that the shares were acquired by the MRP at the
beginning of the period presented in open market purchases at the
Conversion purchase price of $50.00 per share, and that 20% of the
amount contributed was amortized to expense annually during the period
(the MRP will be amortized over a five-year period), net of income tax
at an assumed combined federal and state rate of 39%. The issuance of
authorized but unissued shares of the Company's Common Stock to the MRP
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8%; pro forma net earnings per
share would be $1.19, $1.09, $1.01 and $0.95 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, for the
six-month period ended June 30, 1997; pro forma price to earnings ratio
would be 21.0x, 22.9x, 24.8x and 26.3x; and pro forma stockholders'
equity per share would be $73.09, $68.31, $64.78 and $61.72 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, at June 30, 1997. There can be no assurance that
stockholder approval of the MRP will be obtained, or that the actual
purchase price of the shares will be equal to the Conversion purchase
price. See "MANAGEMENT OF THE BANK -- Proposed Management Recognition
Plan."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. See "MANAGEMENT OF THE BANK --
Proposed Stock Option Plans." If the Option Plan is approved by the
stockholders, an amount equal to 10% of the Common Stock issued in the
Conversion, or 43,350, 51,000, 58,650 and 67,448 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
will be reserved for future issuance upon the exercise of the options
to be granted under the Option Plan. The issuance of Common Stock
pursuant to exercise of options under the Option Plan will result in
the dilution of existing stockholders' interests. Assuming stockholder
approval of the Option Plan and exercise of all options at the
beginning of the period at an exercise price of $50.00 per share, and
the issuance of authorized but unissued shares upon exercise of such
options, the pro forma net earnings per share would be $1.17, $1.07,
$1.00 and $0.94, respectively, and pro forma stockholders' equity per
share would be $73.65, $69.13, $64.89, and $62.90, respectively, at the
minimum, midpoint, maximum and 15% above the maximum of the range.
(4) The retained earnings of the Bank will be substantially restricted
after the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND
REGULATION -- Regulation of the Bank -- Restrictions on Dividends and
Other Capital Distributions." Pursuant to SOP 93-6, stockholders'
equity per share is calculated based on all ESOP shares issuable.
(5) Earnings per share is calculated based on the number of shares
outstanding indicated in the previous tables which include shares to be
acquired by the ESOP and the MRP. Pursuant to SOP 93-6, earnings per
share is calculated based on the ESOP shares released for the period
according to scheduled contributions and does not include ESOP shares
that have not yet been committed for release. The FASB has issued
Statement #128, Earnings per Share (EPS), which requires presentation
of EPS for basic and diluted per-share amounts. Diluted per-share
amounts assume the conversion, exercise or issuance of all potential
common stock instruments. Application is required for annual and
interim periods ending after December 15, 1997 with earlier application
not permitted.
(6) Pro forma net earnings per share have been annualized for purposes of
this ratio.
33
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
-----------------------------------------------------------------
433,500 510,000 586,500 674,475
shares at shares at shares at $50.00 shares at $50.00
$50.00 $50.00 per share per share
per share per share (Maximum) (15% above Max.)
(Minimum) (Midpoint) ---------------- -----------------
-------------- --------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 21,675 $ 25,560 $ 29,325 $ 33,724
Less Offering expenses and commissions (815) (898) (980) (1,075)
--------- --------- --------- ---------
Estimated net conversion proceeds 20,860 24,602 28,345 32,649
Less shares to be acquired by ESOP/(1)/ (1,734) (2,040) (2,346) (2,698)
Less shares to be acquired by MRP/(2)/ (867) (1,020) (1,173) (1,349)
--------- --------- --------- ---------
Adjusted estimated net conversion proceeds $ 18,259 $ 21,542 $ 24,826 $ 28,602
========= ========= ========= =========
Pro forma net income:
Historical net income $ 721 $ 721 $ 721 $ 721
Pro Forma adjustments:
Pro forma income on net proceeds 603 712 821 946
Pro forma ESOP adjustments/(1)/ (106) (124) (143) (165)
Pro forma MRP adjustments/(2)/ (106) (124) (143) (165)
--------- --------- --------- ---------
Pro forma net income $ 1,112 $ 1,185 $ 1,256 $ 1,337
========= ========= ========== =========
Pro forma net income per share/(5)/:
Historical net income per share $ 1.78 $ 1.52 $ 1.32 $ 1.15
Pro forma adjustments:
Pro forma income on net proceeds 1.50 1.50 1.51 1.51
Pro forma ESOP adjustments/(1)/ (0.26) (0.26) (0.26) (0.26)
Pro forma MRP adjustments/(2)/ (0.26) (0.26) (0.26) (0.26)
--------- --------- --------- ---------
Pro forma net income per share $ 2.76 $ 2.50 $ 2.31 $ 2.14
========== ========== ========== =========
Ratio of price per share to pro forma income 18.1X 20.0X 21.6X 23.4X
per share/(5)/ ========== ========== ========== =========
Pro forma stockholders' equity (book value)/(4)/:
Historical retained earnings $ 14,412 $ 14,412 $ 14,412 $ 14,412
Estimated net conversion proceeds 20,860 24,602 28,345 32,649
Less shares to be acquired by:
ESOP/(1)/ (1,734) (2,040) (2,346) (2,698)
MRP/(2)/ (867) (1,020) (1,173) (1,349)
---------- --------- ---------- ---------
Pro forma stockholders' equity/(4)/ $ 32,671 $ 35,954 $ 39,238 $ 43,014
========== ========= ========== =========
Pro forma stockholders' equity per share/(5)/:
Historical retained earnings $ 33.25 $ 28.26 $ 24.57 $ 21.36
Estimated net conversion proceeds 48.12 48.24 48.33 48.41
Less shares to be acquired by:
ESOP/(1)/ (4.00) (4.00) (4.00) (4.00)
MRP/(2)/ (2.00) (2.00) (2.00) (2.00)
Pro forma stockholders' equity per
share/(4)/ $ 75.37 $ 70.50 $ 66.90 $ 63.77
========== ========= ========== =========
Pro forma price to book value 66.34% 70.92% 74.74% 78.41%
Number of shares used to calculate income per ========== ========= ========== =========
share/(5)/ 402,288 473,280 544,272 625,913
========== ========= ========== =========
Number of shares used to calculate
stockholders' equity per share/(4)/ 433,500 510,000 586,500 674,475
========== ========= ========== =========
</TABLE>
34
<PAGE>
- ------------------------------------------
/(1)/ It is assumed that 8% of the shares of Common Stock in the Conversion
will be purchased by the ESOP. For purposes of this table, the funds used
to acquire such shares are assumed to have been loaned to the ESOP by the
Company. The amount loaned is reflected as a reduction of stockholders'
equity. The Bank intends to make annual contributions to the ESOP over a
ten-year period in an amount at least equal to the principal and interest
requirements of the loan. The Bank's total annual payment of the ESOP
loan is based upon ten equal annual installments of principal. The pro
forma net earnings assumes: (i) that the Bank's contribution to the ESOP
for the principal portion of the debt service requirement for the six
months ended June 30, 1997 and for the year ended December 31, 1996 was
made at the end of the period, (ii) that 34,680, 40,800, 46,920 and
53,958 shares at the minimum, midpoint, maximum and 15% above the maximum
of the range, respectively, were committed to be released during the six
months ended June 30, 1997 and the year ended December 31, 1996,
respectively, at an average fair value of $50.00 per share and were
accounted for as a charge to expense in accordance with Statement of
Position ("SOP") No. 93-6, net of income tax at an assumed combined
federal and state rate of 39%. See "MANAGEMENT OF THE BANK -- Employee
Stock Ownership Plan."
/(2)/ It is assumed that the MRP will purchase a number of shares equal to 4%
of the shares of Common Stock issued in the Conversion for issuance to
directors, officers and employees, subject to approval by the Company's
stockholders. If the MRP is approved by the stockholders, the MRP intends
to acquire the Common Stock either through open market purchases or from
authorized but unissued shares of Common Stock of the Company. Funds used
by the MRP to purchase the shares will be contributed to the MRP by the
Bank. In calculating the pro forma effect of the MRP, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open
market purchases at the Conversion purchase price of $50.00 per share,
and that 20% of the amount contributed was amortized to expense annually
during the period (the MRP will be amortized over a five-year period),
net of income tax at an assumed combined federal and state rate of 39%.
The issuance of authorized but unissued shares of the Company's Common
Stock to the MRP instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 3.8%; pro forma net
earnings per share would be $2.72, $2.47, $2.28 and $2.12 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
for the year ended December 31, 1996; pro forma price to earnings ratio
would be 18.4x, 20.2x, 21.9x and 23.6x; and pro forma stockholders'
equity per share would be $72.47, $67.79, $64.33 and $61.32 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, at December 31, 1996. There can be no assurance that
stockholder approval of the MRP will be obtained, or that the actual
purchase price of the shares will be equal to the Conversion purchase
price. See "MANAGEMENT OF THE BANK -- Proposed Management Recognition
Plan."
/(3)/ No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. See "MANAGEMENT OF THE BANK --Proposed
Stock Option Plans." If the Option Plan is approved by the stockholders,
an amount equal to 10% of the Common Stock issued in the Conversion, or
43,350, 51,000, 58,650 and 67,448 shares at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, will be
reserved for future issuance upon the exercise of the options to be
granted under the Option Plan. The issuance of Common Stock pursuant to
exercise of options under the Option Plan will result in the dilution of
existing stockholders' interests. Assuming stockholder approval of the
Option Plan and exercise of all options at the beginning of the period at
an exercise price of $50.00 per share, and the issuance of authorized but
unissued shares upon exercise of such options, the pro forma net earnings
per share would be $2.66, $2.42, $2.24 and $2.09, respectively, and pro
forma stockholders' equity per share would be $73.06, $68.63, $64.47, and
$62.52, respectively, at the minimum, midpoint, maximum and 15% above the
maximum of the range.
/(4)/ The retained earnings of the Bank will be substantially restricted after
the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions." Pursuant to SOP 93-6, stockholders' equity per share is
calculated based on all ESOP shares issuable.
/(5)/ Earnings per share is calculated based on the number of shares
outstanding indicated in the previous tables which include shares to be
acquired by the ESOP and the MRP. Pursuant to SOP 93-6, earnings per
share is calculated based on the ESOP shares released for the period
according to scheduled contributions and does not include ESOP shares
that have not yet been committed for release. The FASB has issued
Statement #128, Earnings per Share (EPS), which requires presentation of
EPS for basic and diluted per-share amounts. Diluted per-share amounts
assume the conversion, exercise or issuance of all potential common stock
instruments. Application is required for annual and interim periods
ending after December 15, 1997 with earlier application not permitted.
35
<PAGE>
HISTORICAL AND PRO FORMA 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. As of June 30, 1997, the Bank's net worth,
computed in accordance with such requirements, was 13.39% 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 I capital to total assets (as defined in
FDIC regulations) of at least 3%. All other institutions are required to
maintain a ratio of 1% or 2% above the 3% minimum with an absolute minimum
leverage ratio of not less than 4%. The FDIC also imposes requirements that (i)
the ratio of Tier I capital to risk-weighted assets equal at least 4% and (ii)
the ratio of total capital to risk-weighted assets equal at least 8%. As
demonstrated in the table below, the Bank exceeds the FDIC Tier I and risk-based
capital requirements and North Carolina capital requirements on a historical and
pro forma basis.
The following table presents (i) the Bank's historical regulatory
capital position on June 30, 1997 and December 31, 1996 and (ii) the Bank's pro
forma regulatory capital position on such dates after giving effect to the
assumptions set forth under "PRO FORMA DATA" and "CAPITALIZATION" and further
assuming that the Company will retain 50% of the net proceeds of the Common
Stock sold in the Conversion after deducting the amount necessary to fund the
loan to the ESOP.
36
<PAGE>
<TABLE>
<CAPTION>
Bank's
Historical
Regulatory Capital
Position at
June 30, 1997
-----------------------
Percent of
Regulatory
Amount Assets/1/
------ ----------
(Dollars in Thousands)
<S> <C> <C>
Tier 1 (leverage) capital $14,671 12.85%
Tier 1 (leverage) capital requirement/(2)/ 4,567 4.00%
------- ----------
$10,104 8.85%
Excess ======= ==========
Tier 1 risk based capital $14,671 24.05%
Tier 1 risk based capital requirement 2,440 4.00%
------- ----------
Excess $12,231 20.05%
======= ==========
Total risk based capital $15,288 25.06%
Total risk based capital requirement 4,880 8.00%
------- ----------
Excess $10,408 17.06%
======= ==========
NC regulatory capital $15,288 13.39%
NC regulatory capital requirement 5,708 5.00%
------- ----------
Excess $ 9,580 8.39%
======= ==========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Regulatory Capital Position at June 30, 1997/(3)/
-----------------------------------------------------------------------------------------
433,500 510,000 586,500 674,475
Shares sold at Shares sold at Shares sold at Shares sold at
Price of $50.00 Price of $50.00 Price of $50.00 Price of $50.00
per share per share per share per share
------------------- ------------------ -------------------- -------------------
Percent of Percent of Percent of Percent of
Regulatory Regulatory Regulatory Regulatory
Amount Assets/1/ Amount Assets/1/ Amount Assets/1/ Amount Assets/1/
------ ------- ------ ------- ------ -------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $24,234 19.59% $25,952 20.69% $27,671 21.76% $29,647 22.96%
Tier 1 (leverage) capital
requirement/(2)/ 4,950 4.00% 5,018 4.00% 5,087 4.00% 5,166 4.00%
------- ------ ------- ------ ------- ------ ------- ------
Excess $19,284 15.59% $20,934 16.69% $22,584 17.76% $24,481 18.96%
======= ====== ======= ====== ======= ====== ======= ======
Tier 1 risk based capital $24,234 38.52% $25,952 41.03% $27,671 43.51% $29,647 46.33%
Tier 1 risk based capital requirement 2,517 4.00% 2,530 4.00% 2,544 4.00% 2,560 4.00%
------- ------ ------- ------ ------- ------ ------- ------
Excess $21,717 34.52% $23,422 37.03% $25,127 39.51% $27,087 42.33%
======= ====== ======= ====== ======= ====== ======= ======
Total risk based capital $24,851 39.50% $26,569 42.00% $28,288 44.48% $30,264 47.29%
Total risk based capital requirement 5,033 8.00% 5,060 8.00% 5,088 8.00% 5,120 8.00%
------- ------ ------- ------ ------- ------ ------- ------
Excess $19,818 31.50% $21,509 34.00% $23,200 36.48% $25,144 39.29%
======= ====== ======= ====== ======= ====== ======= ======
NC regulatory capital $24,851 20.09% $26,569 21.18% $28,288 22.25% $30,264 23.44%
NC regulatory capital requirement 6,186 5.00% 6,272 5.00% 6,358 5.00% 6,457 5.00%
------- ------ ------- ------ ------- ------ ------- ------
Excess $18,665 15.09% $20,297 16.18% $21,930 17.25% $23,807 18.44%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
- --------------------------------
/(1)/ For the Tier 1 (leverage) capital and North Carolina regulatory capital
calculations, percent is of total average assets. Average assets after
investment of net proceeds from the offering at the minimum, midpoint,
maximum and 15% above the maximum total $123,725,000, $125,443,000,
$127,162,000 and $129,138,000, respectively. For the Tier 1 risk-based
capital and total risk-based capital calculations, percent is of total
risk-weighted assets. Net proceeds (after ESOP) were assumed to be
invested in short-term treasury securities (0% risk-weight) and one-to-
four family residential mortgage loans (50% risk-weight) with a weighted
average risk-weight of 20%. Total risk-weighted assets after investment
of net proceeds from the offering at the minimum, midpoint, maximum and
15% above the maximum total $62,913,000, $63,256,000, $63,600,000 and
$63,995,000, respectively.
/(2)/ As a North Carolina-chartered savings bank, the Bank is subject to the
capital requirements of the FDIC and the Administrator. The FDIC requires
state-chartered savings banks, including the Bank, to have a minimum
leverage ratio of Tier 1 capital to total assets of at least 3%;
provided, however, that all institutions, other than those (i) receiving
the highest rating during the examination process and (ii) not
anticipating any significant growth, are required to maintain a ratio of
1% to 2% above the stated minimum, with an absolute minimum leverage
ratio of at least 4%. For the purposes of this table, the Bank has
assumed that its leverage capital requirement is 4% of total average
assets.
/(3)/ Assumes a bank-only calculation for regulatory requirements.
37
<PAGE>
<TABLE>
<CAPTION>
Bank's
Historical
Regulatory Capital
Position at
December 31, 1996
-----------------------
Percent of
Regulatory
Amount Assets/(1)/
------ -----------
(Dollars in Thousands)
<S> <C> <C>
Tier 1 (leverage) capital $14,384 12.78%
Tier 1 (leverage) capital
requirement/(2)/ 4,502 4.00%
------- ------
Excess $ 9,882 8.78%
======= ======
Tier 1 risk based capital $14,384 24.40%
Tier 1 risk based capital requirement 2,358 4.00%
------- ------
Excess $12,026 20.40%
======= ======
Total risk based capital $14,772 25.06%
Total risk based capital requirement 4,716 8.00%
------- ------
Excess $10,056 17.06%
======= ======
NC regulatory capital $14,772 13.12%
NC regulatory capital requirement 5,628 5.00%
------- ------
Excess $ 9,144 8.12%
======= ======
<CAPTION>
Pro Forma Regulatory Capital Position at December 31, 1996/3/
---------------------------------------------------------------------------------------------
433,500 510,000 586,500 674,475
Shares sold at Shares sold at Shares sold at Shares sold at
Price of $50.00 Price of $50.00 Price of $50.00 Price of $50.00
per share per share per share per share
--------------------- --------------------- --------------------- ---------------------
Percent of Percent of Percent of Percent of
Regulatory Regulatory Regulatory Regulatory
Amount Assets/(1)/ Amount Assets/(1)/ Amount Assets/(1)/ Amount Assets/(1)/
------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $23,947 19.61% $25,665 20.73% $27,384 21.81% $29,360 23.02%
Tier 1 (leverage) capital
requirement/2/ 4,885 4.00% 4,953 4.00% 5,022 4.00% 5,101 4.00%
------- ------ ------- ------ ------- ------ ------- ------
Excess $19,062 15.61% $20,712 16.73% $22,362 17.81% $24,259 19.02%
======= ====== ======= ====== ======= ====== ======= ======
Tier 1 risk based capital $23,947 39.34% $25,665 41.93% $27,384 44.49% $29,360 47.39%
Tier 1 risk based capital requirement 2,435 4.00% 2,448 4.00% 2,462 4.00% 2,478 4.00%
------- ------ ------- ------ ------- ------ ------- ------
Excess $21,512 35.34% $23,217 37.93% $24,922 40.49% $26,882 43.39%
======= ====== ======= ====== ======= ====== ======= ======
Total risk based capital $24,334 39.98% $26,053 42.56% $27,772 45.12% $29,748 48.02%
Total risk based capital requirement 4,869 8.00% 4,896 8.00% 4,924 8.00% 4,956 8.00%
------- ------ ------- ------ ------- ------ ------- ------
Excess $19,465 31.98% $21,157 34.56% $22,848 37.12% $24,792 40.02%
======= ====== ======= ====== ======= ====== ======= ======
NC regulatory capital $24,334 19.93% $26,053 21.04% $27,772 22.12% $29,748 23.33%
NC regulatory capital requirement 6,106 5.00% 6,192 5.00% 6,278 5.00% 6,377 5.00%
------- ------ ------- ------ ------- ------ ------- ------
Excess $18,228 14.93% $19,861 16.04% $21,494 17.12% $23,371 18.33%
======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
- --------------------------------
(1) For the Tier 1 (leverage) capital and North Carolina regulatory capital
calculations, percent is of total average assets. Average assets after
investment of net proceeds from the offering at the minimum, midpoint,
maximum and 15% above the maximum total $122,115,000, $123,833,000,
$125,552,000 and $127,528,000, respectively. For the Tier 1 risk-based
capital and total risk-based capital calculations, percent is of total
risk-weighted assets. Net proceeds (after ESOP) were assumed to be invested
in short-term treasury securities (0% risk-weight) and one-to-four family
residential mortgage loans (50% risk-weight) with a weighted average risk-
weight of 20%. Total risk-weighted assets after investment of net proceeds
from the offering at the minimum, midpoint, maximum and 15% above the
maximum total $60,869,000, $61,212,000, $61,556,000 and $61,951,000,
respectively.
(2) As a North Carolina-chartered savings bank, the Bank is subject to the
capital requirements of the FDIC and the Administrator. The FDIC requires
state-chartered savings banks, including the Bank, to have a minimum
leverage ratio of Tier 1 capital to total assets of at least 3%; provided,
however, that all institutions, other than those (i) receiving the highest
rating during the examination process and (ii) not anticipating any
significant growth, are required to maintain a ratio of 1% to 2% above the
stated minimum, with an absolute minimum leverage ratio of at least 4%. For
the purposes of this table, the Bank has assumed that its leverage capital
requirement is 4% of total average assets.
(3) Assumes a bank-only calculation for regulatory requirements.
38
<PAGE>
STOCK PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
Directors, officers and employees of the Bank will be entitled to subscribe
for shares of Common Stock in the Subscription Offering in their capacities as
such and to the extent they qualify as Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members. Shares purchased by such persons
will be purchased at the same price per share--$50.00--that will be paid by
other purchasers in the Offerings. They may also purchase Common Stock in the
Community Offering or in the Syndicated Community Offering, if any, subject to
the maximum purchase limitations applicable to all purchasers of shares in the
Conversion.
The following table sets forth for each of the executive officers and
directors of the Bank who intends to purchase Common Stock, and for all
executive officers and directors as a group (including in each case, except as
otherwise noted, all associates of such persons) the aggregate dollar amount of
Common Stock for which such director or executive officer has informed the Bank
he intends to subscribe. The amounts reflected in the table are estimates only
and the actual shares of Common Stock actually subscribed for by the listed
individuals may differ from the amounts reflected in the table. The following
table assumes that sufficient shares will be available to satisfy the
subscriptions of the Bank's executive officers and directors.
<TABLE>
<CAPTION>
Anticipated
Anticipated Number
Amount of Shares As a Percent
to be Paid to be of Shares
Name for Shares Purchased/(1)/ Issued/(2)/
- ---- ---------- -------------- -----------
<S> <C> <C> <C>
Willis L. Barnette, Director $ 300,000 6,000 1.18%
Donald R. Belk, Director 350,000 7,000/(3)/ 1.37
Dale W. Brawley, Director, Executive Vice President
and Treasurer 350,000 7,000/(4)/ 1.37
George W. Brawley, Jr., Director, President and
Chief Executive Officer 600,000 12,000/(5)/ 2.35
Jack G. Lawler, Director 300,000 6,000 1.18
Calvin E. Tyner, Director 300,000 6,000 1.18
Claude U. Voils, Jr., Director 300,000 6,000 1.18
Billy R. Williams, Secretary and Controller 100,000 2,000 0.39
---------- ------ -----
Total $2,600,000 52,000 10.20%
========== ====== =====
</TABLE>
39
<PAGE>
- ----------------------
(1) Subscriptions by the ESOP are not aggregated with shares of Common Stock
purchased by the executive officers and directors listed above. See
"MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan." Also, grants
under the proposed MRP and shares subject to option under the Stock Option
Plan, if approved by the stockholders of the Company at a meeting of
stockholders following the Conversion, are not aggregated with shares of
Common Stock purchased by the executive officers and directors listed
above. It is expected that the ESOP will acquire 8% of the shares issued in
the Conversion. Recipients of shares under the ESOP will have voting
control over the shares allocated to them, and trustees of the ESOP
(directors of the Bank) will have voting control over unallocated shares.
See "MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan." Under the
proposed MRP, if approved by the stockholders of the Company, a number of
shares equal to 4% of the shares issued in the Conversion are expected to
be issued to directors and certain employees of the Bank. Such shares could
be purchased in the open market at any time following approval of the MRP
by the Company's stockholders or could be issued out of authorized but
unissued shares. Recipients of shares under the MRP will have voting
control over such shares regardless of whether such shares have vested. See
"MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan."
(2) Based upon the issuance of 510,000 shares of Common Stock which is the
number of shares to be issued at the midpoint of the Valuation Range. The
same individuals would subscribe for 12.00% of the shares issued based upon
the issuance of 433,500 shares of Common Stock which is the number of
shares to be issued at the minimum of the Valuation Range.
(3) Excludes shares to be purchased by Dale W. Brawley and George W. Brawley,
Jr.
(4) Excludes shares to be purchased by Donald R. Belk and George W. Brawley,
Jr.
(5) Excludes shares to be purchased by Donald R. Belk and Dale W. Brawley.
Without the prior written consent of the Administrator, shares of Common
Stock purchased by directors or executive officers of the Bank in the Conversion
cannot be sold during a period of one year following the Conversion, except upon
death of the director or executive officer. Such restriction also applies to any
shares issued to such person as a stock dividend, stock split or otherwise with
respect to any of such originally restricted stock.
In addition, the North Carolina conversion regulations provide that
directors and executive officers and their associates are prohibited from
purchasing outstanding shares of Common Stock for a period of three years
following the Conversion, except from or through a broker or dealer registered
with the SEC or Secretary of State of North Carolina, unless the prior written
approval of the Administrator is obtained. This provision does not apply to
negotiated transactions involving more than 1% of the Company's outstanding
Common Stock or to purchases of stock made by or held by one or more tax-
qualified or non-tax-qualified employee stock benefit plans of the Bank or the
Company which may be attributable to individual executive officers or directors.
Purchases and sales of Common Stock by officers and directors will also be
subject to the short-swing trading prohibitions contained in Section 16(b) of
the Securities Exchange Act of 1934 (the "Exchange Act"), and the short-swing
trading and other rules promulgated pursuant to the Exchange Act.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
changes therein and results of operations of the Bank. The discussion contains
certain forward-looking statements consisting of estimates with respect to the
financial condition, result of operations and other business of the Bank that
are subject to various factors which could cause actual results to differ
materially from those estimates. Factors which could influence the estimates
include changes in the national, regional and local market conditions,
legislative and regulatory conditions, and an adverse interest rate environment.
The information contained in this section should be read in conjunction with the
Financial Statements, the accompanying Notes to Financial Statements, and the
information sections contained in this Prospectus.
The Company was incorporated under North Carolina law in August 1997 at the
direction of the Bank for the purpose of acquiring and holding all of the
outstanding stock of the Bank to be issued in the Conversion. The Company's
principal business activities after the Conversion are expected to be conducted
solely through the Bank.
40
<PAGE>
The Bank's results of operations depend primarily on net interest income,
which is the difference between interest income from interest-earning assets and
interest expense on interest-bearing liabilities. The Bank's operations are
affected to a much lesser degree by non-interest income, such as transaction and
other service fee income, and other sources of income. The Bank's principal
operating expenses, aside from interest expense, consist of compensation and
employee benefits, office occupancy costs, data processing expenses and federal
deposit insurance premiums.
Capital Resources and Liquidity
The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.
The Bank's primary sources of internally generated funds are principal and
interest payments on loans receivable, cash flows generated from operations, and
cash flows generated by investment maturities. External sources of funds include
increases in deposits and advances from the FHLB of Atlanta. Advances from the
FHLB of Atlanta have not historically been a primary source of liquidity for the
Bank.
Operating activities generated cash of $502,000, $549,000, $724,000,
$693,000 and $857,000 for the six-month periods ended June 30, 1997 and 1996 and
the years ended December 31, 1996 and 1995 and the nine months ended December
31, 1994, respectively. Historically, in addition to cash provided by operating
activities, financing activities have provided the Bank with sources of funds
for asset growth and liquidity. For the six month periods ended June 30, 1997
and 1996, deposits grew $2.1 million and $825,000, respectively, while for the
years ended December 31, 1996 and 1995 deposits grew $1.7 million and $6.9
million, respectively. During the six months ended June 30, 1997 and the year
ended December 31, 1996, the Bank decreased by $1 million and increased by $2
million, respectively, advances from the FHLB of Atlanta with whom they have a
readily available source of credit. Such funds were used primarily to fund
increasing loan demand. The Bank did not utilize FHLB advances during the six
months ended June 30, 1996, the year ended December 31, 1995 or the nine months
ended December 31, 1994.
Cash provided by operating and financing activities is used by the Bank to
originate new loans to customers, to maintain investment portfolios and to meet
liquidity requirements. During the six months ended June 30, 1997 and 1996 and
the years ended December 31, 1996 and 1995 and the nine months ended December
31, 1994, loans outstanding increased $2.7 million, $3.5 million, $7.3 million,
$8.0 million, and $3.3 million, respectively. During the six months ended June
30, 1997 and 1996 and the years ended December 31, 1996 and 1995 and the nine
months ended December 31, 1994, proceeds from maturities of investment
securities exceeded purchases of such investments by $939,000, $1.2 million,
$2.6 million, $969,000 and $136,000, respectively.
At June 30, 1997, the Bank had a one-year mismatch of the maturities of
interest-bearing liabilities and interest-earning assets of negative 28.18%. The
Bank is able to manage these mismatches to some extent by attempting to control
the maturity or rate adjustments of its interest-earning assets and interest-
earning liabilities over given periods of time. In order to manage the potential
effects of adverse liquidity or funding requirements from maturities, management
has implemented an asset/liability program designed to stabilize the Bank's
interest rate gap. The program emphasizes the investment of excess cash in short
term interest-earning assets, the origination of adjustable rate loans, and the
solicitation of checking and transaction accounts which are less sensitive to
changes in interest rates and can be repriced rapidly. In addition to shortening
the average repricing period of its assets, the Bank has sought to be price rate
competitive in the marketplace on its maturing certificates of deposit to
encourage depositors to reinvest in certificates with the Bank. Management
believes that substantially all of the maturing certificates will be renewed.
North Carolina-chartered savings banks must maintain liquid assets equal to
at least 10% of total assets. The computation of liquidity under North Carolina
regulation allows the inclusion of mortgage-backed securities and investments
with readily marketable value, including investments with maturities in excess
of five years. The Bank's
41
<PAGE>
liquidity ratio on June 30, 1997, as computed under North Carolina regulations,
was approximately 8.35%. Prior to and following that date, the Bank's liquidity
ratio exceeded 10% of total assets. The Bank believes that it will have
sufficient funds available to meet its anticipated future loan commitments as
well as other liquidity needs. At June 30, 1997, the Bank had $12.0 million in
available credit with the FHLB of Atlanta and stable, core-like time deposits of
$100,000 or more of approximately $13.0 million.
Following the Conversion, the Company will initially conduct no business
other than holding the capital stock of the Bank and the loan it will make to
the ESOP. In order to provide sufficient funds for its operations, the Company
expects to retain at the Company level and invest 50% of the net proceeds of the
Conversion remaining after making the loan to the ESOP. In the future, the
Company's primary source of funds, other than income from its investments and
principal and interest payments received from the ESOP with respect to the ESOP
loan, is expected to be dividends from the Bank. As a North Carolina-chartered
stock savings bank, the Bank may not declare or pay a cash dividend on or
repurchase any of its capital stock if the effect of such transaction would be
to reduce the net worth of the institution to an amount which is less than the
minimum amount required by applicable federal and state regulations. At June 30,
1997, the Bank was in compliance with all applicable capital requirements. In
addition, for a period of five years after the Conversion, the Bank must obtain
written approval from the Administrator before declaring or paying a cash
dividend on its capital stock in an amount in excess of one-half of the greater
of (i) its net income for the most recent fiscal year end, or (ii) the average
of its net income after dividends for the most recent fiscal year end and not
more than two of the immediately preceding fiscal year-ends. As a result of this
limitation, if the Bank had been a stock institution at the end of fiscal 1996
and for the two preceding years, it could not have been paid a cash dividend in
excess of $362,000 without approval of the Administrator.
In connection with the Conversion, the Company and the Bank have agreed
with the FDIC that, within the first year after completion of the Conversion,
they will not pay any dividend or make any distribution that represents, or is
characterized as, or is treated for tax purposes as a return of capital. In
addition, after the Conversion, the Bank will be subject to the restriction that
it will not be permitted to declare or pay a cash dividend on or repurchase any
of its capital stock if the effect thereof would be to cause its net worth to be
reduced below the amount required for the liquidation account to be established
in connection with the Conversion. See "THE CONVERSION -- Effects of
Conversion -- Liquidation Rights -- Liquidation Rights After the Conversion".
Operating Strategy
The primary goals of management are to increase the Bank's profitability,
monitor its capital position and enhance its banking franchise. The Bank's
results of operations are dependent primarily on net interest income, which is
the difference between the income earned on its interest-earning assets, such as
loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits. The Bank's operations are affected to a much lesser
degree by non-interest income, such as transaction and other service fee income,
and other sources of income. The Bank's net income is also affected by, among
other things, provisions for loan losses and operating expenses. The Bank's
principal operating expenses, aside from interest expense, consists of
compensation and employee benefits, office occupancy costs, data processing
expenses and federal deposit insurance premiums. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and policies concerning monetary and fiscal affairs, housing and
financial institutions and the attendant actions of regulatory authorities.
In guiding the operations of the Bank, management has implemented various
strategies designed to continue the institution's profitability while
maintaining its safety and soundness. These strategies include: (i) emphasizing
one-to-four family residential lending; (ii) maintaining asset quality; (iii)
controlling operating expenses; and (iv) monitoring interest-rate risk. It is
anticipated, subject to market conditions, that the strategies presently in
place will be continued following completion of the Conversion.
42
<PAGE>
Emphasis on One-to-Four Family Residential Housing. Historically, the Bank
has been predominantly a one-to-four family residential lender. As of June 30,
1997, approximately 82.07% of its loan portfolio, before net items, was composed
of permanent one-to-four residential loans. As of such date, an additional
11.19% of its loan portfolio, before net items, was composed of construction
loans and equity line loans. As a result, the Bank has developed expertise in
mortgage loan underwriting and origination. The Bank has established methods to
expand its loan originations through contacts with Realtors, homebuilders and
past and present customers. The Bank also uses advertising and community
involvement to gain exposure within the communities is operates. As of June 30,
1997, approximately 31.51% of the Bank's loan portfolio, before net items, was
composed of adjustable rate loans.
Maintenance of Asset Quality. At June 30, 1997, the Bank's ratio of
nonperforming assets to total assets was 0.96%. Since March 31, 1992, annual net
loan charge-offs have averaged 0.02% of average loans outstanding. The Bank has
attempted to maintain asset quality through its underwriting and collection
procedures.
Monitoring of Interest-Rate Risk. Although the Bank has a significant
"negative gap" and its net interest income would likely be negatively impacted
by increases in interest rates. However, in order to reduce the impact on the
Bank's net income resulting from changes in interest rates, as described below,
management has implemented several strategies. See "-- Interest Rate Risk".
Control of General and Administrative Expenses. The Bank closely monitors
its general and administrative expenses and seeks to control them while
maintaining the necessary personnel to properly serve its customers. Since March
31, 1992, the Bank's ratio of general and administrative expenses to average
assets has averaged 2.44%.
Interest Rate Risk
The Bank's asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond 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 other factors, the 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 rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.
Therefore, by controlling the increases and decreases in its interest income and
interest expense which are brought about by changes in market and interest
rates, the Bank can significantly influence its net interest income.
Net Portfolio Value and Net Interest Income Analysis. In addition to the
interest rate gap analysis as discussed below, management monitors the Bank's
interest rate sensitivity through the use of a model which estimates the change
in net portfolio value ("NPV") and net interest income in response to a range of
assumed changes in market interest rates. NPV is the present value of expected
cash flows from assets, liabilities, and off-balance sheet items. The model
estimates the effect on the Bank's NPV and net interest income of instantaneous
and permanent 50 to 200 basis point increases and decreases in market interest
rates.
43
<PAGE>
The following table presents information regarding possible changes in
the Bank's NPV as of June 30, 1997.
<TABLE>
<CAPTION>
Percentage Change in
Net Portfolio Value
----------------------------------------------
Change Board
in Market Projected Policy
Interest Rates Change/(1)/ Limit/(2)/
-------------- ------ -----
<S> <C> <C>
Up 200 (22.85)% (40.00)%
Up 150 (17.42) (30.00)
Up 100 (11.73) (20.00)
Up 50 (5.78) (10.00)
</TABLE>
- ----------------
/(1)/Calculated as the amount of change in the estimated NPV ratio divided by
the estimated NPV, assuming no change in interest rates.
/(2)/Represents approved Board limits of change in NPV.
The following table presents the predicted effects on the Bank's net
interest income as of June 30, 1997 of instantaneous and permanent 50 to 200
basis point changes in market interest rates.
<TABLE>
<CAPTION>
Percentage Change in
Net Interest Income
----------------------------------------------
Change Board
in Market Projected Policy
Interest Rates Change/(1)/ Limit/(2)/
-------------- ------ -----
<S> <C> <C>
Up 200 (7.00)% (40.00)%
Up 150 (5.23) (30.00)
Up 100 (3.46) (20.00)
Up 50 (1.72) (10.00)
</TABLE>
- --------------
/(1)/Calculated as the amount of change in estimated net interest income divided
by net interest income, assuming no change in interest rates.
