<PAGE>
As filed with the Securities and Exchange Commission on November 10, 1997
Registration No. 333-35497
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT
NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------------------
CODDLE CREEK FINANCIAL CORP.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
North Carolina 6039 56-2045998
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
347 North Main Street/Post Office Box 117
Mooresville, North Carolina 28115
(704) 664-4888
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
---------------------
GEORGE W. BRAWLEY, JR., President
Coddle Creek Financial Corp.
347 North Main Street
Mooresville, North Carolina 28115
(704) 664-4888
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
EDWARD C. WINSLOW III
ELLEN P. HAMRICK
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
2000 Renaissance Plaza
Post Office Box 26000
Greensboro, North Carolina 27420
--------------------
Approximate date of commencement of the proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ X ]
-----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================================================
Title of Each Class Proposed Maximum Proposed Maximum Amount of
of Securities to be Amount to Offering Price Aggregate Registration
Registered be Registered Per Share Offering Price Fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value..... 674,475/(1)/ $50.00 $33,723,750 $10,219.32/(2)/
=====================================================================================================================
</TABLE>
(1) The estimated maximum number of shares to be registered is based upon
the maximum of the valuation range of Mooresville Savings Bank, SSB and
the Registrant, as established by an independent appraisal, divided by
the proposed offering price per share.
(2) Previously paid: $9,217.42.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a)
may determine.
================================================================================
<PAGE>
CODDLE CREEK FINANCIAL CORP.
CROSS-REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
<TABLE>
<CAPTION>
Item Caption or Location
Number in Prospectus
------ -------------------
<S> <C> <C>
1 Forepart of the Registration Statement and Outside Front Cover Page
Front Cover Page of Prospectus
2 Inside Front and Outside Back Cover Pages of Inside Front Cover Page; Table of Contents;
Prospectus Outside Back Cover Page
3 Summary Information, Risk Factors and Ratio of Summary; Selected Financial and Other Data
Earnings to Fixed Charges of The Bank; Risk Factors
4 Use of Proceeds Summary; Use of Proceeds
5 Determination of Offering Price Summary; The Conversion
6 Dilution Not Applicable
7 Selling Security Holders Not Applicable
8 Plan of Distribution Summary; Use of Proceeds; The Conversion
9 Description of Securities to be Registered Dividend Policy; Description of Capital
Stock; Anti-Takeover Provisions Affecting
The Company and The Bank
10 Interests of Named Experts and Counsel Not Applicable
11 Information with Respect to the Registrant Summary; Selected Financial and Other Data
of The Bank; Coddle Creek Financial Corp.;
Mooresville Savings Bank, SSB; Dividend Policy,
Market for Common Stock; Management's Discussion
and Analysis of Financial Condition and
Operating Results; Business of The Company;
Business of The Bank; Management of The Bank;
Financial Statements
12 Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Not Applicable
</TABLE>
<PAGE>
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
(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, Estimated Net
Purchase Price Marketing and Conversion
Other Fees and Proceeds/(4)/
Expenses/(3)/
- --------------------------------------------------------------------------------
<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
adjusted.................. $ 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
adjusted /(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, 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."
<PAGE>
TRIDENT SECURITIES, INC.
The date of this Prospectus is November _____, 1997.
December _____, 1997, unless extended by the Bank and the Company with the
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), resolicited
and would 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, 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, but not later than __________, 199___, 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 _____, 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
<PAGE>
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.
<PAGE>
MAP
<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.
5
<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
6
<PAGE>
interest sensitivity of its assets and liabilities.
As is described above, the 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
7
<PAGE>
to the Conversion, subject to certain conditions. See "THE
CONVERSION -- General."
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 _____, 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
__________, 199__, unless extended with the approval of
the Administrator.
8
<PAGE>
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, 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
_____, 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
9
<PAGE>
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 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
10
<PAGE>
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 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.
11
<PAGE>
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.
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."
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
12
<PAGE>
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.
Benefits to Directors In connection with the Conversion, certain benefits
and Executive Officers 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 of 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
13
<PAGE>
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. 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.
14
<PAGE>
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."
15
<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.
16
<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>
17
<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)
Financial Condition Data:
- -------------------------
<S> <C> <C>
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>
18
<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 $10,000 was
charged to expense for the three months ended
19
<PAGE>
September 30, 1997. The allowance for loan losses totalled $616,000 at September
30, 1997.
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
20
<PAGE>
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.
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
21
<PAGE>
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.
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
22
<PAGE>
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 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
23
<PAGE>
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.
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."
24
<PAGE>
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."
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
25
<PAGE>
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.
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."
26
<PAGE>
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 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
27
<PAGE>
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.
28
<PAGE>
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 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
29
<PAGE>
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 does not intend to repurchase any Common Stock during the first year
following the Conversion.
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 captial 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 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
30
<PAGE>
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 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
31
<PAGE>
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.
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.
32
<PAGE>
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."
33
<PAGE>
<TABLE>
<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
Historical price of price of price of price of
Capitalization $50.00 per share $50.00 per share $50.00 per share $50.00 per share/(1)/
---------------------- ----------------- ----------------- ----------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits $ 95,872 $ 95,872 $ 95,872 $ 95,872 $ 95,872
Advances from FHLB 1,000 1,000 1,000 1,000 1,000
-------- -------- -------- -------- --------
Deposits and advances from
FHLB/(2)/ $ 96,872 $ 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 14,691
-------- -------- -------- -------- --------
Total $ 14,691 $ 32,950 $ 36,233 $ 39,517 $ 43,293
======== ======== ======== ======== ========
Total deposits and
stockholders' equity $111,563 $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.
<PAGE>
<TABLE>
<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
Historical price of price of price of price of
Capitalization $50.00 per share $50.00 per share $50.00 per share $50.00 per share/(1)/
---------------------- ----------------- ----------------- ----------------- ---------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits $ 93,785 $ 93,785 $ 93,785 $ 93,785 $ 93,785
Advances from FHLB 2,000 2,000 2,000 2,000 2,000
-------- -------- -------- -------- --------
Deposits and advances from
FHLB/(2)/ $ 95,785 $ 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 14,412
-------- -------- -------- -------- --------
Total $ 14,412 $ 32,671 $ 35,954 $ 39,238 $ 43,014
======== ======== ======== ======== ========
Total deposits and
stockholders' equity $110,197 $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.
<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
38
<PAGE>
be used as a basis for projection of results of operations for future periods.
39
<PAGE>
<TABLE>
<CAPTION>
At or For the Six Months Ended June 30, 1997
--------------------------------------------------------------------------
433,500 510,000 586,500 674,475
shares at $50.00 shares at $50.00 shares at $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>
38
<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.
39
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1996
--------------------------------------------------------------------------
433,500 510,000 586,500 674,475
shares at $50.00 shares at $50.00 shares at $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 $ 25,560 $ 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
per share/(5)/ 18.1X 20.0X 21.6X 23.4X
========= ========= ========= =========
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>
- ---------------------
40
<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.
41
<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.
42
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Regulatory Capital Position at June 30, 1997/(3)/
Bank's ------------------------------------------------------------
Historical
Regulatory Capital
Position at
June 30, 1997
------------------ 433,500 510,000
------- -------
Shares sold at Shares sold at
Price of $50.00 Price of $50.00
per share per share
------------------ --------------------
Percent of Percent of Percent of
Regulatory Regulatory Regulatory
Amount Assets/(1)/ Amount Assets/(1)/ Amount Assets/(1)/
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $14,671 12.85% $24,234 19.59% $25,952 20.69%
Tier 1 (leverage) capital requirement/(2)/ 4,567 4.00% 4,950 4.00% 5,018 4.00%
------- ----- ------- ------ ------- ------
Excess $10,104 8.85% $19,284 15.59% $20,934 16.69%
======= ===== ======= ====== ======= ======
Tier 1 risk based capital $14,671 24.05% $24,234 38.52% $25,952 41.03%
Tier 1 risk based capital requirement 2,440 4.00% 2,517 4.00% 2,530 4.00%
------- ----- ------- ------ ------- ------
Excess $12,231 20.05% $21,717 34.52% $23,422 37.03%
======= ====== ======= ====== ======= ======
Total risk based capital $15,288 25.06% $24,851 39.50% $26,569 42.00%
Total risk based capital requirement 4,880 8.00% 5,033 8.00% 5,060 8.00%
------- ----- ------- ------ ------- ------
Excess $10,408 17.06% $19,818 31.50% $21,509 34.00%
======= ====== ======= ====== ======= ======
NC regulatory capital $15,288 13.39% $24,851 20.09% $26,569 21.18%
NC regulatory capital requirement 5,708 5.00% 6,186 5.00% 6,272 5.00%
------- ----- ------- ------ ------- ------
Excess $ 9,580 8.39% $18,665 15.09% $20,297 16.18%
======= ===== ======= ====== ======= ======
<CAPTION>
Pro Forma Regulatory Capital Position at June 30, 1997/(3)/
-----------------------------------------------------------------
586,500 674,475
Shares sold at Shares sold at
Price of $50.00 Price of $50.00
per share per share
-------------------- ----------------------
Percent of Percent of
Regulatory Regulatory
Amount Assets/(1)/ Amount Assets/(1)/
------ -------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Tier 1 (leverage) capital $27,671 21.76% $29,647 22.96%
Tier 1 (leverage) capital requirement/(2)/ 5,087 4.00% 5,166 4.00%
------- ------ ------- ------
Excess $22,584 17.76% $24,481 18.96%
======= ====== ======= ======
Tier 1 risk based capital $27,671 43.51% $29,647 46.33%
Tier 1 risk based capital requirement 2,544 4.00% 2,560 4.00%
------- ------ ------- ------
Excess $25,127 39.51% $27,087 42.33%
======= ====== ======= ======
Total risk based capital $28,288 44.48% $30,264 47.29%
Total risk based capital requirement 5,088 8.00% 5,120 8.00%
------- ------ ------- ------
Excess $23,200 36.48% $25,144 39.29%
======= ====== ======= ======
NC regulatory capital $28,288 22.25% $30,264 23.44%
NC regulatory capital requirement 6,358 5.00% 6,457 5.00%
------- ------ ------- ------
Excess $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.
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Regulatory Capital Position at December 31, 1996/(3)/
Bank's ------------------------------------------------------------
Historical
Regulatory Capital
Position at
December 31, 1996
------------------ 433,500 510,000
Shares sold at Shares sold at
Price of $50.00 Price of $50.00
per share per share
------------------ --------------------
Percent of Percent of Percent of
Regulatory Regulatory Regulatory
Amount Assets/(1)/ Amount Assets/(1)/ Amount Assets/(1)/
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (leverage) capital $14,384 12.78% $23,947 19.61% $25,665 20.73%
Tier 1 (leverage) capital requirement/(2)/ 4,502 4.00% 4,885 4.00% 4,953 4.00%
------- ------ ------- ------ ------- ------
Excess $ 9,882 8.78% $19,062 15.61% $20,712 16.73%
======= ====== ======= ====== ======= ======
Tier 1 risk based capital $14,384 24.40% $23,947 39.34% $25,665 41.93%
Tier 1 risk based capital requirement 2,358 4.00% 2.435 4.00% 2,448 4.00%
------- ------ ------- ------ ------- ------
Excess $12,026 20.40% $21,512 35.34% $23,217 37.93%
======= ====== ======= ====== ======= ======
Total risk based capital $14,772 25.06% $24,334 39.98% $26,053 42.56%
Total risk based capital requirement 4,716 8.00% 4,869 8.00% 4,896 8.00%
------- ------ ------- ------ ------- ------
Excess $10,056 17.06% $19,465 31.98% $21,157 34.56%
======= ====== ======= ====== ======= ======
NC regulatory capital $14,772 13.12% $24,334 19.93% $26,053 21.04%
NC regulatory capital requirement 5,628 5.00% 6,106 5.00% 6,192 5.00%
------- ------ ------- ------ ------- ------
Excess $ 9,144 8.12% $18,228 14.93% $19,861 16.04%
======= ====== ======= ====== ======= ======
<CAPTION>
Pro Forma Regulatory Capital Position at December 31, 1996
-----------------------------------------------------------------
586,500 674,475
Shares sold at Shares sold at
Price of $50.00 Price of $50.00
per share per share
-------------------- ----------------------
Percent of Percent of
Regulatory Regulatory
Amount Assets/(1)/ Amount Assets/(1)/
------ -------- ------ ------
<S> <C> <C> <C> <C>
Tier 1 (leverage) capital $27,384 21.81% $29,360 23.02%
Tier 1 (leverage) capital requirement/(2)/ 5,022 4.00% 5,101 4.00%
------- ------ ------- ------
Excess $22,362 17.81% $24,259 19.02%
======= ====== ======= ======
Tier 1 risk based capital $27,384 44.49% $29,360 47.39%
Tier 1 risk based capital requirement 2,462 4.00% 2,478 4.00%
------- ------ ------- ------
Excess $24,922 40.49% $26,882 43.39%
======= ====== ======= ======
Total risk based capital $27,772 45.12% $29,748 48.02%
Total risk based capital requirement 4,924 8.00% 4,956 8.00%
------- ------ ------- ------
Excess $22,848 37.12% $24,792 40.02%
======= ====== ======= ======
NC regulatory capital $27,772 22.12% $29,748 23.33%
NC regulatory capital requirement 6,278 5.00% 6,377 5.00%
------- ------ ------- ------
Excess $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.
<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>
45
<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
46
<PAGE>
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.
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
47
<PAGE>
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
minimize 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 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
48
<PAGE>
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.
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
49
<PAGE>
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.
50
<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
in Market
Interest Rates
--------------
Projected Policy
Change/(1)/ Limit/(2)/
------ -----
<S> <C> <C>
Up 200 (22.85)% (85.00)%
Up 150 (17.42) (60.00)
Up 100 (11.73) (45.00)
Up 50 (5.78) (30.00)
----------------
</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.
51
<PAGE>
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
in Market
Interest Rates
--------------
Board
Projected Policy
Change/(1)/ Limit/(2)/
------ -----
<S> <C> <C>
Up 200 (7.00)% (65.00)%
Up 150 (5.23) (50.00)
Up 100 (3.46) (40.00)
Up 50 (1.72) (20.00)
----------------
</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.
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.
52
<PAGE>
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, however, 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.
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
53
<PAGE>
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.
54
<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)
INTEREST-EARNING ASSETS/(1)/:
<S> <C> <C> <C> <C> <C>
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 36,604 2,098 1,861 60,560 101,123
Interest-bearing deposits 2,348 -- -- -- 2,348
Investments 2,206 2,587 933 1,028 6,754
FHLB stock -- -- -- 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.
55
<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).