/(2)/Represents approved Board limits of change in estimated net interest
income.
44
<PAGE>
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not reflect any
actions management may undertake in response to changes in interest rates.
The tables set forth above indicate that, in the event of a 200 basis
point decrease in interest rates, the Bank could experience a 9.77% increase in
NPV and a 7.97% increase in net interest income. In the event of a 200 basis
point increase in interest rates, the Bank could experience a 22.85% decrease in
NPV and a 7.00% decrease in net interest income.
Certain shortcomings are inherent in the method of analysis presented
in both the NPV and net interest income computations and in the gap computations
presented in the above tables. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, adjustable-rate mortgages have interest rate caps
which restrict changes in interest rates on a short-term basis and over the life
of the assets. The proportion of adjustable-rate loans could be reduced in
future periods if market interest rates should decline and remain at lower
levels for a sustained period due to increased refinancing activity. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in the tables. Finally,
the ability of many borrowers to service their adjustable-rate debt may decrease
in the event of a sustained interest rate increase.
The Bank's net interest income during recent periods has been slightly
negatively impacted by increasing interest rates, and its net interest income in
the near future is likely to be reduced if interest rates increase. In order to
better control its interest rate risk, the Bank has begun (i) attempting to
originate adjustable rate loans when market conditions permit, including an
emphasis on adjustable rate equity line of credit loans; (ii) maintaining a
short-term investment portfolio; and (iii) attempting to lengthen deposit
maturities. In addition, checking and transaction accounts are generally
considered to be less interest rate sensitive deposits. As a result, the Bank
has begun to emphasize the origination of those accounts - even though an
increase in such accounts will not improve the Bank's one-year interest rate
sensitivity gap, as the Bank presently computes its interest rate gap, because,
for purposes of such computation, all of such accounts are assumed to reprice
within one year.
The Bank does not originate its fixed rate or adjustable rate loans for
sale, or sell its loans, in the secondary market. This tends to increase its
exposure to interest rate risk.
Interest Rate Gap Analysis. As a part of the Bank's interest rate risk
management policy, the Bank calculates an interest rate "gap". Interest rate
"gap" analysis is a common, though imperfect, measure of interest rate risk,
which measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the
amounts of such assets and liabilities that are subject to repricing. A
"negative gap" for a given period means that the amount of interest-bearing
liabilities maturing or otherwise repricing within that period exceeds the
amount of interest-earning assets maturing or otherwise repricing within the
same period. Accordingly, in a declining interest rate environment, an
institution with a negative gap would generally be expected, absent the effects
of other factors, to experience a lower decrease in the yield of its assets
relative to the cost of its liabilities and its income should be positively
affected. Conversely, the cost of funds for an institution with a negative gap
would generally be expected to increase more quickly that the yield on its
assets in a rising interest rate environment, and such institution's net
interest income generally would be expected to be adversely affected by rising
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "positive gap".
The Bank's one-year interest sensitivity gap as a percentage of total
interest-earning assets at June 30, 1997 was a negative 28.18%. At June 30,
1997, the Bank's three-year and five-year cumulative interest sensitivity gaps
as a percentage of total interest-earning assets were a negative 42.60% and
negative 43.03%, respectively.
45
<PAGE>
The following table sets forth the amounts of interest-earning assets
and interest-bearing-liabilities outstanding at June 30, 1997 which are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular time period were determined in accordance with the
contractual terms of the asset or liability. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
savings, money market deposit accounts and negotiable order of withdrawal or
other transaction accounts are assumed to be subject to immediate repricing and
depositor availability and have been placed in the shortest period. In making
the gap computations, no assumptions were made regarding prepayment rates and
deposit decay rates used for any interest-earning assets or interest-bearing
liabilities. In addition, the table does not reflect scheduled principal
repayments which will be received throughout the lives of the loans. The
interest rate sensitivity of the Bank's assets and liabilities illustrated in
the following table would vary substantially if different assumptions were used
or if actual experience differs from that indicated by such assumptions.
46
<PAGE>
<TABLE>
<CAPTION>
Terms to Repricing at June 30, 1997
-----------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
------- --------- ---------- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS/(1)/:
Loans receivable:
Adjustable rate residential 1-4 family $ 25,294 $ 536 $ -- $ -- $ 25,830
Fixed rate residential 1-4 family 55 616 952 58,663 60,286
Nonresidential - adjustable 1,552 -- -- -- 1,552
Nonresidential - fixed 172 -- 7 1,072 1,251
Other real estate loans - adjustable 5,684 -- -- -- 5,684
Other real estate loans - fixed 209 323 535 825 1,892
Construction 2,447 2 -- -- 2,449
Other loans 1,191 621 367 -- 2,179
-------- -------- -------- -------- --------
Total loans
Interest-bearing deposits 36,604 2,098 1,861 60,560 101,123
Investments 2,348 -- -- -- 2,348
FHLB stock 2,206 2,587 933 1,028 6,754
-- -- -- 930 930
-------- -------- -------- -------- --------
Total interest-earning assets $ 41,158 $ 4,685 $ 2,794 $ 62,518 $111,155
======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits:
Certificates of deposit $ 47,806 $ 20,717 $ 3,271 $ -- $ 71,794
Money market deposit accounts 4,485 -- -- -- 4,485
NOW accounts 5,842 -- -- -- 5,842
Passbook savings 11,564 -- -- -- 11,564
Noninterest-bearing 1,782 -- -- -- 1,782
-------- -------- -------- -------- --------
Total deposits 71,479 20,717 3,271 -- 95,467
-------- -------- -------- -------- --------
Advances from FHLB 1,000 -- -- -- 1,000
-------- -------- -------- -------- --------
Total interest-bearing liabilities $ 72,479 $ 20,717 $ 3,271 $ -- $ 96,467
======== ======== ======== ======== ========
INTEREST SENSITIVITY GAP PER PERIOD $(31,321) $(16,032) $ (477) $ 62,518 $ 14,688
CUMULATIVE INTEREST SENSITIVITY GAP (31,321) (47,353) (47,830) 14,688 14,688
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL
INTEREST-EARNING ASSETS -28.18% -42.60% -43.03% 13.21% 13.21%
CUMULATIVE INTEREST-EARNING ASSETS AS A PERCENTAGE
OF INTEREST-BEARING LIABILITIES 56.79% 49.19% 50.42% 115.23% 115.23%
</TABLE>
- -------------------------------
/(1)/Interest-earning assets are included in the period in which balances are
expected to be redeployed and/or repriced as a result of scheduled rate
adjustments and contractual maturities.
47
<PAGE>
Net Interest Income
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Bank's assets and liabilities for the six months ended
June 30, 1997 and 1996 and for the years ended December 31, 1996 and 1995 and
the nine months ended December 31, 1994. For the periods indicated, the table
reflects the average yield on interest-earning assets and the average cost of
interest-bearing liabilities (derived by dividing income or expense by the
monthly average balance of interest-earning assets or interest-bearing
liabilities, respectively) as well as the net yield on interest-earning assets
(which reflects the impact of the net earning balance).
48
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
------------------------------------------------------------------
At
June 30,
1997 1997 1996
---------- ------------------------------- -------------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Rate/(6)/ Balance Interest Rate/(4)/ Balance Interest Rate/(4)/
---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits 4.20% $ 2,308 $ 52 4.51% $ 2,074 $ 49 4.73%
Investments/(1)/ 6.26% 8,108 251 6.19% 11,573 319 5.51%
Loans receivable, net/(5)/ 6.18% 99,380 4,130 8.31% 90,213 3,889 8.34%
------- -------- ------- -------
Total interest-earning assets 7.96% 109,796 $ 4,433 8.07% 106,860 $ 4,257 7.97%
------- -------
Non-interest-earning assets 3,092 1,939
------- -------
Total $112,888 $108,799
======= =======
Liabilities and retained earnings:
Interest-bearing liabilities:
NOW & Money Market accounts 1.85% $ 11,239 $ 104 1.85% $ 11,429 $ 123 2.15%
Passbook accounts 3.04% 11,365 177 3.11% 11,531 166 2.88%
Certificates of deposit 5.72% 70,993 2,027 5.71% 69,050 2,016 5.84%
------- ------- ------- -------
Total deposits 4.84% 93,597 2,308 4.93% 92,010 2,305 5.01%
FHLB advances 5.82% 1,667 58 6.96% 166 5 6.02%
------- ------- ------- -------
Total interest-bearing liabilities 4.95% 95,264 $ 2,366 4.97% 92,176 $ 2,310 5.01%
------- -------
Non-interest-bearing liabilities 3,222 2,894
Equity 14,402 13,729
------- -------
Total $112,888 $108,799
======= =======
Net interest income and
interest rate spread/(2)/ 3.01% $ 2,067 3.10% $ 1,947 2.96%
====== =======
Net yield on interest-earning
assets/(3)/ 3.77% 3.77% 3.64%
Ratio of interest-earning assets
to interest-bearing liabilities 115.25% 115.93%
<CAPTION>
For the Nine Months
For the Year Ended December 31, Ended December 31,
------------------------------------------------------------------ -------------------
1996 1995 1994
------------------------------ -------------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest earning assets:
Interest-bearing deposits $ 1,900 $ 88 4.63% $ 2,773 $ 158 5.70% $ 2,990 $ 107 4.77%
Investments/(1)/ 10,141 628 6.19% 11,87 670 5.64% 12,339 476 5.14%
Loans receivable, net/(5)/ 95,453 7,963 8.34% 86,446 7,118 8.23% 81,309 4,961 8.14%
------- ------- ------- ------- ------- -------
Total interest-earning assets 107,494 $ 8,679 8.07% 101,090 $ 7,946 7.86% 96,638 $ 5,544 7.65%
------- ------- =======
Non-interest-earning assets 1,901 3,079 3,004
------- ------- -------
Total $109,395 $104,169 $ 99,642
======= ======= =======
Liabilities and retained earnings:
Interest-bearing liabilities:
NOW & Money Market accounts $ 11,113 $ 220 1.98% $ 11,611 $ 278 2.39% $ 13,424 $ 225 2.23%
Passbook accounts 11,480 322 2.80% 11,006 365 3.32% 11,221 267 3.17%
Certificates of deposit 69,877 4,082 5.84% 65,602 3,773 5.75% 59,802 2,115 4.72%
------- ------- ------- ------- ------- -------
Total deposits 92,470 4,624 5.00% 88,219 4,416 5.00% 84,447 2,607 4.12%
FHLB advances 833 34 4.08% -- -- --% -- -- --%
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 93,303 $ 4,658 4.99% $ 88,219 $ 4,416 5.01% 84,447 $ 2,607 4.12%
------- ------- -------
Non-interest-bearing liabilities 3,503 3,065 3,023
Equity 13,422 12,885 12,172
------- ------- -------
Total $110,228 $104,169 $ 99,642
======= ======= =======
Net interest income and
interest rate spread/(2)/ $ 4,021 3.08% $ 3,500 2.85% $ 2,937 3.53%
======= ======= =======
Net yield on interest-earning
assets/(3)/ 3.74% 3.49% 4.05%
Ratio of interest-earning assets
to interest-bearing liabilities 115.21% 114.59% 114.44%
</TABLE>
- ---------------------------------------------------
(1) Includes investment securities and FHLB of Atlanta common stock.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income divided
by average interest-earning assets.
(4) Average yield/rate for the six months ended June 30, 1997 and 1996, and the
nine months ended December 31, 1994 have been annualized.
(5) Loans placed on nonperforming status have been included in the computation
of average balances.
(6) The weighted average rate represents the coupon associated with each asset
and liability, weighted by the principle balance associated with each asset
and liability.
49
<PAGE>
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
50
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
1997 vs. 1996 1996 vs. 1995
----------------------------------------- ------------------------------------
Increase (Decrease) Attributable to Increase (Decrease) Attributable to
----------------------------------------- ------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest-earning deposits in other banks $ 6 $ (3) $ -- $ 3 $ (50) $ (30) $ 10 $ (70)
Investments (95) 39 (12) (68) (98) 65 (9) (42)
Loans receivable 257 (14) (2) 241 741 95 9 845
------ ------ ------ ------ ------ ------ ------ ------
Total interest income on
interest-earning assets 168 22 (14) 176 593 130 10 733
------ ------ ------ ------ ------ ------ ------ ------
Interest expense on:
NOW and Money Market accounts (2) (17) -- (19) (12) (48) 2 (58)
Passbook accounts (2) 13 -- 11 16 (57) (2) (43)
Certificates of Deposit 57 (45) (1) 11 246 59 4 309
FHLB advances 45 1 7 53 -- -- 34 34
------ ------ ------ ------ ------ ------ ------ ------
Total interest expense on
interest-bearing liabilities 98 (48) 6 56 250 (46) 38 242
------ ------ ------ ------ ------ ------ ------ ------
Increase (decrease) in net interest income $ 70 $ 70 $ (20) $ 120 $ 343 $ 176 $ (28) $ 491
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
Year Ended December 31, 1995 vs.
Nine Months Ended December 31, 1994
------------------------------------
Increase (Decrease) Attributable to
------------------------------------
Rate/
Volume Rate Volume Net
------ ---- ------ ---
<S>
Interest income on: <C> <C> <C> <C>
Interest-earning deposits in other banks $ (8) $ 64 $ (5) $ 51
Investments (18) 220 (8) 194
Loans receivable 314 1,728 115 2,157
------ ------ ------ -------
Total interest income on
interest-earning assets 288 2,012 102 2,402
------ ------ ------ -------
Interest expense on:
NOW and Money Market accounts (30) 96 (13) 53
Passbook accounts (5) 106 (2) 99
Certificates of Deposit 205 1,324 128 1,657
FHLB advances -- -- -- --
------ ------ ------ -------
Total interest expense on
interest-bearing liabilities 170 1,526 113 1,809
------ ------ ------ -------
Increase (decrease) in net interest income $ 118 $ 486 $ (11) $ 593
====== ====== ====== =======
</TABLE>
51
<PAGE>
Comparison of Financial Condition at June 30, 1997, December 31, 1996 and 1995
At June 30, 1997, and December 31, 1996 and 1995 assets totaled $114.2
million, $112.6 million and $108.0 million, respectively. The growth from
December 31, 1995 to June 30, 1997 can primarily be attributed to the increase
in loans receivable, funded by savings deposit growth and a decrease in
investment securities, which has been utilized to originate loans. Loans
receivable, net, increased from $90.6 million to $100.5 million at June 30,
1997, a $9.9 million or a 10.99% increase. Savings deposits increased $3.8
million from $92.1 million at December 31, 1995 to $95.9 million at June 30,
1997, for a 4.13% increase. Investment securities, including interest-bearing
deposits, decreased $3.9 million from $13.9 million at December 31, 1995 to
$10.0 million at June 30, 1997 or a 27.84% decrease.
The principal category of earning assets is loans. During the six month
period ended June 30, 1997 loans receivable, net, increased by $2.6 million,
primarily from $6.4 million and $2.0 million originations in residential one-to-
four family dwellings and equity line loans, respectively. Such loan types
account for a $0.9 million and $1.1 million increase in loans receivable, net
for the six-month period ended June 30, 1997. During the years ended December
31, 1996 and 1995 loans receivable, net, increased by $7.4 million and $8.1
million, respectively, and residential one-to-four family dwelling loans
increases accounted for $6.3 million and $3.8 million, respectively, while
equity line loan increases accounted for $2.1 million and $2.7 million,
respectively. During 1997, 1996 and 1995, the Bank continued its emphasis on
marketing mortgage lending while more recently emphasizing home equity loans as
well.
The Bank's investment portfolio, including interest-bearing deposits,
remained relatively unchanged, totaling $10.0 million at June 30, 1997 and
December 31, 1996. During the 1996 fiscal year, the investment portfolio
declined by approximately $3.9 million to $10.0 million from $13.9 million at
December 31, 1995, as the Bank utilized maturing investments to fund loan
originations.
Savings deposits increased $2.1 million or 2.23% during the six months
ended June 30, 1997 to $95.9 million from $93.8 million at December 31, 1996, as
the Bank focused marketing on building deposit relationships through increased
core deposits in passbook and statement savings and in checking accounts.
Savings deposits increased $1.7 million and $7.0 million for the years ended
December 31, 1996 and 1995 to $93.8 million and $92.1 million from $92.1 million
and $85.1 million at December 31, 1995 and 1994, respectively. The increase in
fiscal 1996 and 1995 was due primarily to what management believes to be better
marketing of the Bank's products and a policy of setting its deposit rates in
the local market to compete favorably with rates offered by competitors.
Equity increased due to net income of $287,000, $721,000, and $780,000 for
the six months ended June 30, 1997 and the fiscal years ended December 31, 1996
and 1995, respectively. The Bank has adopted SFAS No. 115 and records its
available for sale securities at their estimated fair market value. The
unrealized gain, net of tax, on securities available for sale was $20,000,
$28,000 and $63,000 at June 30, 1997 and December 31, 1996 and 1995,
respectively.
At June 30, 1997, the Bank was required to maintain net worth to total
assets of 5% under the Administrator's regulations, and the Bank had regulatory
adjusted net worth of $15.3 million, or net worth to total assets of 13.39%.
Additionally, at June 30, 1997, the Bank had Tier 1 risk adjusted capital,
leverage capital, and total risk-based capital of $14.7 million, $14.7 million
and $15.3 million, respectively, exceeding the regulatory capital requirements
by $12.2 million, $10.1 million and $10.4 million, respectively.
Comparison of Operating Results for the Six-Month Periods Ended June 30, 1997
and 1996
Net Income. Net income for the six-month periods ended June 30, 1997 and
June 30, 1996 was $287,000 and $429,000, respectively. Net income decreased in
1997 from 1996 primarily due to a increase in noninterest expenses offset
somewhat by a higher net interest income due to a larger interest rate spread in
1997. Additionally, the Bank provided additional provisions for loan losses
during the six-month period ended June 30, 1997, to reflect peer group bank
levels of reserves and for risk in the portfolio resulting from the changing
economic environment in the Bank's market area.
52
<PAGE>
Net Interest Income. Net interest income amounted to $2.1 million and $1.9
million during the six-month periods ended June 30, 1997 and 1996, respectively.
The average balance of interest-earning assets and interest-bearing liabilities
increased by a net of $2.9 million during 1997 and the Bank's interest rate
spread increased from 2.96% in 1996 to 3.10% in 1997 as a result of a slight
decrease in the Bank's cost of funds coupled with a slight increase in the
Bank's yield on interest earning assets. The Bank's spread in 1997 had a
positive impact on net interest income along with the higher balance of net
interest-earning assets outstanding during 1996.
See the table on page 51 which analyzes the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. The table distinguishes between (i)
changes attributable to volume (changes in volume multiplied by the prior
period's rate) (ii) changes attributable to rate (changes in rate multiplied by
the prior period's volume) and (iii) mixed changes (changes in volume multiplied
by changes in rate).
Interest Income. Interest income amounted to $4.4 million and $4.3 million
for the six-month periods ended June 30, 1997 and 1996, respectively, an
increase of $176,000 or 4.13% . The Bank experienced a 10 basis point increase
in total yield, along with the increase in the Bank's average balances of
interest-earning assets. The increase in average balances was primarily in loans
receivable.
Interest Expense. Interest expense increased $56,000 for the six-month
period ended June 30, 1997 to $2.4 million from $2.3 million for the same period
ended June 30, 1996. The Bank's average balance of outstanding deposits
increased $1.6 million, while the average cost of funds decreased from 5.01%
during 1996 to 4.97% during 1997. The decrease in cost of funds was primarily in
certificates of deposit which decreased from 5.84% during 1996 to 5.72% during
1997. The increase in outstanding average balances was primarily due to an
increase in certificate of deposit balances, while core deposits of passbook
savings, NOW and money market accounts remained stable. Management believes the
Bank's cost of funds was indicative of changes in overall market rates.
See the table on page 49 for additional information concerning the Bank's
yields on interest-earning assets and cost of funds on interest-bearing
liabilities for the six-month periods ended June 30, 1997 and 1996.
Provisions for Loan Losses and Asset Quality. The Bank's provision for loan
losses amounted to $230,000 and $0 in 1997 and 1996. The provision, which is
charged to operations, and the resulting loan loss allowances, are amounts the
Bank's management believes necessary to absorb potential losses on existing
loans that may become uncollectible. Loans are charged off against the allowance
when management believes collectibility is unlikely. The evaluation to increase
or decrease the provision and resulting allowances is based on both prior loan
loss experience and other factors, such as changes in the mix and volume of the
loan portfolio, overall portfolio quality, and current economic conditions.
During the six months ended June 30, 1997, management determined that its
allowance for loan losses should be increased to reflect peer group bank levels
of reserves and for risk in the portfolio resulting from the changing economic
environment in the Bank's market area.
The Bank's level of nonperforming loans, defined as nonaccrual loans and
loans past due 90 days or more, has historically been low as a percentage of
total loans outstanding. The Bank had loans amounting to $1.1 million which were
delinquent more than 90 days or were in nonaccrual status at June 30, 1997. In
addition, the Bank had no real estate owned at June 30, 1997. The Bank has
adopted policies to monitor, and increase when necessary, levels of loan loss
allowances. At June 30, 1997, the Bank's level of general valuation allowances
for loan losses amounted to $617,000.
Noninterest Income. Noninterest income amounted to $87,000 and $104,000 for
the six-month periods ended June 30, 1997 and 1996, respectively. Noninterest
income consists primarily of service charges and fees associated with the Bank's
checking accounts. The Bank's level of noninterest income has remained fairly
stable over the periods.
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and employee benefits, occupancy, federal deposit
insurance premiums, data processing charges and other operating expenses.
Noninterest expense amounted to $1.4 million for both of the six-month periods
ended June 30, 1997 and 1996, respectively.
53
<PAGE>
Compensation increased $128,000 for the six-month period ended June 30, 1997
from the same period ended 1996 due to inflationary increases and unfunded
deferred compensation expense. Occupancy expenses and data processing expense
remained level while deposit insurance premiums declined $89,000 from 1996
levels due to new premium assessment rates effective during the six months ended
June 30, 1997.
Income Taxes. The Bank's effective income tax rate was 42.13% and 37.46%
for the six-month periods ended June 30, 1997 and 1996, respectively, and
reflect normal expected rates on taxable income.
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
and the Nine-Months Ended December 31, 1994
Net Income. Net income for the years ended December 1996 and 1995 and the
nine months ended December 31, 1994 amounted to $721,000, $780,000 and $675,000,
respectively. Net interest income was stable during 1996 and 1994 (on an
annualized basis). A decrease in interest rate spread offset somewhat by an
increase in net average balances of interest-earning assets over interest-
bearing liabilities resulted in a $386,000 decrease (annualizing 1994) in net
interest income for the year ended December 31, 1995. The Bank also incurred an
increase in non-interest expenses during 1996 primarily as a result of a special
SAIF assessment.
Net Interest Income. Net interest income for the years ended December 31,
1996 and 1995 and the nine months ended December 31, 1994 amounted to $4.0
million, $3.5 million and $2.9 million, respectively. The net average
outstanding balances of interest-earning assets and interest-bearing liabilities
was relatively stable during 1995 and 1994 amounting to $12.9 million and $12.2
million, respectively, and increased to $14.2 million during 1996. The Bank's
interest rate spread decreased 88 basis points to 2.85% in 1995 from 3.53% in
1994, but increased in 1996 to 3.08%. The 23 basis point increase in interest
rate spread in 1996, coupled with a $1.3 million increase in net average
balances of interest-earning assets over interest-bearing liabilities, increased
net interest income $491,000 during the year ended December 31, 1996. The 88
basis point decrease in interest rate spread in 1995 offset slightly by a
$680,000 increase in net interest-earning assets over interest-bearing
liabilities decreased net interest income by $380,000 (annualizing 1994) for the
year ended December 31, 1995.
The table on page 51 analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume) and (iii) mixed changes (changes in volume multiplied by
changes in rate).
Interest Income. Interest income amounted to $8.7 million, $7.9 million and
$5.5 million for the years ended December 31, 1996 and 1995 and the nine months
ended December 31, 1994, respectively. The Bank's average yield on interest-
earning assets increased to 8.07% in 1996 from 7.86% in 1995 and 7.65% in 1994.
The Bank's primary interest-earning asset is loans receivable which experienced
an increase in both average yield and average outstanding balances during 1996
and 1995. Outstanding average balances on loans increased $9.0 million to $95.5
million during 1996 from $86.4 million during 1995 and increased $5.1 million to
$86.4 million during 1995 from $81.3 million during 1994. Additionally, average
yields on loans increased to 8.34% in 1996 from 8.23% in 1995 and 8.14% in 1994.
Interest Expense. Interest expense amounted to $4.7 million, $4.4 million
and $2.6 million for the years ended December 31, 1996 and 1995 and the nine
months ended December 31, 1994, respectively. Interest expense increased
$242,000 in 1996 as average outstanding balances increased $4.3 million while
cost of funds remained flat at 5.00%. The primary interest-bearing liability is
certificates of deposit which increased $4.3 million during the year ended
December 31, 1996 and the cost of funds on certificates of deposit increased 9
basis points to 5.84% from 5.75% during 1995. Interest expense during 1995
increased $940,000 (1994 expense annualized) due to an increase in average
outstanding balances of $3.8 million to $88.2 million during 1995 from $84.4
million during 1994 and an increase in average cost of funds of 88 basis points
to 5.01% from 4.12% during 1994.
54
<PAGE>
The table on page 49 provides additional information concerning the Bank's
yields on interest-earning assets and cost of funds on interest-bearing
liabilities at June 30, 1997, for the six-month periods ended June 30, 1997 and
1996, and for the years ended December 31, 1996 and 1995 and the nine months
ended December 31, 1994.
Provision for Loan Losses and Asset Quality. The Bank had no provision for
loan losses in 1996 and minimal provision for 1995 and 1994. The loan loss
allowances are amounts the Bank's management believes necessary to absorb
potential losses on existing loans that may become uncollectible. Loans are
charged off against the allowance when management believes that collectibility
is unlikely. The evaluation to increase or decrease the provision and resulting
allowances is based both on prior loan loss experience and other factors, such
as changes in the nature and volume of the loan portfolio, overall portfolio
quality and current economic conditions.
The Bank's level of nonperforming loans, defined as nonaccrual loans and
accruing loans past due 90 days or more, has historically been low as a
percentage of total loans outstanding. Loans outstanding which were delinquent
more than 90 days were approximately $1.2 million at each of December 31, 1996,
1995 and 1994. Foreclosures or real estate transfers in lieu of foreclosures
amounted to $0, $0, and $93,000 in 1996, 1995 and 1994, respectively. The Bank
has adopted policies to monitor, and increase when necessary, levels of loan
loss allowances. At June 30, 1997, the Bank's level of general valuation
allowances for loan losses amounted to $617,000.
Noninterest Income. Noninterest income amounted to $200,000, $190,000 and
$149,000 for the years ended December 31, 1996 and 1995 and the nine months
ended December 31, 1994, respectively. Noninterest income consists primarily of
service charges and fees associated with the Bank's checking accounts. The
Bank's level of noninterest income has remained fairly stable over the two-year
and nine-month period ended December 31, 1996.
Noninterest Expense. Noninterest expense consists primarily of operating
expenses for compensation and employee benefit, occupancy, federal deposit
insurance premiums, data processing charges, pension expense and other operating
expenses. Noninterest expense amounted to $3.1 million, $2.6 million and $2.0
million for the years ended December 31, 1996 and 1995 and the nine months ended
December 31, 1994, respectively. Compensation expense increased (decreased)
$145,000 and $(90,000) (1994 annualized) during the years ended December 31,
1996 and 1995, respectively. The increases were due to a special one-time SAIF
assessment of $520,000, additional personnel, inflationary increases and pension
and supplemental income benefit expense. Data processing, regular federal
insurance premium and other operating expenses increased nominally during the
two-year and nine-month period ended December 31, 1996. Occupancy expense
decreased $97,000 during 1996 and remained relatively stable during 1995 (1994
annualized).
Income Taxes. The Bank's effective income tax rate was 32.93%, 28.04% and
34.85% for the years ended December 31, 1996 and 1995 and the nine months ended
December 31, 1994, respectively, and reflect normal expected rates on taxable
income.
Impact of Inflation and Changing Prices
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepting 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 in
nature. 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 New Reporting and Accounting Standards
The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation,
which the Bank has not been required to adopt as of June 30, 1997.
55
<PAGE>
The Statement, which will be in effect for the Bank's fiscal year ending
December 31, 1997, will require that an entity account for stock based
compensation plans using a fair value based method which measures compensation
cost at the grant date based upon the value of the award, which is then
recognized over the service period, usually the vesting period. The accounting
requirements of the Statement apply to grants of awards entered into in fiscal
years that begin after December 15, 1995. The Statement allows entities to
continue to use APB Opinion No. 25 to measure compensation cost, but requires
that the proforma effects on net income and earnings per share be disclosed to
reflect the difference between the compensation cost, if any, from applying APB
Opinion No. 25 and the related cost measured by the fair value method defined in
the Statement. The Statement is not expected to have a material effect on the
Bank's financial statements, should the Bank elect to adopt a restricted stock
plan subsequent to conversion to the stock form, because management is expected
to elect to continue to use the accounting and reporting permitted by APB
Opinion No. 25 and will disclose the differences, if any, in notes to the
financial statements as proforma effects of not utilizing the fair value method
prescribed in SFAS No. 123.
The Accounting Standards Division of the AICPA approved SOP 93-6,
"Employers' Accounting for Employee Stock Ownership Plans", which is effective
for fiscal years beginning after December 31, 1993 and applies to shares of
capital stock of sponsoring employers acquired by employee stock ownership plans
after December 31 1992 that had not been committed to be released as of January
1, 1992. SOP 93-6, among other things, changed the measure of compensation
recorded by employers from the cost of employee stock ownership plan shares to
the fair value of such shares. To the extent that the fair value of the ESOP
shares, committed to be released directly to compensate employees, differs from
the cost of such shares, compensation expenses and a related charge or credit to
additional paid-in capital will be reported in the Bank's financial statements.
The FASB has issued SFAS No. 128, Earning Per Share, which the Bank has not
been required to adopt as of June 30, 1997. The Statement, which will be
effective for the Bank's first interim period as a public stock company ending
after December 15, 1997, specifies the computation, presentation and disclosure
requirements for earnings per share.
The FASB has issued SFAS No. 130, Reporting Comprehensive Income, which the
Bank has not been required to adopt as of June 30, 1997. The Statement, which is
effective for fiscal years beginning after December 15, 1997, establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This statement requires that all items that are recognized
under accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements.
BUSINESS OF THE COMPANY
Prior to the Conversion, the Company will not transact any material
business. Following the Conversion, in addition to directing, planning and
coordinating the business activities of the Bank, the Company will invest the
proceeds of the Conversion which are retained by it. See "USE OF PROCEEDS." Upon
consummation of the Conversion, the Company will have no significant assets
other than the shares of the Bank's capital stock acquired in the Conversion,
the loan receivable held with respect to its loan to the ESOP and that portion
of the net proceeds of the Conversion retained by it, and it will have no
significant liabilities. Cash flow to the Company will be dependent upon
investment earnings from the net proceeds retained by it, payments on the ESOP
loan and any dividends received from the Bank. Initially, the Company will
neither own nor lease any property, but will instead use the premises, equipment
and furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than its officers (who are not anticipated to be
separately compensated by the Company), but will utilize the support staff of
the Bank from time to time. Additional employees will be hired as appropriate to
the extent the Company expands its business in the future. In the future, the
Company may consider using some of the proceeds of the Conversion retained by it
to expand its operations in its existing primary market and other nearby areas
by acquiring other financial institutions or their branches. The Company has no
current plans with respect to any such acquisitions, however. Existing
management of the Company believes that it is in the best interest of the
Company and its shareholders for the Company to remain an independent company.
56
<PAGE>
BUSINESS OF THE BANK
General
The Bank is engaged primarily in the business of attracting deposits from
the general public and using such deposits to make mortgage loans secured by
real estate. The Bank makes one-to-four family residential real estate loans,
loans secured by multi-family residential and commercial real property,
construction loans and equity line of credit loans. The Bank also makes loans
which are not secured by real property, such as loans secured by pledged deposit
accounts and various types of secured and unsecured consumer loans. The Bank's
primary source of revenue is interest income from its lending activities. The
Bank's other major sources of revenue are interest and dividend income from
investments, interest income from its interest-earning deposit balances in other
depository institutions, and transaction and fee income from its lending and
deposit activities. The major expenses of the Bank are interest on deposits and
general and administrative expenses such as employee compensation and benefits,
federal deposit insurance premiums, data processing expenses and occupancy
expenses.
As a North Carolina-chartered savings bank, the Bank is subject to
examination and regulation by the FDIC and the Administrator. Upon consummation
of the Conversion, the Bank, as a subsidiary of the Company, will be subject to
indirect regulation by the Federal Reserve. The business and regulation of the
Bank are subject to legislative and regulatory changes from time to time. See
"SUPERVISION AND REGULATION -- Regulation of the Bank."
Market Area
The Bank's primary market area consists of the communities in an
approximately 15-mile radius around its headquarters office in Mooresville,
North Carolina. This area includes portions of Iredell, Mecklenburg, Lincoln,
Catawba, Rowan and Cabarrus counties in North Carolina. Mooresville is located
only 30 miles north of Charlotte, North Carolina, and the Bank's primary market
area is and will continue to be significantly affected by its close proximity to
this major metropolitan area.
Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. Draymore Manufacturing (textiles manufacturer) is the largest
employer in Mooresville. Other major employers include Burlington Industries
(textiles manufacturer) and Lake Norman Regional Medical Center.
Based upon 1996 comparative data, the Bank had approximately 22% and 7.2%
of the deposits in Mooresville and Iredell County, respectively. Employment in
the Bank's primary market area as of June 1997 was strong, with an unemployment
rate below that of North Carolina and national averages. Comparative data
indicates that the income levels in the Bank's primary market area approximate
the national average and are above the North Carolina average for 1997.
Mooresville has a significant elderly population, slightly in excess of state
and national averages. Residential housing construction increased approximately
155% in Iredell County from 1991 to 1996, more than double the state average and
more than triple the national average. From 1990 to 1995, the population in
Iredell County, where most of the Bank's deposits and loans are originated, and
Mooresville increased by approximately 11.3% and 20.2%, respectively, which was
well above national and North Carolina averages. This growth trend is expected
to continue into the foreseeable future.
Lending Activities
General. The Bank's primary source of revenue is interest and fee income
from its lending activities, consisting primarily of mortgage loans for the
purchase or refinancing of one-to-four family residential real property located
in its primary market area. The Bank also makes loans secured by multi-family
and nonresidential properties, construction loans, equity line loans, savings
account loans and various types of secured and unsecured consumer loans. Only
3.25% of the Bank's loan portfolio, before net items, is not secured by real
estate. On June 30, 1997, the Bank's largest single outstanding loan had a
balance of approximately $495,000. In addition to interest earned on loans, the
Bank receives fees
57
<PAGE>
in connection with loan originations, loan modifications, late payments, loan
assumptions and other miscellaneous services. The Bank generally does not sell
its loans; both fixed and adjustable rate loans are originated with the
intention that they will be held in the Bank's loan portfolio.
Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $100.5 million at June 30, 1997 representing 88.04% of the Bank's
total assets at such date. At June 30, 1997, 82.07% of the Bank's loan
portfolio, before net items, was composed of one-to-four family residential
mortgage loans. Multi-family residential and nonresidential real estate loans
represented 3.50% of the Bank's loan portfolio, before net items, on such date.
Construction loans and equity line loans represented 5.44% and 5.75%,
respectively, of the Bank's loan portfolio, before net items, on such date. As
of June 30, 1997, 31.52% of the loans in the Bank's loan portfolio, before net
items, had adjustable interest rates.
The following table sets forth the composition of the Bank's loan portfolio
by type of loan at the dates indicated.
58
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
At June 30, 1997 1996 1995 1994
------------------ ----------------- ----------------- ----------------------
% of % of % of % of
Amount Total Amount Total Amount Total Amount Total
-------- ------ -------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family residential $ 86,117 85.68% $ 85,341 87.13% $ 78,693 86.90% $ 74,904 90.85%
Multi-family residential 870 0.87% 761 0.78% 748 0.82% 643 0.78%
Nonresidential 2,803 2.79% 2,711 2.76% 2,044 2.26% 1,988 2.41%
Construction 5,710 5.68% 4,086 4.17% 8,673 9.58% 5,052 6.13%
Equity line 6,031 6.00% 4,947 5.05% 2,891 3.19% 207 0.25%
-------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 101,531 101.02% 97,846 99.89% 93,049 102.75% 82,794 100.42%
-------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Installment loan 2,447 2.43% 2,397 2.45% 2,403 2.66% 2,396 2.91%
Other consumer and commercial 959 0.95% 941 0.96% 907 1.00% 625 0.76%
-------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 3,406 3.38% 3,338 3.41% 3,310 3.66% 3,021 3.67%
-------- ------ -------- ------ -------- ------ -------- ------
Total gross loans 104,937 104.40% 101,184 103.30% 96,359 106.41% 85,815 104.09%
-------- ------ -------- ------ -------- ------ -------- ------
Less:
Construction loans in process 3,261 3.24% 2,321 2.37% 4,930 5.44% 2,580 3.14%
Deferred loan fees 553 0.55% 524 0.53% 478 0.53% 386 0.47%
Allowance for loan losses 617 0.61% 388 0.40% 396 0.44% 396 0.48%
-------- ------ -------- ------ -------- ------ -------- ------
Total reductions 4,431 4.40% 3,233 3.30% 5,804 6.41% 3,362 4.09%
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable, net $100,506 100.00% $ 97,951 100.00% $ 90,555 100.00% $ 82,453 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
59
<PAGE>
The following table sets forth the time to contractual maturity of
the Bank's loan portfolio at June 30, 1997. Loans which have adjustable rates
are shown as being due in the period during which rates are next subject to
change, while fixed rate and other loans are shown as due in the period of
contractual maturity. Demand loans, loans having no stated maturity and
overdrafts are reported as due in one year or less. The table does not include
prepayments or scheduled principal repayments. Amounts in the table are net of
loans in process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
At June 30, 1997
--------------------------------------------------------------------
More Than
1 Year 1 Year to Greater Than
or Less 5 Years 5 Years Total
------- --------- ------------ -----
(In Thousands)
TOTAL LOANS:
- -----------
<S> <C> <C> <C> <C>
Real estate loans:
Adjustable rate residential 1-4 family $ 25,232 $ 565 $ -- $ 25,797
Fixed rate residential 1-4 family 55 1,048 58,664 59,767
Residential multi-family - fixed -- -- 870 870
Nonresidential - adjustable 1,552 -- -- 1,552
Nonresidential - fixed 172 7 1,072 1,251
Equity line 6,031 -- -- 6,031
Construction 2,447 2 -- 2,449
Commercial - adjustable 332 -- -- 332
Other loans 648 2,367 59 3,074
Less:
Allowance for loan losses (617) -- -- (617)
-------- ------- -------- --------
Totals $ 35,852 $ 3,989 $ 60,665 $100,506
======== ======= ======== ========
</TABLE>
The following table sets forth the dollar amount at June 30, 1997 of
all loans maturing or repricing on or after June 30, 1998 which have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
----- ----------
(In Thousands)
<S> <C> <C>
Real estate loans 1-4 family $59,712 $ 565
Other loans 1,951 2,426
------- ------
$61,663 $2,991
======= ======
</TABLE>
60
<PAGE>
Origination and Sale of Loans. Historically, the Bank has generally not
originated its one-to-four family residential mortgage or other loans with the
intention that they will be sold in the secondary market. Although the Bank
believes that many of its one-to-four family residential loans could be sold to
investors, some of such loans could be sold only after the Bank incurred certain
costs and/or discounted the purchase price. As a result, the Bank's loan
portfolio is less liquid than would be the case if it was composed entirely of
loans originated in conformity with secondary market requirements.
The table below sets forth the Bank's loan origination, purchase and
sale activity and loan portfolio repayment experience during the periods
indicated.
61
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended
June 30, Year Ended December 31, December 31,
---------------- ------------------------- --------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, net, beginning of period $ 97,951 $ 90,555 $ 90,555 $ 82,453 $ 79,031
-------- -------- -------- -------- --------
Loan originations:
Residential 1-4 family 6,745 6,856 13,392 12,604 7,502
Residential multi-family 125 20 40 128 105
Nonresidential real estate 297 28 168 169 539
Residential construction 3,834 3,628 6,356 7,965 4,912
Equity line 2,030 1,797 3,661 4,051 642
Consumer 1,068 1,050 2,294 2,237 1,729
-------- -------- -------- -------- --------
Total loan originations 14,099 13,379 25,911 27,154 15,429
-------- -------- -------- -------- --------
Loans purchased -- -- -- -- --
Loan sales -- -- -- -- --
Principal repayments (11,394) (9,862) (18,657) (19,179) (12,101)
Other changes, net (1) (150) 71 142 127 94
-------- -------- -------- -------- --------
Increase in loans receivable 2,555 3,588 7,396 8,102 3,422
-------- -------- -------- -------- --------
Loans receivable, net, end of period $100,506 $ 94,143 $ 97,951 $ 90,555 $ 82,453
======== ======== ======== ======== ========
</TABLE>
- -----------------------------
(1) Includes changes in deferred loan fees and the allowance for loan losses.
62
<PAGE>
One-to-Four Family Residential Real Estate Lending. The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of fixed and adjustable rate first mortgage loans to enable borrowers to
purchase or refinance one-to-four family residential real property. Consistent
with the Bank's emphasis on being a community-oriented financial institution, it
is and has been the Bank's strategy to focus its lending efforts in its primary
market area. On June 30, 1997, approximately 82.07% of the Bank's real estate
loan portfolio, before net items, consisted of one-to-four family residential
real estate loans. These include both loans secured by detached single-family
residences and condominiums and loans secured by housing containing not more
than four separate dwelling units. Of such loan amounts, 24.59% had adjustable
interest rates.
Historically, the Bank has not originated its one-to-four family loans
with the intention that they will be sold in the secondary market. The Bank
generally originates loans satisfying its underwriting requirements which are
tailored for its local community. Specifically, the Bank does not obtain
property surveys, uses in-house appraisers only for loans under $250,000 and
sometimes accepts higher than normal debt-to-income ratios and may waive other
FHLMC or FNMA requirements on a case-by-case basis. As a result, such loans are
not readily saleable in the secondary market and the Bank's loan portfolio is
less liquid than would be the case if it was composed of loans originated in
conformity with secondary market requirements. In addition, loans which are not
originated in conformity with the purchase requirements of FHLMC and FNMA, or
nonconforming loans, are generally thought to have greater risks of default and
nonperformance. However, the Bank does not make loans with a loan-to-value ratio
in excess of 80%. See "BUSINESS OF THE BANK -- Origination and Sale of Loans."
These loans satisfy a need in the Bank's local community and generally produce a
higher yield than would be produced by conforming loans. The Bank plans to
continue to originate a significant amount of nonconforming loans. Therefore, in
periods of economic downturn, the Bank's level of nonperforming assets may be
greater than its peer group.
The Bank originates conventional mortgage loans secured by owner
occupied property in amounts of up to 95% of the value of the property. Private
mortgage insurance is generally required if the loan amount exceeds 80% of the
value of the property. The loans have both fixed and adjustable rates. The
maximum term for fixed and adjustable rate loans is 30 years. The interest rates
on adjustable rate loans are generally adjustable every year and are tied to the
one-year United States treasury bill rate. The loans have rate caps which limit
the amount of changes at the time of each adjustment and over the lives of the
loans. The Bank offers loans which require monthly payments.
Adjustable rate loans are generally considered to involve a greater
degree of credit risk than fixed rate loans because borrowers may have
difficulty meeting their payment obligations if interest rates and required
payment amounts increase substantially. Substantially all of the fixed-rate
loans in the Bank's mortgage loan portfolio have due on sale provisions allowing
the Bank to declare the unpaid balance due and payable in full upon the sale or
transfer of an interest in the property securing the loan.
While one-to-four family residential loans are normally originated for
up to 30 year terms, such loans customarily remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates,
and the interest rates payable on outstanding loans.
The Bank generally requires title insurance for its one-to-four family
residential loans. The Bank also generally requires that fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) be maintained
in an amount at least equal to the loan amount or replacement cost of the
improvements on the property securing the loans, whichever is greater.
As of June 30, 1997, the Bank has 48 loan relationships with individual
borrowers in excess of $200,000, totaling approximately $12.4 million or 11.81%
of the Bank's total loan portfolio. The principal balance of five individual
loans exceeds $350,000, with the largest single loan balance of approximately
$495,000. The majority of these loans are secured by residential real estate
located near or on Lake Norman, North Carolina, which is located in parts of
Catawba, Iredell,
63
<PAGE>
Lincoln and Mecklenburg counties. While these loans are performing according to
the terms of their loan documents, an economic downturn in the Bank's primary
market area, in which Lake Norman is located, could have an adverse effect on
the performance of these loans.
Multi-family Residential and Nonresidential Real Estate Lending. On June
30, 1997, the Bank had $3.7 million outstanding in loans secured by multi-family
residential and nonresidential properties, comprising approximately 3.50% of its
loan portfolio, before net items, as of that date. These loans are secured by
apartments, office, retail and other nonresidential real estate, and church
properties, with the majority having adjustable interest rates. These loans
generally do not exceed 80% of the appraised value of the real estate securing
the loans. Multi-family residential loans have terms of up to 30 years.
Nonresidential real estate loans have terms of up to 15 years. The loans
generally use the same index and rate change limitations as are used in
one-to-four family residential lending. See "-- One-to-Four Family Residential
Real Estate Lending."
The Bank generally requires title insurance in connection with its
multi-family residential and nonresidential real estate loans. The Bank also
requires that fire and extended coverage casualty insurance (and, if
appropriate, flood insurance) be maintained in an amount at least equal to the
loan amount or the replacement cost of the improvements on the property securing
the loans, whichever is greater.
Loans secured by multi-family and nonresidential real estate generally
are larger than one-to-four family residential loans and involve greater
concentration of assets and a greater degree of risk. Payments on these loans
depend to a large degree on results of operations and management of the
properties and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general. Since commercial lending is
frequently secured by leased or operating commercial properties, repayment
frequently depends upon the results of operations of the tenant or operating
entity. Multi-family and residential and nonresidential loans also generally
involve more specialized and complicated underwriting decisions than one-to-four
family residential real estate lending. The Bank intends to continue to make
multi-family residential and commercial real estate loans. Any significant
expansion into commercial real estate lending activities will require additional
personnel with commercial lending experience.
Construction Lending. The Bank makes construction loans for the
construction of single-family dwellings, and for the construction of
multi-family and commercial buildings. The aggregate outstanding balance of such
loans on June 30, 1997 was approximately $5.7 million, representing
approximately 5.44% of the Bank's loan portfolio, before net items, and included
construction loans in process of approximately $3.3 million. Some of these loans
were made to persons who are constructing properties for the purpose of
occupying them; others were made to builders who were constructing properties
for sale. Loans made to builders are generally "pure construction" loans which
require the payment of interest during the construction period of generally one
year or less and the payment of the principal in full at the end of the
construction period. Loans made to individual property owners are both pure
construction loans and "construction-permanent" loans which generally provide
for the payment of interest only during a construction period, after which the
loans convert to a permanent loan at fixed or adjustable interest rates having
terms similar to one-to-four family residential loans.
Construction loans for one-to-four family real estate to be occupied by
the borrower generally have a maximum loan-to-value ratio of 85% of the
appraised value of the property. Other construction loans are made at loan to
value ratios of up to 80%. Title insurance is generally required for
construction loans. In addition, the Bank generally requires builders risk or
casualty insurance (and, if appropriate, flood insurance) on such loans.
Construction loans are generally considered to involve a higher degree
of risk than long-term financing secured by real estate which is already
occupied. A lender's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at the
completion of construction and the estimated cost (including interest) of
construction. If the estimate of construction costs proves to be inaccurate, the
lender may be required to advance funds beyond the amount originally committed
in order to permit completion of construction. If the estimate of anticipated
value proves to be inaccurate, the lender may have security which has value
insufficient to assure full repayment. In addition,
64
<PAGE>
repayment of loans made to builders to finance construction of properties is
often dependent upon the builder's ability to sell the property once
construction is completed.
Equity Line of Credit Lending. At June 30, 1997, the Bank had
approximately $6.0 million in equity line of credit loans, representing
approximately 5.75% of its loan portfolio, before net items. In addition, at
such date, the Bank had unfunded equity lines of credit totaling $3.0 million.
The Bank's equity lines of credit have adjustable interest rates tied to prime
interest rates plus a margin. The equity lines of credit require the payments of
principal and interest monthly, and all outstanding amounts must be paid in full
at the end of 15 years. Equity lines of credit are generally secured by
subordinate liens against residential real property. The Bank requires title
opinions from attorneys in connection with these loans. 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.
Equity loans are generally limited so that the amount of such loans, along with
any senior indebtedness, does not exceed 90% of the value of the real estate
security. Because equity loans involve revolving lines of credit which can be
drawn over a period of time, the Bank faces risks associated with changes in the
borrower's financial condition. Because equity loans have adjustable interest
rates with no rate caps (other than usury limitations), increased delinquencies
could occur if interest rate increases occur and borrowers are unable to satisfy
higher payment requirements. The risks faced associated with equity line of
credit loans are also greater due to the fact that most such loans have a junior
lien position. However, the Bank will continue to emphasize the origination of
equity lines of credit in an effort to increase its adjustable rate loan
portfolio and reduce its interest rate risk.
Consumer Loans. The Bank offers various consumer loans, including home
improvement loans, automobile loans and other secured and unsecured loans. At
June 30, 1997, the Bank's consumer loan portfolio totaled $3.4 million,
representing 3.25% of its total loan portfolio, before net items. Unsecured
loans constituted 0.49% of the total loan portfolio or $512,000. Automobile
loans generally have terms not exceeding 48 months, have fixed interest rates
and do not exceed 80% of the fair market value of the automobile securing the
loan. Home improvement loans are generally secured by a subordinate lien on the
property being improved, do not exceed 80% of the value of such property less
the amount secured by any prior liens, and have terms of no more than 15 years.
Consumer lending usually involves more risk than residential mortgage lending
because payment patterns are more significantly influenced by general economic
conditions and because any collateral for such loans frequently consists of
depreciating property.
Loans Secured by Deposits. The Bank also offers loans secured by deposit
accounts. At June 30, 1997, such loans totaled $591,000, representing 0.56% of
the Bank's loan portfolio, before net items. The interest rates on these loans
are variable and are generally 2% above the interest rate being paid on the
deposit account serving as collateral. The maximum amounts of these loans is
generally 90% of the related deposit account.
Loan Solicitation, Processing and Underwriting. Loan originations are
derived from a number of sources such as referrals from real estate brokers,
present depositors and borrowers, builders, attorneys, walk-in customers and in
some instances, other lenders.
During its loan approval process, the Bank assesses the applicant's
ability to make principal and interest payments on the loan and the value of the
property securing the loan. The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations. Under current practice, the responsible officer or loan officer
of the Bank analyzes the loan application and the property involved, and an
appraiser inspects and appraises the property. The Bank generally requires
independent fee appraisals only on loans in excess of $250,000 originated
primarily on the basis of real estate collateral. The Bank also obtains
information concerning the income, financial condition, employment and the
credit history of the applicant.
All real estate loans, except equity loans, must be approved by the
Bank's loan committee which includes three loan officers appointed annually by
the Board of Directors. Real estate loans in excess of $250,000 must be approved
by the Board of Directors. Equity and consumer loans, up to $250,000, may be
approved by George W. Brawley, Jr., President
65
<PAGE>
and Chief Executive Officer, or Dale W. Brawley, Executive Vice President and
Treasurer. All loans must be reported to the Board of Directors monthly.
Normally, upon approval of a residential mortgage loan application, the
Bank gives a commitment to the applicant that it will make the approved loan at
a stipulated rate any time within a 15-day period. The loan is typically funded
at such rate of interest and on other terms which are based on market conditions
existing as of the date of the commitment. As of June 30, 1997, the Bank had
$1.3 million in such unfunded mortgage loan commitments. In addition, on such
date the Bank had $3.3 million in undisbursed construction loans and $367,000 in
unfunded commitments for unused lines of credit.
Interest Rates, Terms, Points and Fees. Interest rates and fees charged
on the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds. These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.
In addition to earning interest on loans, the Bank receives fees in
connection with originating loans. Fees for loan modifications, late payments,
loan assumptions and other miscellaneous services in connection with loans are
also charged by the Bank.
Nonperforming Assets and Asset Classification. When a borrower fails to
make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent. In this event, the normal procedure
followed by the Bank is to make contact with the borrower at prescribed
intervals in an effort to bring the loan to a current status, and late charges
are assessed as allowed by law. In most cases, delinquencies are cured. If a
delinquency is not cured, the Bank normally, subject to any required prior
notice to the borrower, commences foreclosure proceedings. If the loan is not
reinstated within the time permitted for reinstatement, or the property is not
redeemed prior to sale, the property may be sold at a foreclosure sale. In
foreclosure sales, the Bank may acquire title to the property through
foreclosure, in which case the property so acquired is offered for sale and may
be financed by a loan involving terms more favorable to the borrower than those
normally offered. Any property acquired as a result of foreclosure or by deed in
lieu of foreclosure is classified as real estate owned until such time as it is
sold or otherwise disposed of by the Bank in an effort to recover its
investment. As of June 30, 1997, the Bank had no real estate acquired in
settlement of loans. Real estate acquired through, or in lieu of, loan
foreclosure is initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management, and the real estate is carried at the lower of cost or
fair value minus costs to sell. Costs relating to the development and
improvement of the property are capitalized, and costs relating to holding the
property are charged to expenses. See Note 3 to "Notes to Financial Statements."
Interest on loans is recorded as borrowers' monthly payments become due.
Accrual of interest on loans is suspended when interest becomes 90 days past due
or earlier when, in management's judgment, doubts exist as to the collectibility
of additional interest. Interest is reserved by establishing an allowance for
uncollected interest when a loan becomes delinquent 90 days or more or earlier
at the time a loan becomes nonperforming. Loans begin accruing interest again
when interest is brought current.
The following table sets forth information with respect to nonperforming
assets identified by the Bank, including nonaccrual loans and accruing loans
past due 90 days or more at the dates indicated.
66
<PAGE>
<TABLE>
<CAPTION>
At June 30, At December 31,
--------------------- ----------------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 793 $ 958 $ 1,104 $ 518 $ 560
Accruing loans past due 90 days or more 304 243 143 684 616
Foreclosed real estate -- -- -- -- --
-------- -------- -------- -------- --------
Total nonperforming assets $ 1,097 $ 1,201 $ 1,247 $ 1,202 $ 1,176
======== ======== ======== ======== ========
Nonperforming loans to total gross loans 1.05% 1.21% 1.23% 1.25% 1.37%
======== ======== ======== ======== ========
Nonperforming assets to total assets 0.96% 1.09% 1.11% 1.11% 1.18%
======== ======== ======== ======== ========
Total assets $114,162 $109,699 $112,552 $108,033 $ 99,966
Total gross loans $104,937 $ 99,042 $101,184 $ 96,359 $ 85,815
</TABLE>
During the six months ended June 30, 1997 and the fiscal year ended December 31,
1996, gross interest income of $44,000 and $54,000, respectively, would have
been recorded on nonperforming assets if such assets had been current in
accordance with their terms and had been outstanding throughout the period or
since origination, if held for part of such period. The amount of gross interest
income actually recorded on such nonperforming assets during such periods was
$6,000 and $20,000, respectively.
Applicable regulations require the Bank to "classify" its own assets on
a regular basis. In addition, in connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
and, if appropriate, classify them. Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.
An asset is considered "substandard" if not adequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. "Substandard" assets include those characterized by well-defined
weakness with possible risk of loss if the deficiency is not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable." Assets classified "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a loss reserve is not warranted.
As of June 30, 1997, the Bank had approximately $1.1 million of loans
internally classified as "substandard," no loans classified as "doubtful" and no
loans classified as "loss." Total classified loans as of December 31, 1996 and
1995 were approximately $1.3 million and approximately $1.2 million,
respectively.
The following table sets forth at June 30, 1997, the Bank's aggregate
carrying value of the assets classified as substandard, doubtful, loss or
"special mention":
67
<PAGE>
<TABLE>
<CAPTION>
Special Mention List Substandard Doubtful Loss
-------------------- ------------------- ------------------ -----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family 29 $ 1,258 15 $ 892 -- $ -- -- $ --
Residential multi-family -- -- -- -- -- -- -- --
Nonresidential -- -- -- -- -- -- -- --
Construction -- -- -- -- -- -- -- --
Equity line 3 23 1 11 -- -- -- --
------- ------- -------- -------- ------- ------ ------- -------
Total real estate loans 32 1,281 16 903 -- -- -- --
------- ------- -------- -------- ------- ------ ------- -------
Consumer loans:
Installment loan -- -- 1 23 -- -- -- --
Other consumer and commercial 5 20 7 171 -- -- -- --
------- ------- -------- -------- ------- ------ ------- -------
Total consumer loans 5 20 8 194 -- -- -- --
------- ------- -------- -------- ------- ------ ------- -------
Total 37 $ 1,301 24 $ 1,097 -- $ -- -- $ --
======= ======= ======== ======== ======= ====== ======= =======
</TABLE>
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. These allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities and the risks associated with particular
problem assets. When an insured institution classifies problem assets as "loss,"
it charges off, or writes down the balance of, the asset. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the FDIC and the Administrator
which can order the establishment of additional loss allowances.
The Bank also identifies assets which possess credit deficiencies or
potential weaknesses deserving close attention by management. These assets are
maintained on a "watch list" and do not yet warrant adverse classification. At
June 30, 1997, the Bank's watch list consisted of 13 loans with an aggregate
outstanding balance of approximately $1.3 million.
Loans charged off were $2,000, $13,000 and $13,000 for the six
months ended June 30, 1997, and for the years ended December 31, 1996 and 1995,
respectively. Nonperforming loans as a percentage of total assets was 0.96%,
1.11% and 1.11% at June 30, 1997, December 31, 1996 and 1995, respectively. At
June 30, 1997 and December 31, 1996, the Bank's allowance for loan losses was
$617,000 and $388,000 or 56.24% and 31.11% of nonperforming loans, respectively,
and 0.61% and 0.40% of total loans. While management feels that its allowance
for loan losses at December 31, 1996 is adequate, management's assessment of the
credit risk inherent in the portfolio, historical loan loss experience and
underwriting policies has resulted in an increase in the Bank's allowance for
loan losses at June 30, 1997. The Bank's lending region encompasses high growth
lake development areas which are profiled by significant leisure activities and
higher income levels. The Bank's recent lending has trended toward higher dollar
loans which could increase the level of loan losses in case of default and as a
result management feels that its risk inherent in its lending portfolio has
increased sufficiently to increase its loan loss reserves. The Bank increased
its loan loss reserves by $230,000 to $617,000 in the quarter ended June 30,
1997. Management continues to actively monitor the Bank's asset quality and to
charge-off loans against the allowance for loan losses when appropriate.
Management believes it uses the best information available to make
determinations with respect to the allowance for loan losses based on current
economic assumptions.
The Bank has historically had low charge-offs but has had higher
than national and regional peer group levels of nonperforming assets. The level
of reserves at June 30, 1997 remains below national and regional peer groups,
primarily due to the Bank's historically low level of loans charged off and
delinquencies; however, it is the intent of the Bank to adjust its allowance for
loan losses to reflect the future credit risk inherent in its lending portfolio
as lending trends and changes in economic environment may dictate.
68
<PAGE>
Allowance for Loan Losses. In originating loans, the Bank recognizes
that credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan as well as general economic conditions. It
is management's policy to maintain an allowance for loan losses based on, among
other things, the Bank's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the security for the loans.
Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations. The Bank increased its loan loss
reserves by $230,000 in the quarter ended June 30, 1997.
The following table describes the activity related to the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended Nine Months Ended
June 30, Year Ended December 31, December 31,
---------------- ----------------------- -----------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 388 $ 396 $ 396 $ 396 $ 385
-------- -------- -------- -------- --------
Charge-offs:
Residential 1-4 family -- 8 13 -- --
Other 2 -- -- 13 10
-------- -------- -------- -------- --------
Total loans charged off 2 8 13 13 10
-------- -------- -------- -------- --------
Recoveries:
Residential 1-4 family -- -- -- 1 --
Other 1 5 5 -- 3
-------- -------- -------- -------- --------
Net charge-offs 1 3 8 12 7
-------- -------- -------- -------- --------
Provision for loan losses 230 -- -- 12 18
-------- -------- -------- -------- --------
Balance, end of period $ 617 $ 393 $ 388 $ 396 $ 396
======== ======== ========= ======== ========
Ratio of nonperforming loans to total
loans(1) 1.05% 1.21% 1.23% 1.25% 1.37%
======== ======== ========= ======== ========
Ratio of net charge-offs during the
period to average loans outstanding
during the period 0.00% 0.00% 0.01% 0.01% 0.01%
======== ======== ========= ======== ========
Allowance for loan losses to
nonperforming loans 56.24% 32.72% 31.11% 32.95% 33.67%
======== ======== ========= ======== ========
</TABLE>
- --------------------------
(1) Nonperforming loans included nonaccrual loans and accruing loans past due
90 days or more.
69
<PAGE>
The following table sets forth the composition of the allowance for loan
losses by type of loan at the dates indicated. The allowance is allocated to
specific categories of loans for statistical purposes only, and may be applied
to loan losses incurred in any loan category.
70
<PAGE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------
At June 30, 1997 1996
----------------------------------- ---------------------------------
Percent of Amount Percent of Amount
Allowance of Loans Allowance of Loans
Amount of to Total to Gross Amount of to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
--------- --------- -------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 241 39.06% 82.07% $ 258 66.49% 84.34%
Residential multi-family -- --% 0.83% -- --% 0.75%
Nonresidential -- --% 2.64% -- --% 2.68%
Construction -- --% 5.44% -- --% 4.04%
Equity line 32 5.19% 5.75% 19 4.90% 4.89%
---------- ------ ------ ---------- ------ ------
Total real estate loans 273 44.25% 96.76% 277 71.39% 96.70%
---------- ------ ------ ---------- ------ ------
Consumer loans:
Installment loans 23 3.73% 2.33% 27 6.96% 2.37%
Other consumer and commercial 7 1.13% 0.91% 4 1.03% 0.93%
---------- ------ ------ ---------- ------ ------
Total consumer loans 30 4.86% 3.24% 31 7.99% 3.30%
---------- ------ ------ ---------- ------ ------
Unallocated 314 50.89% --% 80 20.62% --
---------- ------ ------ ---------- ------ ------
Total allowance for loan losses $ 617 100.00% 100.00% $ 388 100.00% 100.00%
========= ====== ====== ========= ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------
1995 1994
---------------------------------- ---------------------------------
Percent of Amount Percent of Amount
Allowance of Loans Allowance of Loans
Amount of to Total to Gross Amount of to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
--------- --------- -------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 356 89.90% 81.67% $ 335 84.60% 87.28%
Residential multi-family -- --% 0.78% -- --% 0.75%
Nonresidential -- --% 2.12% -- --% 2.32%
Construction -- --% 9.00% -- --% 5.89%
Equity line 13 3.28% 3.00% -- --% 0.24%
--------- ------ ------ --------- ------ ------
Total real estate loans 369 93.18% 96.57% 335 84.60% 96.48%
--------- ------ ------ --------- ------ ------
Consumer loans:
Installment loans 15 3.79% 2.49% 15 3.79% 2.79%
Other consumer and commercial 4 1.01% 0.94% -- --% 0.73%
--------- ------ ------ --------- ------ ------
Total consumer loans 19 4.80% 3.43% 15 3.79% 3.52%
--------- ------ ------ --------- ------ ------
Unallocated 8 2.02% --% 46 11.61% --
--------- ------ ------ --------- ------ ------
Total allowance for loan losses $ 396 100.00% 100.00% $ 396 100.00% 100.00%
========= ====== ====== ========= ====== ======
</TABLE>
71
<PAGE>
Investment Securities
Interest and dividend income from investment securities generally
provides the second largest source of income to the Bank after interest on
loans. In addition, the Bank receives interest income from deposits in other
financial institutions. At June 30, 1997, the Bank's investment portfolio
totaled approximately $10.0 million and consisted of U.S. government and agency
securities, municipal bonds, interest-earning deposits in other financial
institutions, certificates of deposit and stock of the FHLB of Atlanta.
The FASB has issued SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" which addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. These investments are to be classified
in three categories and accounted for as follows: (1) debt securities that the
entity has the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; (2) debt and equity securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with net
unrealized gains and losses included in earnings; and (3) debt and equity
securities not classified as either held-to-maturity or trading securities are
classified as securities available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity. At June 30, 1997, the Bank had no trading securities. The
Bank adopted SFAS No. 115 as of April 1, 1994. The adoption affected only the
held-to-maturity and available-for-sale classifications. Net unrealized
securities gains on the securities available-for-sale of $20,000, net of related
deferred tax assets of $14,000, are reported as a separate component of equity
in its financial statements at June 30, 1997. See Note 2 of "Notes to Financial
Statements."
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income from
investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be other
than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method. Prior to the
adoption of SFAS No. 115, the Bank stated its debt securities at amortized cost
and its marketable equity securities at the lower of cost or market. Accumulated
changes in net unrealized losses on marketable equity securities were included
in retained earnings.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As of
June 30, 1997, the Bank's investment in stock of the FHLB of Atlanta was
$930,000.
North Carolina regulations require the Bank to maintain a minimum amount
of liquid assets which may be invested in specified short-term securities. See
"SUPERVISION AND REGULATION -- Regulation of the Bank -- Liquidity." The Bank is
also permitted to make certain other securities investments.
The Bank's current investment policy provides that investment decisions
will be made by George W. Brawley, Jr., President and Chief Executive Officer,
or by Dale W. Brawley, Executive President and Treasurer, in his absence, and
reviewed monthly by the Board of Directors. The investment policy provides that
the objectives of the investment portfolio are to: (i) establish an acceptable
level of interest rate and credit risk for all investments; (ii) generate an
acceptable rate of return on investments; (iii) provide for adequate levels of
liquidity for the Bank; and (iv) provide guidance to management by the Board of
Directors on the investments desired for the Bank.
Permitted investments include FHLB daily time deposits, insured
certificates of deposit, government securities and government agency securities.
The investment policy also permits investment in the general obligations of
municipalities primarily located within North Carolina. Such general obligations
are considered less risky since they are repaid with taxes collected by the
municipality, not with revenues from a particular project. At June 30, 1997,
$1,473,000 or 14.68% of the
72
<PAGE>
Bank's investment portfolio consisted of municipal bonds issued by
municipalities located in North Carolina, all but $100,000 of which had an A or
above rating by Moodys Investment Service.
The following table sets forth certain information regarding the Bank's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------
At June 30, 1997 1996 1995 1994
---------------- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agencies $ 2,345 $ 2,859 $ 3,512 $ --
FHLB bonds 1,101 1,100 -- --
--------- --------- --------- ---------
Total securities available for sale 3,446 3,959 3,512 --
--------- --------- --------- ---------
Securities held to maturity:
U.S. government and agencies 500 1,600 4,201 6,207
FHLB bonds 1,225 625 1,025 2,850
Municipal bonds 1,473 1,473 1,474 2,018
Other 10 10 10 10
--------- --------- --------- ---------
Total securities held to maturity 3,208 3,708 6,710 11,085
--------- --------- --------- ---------
Total investment securities 6,654 7,667 10,222 11,085
Interest-bearing deposits 2,348 2,253 2,657 2,111
Federal Home Loan Bank stock 930 869 824 824
Certificates of deposit 100 100 200 200
--------- --------- --------- ---------
Total investments $ 10,032 $ 10,889 $ 13,903 $ 14,220
========= ========= ========= =========
</TABLE>
At June 30, 1997, the market value of the Bank's investment securities
available for sale and held to maturity were $3.4 million and $3.2 million,
respectively.
The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of the Bank's
investment portfolio as of June 30, 1997.
73
<PAGE>
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years After Ten Years Total
------------------- ------------------ ----------------- ------------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agencies $ 806 6.62% $ 1,539 7.24% $ -- --% $ -- --% $ 2,345 7.03%
FHLB bonds -- -- 1,101 5.88 -- -- -- -- 1,101 5.88
Securities held to maturity:
U.S. government and agencies 400 6.03 100 6.38 -- -- -- -- 500 6.10
FHLB bonds 700 6.61 525 6.19 -- -- -- -- 1,225 6.43
Municipal bonds 200 5.00 255 5.12 1,018 4.62 -- 1,473 4.76
Other -- -- -- -- -- -- 10 4.80 10 4.80
Other:
Interest-earning deposits 2,348 4.20 -- -- -- -- -- -- 2,348 4.20
Federal Home Loan Bank stock -- -- -- -- -- -- 930 7.02 930 7.02
Certificates of deposit 100 6.10 -- -- -- -- -- -- 100 6.10
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total $ 4,554 5.24% $ 3,520 6.48% $ 1,018 4.62% $ 940 7.00% $10,032 5.78%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
74
<PAGE>
Deposits and Borrowings
General. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, interest
income and advances from the FHLB of Atlanta and otherwise from its operations.
Loan repayments are a relatively stable source of funds while deposit inflows
and outflows may be significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a variety of accounts and rates. The Bank offers
passbook savings accounts, statement savings accounts, negotiable order of
withdrawal accounts, money market demand accounts, non-interest-bearing
accounts, and fixed interest rate certificates with varying maturities. At June
30, 1997, 75.20% of the Bank's deposits consisted of certificate accounts,
12.11% consisted of passbook savings accounts, 10.82% consisted of
interest-bearing transaction accounts and 1.87% consisted of noninterest-bearing
transaction accounts. Deposit flows are greatly influenced by economic
conditions, the general level of interest rates, competition, and other factors,
including the restructuring of the thrift industry. The Bank's savings deposits
traditionally have been obtained primarily from its primary market area. The
Bank utilizes traditional marketing methods to attract new customers and savings
deposits, including print, television and radio media advertising and direct
mailings. The Bank does not advertise for deposits outside of its local market
area or utilize the services of deposit brokers.
The following table sets forth information relating to the Bank's
deposit flows during the periods shown and total deposits at the end of such
periods.
<TABLE>
<CAPTION>
At or for the Six Months At or for the Year At or for the Nine Months
Ended June 30, Ended December 31, Ended December 31,
------------------------ ------------------ -------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total deposits at beginning of period $93,785 $92,103 $92,103 $85,105 $84,863
Net increase (decrease) before interest
credited (279) (1,464) (2,976) 2,582 (2,365)
Interest credited 2,366 2,310 4,658 4,416 2,607
Total deposits at end of period $95,872 $92,949 $93,785 $92,103 $85,105
======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain other information regarding the
Bank's savings deposits at the dates indicated.
75
<PAGE>
<TABLE>
<CAPTION>
At June 30, 1997
--------------------------------
Weighted
Average % of
Amount Rate Deposits
------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Demand accounts:
Passbook savings $11,564 3.04% 12.06%
NOW accounts 5,842 1.10% 6.09%
Money market deposit accounts 4,485 2.82% 4.68%
Non-interest bearing accounts 1,782 --% 1.86%
------- ------- -------
Total demand deposits 23,673 2.28% 24.69%
------- ------- -------
Certificates of deposit 71,794 5.72% 74.89%
------- ------- -------
Accrued interest 405 0.42%
------- -------
Total deposits $95,872 4.84% 100.00%
======= ======= =======
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
Weighted Weighted Weighted
Average % of Average % of Average % of
Amount Rate Deposits Amount Rate Deposits Amount Rate Deposits
------ -------- -------- ------ -------- -------- ------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Passbook savings $11,487 3.00% 12.24% $11,225 3.50% 12.19% $11,597 3.50% 13.63%
NOW accounts 5,644 1.08% 6.02% 7,359 2.40% 7.99% 5,736 2.25% 6.74%
Money market deposit accounts 4,180 2.91% 4.46% 4,826 3.00% 5.24% 6,243 3.00% 7.34%
Non-interest bearing accounts 1,319 --% 1.41% 943 --% 1.02% 870 --% 1.02%
------- ------- ------- ------- ------- ------- ------- ------- -------
Total demand deposits 22,630 2.33% 24.13% 24,353 2.94% 26.44% 24,446 2.96% 28.73%
------- ------- ------- ------- ------- ------- ------- ------- -------
Certificates of deposit 70,742 5.78% 75.43% 67,365 5.80% 73.14% 60,357 4.94% 70.92%
------- ------- ------- ------- ------- ------- ------- ------- -------
Accrued interest 413 0.44% 385 0.42% 302 0.35%
------- ------- ------- ------- ------- -------
Total deposits $93,785 4.92% 100.00% $92,103 5.03% 100.00% $85,105 4.35% 100.00%
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<PAGE>
The following table presents the maturities by 200 point basis rate paid
on all certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
Amount Due During the Year Ending June 30,
--------------------------------------------------------
1998 1999 2000 2001 2002 Total
---- ---- ---- ---- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit
2.00% to 3.99% $ 130 $ 140 $ -- $ -- $ -- $ 270
4.00% to 5.99% 41,122 6,221 991 1,722 911 50,967
6.00% to 7.99% 5,927 2,384 10,657 638 -- 19,606
8.00% to 9.99% 574 324 -- -- -- 898
10.00% to 11.99% 53 -- -- -- -- 53
--------- --------- --------- --------- --------- --------
Total $ 47,806 $ 9,069 $ 11,648 $ 2,360 $ 911 $ 71,794
========= ========= ========= ========= ========= ========
</TABLE>
As of June 30, 1997, the aggregate amount of time certificates of deposit
in amounts greater than or equal to $100,000 outstanding was approximately $13.1
million, representing 18.22% of all certificates of deposit on such date.