56
<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-earnings assets 7.96% 109,796 $ 4,433 8.07% 106,860 $ 4,257 7.79%
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 $ 122,888 $ 108,799
--------- ---------
Net interest income and interest
rate spread(2) 3.01% $ 2,067 3.10% $ 1,947 2.96%
======= =======
Net yield on interest-earnings
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% 11,871 670 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-earnings 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-earnings
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.
<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.
58
<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
------ ---- ------ --- ------ ---- ------ ---
<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
------ ---- ------
<S> <C> <C> <C> <C>
Interest income on:
Interest-earning deposits in other banks $ (8) $ 64 $ (5) $
Investments (18) 220 (8)
Loans receivable 314 1,728 115
----- ----- ----- -----
Total interest income on interest-earning assets 288 2,012 102
----- ----- ----- -----
Interest expense on:
NOW and Money Market accounts (30) 96 (13)
Passbook accounts (5) 106 (2)
Certificates of Deposit 205 1,324 128
FHLB advances - - -
----- ----- ----- -----
Total interest expense on interest-bearing
liabilities 170 1,526 113
----- ----- ----- -----
Increase (decrease) in net interest income $ 118 $ 486 $ (11) $
===== ===== ===== =====
</TABLE>
<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
60
<PAGE>
bank levels of reserves and for risk in the portfolio resulting from the
changing economic environment in the Bank's market area.
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 52 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 50 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
61
<PAGE>
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. 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 52 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
62
<PAGE>
$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.
The table on page 50 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
63
<PAGE>
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.
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
64
<PAGE>
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.
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%,
65
<PAGE>
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 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.
66
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
At June 30, 1997 1996 1995
------------------ ----------------------- -------------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <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%
Multi-family residential 870 0.87% 761 0.78% 748 0.82%
Nonresidential 2,803 2.79% 2,711 2.76% 2,044 2.26%
Construction 5,710 5.68% 4,086 4.17% 8,673 9.58%
Equity line 6,031 6.00% 4,947 5.05% 2,891 3.19%
-------- -------- -------- -------- -------- --------
Total real estate loans 101,531 101.02% 97,846 99.89% 93,049 102.75%
-------- -------- -------- -------- -------- --------
Consumer loans:
Installment loan 2,447 2.43% 2,397 2.45% 2,403 2.66%
Other consumer and commercial 959 0.95% 941 0.96% 907 1.00%
-------- -------- -------- -------- -------- --------
Total consumer loans 3,406 3.38% 3,338 3.41% 3,310 3.66%
-------- -------- -------- -------- -------- --------
Total gross loans 104,937 104.40% 101,184 103.30% 96,359 106.41%
-------- -------- -------- -------- -------- --------
Less:
Construction loans in process 3,261 3.24% 2,321 2.37% 4,930 5.44%
Deferred loan fees 553 0.55% 524 0.53% 478 0.53%
Allowance for loan losses 617 0.61% 388 0.40% 396 0.44%
-------- -------- -------- -------- -------- --------
Total reductions 4,431 4.40% 3,233 3.30% 5,804 6.41%
-------- -------- -------- -------- -------- --------
Total loans receivable, net $100,506 100.00% $ 97,951 100.00% $ 90,555 100.00%
======== ======= ======== ======= ======== =======
<CAPTION>
At December 31,
-----------------------
1994
--------------------
% of
Amount Total
------ -----
(Dollars in Thousands)
<S> <C> <C>
Real estate loans:
One-to-four family residential $74,904 90.85%
Multi-family residential 643 0.78%
Nonresidential 1,988 2.41%
Construction 5,052 6.13%
Equity line 207 0.25%
------- -------
Total real estate loans 82,794 100.42%
------- -------
Consumer loans:
Installment loan 2,396 2.91%
Other consumer and commercial 625 0.76%
------- -------
Total consumer loans 3,021 3.67%
------- -------
Total gross loans 85,815 104.09%
------- -------
Less:
Construction loans in process 2,580 3.14%
Deferred loan fees 386 0.47%
Allowance for loan losses 396 0.48%
------- -------
Total reductions 3,362 4.09%
------- -------
Total loans receivable, net $82,453 100.00%
======= =======
</TABLE>
<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
----- -----
<S> <C> <C>
(In Thousands)
Real estate loans 1-4 family $59,712 $ 565
Other loans 1,951 2,426
------- -------
$61,663 $ 2,991
======= =======
</TABLE>
68
<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.
69
<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.
70
<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
71
<PAGE>
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.
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
72
<PAGE>
the estimate of construction costs proves to be inaccurate, the lender may be
required to advance funds beyond the amount originally committed in order to
permit completion of construction. If the estimate of anticipated value proves
to be inaccurate, the lender may have security which has value insufficient to
assure full repayment. In addition, repayment of loans made to builders to
finance construction of properties is often dependent upon the builder's ability
to sell the property once construction is completed.
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
73
<PAGE>
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 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.
74
<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":
75
<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 future credit risk inherent in its lending portfolio as
lending trends and changes in economic environment may dictate.
76
<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>
77
<PAGE>
- -------------------------------------
(1) Nonperforming loans included nonaccrual loans and accruing loans past due
90 days or more.
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.
78
<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
--------- --------- ----- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
Residental 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%
======== ======== ======== ======== ======== ========
<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
--------- --------- ----- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
Residental 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>
<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 of the Bank's investment portfolio consisted of municipal bonds
issued by municipalities located in North
80
<PAGE>
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.
81
<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>
<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.
83
<PAGE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------
At June 30, 1997 1996
---------------------------------- ---------------------------------
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits
------ -------- -------- ------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Passbook savings $11,564 3.04% 12.06% $11,487 3.00% 12.24%
NOW accounts 5,842 1.10% 6.09% 5,644 1.08% 6.02%
Money market deposit accounts 4,485 2.82% 4.68% 4,180 2.91% 4.46%
Non-interest bearing accounts 1,782 --% 1.86% 1,319 --% 1.41%
------- ------- ------- ------- ------- -------
Total demand deposits 23,673 2.28% 24.69% 22,630 2.33% 24.13%
------- ------- ------- ------- ------- -------
Certificates of deposit 71,794 5.72% 74.89% 70,742 5.78% 75.43%
------- ------- ------- ------- ------- -------
Accrued interest 405 0.42% 413 0.44%
------- ------- ------- -------
Total deposits $95,872 4.84% 100.00% $93,785 4.92% 100.00%
======= ======= ======= ======= ======= =======
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1995 1994
---------------------------------- ---------------------------------
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits
------ -------- -------- ------ -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Passbook savings $11,225 3.50% 12.19% $11,579 3.50% 13.63%
NOW accounts 7,359 2.40% 7.99% 5,736 2.25% 6.74%
Money market deposit accounts 4,826 3.00% 5.24% 6,243 3.00% 7.34%
Non-interest bearing accounts 943 --% 1.02% 870 --% 1.02%
------- ------- ------- ------- ------- -------
Total demand deposits 24,353 2.94% 26.44% 24,446 2.96% 28.73%
------- ------- ------- ------- ------- -------
Certificates of deposit 67,365 5.80% 73.14% 60,357 4.94% 70.92%
------- ------- ------- ------- ------- -------
Accrued interest 385 0.42% 302 0.35%
------- ------- ------- -------
Total deposits $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
85
<PAGE>
exceed an investment of 3% of assets must receive prior approval of the FDIC.
The Bank has no subsidiaries.
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
86
<PAGE>
decreased in recent years, its deposit base has grown principally due to
economic growth in the Bank's market area. The ability of 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.
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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
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corporation's alternative minimum taxable income ("AMTI") subject to applicable
statutory exemptions. AMTI is calculated by adding certain tax preference items
and making certain adjustments to the corporation's regular taxable income.
Preference items and adjustments generally applicable to financial institutions
include, but are not limited to, the following: (i) the excess of the bad debt
deduction over the amount that would have been allowable on the basis of actual
experience; (ii) interest on certain tax-exempt bonds issued after August 7,
1986; and (iii) 75% of the excess, if any, of a corporation's adjusted earnings
and profits over its AMTI (as otherwise determined with certain adjustments).
Net operating loss carryovers, subject to certain adjustments, may be utilized
to offset up to 90% of the AMTI. Credit for AMT paid may be available in future
years to reduce future regular federal income tax liability 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.
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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 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
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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 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. In addition, 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
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insured savings institutions and other federally regulated financial
institutions in the past several years and have increased competition among
savings institutions, commercial banks and other providers of financial
services. In addition, federal legislation has imposed new limitations on
investment authority, and higher insurance and examination assessments on
savings institutions and has made other changes that may adversely affect the
future operations and competitiveness of savings institutions with other
financial institutions, including commercial banks and their holding companies.
The operations of regulated depository institutions, including 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.
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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) 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,
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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
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
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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 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.
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<PAGE>
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 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
96
<PAGE>
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.
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
97
<PAGE>
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 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.
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.
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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.
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
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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:
<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
<S> <C> <C>
</TABLE>
100
<PAGE>
<TABLE>
<CAPTION>
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.
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
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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
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."
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
102
<PAGE>
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.
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
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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 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. 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 payments equal to their accrued benefit under the plan on November 3 and 4,
1997. Mr. G. Brawley and Mr. D. Brawley, as 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. These 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
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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."
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
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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.
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
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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.
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
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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.
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"),
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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
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
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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 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."
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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.
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.
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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.
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.
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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% 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 -
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- - 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-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 --
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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.
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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.
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 __________, 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 ____, 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 ___________, 199___. 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
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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 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.
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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:
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
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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 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 ____, 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 __________, 199__, 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 canceled,
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
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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
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
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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 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 __________, 199__,
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.
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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.
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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 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 _____________, 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
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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.
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.
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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 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
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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 ____, 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.
Persons wishing to use funds in a the Bank IRA to purchase Common Stock
must visit the Stock Information Center on or before December ____, 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
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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, 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
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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.
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
128
<PAGE>
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 ____, 1997.
In the event the 6,000 or 12,000 share maximum purchase limitation is increased,
any subscriber or group of subscribers in the Subscription, Community or
Syndicated Community Offering who has subscribed for the maximum amount which is
increased, and certain other large subscribers in the discretion of the 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
129
<PAGE>
(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.
130
<PAGE>
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.
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.
131
<PAGE>
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 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
132
<PAGE>
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.
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.
133
<PAGE>
Index to Financial Statements
of
Mooresville Savings Bank, SSB
<TABLE>
<CAPTION>
Page
----
<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 Operations for the Six Months Ended June 30, 1997 and 1996
(unaudited) and for 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 for 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
for the Years Ended December 31, 1996 and 1995 and for 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 the Bank or related notes. No financial statements are
provided for the Company since it was not in operation for any of the periods
presented.
134
<PAGE>
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
- ------------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<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:
Interest 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)
--------------------------------
</TABLE>
(Continued)
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 activities 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 for sale 446,000 - -
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 receivable, net (7,254,000) (7,975,000) (3,328,000)
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 Disclosures 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 BANK, S.S.B.
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 those 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 nonaccrual
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 six months ended June 30, 1997 and 1996 and the years ended
December 31, 1996 and 1995 and nine 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>
June 30, December 31,
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>
<CAPTION>
<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 June 30, December 31,
Average -------------------------------------------------------
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, 1997
--------------------------------------------------------------------------
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 34.0 % 34.0 % 34.0 % 34.0 % 34.0 %
tax rate
Increases (decreases) in taxes
resulting from:
Permanent Differences 2.8 1.1 (2.5 ) (5.8) (3.8)
State income tax, net of 2.7 2.4 1.2 1.2 2.0
federal benefit
(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 $ 1,258,000 $ - $ 1,258,000
loans
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 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
- --------------------------------------------------------------------------------
2. 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........................................... 25
Mooresville Savings, SSB.............................................. 25
Use of Proceeds....................................................... 26
Dividend Policy....................................................... 27
Market for Common Stock............................................... 28
Capitalization ....................................................... 29
Pro Forma Data........................................................ 32
Historical and Pro Forma Capital Compliance .......................... 37
Stock Purchases by Directors and Executive Officers................... 40
Management's Discussion and Analysis
of Financial Condition and Operating Results........................ 41
Business of The Company............................................... 57
Business of The Bank.................................................. 58
Taxation.............................................................. 80
Supervision and Regulation............................................ 82
Management of the Company............................................. 92
Management of The Bank................................................ 93
Description of Capital Stock.......................................... 102
Anti-Takeover Provisions of the Company
and The Bank........................................................ 104
The Conversion........................................................ 107
Legal Opinions........................................................ 122
Experts............................................................... 122
Registration Requirements............................................. 122
Additional Information................................................ 123
Index to Financial Statements of Mooresville
Savings Bank, SSB................................................... 124
</TABLE>
Until November ___, 1997, 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.
================================================================================
================================================================================
Between
433,500 and 674,475
Shares
CODDLE CREEK
FINANCIAL CORP.
(Proposed Holding Company for
Mooresville Savings Bank, Inc., SSB)
Common Stock
---------------------
PROSPECTUS
---------------------
Trident Securities, Inc.
November ___, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution. Set forth below is an
-------------------------------------------
estimate of the amount of fees and expenses (other than the Underwriters
commissions) to be incurred in connection with the issuance and distribution of
the shares.
<TABLE>
<CAPTION>
<S> <C>
Registration and Filing Fees................................ $ 26,000
Postage and Printing........................................ $ 60,000
Accounting Fees and Expenses................................ $ 50,000
Appraisal Fees and Expenses................................. $ 32,500
Legal Fees and Expenses..................................... $135,000
Sales Agent Expenses........................................ $ 37,500
Data Processing Expenses.................................... $ 9,000
Transfer Agent.............................................. $ 12,000
Other....................................................... $ 25,000
--------
$387,000
========
</TABLE>
Item 14. Indemnification of Directors and Officers. The Registrant's
-----------------------------------------
Articles of Incorporation provide that, to the fullest extent permitted by the
North Carolina Business Corporation Act (the "NCBCA"), no person who serves as a
director shall be personally liable to the Registrant or any of its stockholders
or otherwise for monetary damages for breach of any duty as director. The
Registrant's Bylaws state that any person who at any time serves or has served
as a director or officer of the Registrant, or who, while serving as a director
or officer of the Registrant, serves or has served at the request of the
Registrant as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, or
as a trustee or administrator under an employee benefit plan, shall have a right
to be indemnified by the Registrant to the fullest extent permitted by law
against (a) reasonable expenses, including attorneys' fees, incurred by him in
connection with any threatened, pending or completed civil, criminal,
administrative, investigative, or arbitrative action, suit, or proceeding (and
any appeal therein), whether or not brought by or on behalf of the Registrant,
seeking to hold him liable by reason of the fact that he is or was acting in
such capacity, and (b) reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan) or penalty for which he may have become liable in any
such action, suit or proceeding, or in connection with a settlement approved by
the Board of Directors of any such action, suit or proceeding.