Management believes that most of these deposits are held by long-time, local
customers of the Bank. Some of these deposits were deposits of state and local
governments which are subject to rebidding from time to time and to
securitization requirements. The following table presents the maturity of these
time certificates of deposit at such date.
<TABLE>
<CAPTION>
At
June 30, 1997
-------------
(In Thousands)
<S> <C>
3 Months or less $ 2,202
Over 3 months through 6 months 2,442
Over 6 months through 12 months 3,891
Over 12 months 4,548
--------
Total $ 13,083
========
</TABLE>
Borrowings. The Bank's principal source of long-term borrowings are
advances from the FHLB of Atlanta. The FHLB system functions in a reserve credit
capacity for savings institutions. As a member, the Bank is required to own
capital stock in the FHLB of Atlanta and is authorized to apply for advances
from the FHLB of Atlanta on the security of that stock and a floating lien on
certain of its real estate secured loans and other assets. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness. At June 30, 1997, the Bank had $1.0 million in
borrowings outstanding from the FHLB of Atlanta.
Subsidiaries
As a North Carolina-chartered savings bank, the Bank is able to invest
up to 10% of its total assets in subsidiary service corporations. However, any
investment in service corporations which would cause the Bank to exceed an
investment of 3% of assets must receive prior approval of the FDIC. The Bank has
no subsidiaries.
77
<PAGE>
Properties
The following table sets forth the location of the Bank's headquarters
office in Mooresville, and branch offices in Cornelius and Huntersville, North
Carolina, as well as certain other information relating to these offices as of
June 30, 1997:
<TABLE>
<CAPTION>
Net Book
Value of
Property or Owned or
Improvements Leased
------------ --------
<S> <C> <C>
347 North Main Street
Mooresville, North Carolina 28115 $252,683 Owned
20209 Highway 73 West
Cornelius, North Carolina 28031 293,033 Owned
401 Gilead Road
Huntersville, North Carolina 28078 195,348 Owned
</TABLE>
In addition, the Bank owns a 1.24 acre lot located at Highway 150 West,
239 West Plaza Drive, Mooresville, North Carolina, purchased in 1988 for future
expansion purposes. The net book value of this property at June 30, 1997 was
$65,000. The total net book value of the Bank's furniture, fixtures and
equipment at June 30, 1997 was $102,133. The properties are considered by the
Bank's management to be in good condition.
Legal Proceedings
From time to time, the Bank is a party to legal proceedings which arise
in the ordinary course of its business. Most commonly, such proceedings are
commenced by the Bank to enforce obligations owed to it. From time to time,
claims are asserted against the Bank directly or as defenses and counterclaims
in actions filed by the Bank. At this time, the Bank is not a party to any legal
proceeding which is expected to have a material effect on its financial
condition or results of operations.
Competition
The Bank has operated in the Mooresville community for more than 60
years and is the only financial institution headquartered in Mooresville.
However, the Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions, brokerage
firms and commercial banks located in its primary market area, including large
financial institutions which have greater financial and marketing resources
available to them. Two national money center commercial banks are headquartered
in Charlotte, North Carolina, only 30 miles from the Bank's primary market area.
As of June 30, 1997, there were eight, nine and six depository institutions with
sixteen, nine and six offices in Mooresville, Cornelius and Huntersville, North
Carolina, respectively. Based upon 1996 comparative data, the Bank had 22% and
7.2% of the deposits in Mooresville and Iredell County, respectively. As a
result of this intense competition, the Bank's branch offices, excluding the
Mooresville office, have lower levels of deposits than the industry average.
The Bank has also faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. While the Bank's market share of deposits has decreased
in recent years, its deposit base has grown principally due to economic growth
in the Bank's market area. The ability of
78
<PAGE>
the Bank to attract and retain savings deposits depends on its ability to
generally provide a rate of return, liquidity and risk comparable to that
offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. The Bank
competes for loans primarily through the interest rates and loan fees it
charges, the efficiency and quality of services it provides borrowers, and its
more flexible underwriting standards. Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions. See "RISK FACTORS --Competition."
Employees
As of June 30, 1997, the Bank had 28 full-time employees and 3 part-time
employees. The Bank provides its employees with basic and major medical
insurance, dental insurance, disability insurance, life insurance, sick leave
and vacation benefits. It also provides its retirees with partial payment of
medical insurance dependent coverage. The Bank maintains a 401(k) retirement
plan pursuant to which the Bank may make discretionary matches up to six percent
of each employee's salary, as well as an excess savings plan that allows
employees to receive certain benefits which are not allowed to them under the
401(k) plan because of certain limits under the Internal Revenue Code. Effective
October 20, 1997, the Bank terminated its defined benefit pension plan.
Additional plan funding in the approximate amount of $210,000 has been made by
the Bank to facilitate the plan termination.
In connection with the Conversion, the Bank has adopted the ESOP, which
will provide benefits to employees of the Bank. See "MANAGEMENT OF THE BANK --
Employee Stock Ownership Plan." Also, the Boards of Directors of the Company and
the Bank are expected to adopt, and stockholders of the Company will be asked to
approve, a MRP and a Stock Option Plan at a meeting of stockholders after the
first anniversary following the Conversion. See "MANAGEMENT OF THE BANK --
Proposed Stock Option Plan" and "--Proposed Management Recognition Plan."
A limited number of employees participate in other benefit plans. See
"MANAGEMENT OF THE BANK -- Deferred Compensation, Supplemental Compensation and
Salary Continuation Agreements."
Employees are not represented by any union or collective bargaining
group, and the Bank considers its employee relations to be good.
TAXATION
Federal Income Taxation
Savings institutions such as the Bank are subject to the taxing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for
corporations, as modified by certain provisions specifically applicable for
financial or thrift institutions. Income is reported using the accrual method of
accounting. The maximum corporate federal income tax rate is 35%.
For fiscal years beginning prior to December 31, 1995, thrift
institutions which qualified under certain definitional tests and other
conditions of the Code were permitted certain favorable provisions regarding
their deductions from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on qualifying real
property loans (generally loans secured by interests in real property improved
or to be improved) under (i) a method based on a percentage of the institution's
taxable income, as adjusted (the "percentage of taxable income method") or (ii)
a method based on actual loss experience (the "experience method"). The reserve
for nonqualifying loans was computed using the experience method.
79
<PAGE>
The addition to the bad debt reserve under the percentage of taxable
income method was limited to 8% of taxable income. This method could not raise
the reserve to exceed 6% of qualifying real property loans at the end of the
year. Moreover, the current year addition for qualifying real property loans,
when added to the experience method deduction for nonqualifying loans, could not
exceed the amount by which 12% of total deposits or withdrawable accounts
exceeded the sum of surplus, undivided profits and reserves at the beginning of
the year. The experience method was the amount necessary to increase the balance
of the reserve at the close of the year to the greater of (i) the amount which
bore the same ratio to loans outstanding at the close of the year as the total
net bad debts sustained during the current and five preceding years bore to the
sum of the loans outstanding at the close of such six years or (ii) the balance
in the reserve account at the close of the last taxable year beginning before
1988 (assuming that the loans outstanding have not declined since such date).
In order to qualify for the percentage of taxable income method, an
institution had to have at least 60% of its assets as "qualifying assets," which
generally included, cash, obligations of the United States government or an
agency or instrumentality thereof or of a state or political subdivision,
residential real estate-related loans, or loans secured by savings accounts and
property used in the conduct of its business. In addition, it had to meet
certain other supervisory tests and operate principally for the purpose of
acquiring savings and investing in loans.
Institutions which became ineligible to use the percentage of taxable
income method had to change to either the reserve method or the specific
charge-off method that applied to banks. Large thrift institutions, those
generally exceeding $500 million in assets, had to convert to the specific
charge-off method. In computing its bad debt reserve for federal income taxes,
the Bank used the reserve method in fiscal years 1994, 1995, and 1996.
Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt reserve") must be included in taxable income upon
certain distributions to shareholders. Distributions in redemption or
liquidation of stock or distributions with respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated as a distribution from the excess bad debt reserve. When such a
distribution takes place, the thrift is required to reduce its reserve by such
amount and simultaneously recognize the amount as an item of taxable income
increased by the amount of income tax imposed on the inclusion. Dividends not in
excess of earnings and profits accumulated since December 31, 1951 will not
require inclusion of part or all of the bad debt reserve in taxable income. The
Bank has accumulated earnings and profits since December 31, 1951 and has an
excess bad debt reserve. Distributions in excess of current and accumulated
earnings and profits will increase taxable income. Net retained earnings at June
30, 1997 includes approximately $3.8 million for which no provision for federal
income tax has been made.
Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period. At June 30, 1997, the Bank's
post-1987 excess reserves amounted to approximately $67,000. A special provision
suspends recapture of post-1987 excess reserves for up to two years if, during
those years, the institution satisfies a "residential loan requirement." This
requirement will be met if the principal amount of the institution's residential
loans exceeds a base year amount, which is determined by reference to the
average of the institution's residential loans during the six taxable years
ending before January 1, 1996. The Bank met the residential loan requirement for
1996 and was permitted to defer recapture of the excess reserves. However,
notwithstanding this special provision, recapture must begin no later than the
first taxable year beginning after December 31, 1997. See "RISK FACTORS --
Increased Tax Liability Resulting From Recapture of Bad Debt Reserves."
The Bank may also be subject to the corporate alternative minimum tax
("AMT"). This tax is applicable only to the extent it exceeds the regular
corporate income tax. The AMT is imposed at the rate of 20% of the corporation's
alternative minimum taxable income ("AMTI") subject to applicable statutory
exemptions. AMTI is calculated by adding certain tax preference items and making
certain adjustments to the corporation's regular taxable income. Preference
items and adjustments generally applicable to financial institutions include,
but are not limited to, the
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following: (i) the excess of the bad debt deduction over the amount that would
have been allowable on the basis of actual experience; (ii) interest on certain
tax-exempt bonds issued after August 7, 1986; and (iii) 75% of the excess, if
any, of a corporation's adjusted earnings and profits over its AMTI (as
otherwise determined with certain adjustments). Net operating loss carryovers,
subject to certain adjustments, may be utilized to offset up to 90% of the AMTI.
Credit for AMT paid may be available in future years to reduce future regular
federal income tax liability to the extent it exceeds the year's AMT. The Bank
has not been subject to the AMT in recent years.
The Bank's federal income tax returns have not been audited in the last
ten tax years.
State and Local Taxation
Under North Carolina law, the corporate income tax is 7.75% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition, for tax years beginning in 1991, 1992, 1993 and 1994,
corporate taxpayers were required to pay a surtax equal to 4%, 3%, 2% and 1%,
respectively, of the state income tax otherwise payable by it. An annual state
franchise tax is imposed at a rate of 0.15% applied to the greatest of the
institutions (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) appraised valuation of property
in North Carolina.
The North Carolina corporate tax rate will drop to 7.5% in 1997, 7.25%
in 1998, 7% in 1999, and 6.9% thereafter.
SUPERVISION AND REGULATION
Regulation of the Company
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto.
Similarly, Federal Reserve approval (or, in certain cases,
non-disapproval) must be obtained prior to any person acquiring control of the
Company. Control is conclusively presumed to exist if, among other things, a
person acquires more than 25% of any class of voting stock of the holding
company or controls in any manner the election of a majority of the directors of
the holding company. Control is presumed to exist if a person acquires more than
10% of any class
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of voting stock and the stock is registered under Section 12 of the Exchange Act
or the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default or in default. For example,
to avoid receivership of an insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all capital standards
as of the time the institution fails to comply with such capital restoration
plan. Under a policy of the Federal Reserve with respect to bank holding company
operations, a bank holding company is required to serve as a source of financial
strength to its subsidiary depository institutions and to commit resources to
support such institutions in circumstances where it might not do so absent such
policy. The Federal Reserve under the BHCA also has the authority to require a
bank holding company to terminate any activity or to relinquish control of a
nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period.
As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve
has adopted capital adequacy guidelines for bank holding companies and banks
that are members of the Federal Reserve system and have consolidated assets of
$150 million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the total
capital is required to be "Tier I capital," principally consisting of common
stockholders' equity, noncumulative perpetual preferred stock, and a limited
amount of cumulative perpetual preferred stock, less certain goodwill items. The
remainder ("Tier II capital") may consist of a limited amount of subordinated
debt, certain hybrid capital instruments and other debt securities, perpetual
preferred stock, and a limited amount of the general loan loss allowance. In
addition to the risk-based capital guidelines, the Federal Reserve has adopted a
minimum Tier I capital (leverage) ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company which has the highest
regulatory examination rating and is not contemplating significant growth or
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expansion. All other bank holding companies are expected to maintain a Tier I
capital (leverage) ratio of at least 1% to 2% above the stated minimum.
Dividend and Repurchase Limitations. In connection with the Conversion,
the Bank has agreed with the FDIC that, during the first three years after
consummation of the Conversion, neither the Company nor the Bank will pay any
taxable dividend or make any other taxable distribution to its stockholders in
excess of their current or retained earnings. Also, the Company and the Bank
have agreed to notify the FDIC before making a return of capital during the
first three years following the Conversion. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to the requirements and limitations of North Carolina corporate law,
except as set forth in this paragraph, neither the Administrator nor the FDIC
have promulgated any regulations specifically limiting the right of the Company
to pay dividends and repurchase shares. However, the ability of the Company to
pay dividends or repurchase shares may be dependent upon the Company's receipt
of dividends from the Bank. The Bank's ability to pay dividends is limited. See
" -- Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Company's application to acquire control of the Bank, the
Company was required to execute a Capital Maintenance Agreement whereby it has
agreed to maintain the Bank's capital in an amount sufficient to enable the Bank
to satisfy all regulatory capital requirements.
Federal Securities Law. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Exchange Act and will not deregister
the Common Stock for a period of three years following the completion of the
Conversion. As a result of such registration, the proxy and tender offer rules,
insider trading reporting requirements, annual and periodic reporting and other
requirements of the Exchange Act are applicable to the Company.
The registration under the Securities Act of the Offerings of the Common
Stock does not cover the resale of such shares. Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company are subject to the
resale provisions of Rule 144 under the Securities Act. So long as the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) will be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
Regulation of the Bank
General. Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services. In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding
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companies. The operations of regulated depository institutions, including the
Bank, will continue to be subject to changes in applicable statutes and
regulations from time to time.
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-
chartered savings banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated in response to violations of
laws and regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the
restrictions contained in Section 22(h) of the Federal Reserve Act and its
implementing regulations with respect to loans to directors, executive officers
and principal stockholders. Under Section 22(h), loans to directors, executive
officers and stockholders who own more than 10% of a savings bank, and certain
affiliated entities of any of the foregoing, may not exceed, together with all
other outstanding loans to such person and affiliated entities, the savings
bank's loans-to-one borrower limit as established by federal law and all loans
to such persons may not exceed the institution's unimpaired capital and
unimpaired surplus. Section 22(h)
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also prohibits loans above amounts prescribed by the appropriate federal banking
agency to directors, executive officers and stockholders who own more than 10%
of a savings bank, and their respective affiliates, unless such loan is approved
in advance by a majority of the disinterested directors of the board of
directors of the savings bank and the Company. Any "interested" director may not
participate in the voting. The Federal Reserve has prescribed the loan amount
(which includes all other outstanding loans to such person), as to which such
prior board of director approval is required, as being the greater of $25,000 or
5% of unimpaired capital and unimpaired surplus (up to $500,000). Further,
pursuant to Section 22(h) the Federal Reserve requires that loans to directors,
executive officers, and principal stockholders be made on terms substantially
the same as offered in comparable transactions to other persons and not involve
more than the normal risk of repayment or present other unfavorable features.
Section 22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
Deposit Insurance. The Bank's deposit accounts are insured by the FDIC
under the SAIF to the maximum extent permitted by law. The Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
discussed below. The matrix so created results in nine assessment risk
classifications, with rates that, until September 30, 1996, ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk to the SAIF unless effective corrective action is taken.
Pursuant to the DIF Act, which was enacted on September 30, 1996, the
FDIC imposed a special assessment on each depository institution with
SAIF-assessable deposits which resulted in the SAIF achieving its designated
reserve ratio. In connection therewith, the FDIC reduced the assessment schedule
for SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with
most institutions paying 0%. This assessment schedule is the same as that for
the BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980s to help fund the
thrift industry cleanup. BIF-assessable deposits will be charged an assessment
to help pay interest on the FICO bonds at a rate of approximately .013% until
the earlier of December 31, 1999 or the date upon which the last savings
association ceases to exist, after which time the assessment will be the same
for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
Community Reinvestment Act. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. A savings bank is evaluated and rated under three categories: a
lending test, an investment test and a service test. For each of these three
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tests, the savings bank is given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial non-
compliance." A set of criteria for each rating is included in the regulation. If
an institution disagrees with a particular rating, the institution has the
burden of rebutting the presumption by clearly establishing that the quantative
measures do not accurately present its actual performance, or that demographics,
competitive conditions or economic or legal limitations peculiar to the service
area should be considered. The ratings received under the three tests are used
to determine the overall composite CRA rating or "outstanding," "satisfactory,"
"needs to improve" or "substantial non-compliance."
During the Bank's last compliance examination, which was performed by
the FDIC under the old CRA regulations in July 1996, the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by the Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and could result in the denial of such applications.
Capital Requirements Applicable To The Bank. The FDIC requires the Bank
to have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder ("Tier
II capital") may consist of a limited amount of subordinated debt, certain
hybrid capital instruments, other debt securities, certain types of preferred
stock and a limited amount of loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At June 30, 1997, the
Bank had a leverage ratio of 12.85%.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At June 30, 1997, 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 June 30, 1997, see "HISTORICAL AND PRO
FORMA CAPITAL COMPLIANCE."
Each federal banking agency was required by law to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multi-family mortgages. On August 2, 1995, the federal banking agencies
issued a joint notice of adoption of final risk-based capital rules to take
account of interest rate risk. The final regulation required an assessment of
the need for additional capital on a case-by-case basis, considering both the
level of measured exposure and qualitative risk factors. The final rule also
stated an intent to, in the future, establish an explicit minimum capital charge
for interest rate risk based on the level of a bank's measured interest rate
risk exposure. The final regulation has not had a material impact on the Bank's
capital requirements.
Effective June 26, 1996, the federal banking agencies issued a joint
policy statement announcing the agencies' election not to adopt a standardized
measure and explicit capital charge for interest rate risk at that time. Rather,
the policy statement (i) identifies the main elements of sound interest rate
risk management, (ii) describes prudent principles
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and practices for each of those elements, and (iii) describes the critical
factors affecting the agencies' evaluation of a bank's interest rate risk when
making a determination of capital adequacy. The joint policy statement is not
expected to have a material impact on the Bank's management of interest rate
risk.
In December 1994, the FDIC adopted a final rule changing its risk-based
capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives - interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterparty, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. The Bank does not anticipate
that this rule will have a material effect upon its financial condition or
results of operations.
Loans-To-One-Borrower. The Bank is subject to the Administrator's
loans-to-one-borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize savings
banks to make loans-to-one-borrower, for any purpose, in an amount not to exceed
$500,000. A savings bank also is authorized to make loans-to-one-borrower to
develop domestic residential housing units, not to exceed the lesser of $30
million or 30% of the savings bank's net worth, provided that the purchase price
of each single-family dwelling in the development does not exceed $500,000 and
the aggregate amount of loans made under this authority does not exceed 150% of
net worth. These limits also authorize a savings bank to make
loans-to-one-borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
As of June 30, 1997, the largest aggregate amount of loans which the
Bank had to any one borrower was $639,046. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On June 30, 1997, the Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock of $930,000.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings
banks, not otherwise exempt from the regulations, to maintain reserves against
their transaction accounts (primarily negotiable order of withdrawal accounts)
and certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of June 30, 1997, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of control,
control of an insured institution is conclusively deemed to have been acquired
by, among other things, the acquisition of more than 25% of any class of voting
stock. In addition, control is presumed to have been acquired, subject to
rebuttal, upon the
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acquisition of more than 10% of any class of voting stock. Such acquisitions of
control may be disapproved if it is determined, among other things, that (i) the
acquisition would substantially lessen competition; (ii) the financial condition
of the acquiring person might jeopardize the financial stability of the savings
bank or prejudice the interests of its depositors; or (iii) the competency,
experience or integrity of the acquiring person or the proposed management
personnel indicates that it would not be in the interest of the depositors or
the public to permit the acquisitions of control by such person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Bank. If any person were to so acquire the beneficial ownership of more than 10%
of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is not
required for (i) any offer with a view toward public resale made exclusively to
the Bank or its underwriters or the selling group acting on its behalf or (ii)
any offer to acquire or acquisition of beneficial ownership of more than 10% of
the common stock of the Bank by a corporation whose ownership is or will be
substantially the same as the ownership of the Bank, provided that the offer or
acquisition is made more than one year following the consummation of the
Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Company and
the Bank or the Boards of Directors of the Company and the Bank support the
acquisition and (iii) the acquiror is of good character and integrity and
possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to the Company and the Bank and the public interests will not
be adversely affected.
Liquidity. The Bank is subject to the Administrator's requirement that
the ratio of liquid assets to total assets equal at least 10%. The computation
of liquidity under North Carolina regulation allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily marketable value, including investments with
maturities in excess of five years. On June 30, 1997, the Bank's liquidity
ratio, calculated in accordance with North Carolina regulations, was
approximately 8.35%. Prior to and following that date, the Bank's liquidity
ratio exceeded 10% of total assets. At June 30, 1997, the Bank had $12.0 million
in available credit with the FHLB of Atlanta and stable, core-like time deposits
of $100,000 or more of approximately $13.0 million.
Additional Limitations on Activities. FDIC law and regulations generally
provide that the Bank may not engage as principal in any type of activity, or in
any activity in an amount, not permitted for national banks, or directly acquire
or retain any equity investment of a type or in an amount not permitted for
national banks. The FDIC has authority to grant exceptions from these
prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
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Prompt Corrective Regulatory Action. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may deny
interstate branching if it specifically elects to do so by June 1, 1997. States
may choose to allow interstate branching prior to June 1, 1997 by opting-in to a
group of states that permits these transactions. These states generally allow
interstate branching via a merger of an out-of-state bank with an in-state bank,
or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
It is anticipated that the Interstate Banking Act will increase
competition within the markets in which the Bank now operates, although the
extent to which such competition will increase in such markets or the timing of
such increase cannot be predicted.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, no stock repurchases may be made by
the savings bank during the first year following a conversion from mutual to
stock, except that stock repurchases of no greater than 5% of the bank's
outstanding shares may be
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repurchased during the first year where compelling and valid business reasons
are established to the satisfaction of the FDIC.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash dividend
on or repurchase any of its capital stock if the effect thereof would be to
cause its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.
In connection with the Conversion, the Bank has agreed with the FDIC
that, during the first three years after the Conversion, neither the Company nor
the Bank will pay any taxable dividend or make any other taxable distribution in
excess of their current and retained earnings. The Bank has also agreed to
notify the FDIC before making a return of capital during the first three years
following the Conversion.
Restrictions on Benefit Plans. FDIC regulations provide that for a
period of one year from the date of the Conversion, the Bank may not implement
or adopt a stock option plan or restricted stock plan, other than a
tax-qualified plan or ESOP, unless: (1) the plans are fully disclosed in the
Conversion proxy soliciting and stock offering material, (2) all such plans are
approved by a majority of the Company's stockholders prior to implementation and
no earlier than six months following the Conversion, (3) for stock option plans,
the exercise price must be at least equal to the market price of the stock at
the time of grant, and (4) for restricted stock plans, no stock issued in
connection with the Conversion may be used to fund the plan.
The FDIC regulations provide that, in reviewing plans submitted to the
stockholders within one year after the consummation of the Conversion, the FDIC
will presume that excessive compensation will result if stock based benefit
plans fail to satisfy percentage limitations on management stock-based benefit
plans set forth in the regulations of the Office of Thrift Supervision ("OTS").
Those regulations provide that (1) for stock option plans, the total number of
shares for which options may be granted may not exceed 10% of the shares issued
in the Conversion, (2) for restricted stock plans, the shares issued may not
exceed 3% of the shares issued in the Conversion (4% for institutions with
tangible capital of 10% or greater after the Conversion), (3) the aggregate
amount of stock purchased by the ESOP shall not exceed 10% (8% for
well-capitalized institutions utilizing a 4% restricted stock plan), (4) no
individual employee may receive more than 25% of the available awards under any
plan, and (5) directors who are not employees may not receive more than 5%
individually or 25% in the aggregate of the awards under any plan. The awards
and grants to be made under the MRP and Stock Option Plan will conform to these
requirements if such plans are submitted for stockholder approval within one
year after the Conversion is consummated.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that the Bank maintain federal deposit insurance as a condition of
doing business.
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The Administrator conducts regular examinations of North
Carolina-chartered savings banks. The purpose of such examinations is to assure
that institutions are being operated in compliance with applicable North
Carolina law and regulations and in a safe and sound manner. These examinations
are usually conducted on a joint basis with the FDIC. In addition, the
Administrator is required to conduct an examination of any institution when he
has good reason to believe that the standing and responsibility of the
institution is of doubtful character or when he otherwise deems it prudent. The
Administrator is empowered to order the revocation of the license of an
institution if he finds that it has violated or is in violation of any North
Carolina law or regulation and that revocation is necessary in order to preserve
the assets of the institution and protect the interests of its depositors. The
Administrator has the power to issue cease and desist orders if any person or
institution is engaging in, or has engaged in, any unsafe or unsound practice or
unfair and discriminatory practice in the conduct of its business or in
violation of any other law, rule or regulation.
A North Carolina-chartered savings bank must maintain net worth,
computed in accordance with the Administrator's requirements, of 5% of total
assets and liquidity of 10% of total assets, as discussed above. Additionally, a
North Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North
Carolina-chartered savings bank cannot invest more than 15% of its total assets
in business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject to approval of the Administrator. The approval
is conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company currently consists of seven
directors: Willis L. Barnette, Donald R. Belk, Dale W. Brawley, George W.
Brawley, Jr., Jack G. Lawler, Calvin E. Tyner, and Claude U. Voils, Jr. Each of
these persons, except for Dale W. Brawley, is also a director of the Bank, and
biographical information with respect to each is set forth under "MANAGEMENT OF
THE BANK -- Directors" and " -- Executive Officers." Each director is elected
for a one-year term. However, at such time, if any, as the number of directors
is at least nine, the Articles of Incorporation and Bylaws of the Company
provide for staggered elections so that approximately one-third of the directors
will each be initially elected to one, two and three-year terms, respectively,
and thereafter, all directors will be elected to terms of three years each.
The executive officers of the Company, each of whom is also currently an
executive officer of the Bank, and each of whom serves at the discretion of the
Board of Directors of the Company, are as follows:
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<PAGE>
<TABLE>
<CAPTION>
Age at Position Held
Name June 30, 1997 With the Company
---- ------------- ----------------
<S> <C> <C>
George W. Brawley, Jr. 64 President and Chief Executive
Officer
Dale W. Brawley 40 Executive Vice President and
Treasurer
Billy R. Williams 37 Secretary and Controller
</TABLE>
Biographical information with respect to each of these officers is set
forth below under "MANAGEMENT OF THE BANK -- Executive Officers." There are no
other employees of the Company. No officer, director or employee of the Company
has received remuneration from the Company to date, and it is currently expected
that no compensation will be paid by the Company after the Conversion.
Information concerning the principal occupations and employment of, and
compensation paid by the Bank to, the directors and executive officers of the
Company is set forth under "MANAGEMENT OF THE BANK." See "MANAGEMENT OF THE BANK
- -- Employment Agreements" for a description of employment agreements expected to
be entered into with the executive officers of the Company and the Bank.
MANAGEMENT OF THE BANK
Directors
The direction and control of the Bank, as a mutual North
Carolina-chartered savings bank, has been vested in its six-member Board of
Directors elected by the depositor and borrower members of the Bank. Upon
conversion of the Bank to capital stock form, each director of the Bank
immediately prior to the Conversion will continue to serve as a director of the
Bank as a stock institution. All directors currently serve for one-year terms.
The Bank's proposed Bylaws, which would become effective after the Conversion,
provide for staggered elections of its directors, if and when the number of
directors shall equal at least nine, so that approximately one-third of the
directors would be elected each year for three-year terms. Upon consummation of
the Conversion, the Company will own all of the issued and outstanding shares of
capital stock of the Bank, and the Company will elect the directors of the Bank.
The Company now plans to nominate and re-elect all members of the Bank's
existing board of directors when their existing terms expire. The following
table sets forth certain information with respect to the persons who currently
serve as members of the Board of Directors of the Bank.
<TABLE>
<CAPTION>
Age on
June 30, Principal Occupation Director
Name 1997 During Last Five Years Since
- ---- -------- ---------------------- --------
<S> <C> <C> <C>
Willis L. Barnette 68 President, Custom Products, Inc. 1996
George W. Brawley, Jr. 64 President and Chief Executive Officer of the Bank 1968
Donald R. Belk 65 President, E. F. Belk & Son Electrical Contractors 1974
Jack G. Lawler 69 Retired President, Taltronics, division of Tally 1992
Industries, a precision instruments manufacturer
Calvin E. Tyner 73 Retired veterinarian 1963
Claude U. Voils, Jr. 68 Retired chemist, National Starch 1970
</TABLE>
Mr. G. Brawley is the father of Dale W. Brawley, Executive Vice President and
Treasurer, and the brother-in-law of Mr. Belk.
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<PAGE>
Board Meetings and Committees
The Bank's Board of Directors has regular monthly meetings, and held
twelve regular and special meetings in the fiscal year ended December 31, 1996.
The Board has also established three committees to whom certain responsibilities
have been delegated - an Executive Committee, an Audit Committee, and a
Buildings and Grounds Committee. No director attended fewer than 75% of the
total number of Board meetings and meetings of Board committees on which he
served during the year ended December 31, 1996.
The Executive Committee is composed of directors Calvin E. Tyner, Claude
U. Voils, Jr., George W. Brawley, Jr. and Donald R. Belk. The Executive
Committee makes recommendations to the full Board and acts on policies adopted
by the full Board in the absence of a meeting of the entire Board. The Executive
Committee met one time during the year ended December 31, 1996.
The Audit Committee is composed of all members of the Board of
Directors, except George W. Brawley, Jr. This committee is responsible for
meeting with and retaining independent auditors, overseeing the adequacy of
internal controls, insuring compliance with the Bank's policies and procedures
and with generally accepted accounting principles. The Audit Committee meets on
an as needed basis, and during the fiscal year ended December 31, 1996, met four
times.
Directors' Fees
For their service on the Bank's Board of Directors, all members of the
Bank's Board of Directors receive $1,200 of benefits per meeting attended. Board
fees are subject to adjustment annually. No fees are paid for service on Board
committees.
Deferred Compensation Agreements with Directors
Messrs. Belk, G. Brawley, Lawler, Tyner and Voils have entered one or
more unfunded deferred compensation agreements under seven substantially similar
but separate plans with the Bank under which the participating directors have
waived payment of their Board of Directors fees in specified amounts for a
period of five or six years, depending upon the plan. Upon attaining 55, 65 or
70 years of age, depending upon the plan, the directors will begin receiving a
specified payment in equal monthly installments over a period of 120 months.
Such payments shall be made to the designated beneficiary of the director should
the director die prior to attaining the age specified in the agreements. The
agreements also provide for payment of benefits in the event the director
otherwise terminates his directorship, subject to a five-year vesting schedule.
Some agreements provide for the forfeiture of benefits in some circumstances.
The Bank has purchased life insurance policies on the lives of the directors to
assist the Bank in meeting its obligations under the agreements. Messrs. Belk,
Tyner and Voils have began receiving monthly payments under some of their
deferred compensation agreements.
Director Retirement Plan Agreements
In 1993, the Bank's Board of Directors approved the entering of
Retirement Plan Agreements with Messrs. Belk, G. Brawley, Tyner and Voils. The
agreements provide for a monthly payment of $1,000 upon retirement following a
director's attainment of age 65 (but no sooner than five years from the date of
the Retirement Plan Agreement), death or disability. The agreements also provide
for payment of benefits in the event the director otherwise terminates his
directorship, subject to a vesting schedule. Payments under the agreements are
to be made in equal monthly installments over a period of 120 months. The Bank
has purchased life insurance policies to assist the Bank in meeting its
obligations under the agreements.
Existing members of the Board of Directors may also receive additional
benefits following the Conversion. See "-- Stock Based Benefits."
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<PAGE>
Executive Officers
The Bank has three executive officers. The following table sets forth
certain information with respect to such executive officers:
<TABLE>
<CAPTION>
Age on Positions and Occupations Employed By
Name June 30, 1997 During Last Five Years the Bank Since
- ---- ------------- ------------------------- --------------
<S> <C> <C> <C>
George W. Brawley, Jr. 64 President and Chief Executive Officer 1957
Dale W. Brawley 40 Executive Vice President and Treasurer 1980
Billy R. Williams 37 Secretary and Controller 1986
</TABLE>
George W. Brawley, Jr., President and Chief Executive Officer of the
Bank, holds a 50% ownership interest in Mooresville Insurance Agency, an
insurance agency which rents approximately 300 square feet of office space from,
and places insurance coverage for, the Bank. Mr. Brawley's wife holds a 40%
interest in the insurance agency and Mr. Brawley's son, Dale W. Brawley,
Executive Vice President and Treasurer of the Bank, holds a 10% ownership
interest. Mr. Brawley is not active in the management of the insurance agency.
The Mooresville Insurance Agency, Inc. has rented space from the Bank since 1964
and has had a formal lease agreement since 1993. The lease was an arms-length
agreement entered into by the Bank's Board, with Mr. Brawley not participating
in the discussion. The Board felt that the rent approximates fair value since
(1) the space would not otherwise be rentable, (2) the Agency is an enhancement
for the Bank's customers, should they wish to avail themselves of the services,
and (3) Mooresville is a small community, not commanding high rent rates or high
space demand. The insurance agency rents its office space from the Bank at the
market rate for similar space in Mooresville and the Bank's customers are not
referred to the insurance agency. The insurance agency paid the Bank $1,040 in
rent and the insurance agency earned approximately $4,834 in insurance
commissions on the Bank's insurance coverage during the year ended December 31,
1996. The current lease between the insurance agency and the Bank terminates on
November 1, 1998.
Executive Compensation
The following table sets forth for the fiscal year ended December 31,
1996 certain information as to the cash compensation earned by (i) the chief
executive officer of the Bank and (ii) all other executive officers of the Bank
whose cash compensation exceeded $100,000 (there were none), for services in all
capacities.
<TABLE>
<CAPTION>
Other Annual
Name and Compensation All Other
Principal Position Salary Bonus ($)/1/ Compensation
------------------ ------ ----- ------------- ------------
<S> <C> <C> <C> <C>
George W. Brawley, Jr. $128,650/2/ $9,600 --- $271,206/3/
President, Chief Executive Officer and
Director
- --------------------
</TABLE>
/1/ Under the "Other Annual Compensation" category, perquisites for the fiscal
year ended December 31, 1996 did not exceed the lesser of $50,000, or 10%
of salary and bonus as reported for Mr. Brawley.
/2/ Includes $8,650 in real estate appraisal fees paid to Mr. Brawley in the
fiscal year ended December 31, 1996.
/3/ Includes (a) $131,138 accrued under various deferred compensation, salary
continuation, directors' retirement and supplemental income agreements
established for the benefit of Mr. Brawley; (b) $11,640 contributed to the
Bank's 401(k) and the non-qualified excess benefit plan for the benefit of
Mr. Brawley; and (c) $128,428 contributed to the Bank's defined benefit
pension plan for the benefit of Mr. Brawley. The defined benefit plan was
terminated effective October 20, 1997.
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<PAGE>
The Board of Directors of the Bank does not have a compensation
committee. The Bank's full Board of Directors determines the compensation of the
executive officers. The salaries of each of the executive officers is determined
based upon the executive officer's contributions to the Bank's overall
profitability, maintenance of regulatory compliance standards, professional
leadership, and management effectiveness in meeting the needs of day to day
operations. The Board of Directors also compares the compensation of the Bank's
executive officers with compensation paid to executives of comparable financial
institutions in North Carolina and executives of other businesses in the Bank's
market area. Mr. Brawley participates in the deliberations of the Board of
Directors regarding compensation of executive officers other than himself. He
does not participate in the discussion or decisions regarding his own
compensation.