Sections 55-8-50 through 55-8-58 of the NCBCA contain provisions
prescribing the extent to which directors and officers shall or may be
indemnified. Section 55-8-51 of the NCBCA permits a corporation, with certain
exceptions, to indemnify a present or former director
II-1
<PAGE>
against liability if (i) the director conducted himself in good faith, (ii) the
director reasonably believed (x) that the director's conduct in the director's
official capacity with the corporation was in its best interests and (y) in all
other cases the director's conduct was at least not opposed to the corporation's
best interests, and (iii) in the case of any criminal proceeding, the director
had no reasonable cause to believe the director's conduct was unlawful. A
corporation may not indemnify a director in connection with a proceeding by or
in the right of the corporation in which the director was adjudged liable to the
corporation or in connection with a proceeding charging improper personal
benefit to the director. The above standard of conduct is determined by the
board of directors, or a committee or special legal counsel or the shareholders
as prescribed in Section 55-8-55.
Sections 55-8-52 and 55-8-26 of the NCBCA require a corporation to
indemnify a director or officer in the defense of any proceeding to which the
director or officer was a party against reasonable expenses when the director or
officer is wholly successful in the director's or officer's defense, unless the
articles of incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if the director or officer is
adjudged fairly and reasonably so entitled under Section 55-8-54.
In addition, Section 55-8-57 permits a corporation to provide for
indemnification of directors, officers, employees or agents, in its articles of
incorporation or bylaws or by contract or resolution, against liability in
various proceedings and to purchase and maintain insurance policies on behalf of
these individuals.
The foregoing is only a general summary of certain aspects of North
Carolina law dealing with indemnification of directors and officers and does not
purport to be complete. It is qualified in its entirety by reference to the
relevant statutes, which contain detailed specific provisions regarding the
circumstances under which and the person for whose benefit indemnifications
shall or may be made.
Item 15. Recent Sales of Unregistered Securities. On August 28, 1997,
---------------------------------------
Registrant sold one share of common stock, no par value per share, to George W.
Brawley, Jr. for an aggregate purchase price of $10.00. Such sale was exempt
from registration under Section 4(2) of Securities Act of 1933.
Item 16. Exhibits. The following exhibits and financial statement schedules
--------
are filed herewith or will, as noted, be filed by amendment.
II-2
<PAGE>
(a) Exhibits
--------
<TABLE>
<CAPTION>
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K) Description
--------------- -----------
<S> <C>
(1)(a) Engagement letter dated July 15, 1997 between
Mooresville Savings Bank, SSB and Trident Securities,
Inc.*
(1)(b) Form of Sales Agency Agreement among Coddle Creek
Financial Corp., Mooresville Savings Bank, SSB and
Trident Securities, Inc.
(2) Plan of Holding Company Conversion of Mooresville
Savings Bank, SSB*
(3)(i) Articles of Incorporation of Coddle Creek Financial
Corp.*
(3)(ii) Bylaws of Coddle Creek Financial Corp.*
(4) Form of Stock Certificate for Coddle Creek Financial
Corp. and Mooresville Savings Bank, Inc., SSB*
(5) Opinion and consent of Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P. as to legality of securities
to be registered hereby*
(8)(a) Opinion of Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P. as to federal and state tax
consequences*
(8)(b) Opinion of JMP Financial, Inc. as to the value of
subscription rights*
(10)(a) Letter Agreement dated July 17, 1997 between
Mooresville Savings Bank, SSB and JMP Financial, Inc.*
(10)(b) Form of Employment Agreements between Mooresville
Savings Bank, Inc., SSB and (i) George W. Brawley, Jr.,
(ii) Dale W. Brawley, and (iii) Billy R. Williams*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K) Description
--------------- -----------
<S> <C>
(10)(c) Form of Employee Stock Ownership Plan and Trust of
Mooresville Savings Bank, Inc., SSB*
(10)(d) Form of the Management Recognition Plan of Mooresville
Savings Bank, Inc., SSB if the Plan is adopted and
approved by the Stockholders of Coddle Creek Financial
Corp. within one year after the conversion of
Mooresville Savings Bank, Inc., SSB to stock form*
(10)(e) Form of Stock Option Plan of Coddle Creek Financial
Corp. if the Plan is adopted and approved by the
Stockholders of Coddle Creek Financial Corp. within one
year after the conversion of Mooresville Savings Bank,
Inc., SSB to stock form*
(10)(f) Form of Mooresville Savings Bank, Inc., SSB Severance
Plan*
(10)(g) Form of Capital Maintenance Agreement between Coddle
Creek Financial Corp. and Mooresville Savings Bank,
Inc., SSB*
(10)(h) (i) Amended and Restated Retirement Payment
Agreements, Amended and Restated Director's
Deferred Compensation Agreements, between
Mooresville Savings Bank, SSB and Donald R. Belk;
(ii) Amended and Restated Retirement Payment
Agreements, Salary Continuation Agreement,
Supplemental Income Agreement, between
Mooresville Savings Bank, SSB and Dale W.
Brawley;
(iii) Amended and Restated Retirement Payment
Agreements, Amended and Restated Director's
Deferred Compensation Agreements, Salary
Continuation Agreement, Supplemental Income
Agreement, between Mooresville Savings Bank, SSB
and George W. Brawley, Jr.;
(iv) Amended and Restated Retirement Payment
Agreement, between Mooresville Savings Bank, SSB
and Jack G. Lawler;
(v) First Amendment to Retirement Payment Agreement,
Retirement Payment Agreement, Director's Deferred
Compensation Agreements, between Mooresville
Savings Bank, SSB and Calvin E. Tyner;
(vi) Amended and Restated Retirement Payment
Agreements, Amended and Restated Director's
Deferred Compensation Agreements, between
Mooresville Savings Bank, SSB and Calvin E.
Tyner;
(vii) Amended and Restated Supplemental Income
Agreement, between Mooresville Savings Bank, SSB
and Calvin E. Tyner.*
(10)(i) Mooresville Savings Bank, SSB Nonqualified
Excess Savings Plan*
(23)(a) Consent of McGladrey & Pullen, LLP
(23)(b) Consent of JMP Financial, Inc.
(23)(c) Consent of Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P.
(27) Financial Data Schedule*
(99)(a) Appraisal Report of JMP Financial, Inc. as of September
2, 1997*
(99)(b) Form of Stock Order Form *
(99)(c) Form of Summary Proxy Statement
(99)(d) Appraisal Update Report of JMP Financial, Inc. as of
October 17, 1997.*
</TABLE>
*Filed previously.
II-4
<PAGE>
(b) Financial Statement Schedules
-----------------------------
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
Item 17. Undertakings.
------------
(a) The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter
to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
II-5
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Pre-Effective Amendment No. 2 to the registrant's Form S-1
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the city of Mooresville, North Carolina, on November 10,
1997.
Coddle Creek Financial Corp.
By: /s/ George W. Brawley, Jr.
-----------------------------------------------
George W. Brawley, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<S> <C>
/s/ George W. Brawley, Jr. Date: November 10, 1997
- -----------------------------
George W. Brawley, Jr.
(President and Chief
Executive Officer)
/s/ Billy R. Williams Date: November 10, 1997
- -----------------------------
Billy R. Williams
(Secretary and Controller)
/s/ Willis L. Barnette Date: November 10, 1997
- -----------------------------
Willis L. Barnette
(Director)
/s/ Donald R. Beck Date: November 10, 1997
- -----------------------------
Donald R. Beck
(Director)
/s/ Dale W. Brawley Date: November 10, 1997
- -----------------------------
Dale W. Brawley
(Director, Executive Vice
President and Treasurer)
/s/ Jack G. Lawler Date: November 10, 1997
- -----------------------------
Jack G. Lawler
(Director)
/s/ Calvin E. Turner Date: November 10, 1997
- -----------------------------
Calvin E. Turner, D.V.M.
(Director)
/s/ Claude U. Voils, Jr. Date: November 10, 1997
- -----------------------------
Claude U. Voils, Jr.
(Director)
</TABLE>
II-7
<PAGE>
CODDLE CREEK FINANCIAL CORP.
433,500 TO 674,475 SHARES
COMMON STOCK
(NO PAR VALUE)
$50.00 PER SHARE
SALES AGENCY AGREEMENT
----------------------
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Coddle Creek Financial Corp., a North Carolina-chartered corporation (the
"Company"), and Mooresville Savings Bank, SSB, a North Carolina-chartered and
federally insured mutual savings bank (the "Bank"), hereby confirm, as of
November ___, 1997, their respective agreements with Trident Securities, Inc.
("Trident"), a broker-dealer registered with the Securities and Exchange
Commission ("Commission") and a member of the National Association of Securities
Dealers, Inc. ("NASD"), as follows:
1. Introductory. The Bank intends to convert from a North Carolina-
------------
chartered mutual savings bank to a North Carolina-chartered stock savings bank
as a wholly owned subsidiary of the Company (together with the Offerings, as
defined below, the issuance of shares of common stock of the Bank to the Company
and the incorporation of the Company, the "Conversion") pursuant to a plan of
conversion adopted on July 14, 1997, as amended, if amended (the "Plan"). In
accordance with the Plan, the Company is offering shares of its common stock, no
par value (the "Shares" and the "Common Stock"), pursuant to nontransferable
subscription rights in a subscription offering (the "Subscription Offering") to
certain depositors and borrowers of the Bank, to the Bank's tax-qualified
employee benefit plan (i.e., the Bank's Employee Stock Ownership Plan (the
"ESOP")) and to the Bank's directors, officers and employees. Subsequent to the
Subscription Offering, shares of the Common Stock not sold in the Subscription
Offering may be offered to the general public in a community offering (the
"Community Offering") with priority being given to natural persons and trusts of
natural persons residing in Iredell, Mecklenburg, Lincoln, Rowan and Cabarrus
Counties, North Carolina (the "Local Community"), including individual
retirement accounts ("IRAs"), Keogh accounts and similar retirement accounts
established for the benefit of natural persons who are residents of the Local
Community and/or in a syndicated community offering, subject to the right of the
Company and the Bank, in their absolute
<PAGE>
discretion, to reject orders in the Community Offering, if any, or any
syndicated community offering in whole or in part. (The Subscription Offering,
the Community Offering, if any, and any syndicated community offering are
sometimes referred to collectively as the "Offerings.")
In the Offerings, the Company is offering between 433,500 and 586,500
Shares, with the possibility of offering up to 674,475 Shares without a
resolicitation of subscribers. With the exception of the ESOP, no individual
person (or persons exercising subscription rights through a single account) or
other entity, together with associates of and persons acting in concert with
such person or other entity, may purchase in the Offerings more than 6,000
Shares issued in the Conversion in the aggregate.
The Company and the Bank have been advised by Trident that it will utilize
its best efforts in assisting the Company and the Bank with the sale of the
Shares in the Offerings. Prior to the execution of this Agreement, the Company
has delivered to Trident the Prospectus dated November ___, 1997 (as hereinafter
defined) and all supplements thereto to be used in the Offerings. Such
Prospectus contains information with respect to the Company, the Bank and the
Shares.
2. Representations and Warranties.
------------------------------
a. The Company and the Bank jointly and severally represent and
warrant to Trident that:
(i) The Company has filed with the Commission a registration
statement, including exhibits and an amendment or amendments thereto,
on Form S-1 (No. 333-35497), including a Prospectus relating to the
Offerings, for the registration of the Shares under the Securities Act
of 1933, as amended (the "Securities Act"); and such registration
statement has become effective under the Securities Act and no stop
order has been issued with respect thereto and no proceedings therefor
have been initiated or, to the Company's best knowledge, threatened by
the Commission. Except as the context may otherwise require, such
registration statement, as amended or supplemented, on file with the
Commission at the time the registration statement became effective,
including the Prospectus, financial statements, schedules, exhibits
and all other documents filed as part thereof, as amended and
supplemented, is herein called the "Registration Statement," and the
prospectus, as amended or supplemented, on file with the Commission at
the time the Registration Statement became
<PAGE>
effective is herein called the "Prospectus," except that if the
prospectus filed by the Company with the Commission pursuant to Rule
424(b) of the general rules and regulations of the Commission under
the Securities Act (together with the enforceable published policies
and actions of the Commission thereunder, the "SEC Regulations")
differs from the form of prospectus on file at the time the
Registration Statement became effective, the term "Prospectus" shall
refer to the Rule 424(b) prospectus from and after the time it is
filed with or mailed for filing to the Commission and shall include
any amendments or supplements thereto from and after their dates of
effectiveness or use, respectively. If any Shares remain unsubscribed
following completion of the Subscription Offering, the Company (i)
will promptly file with the Commission a post-effective amendment to
such Registration Statement relating to the results of the
Subscription Offering, any additional information with respect to the
proposed plan of distribution and any revised pricing information or
(ii) if no such post-effective amendment is required, will file with,
or mail for filing to, the Commission such prospectus or prospectus
supplement containing information relating to the results of the
Subscription Offering and pricing information as may be required by
Rule 424(c) of the SEC Regulations, in either case in a form
reasonably acceptable to the Company and Trident.
(ii) The Bank has filed conversion applications, including
exhibits (as amended or supplemented, the "Conversion Applications")
with both the Administrator of the Savings Institutions Division of
the North Carolina Department of Commerce (the "Administrator") under
Section 54C-33 of Chapter 54C of the General Statutes of North
Carolina, as amended, and the enforceable rules and regulations,
including published policies and actions, of the Administrator and
other applicable North Carolina law thereunder (collectively, the "NC
Conversion Laws") and the Federal Deposit Insurance Corporation (the
"FDIC") under the Federal Deposit Insurance Act, as amended, and the
enforceable rules and regulations, including published policies and
actions, of the FDIC and other applicable federal law thereunder
(collectively, the "FDIC Conversion Laws"), as to which the Bank has
received conditional approval and notice of intention not to object,
respectively; and the Prospectus and the proxy statement for the
solicitation of proxies from members for the special meeting to
approve the Plan (the "Proxy Statement") included as part of the
Conversion Applications are conditionally approved by the
Administrator and are the subject of a conditional notice of intention
not to object by the FDIC. No order has been issued by the
Administrator or the FDIC preventing or suspending the use of the
Prospectus or the Proxy Statement; and no action by or before the
Administrator or the FDIC seeking the revocation of its conditional
approval or notice of intention not to object, respectively, is
pending or, to the Bank's best knowledge, threatened. The Company has
filed holding company applications, including exhibits (as amended or
supplemented, the "Holding Company Applications"), with the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board")
and the Administrator, which have been approved by them. No action by
or before the Federal Reserve Board or the Administrator revoking such
approval is pending or, to the Company's best knowledge,
threatened.