Bonus Compensation
Employees receive annual discretionary holiday bonuses, which during
fiscal year 1996 totalled $50,000 in the aggregate for all employees. The Bank
anticipates that discretionary bonuses will continue to be paid to its employees
in the future. However, as is the case with the Bank's compensation arrangements
in general, the Bank's bonus compensation is subject to regulatory oversight
and, therefore, could be changed in the future in response to regulatory
requirements or otherwise.
Deferred Compensation, Supplemental Income, and Salary Continuation Agreements
The Bank has entered into three separate but substantially similar
deferred compensation agreements with Dale W. Brawley, Executive Vice President
and Treasurer. The terms of these agreements are generally described in "--
Deferred Compensation with Directors," as are the terms of George W. Brawley,
Jr.'s six deferred compensation agreements. During the fiscal year ended
December 31, 1996, the Bank accrued $73,499 towards the cost of the benefits to
be provided to Mr. G. Brawley and Mr. D. Brawley under these agreements.
The Bank has also entered into separate salary continuation agreements
with Mr. G. Brawley, Mr. D. Brawley and eight other non-executive employees of
the Bank. These agreements provide that the employee will receive a monthly
payment of $833.33 for five years upon reaching 65 years of age, for a total
payment of $50,000. In the event of the employee's death before all payments
have been made, benefits would be payable to designated beneficiaries. In
addition, if the employee should die prior to reaching 65 years of age, certain
monthly payments would be made for a five-year period to designated
beneficiaries. In the event the employee terminates his employment, for reasons
other than death, prior to reaching 65 years of age, the monthly benefit payment
would be reduced. The Bank has purchased life insurance on the lives of the
participants to reimburse the Bank at the death of the participant for a part of
the Bank's cost associated with the agreements. The annual life insurance
premium associated with the agreements for Mr. G. Brawley and Mr. D. Brawley is
$3,950.76 and $313.79, respectively. During the fiscal year ended December 31,
1996, the Bank accrued $3,078 towards the cost of the benefits to be provided to
Mr. G. Brawley and Mr. D. Brawley under these agreements.
In 1993, the Bank entered supplemental income agreements with Mr. G.
Brawley, Mr. D. Brawley and Billy R. Williams, Secretary and Controller, and two
other employees. These agreements provide that the employee will receive an
annual retirement benefit at the earlier of age 60, if retired, or at age 65.
The annual benefit provided is $35,000, $25,000 and $7,900 for Mr. G. Brawley,
Mr. D. Brawley and Mr. Williams, respectively. However, Mr. G. Brawley's
agreement provides for benefit payments beginning on the earlier of age 60, if
retired, or November 1, 1998. A death benefit payable to the beneficiary of the
employee and a disability benefit, both equal to the retirement benefit, are
also provided under the agreements. During the fiscal year ended December 31,
1996, the Bank accrued $72,188 towards the cost of the benefits to be provided
to Mr. G. Brawley, Mr. D. Brawley and Mr. Williams under these agreements.
Other Benefits
The Bank provides its employees with group medical, dental, life and
disability insurance benefits, and its retirees with partial payment of medical
insurance dependent coverage. Employees are provided with vacation and sick
leave.
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<PAGE>
The Bank maintains a 401(k) retirement plan pursuant to which the Bank may make
discretionary matches up to six percent of each employee's salary, as well as a
non-qualified excess benefit plan which allows executive employees to contribute
the maximum amount that would otherwise be allowed under the 401(k) plan but for
certain limits imposed under the Internal Revenue Code. The Bank also had a
defined benefit pension plan which was terminated on October 20, 1997. All
participants in that plan became 100% vested on that date and received cash
payment equal to their accrued benefit under the plan on November 3 and 4. Mr.
G. Brawley and Mr. D. Brawley, two of three on-staff appraisers, also receive
$50.00 per real estate loan appraisal performed for the Bank, under guidelines
adopted by the Bank's Board of Directors. Those guidelines require outside
appraisers for all loans in excess of $250,000.
Employment Agreements
In connection with the Conversion, the Bank will enter into employment
agreements with George W. Brawley, Jr., President and Chief Executive Officer,
Dale W. Brawley, Executive Vice President and Treasurer, and Billy R. Williams,
Secretary and Controller, in order to establish their duties and compensation
and to provide for their continued employment with the Bank. The agreements will
provide for initial annual base salaries of $139,200, $84,000 and $56,400, for
Mr. G. Brawley, Mr. D. Brawley and Mr. Williams, respectively. The agreements
will provide for an initial term of employment of three years. Commencing on the
first anniversary date and continuing on each anniversary date thereafter,
following a performance evaluation of the employee, each agreement may be
extended for an additional year so that the remaining term shall be three years,
unless written notice of non-renewal is given by the Board of Directors. The
agreements also provide that the base salary shall be reviewed by the Board of
Directors not less often than annually. In the event of a change in control (as
defined below), each employee's base salary shall be increased by at least 6%
annually and the agreements will automatically be extended so that it will have
a three-year term after the change in control. In addition, the employment
agreements provide for possible profitability and discretionary bonuses and
participation in all other pension, profit-sharing or retirement plans
maintained by the Bank or the Company for employees of the Bank, as well as
fringe benefits normally associated with the employee's office. It is
contemplated that each employee will receive holiday bonuses computed on the
same basis as those paid to other employees. The employment agreements provide
that they may be terminated by the Bank for cause, as defined in the agreements,
and that they may otherwise be terminated by the Bank (subject to vested rights)
or by the employee.
The employment agreements provide that the nature of the employees'
compensation, duties or benefits cannot be diminished following a change in
control of the Bank or the Company. For purposes of the employment agreement, a
change in control generally will occur if (i) after the effective date of the
employment agreements, any "person" (as such term is defined in Sections 3(a)(9)
and 13(d)(3) of the Exchange Act) directly or indirectly, acquires beneficial
ownership of voting stock, or acquires irrevocable proxies or any combination of
voting stock and irrevocable proxies, representing 25% or more of any class of
voting securities of either the Company or the Bank, or acquires in any manner
control of the election of a majority of the directors of either the Company or
the Bank, (ii) either the Company or the Bank consolidates or merges with or
into another corporation, association or entity, or is otherwise reorganized,
where neither the Company nor the Bank is the surviving corporation in such
transaction, or (iii) all or substantially all of the assets of either the
Company or the Bank are sold or otherwise transferred to, or are acquired by,
any other entity or group. The agreements also provide that, in the event of the
employee's death following a change in control, the remaining payments to be
made under the agreements will be made to the employee's beneficiary or the
beneficiary's estate.
The employment agreements could have the effect of making it less likely
that the Bank or the Company will be acquired by another entity. See
"ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK -- The Company --
Anti-Takeover Effect of Employment Agreements and Benefit Plans."
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Severance Plan
In connection with the Conversion, the Bank's Board of Directors plans
to adopt a Severance Plan for the benefit of its employees. The Severance Plan
provides that in the event there is a "change in control" (as defined in the
Severance Plan) of the Bank or the Company and (i) the Bank or any successor of
the Bank terminates the employment of any full time employee of the Bank in
connection with, or within 24 months after the change in control, other than for
"cause" (as defined in the Severance Plan), or (ii) an employee terminates his
or her employment with the Bank or any successor following a decrease in the
level of such employee's annual base salary rate or a transfer of such employee
to a location more than 40 miles distant from the employee's primary work
station within 24 months after a change in control, the employee shall be
entitled to a severance benefit equal to the greater of (a) an amount equal to
two weeks' salary at the employee's existing salary rate multiplied times the
employee's number of complete years of service as a the Bank employee or (b) the
amount of one month's salary at the employee's salary rate at the time of
termination, subject to a maximum payment equal to one half of the employee's
annual salary. Officers of the Bank who, at the time of a "change in control,"
are parties to employment agreements having a remaining term of more than two
years are not covered by the Severance Plan.
Employee Stock Ownership Plan
The Bank has established the ESOP for its eligible employees. The ESOP
will become effective upon the Conversion. Employees with one year of service
with the Bank who have attained age 21 are eligible to participate. As part of
the Conversion, the ESOP intends to borrow funds from the Company and use the
funds to purchase up to 8% of the shares of Common Stock to be issued in the
Conversion, estimated to be between 34,680 and 53,958 shares assuming the
issuance of between 433,500 and 674,475 shares. If, because of an
oversubscription for shares of Common Stock or for any other reason, the ESOP is
unable to purchase in the Conversion 8% of the total number of shares offered in
the Conversion, then the Board of Directors of the Company intends to approve
the purchase by the ESOP in the open market after the Conversion of such shares
as are necessary for the ESOP to acquire a number of shares equal to 8% of the
shares of Common Stock issued in the Conversion.
Collateral for the Company's loan to the ESOP will be the Common Stock
purchased by the ESOP. It is expected that the loan will be repaid principally
from the Bank's discretionary contributions to the ESOP within ten years.
Dividends, if any, paid on shares held by the ESOP may also be used to reduce
the loan. It is anticipated that the interest rate for the loan will be a
commercially reasonable rate at the time of the loan inception. The loan will
not be guaranteed by the Bank. Shares purchased by the ESOP and pledged as
security for the loan will be held in a suspense account for allocation among
participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account
in an amount proportional to the repayment of the ESOP loan will be allocated
among ESOP participants on the basis of relative compensation in the year of
allocation. Benefits will vest in full upon five years of service with credit
given for years of service prior to the Conversion. Benefits are payable upon
death or disability. The Bank's contributions to the ESOP are not fixed, so
benefits payable and corresponding expenses under the ESOP cannot be determined
although benefits payable and corresponding expenses have been estimated in
preparing the pro forma computations set forth in this Prospectus. See "PRO
FORMA DATA."
In connection with the establishment of the ESOP, the Company will
establish a committee of the Board of Directors to administer the ESOP. Trustees
for the ESOP will also be appointed prior to the Conversion. The ESOP committee
may instruct the trustees regarding investment of funds contributed to the ESOP.
Participating employees shall instruct the trustees as to the voting of all
shares allocated to their respective accounts and held in the ESOP. The
unallocated shares held in the suspense account, and all allocated shares for
which voting instructions are not received, will be voted by the trustees in
their discretion subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended.
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The ESOP may be considered an "anti-takeover" device since the ESOP may
become the owner of a sufficient percentage of the total outstanding Common
Stock of the Company that the vote or decision whether to tender shares of the
ESOP may be used as a defense in a contested takeover. See "ANTI-TAKEOVER
PROVISIONS AFFECTING THE COMPANY AND THE BANK -- The Company -- Anti-Takeover
Effect of Employment Agreements and Benefit Plans."
Proposed Management Recognition Plan
The Boards of Directors of the Company and the Bank intend to adopt the
MRP, subject to approval of the stockholders of the Company at a meeting to be
held no sooner than six months following the Conversion. The MRP will serve as a
means of providing the directors and certain employees of the Bank with an
ownership interest in the Company in a manner designed to encourage such persons
to continue their service to the Bank. All directors and certain employees of
the Bank would receive benefits under the MRP.
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 awards
vest.
At any time following approval of the MRP by the Company's stockholders,
the Company and the Bank expect to contribute sufficient funds to the MRP Trust
so that the MRP Trust could purchase a number of shares of Common Stock equal to
4% of the shares issued in the Conversion. Such shares would be provided by the
issuance of authorized but unissued shares of Common Stock or shares purchased
by the MRP Trust in the open market. Whether such shares 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. Shares issued to recipients under the MRP
will be restricted and subject to forfeiture as described below.
Recipients would not be required to pay for shares issued to them under
the MRP. To the extent that the MRP acquires authorized but unissued shares of
Common Stock after the Conversion, the interests of existing shareholders will
be diluted. Assuming the issuance of 586,500 shares in the Conversion and
receipt of stockholder approval, 23,460 shares would be issued pursuant to the
MRP. Under applicable regulations, if the proposed MRP is submitted to and
approved by the stockholders of the Company within one year after consummation
of the Conversion, (i) no employee of the Bank (including Mr. G. Brawley, Mr. D.
Brawley and Mr. Williams) could receive more than 25% of the shares issued under
the MRP, or 5,865 shares, assuming the issuance of 586,500 shares in the
Conversion, (ii) the five non-employee directors of the Bank could receive
restricted stock grants for an aggregate of not more than 25% of the shares
issued under the MRP, or 5,865 shares, assuming the issuance of 586,500 shares
in the Conversion and (iii) none of the five non-employee directors of the Bank
could receive individually more than 5% of the shares issued under the MRP, or
1,173 shares, assuming the issuance of 586,500 shares in the Conversion. If the
MRP is submitted to and approved by the Company's stockholders more than one
year after consummation of the Conversion, the regulatory percentage limitations
set forth above would not apply.
After the grant of shares of Common Stock under the MRP, recipients will
be entitled to vote all vested and unvested shares and receive all dividends and
other distributions with respect thereto. If the MRP is submitted for
stockholder approval within twelve months after consummation of the Conversion,
the MRP will provide that 20% of the shares granted will vest and become
nonforfeitable on the first anniversary of the date of the grant under the MRP,
and 20% will vest and become nonforfeitable on each subsequent anniversary date,
so that the shares would be completely vested at the end of five years after the
date of grant. Grants of Common Stock under the MRP will immediately vest upon
the disability or death of a recipient.
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If the MRP is submitted to the Company's stockholders and approved by
them more than one year after the consummation of the Conversion, the MRP may
provide for a different or no vesting schedule and may provide that grants of
Common Stock under the MRP will become automatically vested upon retirement or
upon a change in control of the Company or the Bank. In such event, it is
expected that a "change in control" would have the same meaning as is set forth
in the employment agreements with Mr. G. Brawley, Mr. D. Brawley and Mr.
Williams. See "-- Employment Agreements."
Until shares become vested, the right to direct the voting of such
shares and the right to receive dividends thereon may not be sold, assigned,
transferred, exchanged, pledged or otherwise encumbered. If the recipient of
shares under the MRP terminates his service to the Bank prior to the time shares
become vested (and such shares are not automatically vested under the terms of
the MRP), unvested shares would be forfeited to the MRP and would be subject to
future allocations to others. In addition, the recipient would be required to
repay all dividends received with respect to shares that did not become vested.
It is expected that the MRP will provide that it cannot be terminated upon a
change in control of the Company or the Bank unless the acquiror provides for an
equivalent benefit.
If the MRP is approved by the stockholders, the Bank expects to
recognize a compensation expense for the MRP awards in the amount of the fair
market value of the Common Stock granted. The expense would be recognized pro
rata over the years during which shares vest. The recipients of stock grants
would be required to recognize ordinary income equal to the fair market value of
the stock.
Proposed Stock Option Plan
The Boards of Directors of the Company and the Bank intend to adopt the
Stock Option Plan, subject to approval of the stockholders of the Company at a
meeting to be held no sooner than six months following the Conversion. As soon
as practicable following stockholder approval of the Stock Option Plan, Common
Stock in the aggregate amount equal to 10% of the shares issued in the
Conversion would be reserved for future issuance by the Company upon the
exercise of the stock options granted under the Stock Option Plan. Assuming the
issuance of between 433,500 and 586,500 shares in the Conversion, an aggregate
of between 43,350 and 58,650 shares of Common Stock would be reserved for
issuance. However, some or all of the shares issued upon the exercise of options
granted under the Stock Option Plan may be purchased in the open market at the
time of exercise.
Assuming the Stock Option Plan is approved by the stockholders of the
Company, the Stock Option Plan would be administered by a committee of the
Company's Board of Directors. Options granted under the Stock Option Plan will
have an option exercise price of not less than the fair market value of the
Common Stock on the date the options are granted. Options granted under the
Stock Option Plan will have a term of ten years, will not be transferable except
upon death and will continue to be exercisable upon retirement, death or
disability. If the Stock Option Plan is submitted for stockholder approval
within twelve months after consummation of the Conversion, options granted under
the Stock Option Plan will have a vesting schedule which will provide that 20%
of the options granted would vest and become nonforfeitable on the first
anniversary of the date of the option grant and 20% will vest and become
nonforfeitable on each subsequent anniversary date, so that the options would be
completely vested at the end of five years after the date of the option grant.
Options would become 100% vested upon death or disability.
If the Stock Option Plan is submitted to and approved by the Company's
stockholders more than one year after consummation of the Conversion, the Stock
Option Plan may provide for a different or no vesting schedule and may provide
that options will become automatically vested upon retirement or upon a change
in control of the Company or the Bank. In such event, it is expected that a
"change in control" would have the same meaning as is set forth in the
employment agreement with Mr. G. Brawley, Mr. D. Brawley and Mr. Williams. See
"-- Employment Agreements." The Stock Option Plan is expected to provide that
the Plan cannot be terminated upon a change in control of the Company or the
Bank unless the acquiror provides for an equivalent benefit to holders of
unvested options.
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Under applicable regulations, if the proposed Stock Option Plan is
submitted to and approved by the stockholders of the Company within one year
after consummation of the Conversion, (i) no employee of the Bank (including Mr.
G. Brawley, Mr. D. Brawley and Mr. Williams) could receive more than 25% of the
options issued under the Stock Option Plan, or options to purchase 14,663
shares, assuming the issuance of 586,500 shares in the Conversion, (ii) the five
non-employee directors of the Bank could receive not more than 25% of the
options issued under the Stock Option Plan, or options to purchase 14,663
shares, assuming the issuance of 586,500 shares in the Conversion, and (iii)
none of the five non-employee directors of the Bank could receive individually
more than 5% of the options issued under the Stock Option Plan, or options to
purchase 2,933 shares, assuming the issuance of 586,500 shares in the
Conversion. If the Stock Option Plan is submitted to and approved by the
Company's stockholders more than one year after consummation of the Conversion,
the regulatory percentage limitations set forth above would not apply.
Options granted to employees under the Stock Option Plan may be
"incentive stock options" which are designed to result in beneficial tax
treatment to the employee but no tax deduction to the Company or the Bank. The
holder of an incentive stock option generally is not taxed for federal income
tax purposes on either the grant or the exercise of the option. However, the
optionee must include in his or her federal alternative minimum tax income any
excess (the "Bargain Element") of the acquired common stock's fair market value
at the time of exercise over the exercise price paid by the optionee.
Furthermore, if the optionee sells, exchanges, gives or otherwise disposes of
such common stock (other than in certain types of transactions) either within
two years after the option was granted or within one year after the option was
exercised (an "Early Disposition"), the optionee generally must recognize the
Bargain Element as compensation income for regular federal income tax purposes.
Any gain realized on the disposition in excess of the Bargain Element is subject
to recognition under the usual rules applying to dispositions of property. If a
taxable sale or exchange is made after such holding periods are satisfied, the
difference between the exercise price and the amount realized upon the
disposition of the common stock generally will constitute a capital gain or loss
for tax purposes. If an optionee exercises an incentive stock option and
delivers shares of common stock as payment for part or all of the exercise price
of the stock purchased ("Payment Stock"), no gain or loss generally will be
recognized with respect to the Payment Stock; provided, however, if the Payment
Stock was acquired pursuant to the exercise of an incentive stock option, the
optionee will be subject to recognizing as compensation income the Bargain
Element on the Payment Stock as an Early Disposition if the exchange for the new
shares occurs prior to the expiration of the holding periods for the Payment
Stock. The Company generally would not recognize gain or loss or be entitled to
a deduction upon either the grant of an incentive stock option or the optionee's
exercise of an incentive stock option. However, if there is an Early
Disposition, the Company generally would be entitled to deduct the Bargain
Element as compensation paid the optionee.
Options granted to directors under the Stock Option Plan would be
"non-qualified stock options." In general, the holder of a non-qualified stock
option will recognize compensation income equal to the amount by which the fair
market value of the common stock received on the date of exercise exceeds the
sum of the exercise price and any amount paid for the non-qualified stock
option. If the optionee elects to pay the exercise price in whole or in part
with common stock, the optionee generally will not recognize any gain or loss on
the common stock surrendered in payment of the exercise price. The Company would
not recognize any income or be entitled to claim any deduction upon the grant of
a non-qualified stock option. At the time the optionee is required to recognize
compensation income upon the exercise of the non-qualified stock option, the
Company would recognize a compensation expense and be entitled to claim a
deduction in the amount equal to such compensation income.
If the Stock Option Plan is approved by the stockholders of the Company,
the options granted to employees and directors pursuant to the Stock Option Plan
would be issued in recognition of the recipients' past service to the Bank and
as an incentive for their continued performance. No cash consideration will be
paid for the options.
Certain Indebtedness and Transactions of Management
The Bank makes loans to executive officers and directors of the Bank in
the ordinary course of its business. These loans are made on the same terms,
including interest rates and collateral, as those then prevailing for comparable
transactions with nonaffiliated persons, and do not involve more than the normal
risk of collectibility or present any other unfavorable features. The Bank does
not make loans to executive officers and directors of the Bank on terms more
favorable than could be obtained by persons not affiliated with the Bank. The
aggregate unpaid principal balance of loans to directors and officers and their
affiliates outstanding at June 30, 1997 totals approximately $780,000 and
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represents 2.15% of pro forma consolidated stockholders' equity of the Company
at June 30, 1997, assuming the sale of 510,000 shares of Common Stock.
DESCRIPTION OF CAPITAL STOCK
The Company
The Company is authorized to issue 20,000,000 shares of Common Stock and
5,000,000 shares of preferred stock. Neither the authorized Common Stock nor the
authorized preferred stock has any par value.
Common Stock. General. The Company's Common Stock will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC or any other governmental entity. Upon payment of the
purchase price for the Common Stock, all such stock will be duly authorized,
validly issued, fully paid, and nonassessable.
Dividends. The holders of the Company's Common Stock will be entitled to
receive and share ratably in such dividends on Common Stock as may be declared
by the Board of Directors of the Company out of funds legally available
therefor, subject to applicable statutory and regulatory restrictions. See
"SUPERVISION AND REGULATION -- Regulation of the Company -- Restrictions on
Dividends." The ability of the Company to pay dividends may be dependent on the
receipt of dividends from the Bank. See "DIVIDEND POLICY," "SUPERVISION AND
REGULATION -- Regulation of the Bank -- Restrictions on Dividends and Other
Capital Distributions," and "TAXATION."
Stock Repurchases. The shares of Common Stock do not have any redemption
provisions. Stock repurchases are subject to North Carolina corporate laws
regarding capital distributions.
Voting Rights. Upon Conversion, the holders of Common Stock, as the only
class of capital stock of the Company then outstanding, will possess exclusive
voting rights with respect to the Company. Such holders will have the right to
elect the Company's Board of Directors and to act on such other matters as are
required to be presented to stockholders under North Carolina law or as are
otherwise presented to them. Each holder of Common Stock will be entitled to one
vote per share. The holders of Common Stock will have no right to vote their
shares cumulatively in the election of directors. As a result, the holders of a
majority of the shares of Common Stock will have the ability to elect all of the
directors on the Company's Board of Directors.
Liquidation Rights. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock of the Company would be
entitled to ratably receive, after payment of or making of adequate provisions
for, all debts and liabilities of the Company and after the rights, if any, of
preferred stockholders of the Company, all remaining assets of the Company
available for distribution.
Preemptive Rights. Holders of the Common Stock of the Company will not
be entitled to preemptive rights with respect to any shares which may be issued
by the Company.
Shares Owned by Directors and Executive Officers. All shares of Common
Stock issued in the Conversion to directors and executive officers of the
Company and the Bank will contain a restriction providing that such shares may
not be sold without the written permission of the Administrator for a period of
one year following the date of purchase, except in the event of death of the
director or the executive officer.
Preferred Stock. None of the 5,000,000 shares of the Company's
authorized preferred stock have been issued and none will be issued in the
Conversion. Such stock may be issued in one or more series with such rights,
preferences and designations as the Board of Directors of the Company may from
time to time determine subject to applicable law
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and regulations. If and when such shares are issued, holders of such shares may
have certain preferences, powers and rights (including voting rights) senior to
the rights of the holders of the Common Stock. The Board of Directors can
(without stockholder approval) issue preferred stock with voting and conversion
rights which could, among other things, adversely affect the voting power of the
holders of the Common Stock and assist management in impeding an unfriendly
takeover or attempted change in control of the Company that some stockholders
may consider to be in their best interests but to which management is opposed.
See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK -- The Company
- -- Restrictions in Articles of Incorporation and Bylaws." The Company has no
current plans to issue preferred stock.
Restrictions on Acquisition. Acquisitions of the Company and
acquisitions of the capital stock of the Company are restricted by provisions in
the Articles of Incorporation and Bylaws of the Company and by various federal
and state laws and regulations. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE
COMPANY AND THE BANK -- The Company -- Restrictions in Articles of Incorporation
and Bylaws" and "-- Regulatory Restrictions."
The Bank
Common Stock. After consummation of the Conversion, the Bank will be
authorized to issue 100,000 shares of common stock, no par value ("the Bank
Common Stock"). The Bank Common Stock will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the FDIC
or any other governmental entity.
Dividends. The payment of dividends by the Bank is subject to
limitations which are imposed by North Carolina law and regulations. See
"DIVIDEND POLICY" and "SUPERVISION AND REGULATION -- Regulation of the Bank --
Restrictions on Dividends and Other Capital Distributions." In addition, federal
income tax law considerations may affect the ability of the Bank to pay
dividends and make other capital distributions. See "TAXATION." The holders of
the Bank Common Stock will be entitled to receive and share ratably in such
dividends on the Bank Common Stock as may be declared by the Board of Directors
of the Bank out of funds legally available therefor, subject to applicable
statutory and regulatory restrictions.
Voting Rights. As a mutual North Carolina-chartered savings bank, the
Bank currently has no stockholders, and voting rights in the Bank are currently
held by the Bank's members (depositors and borrowers). Members elect the Bank's
Board of Directors and vote on such other matters as are required to be
presented to them under North Carolina law.
Upon Conversion, the Company, as sole stockholder of the Bank, will
possess the exclusive voting rights with respect to the Bank Common Stock, will
elect the Bank's Board of Directors and will act on such other matters as are
required to be presented to stockholders under North Carolina law or as are
otherwise presented to stockholders by the Bank's Board of Directors. The
holders of the Bank Common Stock will have no right to vote their shares
cumulatively in the election of directors of the Bank.
Liquidation Rights. After the Conversion, in the event of any
liquidation, dissolution or winding up of the Bank, the Company, as holder of
all of the Bank's outstanding capital stock, would be entitled to receive all
remaining assets of the Bank available for distribution, after payment of or
making of adequate provisions for, all debts and liabilities of the Bank
(including all deposit accounts and accrued interest thereon) and after
distribution of the balance in the liquidation account established in connection
with the Conversion to Eligible Account Holders and Supplemental Eligible
Account Holders. See "THE CONVERSION -- Effects of Conversion --Liquidation
Rights."
Preemptive Rights. Holders of the Bank Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued by the Bank.
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Restrictions on Acquisition. Acquisitions of the Bank and acquisitions
of its capital stock are restricted by various federal and state laws and
regulations. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK --
The Bank."
ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK
The Company
Restrictions in Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of the Company contain certain provisions that are
intended to encourage a potential acquiror to negotiate any proposed acquisition
of the Company directly with the Company's Board of Directors. An unsolicited
non-negotiated takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management. The Board of Directors believes that these provisions will encourage
such negotiations and discourage hostile takeover attempts. It is also the Board
of Directors' view that these provisions should not discourage persons from
proposing a merger or transaction at prices reflective of the true value of the
Company and that otherwise is in the best interests of all stockholders.
However, these provisions may have the effect of discouraging offers to purchase
the Company or its securities which are not approved by the Board of Directors
but which certain of the Company's stockholders may deem to be in their best
interests or pursuant to which stockholders would receive a substantial premium
for their shares over the current market prices. Therefore, the existence of
such anti-takeover provisions in fact may not always be in the best interests of
all shareholders. Stockholders who might desire to participate in such a
takeover not supported by management may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors and
management more difficult. Nevertheless, the Boards of Directors of the Bank and
the Company believe these provisions are in the best interests of the
stockholders because they will assist the Company's Board of Directors in
managing the affairs of the Company in the manner they believe to be in the best
interests of stockholders generally and because a company's board of directors
is often best able in terms of knowledge regarding the company's business and
prospects, as well as resources, to negotiate the best transaction for its
stockholders as a whole.
The following description of certain of the provisions of the Articles
of Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each instance to such Articles of Incorporation and Bylaws.
See "ADDITIONAL INFORMATION" regarding how to obtain a copy of these documents.
Board of Directors. The Bylaws of the Company provide that the number of
directors shall not be less than five nor more than 15. The initial number of
directors is seven, but such number may be changed by resolution of the Board of
Directors. These provisions have the effect of enabling the Board of Directors
to elect directors friendly to management in the event of a non-negotiated
takeover attempt and may make it more difficult for a person seeking to acquire
control of the Company to gain majority representation on the Board of Directors
in a relatively short period of time. The Company believes these provisions to
be important to continuity in the composition and policies of the Board of
Directors.
The Articles of Incorporation provide that, if and when the number of
directors is at least nine, there will be staggered elections of directors so
that the directors will each be initially elected to one, two or three-year
terms, and thereafter (so long as the number of directors is nine or more) all
directors will be elected to terms of three years each. This provision also has
the effect of making it more difficult for a person seeking to acquire control
of the Company to gain majority representation on the Board of Directors.
The Articles of Incorporation and Bylaws of the Company provide that
directors may be removed prior to the end of their term only for cause.
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Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of the Company's shares cannot be assured representation on the Board
of Directors, the absence of cumulative voting may discourage accumulations of
the Company's shares or proxy contests that would result in changes in the
Company's management. The Board of Directors believes that (i) elimination of
cumulative voting will help to assure continuity and stability of management and
policies; (ii) directors should be elected by a majority of the stockholders to
represent the interests of the stockholders as a whole rather than be the
special representatives of particular minority interests; and (iii) efforts to
elect directors representing specific minority interests are potentially
divisive and could impair the operations of the Company.
Special Meetings. The Bylaws of the Company provide that special
meetings of stockholders of the Company may be called by the Chairman of the
Board, the Chief Executive Officer, the President, or by the Board of Directors.
If a special meeting is not called by such persons or entities, stockholder
proposals cannot be presented to the stockholders for action until the next
annual meeting.
Capital Stock. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock and 5,000,000 shares of
preferred stock. The shares of common stock and preferred stock authorized in
addition to the number of shares of Common Stock to be issued pursuant to the
Conversion were authorized to provide the Company's Board of Directors with
flexibility to issue additional shares, without further stockholder approval,
for proper corporate purposes, including financing, acquisitions, stock
dividends, stock splits, director and employee stock options, grants of
restricted stock to directors and certain employees and other appropriate
purposes. However, issuance of additional authorized shares may also have the
effect of impeding or deterring future attempts to gain control of the Company.
The Board of Directors also has sole authority to determine the terms of
any one or more series of preferred stock, including voting rights, conversion
rates, dividend rights, and liquidation preferences, which could adversely
affect the voting power of the holders of the Common Stock and discourage an
attempt to acquire control of the Company. The Board of Directors does not
intend to issue any preferred stock, except on terms which it deems to be in the
best interests of the Company and its stockholders. However, the Board of
Directors has the power, to the extent consistent with its fiduciary duties, to
issue preferred stock to persons friendly to management or otherwise in order to
impede attempts by third parties to acquire voting control of the Company and to
impede other transactions not favored by management. The Board of Directors
currently has no plans for the issuance of additional shares of Common Stock
(except for such shares as may be necessary to fund a MRP and a Stock Option
Plan) or of shares of preferred stock.
Director Nominations. The Bylaws of the Company require a stockholder
who intends to nominate a candidate for election to the Board of Directors at a
stockholders' meeting to give written notice to the Secretary of the Company at
least 50 days (but not more than 90 days) in advance of the date of the meeting
at which such nominations will be made. The nomination notice is also required
to include specified information concerning the nominee and the proposing
stockholder. The Board of Directors of the Company believes that it is in the
best interests of the Company and its stockholders to provide sufficient time
for the Board of Directors to study all nominations and to determine whether to
recommend to the stockholders that such nominees be considered.
Supermajority Voting Provisions. The Company's Articles of Incorporation
require the affirmative vote of 75% of the outstanding shares entitled to vote
to approve a merger, consolidation, or other business combination, unless the
transaction is approved, prior to consummation, by the vote of at least 75% of
the number of the Continuing Directors (as defined in the Articles of
Incorporation) on the Company's Board of Directors. "Continuing Directors"
generally includes all members of the Board of Directors who are not affiliated
with any individual, partnership, trust or other person or entity (or the
affiliates and associates of such person or entity) which is a beneficial owner
of 10%
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or more of the voting shares of the Company. This provision could tend to make
the acquisition of the Company more difficult to accomplish without the
cooperation or favorable recommendation of the Company's Board of Directors.
Anti-Takeover Effect of Employment Agreements and Benefit Plans. The
existence of the ESOP may tend to discourage takeover attempts because employees
participating under the ESOP and the trustees of the ESOP will effectively
control the voting of the large block of shares held by the ESOP. See
"MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan." Also, if approved by
the stockholders of the Company at a meeting of stockholders following the
Conversion, the MRP and the Stock Option Plan will provide for the ownership of
additional shares of Common Stock by the employees and the directors of the Bank
and for voting control by directors and certain employees over shares held by
the MRP and Stock Option Plan which are attributable to grants made to them
under such plans even though the grants are not yet vested. See "MANAGEMENT OF
THE BANK -- Proposed Management Recognition Plan" and "-- Proposed Stock Option
Plan."
If (i) the Stock Option Plan is approved by the stockholders of the
Company within one year after the Conversion and all of the stock options which
could be granted to directors and executive officers under the Stock Option Plan
are granted and exercised or the shares for such options are acquired by the
Stock Option Plan and all option shares are acquired in the open market, (ii)
the MRP is approved by the stockholders of the Company within one year after the
Conversion, all of the MRP shares which could be granted to directors and
executive officers are granted and issued and all such shares are acquired in
the open market, (iii) the ESOP acquires 8% of the shares issued in the
Conversion and none of such shares are allocated, and (iv) the Company did not
issue any additional shares of its Common Stock, the shares held by directors
and executive officers and their associates as a group, including (a) shares
purchased outright in the Conversion, (b) shares purchased by the ESOP, (c)
shares purchased pursuant to the Stock Option Plan and (d) shares granted under
the MRP, would give such persons effective control over as much as 31.34% or
28.21%, at the minimum and maximum of the Valuation Range, respectively, of the
Common Stock issued and outstanding.
The existence of the employment agreements with employees could make a
business combination with the Bank more costly and could discourage such
transactions. See "MANAGEMENT OF THE BANK -- Employment Agreements."
Regulatory Restrictions. Applicable North Carolina regulations provide
that for a period of three years following the Conversion, the prior written
approval of the Administrator will be required before any person may, directly
or indirectly, acquire beneficial ownership of or make any offer to acquire any
stock or other equity security of the 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 Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Company and
the Bank or the 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.
The Change in Bank Control Act, together with North Carolina
regulations, require that the consent of the Administrator and Federal Reserve
be obtained prior to any person or company acquiring "control" of a North
Carolina-chartered savings bank or a North Carolina-
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chartered savings bank Company. Upon acquiring control, such acquiror will be
deemed to be a bank 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 in connection
with its approval of such acquisitions may deter potential acquirors from
seeking to obtain control of the Company. See "SUPERVISION AND REGULATION --
Regulation of the Company."
The Bank
Upon consummation of the Conversion, the Bank will become a wholly-owned
subsidiary of the Company, and, consequently, restrictions on the acquisition of
the Bank would have a more limited effect than if the Bank's common stock were
held directly by the stockholders purchasing in the Conversion. However,
restrictions on the acquisition of the Bank may discourage takeover attempts of
the Company in order to gain immediate control of the Bank.
Regulatory Restrictions. The Administrator and the Federal Reserve have
conditionally approved the Company's acquisition of all of the stock of the Bank
issued in the Conversion. For three years following completion of a conversion,
North Carolina conversion regulations require the prior written approval of the
Administrator before any person may directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of an equity
security of a converting state savings bank such as the Bank. If any person were
to so acquire the beneficial ownership of more than 10% of any class of any
equity security without prior written approval, the securities beneficially
owned in excess of 10% would not be counted as shares entitled to vote and would
not be voted or counted as voting shares in connection with any matter submitted
to stockholders for a vote. Approval is not required for (i) any offer with view
toward public resale made exclusively to the Bank or its underwriters or the
selling group acting on its behalf or (ii) any offer to acquire or acquisition
of beneficial ownership of more than 10% of the common stock of the Bank by a
corporation whose ownership is or will be substantially the same as the
ownership of the Bank, provided that the offer or acquisition is made more than
one year following the consummation of the Conversion. Similarly, Federal
Reserve approval is required before any person or entity may acquire "control"
of the Bank. See "-- The Company-- Regulatory Restrictions."
Board of Directors. The amended Articles of Incorporation of the Bank
upon consummation of the Conversion will provide that the number of directors
may be no less than five. The initial number of directors will be five, but such
number may be changed by resolution of the Board of Directors. This provision
has the effect of enabling the Board of Directors to elect directors friendly to
management in the event of a non-negotiated takeover attempt. The Bank's Bylaws
also provide for staggered elections of directors if and when the total number
of directors is at least nine. These provisions are designed to make it more
difficult for a person seeking to acquire control of the Bank to gain majority
representation on the Board of Directors in a relatively short period of time.