<PAGE>
(iii) At the date of the Prospectus and at all times subsequent
thereto through and including the Closing Date (a) the Registration
Statement and the Prospectus (each as amended or supplemented, if
amended or supplemented) complied and will comply in all material
respects with the Securities Act and the SEC Regulations, the NC
Conversion Laws and the FDIC Conversion Laws, (b) the Registration
Statement (as amended or supplemented, if amended or supplemented) did
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (c) the Prospectus (as amended
or supplemented, if amended or supplemented) did not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. Representations or warranties in this subsection shall not
apply to statements or omissions made in reliance upon and in
conformity with written information furnished to the Company or the
Bank relating to Trident by Trident expressly for use in the
Registration Statement or the Prospectus.
(iv) The Company has been duly incorporated as a North Carolina-
chartered corporation, and the Bank has been duly organized as a
mutual savings bank under the laws of North Carolina, and each of them
is validly existing and in good standing under the laws of the
jurisdiction of its organization with full power and authority to own
its property and conduct its business as described in the Registration
Statement and Prospectus; the Bank is a member in good standing of the
Federal Home Loan Bank of Atlanta; and the deposit accounts of the
Bank are insured by the Savings Association Insurance Fund ("SAIF")
administered by the FDIC up to the applicable legal limits. Each of
the Company and the Bank is not required to be qualified to do
business as a foreign corporation in any jurisdiction where non-
qualification would have a material adverse effect on the condition
(financial or otherwise), operations, business, assets, earnings or
properties of the Company and the Bank, taken as a whole. The Bank
does not own equity securities of or an equity interest in any
business enterprise except as described in the Prospectus. Upon
amendment and restatement of the Bank's articles of incorporation and
bylaws as provided in the rules and regulations of the Administrator
and completion of the sale by the Company of the Shares as
contemplated by the Prospectus, (i) the Bank will be converted
pursuant to the Plan to a North Carolina-chartered capital stock
savings bank with full power and authority to own its property and
conduct its business as described in the Prospectus, (ii) all of the
authorized and outstanding capital stock of the Bank will be owned of
record and beneficially by the Company, and (iii) the Company will
have no direct subsidiaries other than the Bank.
(v) The Bank has good and marketable and, if applicable,
insurable
<PAGE>
title to all assets material to its business and to those
assets described in the Prospectus as owned by it, free and clear of
all material liens, charges, encumbrances or restrictions, except for
liens for taxes not yet due, except as described in the Prospectus and
except as could not in the aggregate reasonably be expected to have a
material adverse effect upon the operations or financial condition of
the Company and the Bank, taken as a whole; and all of the leases and
subleases material to the operations or financial condition of the
Bank, under which it holds properties, including those described in
the Prospectus, are in full force and effect as described therein.
(vi) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary actions on the part of each of
the Company and the Bank, and this Agreement is a valid and binding
obligation of each of the Company and the Bank, enforceable in
accordance with its terms (except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or
similar laws relating to or affecting the enforcement of creditors'
rights generally or the rights of creditors of savings and loan
holding companies the accounts of whose subsidiaries are insured by
the FDIC or by general equity principles, regardless of whether such
enforceability is considered in a proceeding in equity or at law, and
except to the extent that the provisions of Sections 8 and 9 hereof
may be unenforceable as against public policy or pursuant to Section
23A of the Federal Reserve Act, 12 U.S.C. Section 371c ("Section
23A")).
(vii) There is no litigation or governmental proceeding pending
or, to the best knowledge of the Company or the Bank, threatened
against or involving the Company, the Bank or any of their respective
assets which individually or in the aggregate would reasonably be
expected to have a material adverse effect on the condition (financial
or otherwise), results of operations and business, including the
assets and properties, of the Company and the Bank, taken as a whole,
except as referred to in the Prospectus.
(viii) The Company and the Bank have received the opinion of
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. with respect to
federal and North Carolina tax consequences of the Conversion, to the
effect that the Conversion will constitute a tax-free reorganization
under the Internal Revenue Code of 1986, as amended, and will not be a
taxable transaction for the Bank or the Company under the laws of
North Carolina, and the facts relied upon in such opinions are
accurate and complete.
(ix) Each of the Company and the Bank has all such corporate
power, authority, authorizations, approvals and orders as may be
required to enter into this Agreement and to carry out the provisions
and conditions hereof, subject to
<PAGE>
the limitations set forth herein and subject to the satisfaction of
post-Conversion conditions imposed by the Administrator, the FDIC
and/or the Federal Reserve Board in connection with their approvals
of, or notice of intention not to object to, as applicable, the
respective Conversion Applications and Holding Company Applications,
and except as may be required under the securities laws of various
jurisdictions, and in the case of the Company, as of the Closing Date,
will have such authorizations, approvals and orders to issue and sell
the Shares to be sold by the Company as provided herein, and in the
case of the Bank, as of the Closing Date, will have such
authorizations, approvals and orders to issue and sell the Shares of
its Common Stock to be sold to the Company as provided in the Plan,
subject to the issuance of amended and restated articles of
incorporation in the form required for North Carolina-chartered stock
savings banks (the "Stock Articles of Incorporation"), the form of
which Stock Articles of Incorporation has been approved by the
Administrator.
(x) Neither the Company nor the Bank is in violation of any rule
or regulation of the Administrator or the FDIC that could reasonably
be expected to result in any enforcement action against the Company,
the Bank or their officers or directors that might have a material
adverse effect on the condition (financial or otherwise), operations,
businesses, assets or properties of the Company and the Bank, taken as
a whole.
(xi) The consolidated financial statements and any related notes
or schedules which are included in the Registration Statement and the
Prospectus fairly present in all material respects the consolidated
financial condition, results of operations, retained earnings and cash
flows of the Bank at the respective dates thereof and for the
respective periods covered thereby and comply as to form in all
material respects with the applicable accounting requirements of the
SEC Regulations and the NC Conversion Laws and the FDIC Conversion
Laws. Such financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods involved, except as set forth therein, and such
financial statements are consistent with financial statements and
other appropriate reports filed by the Bank with supervisory and
regulatory authorities, except as such generally accepted accounting
principles may otherwise require. The tables in the Prospectus
accurately present in all material respects the information purported
to be shown thereby at the respective dates thereof and for the
respective periods therein.
(xii) There has been no material change in the condition
(financial or otherwise), results of operations or business, including
assets and properties, of the Company and the Bank, taken as a whole,
since the latest date as of which such condition is set forth in the
Prospectus, except as referred to therein. The capitalization,
assets, properties and business of each of the Company and the Bank
conform in all material respects to the descriptions thereof contained
in the
<PAGE>
Prospectus. None of the Company or the Bank has any material
liabilities of any kind, contingent or otherwise, except as set forth
in the Prospectus as of the date specified, and, since such date,
there has been no material adverse effect on the Company or the Bank,
taken as a whole.
(xiii) There has been no breach or default (or the occurrence of
any event which, with notice or lapse of time or both, would
constitute a default) under, or creation or imposition of any lien,
charge or other encumbrance upon any of the properties or assets of
the Company or the Bank pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, debenture,
note, instrument or obligation to which the Company or the Bank is a
party or by which any of them or any of their respective assets or
properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, writ, injunction or
decree, which breach, default, encumbrance or violation would have a
material adverse effect on the condition (financial or otherwise),
operations, business, assets or properties of the Company and the
Bank, taken as a whole; all agreements which are material to the
condition (financial or otherwise), results of operations or
business of the Company and the Bank, taken as a whole, are in full
force and effect, and no party to any such agreement has instituted
or, to the best knowledge of the Company and the Bank, threatened any
action or proceeding wherein the Company or the Bank would or might be
alleged to be in default thereunder.
(xiv) None of the Company or the Bank is in violation of its
respective articles of incorporation or bylaws. The execution and
delivery hereof, the fulfillment of the terms set forth herein and the
consummation of the transactions contemplated hereby do not conflict
with or result in a breach of the articles of incorporation or bylaws
of the Company or the Bank (in either mutual or stock form) or
constitute a material breach of or default (or an event which, with
notice or lapse of time or both, would constitute a default) under,
give rise to any right of termination, cancellation or acceleration
contained in, or result in the creation or imposition of any lien,
charge or other encumbrance upon any of the properties or assets of
the Company or the Bank pursuant to any of the terms, provisions or
conditions of, any material agreement, contract, indenture, bond,
debenture, note, instrument or obligation to which the Company or the
Bank is a party or violate any governmental license or permit or any
enforceable published law, administrative regulation or order or court
order, writ, injunction or decree (subject to the satisfaction of
post-Conversion conditions imposed by the Administrator, the FDIC
and/or the Federal Reserve Board in connection with their approvals
of, or notice of intention not to object to, as applicable, the
respective Conversion Applications and Holding Company Applications),
which breach, default, encumbrance or violation could reasonably be
expected to have a material adverse effect on the condition (financial
or otherwise), operations or
<PAGE>
business of the Company and the Bank, taken as a whole.
(xv) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and prior to the
Closing Date (as hereinafter defined), none of the Company or the Bank
has issued any securities or incurred any liability or obligation,
direct or contingent, or borrowed money, except liabilities,
obligations or borrowings in the ordinary course of business, or
entered into any other transaction not in the ordinary course of
business and consistent with prior practices, which is material in
light of the business of the Company or the Bank, taken as a whole.
(xvi) Upon consummation of the Conversion, the authorized,
issued and outstanding equity capital of the Company shall be within
the range as set forth in the Prospectus under the caption
"Capitalization," and no Common Stock of the Company shall be
outstanding immediately prior to the Closing Date (except for one
share of Common Stock issued in connection with the organization of
the Company, which share shall be cancelled effective as of the
Closing); the issuance and the sale of the Shares of the Company have
been duly authorized by all necessary action of the Company and
approved or not objected to, as applicable, by the Administrator, the
FDIC and the Federal Reserve Board and, when issued in accordance with
the terms of the Plan and paid for, shall be validly issued, fully
paid and nonassessable and shall conform to the description thereof
contained in the Prospectus; the issuance of the Shares is not subject
to preemptive rights; and good title to the Shares will be transferred
by the Company upon issuance thereof against payment therefor, free
and clear of all claims, encumbrances, security interests and liens
against the Company whatsoever. The certificates representing the
Shares will conform in all material respects with the requirements of
applicable laws and regulations. The issuance and sale of the capital
stock of the Bank to the Company has been duly authorized by all
necessary action of the Bank and the Company and appropriate
regulatory authorities (subject to the satisfaction of post-Conversion
conditions imposed by the Administrator, the FDIC and/or the Federal
Reserve Board in connection with their approvals or notice of
nonobjection, as applicable, with respect to the respective Conversion
Applications and Holding Company Applications), and such capital
stock, when issued in accordance with the terms of the Plan for the
consideration described in the Prospectus, will be fully paid and
nonassessable and will conform in all material respects to the
description thereof contained in the Prospectus.
(xvii) No approval, or notice of intention not to object, of any
regulatory or supervisory or other public authority is required in
connection with the execution and delivery of this Agreement or the
issuance of the Shares, except for the declaration of effectiveness of
any required post-effective amendment by the Commission and approval
thereof or nonobjection thereto, as
<PAGE>
applicable, by the Administrator and the FDIC, the issuance of the
Stock Articles of Incorporation by the Administrator and as may be
required under the securities laws of various jurisdictions.
(xviii) All contracts and other documents required to be filed
as exhibits to the Registration Statement, the Conversion Applications
or the Holding Company Applications have been filed with the
Commission, the Administrator, the FDIC and/or the Federal Reserve
Board, as the case may be.
(xix) McGladrey & Pullen, which has audited the financial
statements of the Bank at December 31, 1996 and 1995 and for the years
ended December 31, 1996, 1995 and 1994 included in the Prospectus, is
an independent public accountant within the meaning of the Code of
Professional Ethics of the American Institute of Certified Public
Accountants and Title 12 of the Code of Federal Regulations, Section
571.2(c)(3).
(xx) The Company and the Bank have timely filed all required
federal, state and local franchise tax returns, and no deficiency has
been asserted with respect to such returns by any taxing authorities,
and the Company and the Bank have paid all taxes that have become due
and, to the best of their knowledge, have made adequate reserves for
similar future tax liabilities, except where any failure to make such
filings, payments and reserves, or the assertion of such a deficiency,
would not have a material adverse effect on the condition of the
Company and the Bank, taken as a whole.
(xxi) To the best knowledge of the Company and the Bank, after
due inquiry, all of the loans represented as assets of the Bank on the
most recent financial statements of the Bank included in the
Prospectus meet or are exempt from all requirements of federal, state
or local law pertaining to lending, including without limitation truth
in lending (including the requirements of 12 C.F.R. Part 226
("Regulation Z")), real estate settlement procedures, consumer credit
protection, equal credit opportunity and all disclosure laws
applicable to such loans, except for violations which, if asserted,
would not have a material adverse effect on the Company and the Bank,
taken as a whole.
(xxii) The records of account holders, depositors, borrowers and
other members of the Bank delivered to Trident by the Bank or its
agent for use during the Conversion have been prepared or reviewed by
or for the Bank and are reliable and accurate.
(xxiii) None of the Company or the Bank or, to the best
knowledge of the Company and the Bank, the employees of the Company or
the Bank, has made any payment of funds of the Company or the Bank
prohibited by law, and
<PAGE>
no funds of the Company or the Bank have been set aside to be used for
any payment prohibited by law.
(xxiv) The Company and the Bank are in compliance with all
federal, state, local and foreign laws, statutes, ordinances, rules,
regulations, codes, licenses, permits, authorizations, approvals,
consents, orders, judgments, decrees, injunctions and agreements with
all agencies (e.g., all federal, state and local agencies responsible
for regulating or enforcing the matters identified herein) relating to
(i) the protection, preservation and/or restoration of the environment
(including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil,
plant and animal life or any other natural resource) and/or (ii) the
usage, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of any
substance presently listed, defined, designated or classified as
hazardous, toxic, radioactive or dangerous, or otherwise regulated,
whether by type or by quantity, including any material containing any
such substance as a component (collectively, "Environmental Laws"),
and neither the Company nor the Bank has any reason to believe that
the Company or the Bank is subject to liability under the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, or any similar Environmental Law, except for
violations which, if asserted, could not reasonably be expected to
have a material adverse effect on the Company and the Bank, taken as a
whole. There are no actions, suits, regulatory investigations or
other proceedings pending or, to the best knowledge of the Company or
the Bank, threatened against the Company or the Bank relating to
environmental protection, including the discharge, storage, handling
and disposal of hazardous or toxic substances, pollutants or
contaminants. No disposal, release or discharge of hazardous or toxic
substances, pollutants or contaminants, including petroleum and gas
products, as any of such terms may be defined under federal, state or
local law, has been caused by the Company or the Bank or, to the best
knowledge of the Company or the Bank, has occurred on, in or at any of
the facilities or properties of the Company or the Bank, except such
disposal, release or discharge which would not have a material adverse
effect on the Company and the Bank, taken as a whole.
(xv) At the Closing Date, the Company and the Bank will have
completed all pre-Conversion conditions to, and shall have conducted
the Conversion in all material respects in accordance with, the Plan,
the Prospectus, the SEC Regulations, the NC Conversion Laws and the
FDIC Conversion Laws and all other applicable laws, regulations,
published decisions and orders, including all terms, conditions,
requirements and provisions precedent to the
<PAGE>
Conversion imposed by the Administrator, the FDIC and/or the Federal
Reserve Board.
(b) Trident represents and warrants to the Company and the Bank that:
(i) Trident is registered as a broker-dealer with the Commission,
and is in good standing with the Commission and the NASD.
(ii) Trident is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with
full corporate power and authority to provide the services to be
furnished to the Company and the Bank hereunder.
(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action on the part
of Trident, and this Agreement is a legal, valid and binding
obligation of Trident, enforceable in accordance with its terms
(except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization or similar laws relating to or
affecting the enforcement of creditors' rights generally or the rights
of creditors of registered broker-dealers accounts of whom may be
protected by the Securities Investor Protection Corporation or by
general equity principles, regardless of whether such enforceability
is considered in a proceeding in equity or at law, and except to the
extent that the provisions of Sections 8 and 9 hereof may be
unenforceable as against public policy or pursuant to Section 23A).
(iv) Each of Trident and, to Trident's knowledge, its employees,
agents and representatives who shall perform any of the services
required hereunder to be performed by Trident shall be duly authorized
and shall have all licenses, approvals and permits necessary to
perform such services, and Trident is a registered selling agent as
set forth in the jurisdictions listed in Exhibit A hereto and will
remain so registered in such jurisdictions as to which the Company
duly notifies Trident that it is relying on such registration for the
sale of the Shares, until the Conversion is consummated or terminated.
(v) The execution and delivery of this Agreement by Trident, the
fulfillment of the terms set forth herein and the consummation of the
Conversion shall not violate or conflict with the corporate charter or
bylaws of Trident or violate, conflict with or constitute a breach of,
or default (or an event which, with notice or lapse of time, or both,
would constitute a default) under, any material agreement, indenture
or other instrument to which Trident is a party or, to Trident's
actual knowledge, under any governmental license or permit or any law,
administrative regulation, authorization, approval or order or court
decree, injunction or order by which Trident is bound.
<PAGE>
(vi) Any funds received by Trident to purchase Common Stock will
be handled in accordance with Rule 15c2-4 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(vii) There is not now pending or, to Trident's actual
knowledge, threatened against Trident any action or proceeding before
the Commission, the NASD, any state securities commission or any state
or federal court concerning Trident's activities as a broker-dealer
which is expected to have a materially adverse impact upon Trident's
ability to perform its obligations hereunder.
3. Employment of Trident; Sale and Delivery of the Shares. On the basis
------------------------------------------------------
of the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Bank hereby employ Trident
as their agent to utilize its best efforts in assisting the Company with the
Company's sale of the Shares in the Subscription Offering and, if any, the
Community Offering or any syndicated community offering. The employment of
Trident hereunder shall terminate (a) forty-five (45) days after the Offerings
close, unless the Company and the Bank, with the approval of the Administrator,
are permitted to extend such period of time, or (b) upon consummation of the
Conversion, whichever date shall first occur.
Subscriptions shall be offered in the Subscription Offering only during the
subscription period by means of Order Forms as described in the Prospectus and
may be offered in the Syndicated Community Offering by means of solicitation of
indications of interest from customers of Trident or Selected Dealers (as
defined in the Prospectus) residing in those states in which the Shares may be
qualified for offer and sale.
In the event the Company is unable to sell a minimum of 433,500 Shares (or
such lesser amount as the Administrator and the FDIC may permit) within the
period herein provided, this Agreement shall terminate, and the Company and the
Bank shall refund promptly to any persons who have subscribed for any of the
Shares, the full amount which it may have received from them, together with
interest as provided in the Prospectus, and no party to this Agreement shall
have any obligation to the other party hereunder, except as set forth in
Sections 6, 8 and 9 hereof. Appropriate arrangements for placing the funds
received from subscriptions for Shares in special interest-bearing accounts with
the Bank until all Shares are sold and paid for were made prior to the
commencement of the Subscription and Community Offering, with provision for
prompt refund to the purchasers as set forth above, or for delivery to the
Company if all Shares are sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued such Shares and to release for delivery
certificates to subscribers thereof for such Shares as soon as practicable after
the Closing Date against payment to the Company by any
<PAGE>
means authorized pursuant to the Prospectus, at the principal office of the
Company at 347 North Main Street, Mooresville, North Carolina 28115 or at such
other place as shall be agreed upon between the parties hereto. The date upon
which Trident is paid the compensation due hereunder is herein called the
"Closing Date."
The Bank and the Company shall notify Trident promptly after the expiration
of the Subscription Offering of the number of Shares sold in the Subscription
Offering and the aggregate number of Shares remaining available to be sold in
the Syndicated Community Offering.
In the event of a syndicated community offering, Trident agrees either (a)
upon receipt of an executed order form of a subscriber to forward the offering
price of the Common Stock ordered on or before twelve noon on the next business
day following receipt or execution of an order form by Trident to the Bank for
deposit in a segregated account or (b) to solicit indications of interest in
which event (i) Trident will subsequently contact any potential subscriber
indicating interest to confirm the interest and give instructions to execute and
return an order form or to receive authorization to execute the order form on
the subscriber's behalf, (ii) Trident will mail acknowledgements of receipt of
orders to each subscriber confirming interest on the business day following such
confirmation, (iii) Trident will debit accounts of such subscribers by the date
prescribed by applicable law ("debit date") following receipt of the
confirmation referred to in (i), and (iv) Trident will forward completed order
forms together with such funds to the Bank on or before twelve noon on the next
business day following the debit date for deposit in a segregated account.
Trident acknowledges that if the procedure in (b) is adopted, subscribers' funds
are not required to be in their accounts until the debit date.
In addition to the expenses specified in Section 6 hereof, Trident shall
receive the following compensation for its services hereunder:
(a) (i) a management fee of .40% of the aggregate dollar amount of
Common Stock sold in the Offerings, (ii) a commission equal to 2% of the
aggregate dollar amount of Common Stock sold in the Subscription Offering
and the Community Offering, excluding Shares sold to the Bank's directors
and executive officers and their "associates," as such term is defined in
the Plan, and the ESOP and excluding any Shares sold by other member firms
of the NASD through any selected dealer arrangement in any syndicated
community offering, for which Shares the commission shall not exceed a fee
to be agreed upon jointly by Trident and the Bank to reflect market
requirements at the time of the stock allocation in such offering. All
such fees are to be payable in next-day funds to Trident on the Closing
Date.
(b) Trident shall be reimbursed for all allocable expenses, including
but not limited to travel, communications, legal fees and expenses,
postage, etc., incurred by it whether or not the Offerings are successfully
completed. Unless otherwise agreed, and except as otherwise set forth
herein, Trident's out-of-pocket expenses will not exceed
<PAGE>
$10,000 and its legal fees will not exceed $27,500. Full payment to defray
Trident's reimbursable expenses shall be made in next-day funds on the
Closing Date or, if the Conversion is not completed and is terminated for
any reason, within ten (10) business days of receipt by the Company of a
written request from Trident for reimbursement of its expenses, accompanied
by a reasonably detailed list thereof.
The Company shall pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Shares.
The Company and the Bank shall also pay all expenses of the Conversion
incurred by them or on their prior approval, including but not limited to the
following: their attorneys' fees, NASD filing fees, attorneys' fees relating to
any required state securities laws research and filings, telephone charges, air
freight, rental equipment, supplies, transfer agent charges, fees relating to
auditing and accounting, costs of printing all documents necessary in connection
with the Conversion, etc.
4. Offerings. Subject to the provisions of Section 7 hereof, Trident is
---------
assisting the Company on a best efforts basis in offering a minimum of 433,500
and a maximum of 586,500 Shares, with the possibility of offering up to 674,475
Shares (except as the Administrator and the FDIC may permit to be decreased or
increased) in the Offerings. The Shares are to be offered to the public at the
price set forth on the cover page of the Prospectus and the first page of this
Agreement.
5. Further Agreements. The Company and the Bank jointly and severally
------------------
covenant and agree that:
(a) The Company shall deliver to Trident, from time to time, such
number of copies of the Prospectus as Trident reasonably may request. The
Company authorizes Trident to use the Prospectus in any lawful manner in
connection with the offer and sale of the Shares.
(b) The Company will notify Trident immediately upon discovery, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement becomes effective or any supplement to the
Prospectus has been filed, (ii) of the issuance by the Commission of any
stop order relating to the Registration Statement or of the initiation or
the threat of any proceedings for that purpose, (iii) of the receipt of any
notice with respect to the suspension of the qualification of the Shares
for offering or sale in any jurisdiction, and (iv) of the receipt of any
comments from the staff of the Commission relating to the Registration
Statement. If the Commission enters a stop order relating to the
Registration Statement at any time, the Company will make every reasonable
effort to obtain the lifting of such order at the earliest possible moment.
<PAGE>
(c) During the time when a prospectus is required to be delivered
under the Securities Act, the Company will comply so far as it is able with
all requirements imposed upon it by the Securities Act, as now in effect
and hereafter amended, and by the SEC Regulations, as from time to time in
force, so far as necessary to permit the continuance of offers and sales of
or dealings in the Shares in accordance with the provisions hereof and the
Prospectus. If during the period when the Prospectus is required to be
delivered in connection with the offer and sale of the Shares any event
relating to or affecting the Company and the Bank, taken as a whole, shall
occur as a result of which it is necessary, in the opinion of counsel for
Trident, with the concurrence of counsel to the Company, to amend or
supplement the Prospectus in order to make the Prospectus not false or
misleading in light of the circumstances existing at the time it is
delivered to a purchaser of the Shares, the Company forthwith shall prepare
and furnish to Trident a reasonable number of copies of an amendment or
amendments or of a supplement or supplements to the Prospectus (in form and
substance satisfactory to counsel for Trident) which shall amend or
supplement the Prospectus so that, as amended or supplemented, the
Prospectus shall not contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein,
in light of the circumstances existing at the time the Prospectus is
delivered to a purchaser of the Shares, not misleading. The Company will
not file or use any amendment or supplement to the Registration Statement
or the Prospectus of which Trident has not first been furnished a copy or
to which Trident shall reasonably object after having been furnished such
copy. For the purposes of this subsection the Company and the Bank shall
furnish such information with respect to themselves as Trident from time to
time may reasonably request.
(d) The Company and the Bank have taken or will take all reasonably
necessary action and furnish to whomever Trident may reasonably direct such
information as may be required to qualify or register the Shares for offer
and sale by the Company under the securities laws of such jurisdictions as
Trident and either the Company or its counsel may agree upon; provided,
however, that the Company shall not be obligated to qualify as a foreign
corporation to do business under the laws of any such jurisdiction. In
each jurisdiction where such qualification or registration shall be
effected, the Company, unless Trident agrees that such action is not
necessary or advisable in connection with the distribution of the Shares,
shall file and make such statements or reports as are, or reasonably may
be, required by the laws of such jurisdiction.
(e) Appropriate entries will be made in the financial records of the
Bank sufficient to establish a liquidation account for the benefit of
eligible account holders and supplemental eligible account holders in
accordance with the requirements of applicable law.
(f) The Company will file a registration statement for the Common
Stock if required under Section 12(b) or (g), as applicable, of the
Securities Exchange Act of
<PAGE>
1934, as amended (the "Exchange Act"), prior to completion of the Offerings
and shall request that such registration statement be effective upon or
before completion of the Conversion. In such event, the Company shall
maintain the effectiveness of such registration for a minimum period of
three years or for such shorter period as may be permitted by applicable
law.
(g) [omitted]
(h) For a period of three (3) years from the date of this Agreement
(unless the Common Stock shall have been deregistered under the Exchange
Act), the Company will furnish to Trident, as soon as publicly available
after the end of each fiscal year, a copy of its annual report to
shareholders for such year; and the Company will furnish to Trident (i) as
soon as publicly available, a copy of each report or definitive proxy
statement of the Company filed with the Commission under the Exchange Act
or mailed to shareholders, and (ii) from time to time, such other public
information concerning the Company as Trident may reasonably request.
(i) The Company shall use the net proceeds from the sale of the Shares
consistently with the manner set forth in the Prospectus.
(j) The Company shall not deliver the Shares until each and every
condition set forth in Section 7 hereof has been satisfied, unless such
condition is waived in writing by Trident.
(k) The Company shall advise Trident, if necessary, as to the
allocation of deposits, in the case of eligible account holders and
supplemental eligible account holders, and votes, in the case of other
members, and shall provide Trident with any information (which shall be
accurate and reliable) necessary or appropriate for Trident to assist the
Company and the Bank in allocating the Shares, in the event of an
oversubscription, and the Company and the Bank shall provide Trident final
instructions as to the allocation of the Shares ("Allocation Instructions")
in such event, and such information shall be accurate and reliable.
Trident shall be entitled to rely on such instructions and shall have no
liability in respect of its reliance thereon, including without limitation,
no liability for or related to any denial or grant of a subscription in
whole or in part, and the Company and the Bank, jointly and severally,
shall indemnify and hold harmless each of Trident and the Selected Dealers
against any losses, claims, damages or liabilities resulting from reliance
under any records of depositors, borrowers and other members of the Bank
delivered to Trident
<PAGE>
by the Bank or its agents for use during the Conversion.
(l) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by Trident in order for Trident to
ensure compliance with the NASD's "Interpretation Relating to Free-Riding
and Withholding."
6. Payment of Expenses. Whether or not the Conversion is consummated, the
-------------------
Company and the Bank shall pay or reimburse Trident for (a) all filing fees paid
or incurred by Trident in connection with all filings with the NASD with respect
to the Subscription and Community Offerings and, (b) in addition, if the Company
is unable to sell a minimum of 433,500 Shares or such lesser amount as the
Administrator and the FDIC may permit or the Conversion is otherwise terminated,
the Company and the Bank shall reimburse Trident for allocable expenses incurred
by Trident relating to the offering of the Shares as provided in Section 3
hereof; provided, however, that the Company and the Bank shall not pay or
reimburse Trident for any of the foregoing expenses accrued after Trident shall
have notified the Company and the Bank of its election to terminate this
Agreement pursuant to Section 11 hereof or after such time as the Company and
the Bank shall have given notice in accordance with Section 11 hereof that
Trident is in breach of this Agreement.