The Bank believes these provisions to be important to continuity in the
composition and policies of its Board of Directors.
THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED AND THE ADMINISTRATOR HAS
APPROVED COMPLETION OF THE TRANSACTIONS DESCRIBED IN THE PLAN SUBJECT TO
APPROVAL BY THE MEMBERS OF THE BANK AND TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. APPROVAL BY THE ADMINISTRATOR DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN BY THE ADMINISTRATOR.
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General
The Bank was organized and has operated as a traditional savings and
loan association. It recognizes that the banking and financial services
industries are in the process of fundamental changes, reflecting changes in the
local, national and international economies, technological changes and changes
in state and federal laws. As a result, for several years the Bank has been
studying the environment in which it operates and its strategic options.
As a result of its study of its strategic options, the Bank adopted the
Plan. The Bank believes that converting the bank from the mutual to stock form
and organizing the Company will provide increased flexibility for the Bank and
the Company to react to changes in their operating environment, regardless of
the strategies ultimately chosen.
The existing management of the Bank and the Company believes that it
will be in the best interests of the Bank, the Company and the stockholders of
the Company for the Company to remain an independent financial institution.
Assuming the consummation of the Conversion, the Company and the Bank intend to
pursue the business strategy described in this Prospectus with the goal of
enhancing shareholder value over the long term. Neither the Company nor the Bank
has any existing plan to consider any business combination, and neither company
has any agreement or understanding with respect to any possible business
combination.
The Board of Director's adoption of the Plan is subject to approval by
the members of the Bank and receipt of required regulatory approvals. Pursuant
to the Plan, the Bank will be converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank and will become a
wholly-owned subsidiary of the Company. The Company will issue the Common Stock
to be sold in the Conversion and will use that portion of the net proceeds
thereof which it does not retain to purchase the capital stock of the Bank. By
letter dated November 10, 1997, the Administrator approved the Plan, subject to
approval by the members of the Bank and satisfaction of certain other
conditions. The Special Meeting will be held on December 16, 1997 for the
purpose of considering approval of the Plan.
Consummation of the Conversion is contingent also upon receipt of the
approvals of the Federal Reserve and the Administrator for the Company to
acquire the Bank. Those approvals have been received. The Conversion cannot be
consummated until the expiration of the Bank Merger Act of 1956 waiting period
which began to run upon approval by the Federal Reserve of the Company's
application and expires November 25, 1997. Finally, consummation of the
Conversion is contingent upon receipt from the FDIC of a final non-objection
letter with respect to the transaction. The FDIC has issued a conditional
notification that it does not intend to object to the Conversion.
The following is a summary of all material provisions of the Plan. It is
qualified in its entirety by the provisions of the Plan, which contains a more
detailed description of the terms of the Conversion. The Plan is attached as
Attachment I to the Bank's Proxy Statement for the Special Meeting which has
been delivered to all members of the Bank. The Plan can also be obtained by
written request from the Bank. See "ADDITIONAL INFORMATION."
Purposes of Conversion
The Bank, as a mutual savings bank, now has no stockholders and no
authority to issue capital stock. By converting to the stock form of
organization, the Bank will be structured in the form used by most commercial
banks, other business entities and a substantial number of savings institutions.
Conversion to a North Carolina-chartered capital stock savings bank and the
formation of a Company offers a number of advantages which may be important to
the future and performance of the Bank, including (i) a larger capital base for
the Bank's operations, (ii) an enhanced future access to capital markets and
(iii) an opportunity for depositors of the Bank to become stockholders of the
Company.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Company's Articles of Incorporation will permit the
Company, subject to market conditions, to raise additional equity capital
through further sales of securities. Following the Conversion, the Company will
also be able to use stock-related incentive programs to attract, retain and
provide incentives for qualified directors and executive and other personnel
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of the Company and the Bank. See "MANAGEMENT OF THE BANK -- Employee Stock
Ownership Plan" and "-- Stock Based Benefits."
Formation of the Company will provide greater flexibility than the Bank
would otherwise have to expand and diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
with, both mutual and stock institutions, as well as other companies. However,
there are no current plans, arrangements, understandings or agreements regarding
any such business combinations.
Effects of Conversion
General. Each person with a deposit account in the Bank has pro rata
rights, based upon the balance in his or her account, in the net worth of the
Bank upon liquidation. However, this right is tied to the depositor's account
and has no tangible market value separate from such deposit account. Further,
the Bank's depositors can realize value with respect to their interests only in
the unlikely event that the Bank is liquidated and has a positive net worth. In
such an event, the depositors of record at that time, as owners, would share pro
rata in any residual surplus after other claims, including those with respect to
the deposit accounts of depositors, are paid.
Upon the Bank's conversion to stock form, its Certificate of
Incorporation will be amended to authorize the issuance of permanent
nonwithdrawable capital stock to represent the ownership of the Bank, including
its net worth. The capital stock will be separate and apart from deposit
accounts and will not be insured by the FDIC or any other governmental entity.
Certificates will be issued to evidence ownership of the capital stock. All of
the outstanding capital stock of the Bank will be acquired by the Company, which
in turn will issue its Common Stock to purchasers in the Conversion. The stock
certificates issued by the Company will be transferable and, therefore, subject
to applicable law, the stock could be sold or traded if a purchaser is available
with no effect on any deposit account the seller may hold at the Bank.
Voting Rights. Under the Bank's current Certificate of Incorporation and
Bylaws, deposit account holders and borrowers have voting rights with respect to
certain matters relating to the Bank, including the election of directors. After
the Conversion, (i) neither deposit account holders nor borrowers will have
voting rights with respect to the Bank and will therefore not be able to elect
directors of the Bank or control its affairs; (ii) voting rights with respect to
the Bank will be vested in the Company as the sole stockholder of the Bank; and
(iii) voting rights with respect to the Company will be vested in the Company's
stockholders. Each purchaser of Common Stock will be entitled to vote on any
matters to be considered by the Company's stockholders. For a description of the
voting rights of the holders of Common Stock, see "DESCRIPTION OF CAPITAL
STOCK."
Deposit Accounts and Loans. The account balances, interest rates and
other terms of deposit accounts at the Bank and the existing deposit insurance
coverage of such accounts will not be affected by the Conversion (except to the
extent that a depositor directs the Bank to withdraw funds to pay for his or her
Common Stock). Furthermore, the Conversion will not affect any loan account, the
balances, interest rates, maturities or other terms of these accounts, or the
obligations of borrowers under their individual contractual arrangements with
the Bank.
Continuity. The Bank will continue without interruption, during and
after completion of the Conversion, to provide its services to depositors and
borrowers pursuant to existing policies and will maintain its office operated by
the existing management and employees of the Bank.
Liquidation Rights. In the unlikely event of a complete liquidation of
the Bank, either before or after Conversion, account holders would have claims
for the amount of their deposit accounts, including accrued interest, and would
receive the protection of deposit insurance up to applicable limits. In addition
to deposit insurance coverage, depositor liquidation rights before and after
Conversion would be as follows:
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Liquidation Rights Prior to the Conversion. Prior to the Conversion, in
the event of a complete liquidation of the Bank, each holder of a deposit
account in the Bank would receive such holder's 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, including
accrued interest). Such holder's pro rata share of such remaining assets, if
any, would be in the same proportion of such assets as the value of such
holder's deposit account was to the total value of all deposit accounts in the
Bank at the time of liquidation.
Liquidation Rights After the Conversion. As required by North Carolina
conversion regulations, the Plan provides that, upon completion of the
Conversion, a memorandum account called a "Liquidation Account" will be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. The amount of the Liquidation Account will be equal to
the net worth of the Bank as of the date of its latest statement of financial
condition contained in the final prospectus relating to the sale of shares of
Common Stock in the Conversion. Under applicable regulations, the Bank will not
be permitted to pay dividends on, or repurchase any of, its capital stock if its
net worth would thereby be reduced below the aggregate amount then required for
the Liquidation Account. See "DIVIDEND POLICY" and SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions." After the Conversion, Eligible Account Holders and Supplemental
Eligible Account Holders will be entitled, in the event of a liquidation of the
Bank, to receive liquidating distributions of any assets remaining after payment
of all creditors' claims (including the claims of all depositors to the
withdrawal values of their deposit accounts, including accrued interest), before
any distributions are made on the Bank's capital stock, equal to their
proportionate interests at that time in the Liquidation Account.
Each Eligible Account Holder and Supplemental Eligible Account Holder
will have an initial interest ("subaccount balance") in the Liquidation Account
for each deposit account held as of December 31, 1995 (the Eligibility Record
Date) or as of September 30, 1997 (the Supplemental Eligibility Record Date),
respectively. Each initial subaccount balance will be the amount determined by
multiplying the total opening balance in the Liquidation Account by the
Qualifying Deposit (a deposit of at least $50 as of the Eligibility Record Date
or Supplemental Eligibility Record Date, as applicable) of such deposit account
divided by the total of all Qualifying Deposits on that date. If the amount in
the deposit account on any subsequent annual closing date of the Bank is less
than the balance in such deposit account on any other annual closing date or the
balance in such an account on the Eligibility Record Date or Supplemental
Eligibility Record Date, as the case may be, this interest in the Liquidation
Account will be reduced by an amount proportionate to any such reduction, and
will not thereafter be increased despite any subsequent increase in the related
deposit account. An Eligible Account Holder's or Supplemental Eligible Account
Holder's interest in the Liquidation Account will cease to exist if the deposit
account is closed. The Liquidation Account will never increase and will be
correspondingly reduced as the interests in the Liquidation Account are reduced
or cease to exist. In the event of a liquidation, any assets remaining after the
above liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to the Company, as sole
stockholder of the Bank.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with another FDIC-insured depository institution, whether or not the
Bank is the surviving institution, would not be viewed as a complete liquidation
for purposes of distribution of the Liquidation Account. In any such
transaction, the Liquidation Account would be assumed by the surviving
institution to the full extent authorized by regulations of the Administrator as
then in effect.
Offering of Common Stock
As part of the Conversion, the Company is making the Subscription
Offering of Common Stock in the priorities and to the persons described below
under "--Subscription Offering." In addition, any shares which remain
unsubscribed for in the Subscription Offering will be offered in the Community
Offering to members of the general public, with priority being given to natural
persons and trusts of natural persons residing or located in the Local
Community, including IRAs, Keogh accounts and similar retirement accounts
established for the benefit of natural persons who are
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residents of the Local Community. See "-- Community Offering." If necessary, all
shares of Common Stock not purchased in the Subscription Offering and Community
Offering, if any, may be offered for sale to the general public through a
syndicate of registered broker-dealers as selected dealers to be managed by
Trident Securities. See "--Syndicated Community Offering." The Plan requires
that the aggregate dollar amount of the Common Stock sold equal not less than
the minimum nor more than the maximum of the Valuation Range which is
established in connection with the Conversion; provided, however, with the
consent of the Administrator and the FDIC the aggregate dollar amount of the
Common Stock sold may be increased to as much as 15% above the maximum of the
Valuation Range, without a resolicitation of subscribers or any right to cancel
subscriptions, in order to reflect changes in market and financial conditions
following commencement of the Subscription Offering. See "-- Purchase Price of
Common Stock and Number of Shares Offered." If the Syndicated Community Offering
is not feasible or successful and Common Stock having an aggregate value of at
least the minimum of the Valuation Range is not subscribed for in the
Subscription and Community Offerings, the Company will consult with the
Administrator to determine an appropriate alternative method of selling all
shares of Common Stock offered in the Conversion and not subscribed for in the
Offerings. The same per share price ($50.00) will be paid by purchasers in the
Subscription, Community and Syndicated Community Offerings.
The Subscription Offering will expire at the Expiration Time, which is
12:00 noon, Eastern Time, on December 15, 1997, unless, with the approval of the
Administrator, the offering period is extended by the Company and the Bank. The
Community Offering, if any, may begin at any time after the Subscription
Offering begins and will terminate at the Expiration Time or at any time
thereafter, but not later than January 29, 1998, unless extended with the
approval of the Administrator. The Syndicated Community Offering, if any, or
other sale of all shares not subscribed for in the Subscription and Community
Offerings, will be made as soon as practicable following the Expiration Time.
The sale of the Common Stock must, under the North Carolina conversion
regulations, be completed within 45 days after the Expiration Time unless such
period is extended with the approval of the Administrator. In the event such an
extension is approved, subscribers would be resolicited and would be given the
opportunity to increase (subject to maximum purchase limitations), decrease
(subject to minimum purchase limitations) or rescind their subscriptions. If a
subscriber fails to respond to the resolicitation by the end of the
resolicitation period, the subscription of such subscriber will be cancelled,
funds submitted with the subscription will be refunded promptly with interest at
the Bank's passbook savings rate, and holds on accounts from which withdrawals
were designated will be released. Any such solicitation will be by means of an
amended prospectus filed with the SEC. In such event, substantial additional
printing, legal and accounting expenses may be incurred in completing the
Conversion.
The commencement and completion of any required Community or Syndicated
Community Offering will be subject to market conditions and other factors beyond
the Company's control. Accordingly, no assurance can be given that any required
Community or Syndicated Community Offering or other sale of Common Stock will be
commenced at any particular time or as to the length of time that will be
required to complete the sale of all shares of Common Stock offered, and
significant changes may occur in the estimated pro forma market value of the
Common Stock, together with corresponding changes in the offering price, the
number of shares being offered, and the net proceeds realized from the sale of
the Common Stock. The Plan requires that the Conversion be completed within 24
months after the date of approval of the Plan by the Bank's members.
Subscription Offering
In accordance with North Carolina conversion regulations,
non-transferable Subscription Rights have been granted under the Plan to the
following persons in the following order of priority: (i) the Bank's Eligible
Account Holders, who are depositors as of December 31, 1995 who had aggregate
deposits at the close of business on such date of at least $50 ("Qualifying
Deposits"); (ii) the ESOP; (iii) the Bank's Supplemental Eligible Account
Holders, who are depositors as of September 30, 1997 who had Qualifying Deposits
on such date; (iv) the Bank's Other Members, who are depositor and borrower
members as of November 5, 1997, the voting record date for the Special Meeting,
who are not Eligible Account Holders or Supplemental Eligible Account Holders;
and (v) directors, officers and employees of the Bank who are not Eligible
Account Holders, Supplemental Eligible Account Holders or Other Members, in the
priorities and subject to the limitations described herein. All subscriptions
received will be subject to the availability
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of Common Stock after satisfaction of subscriptions of all persons having prior
rights in the Subscription Offering, and to the maximum purchase limitations and
other terms and conditions set forth in the Plan and described below.
In order to ensure proper identification of Subscription Rights, it is
the responsibility of subscribers in the Subscription Offering to provide
correct account verification information on the Stock Order Forms.
Eligible Account Holders. Each Eligible Account Holder has been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the maximum purchase limitation described in "--Minimum and
Maximum Purchase Limitations." If Eligible Account Holders subscribe for more
shares of Common Stock than are available for purchase, the shares offered will
first be allocated among the subscribing Eligible Account Holders so as to
enable each subscribing Eligible Account Holder to the extent possible, to
purchase the number of shares necessary to make his or her total allocation of
Common Stock equal to the lesser of 100 shares of Common Stock or the number of
shares subscribed for by such Eligible Account Holder. Any shares remaining
after such allocation will be allocated among the subscribing Eligible Account
Holders whose subscriptions remain unsatisfied in the proportion that each such
Eligible Account Holder's Qualifying Deposits bears to the total of the
Qualifying Deposits of all such Eligible Account Holders.
ESOP. The ESOP has been granted, without payment therefor, Subscription
Rights to purchase a number of shares of Common Stock up to 8% of the aggregate
number of shares issued in the Conversion. The ESOP is expected to purchase 8%
of the number of shares to be issued in the Conversion. If, because of an
oversubscription for shares of Common Stock or for any other reason, the ESOP is
unable to purchase in the Conversion 8% of the total number of shares offered in
the Conversion, then the Board of Directors of the Company intends to approve
the purchase by the ESOP in the open market after the Conversion, of such shares
as are necessary for the ESOP to acquire a number of shares equal to 8% of the
shares of Common Stock issued in the Conversion.
Supplemental Eligible Account Holders. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders and the ESOP, each Supplemental Eligible Account Holder has been
granted, without payment therefor, non-transferable Subscription Rights to
purchase Common Stock up to the maximum purchase limitation described in "--
Minimum and Maximum Purchase Limitations." If Supplemental Eligible Account
Holders subscribe for more shares of Common Stock than are available for
purchase, the shares offered will first be allocated among the subscribing
Supplemental Eligible Account Holders so as to enable each subscribing
Supplemental Eligible Account Holder to the extent possible, to purchase the
number of shares necessary to make his or her total allocation of Common Stock
equal to the lesser of 100 shares of Common Stock or the number of shares
subscribed for by such Supplemental Eligible Account Holder. Any shares
remaining after such allocation will be allocated among the subscribing
Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in
the proportion that each such Supplemental Eligible Account Holder's Qualifying
Deposits bears to the total of the Qualifying Deposits of all such Supplemental
Eligible Account Holders.
Other Members. To the extent that shares remain available for purchase
after satisfaction of subscriptions of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders, members of the Bank as of November 5,
1997 (the voting record date for the Special Meeting), other than Eligible
Account Holders and Supplemental Eligible Account Holders (Other Members) have
each been granted, without payment therefor, non-transferable Subscription
Rights to purchase Common Stock up to the maximum purchase limitation described
in "-- Minimum and Maximum Purchase Limitations." If Other Members subscribe for
more shares of Common Stock than remain available for purchase by Other Members,
shares will be allocated among the subscribing Other Members in the proportion
that the number of votes eligible to be cast by each Other Member bears to the
total number of votes eligible to be cast at the Special Meeting by all Other
Members whose subscriptions remain unsatisfied.
Employees, Officers, and Directors. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, the
Bank's employees, officers and directors who are not Eligible Account Holders,
Supplemental Eligible Account
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Holders or Other Members have each been granted, without payment therefor, non-
transferable Subscription Rights to purchase Common Stock up to the maximum
purchase limitation described in "-- Minimum and Maximum Purchase Limitations."
If more shares are subscribed for by such employees, officers and directors than
are available for purchase by them, the available shares will be allocated among
subscribing employees, officers and directors pro rata on the basis of the
amount of their respective subscriptions.
Community Offering
Any shares of Common Stock which remain unsubscribed for in the
Subscription Offering may be offered by the Company to members of the general
public in the Community Offering, which may commence at any time after
commencement of the Subscription Offering, with priority given to natural
persons and trusts of natural persons residing or located in Iredell,
Mecklenburg, Lincoln, Catawba, Rowan and Cabarrus counties in North Carolina
(the Local Community), including IRA accounts, Keogh accounts and similar
retirement accounts established for the benefit of natural persons who are
residents of, the Local Community. The Community Offering may terminate at the
Expiration Time or at any time thereafter, but no later than January 29, 1998,
unless further extended with the consent of the Administrator. The opportunity
to subscribe for shares of Common Stock in the Community Offering is subject to
the right of the Bank and the Company, in their sole discretion, to accept or
reject any such orders, in whole or in part, either at the time of receipt of an
order or as soon as practicable following the termination of the Community
Offering. In the event the Bank and the Company reject any such orders after
receipt, subscribers will be promptly notified and all funds submitted with
subscriptions will be returned with interest at the Bank's passbook savings
rate.
In the event that subscriptions by subscribers in the Community Offering
whose orders would otherwise be accepted exceed the shares available for
purchase in the Community Offering, then subscriptions of natural persons and
trusts of natural persons residing in the Local Community, including IRAs, Keogh
accounts and similar retirement accounts established for the benefit of natural
persons who are residents of the Local Community ("First Priority Community
Subscribers") will be filled in full up to applicable purchase limitations (to
the extent such subscriptions are not rejected by the Bank and the Company)
prior to any allocation to other subscribers in the Community Offering.
In the event of an oversubscription by First Priority Community
Subscribers whose orders would otherwise be accepted, shares of Common Stock
will be allocated first to each First Priority Community Subscriber whose order
is accepted in full or in part by the Bank and the Company in the entire amount
of such order up to a number of shares no greater than 5,000 shares, which
number shall be determined by the Board of Directors of the Bank prior to the
time the Conversion is consummated with the intent to provide for a wide
distribution of shares among such subscribers. Any shares remaining after such
allocation will be allocated to each First Priority Community Subscriber whose
order is accepted in full or in part on an equal number of shares basis until
all orders are filled. Such allocation shall also be applied to subscriptions by
other subscribers in the Community Offering, in the event shares are available
for such subscribers but there is an oversubscription by them.
In order to ensure proper allocation of shares in the event of an
oversubscription, it is the responsibility of subscribers in the Community
Offering to provide correct addresses of residence on the Stock Order Forms.
Syndicated Community Offering
The Plan provides that, if necessary, all shares of Common Stock not
purchased in the Subscription and Community Offerings, if any, may be offered
for sale to the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers as selected dealers ("Selected Dealers")
to be formed and managed by Trident Securities acting as agent of the Company in
the sale of the Common Stock. The Company and the Bank have the right to reject
orders, in whole or in part, in their sole discretion in the Syndicated
Community Offering. Neither Trident Securities nor any registered broker-dealer
shall have any obligation to take or purchase any shares of the Common Stock in
the Syndicated Community Offering; however, Trident Securities has agreed to use
its best efforts
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in the sale of shares in the Syndicated Community Offering. Common Stock sold in
the Syndicated Community Offering will be sold at the purchase price of $50.00
per share which is the same price as all other shares being offered in the
Conversion.
It is estimated that the Selected Dealers will receive a negotiated
commission based on the amount of Common Stock sold by the Selected Dealer,
payable by the Company. 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 (the "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 Conversion, Trident Securities will request, as of the Order
Date, Selected Dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected Dealers will
send confirmations of the orders to such customers on the next business day
after the Order Date. Selected Dealers will debit the accounts of their
customers on a date which will be three business days from the Order Date
("Debit Date"). Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Debit Date. On the next business day following the Debit
Date, Selected Dealers will remit funds to the account that the 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 Conversion. In the event the
Conversion is not consummated as described above, funds with interest will be
returned promptly to the Selected Dealers, who, in turn, will promptly credit
their customers' brokerage accounts.
The Syndicated Community Offering may close at any time after the
Expiration Time at the discretion of the Bank and the Company, but in no case
later than January 29, 1998.
Fractional Shares
In making allocations in the event of oversubscriptions, all
computations will be rounded down to the nearest whole share; no fractional
shares will be issued. Excess and other amounts sent by subscribers which are
not used to satisfy subscriptions will be refunded with interest at the Bank's
passbook savings rate, and amounts designated for withdrawal from deposit
accounts will be released.
Purchase Price of Common Stock and Number of Shares Offered
The purchase price of shares of Common Stock sold in the Subscription
Offering, Community Offering and Syndicated Community Offering will be $50.00
per share. The purchase price was determined by the Boards of Directors of the
Company and the Bank in consultation with the Bank's financial advisor and sales
agent, Trident Securities, and was based upon a number of factors. The Board of
Directors considered a purchase price of $50.00 preferable to a lower per share
price for several reasons. It was hoped that, in the event of an
oversubscription, the higher price would result in a wider distribution of the
Common Stock. See "- Subscription Offering - Eligible Account Holders."
Additionally, the Board of Directors would like the Company and the Bank to be
more closely identified with the commercial banks doing business in its market
area which have common stock trading at per share prices in the range of
approximately $50.00 to $92.00. It is also hoped that a $50.00 per share price
will encourage a higher level of local, long-term investment in the Company and
the Bank. See "Dividend Policy."
The North Carolina regulations governing conversions of North
Carolina-chartered mutual savings banks to stock form require that the aggregate
purchase price of the shares of Common Stock of the Company sold in connection
with the Conversion be equal to not less than the minimum, nor more than the
maximum, of the Valuation Range which is established by an independent appraisal
in the Conversion and is described below; provided, however, that with the
consent of the Administrator and the FDIC the aggregate purchase price of the
Common Stock sold may be increased to up to 15% above the maximum of the
Valuation Range, without a resolicitation of subscribers or any right to cancel,
rescind or change subscription orders, to reflect changes in market and
financial conditions following commencement of the Subscription Offering.
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FDIC rules with respect to appraisals require that the independent
appraisal must include a complete and detailed description of the elements of
the appraisal report, justification for the methodology employed and sufficient
support for the conclusions reached. The appraisal report must include a full
discussion of each peer group member and documented analytical evidence
supporting variances from peer group statistics. The appraisal report must also
include a complete analysis of the converting institution's pro forma earnings,
which should include the institution's full potential once it fully deploys the
capital from the conversion pursuant to its business plan.
The Bank has retained JMP Financial, an independent appraisal firm
experienced in the valuation and appraisal of savings institutions and their
holding companies, to prepare an appraisal of the pro forma market value of the
Bank and the Company and to assist the Bank in preparing a business plan. For
its services in determining such valuation and assisting with the business plan,
JMP Financial will receive an aggregate fee of $27,500 and will be reimbursed
for its out-of-pocket expenses.
JMP Financial has informed the Bank that its appraisal has been made in
reliance upon the information contained in this Prospectus, including the
financial statements of the Bank. JMP Financial has further informed the Bank
that it also considered the following factors, among others, in making the
appraisal: (i) the present and projected operating results and financial
condition of the Company and the Bank; (ii) the economic and demographic
conditions in the Bank's existing market area; (iii) certain historical,
financial and other information relating to the Bank; (iv) the proposed dividend
policy of the Company; (v) a comparative evaluation of the operating and
financial statistics of the Bank with those of other savings institutions; (vi)
the aggregate size of the offering of the Common Stock; and (vii) the trading
market for the securities of institutions JMP Financial believes to be
comparable in relevant respects to the Company and the Bank and general
conditions in the markets for such securities. In addition, JMP Financial has
advised the Bank that it has considered the effect of the Conversion on the net
worth and earnings potential of the Company and the Bank.
On the basis of its consideration of the above factors, JMP Financial
has advised the Bank that, in its opinion, at October 17, 1997, the Valuation
Range of the Bank and the Company was from a minimum of $21,675,000 to a maximum
of $29,325,000, with a midpoint of $25,500,000. Based upon such valuation and a
purchase price for shares offered in the Conversion of $50.00 per share, the
number of shares to be offered ranges from a minimum of 433,500 shares to a
maximum of 586,500 shares, with a midpoint of 510,000 shares.
The Board of Directors of the Bank has reviewed the methodology and
assumptions used by JMP Financial in preparing the appraisal and has determined
that the Valuation Range, as well as the methodology and assumptions used, were
reasonable and appropriate.
Upon completion of the Offerings, JMP Financial will confirm or update
its valuation of the estimated aggregate pro forma market value of the Bank and
the Company. Based on the confirmed or updated appraisal, a determination will
be made of the total number of shares of Common Stock which shall be offered and
sold in the Conversion.
With the consent of the Administrator and the FDIC, the aggregate price
of the shares sold in the Conversion may be increased by up to 15% above the
maximum of the Valuation Range, or to $33,723,750 (674,475 shares), without a
resolicitation of subscribers and without any right to cancel, rescind or change
subscription orders, to reflect changes in market and financial conditions
following commencement of the Subscription Offering.
No sale of shares of Common Stock may be consummated unless, after the
expiration of the offering period, JMP Financial confirms to the Bank, the
Company, the Administrator and the FDIC, that, to the best of its knowledge,
nothing of a material nature has occurred which, taking into account all
relevant factors, would cause JMP Financial to conclude that the aggregate
purchase price of the Common Stock sold in the Conversion is incompatible with
its estimate of the aggregate pro forma market value of the Bank and the Company
at the conclusion of the Offerings. If the aggregate pro forma market value of
the Bank and the Company as of such date is within the Valuation Range (or, with
the consent of the Administrator and FDIC, not more than 15% above the maximum
of the Valuation Range), then such pro forma market value will determine the
number of shares of Common Stock to be sold in the Conversion. If
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there has occurred a change in the aggregate pro forma market value of the Bank
and the Company so that the aggregate pro forma market value is below the
minimum of the Valuation Range or more than 15% above the maximum of the
Valuation Range, a resolicitation of subscribers may be made based upon a new
Valuation Range, the Plan may be terminated or such other actions as the
Administrator and the FDIC may permit may be taken.
In the event of a resolicitation, subscribers would be given a specified
time period within which to respond to the resolicitation. If a subscriber fails
to respond to the resolicitation by the end of such period, the subscription of
such subscriber will be cancelled, funds submitted with the subscription will be
refunded promptly with interest at the Bank's passbook savings rate, and holds
on accounts from which withdrawals were designated will be released. Any such
resolicitation will be by means of an amended prospectus filed with the SEC. A
resolicitation may delay completion of the Conversion. If the Plan is
terminated, all funds will be returned promptly with interest at the Bank's
passbook savings rate from the date payment was deemed received, and holds on
funds authorized for withdrawal from deposit accounts will be released. See "--
Exercise of Subscription Rights and Purchases in the Community Offering."
The valuation by JMP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
Common Stock. JMP Financial did not independently verify the financial
statements and other information provided by the Bank, nor did JMP Financial
value independently the assets or liabilities of the Bank. The valuation
considers the Bank as a going concern and should not be considered as an
indication of the liquidation value of the Bank or 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 such shares in the Conversion
will thereafter be able to sell shares at prices in the range of the foregoing
valuation of the pro forma market value thereof.
A copy of the complete appraisal by JMP Financial is on file and
available for inspection at the office of the Savings Institutions Division of
the North Carolina Department of Commerce, Tower Building, Suite 301, 1110
Navaho Drive, Raleigh, North Carolina 27609. A copy is also available for
inspection at the Stock Information Center, 347 North Main Street, Mooresville,
North Carolina 28115. A copy of the appraisal has also been filed as an exhibit
to the Registration Statement filed with the SEC with respect to the Common
Stock offered hereby. See "ADDITIONAL INFORMATION."
Exercise of Subscription Rights and Purchases in Community Offering
In order for Subscription Rights to be effectively exercised in the
Subscription Offering and in order to purchase in the Subscription Offering, the
original signed Stock Order Forms (including an original signed form of
certification) and the required payment for the aggregate dollar amount of
Common Stock desired or appropriate instructions authorizing withdrawal from one
or more the Bank deposit accounts (other than negotiable order of withdrawal
accounts or other demand deposit accounts), must be received by the Bank by the
Expiration Time, which is 12:00 noon, Eastern Time, on December 15, 1997.
Subscription Rights (i) for which the Bank does not receive original signed
Stock Order Forms by the Expiration Time (unless such time is extended), or (ii)
for which Stock Order Forms are executed defectively or are not accompanied by
full payment (or appropriate withdrawal instructions) for subscribed shares,
will expire whether or not the Bank has been able to locate the persons entitled
to such rights. Copies of the Stock Order Forms, including copies sent by
facsimile, will not be accepted. In order to purchase in the Community Offering,
the Stock Order Forms, accompanied by the required payment for the aggregate
dollar amount of Common Stock desired or appropriate instructions authorizing
withdrawal from one or more the Bank deposit accounts (other than negotiable
order of withdrawal accounts or other demand deposit accounts), must be received
by the Bank prior to the time the Community Offering terminates, which could be
at any time at or subsequent to the Expiration Time. No orders will be accepted
from persons who do not have Subscription Rights in the Subscription Offering
unless a Community Offering is commenced.
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Persons wishing to use funds in a the Bank IRA to purchase Common Stock
must visit the Stock Information Center on or before December 8, 1997 in order
to complete that purchase so that the necessary forms may be forwarded for
execution and returned prior to the Expiration Time.
Executed Stock Order Forms once received by the Bank, may not be
modified, amended or rescinded without the consent of the Bank. The Bank has the
right to extend the subscription period subject to applicable regulations,
unless otherwise ordered by the Administrator, or to waive or permit correction
of incomplete or improperly executed Stock Order Forms, but does not represent
that it will do so.
The amount to be remitted with the Stock Order Forms shall be the
aggregate dollar amount that a subscriber or purchaser desires to invest in the
Subscription and Community Offerings. Complete payment must accompany all
completed Stock Order Forms submitted in the Subscription and Community
Offerings in order for subscriptions to be valid. See "-- Purchase Price of
Common Stock and Number of Shares Offered."
Payment for shares will be permitted to be made by any of the following
means: (i) in cash, if delivered in person to either office of the Bank; (ii) by
check, bank draft, negotiable order of withdrawal or money order, provided that
the foregoing will only be accepted subject to collection and payment; or (iii)
by appropriate authorization of withdrawal from any deposit account in the Bank
(other than a negotiable order of withdrawal account or other demand deposit
account). Stock Order Forms directing that payment for shares be made by
authorization of withdrawal will be accepted only if, at the time the Stock
Order Forms are received, there exists sufficient funds in the account from
which withdrawal is authorized to pay the full purchase price for the number of
shares ordered. Payment may not be made by wire transfer. In order to ensure
proper identification of Subscription Rights and proper allocations in the event
of an oversubscription, it is the responsibility of subscribers to provide
correct account verification information on the Stock Order Forms. Stock Order
Forms submitted by unauthorized purchasers or in amounts exceeding purchase
limitations will not be honored.
For purposes of determining the withdrawal balance of deposit accounts
from which withdrawals have been authorized, such withdrawals will be deemed to
have been made upon receipt of appropriate authorization therefor, but interest
will be paid by the Bank on the amount deemed to have been withdrawn at the
contractual rate of interest paid on such accounts until the date on which the
Conversion is completed or terminated.
Interest will be paid by the Bank on payments for Common Stock made in
cash or by check, bank draft, negotiable order of withdrawal or money order at
the Bank's passbook savings rate. Such interest shall be paid from the date the
order is accepted for processing and payment in good funds is received by the
Bank until consummation or termination of the Conversion. The Bank shall be
entitled to invest all amounts paid on subscriptions for Common Stock for its
own account until completion or termination of the Conversion. The Bank may not
knowingly lend funds or otherwise extend credit to any person to purchase Common
Stock. After amounts submitted for payment are applied to the purchase price for
shares sold, they will no longer earn interest, and they will not be insured by
the FDIC or any other government agency or other entity.
The Stock Order Forms contain appropriate means by which authorization
of withdrawals from deposit accounts may be made to pay for subscribed shares.
Once such a withdrawal has been authorized, none of the designated withdrawal
amount may be withdrawn (except by the Bank as payment for Common Stock) until
the Conversion is completed or terminated. Savings accounts will be permitted to
be established for the purpose of making payment for subscribed shares of Common
Stock. Funds authorized for withdrawal will continue to earn interest at the
applicable contract interest rate until completion or termination of the
Conversion or, in the case of an order submitted in the Community Offering,
until it is determined that such order cannot or will not be accepted.
Notwithstanding any regulatory provision regarding penalties for early
withdrawal from certificate accounts, payment for subscribed shares of Common
Stock will be permitted through authorization of withdrawals from such accounts
without the assessment of such penalties. However, if after such withdrawal the
applicable minimum balance requirement ceases to be satisfied,
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such certificate account will be canceled and the remaining balance thereof will
earn interest at the Bank's passbook savings rate.
Upon completion or termination of the Conversion, the Bank will return
to subscribers all amounts paid with subscriptions which are not applied to the
purchase price for shares, plus interest at its passbook savings rate from the
date good funds are received until the consummation or termination of the
Conversion, and the Bank will release deposit account withdrawal orders given in
connection with the subscriptions to the extent funds are not withdrawn and
applied toward the purchase of shares.
Delivery of Stock Certificates
Certificates representing Common Stock issued in the Conversion will be
mailed by the Company's transfer agent to persons entitled thereto at the
address of such persons appearing on the Stock Order Forms as soon as
practicable following consummation of the Conversion. Any certificates returned
as undeliverable will be held by the Company until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of Common Stock for which they
have subscribed, even though trading of the Common Stock may have commenced.
Allocations of Common Stock will be deemed final only upon stockholder receipt
of the certificate representing the Common Stock.
Persons in Non-Qualified or Foreign Jurisdictions
The Company will make reasonable efforts to comply with the securities
laws of all states of the United States in which Eligible Account Holders,
Supplemental Eligible Account Holders, or Other Members entitled to subscribe
for shares of Common Stock reside. However, no shares of Common Stock or
Subscription Rights under the Plan will be offered or sold in a foreign country,
or in a state in the United States (i) where a small number of persons otherwise
eligible to subscribe for shares under the Plan reside or (ii) if the Company
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including, but not limited to, a
requirement that the Company, the Bank or any employee or representative thereof
register as a broker, dealer, agent or salesperson or register or otherwise
qualify the Subscription Rights or Common Stock for sale in such state. No
payments will be made in lieu of the granting of Subscription Rights to persons
residing in such jurisdictions.