7. Conditions of Trident's Obligations. Except as may be waived in
-----------------------------------
writing by Trident, the obligations of Trident as provided herein shall be
subject to the accuracy of the representations and warranties contained in
Section 2 hereof as of the date hereof and as of the Closing Date, to the
performance by the Company and the Bank of their obligations hereunder and to
the following conditions:
(a) At the Closing Date, Trident shall receive the favorable opinion
of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., special counsel
for the Company and the Bank, dated the Closing Date, addressed to Trident,
in form and substance reasonably satisfactory to counsel for Trident and to
the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation under the laws of its jurisdiction of
incorporation, and the Bank has been duly organized and is validly
existing as a mutual savings bank under the laws of North Carolina,
each with full power and authority to own its properties and conduct
its business as described in the Prospectus;
(ii) each of the Company and the Bank has been duly qualified to
do business and is in good standing as a foreign corporation in each
jurisdiction where the ownership or leasing of its properties of which
such counsel has actual knowledge, or the conduct of its business of
which such counsel has actual knowledge, requires such qualification
or, if not so qualified and in good standing, failure to so qualify
would not have any material adverse effect on the Company and the
Bank, taken as a whole;
<PAGE>
(iii) the Bank is a member of the Federal Home Loan Bank of
Atlanta, and the deposit accounts of the Bank are insured by the SAIF
up to the applicable legal limits;
(iv) to the actual knowledge of such counsel, the activities of
the Bank are permitted under federal and North Carolina law to
subsidiaries of a North Carolina business corporation, and the Bank
does not have any subsidiaries;
(v) to the actual knowledge of such counsel, the Bank has
obtained all licenses, permits and other governmental authorizations
required for the conduct of its business, all such licenses, permits
and other governmental authorizations are in full force and effect,
and the Bank is in all material respects complying therewith, except
where the failure to hold such licenses, permits or governmental
authorizations or the failure to so comply would not have a material
adverse effect on the Company and the Bank, taken as a whole;
(vi) the Plan complies with, and, to the actual knowledge of such
counsel, the Conversion of the Bank from a North Carolina-chartered
mutual savings bank to a North Carolina-chartered stock savings bank
and the creation of the Company as a holding company for the Bank have
been effected in all material respects in accordance with all
applicable laws, rules, regulations, decisions and orders (except for
federal and state securities laws, as to which no opinion need be
rendered), with such modifications as were duly disclosed to and
approved by the Administrator and FDIC, as evidenced by their
conditional approval and conditional notice of intent not to object;
to such counsel's actual knowledge, all of the terms, conditions,
requirements and provisions with respect to the Plan and the
Conversion, except with respect to the filing or submission of
required post-Conversion reports by the Company or the Bank, have been
complied with in all material respects by the Company and the Bank or
appropriate waivers have been duly obtained; and, to the actual
knowledge of such counsel, no person has sought to obtain regulatory
or judicial review of the final actions of the Administrator and the
FDIC in approving, or not objecting to, as applicable, the Plan;
(vii) As of the Closing Date, the Company and Bank have
authorized Common Stock as set forth in the Registration Statement and
the Prospectus, and the description of such Common Stock in the
Registration Statement and the Prospectus is accurate and complete in
all material respects;
(viii) the issuance and sale of the Shares have been duly and
validly
<PAGE>
authorized by all necessary corporate action on the part of the
Company; the Shares, upon receipt of payment and issuance in
accordance with the terms of the Plan and this Agreement, will be
validly issued, fully paid, nonassessable and, except as disclosed in
the Prospectus, free of preemptive rights, and good title thereto
shall be transferred by the Company free and clear of all claims,
encumbrances, security interests and liens created by the
Company;
(ix) the certificates for the Shares are in due and proper form
and comply with applicable North Carolina law;
(x) the issuance and sale of the capital stock of the Bank to the
Company have been duly authorized by all necessary corporate action of
the Bank and the Company and have received the approvals of the
Administrator and the Federal Reserve Board, and such capital stock,
upon receipt of payment and issuance in accordance with the terms of
the Plan, will be validly issued, fully paid and nonassessable and
owned of record and, to the actual knowledge of such counsel,
beneficially by the Company;
(xi) subject to the satisfaction of the post-Conversion
conditions to the Administrator's, the FDIC's and the Federal Reserve
Board's approvals of, or notice of intention not to object to, as
applicable, the respective Conversion Applications and Holding Company
Applications, no further approval, notice of intention not to object,
authorization, consent or other order of any public board or body is
required in connection with the execution and delivery of this
Agreement, the issuance of the Shares and the consummation of the
Conversion, except as may be required under the securities laws of the
various jurisdictions (as to which an opinion need not be expressed);
(xii) the execution and delivery of this Agreement and the
consummation of the transactions contemplated thereby have been duly
and validly authorized by all necessary action, corporate or
otherwise, on the part of each of the Company and the Bank; and this
Agreement is a legal, valid and binding obligation of each of the
Company and the Bank, enforceable in accordance with its terms (except
as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization, receivership, conservatorship
or similar laws relating to or affecting the enforcement of creditors'
rights generally or by general equity principles, regardless of
whether such enforceability is considered in a proceeding in equity or
at law, and except to the extent that the provisions of Sections 8 and
9 hereof may be unenforceable as against public policy or pursuant to
Section 23A, as to which an opinion need not be expressed);
(xiii) except as set forth in the Prospectus, to the actual
knowledge of such counsel,
<PAGE>
there are no material legal or governmental proceedings pending or
threatened against or involving the assets of the Company or the Bank
(provided that for this purpose such counsel need not regard any legal
or governmental proceedings to be "threatened" unless the potential
litigant or government authority has manifested to the management of
the Company or the Bank, or to such counsel, a present intention to
initiate such litigation or proceeding);
(xiv) the statements in the Prospectus and incorporated by
reference in the Proxy Statement under the captions "DIVIDEND POLICY,"
"BUSINESS OF THE BANK -- Lending Activities," "BUSINESS OF THE BANK --
Nonperforming Assets and Asset Classification," "TAXATION,"
"SUPERVISION AND REGULATION," "DESCRIPTION OF CAPITAL STOCK" and
"ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK," insofar
as they include, or refer to, statements of law or legal conclusions
(excluding financial data included therein, as to which an opinion
need not be expressed), have been prepared or reviewed by such counsel
and are correct in all material respects;
(xv) the Conversion Applications have been approved or not
objected to, as applicable, by the Administrator and the FDIC, and the
Prospectus and the Proxy Statement have been authorized or not
objected to by them; the Holding Company Applications have been
approved by the Administrator and the Federal Reserve Board; the
Registration Statement and any post-effective amendment thereto has
been declared effective by the Commission; except as to any necessary
qualifications or registration under the securities laws of the
jurisdictions in which the Shares were offered, as to which no opinion
need be rendered herein, no further approval or notice of intention
not to object, as applicable, of any governmental authority is
required for the issuance and sale of the Shares (subject to the
satisfaction of post-Conversion conditions imposed by the
Administrator, the FDIC and/or the Federal Reserve Board in connection
with their approval or notice of intention not to object, as
applicable, with respect to the respective Conversion Applications and
Holding Company Applications), and, to the actual knowledge of such
counsel, no proceedings are pending by or before the Administrator,
the FDIC or the Federal Reserve Board or the Commission seeking
revocation or rescission of the orders approving or not objecting to
the Conversion Applications and the Holding Company Applications or
declaring the Registration Statement effective or are contemplated or
threatened (provided that for this purpose such counsel need not
regard any litigation or governmental proceeding to be "threatened"
unless the potential litigant or government authority has manifested
to the management of
<PAGE>
the Company or the Bank, or to such counsel, a present intention to
initiate such litigation or proceeding);
(xvi) the execution and delivery of this Agreement, the
incurrence of the obligations herein set forth and the consummation of
the transactions contemplated hereby by the Company and the Bank do
not conflict with or result in a breach of the articles of
incorporation or bylaws of the Company or the Bank (in either mutual
or stock form), or, to the actual knowledge of such counsel,
constitute a material breach of or default (or an event which, with
notice or lapse of time or both, would constitute a material breach or
default) under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of
any lien, charge or other encumbrance upon any of the properties or
assets of the Company or the Bank pursuant to any of the terms,
provisions or conditions of, any material agreement, contract,
indenture, bond, debenture, note, instrument or obligation to which
the Company or the Bank is a party or by which it or its assets or
properties may be bound or is subject or violate any governmental
license or permit or any law, administrative regulation or order or
court order, writ, injunction or decree (subject to the satisfaction
of post-Conversion conditions imposed by the Administrator, the FDIC
and/or the Federal Reserve Board in connection with their approval of,
or notice of intention not to object to, as applicable, the respective
Conversion Applications and Holding Company Applications), which
breach, default, encumbrance or violation would have a material
adverse effect on the condition (financial or otherwise), operations,
business, assets or properties of the Company and the Bank, taken as a
whole;
(xvii) to the actual knowledge of such counsel, there has been
no material breach of any provision of the Company's or the Bank's
articles of incorporation or bylaws or material breach or default (or
the occurrence of any event which, with notice or lapse of time or
both, would constitute a material breach or default) under any
agreement, contract, indenture, bond, debenture, note, instrument or
obligation to which the Company or the Bank is a party or by which any
of them or any of their respective assets or properties may be bound,
or any governmental license or permit, or a violation of any law,
administrative regulation or order, or court order, writ, injunction
or decree which breach, default, encumbrance or violation would have a
material adverse effect on the condition (financial or otherwise),
operations, business, assets or properties of the Company and the
Bank, taken as a whole; and,
(xviii) the Conversion Applications, the Holding Company
Applications, the Registration Statement, the Prospectus and the Proxy
Statement, in each case as amended, comply as to form in all material
respects with the requirements of the NC Conversion Laws, the FDIC
Conversion Laws, the Securities Act and the SEC Regulations, as the
case may be (except as to financial statements,
<PAGE>
notes to financial statements, financial tables and other financial
and statistical data, including the appraisal, included therein, and
except as to any statement or omission made in reliance upon and in
conformity with written information furnished to the Company or the
Bank with respect to Trident by or on behalf of Trident expressly for
use in the Prospectus or any amendment or supplement thereof or in any
Application, as the case may be, as to which an opinion need not be
expressed); to such counsel's actual knowledge, all documents and
exhibits required to be filed with the Conversion Applications, the
Holding Company Applications and the Registration Statement have been
so filed, and the descriptions in the Conversion Applications, the
Holding Company Applications and the Registration Statement of such
documents and exhibits are accurate and complete in all material
respects and present fairly the information required to be shown; to
such counsel's actual knowledge, there are no contracts or other
documents of a character required to be described which are not
described, and there are no statutes or regulations applicable to,
certificates, permits or other authorizations from governmental
regulatory officials or bodies required to be obtained or maintained
by, or legal or governmental proceedings, past, pending or threatened
(provided that for this purpose such counsel need not regard any legal
or governmental proceedings to be "threatened" unless the potential
litigant or government authority has manifested to the management of
the Company or the Bank, or to such counsel, a present intention to
initiate such litigation or proceeding) against, the Company or the
Bank of a character required to be disclosed in the Conversion
Applications, the Holding Company Applications, the Registration
Statement, the Prospectus or the Proxy Statement which have not been
so disclosed and properly described therein.
In rendering such opinions, such counsel may rely as to matters of
fact on certificates of officers and directors of the Company and the Bank
and certificates of public officials delivered pursuant hereto. Such
counsel may assume that any agreement is the valid and binding obligation
of any parties to such agreement other than the Company and the Bank. As
used in such counsel's opinion, the phrase "actual knowledge" shall mean
the conscious awareness of facts or other information by Edward C. Winslow,
III, Howard L. Williams, Melissa H. Weaver, Ellen P. Hamrick, John M. Cross
or Ginger S. Shields, who are all the lawyers employed by such counsel who
have had active involvement with such counsel's representation of the
Company and the Bank. Such opinions may be limited to present statutes,
regulations and judicial interpretations and to facts as they presently
exist; in rendering such opinions, such counsel need assume no obligation
to revise or supplement them should the present laws be changed by
legislative or regulatory action, judicial decision or otherwise; and such
counsel need express no view, opinion or belief with respect to whether any
proposed or pending legislation, if enacted, or any regulations or any
policy statements issued by any regulatory agency, whether or not
promulgated pursuant to any such legislation, would affect the validity of
the execution and delivery by the Company and the Bank of
<PAGE>
this Agreement or the issuance of the Shares. In such opinion, such counsel
may state that, except to the extent stated therein, such counsel has not
undertaken any independent investigation or inquiry to determine the
existence or absence of any facts.
(b) At the Closing Date, Trident shall receive the letter of Brooks,
Pierce, McLendon, Humphrey & Leonard, L.L.P., dated the Closing Date,
addressed to Trident, in form and substance reasonably satisfactory to
counsel for Trident and to the effect that, based on such counsel's
participation in conferences with representatives of the Company, the Bank,
its counsel, the independent appraiser, the independent certified public
accountants, Trident and its counsel, review of documents and understanding
of applicable law (including the requirements of Form S-1 and the character
of the Registration Statement contemplated thereby), nothing has come to
such counsel's attention that would lead it to believe that the
Registration Statement (except as to the financial statements, notes to
financial statements, financial tables and other financial and statistical
data contained therein, as to which such counsel need express no comment),
at the time it became effective, and at the time any post-effective
amendment thereto became effective, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein not misleading, or
that the Prospectus (except as to financial statements, notes to
financial statements, financial tables and other financial and statistical
data contained therein as to which such counsel need express no comment),
as of the date of the Prospectus, at the time the Prospectus or any
amendment or supplement thereto was filed with the Commission or
transmitted to the Commission for filing and at the Closing Date, contained
any untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading (in making this statement such
counsel may state that it has not undertaken to verify independently the
information in the Registration Statement or Prospectus and, therefore,
does not assume any responsibility for the accuracy or completeness
thereof).