Marketing Arrangements
The Bank has retained Trident Securities to consult with and advise the
Bank and the Company and to assist the Company, on a best-efforts basis, in the
marketing of shares in the Offerings. Trident Securities is a broker-dealer
registered with the SEC and a member of the National Association of Securities
Dealers, Inc. ("NASD"). Trident Securities is headquartered in Raleigh, North
Carolina, and its telephone number is (919) 781-8900. Trident Securities will
assist the Bank and the Company in the Conversion as follows: (i) it will act as
marketing advisor with respect to the Subscription Offering and will assist the
Company on a best-efforts basis in the marketing of the Common Stock in the
Community Offering and Syndicated Community Offering; (ii) members of its staff
will conduct training sessions to educate directors, officers and employees of
the Bank regarding the Conversion process; and (iii) it will provide assistance
in the establishment and supervision of the Stock Information Center, including
training staff to record and tabulate orders for the purchase of Common Stock
and to respond to customer inquiries.
For rendering its services, the Bank has agreed to pay Trident
Securities (a) a management fee equal to .40% of the aggregate dollar amount of
Common Stock sold in the Offerings; and (b) a commission equal to 2.0% of the
aggregate dollar amount of Common Stock sold in the Subscription and Community
Offerings, excluding shares purchased by the ESOP, directors, executive officers
and their "associates" (as defined in the Plan). The Bank has also agreed to pay
to Selected Dealers, if any, negotiated commissions. The Bank has paid Trident
Securities $10,000 toward amounts due to such agent.
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The Bank has agreed to reimburse Trident Securities for its reasonable
out-of-pocket expenses, including but not limited to travel, communications,
legal fees and postage, and to indemnify Trident Securities against certain
claims or liabilities, including certain liabilities under the Securities Act.
Trident has agreed that the Bank is not required to pay its legal fees to the
extent they exceed $27,500 or its other out of pocket expenses to the extent
they exceed $10,000. Total fees and commissions to Trident Securities are
expected to be between $428,180 and $688,433 at the minimum and 15% above the
maximum, respectively, of the Valuation Range. See "PRO FORMA DATA" for the
assumptions used to determine these estimates.
Sales of Common Stock will be made primarily through registered
representatives affiliated with Trident Securities or by the broker-dealers
managed by Trident Securities. In addition, subject to applicable law, executive
officers of the Company and the Bank may participate in the solicitation of
offers to purchase Common Stock. Other employees of the Bank may participate in
the Offerings in clerical capacities, providing administrative support in
effecting sales transactions and answering questions of a mechanical nature
relating to the proper execution of the Stock Order Forms. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. A Stock Information
Center will be established in the Bank's office, in an area separate from the
Bank's banking operations. Employees will inform prospective purchasers that
their questions should be directed to the Stock Information Center and will
provide such persons with the telephone number of the Stock Information Center.
Stock orders will be accepted at the Bank's office and will be promptly
forwarded to the Stock Information Center for processing. Sales of Common Stock
by registered representatives will be made from the Stock Information Center. In
addition, the Bank may hire one or more temporary clerical persons to assist in
typing, opening mail, answering the phone, and with other clerical duties. An
employee of the Bank will also be present at the Stock Information Center to
process funds and answer questions regarding payment for stock, including
verification of account numbers in the case of payment by withdrawal
authorization and similar matters. Subject to applicable state law, the Company
will rely on Rule 3a4-1 under the Exchange Act, and sales of Common Stock will
be conducted within the requirements of Rule 3a4-1, so as to permit officers and
current full and part-time the Bank employees to participate in the sale of
Common Stock. No officer, director or employee of the Company or the Bank will
be compensated in connection with his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
The engagement of Trident Securities and the work performed by Trident
Securities pursuant to its engagement should not be construed by purchasers of
Common Stock as constituting an endorsement or recommendation relating to such
investment or a verification of the accuracy or completeness of information
contained in this Prospectus.
Minimum and Maximum Purchase Limitations
Each person subscribing for Common Stock in the Conversion must
subscribe for at least ten shares of the Common Stock to be offered in the
Conversion. In addition, the maximum number of shares of Common Stock which may
be purchased in the Conversion by (i) any person or entity, (ii) persons or
entities exercising Subscription Rights through a single account or (iii) group
of persons or entities otherwise acting in concert, is 6,000 shares; provided,
however, that the ESOP may purchase up to 8% of the number of shares offered in
the Conversion (53,958 shares, assuming the issuance of 674,475 shares). In
addition, no person or entity, or group of persons or entities acting in
concert, together with any associate (as defined in the Plan), may subscribe for
more than 12,000 shares of Common Stock sold in the Conversion. Any shares held
by the ESOP and attributed to a natural person shall not be aggregated with
other shares purchased directly by or otherwise attributable to that natural
person. The Board of Directors of the Bank may in its absolute discretion (i)
reduce the above-described 6,000 and 12,000 share maximum purchase limitations
to an amount not less than 1% of the number of shares offered and sold in the
Conversion or (ii) increase such 6,000 and 12,000 share maximum purchase
limitations to an amount of up to 5% of the shares of Common Stock offered and
sold. Any reduction or increase in the maximum purchase limitation by the Bank's
Board of Directors may occur at any time prior to consummation of the
Conversion, either before or after the Special Meeting on December 16, 1997. In
the event the 6,000 or 12,000 share maximum purchase limitation is increased,
any subscriber or group of
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subscribers in the Subscription, Community or Syndicated Community Offering who
has subscribed for the maximum amount which is increased, and certain other
large subscribers in the discretion of the Company, shall be given the
opportunity to increase their subscriptions up to the then applicable maximum
purchase limitation.
The Plan further provides that for purposes of the foregoing limitations
the term "associate" is used to indicate any of the following relationships with
a person:
(i) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director
or officer of the Bank, the Company or any subsidiary of the Bank
or of the Company;
(ii) any corporation or organization (other than the Bank, the Company
or a majority-owned subsidiary of the Bank or the Company) of
which the person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of
equity security; and
(iii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as a trustee
or in a similar fiduciary capacity, except for any tax-qualified
employee stock benefit plan or any charitable trust which is
exempt from federal taxation pursuant to Section 501(c)(3) of the
Code.
For purposes of the foregoing limitations, (i) directors and officers of
the Bank or the Company shall not be deemed to be associates or a group of
persons acting in concert solely as a result of their serving in such
capacities, (ii) the ESOP will not be deemed to be acting in concert with any of
its trustees for purposes of determining the number of shares which any such
trustee, individually, may purchase and (iii) shares of Common Stock held by the
ESOP and attributed to an individual will not be aggregated with other shares
purchased directly by, or otherwise attributable to, that individual.
For purposes of the foregoing limitations, persons will be deemed to be
"acting in concert" if they are (i) knowingly participating in a joint activity
or interdependent conscious parallel action towards a common goal (whether or
not pursuant to an express agreement), with respect to the purchase, ownership,
voting or sale of Common Stock or (ii) engaged in a combination or pooling of
voting or other interests in the securities of the Company for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise. The Company and the Bank may presume
that certain persons are acting in concert based upon, among other things, joint
account relationships and the fact that such persons have filed joint Schedules
13D with the SEC with respect to other companies.
Approval, Interpretation, Amendment and Termination
Under the Plan, the Administrator's approval thereof, and applicable
North Carolina conversion regulations, consummation of the Conversion is subject
to satisfaction of certain conditions, including the following: (i) approval of
the Plan by the affirmative vote of a majority of the votes eligible to be cast
by members of the Bank at the Special Meeting; (ii) sale of shares of Common
Stock for an aggregate purchase price equal to not less than the minimum or more
than the maximum of the Valuation Range unless the aggregate purchase price is
increased to as much as 15% above the maximum with the consent of the
Administrator and FDIC, and (iii) receipt by the Company and the Bank of
favorable opinions of counsel or other tax advisor as to the federal and state
tax consequences of the Conversion. See "-- Income Tax Consequences."
If all conditions for consummation of the Conversion are not satisfied,
no Common Stock will be issued, the Bank will continue to operate as a North
Carolina-chartered mutual savings bank, all subscription funds will be promptly
returned with interest at the Bank's passbook savings rate, and all deposit
withdrawal authorizations (and holds placed on such accounts) will be canceled.
In such an event, the Company would not acquire control of the Bank.
119
<PAGE>
All interpretations by the Bank and the Company of the Plan and of the
Stock Order Forms and related materials for the Subscription and Community
Offerings will be final, subject to the authority of the Administrator. The Bank
and the Company may reject Stock Order Forms that are not properly completed.
However, the Company and the Bank retain the right, but will not be required, to
waive irregularities in submitted Stock Order Forms or to require the submission
of corrected Stock Order Forms or the remittance of full payment for all shares
subscribed for by such dates as they may specify. In addition, the Plan may be
substantively amended by a two-thirds vote of the Bank's Board of Directors at
any time prior to the Special Meeting, and at any time thereafter by a
two-thirds vote of the Bank's Board of Directors with the concurrence of the
Administrator and the FDIC. If the Bank determines upon the advice of counsel
and after consultation with the Administrator that any such amendment is
material, subscribers would be given the opportunity to increase, decrease or
cancel their subscriptions. Also, as required by the regulations of the
Administrator, the Plan provides that the transactions contemplated thereby may
be terminated by a two-thirds vote of the Bank's Board of Directors at any time
prior to the Special Meeting and may be terminated by a two-thirds vote of the
Bank's Board of Directors at any time thereafter but prior to the completion of
the Conversion with the concurrence of the Administrator, notwithstanding
approval of the Plan by the Members at the Special Meeting.
Certain Restrictions on Transfer of Subscription Rights; False or Misleading
Order Forms
The Subscription Rights granted under the Plan are non-transferable.
Subscription Rights may be exercised only by the person to whom they are issued
and only for his or her own account. Persons exercising Subscription Rights are
required to certify that they are purchasing shares for their own accounts
within the purchase limitations set forth in the Plan and that they have no
agreement or understanding for the sale or transfer of such shares.
The Bank reserves the right to make an independent investigation of any
facts or circumstances brought to its attention that indicate or tend to
indicate that one or more persons acting independently or as a group acting in
concert may be attempting to violate or circumvent the regulatory prohibition on
transferability of Subscription Rights. The nature and extent of such
investigation will be at the Bank's sole discretion and the Bank may require a
holder of Subscription Rights to provide certified affidavits and other
documentation to satisfy the Bank that its Plan and North Carolina and federal
conversion regulations regarding nontransferability are not being subverted by
actions of holders of Subscription Rights. In extreme cases the Bank reserves
the right to seek legal advice from the General Counsel for the Administrator as
to compliance with all regulations governing the Conversion, including the
nontransferability of Subscription Rights.
The Plan provides that, if the Bank's Board of Directors determines that
a subscriber (i) has submitted a false or misleading information on his or her
Stock Order Forms or otherwise in connection with the attempted purchase of
shares, (ii) has attempted to purchase shares of Common Stock in violation of
provisions of the Plan or (iii) fails to cooperate with attempts by the Bank or
the Company or their employees or agents to verify information with respect to
purchase rights, the Board of Directors may reject the order of such subscriber.
Income Tax Consequences
The Bank has received an opinion from its special counsel, Brooks,
Pierce, McLendon, Humphrey & Leonard, L.L.P., of Greensboro, North Carolina, to
the effect that for federal income tax purposes: (i) the Conversion will
constitute a tax free reorganization with respect to the Bank and no gain or
loss will be recognized by the Bank either in its mutual or stock form; (ii) no
gain or loss will be recognized by the Bank upon the purchase of the Bank's
stock by the Company or upon the sale by the Company of its Common Stock; (iii)
no gain or loss will be recognized by the Bank's depositors with respect to
their deposit accounts at the Bank as a consequence of the Conversion; (iv) the
tax basis of depositors' deposit accounts at the Bank will not be changed as a
result of the Conversion; (v) assuming the Subscription Rights have no value, no
gain or loss will be recognized by Eligible Account Holders, Supplemental
Eligible Account Holders, Other Members, or directors, officers and employees of
the Bank upon either the issuance to them of the Subscription Rights or the
exercise or lapse thereof; (vi) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the distribution
to them of interests in the Liquidation
120
<PAGE>
Account; (vii) assuming the Subscription Rights have no value, the tax basis for
Common Stock purchased in the Conversion will be the amount paid therefor; and
(viii) the tax basis of interests in the Liquidation Account will be zero. The
Bank has been further advised by its special counsel, Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P., that the tax effects of the Conversion under North
Carolina tax laws will be consistent with the federal income tax consequences.
Several of the foregoing legal opinions are premised on the assumption
that the Subscription Rights will have no value. The Bank has been advised by
JMP Financial that, in its opinion, the Subscription Rights will not have any
ascertainable value, based on the fact that such rights are acquired by the
recipients without cost, are non-transferable, are of short duration and afford
the recipients the right only to purchase Common Stock at a price equal to its
estimated fair market value as of the date such rights are issued, which will be
the same price paid by all purchasers in the Conversion. The opinion of JMP
Financial is not binding on the IRS and if the Subscription Rights were
ultimately determined to have ascertainable value, recipients of Subscription
Rights would have to include in gross income an amount equal to the value of the
Subscription Rights received by them. The basis of the Common Stock purchased
pursuant to Subscription Rights would be increased by the amount of income
realized with respect to the receipt or exercise of the Subscription Rights.
Moreover, recipients of Subscription Rights could then have to report the
transaction to the IRS. Each Eligible Account Holder, Supplemental Eligible
Account Holder, Other Member or other recipient of Subscription Rights is
encouraged to consult with his, her or its own tax advisor as to the tax
consequences in the event the Subscription Rights are deemed to have
ascertainable value.
No legal opinion has been or will be received with respect to any tax
consequences of the Conversion not specifically described above, including the
tax consequences to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members, other recipients of Subscription Rights or purchasers of
Common Stock under the laws of any other state, local or foreign taxing
jurisdiction to which they may be subject. Special counsel expresses no opinion
regarding the value of the Subscription Rights.
LEGAL OPINIONS
The validity of the issuance of the Common Stock in the Conversion has
been passed upon for the Company by its special counsel, Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P., Greensboro, North Carolina, which firm has
also rendered its opinion to the Bank concerning certain federal and North
Carolina income tax aspects of the Conversion as described herein under "THE
CONVERSION -- Income Tax Consequences." Certain legal matters will be passed
upon for Trident Securities by Housely Kantarian & Bronstein, P.C., Washington,
D.C.
EXPERTS
The Financial Statements of the Bank as of December 31, 1996 and 1995
and for each of the years in the two-year period ended December 31, 1996 and for
the nine-month period ended December 31, 1994 have been included herein in
reliance upon the report of McGladrey & Pullen LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
JMP Financial has consented to being named as an expert herein and to
the summary herein of its appraisal report as to the estimated pro forma market
value of the Bank and the Company and its opinion with respect to Subscription
Rights.
121
<PAGE>
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to
Section 12 of the Exchange Act in connection with the Conversion and will not
deregister the Common Stock for a period of three years following the completion
of the Conversion. Upon such registration, the proxy and tender offer rules,
insider trading reporting requirements and restrictions, annual and periodic
reporting and other requirements of the Exchange Act will be applicable to the
Company.
ADDITIONAL INFORMATION
The Company has filed a registration statement with the SEC on Form S-1
under the Securities Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all of the information set forth in the registration statement. Such
information can be examined and copied at the public reference facilities of the
SEC located at Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and
at the regional offices of the SEC at 75 Park Place, Fourteenth Floor, New York,
New York 10007 and Room 3190, John C. Kluczynski Building, 230 South Dearborn
Street, Chicago, Illinois 60604. Copies of such material can be obtained by mail
from the SEC at prescribed rates from the Public Reference Section of the SEC at
450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC maintains
a World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC, including the Company; the address is (http://www.sec.gov.). The statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions of each material feature thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
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 JMP Financial's
appraisal, may be inspected at the office of the Administrator, Savings
Institutions Division, North Carolina Department of Commerce, Tower Building,
Suite 301, 1110 Navaho Drive, Raleigh, North Carolina 27609. Copies of the Plan,
which includes a copy of the Bank's proposed Amended Certificate of
Incorporation and Stock Bylaws, and copies of the Company's 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 347 North Main Street,
Mooresville, North Carolina 28115, Attention: George W. Brawley, Jr., President,
or by telephoning the Bank at (704) 664-4888. A copy of JMP Financial's
independent appraisal is also available for inspection at the Stock Information
Center, 347 North Main Street, Mooresville, North Carolina 28115.
122
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
INDEPENDENT AUDITORS' REPORT F-1
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS:
Statements of financial condition at June 30, 1997 (unaudited) and December 31, 1996 and 1995 F-2
Statements of income for the six months ended June 30, 1997 and 1996 (unaudited) and
the years ended December 31, 1996 and 1995, and for the nine months ended December 31, 1994 F-3 - F-4
Statements of equity for the six months ended June 30, 1997 (unaudited) and the years
ended December 31, 1996 and 1995 and for the nine months ended December 31, 1994 F-5
Statements of cash flows for the six months ended June 30, 1997 and 1996 (unaudited) and
the years ended December 31, 1996 and 1995 and the nine months ended December 31, 1994 F-6 - F-9
Notes to financial statements F-10 - F-33
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
All schedules are omitted because of the absence of the conditions under which
they are required or because the required information is included in the
financial statements of Mooresville Savings Bank, S.S.B., or related notes. No
financial statements are provided for the company since it was not in operation
for any of the periods presented.
123
<PAGE>
[LOGO OF MCGLADREY & PULLEN, LLP APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Mooresville Savings Bank, S.S.B
Mooresville, North Carolina
We have audited the accompanying statements of financial condition of
Mooresville Savings Bank, S.S.B. as of December 31, 1996 and 1995, and the
related statements of income, equity, and cash flows for each of the years in
the two year period ended December 31, 1996 and the nine month period ended
December 31, 1994. 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. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mooresville Savings Bank,
S.S.B. as of December 31, 1996 and 1995 and the results of its operations and
its cash flows for each of the years in the two year period ended December 31,
1996, and the nine month period ended December 31, 1994, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
January 16, 1997
F-1
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
STATEMENTS OF FINANCIAL CONDITION
June 30, 1997, December 31, 1996 and 1995
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Cash
Interest-bearing deposits $ 2,348,000 $ 2,253,000 $ 2,657,000
Noninterest-bearing deposits 246,000 422,000 399,000
Certificates of deposit 100,000 100,000 200,000
Securities available for sale (Note 2) 3,446,000 3,959,000 3,512,000
Securities held to maturity
Fair value 1997, $3,205,000; 1996, $3,705,000;
1995, $6,733,000 (Notes 2 and 5) 3,208,000 3,708,000 6,710,000
Federal Home Loan Bank stock (Note 1) 930,000 869,000 824,000
Loans receivable, net (Note 3) 100,506,000 97,951,000 90,555,000
Office properties and equipment, net (Note 4) 908,000 922,000 960,000
Accrued interest receivable:
Investment securities 83,000 96,000 117,000
Loans receivable 639,000 618,000 581,000
Cash value of life insurance (Note 6) 810,000 838,000 732,000
Deferred income taxes (Note 8) 861,000 713,000 618,000
Income taxes receivable -- 42,000 122,000
Prepaid expenses and other assets 77,000 61,000 46,000
------------------------------------------------------------
$114,162,000 $112,552,000 $108,033,000
============================================================
LIABILITIES AND EQUITY
- --------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits (Note 5) $ 95,872,000 $ 93,785,000 $ 92,103,000
Advances from Federal Home Loan Bank (Note 11) 1,000,000 2,000,000 --
Advances from borrowers for taxes and insurance 215,000 105,000 123,000
Accounts payable and other liabilities (Note 6) 229,000 245,000 342,000
Deferred compensation (Note 6) 2,137,000 2,005,000 1,739,000
Income taxes payable 18,000 -- --
-----------------------------------------------------------
Total liabilities 99,471,000 98,140,000 94,307,000
Commitments (Notes 6 and 9)
Equity:
Retained earnings, substantially restricted
(Notes 7 and 8) 14,671,000 14,384,000 13,663,000
Unrealized gain on securities available
for sale, net of tax 20,000 28,000 63,000
------------------------------------------------------------
14,691,000 14,412,000 13,726,000
------------------------------------------------------------
$114,162,000 $112,552,000 $108,033,000
============================================================
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
STATEMENTS OF INCOME
For the Six Months Ended June 30, 1997 and 1996 and
Years Ended December 31, 1996 and 1995,
and Nine Months ended December 31, 1994
<TABLE>
<CAPTION>
June 30,
1997 1996
- ----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Interest income:
Loans $ 4,130,000 $ 3,889,000
Investment securities 251,000 319,000
Other 52,000 49,000
-------------------------------------
4,433,000 4,257,000
Interest expense:
Deposits (Note 5) 2,308,000 2,305,000
Federal Home Loan Bank advances 58,000 5,000
-------------------------------------
2,366,000 2,310,000
-------------------------------------
Net interest income 2,067,000 1,947,000
Provision for loan losses (Note 3) 230,000 -
-------------------------------------
Net interest income after provision
for loan losses 1,837,000 1,947,000
-------------------------------------
Noninterest income:
Service fee income 75,000 74,000
Other 12,000 30,000
-------------------------------------
87,000 104,000
-------------------------------------
Noninterest expenses:
Compensation and employee benefits (Note 6) 1,006,000 878,000
Net occupancy 91,000 89,000
Deposit insurance premiums 15,000 104,000
Special SAIF assessment (Note 12) - -
Data processing 83,000 88,000
Real estate owned expenses 3,000 -
Other 230,000 206,000
-------------------------------------
1,428,000 1,365,000
-------------------------------------
Income before income taxes 496,000 686,000
Income taxes (Note 8) 209,000 257,000
-------------------------------------
Net income $ 287,000 $ 429,000
=====================================
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
STATEMENTS OF INCOME
For the Six Months Ended June 30, 1997 and 1996 and
Years Ended December 31, 1996 and 1995,
and Nine Months ended December 31, 1994
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 7,963,000 $ 7,118,000 $ 4,961,000
Investment securities 628,000 670,000 476,000
Other 88,000 158,000 107,000
-----------------------------------------------------
8,679,000 7,946,000 5,544,000
Interest expense:
Deposits (Note 5) 4,624,000 4,416,000 2,607,000
Federal Home Loan Bank advances (Note 11) 34,000 -- --
-----------------------------------------------------
4,658,000 4,416,000 2,607,000
-----------------------------------------------------
Net interest income 4,021,000 3,530,000 2,937,000
Provision for loan losses (Note 3) -- 12,000 18,000
-----------------------------------------------------
Net interest income after provision 4,021,000 3,518,000 2,919,000
-----------------------------------------------------
Noninterest income:
Service fee income 155,000 156,000 117,000
Other 45,000 34,000 32,000
-----------------------------------------------------
200,000 190,000 149,000
-----------------------------------------------------
Noninterest expenses:
Compensation and employee benefits (Note 6) 1,676,000 1,531,000 1,216,000
Net occupancy 162,000 259,000 184,000
Deposit insurance premiums 210,000 195,000 147,000
Special SAIF assessment (Note 12) 520,000 -- --
Data processing 169,000 168,000 113,000
Real estate owned expenses -- 1,000 2,000
Other 409,000 470,000 370,000
-----------------------------------------------------
3,146,000 2,624,000 2,032,000
-----------------------------------------------------
Income before income taxes 1,075,000 1,084,000 1,036,000
Income taxes (Note 8) 354,000 304,000 361,000
-----------------------------------------------------
Net income $ 721,000 $ 780,000 $ 675,000
=====================================================
</TABLE>
F-4
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
STATEMENTS OF EQUITY
For the Six Months Ended June 30, 1997 and
Years Ended December 31, 1996 and 1995,
and Nine Months ended December 31, 1994
<TABLE>
<CAPTION>
Retained Unrealized Gain
Earnings On Securities
Substantially Available For
Restricted Sale Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, March 31, 1994 $ 12,208,000 $ - $ 12,208,000
Net income 675,000 675,000
----------------------------------------------------------------
Balance, December 31, 1994 12,883,000 - 12,883,000
Net income 780,000 - 780,000
Net change in unrealized gain on securities
available for sale, net of tax - 63,000 63,000
----------------------------------------------------------------
Balance, December 31, 1995 13,663,000 63,000 13,726,000
Net income 721,000 - 721,000
Net change in unrealized gain (loss) on
securities available for sale, net of tax - (35,000) (35,000)
----------------------------------------------------------------
Balance, December 31, 1996 14,384,000 28,000 14,412,000
Net income (Unaudited) 287,000 287,000
Net change in unrealized gain (loss) on
securities available for sale, net of tax
(Unaudited) - (8,000) (8,000)
----------------------------------------------------------------
Balance, June 30, 1997 (Unaudited) $ 14,671,000 $ 20,000 $ 14,691,000
================================================================
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 and 1996 and
Years Ended December 31, 1996 and 1995, and
Nine Months ended December 31, 1994
<TABLE>
<CAPTION>
June 30,
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 287,000 $ 429,000
Adjustments to reconcile net income to cash provided by
operating activities:
Provision for loan losses 230,000 -
Provision for depreciation 36,000 38,000
Provision for deferred income taxes (144,000) (63,000)
Amortization of deferred loan fees (79,000) (71,000)
Changes in assets and liabilities:
(Increase) decrease in:
Increase receivable (8,000) 11,000
Cash value of life insurance 28,000 24,000
Income taxes 60,000 154,000
Prepaid expenses and other assets (16,000) (86,000)
Increase (decrease) in:
Interest payable (8,000) 21,000
Accounts payable and other liabilities (16,000) (42,000)
Deferred compensation 132,000 134,000
-----------------------------------
Net cash provided by operating activities 502,000 549,000
-----------------------------------
Cash Flows From Investing Activities
Proceeds from maturities of certificates of deposit - 100,000
Purchases of certificates of deposit - -
Purchases of securities available for sale - (1,054,000)
Proceeds from maturities of securities available for sale 500,000 400,000
Purchases of securities held to maturity - (600,000)
Proceeds from maturities of securities held to maturity 500,000 2,400,000
Purchase of Federal Home Loan Bank stock (61,000) (45,000)
Originations and principal payments on loans receivable, net (2,705,000) (3,499,000)
Purchases of office properties and equipment (22,000) (10,000)
-----------------------------------
Net cash used in investing activities (1,788,000) (2,308,000)
-----------------------------------
(Continued)
</TABLE>
F-6
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 AND
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
NINE MONTHS ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 721,000 $ 780,000 $ 675,000
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses -- 12,000 18,000
Provision for depreciation 77,000 92,000 92,000
Provision for deferred income taxes (72,000) (113,000) (102,000)
Amortization of deferred loan fees (142,000) (139,000) (112,000)
Changes in assets and liabilities:
(Increase) decrease in:
Interest receivable (16,000) (84,000) (16,000)
Cash value of life insurance (106,000) (155,000) (2,000)
Income taxes 80,000 (51,000) --
Prepaid expenses and other assets (15,000) 4,000 46,000
Increase (decrease) in:
Interest payable 28,000 82,000 (3,000)
Accounts payable and other liabilities (97,000) (32,000) 83,000
Deferred compensation 266,000 297,000 178,000
--------------------------------------------------
Net cash provided by operating 724,000 693,000 857,000
--------------------------------------------------
Cash Flows From Investing Activities
Proceeds from maturities of certificates of
deposit 100,000 100,000 300,000
Purchases of certificates of deposit -- (100,000) --
Purchases of securities available for sale (951,000) (500,000) --
Proceeds from maturities of securities available 446,000 -- --
for sale
Purchases of securities held to maturity (498,000) (2,425,000) (700,000)
Proceeds from maturities of
securities held to maturity 3,500,000 3,894,000 536,000
Purchase of Federal Home Loan Bank stock (45,000) -- --
Originations and principal payments on loans (7,254,000) (7,975,000) (3,328,000)
receivable, net
Purchases of office properties and equipment (39,000) (52,000) (26,000)
--------------------------------------------------
Net cash used in investing activities (4,741,000) (7,058,000) (3,218,000)
--------------------------------------------------
</TABLE>
F-7
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended June 30, 1997 and 1996 and
Years Ended December 31, 1996 and 1995, and
Nine Months ended December 31, 1994
<TABLE>
<CAPTION>
June 30,
1997 1996
- --------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits $ 2,095,000 $ 825,000
Proceeds from Federal Home Loan Bank advances 2,000,000 -
Payments on Federal Home Loan Bank advances (3,000,000) -
Increase (decrease) in advances from borrowers for
taxes and insurance 110,000 112,000
---------------------------------
Net cash provided by financing activities 1,205,000 937,000
---------------------------------
Increase (decrease) in cash and cash equivalents (81,000) (822,000)
Cash and cash equivalents:
Beginning 2,675,000 3,056,000
---------------------------------
Ending $ 2,594,000 $ 2,234,000
=================================
Supplemental Schedule of Cash and Cash Equivalents
Cash:
Interest-bearing $ 2,348,000 $ 1,900,000
Noninterest-bearing 246,000 334,000
---------------------------------
$ 2,594,000 $ 2,234,000
=================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 2,374,000 $ 2,289,000
Income Taxes 304,000 181,000
Supplemental Disclosure of Noncash Transactions
Transfer of loans to real estate owned - -
Loans originated to facilitate sale of real estate owned - -
Transfers from securities held for investment to securities
held to maturity - -
Transfers from securities held to maturity to securities
available for sale - -
Change in unrealized gain (loss) on securities available for sale,
net of deferred income taxes (8,000) (117,000)
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
STATEMENTS OF CASH FLOWS (CONTINUED)
Six Months Ended June 30, 1997 and 1996 and
Years Ended December 31, 1996 and 1995, and
Nine Months ended December 31, 1994
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
--------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits $ 1,654,000 $ 6,916,000 $ 245,000
Proceeds from Federal Home Loan Bank advances 3,000,000 - -
Payments on Federal Home Loan Bank advances (1,000,000) - -
Increase (decrease) in advances from borrowers for
taxes and insurance (18,000) (41,000) (81,000)
--------------------------------------------------
Net cash provided by financing activities 3,636,000 6,875,000 164,000
--------------------------------------------------
Increase (decrease) in cash and cash (381,000) 510,000 (2,197,000)
Cash and cash equivalents:
Beginning 3,056,000 2,546,000 4,743,000
--------------------------------------------------
Ending $ 2,675,000 $ 3,056,000 $ 2,546,000
==================================================
Supplemental Schedule of Cash and Cash
Equivalents
Cash:
Interest-bearing $ 2,253,000 $ 2,657,000 $ 2,111,000
Noninterest-bearing 422,000 399,000 435,000
--------------------------------------------------
$ 2,675,000 $ 3,056,000 $ 2,546,000
==================================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 4,630,000 $ 4,334,000 $ 2,610,000
Income taxes 346,000 242,000 501,000
Supplemental Disclosures of Noncash Transactions
Transfer of loans to real estate owned - - 93,000
Loans originated to facilitate sale of real estate - - 75,000
Transfers from securities held for investment to
held to maturity - - 10,921,000
Transfers from securities held to maturity to
available for sale - 3,408,000 -
Change in unrealized gain (loss) on securities
available for sale, net of deferred income taxes (35,000) 63,000 -
</TABLE>
F-9
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business and year end change: Mooresville Savings Bank, S.S.B., (the
- --------------------------------------
"Bank") is primarily engaged in the business of obtaining savings deposits and
originating single-family residential loans within its primary lending area of
northern Mecklenburg and southern Iredell Counties. The Bank's underwriting
policies require such loans to be made at 80% loan to value based upon appraised
values unless private mortgage insurance is obtained. These loans are secured by
the underlying properties. The Bank changed its year end from March 31 to
December 31 effective December 31, 1994.
Unaudited financial statements: The unaudited financial statements furnished
- ------------------------------
reflect all adjustments, consisting of normal recurring accruals, which are in
the opinion of management, necessary for a fair presentation of the financial
position as of June 30, 1997 and the results of operations and cash flows
for the six months ended June 30, 1997 and 1996. The results for the six
month periods are not necessarily indicative of the operating results of the
Bank for the entire year.
The following is a description of the significant accounting policies used in
the preparation of the accompanying financial statements.
Basis of financial statement presentation: The accounting and reporting policies
- -----------------------------------------
of the Bank conform to generally accepted accounting principles and general
practices within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the statement
of financial condition and revenues and expenses for the period. Actual results
could differ from those estimates.
Cash and cash equivalents: For purposes of reporting the statements of cash
- -------------------------
flows, the Bank includes in cash equivalents all interest-bearing and
noninterest-bearing cash accounts, which are not subject to withdrawal
restrictions or penalties. For purposes of the statement of cash flows, the Bank
considers all highly liquid debt instruments with original maturities when
purchased of three months or less to be cash equivalents. The Bank maintains
deposits with financial institutions which are in excess of the
federally-insured amounts.
Investment in debt securities: The Bank has investments in debt securities. Debt
- -----------------------------
securities consist of obligations of the U. S. Government and federal agencies
and municipal obligations.
Management classifies all securities as trading, available for sale, or held to
maturity as individual investment securities are acquired, and that the
appropriateness of such classification be reassessed at each statement of
financial condition date. In accordance with the Financial Accounting Standards
Board's Special Report, "A Guide to the Implementation of Statement 115" the
Bank reclassified certain debt securities to the available for sale designation
as of December 31, 1995.
Since the Bank does not buy investment securities in anticipation of short-term
fluctuations in market prices, none of the investment securities are classified
as trading in accordance with Statement No. 115. All investment securities have
been classified as either held to maturity or available for sale.
F-10
<PAGE>
MOORESVILLE SAVINGS
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Securities available for sale: Securities classified as available for sale are
- -----------------------------
those securities that the Bank intends to hold for an indefinite period of time
but not necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Bank's assets
and liabilities, liquidity needs, regulatory capital considerations, and other
similar factors. Securities available for sale are carried at their fair
(market) value. Unrealized gains or losses are reported as increases or
decreases in equity, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are
included in income.
Securities held to maturity: Securities classified as held to maturity are those
- ---------------------------
securities the Bank has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by a method that
approximates the interest method over their contractual lives. Based on the
Bank's financial position and liquidity, management believes the Bank has the
ability to hold these securities to maturity.
Investment in Federal Home Loan Bank stock: The Bank, as a member of the Federal
- ------------------------------------------
Home Loan Bank (FHLB) system, is required to maintain an investment in capital
stock of the Federal Home Loan Bank in an amount equal to the greater of 1% of
its outstanding home loans or 5% of advances from the FHLB. No ready market
exists for the Federal Home Loan Bank stock, and it has no quoted market value.
Loans receivable: Loans receivable are stated at unpaid principal balances, less
- ----------------
undisbursed loan funds, the allowance for loan losses, and net deferred
loan-origination fees and discounts. The Bank's loan portfolio consists
principally of long-term conventional loans collateralized by first deeds of
trust or single-family residences, other residential property, nonresidential
property and land. Interest income is accrued and credited to interest income as
it is earned, using the interest method.
Allowance for loan losses: The allowance for loan losses is increased by charges
- -------------------------
to income and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to pay, the estimated value of
any underlying collateral, and current economic conditions. While management
uses the best information to make evaluations, future adjustments may be
necessary, if economic or other conditions differ substantially from the
assumptions used.
F-11
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Impaired loans: SFAS No. 114 Accounting by Creditors for Impairment of a Loan
- -------------- ------------------------------------------------
requires that the Bank establish specific loan loss allowances on impaired loans
if it is doubtful that all principal and interest due, according to the loan
terms, will be collected. An allowance on an impaired loan is required if the
present value of the future cash flows discounted using the loan's effective
interest rate is less than the carrying value of the loan. An impaired loan can
also be valued based upon its fair value in the market place or on the basis of
its underlying collateral if the loan is collateral dependent. If foreclosure is
imminent, and the loan is collateral dependent, the loan must be valued based
upon the fair value of the underlying collateral. Since the Bank had no loans
outstanding during the years ended December 31, 1996 and 1995 which it
considered to be impaired, due to the fact that the fair values of the
underlying collateral for the nonperforming loans are in excess of the carrying
amounts of the loans, there is no SFAS No. 114 allowance for unpaid loans
at December 31, 1996 and 1995.
Interest Income: SFAS No. 118 Accounting by Creditors for Impairment of a
- --------------- -------------------------------------------
Loan-Income Recognition and Disclosures requires the disclosure of the Bank's
- ---------------------------------------
method of accounting for interest income on impaired loans. The Bank continues
to accrue interest on loans, including loans delinquent 90 days or more. At the
time a loan becomes nonperforming, the loan is placed on nonaccrual status by
establishing an allowance for uncollected interest. When a loan is on
non-accrual status interest income is recognized only to the extent cash
payments are received. If and when management determines that the collectibility
of principal and interest is no longer in doubt, the loan is returned to
performing status and the reserve for uncollected interest is reversed. The Bank
anticipates that it will account for interest on impaired loans in a similar
fashion in the future if and when it has impaired loans.
Loan-origination fees and related costs: Loan fees and certain direct loan
- ---------------------------------------
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for actual prepayments.
Office properties and equipment: Office properties and equipment are stated at
- -------------------------------
cost less accumulated depreciation which is computed principally by the
straight-line method.
Pension plans: The Bank has a noncontributory defined benefit pension plan
- -------------
covering all employees who meet the eligibility requirements. To be eligible, an
employee must be 21 years of age and have completed one year of continuous
service. The plan provides benefits based on the career earnings of each
participant which are subject to certain reductions if the employee retires
before reaching age 62. The Bank's funding policy is to make the maximum annual
contribution that is deductible for income tax purposes. The Bank has a 401K
savings plan covering substantially all of its employees. The Bank matches 50%
of the qualified employee's contribution, limited to 6.0% of the employee's
salary. The Bank has deferred compensation and retirement agreements for the
benefit of the Board of Directors and several key employees. The plans are
unfunded and the liabilities are being accrued over the terms of active service
of the directors.
F-12
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Income taxes: Deferred taxes are provided on a liability method whereby deferred
- ------------
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Fair value of financial instruments: The estimated fair values required under
- -----------------------------------
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, have been
-----------------------------------------------------
determined by the Bank using available market information and appropriate
valuation methodologies; however, considerable judgment is required to develop
the estimates of fair value. Accordingly, the estimates presented for the fair
value of the Bank's financial instruments are not necessarily indicative of the
amounts the Bank could realize in a current market exchange. The use of
different market assumptions or estimation methodologies may have a material
effect on the estimated fair market value amounts.
The fair value estimates presented are based on pertinent information available
to management as of June 30, 1997 and December 31, 1996 and 1995. Although
management is not aware of any factors that would significantly affect the
estimated fair value amount, such amounts have not been comprehensively revalued
for purposes of these financial statements since that date and therefore,
current estimates of fair value may differ significantly from the amounts
presented here.
Off-statement of financial condition risk: The Bank is a party to financial
- -----------------------------------------
instruments with off-statement of financial condition risk such as commitments
to extend credit and lines of credit. Management assesses the risk related to
these instruments for potential losses on an ongoing basis.
F-13
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Debt Securities
The amortized cost and fair values of securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, 1997
--------------------------------------------------------------------
(Unaudited)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and federal
agencies obligations $ 3,413,000 $ 40,000 $ (7,000) $ 3,446,000
====================================================================
Securities held to maturity:
U.S. Government and federal
agencies obligations $ 1,725,000 $ 6,000 $ (1,000) $ 1,730,000
Municipal obligations 1,473,000 3,000 (11,000) 1,465,000
Other 10,000 - - 10,000
--------------------------------------------------------------------
$ 3,208,000 $ 9,000 $ (12,000) $ 3,205,000
====================================================================
<CAPTION>
December 31, 1996
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and federal
agencies obligations $ 3,913,000 $ 56,000 $ (10,000) $ 3,959,000
====================================================================
Securities held to maturity:
U.S. Government and federal
agencies obligations $ 2,225,000 $ 10,000 $ - $ 2,235,000
Municipal obligations 1,473,000 9,000 (22,000) 1,460,000
Other 10,000 - - 10,000
--------------------------------------------------------------------
$ 3,708,000 $ 19,000 $ (22,000) $ 3,705,000
====================================================================
</TABLE>
F-14
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Debt Securities (Continued)
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Government and federal
agencies obligations $ 3,408,000 $ 109,000 $ (5,000) $ 3,512,000
====================================================================
Securities held to maturity:
U.S. Government and federal
agencies obligations $ 5,226,000 $ 25,000 $ - $ 5,251,000
Municipal obligations 1,474,000 - (2,000) 1,472,000
Other 10,000 - - 10,000
--------------------------------------------------------------------
$ 6,710,000 $ 25,000 $ (2,000) $ 6,733,000
====================================================================
</TABLE>
The amortized cost and fair value of debt securities by contractual maturity are
shown below.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
-----------------------------------------------------------------
(Unaudited)
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
Due in one year or less $ 800,000 $ 805,000 $ 900,000 $ 902,000
Due after one year through five years 2,613,000 2,641,000 3,013,000 3,057,000
-----------------------------------------------------------------
$ 3,413,000 $ 3,446,000 $ 3,913,000 $ 3,959,000
=================================================================
Securities held to maturity:
Due in one year or less $ 1,300,000 $ 1,306,000 $ 999,000 $ 1,004,000
Due after one year through five years 880,000 880,000 1,528,000 1,535,000
Due after five years through ten years 1,028,000 1,019,000 276,000 277,000
Due after ten years - - 905,000 889,000
-----------------------------------------------------------------
$ 3,208,000 $ 3,205,000 $ 3,708,000 $ 3,705,000
=================================================================
</TABLE>
There were no sales of investment securities held to maturity and available for
sale during the nine months ended June 30, 1997 and 1996 and the years
ended December 31, 1996 and 1995 and six months ended December 31, 1994.
F-15
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Debt Securities (Continued)
Proceeds from maturities of investment securities are as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Nine Months Ended
June 30, December 31, December 31,
---------------------------------------------------------------------------------
1997 1996 1996 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Certificates of deposit $ - $ 100,000 $ 100,000 $ 100,000 $ 300,000
Securities available for sale 500,000 400,000 446,000 - -
Securities held to maturity 500,000 2,400,000 3,500,000 3,894,000 536,000
---------------------------------------------------------------------------------
$ 1,000,000 $ 2,900,000 $ 4,046,000 $ 3,994,000 $ 836,000
=================================================================================
</TABLE>
The change in net unrealized gains and losses shown as a separate component of
equity for the six months ended June 30, 1997, the year ended December 31, 1996
and 1995 is as shown below:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1995
------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Balance in equity component, beginning $ 28,000 $ 63,000 $ -
Change in unrealized gains (losses) (12,000) (58,000) 104,000
Change in deferred income taxes 4,000 23,000 (41,000)
------------------------------------------------
Balance in equity component, ending $ 20,000 $ 28,000 $ 63,000
================================================
</TABLE>
F-16
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------
1997 1996 1995
-----------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Loans secured by first mortgages on real estate:
Conventional $ 86,987,000 $ 86,102,000 $ 79,441,000
Non-residential 2,803,000 2,711,000 2,044,000
Construction 5,710,000 4,086,000 8,673,000
Home equity 6,031,000 4,947,000 2,891,000
Installment loans 2,447,000 2,397,000 2,403,000
Other loans 959,000 941,000 907,000
-----------------------------------------------------
104,937,000 101,184,000 96,359,000
Less:
Undisbursed loan funds (3,261,000) (2,321,000) (4,930,000)
Deferred loan fees (553,000) (524,000) (478,000)
Allowance for loan losses (617,000) (388,000) (396,000)
-----------------------------------------------------
$ 100,506,000 $ 97,951,000 $ 90,555,000
=====================================================
</TABLE>
The following is an analysis of the allowance for loan losses for the following
periods:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Nine Months
June 30, December 31, Ended December 31,
--------------------------------------------------------------------------
1997 1996 1996 1995 1994
--------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning $ 388,000 $ 396,000 $ 396,000 $ 396,000 $ 385,000
Provision charged to income 230,000 - - 12,000 18,000
Loans charged off (2,000) (8,000) (13,000) (13,000) (10,000)
Recoveries 1,000 5,000 5,000 1,000 3,000
--------------------------------------------------------------------------
Balance, ending $ 617,000 $ 393,000 $ 388,000 $ 396,000 $ 396,000
==========================================================================
</TABLE>
Nonaccrual and renegotiated loans for which interest has been reduced totaled
approximately $793,000, $1,104,000 and $518,000 at June 30, 1997 and
December 31, 1996 and 1995, respectively. Interest income that would have been
recorded under the original terms of such loans was $44,000 and $43,000 for the
six months ended June 30, 1997 and 1996 and $54,000 and $32,000 for the years
ended December 31, 1996 and 1995, and $52,000 for the nine months ended December
31, 1994.
The Bank adopted SFAS No. 114 Accounting by Creditors for Impairment of a Loan
------------------------------------------------
during 1995 which requires that the Bank establish a specific allowance on
impaired loans. The Bank had no loans outstanding at June 30, 1997 and
December 31, 1996 and 1995 which it considers to be impaired loans. Therefore,
there is no specific SFAS No. 114 allowance for impaired loans at June 30, 1997
and December 31, 1996 and 1995.
F-17
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
The Bank has made loans to its officers and directors in the normal course of
business totaling $780,000, $779,000 and $552,000 at June 30, 1997,
December 31, 1996 and 1995, respectively. The following is an analysis of the
loans to officers and directors for the six months ended June 30, 1997:
<TABLE>
<S> <C>
Balance, beginning $ 779,000
Originations 25,000
Payments (24,000)
-------------
Balance, ending $ 780,000
=============
</TABLE>
Note 4. Office Properties and Equipment
Office properties and equipment consist of the following:
<TABLE>
<CAPTION>
Depreciable June 30, December 31,
Lives 1997 1996 1995
---------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Land $ 364,000 $ 364,000 $ 364,000
Buildings 50 years 879,000 879,000 879,000
Building improvements 7 - 20 years 175,000 175,000 175,000
Furniture and fixtures 5 - 10 years 566,000 544,000 671,000
Automobiles 5 years 47,000 47,000 36,000
----------------------------------------------
2,031,000 2,009,000 2,125,000
----------------------------------------------
Less accumulated depreciation 1,123,000 1,087,000 1,165,000
----------------------------------------------
$ 908,000 $ 922,000 $ 960,000
==============================================
</TABLE>
Depreciation expense was $36,000, $38,000, $77,000, $92,000 and $92,000 for the
six month periods ended June 30, 1997 and 1996 and for the years ended
December 31, 1996 and 1995 and for the nine months ended December 31, 1994,
respectively.
F-18
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted December 31,
Average June 30, ------------------------------------------------------
Rate at 1997 1996 1995
June 30, ---------------------------------------------------------------------------------
1997 Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing - % $ 1,782,000 1.9 % $ 1,319,000 1.4 % $ 943,000 1.0 %
NOW accounts 1.10 5,842,000 6.1 5,644,000 6.0 7,359,000 8.0
Money market 2.82 4,485,000 4.7 4,180,000 4.5 4,826,000 5.3
Passbook savings 3.04 11,564,000 12.1 11,487,000 12.3 11,225,000 12.3
---------------------------------------------------------------------------------
23,673,000 24.8 22,630,000 24.2 24,353,000 26.6
---------------------------------------------------------------------------------
Certificates of deposit:
2.00% to 3.99% 270,000 0.3 477,000 0.5 470,000 0.5
4.00% to 5.99% 50,966,000 53.4 48,151,000 51.6 34,199,000 37.3
6.00% to 7.99% 19,606,000 20.5 21,971,000 23.5 32,534,000 35.4
8.00% to 9.99% 899,000 0.9 92,000 0.1 162,000 0.2
10.00% to 11.99% 53,000 0.1 51,000 0.1 - -
---------------------------------------------------------------------------------
5.72 % 71,794,000 75.2 70,742,000 75.8 67,365,000 73.4
---------------------------------------------------------------------------------
95,467,000 100.0 % 93,372,000 100.0 % 91,718,000 100.0 %
============ =========== ===========
Accrued interest 405,000 413,000 385,000
--------------- --------------- -----------------
$ 95,872,000 $ 93,785,000 $ 92,103,000
============== ============== =================
</TABLE>
A summary of certificate accounts by maturity as of June 30, 1997 follows:
<TABLE>
<S> <C>
July 1, 1997 - June 30, 1998 $ 47,806,000
July 1, 1998 - June 30, 1999 9,069,000
July 1, 1999 - June 30, 2000 11,648,000
July 1, 2000 - June 30, 2001 2,360,000
July 1, 2001 - June 30, 2002 911,000
Thereafter -
---------------
Total certificate accounts $ 71,794,000
===============
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $13,083,000, $11,876,000 and $9,416,000 at June
30, 1997, December 31, 1996 and 1995, respectively.
F-19
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Deposits (Continued)
The aggregate amount of certificates of deposit by maturity with a minimum
denomination of $100,000 at June 30, 1997 is as follows:
<TABLE>
<CAPTION>
June 30,
1997
--------------
(Unaudited)
<S> <C>
Maturity Period:
Within 3 months or less $ 2,202,000
Over 3 months through 6 months 2,442,000
Over 6 months through 12 months 3,891,000
Over 12 months 4,548,000
--------------
$ 13,083,000
==============
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
-------------------------------------------------------------------------------
1997 1996 1996 1995 1994
-------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
NOW and money market $ 104,000 $ 123,000 $ 220,000 $ 278,000 $ 225,000
Passbook savings 177,000 166,000 322,000 365,000 267,000
Certificates of deposit 2,027,000 2,016,000 4,082,000 3,773,000 2,115,000
-------------------------------------------------------------------------------
$ 2,308,000 $ 2,305,000 $ 4,624,000 $ 4,416,000 $ 2,607,000
===============================================================================
</TABLE>
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).
The Bank has $100,000 of U. S. Government and federal agency obligations pledged
as security for public deposits at June 30, 1997.
F-20
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Employee Benefit Plans
The Bank has a defined benefit pension plan covering substantially all of its
employees. Pension expense was $94,000, $52,000, $109,000 and $120,000 and
$91,000 for the six months ended June 30, 1997 and 1996 and years ended
December 31, 1996 and 1995, and nine months ended December 31, 1994,
respectively.
The components of pension cost charged to expense consisted of the following:
<TABLE>
<CAPTION>
Six Months Ended Year Ended Nine Months Ended
June 30, December 31, December 31,
1997 1996 1995 1994
-------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Service Cost $ 36,000 $ 66,000 $ 70,000 $ 60,000
Interest cost on projected
benefit obligation 72,000 131,000 129,000 87,000
Actual return on plan assets (56,000) (95,000) (89,000) (60,000)
Amortization of unrecognized
net asset from initial
application of SFAS No. 87 7,000 7,000 10,000 4,000
Other 35,000 - - -
-------------------------------------------------------------------------
$ 94,000 $ 109,000 $ 120,000 $ 91,000
=========================================================================
</TABLE>
F-21
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Employee Benefit Plans (Continued)
The following table sets forth the funded status of the pension plan as of
June 30, 1997 and December 31, 1996, respectively, and the amount recognized in
the accompanying statements of financial condition:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------------------------
(Unaudited)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested portion $ (1,596,000) $ (1,554,000)
Nonvested portion (6,000) (6,000)
----------------------------------
(1,602,000) (1,560,000)
Effect of projected future compensation levels (564,000) (461,000)
----------------------------------
Projected benefits (2,166,000) (2,021,000)
Plan assets at fair value, primarily certificates of deposit, on
deposit at the Bank 1,671,000 1,464,000
----------------------------------
Projected benefit obligations in excess of plan assets (495,000) (557,000)
Unrecognized prior service cost 86,000 88,000
Unrecognized net loss 175,000 126,000
Unrecognized net transition obligation (recognized over 28 years) 201,000 207,000
Other (28,000) -
----------------------------------
Accrued pension cost on statement of financial condition $ (61,000) $ (136,000)
==================================
</TABLE>
A weighted-average discount rate of 7.0% and a rate of increase in future
compensation levels of 5.0% were used in determining the actuarial present value
of the benefit obligations at June 30, 1997 and December 31, 1996, 1995 and
1994, respectively. The expected long-term rate of return on assets was 7.0% at
June 30, 1997 and December 31, 1996, 1995 and 1994, respectively.
On August 19, 1997 the Board of Directors approved the termination of the
defined benefit pension plan effective October 20, 1997. Settlement of the plan
will result in approximately $210,000 of additional pension expense in the year
ending December 31, 1997.
The Bank has adopted a savings plan under Section 401(k) of the Internal Revenue
Code. This plan allows employees, who meet certain service and age requirements,
to defer a percentage of their income through contributions to the plan. In
accordance with provisions of the plan, the Bank matches 50% of the employee's
contribution, limited to 6.0% of the employee's salary. The expense for the plan
was $35,000, $35,000, $70,000 and $68,000 and $54,000 for the six month period
ended June 30, 1997 and 1996 and the years ended December 31, 1996 and 1995, and
the nine month period ended December 31, 1994, respectively.
F-22
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Employee Benefit Plans (Continued)
The Bank has also entered into unfunded deferred compensation agreements and a
salary continuation agreement providing retirement and death benefits for the
directors and several key employees. Vested benefits under the agreements are
payable in installments upon death or retirement. The Bank has insured the lives
of the directors and employees for amounts sufficient to discharge its
obligation under such agreements in the event of death. The cash surrender value
of these policies is $810,000, $838,000 and $732,000 at June 30, 1997,
December 31, 1996 and 1995, respectively. The present value of the liability for
the benefits is being accrued over the expected term of active service of the
directors and employees. The amount accrued is $2,137,000, $2,005,000 and
$1,739,000 at June 30, 1997, December 31, 1996 and 1995, respectively. The
expense related to the agreements for the six month period ended June 30, 1997
and 1996 and for the years ended December 31, 1996 and 1995 and the nine months
ended December 31, 1994 amounted to $158,000, $177,000, $333,000, $339,000 and
$244,000, respectively. The discount rate of 7% was used in determining the
present value of the future obligation at June 30, 1997, December 31, 1996,
1995 and 1994, respectively.
Note 7. Capital Requirements
The Bank is subject to regulatory capital requirements administered by the
various banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional discretionary -- actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The FDIC requires Mooresville Savings Bank, S.S.B. to have a minimum leverage
ratio of Tier I Capital (principally consisting of retained earnings less any
intangible assets) to total assets of at least 3%, provided that it receives the
highest rating during the examination process. For institutions that receive
less than the highest rating, the Tier I capital requirement is 1% to 2% above
the stated minimum. The FDIC also requires the Bank to have a ratio of total
capital to risk-weighted assets of 8%, of which at least 4% must be in the form
of Tier I capital. The Administrator requires a net worth equal to at least 5%
of total assets.
F-23
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Capital Requirements (Continued)
At June 30, 1997 and December 31, 1996, Mooresville Savings Bank, S.S.B.
complied with all the capital requirements described above as shown below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------
June 30, 1996
------------------------------------------------------------------------
Leverage Tier I N.C.
Ratio of Risk-Adjusted Risk-Based Savings Bank
Tier I Capital Capital Capital Capital
------------------------------------------------------------------------
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Equity (GAAP) $ 14,691 $ 14,691 $ 14,691 $ 14,691
Unrealized gain on securities
available for sale (20) (20) (20) (20)
Supplemental capital items:
General valuation allowance 617 617
------------------------------------------------------------------------
Regulatory capital 14,671 14,671 15,288 15,288
Minimum capital requirement 4,567 2,440 4,880 5,708
------------------------------------------------------------------------
Excess regulatory capital $ 10,104 $ 12,231 $ 10,408 $ 9,580
========================================================================
Total assets at June 30, 1997 $ 114,162 $ 114,162
================== ===================
Risk-weighted assets at
June 30, 1997 $ 61,000 $ 61,000
===================================
Capital as a percentage of assets:
Actual 12.85 % 24.05 % 25.06 % 13.39 %
Required 4.00 4.00 8.00 5.00
---------------------------------------------------------------------------
Excess 8.85 % 20.05 % 17.06 % 8.39 %
===========================================================================
</TABLE>
A ratio of 4% of total assets was used for purposes of computing the minimum
required leverage ratio of Tier I Capital.
F-24
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Capital Requirements (Continued)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
December 31, 1996
--------------------------------------------------------------------------
Leverage Tier I N.C.
Ratio of Risk-Adjusted Risk-Based Savings Bank
Tier I Capital Capital Capital Capital
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Equity (GAAP) $ 14,412 $ 14,412 $ 14,412 $ 14,412
Unrealized gain on securities
available for sale (28) (28) (28) (28)
Supplemental capital items:
General valuation allowance - - 388 388
------------------------------------------------------------------------
Regulatory capital 14,384 14,384 14,772 14,772
Minimum capital requirement 4,502 2,358 4,716 5,628
------------------------------------------------------------------------
Excess regulatory capital $ 9,882 $ 12,026 $ 10,056 $ 9,144
========================================================================
Total assets at December 31, 1996 $ 112,552 $ 112,552
================== ===================
Risk-weighted assets at
December 31, 1996 $ 58,956 $ 58,956
===================================
Capital as a percentage of assets:
Actual 12.78 % 24.40 % 25.06 % 13.12 %
Required 4.00 4.00 8.00 5.00
--------------------------------------------------------------------------
Excess 8.78 % 20.40 % 17.06 % 8.12 %
==========================================================================
</TABLE>
A ratio of 4% of total assets was used for purposes of computing the minimum
required leverage ratio of Tier I Capital.
F-25
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Capital Requirements (Continued)
Under the FDIC prompt corrective action regulations, a savings bank is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier 1 capital to risk-weighted assets is
at least 6.0%, and its ratio of Tier 1 capital to total average assets is at
least 5.0%. The Bank meets all of the above requirements and is considered to be
well capitalized under the prompt corrective action regulations.
Note 8. Income Tax Matters
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purposes of absorbing losses. For the years beginning before January 1, 1996,
the provisions of the Code permitted the Bank to deduct from taxable income an
allowance for bad debts based on 8% of taxable income before such deduction or
actual loss experience. Legislation passed in 1996 eliminates the percentage of
taxable income method as an option for computing bad debt deductions for 1996
and all future years. The Bank will still be permitted to take deductions for
bad debts, but will be required to compute such deductions using an experience
method.
The Bank will also have to recapture its tax bad debt reserves which have
accumulated since January 1, 1988 amounting to approximately $67,000, over a six
year period. The tax associated with the recaptured reserve is approximately
$26,000. The recapture was scheduled to begin with the Bank's 1996 year, but can
be delayed up to two years if the Bank originates a certain level of residential
mortgage loans during 1996 and 1997. The loan origination test was met during
1996 and 1997; therefore, there was no recapture of the reserve in 1996 and
1997. Deferred income taxes have been previously established for the taxes
associated with the recaptured reserves and the ultimate payment of the taxes
will not result in a charge to earnings.
Deferred taxes have been provided for certain increases in the Bank's tax bad
debt reserves subsequent to 1987 which are in excess of recorded book loan loss
allowances. At June 30, 1997 and December 31 1996 and 1995, retained
earnings contain pre-1988 additions to bad debt reserves for income tax purposes
of approximately $3,816,000, for which no deferred taxes have been provided
because the Bank does not intend to use these reserves for purposes other than
to absorb losses. If amounts which qualified as bad debt deductions are used for
purposes other than to absorb losses or adjustments arising from the carryback
of net operating losses, income taxes may be imposed at the then existing rates.
The unrecorded deferred income tax liability on the above amount was
approximately $1,493,000 as of June 30, 1997, December 31, 1996 and 1995.
F-26
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Income Tax Matters (Continued)
The tax effects of temporary differences that gave rise to significant portions
of the net deferred tax assets in the statement of financial condition were as
follows at June 30, 1997 and December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
June 30, ---------------------------------------
1997 1996 1995
-----------------------------------------------------------
(Unaudited)
---------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Interest income on non performing assets $ 21,000 $ 21,000 $ -
Deferred loan fees 9,000 - 10,000
Deferred compensation 832,000 784,000 680,000
Allowance for loan losses 240,000 152,000 167,000
Pension plan 47,000 53,000 65,000
Section 401 (k) contribution - - 1,000
-----------------------------------------------------------
1,149,000 1,010,000 923,000
-----------------------------------------------------------
Deferred tax liabilities:
Property and equipment 101,000 102,000 96,000
FHLB stock dividends 136,000 136,000 136,000
Section 401 (k) contribution - 1,000 -
Deferred loan fees 5,000 8,000 -
Tax bad debt reserves 26,000 26,000 26,000
Unrealized gains on securities 14,000 18,000 41,000
FHLB accrued dividend 6,000 6,000 6,000
-----------------------------------------------------------
288,000 297,000 305,000
-----------------------------------------------------------
Net deferred tax asset $ 861,000 $ 713,000 $ 618,000
===========================================================
</TABLE>
At June 30, 1997, and December 31, 1996 and 1995, no valuation allowance was
recorded for deferred tax assets.
Income tax expense (credits) for the six month periods ended June 30, 1997 and
1996 and the years ended December 31, 1996 and 1995, and the nine month period
ended December 31, 1994 consists of the following:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
June 30, December 31, December 31,
---------------------------------------------------------------------------------------
1997 1996 1996 1995 1994
---------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current $ 353,000 $ 320,000 $ 426,000 $ 417,000 $ 463,000
Deferred (144,000) (63,000) (72,000) (113,000) (102,000)
---------------------------------------------------------------------------------------
$ 209,000 $ 257,000 $ 354,000 $ 304,000 $ 361,000
=======================================================================================
</TABLE>
F-27
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Income Tax Matters (Continued)
A reconciliation of the federal income tax rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
Nine Months
Six Months Ended Year Ended Ended
June 30, December 31, December 31,
--------------------------------------------------------------
1997 1996 1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statutory federal income tax rate 34.0 % 34.0 % 34.0 % 34.0 % 34.0 %
Increases (decreases) in taxes resulting from:
Permanent Differences 2.8 1.1 (2.5) (5.8) (3.8)
State income tax, net of federal benefit 2.7 2.4 1.2 1.2 2.0
(Underaccrual) overaccrual 2.4 - - (0.4) 0.8
Other 0.2 - 0.2 (1.0) 1.8
--------------------------------------------------------------
Effective tax rate 42.1 % 37.5 % 32.9 % 28.0 % 34.8 %
==============================================================
</TABLE>
Note 9. Commitments and Related Party Transactions
In addition to undisbursed loan funds outstanding, the Bank has mortgage loan
commitments and unused home equity loans and lines of credit outstanding at
June 30, 1997. Commitments, which are disbursed subject to certain
limitations, extend over varying periods of time with the majority subject to
disbursement over a 6-month period. A summary of these commitments, except for
undisbursed loan funds is as follows:
<TABLE>
<CAPTION>
Fixed Rate Variable Rate Total
---------------------------------------------------------
<S> <C> <C> <C>
Commitments to extend credit, mortgage loans $ 1,258,000 $ - $ 1,258,000
Unused home equity loans and lines of credit - 3,393,000 3,393,000
</TABLE>
Officers and directors maintain deposits with the Bank in the normal course of
business. Such deposits amounted to approximately $1,727,000, $1,621,000, and
$1,561,000 at June 30, 1997, December 31, 1996, and 1995, respectively.
F-28
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Fair Value of Financial Instruments
The following table reflects a comparison of carrying amounts and the fair
values of the financial instruments as of June 30, 1997, December 31, 1996,
and 1995:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1995
-------------------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
-------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash
Interest-bearing deposits $ 2,348,000 $ 2,348,000 $ 2,253,000 $ 2,253,000 $ 2,657,000 $ 2,657,000
Noninterest-bearing deposits 246,000 246,000 422,000 422,000 399,000 399,000
Certificates of deposit 100,000 100,000 100,000 100,000 200,000 200,000
Investments 6,654,000 6,651,000 7,667,000 7,664,000 10,222,000 10,245,000
Loans receivable 100,506,000 103,635,000 97,951,000 99,451,000 90,555,000 94,111,000
Accrued interest receivable 722,000 722,000 714,000 714,000 698,000 698,000
FHLB stock 930,000 930,000 869,000 869,000 824,000 824,000
Financial liabilities:
Deposits 95,872,000 94,023,000 93,785,000 92,483,000 92,103,000 90,242,000
Advances from FHLB 1,000,000 1,000,000 2,000,000 2,000,000 - -
Advances from borrowers for
taxes and insurance 215,000 215,000 105,000 105,000 123,000 123,000
</TABLE>
The fair values utilized in the table were derived using the information
described below for the group of instruments listed. It should be noted that the
fair values disclosed in this table do not represent market values of all assets
and liabilities of the Bank and, thus, should not be interpreted to represent
the market or liquidation value of the Bank.
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and Certificates of Deposits: The carrying amounts reported in the
- ---------------------------------
statement of financial position for cash and short-term instruments approximate
their fair values.
Investment securities: Fair values for securities are based on quoted market
- ----------------------
prices, where available. If quoted market prices are not available, fair values
are based on quoted market prices of similar securities.
Loans receivable: The fair value of fixed rate loans is estimated by discounting
- -----------------
the future cash flows, adjusted for prepayments, using the current rates at
which similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities. For variable rate loans that reprice
frequently and with no significant change in credit risk, fair values are equal
to carrying amounts. Management believes that the allowance for loan losses is
an appropriate indication of the applicable
F-29
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Fair Value of Financial Instruments (Continued)
credit risk associated with determining the fair value of its loan portfolio and
has been deducted from the estimated fair value of loans.
Accrued interest receivable: The fair value of accrued interest receivable is
- ----------------------------
the amount receivable on demand at the balance sheet date.
Deposits: The fair value of demand deposits, savings accounts, and certain money
- ---------
market deposits is the amount payable on demand at the balance sheet date. The
fair value of fixed maturity certificates of deposit are estimated based upon
the discounted value of contractual cash flows using rates currently offered for
deposits with similar remaining maturities.
Advances from Federal Home Loan Bank: The carrying value of the advances
- -------------------------------------
approximates their fair value due to their short-term nature and market rate of
interest.
Off-statement of financial condition instruments: Fair values for the Bank's
- -------------------------------------------------
off-statement of financial condition instruments (loan commitments) are based on
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standings. The
fair value for such commitments is nominal.
Note 11. Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank ("FHLB") at June 30, 1997,
December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------
1997 1996 1995
---------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Advances due FHLB, quarterly interest only
installments at 5.82% through September 1997,
with the principal balance due September 1997. $ 1,000,000 $ - $ -
Advances due FHLB, quarterly interest only
installments at 5.60% through February 1997,
with the principal balance due February 1997. - 1,000,000 -
Advances due FHLB, quarterly interest only,
installments at 5.72% through March 1997,
with the principal balance due March 1997. - 1,000,000 -
---------------------------------------------------------
$ 1,000,000 $ 2,000,000 $ -
=========================================================
</TABLE>
F-30
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Advances From Federal Home Loan Bank (Continued)
Pursuant to collateral agreements with the FHLB, advances are covered by the
Bank's blanket status and no collateral is required. Advances at June 30, 1997
have a scheduled maturity date of September 22, 1997.
Interest expense on borrowed funds is summarized as follows:
<TABLE>
<CAPTION>
Nine Months
Six Months Ended Year Ended Ended
-----------------------------------------------------------------------------------
June 30, December 31, December 31,
-----------------------------------------------------------------------------------
1997 1996 1996 1995 1994
-----------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest expense
from FHLB advances $ 58,000 $ 5,000 $ 34,000 $ - $ -
===================================================================================
</TABLE>
Note 12. Special SAIF Assessment
On September 30, 1996, the "Deposit Insurance Funds Act of 1996" was signed into
law. The legislation included a special assessment to recapitalize the SAIF
insurance fund up to its statutory goal of 1.25% of insured deposits. The
assessment is equal to approximately 65 basis points of the SAIF assessable
deposit base as of March 31, 1995. The expense recorded for the special
assessment amounted to $520,000, for the year ended December 31, 1996.
Note 13. Subsequent Event - Plan of Conversion (Unaudited)
On July 14, 1997 the Board of Directors of the Bank adopted a Plan of Conversion
(the Plan) under which the Bank will convert from a North Carolina chartered
mutual savings bank to a North Carolina chartered stock savings bank and will
become a wholly-owned subsidiary of a holding company formed in connection with
the conversion. The holding company will issue common stock to be sold in the
conversion and will use that portion of the net proceeds thereof which it does
not retain to purchase the capital stock of the Bank. The Plan is subject to
approval by regulatory authorities and the members of the Bank at a special
meeting.
At the time of the conversion, the Bank will establish a liquidation account in
the amount equal to its net worth as reflected in its latest statement of
financial condition used in its final conversion-offering circular. The
liquidation account will be maintained for the benefit of eligible deposit
account holders who continue to maintain their deposit accounts in the Bank
after conversion. Only in the event of a complete liquidation each deposit
account holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance for deposit accounts then held before any liquidation distribution may
be made with respect to common stock. Dividends paid by the Bank subsequent to
the conversion cannot be paid from this liquidation account.
F-31
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Subsequent Event - Plan of Conversion (Unaudited)
The Bank may not declare or pay a cash dividend on its common stock if its net
worth would thereby be reduced below either the aggregate amount then required
for the liquidation account or the minimum regulatory capital requirements
imposed by federal and state regulations. As a North Carolina-chartered stock
savings bank, the Bank may not declare or pay a cash dividend on its capital
stock if the effect of such transaction would be to reduce the net worth of the
Bank to an amount which is less than the minimum amount required by applicable
federal and state regulations. For a period of five years after its conversion
from mutual to stock form, the Bank must obtain written approval from the
Administrator of the North Carolina Savings Institutions Division before
declaring or paying a cash dividend on its capital stock in an amount in excess
of one-half of the greater of (i) the Banks net income for the most recent
fiscal year end, or (ii) the average of the Banks net income after dividends for
the most recent year end and not more than two of the immediately preceding
fiscal year ends.
If the conversion is ultimately successful, conversion costs will be accounted
for as a reduction of the stock proceeds. If the conversion is unsuccessful,
conversion costs will be charged to the Bank's operations. The Bank had not
incurred any conversion costs as of June 30, 1997.
Note 14. Reclassification
Certain amounts in the December 31, 1996, 1995, and 1994 financial statements
have been reclassified to conform with June 30, 1997 presentation with no
effect on net income or retained earnings.
Note 15. Future Reporting Requirements
The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation, which
the Bank has not been required to adopt as of June 30, 1997.
The Statement, which will be in effect for the Bank's fiscal year ending
December 31, 1997, requires that an entity account for stock based compensation
plans using a fair value based method which measures compensation cost at the
grant date based upon the value of the award, which is then recognized over the
service period, usually the vesting period. The accounting requirements of the
Statement apply to grants of awards entered into in fiscal years that begin
after December 15, 1995. The Statement allows entities to continue to use APB
Opinion No. 25 to measure compensation cost, but requires that the proforma
effects on net income and earnings per share be disclosed to reflect the
difference between the compensation cost, if any, from applying APB Opinion No.
25 and the related cost measured by the fair value method defined in the
Statement. The Statement is not expected to have a material effect on the Bank's
financial statements because management is expected to elect to continue to use
the accounting and reporting permitted by APB Opinion No. 25 and will disclose
the differences, if any, as proforma effects in notes to the financial
statements of not utilizing the fair value method prescribed in SFAS No. 123
should the Bank elect to adopt a restricted stock plan subsequent to conversion
to the stock form.
The FASB has issued SFAS No. 128, Earnings Per Share, which the Bank has not
been required to adopt as of June 30, 1997.
F-32
<PAGE>
MOORESVILLE SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Future Reporting Requirements (Continued)
The Statement, which will be effective for the Bank's first interim period as a
public stock company ending after December 15, 1997, specifies the computation,
presentation and disclosure requirements for earnings per share.
The FASB has issued SFAS No. 130, Reporting Comprehensive Income, which the Bank
has not been required to adopt as of June 30, 1997.
The Statement, which is effective for fiscal years beginning after December 15,
1997, establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
F-33
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER INDIVIDUAL OR ENTITY HAS BEEN AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
ANY SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY CODDLE CREEK FINANCIAL CORP. OR MOORESVILLE SAVINGS BANK,
SSB. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY, OR ANY OTHER
SECURITIES, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF CODDLE CREEK FINANCIAL CORP. OR MOORESVILLE SAVINGS BANK, SSB SINCE
ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE
HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 4
Selected Financial and Other Data of The Bank............................ 15
Recent Developments...................................................... 16
Risk Factors............................................................. 18
Coddle Creek Financial Corp.............................................. 24
Mooresville Savings, SSB................................................. 25
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 27
Market for Common Stock.................................................. 28
Capitalization........................................................... 28
Pro Forma Data........................................................... 31
Historical and Pro Forma Capital Compliance.............................. 36
Stock Purchases by Directors and Executive Officers...................... 39
Management's Discussion and Analysis of Financial Condition and Operating
Results................................................................. 40
Business of The Company.................................................. 56
Business of The Bank..................................................... 57
Taxation................................................................. 79
Supervision and Regulation............................................... 81
Management of the Company................................................ 91
Management of The Bank................................................... 92
Description of Capital Stock............................................. 101
Anti-Takeover Provisions of the Company and The Bank..................... 103
The Conversion........................................................... 106
Legal Opinions........................................................... 121
Experts.................................................................. 121
Registration Requirements................................................ 122
Additional Information................................................... 122
Index to Financial Statements of Mooresville Savings Bank, SSB........... 123
</TABLE>
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UNTIL FEBRUARY 20, 1998, 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.
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BETWEEN
433,500 AND 674,475
SHARES
CODDLE CREEK
FINANCIAL CORP.
(PROPOSED HOLDING COMPANY FOR
MOORESVILLE SAVINGS BANK, INC., SSB)
COMMON STOCK
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PROSPECTUS
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TRIDENT SECURITIES, INC.
NOVEMBER 22, 1997
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