(c) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them to review or
pass upon the matters required by Trident, and for the purpose of
evidencing the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained, including but
not limited to, resolutions of the Board of Directors of the Company and
the Bank regarding the authorization of this Agreement and the transactions
contemplated hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material change in the condition,
financial or otherwise, business or results of operations of the Company
and the Bank, taken as a whole, since the latest date as of which such
condition is set forth in the Prospectus, except as referred to therein;
(ii) there shall have been no transaction entered into by the Company or
the Bank after the latest date as of which the financial condition of the
<PAGE>
Company or the Bank is set forth in the Prospectus other than transactions
referred to or contemplated therein, transactions in the ordinary course of
business, and transactions which are not material to the Company and the
Bank, taken as a whole; (iii) none of the Company or the Bank shall have
received from the Administrator, the FDIC or the Federal Reserve Board or
the Commission any direction (oral or written) to make any change in the
method of conducting their respective businesses which is material to the
business of the Company and the Bank, taken as a whole, with which they
have not complied; (iv) no action, suit or proceeding, at law or in equity
or before or by any federal or state commission, board or other
administrative agency, shall be pending or threatened against the Company
and the Bank or affecting any of their respective assets, wherein an
unfavorable decision, ruling or finding would have a material adverse
effect on the business, operations, financial condition or income of the
Company and the Bank, taken as a whole; and (v) the Shares shall have been
qualified or registered for offering and sale by the Company under the
securities laws of such jurisdictions as Trident and the Company shall have
agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive officer and the principal financial officer of each of
the Company and the Bank, dated the Closing Date, to the effect that: (i)
they have examined the Prospectus and, at the time the Prospectus became
authorized by the Company for use, the Prospectus did not contain an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading with respect to the Company or the
Bank; (ii) since the date the Prospectus became authorized by the Company
for use, no event has occurred which should have been set forth in an
amendment or supplement to the Prospectus which has not been so set forth,
including specifically, but without limitation, any material change in the
business, condition (financial or otherwise) or results of operations of
the Company or the Bank and, the conditions set forth in clauses (ii)
through (iv) inclusive of subsection (d) of this Section 7 have been
satisfied; (iii) to the best knowledge of such officers, no order has been
issued by the Commission or the Administrator, the FDIC or the Federal
Reserve Board to suspend the Offerings or the effectiveness of the
Prospectus, and no action for such purposes has been instituted or
threatened by the Commission or the Administrator, the FDIC or the Federal
Reserve Board; (iv) to the best knowledge of such officers, no person has
sought to obtain review of the final actions of the Administrator, the FDIC
and the Federal Reserve Board approving or not objecting to, as applicable,
the respective Conversion Applications and Holding Company Applications;
and (v) all of the representations and warranties contained in Section 2 of
this Agreement are true and correct, with the same force and effect as
though expressly made on the Closing Date.
(f) At the Closing Date, Trident shall receive, among other documents,
copies of all governmental authorizations, approvals, notices of intention
not to object and certificates obtained in connection with the Conversion,
including (i) a copy of the
<PAGE>
letter from the Administrator authorizing the use of the Prospectus and the
Proxy Statement, (ii) a copy of the order of the Commission declaring the
Registration Statement effective; (iii) a copy of the letter from the
Administrator evidencing the corporate existence of the Bank; (iv) a copy
of the letter from the appropriate North Carolina authority evidencing the
incorporation (and, if generally available from such authority, good
standing) of the Company; (v) a copy of the Company's articles of
incorporation certified by the appropriate North Carolina governmental
authority; and, (vi) if available, a copy of the letter from the
Administrator approving the Bank's Stock Articles of Incorporation.
(g) As soon as available after the Closing Date, Trident shall receive
a certified copy of the Bank's Stock Articles of Incorporation executed or
endorsed by the appropriate governmental authority.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of letters from McGladrey & Pullen, independent
certified public accountants, addressed to Trident and the Company, in
substance and form satisfactory to counsel for Trident, with respect to the
financial statements and certain financial information contained in the
Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance satisfactory to counsel for Trident from McGladrey & Pullen,
independent certified public accountants, dated the Closing Date and
addressed to Trident and the Company, confirming the statements made by
them in the letter delivered by them pursuant to the preceding subsection
as of a specified date not more than five (5) days prior to the Closing
Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel.
Any certificates signed by an officer or director of the Company or the Bank
prepared for Trident's reliance and delivered to Trident or to counsel for
Trident shall be deemed a representation and warranty by the Company and the
Bank to Trident as to the statements made therein. If any condition to
Trident's obligations hereunder to be fulfilled prior to or at the Closing Date
is not so fulfilled, Trident may terminate this Agreement or, if Trident so
elects, may waive in writing any such conditions which have not been fulfilled,
or may extend the time of their fulfillment. If Trident terminates this
Agreement as aforesaid, the Company and the Bank shall reimburse Trident for its
expenses as provided in Section 3(b) hereof.
8. Indemnification.
---------------
(a) The Company and the Bank jointly and severally agree to indemnify
and hold harmless Trident, its officers, directors and employees and each
person, if any, who controls Trident within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act, against any and
all loss, liability, claim, damage and
<PAGE>
expense whatsoever and shall further promptly reimburse such persons for
any legal or other expenses reasonably incurred by each or any of them in
investigating, preparing to defend or defending against any such action,
proceeding or claim (whether commenced or threatened) arising out of or
based upon (A) any misrepresentation by the Company or the Bank in this
Agreement or any breach of warranty by the Company or the Bank with respect
to this Agreement or arising out of or based upon any untrue or alleged
untrue statement of a material fact or the omission or alleged omission of
a material fact required to be stated or necessary to make not misleading
any statements contained in (i) the Registration Statement, the Prospectus
or the Proxy Statement or (ii) any application (including the Conversion
Applications and Holding Company Applications) or other document or
communication (in this Section 8 collectively called "Application")
prepared or executed by or on behalf of the Company or the Bank or based
upon information furnished by or on behalf of the Company or the Bank,
whether or not filed in any jurisdiction, to effect the Conversion or
qualify the Shares under the securities laws thereof or filed with the
Administrator, the FDIC or the Federal Reserve Board or the Commission,
unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company or the Bank
with respect to Trident by or on behalf of Trident expressly for use in the
Prospectus or any amendment or supplement thereof or in any Application, as
the case may be, or (B) the participation by Trident in the Conversion,
unless it is determined by final judgment of a court having jurisdiction
over the matter that such loss, liability, claim, damage or expense is
primarily a result of Trident's gross negligence. This indemnity shall be
in addition to any liability the Company and the Bank may have to Trident
otherwise.
(b) The Company shall indemnify and hold Trident harmless for any
liability whatsoever arising out of (i) the Allocation Instructions or (ii)
any records of account holders, depositors, borrowers and other members of
the Bank delivered to Trident by the Bank or its agents for use during the
Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and the
Bank, their officers, directors and employees and each person, if any, who
controls the Company or the Bank within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, to the same extent and
subject to the same limitations as the foregoing indemnity from the Company
and the Bank to Trident, but only with respect to (A) statements or
omissions, if any, made in the Prospectus, the Proxy Statement or any
amendment or supplement thereof, in any Application or to a purchaser of
the Shares in reliance upon, and in conformity with, written information
furnished to the Company or the Bank with respect to Trident by or on
behalf of Trident expressly for use in the Prospectus, the Proxy Statement
or in any Application or (B) any misrepresentation or breach of warranty by
Trident in Section 2(b) of this Agreement.
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in
<PAGE>
respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but
the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than
under this Section 8. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to
such indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than the reasonable cost of investigation except as
otherwise provided herein. In the event the indemnifying party elects to
assume the defense of any such action and retain counsel acceptable to the
indemnified party, the indemnified party may retain additional counsel, but
shall bear the fees and expenses of such counsel unless (i) the
indemnifying party shall have specifically authorized the indemnified party
to retain such counsel or (ii) the parties to such suit include such
indemnifying party and the indemnified party, and such indemnified party
shall have been advised by counsel that one or more material legal defenses
may be available to the indemnified party which may not be available to the
indemnifying party, in which case the indemnifying party shall not be
entitled to assume the defense of such suit notwithstanding the
indemnifying party's obligation to bear the fees and expenses of such
counsel. An indemnifying party against whom indemnity may be sought shall
not be liable to indemnify an indemnified party under this Section 8 if any
settlement of any such action is effected without such indemnifying party's
consent. To the extent required by law, this Section 8 is subject to and
limited by the provisions of Section 23A.
9. Contribution. In order to provide for just and equitable contribution
------------
in circumstances in which the indemnity agreement provided for in Section 8
above is for any reason held to be unavailable to Trident, the Company and/or
the Bank other than in accordance with its terms, the Company or the Bank and
Trident shall contribute to the aggregate losses, liabilities, claims, damages,
and expenses of the nature contemplated by said indemnity agreement incurred by
the Company or the Bank and Trident (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Bank on the one
hand and Trident on the other from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above, but also the relative fault of the Company or
the Bank on the one hand and Trident on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Bank on
the one hand and Trident on the other shall be deemed to be in the same
proportions as the total net proceeds from the Conversion (before deducting
expenses) received by the Company and the Bank bear to the total fees received
by
<PAGE>
Trident under this Agreement. The relative fault of the Company or the Bank
on the one hand and Trident on the other shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Bank or by Trident and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Bank and Trident agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by the indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, Trident shall not be required
to contribute any amount in excess of the amount by which fees owed Trident
pursuant to this Agreement exceeds the amount of any damages which Trident has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. To the extent required by law, this Section 9 is
subject to and limited by the provisions of Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
-------------------------------------------------------
respective indemnities of the Company and the Bank and Trident and the
representation and warranties of the Company and the Bank and, if any, of
Trident set forth in or made pursuant to this Agreement shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of Trident or the Company or
the Bank or any controlling person or indemnified party referred to in Section 8
hereof, and shall survive any termination or consummation of this Agreement
and/or the issuance of the Shares, and any legal representative of Trident, the
Company, the Bank and any such controlling persons shall be entitled to the
benefit of the respective agreements, indemnities, warranties and
representations.
11. Termination. Trident may terminate this Agreement by giving the
-----------
notice indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make
it, in Trident's opinion, impracticable to proceed with the offering of the
Shares; or if trading on the New York Stock Exchange shall have suspended;
or if the United States shall have become involved in a war or major
hostilities; or if a general banking moratorium has been declared by a
state or federal authority which has material effect on the Bank or the
Conversion; or if a moratorium in foreign exchange trading by major
international
<PAGE>
banks or persons has been declared; or if there shall have been a material
change in the capitalization, condition or business of the Company, or if
the Bank shall have sustained a material or substantial loss by fire,
flood, accident, hurricane, earthquake, theft, sabotage or other calamity
or malicious act, whether or not said loss shall have been insured; or if
there shall have been a material change in the condition or prospects of
the Company or the Bank or a material breach of this Agreement by the
Company or the Bank.
(b) If Trident elects to terminate this Agreement as provided in this
Section, the Company and the Bank shall be notified promptly by Trident by
telephone or telegram, confirmed by letter.
(c) If this Agreement is terminated by Trident for any of the reasons
set forth in subsection (a) above, and to fulfill its obligations, if any,
pursuant to Sections 3, 6, 8(a) and 9 of this Agreement and upon demand,
the Company and the Bank shall pay Trident the full amount so owing
thereunder.
The Bank may terminate the Conversion in accordance with the terms of the
Plan. Such termination shall be without liability to any party, except that the
Company, the Bank and Trident shall be required to fulfill their obligations
pursuant to Sections 3(b), 3(c), 6, 8 and 9 of this Agreement.
The Bank may terminate this Agreement with respect to Trident if there
shall have been a material breach of this Agreement by Trident.
12. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Housley Kantarian & Bronstein, P.C., 1220 19th
Street, N.W., Washington, DC 20036, Attention: K. Scott Fife, Esquire) and if
sent to the Company or the Bank, shall be mailed, delivered or telegraphed and
confirmed to Coddle Creek Financial Corp., Mooresville Savings Bank, SSB, 347
North Main Street, Mooresville, North Carolina 28115, Attention: Mr. George W.
Brawley, Jr., President (with a copy to Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P., 2000 Renaissance Plaza, 230 North Elm Street, Greensboro, North
Carolina 27401, Attention: Edward C. Winslow, III, Esquire, with a copy to Ellen
P. Hamrick, Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, Trident, the Company, the Bank and the controlling and
other persons referred to in Section 8 hereof, and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
<PAGE>
14. Construction. Unless governed by preemptive federal law, this
------------
Agreement shall be governed by and construed in accordance with the substantive
laws of North Carolina.
15. Amendment. This Agreement may be amended only by a subsequent writing
---------
signed by all of the parties hereto.
16. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute but one and the same instrument.
17. Severability. Any provision of this Agreement found to be invalid,
------------
unenforceable, or otherwise limited by or regulation shall not affect the
validity or enforceability of the remaining terms of this Agreement.
<PAGE>
Trident Securities, Inc.
Sales Agency Agreement
Page 32
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
CODDLE CREEK FINANCIAL CORP. MOORESVILLE SAVINGS BANK, SSB
By: By:
_____________________________ ________________________________
George W. Brawley, Jr. George W. Brawley, Jr.
President and Chief President and Chief
Executive Officer Executive Officer
Date: Date:
___________________________ _______________________________
Agreed to and accepted:
TRIDENT SECURITIES, INC.
By:
___________________________
Date:
________________________
<PAGE>
Exhibit A
Trident Securities, Inc. is a registered selling agent in the jurisdictions
--
listed below:
<TABLE>
<CAPTION>
<C> <S>
Alabama Missouri
Arizona Nebraska
Arkansas Nevada
California New Hampshire
Colorado New Jersey
Connecticut New Mexico
Delaware New York
District of Columbia North Carolina
Florida North Dakota (Trident Securities, Inc. only, no agents)
Georgia Ohio
Idaho Oklahoma
Illinois Oregon
Indiana Pennsylvania
Iowa Rhode Island
Kansas South Carolina
Kentucky Tennessee
Louisiana Texas
Maine Vermont
Maryland Virginia
Massachusetts Washington
Michigan West Virginia
Minnesota Wisconsin
Mississippi Wyoming
</TABLE>
Trident Securities, Inc. is not a registered selling agent in the jurisdictions
---
listed below:
Alaska
Hawaii
Montana
South Dakota
Utah
<PAGE>
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Coddle Creek Financial Corp., a North Carolina-chartered corporation (the
"Company"), and Mooresville Savings Bank, SSB, a North Carolina-chartered and
federally insured mutual savings bank (the "Bank"), hereby confirm, as of
November ___, 1997, their collective agreement that under Section 8(a) of the
Sales Agency Agreement entered into as of this date with Trident Securities,
Inc. ("Trident"), a broker-dealer registered with the Securities and Exchange
Commission and a member of the National Association of Securities Dealers, Inc.,
the Company and the Bank have jointly and severally agreed to indemnify and hold
harmless Trident, its officers, directors and employees and each person, if any,
who controls Trident within the meaning of Section 15 of the Securities Act of
1933, as amended, or Section 20(a) of the Securities Exchange Act of 1934, as
amended, against any and all loss, liability, claim, damage and expense
whatsoever and shall further promptly reimburse such persons for any legal or
other expenses reasonably incurred by each or any of them in investigating,
preparing to defend or defending against any such action, proceeding or claim
(whether commenced or threatened) arising out of or based upon any
_________________________________________________ by the Bank.
CODDLE CREEK FINANCIAL CORP. MOORESVILLE SAVINGS BANK, SSB
By: By:
__________________________ ______________________________
George W. Brawley, Jr. George W. Brawley, Jr.
President and Chief President and Chief
Executive Officer Executive Officer
Date: Date:
_________________________ ____________________________
<PAGE>
Exhibit 23(a)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in this amendment No. 2 to the Registration
Statement/Prospectus of Coddle Creek Financial Corp. of our report dated January
16, 1997 relating to the 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 and to the reference to our firm in the Registration Statement/Prospectus
under the caption "Experts".
/S/ McGLADREY & PULLEN, LLP
Charlotte, North Carolina
November 10, 1997
<PAGE>
Exhibit 23(b)
[COMPANY LETTERHEAD APPEARS HERE]
November 10, 1997
Board of Directors
Mooresville Savings Bank, SSB
347 Main Street
Mooresville, NC 28115
Dear Sirs:
We hereby consent to the use of our firm's name in the applications
for conversion of Mooresville Savings, SSB, Mooresville, North Carolina, and any
amendments thereto, filed with the Division of Savings Institutions, North
Carolina Department of Commerce (the "Division"), and the Federal Deposit
Insurance Corporation, in the Form S-1 Registration Statement, and any
amendments thereto, and in the Acquisition Application and the Holding Company
Application of Coddle Creek Financial Corp., as filed with the Division and the
Federal Reserve Board, respectively. We also hereby consent to the inclusion of,
a summary of, a summary of, and references to our appraisal report, including
updates, and our opinion concerning subscription rights in such filings
including the Prospectus of Coddle Creek Financial Corp., and the Proxy
Statement of Mooresville Savings, SSB.
Sincerely,
[SIGNATURE APPEARS HERE]
JMP Financial, Inc.
<PAGE>
Exhibit 23(c)
LETTERHEAD OF
BROOKS, PIERCE, McLENDON, HUMPHREY & LEONARD, L.L.P.
November 10, 1997
Board of Directors
Coddle Creek Financial Corp.
347 North Main Street
Mooresville, North Carolina 28115
Gentlemen:
We hereby consent to reference to our firm in the "Legal Opinions" section
of the Prospectus included in the Registration Statement of Coddle Creek
Financial Corp. on Form S-1, as amended (the "Registration Statement") and to
the reference to the opinions rendered by our firm which are described in such
section of the Registration Statement, as amended.
Very truly yours,
BROOKS, PIERCE, MCLENDON,
HUMPHREY & LEONARD, L.L.P.
By: /s/ Edward C. Winslow III
-------------------------
Edward C. Winslow III
ECWIII/cln
<PAGE>
MOORESVILLE SAVINGS BANK, SSB
Post Office Box 117
347 North Main Street
Mooresville, North Carolina 28115
(704) 664-4888
----------------------------------------------
NOTICE OF SPECIAL MEETING OF MEMBERS
TO BE HELD ON DECEMBER ____, 1997
----------------------------------------------
NOTICE IS HEREBY GIVEN, that a special meeting (the "Special Meeting") of
the members of Mooresville Savings Bank, SSB (the "Bank") will be held at the
Bank's headquarters office at 347 North Main Street, Mooresville, North Carolina
on December _____, 1997 at ______ __.m., Eastern Time, to consider and vote
upon:
1. The Plan of Holding Company Conversion (the "Plan of Conversion")
pursuant to which, among other things, (i) the Bank will convert from
a North Carolina-chartered savings bank organized in mutual form to a
North Carolina-chartered savings bank organized in stock form (the
"Conversion"), and in connection therewith will adopt an amended
Certificate of Incorporation and Bylaws, (ii) the Bank will sell its
capital stock to Coddle Creek Financial Corp. (the "Company"), a North
Carolina corporation, and become the wholly-owned subsidiary of the
Company, and (iii) the Company will offer and sell shares of its
common stock in a Subscription Offering and, if necessary, in a
Community Offering and a Syndicated Community Offering, all as more
specifically set forth in the Plan of Conversion; and
2. Such other business as may relate to the purposes set forth in this
Notice of Special Meeting and properly come before the meeting and any
adjournment(s) thereof. Management is not aware of any such other
business.
The Board of Directors has fixed the close of November 5, 1997 as the
record date for the determination of members entitled to notice of and to vote
at the Special Meeting and at any adjournment(s) thereof. Members of the Bank
of record as of the close of business on that date who cease to be members prior
to the date of the Special Meeting will not be entitled to vote at the Special
Meeting. Approval of the Plan of Conversion requires the affirmative vote, cast
in person or by proxy, of a majority of the total outstanding votes entitled to
be cast by voting members at the Special Meeting. A copy of the Plan of
Conversion is attached to this Summary Proxy Statement as Attachment I.
BY ORDER OF THE BOARD OF DIRECTORS
BILLY R. WILLIAMS
Secretary
Mooresville, North Carolina
November _____, 1997
<PAGE>
PLEASE COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY CARD(S) IN THE
ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE SPECIAL MEETING. THIS WILL ASSURE YOUR REPRESENTATION AT THE SPECIAL
MEETING AND MAY AVOID THE COST OF ADDITIONAL COMMUNICATIONS. THIS WILL NOT
PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY
REVOKE YOUR WRITTEN PROXY BY DELIVERING A WRITTEN INSTRUMENT TO SUCH EFFECT TO
THE SECRETARY OF THE BANK AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY
DELIVERING TO THE SECRETARY OF THE BANK PRIOR TO THE SPECIAL MEETING A DULY
EXECUTED PROXY BEARING A LATER DATE. PROPERLY COMPLETED PROXIES WILL BE VOTED
IN ACCORDANCE WITH THE INSTRUCTIONS INDICATED THEREON, OR IF NO INSTRUCTIONS ARE
INDICATED, FOR APPROVAL OF THE PLAN OF CONVERSION.
---
YOUR PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE BANK. THE BANK
BOARD OF DIRECTORS RECOMMENDS THAT VOTING MEMBERS VOTE FOR APPROVAL OF THE PLAN
OF CONVERSION. FAILURE TO VOTE IN PERSON OR BY PROXY WILL HAVE THE SAME EFFECT
AS A VOTE AGAINST THE PLAN OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF
-------
CONVERSION WILL NOT OBLIGATE ANY PERSON TO PURCHASE COMMON STOCK, AND VOTING
AGAINST THE PLAN OF CONVERSION OR A FAILURE TO VOTE WILL NOT PRECLUDE ANY SUCH
PURCHASE.
THE ENCLOSED PROXY IS SOLICITED FOR THIS SPECIAL MEETING ONLY, AND ANY
ADJOURNMENT(S) THEREOF, AND WILL NOT BE USED FOR ANY OTHER MEETING. NO
PREVIOUSLY PROVIDED GENERAL PROXIES WILL BE VOTED AT THE SPECIAL MEETING FOR
APPROVAL OF THE PLAN OF CONVERSION.
ii.
<PAGE>
MOORESVILLE SAVINGS BANK, SSB
347 North Main Street
Mooresville, North Carolina 28115
(704) 664-4888
-------------------------------------
SUMMARY PROXY STATEMENT
-------------------------------------
SPECIAL MEETING OF MEMBERS TO BE HELD ON DECEMBER ____, 1997
PURPOSE OF THE SPECIAL MEETING
This Summary Proxy Statement (the "Proxy Statement") is being furnished to
you in connection with the solicitation by the Board of Directors of Mooresville
Savings Bank, SSB (the "Bank") of proxies to be voted at a special meeting of
members (the "Special Meeting") to be held at the Bank's headquarters office at
347 North Main Street, Mooresville, North Carolina on December ____, 1997 at
______ __.m., Eastern Time.
The Special Meeting will be held for the purpose of considering and voting
upon the proposed Plan of Holding Company Conversion approved by the Board of
Directors of the Bank on July 14, 1997 (the "Plan of Conversion"), which
provides for the adoption by the Bank of an amended Certificate of Incorporation
and Bylaws. If the Plan of Conversion is approved by a majority of the total
votes eligible to be cast and if certain other conditions are satisfied, the
Bank will convert from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank, and the Bank will become the wholly-owned
subsidiary of Coddle Creek Financial Corp. (the "Company"), a North Carolina
corporation formed by the Bank to own all of the stock of the Bank issued
pursuant to the Plan of Conversion (the "Conversion"). The proposed Plan of
Conversion, including the proposed forms of the Bank's amended Certificate of
Incorporation and Bylaws, is attached to this Proxy Statement as Attachment I.
For a description of the Conversion, see "THE CONVERSION."
This Proxy Statement is dated November _____, 1997, and is first being
mailed to members of the Bank, together with the Prospectus dated November
_____, 1997 (the "Prospectus"), on or about November _____, 1997.
The following information is not complete and is qualified in its entirety
by the Plan of Conversion, which is attached to this Proxy Statement, the
information contained in this Proxy Statement and the information and financial
statements and accompanying notes contained in the Prospectus which accompanies
this Proxy Statement.
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
Company has not as 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 Employee Stock Ownership
Plan (the "ESOP"). The Company has received the approval of the Administrator,
Savings Institutions Division, North Carolina Department of Commerce (the
"Administrator"), and the Board of Governors of the Federal Reserve System (the
"Federal Reserve") to acquire the Bank.
<PAGE>
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 and has been in
operation since 1937. The Bank is a member of the Federal Home Loan Bank
("FHLB") system, and its deposits are federally insured by the Savings
Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance
Corporation (the "FDIC") to the maximum amount permitted by law.
The Bank, headquartered in Mooresville, North Carolina, 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, Catawba, Lincoln, Mecklenburg, Cabarrus and Rowan counties
in North Carolina. Based upon 1996 comparative data, the Bank had approximately
22% and 7.2% of the deposits in Mooresville and Iredell County, respectively.
On 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 multi-family residential, nonresidential real estate,
construction, equity line of credit, and other secured and unsecured consumer
loans. See "BUSINESS OF THE BANK" in the Prospectus. 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.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Bank has fixed the close of business on
November _____, 1997 (the "Voting Record Date") as the record date for
determining the members entitled to notice of and to vote at the Special
Meeting. The Bank's depositors (including beneficial owners of Individual
Retirement Account ("IRA") accounts) and borrowers are members of the Bank
entitled to vote under its current Certificate of Incorporation and Bylaws. The
Bank's members of record as of the close of business on the Voting Record Date
who cease to be members prior to the date of the Special Meeting will not be
entitled to vote at the Special Meeting.
At the Special Meeting, each deposit account holder entitled to vote may
cast one vote for each $100 or fraction thereof of the aggregate withdrawal
value of any deposit account in the Bank as of the Voting Record Date. Each
borrower member entitled to vote may cast one vote as a borrower in addition to
the number of votes to which such member may be entitled as an owner of a
deposit account. No member, however, may cast more than 1,000 votes. A deposit
account or loan creates a single membership for voting purposes, even though
more than one person has an interest in such deposit account or is obligated on
such loan.
Beneficial owners of IRA accounts at the Bank will be considered voting
members entitled to vote on the Plan of Conversion. The legal owners of other
fiduciary accounts, rather than the beneficial owners, will be treated as the
member entitled to cast the votes for such account, unless the trust agreement
or any other agreement relating to the fiduciary's authority provides otherwise.
Twenty-five members present in person or by proxy at the Special Meeting
will constitute a quorum for the transaction of business. The affirmative vote
of at least a majority of the total outstanding votes of the Bank's' members
eligible to be cast at the Special Meeting is required for approval of the Plan
of Conversion. As of the Voting Record Date, the Bank's records disclose that
there were _________ votes
2
<PAGE>
entitled to be cast at the Special Meeting, of which _________ votes would
represent a majority.
Members may vote at the Special Meeting in person or by proxy. Each proxy
solicited hereby, if properly executed, duly returned at least five days prior
to the date of the Special Meeting, and not revoked prior to or at the Special
Meeting, will be voted at the Special Meeting in accordance with the member's
instructions indicated thereon. IF NO VOTING INSTRUCTIONS ARE INDICATED ON THE
PROXY CARD, THE PROXY WILL BE VOTED FOR THE PLAN OF CONVERSION. If any other
---
matters are properly presented before the Special Meeting, the proxies solicited
hereby will be voted on such matters in accordance with the best judgment of the
proxyholders named therein. Management of the Bank is not aware of any other
business to be presented at the Special Meeting.
Any member giving a proxy may revoke it at any time before it is voted by
delivering to the Secretary of the Bank before or at the Special Meeting either
a written revocation of the proxy or by delivering to the Secretary of the Bank
no later than five days prior to the Special Meeting a duly executed proxy
bearing a later date, or by attending the Special Meeting and voting in person.
Proxies are being solicited only for use at the Special Meeting and any and all
adjournments thereof and will not be used for any other meeting. No previously
provided general proxies will be voted at the Special Meeting for approval of
the Plan of Conversion.
The Board of Directors' solicitation of proxies for the Special Meeting is
being made by means of this Proxy Statement. It may be followed by further
letters and personal calls to members by employees or agents of the Bank. All
costs of this proxy solicitation will be paid by the Bank.
The directors and executive officers of the Bank were entitled to cast
_______ votes as of the Voting Record Date for the Special Meeting.
RECOMMENDATION OF MANAGEMENT
THE BOARD OF DIRECTORS OF THE BANK RECOMMENDS THAT YOU VOTE FOR THE PLAN OF
---
CONVERSION.
FAILURE TO VOTE IN FAVOR OF THE PLAN OF CONVERSION, IN PERSON OR BY PROXY,
WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PLAN OF CONVERSION. VOTING IN
-------
FAVOR OF THE PLAN OF CONVERSION WILL NOT OBLIGATE ANY PERSON TO SUBSCRIBE FOR
THE PURCHASE OF ANY STOCK, AND VOTING AGAINST THE PLAN OR FAILING TO VOTE WILL
NOT PRECLUDE ANY SUCH PURCHASE.
THE DIRECTORS AND CERTAIN OFFICERS OF THE BANK HAVE A PERSONAL INTEREST IN
THE APPROVAL OF THE CONVERSION TO THE EXTENT THAT THEY WILL RECEIVE CERTAIN
BENEFITS AS A RESULT OF THE CONVERSION. SEE "MANAGEMENT OF THE BANK" IN THE
PROSPECTUS AND "BENEFITS TO DIRECTORS AND EMPLOYEES" IN THIS PROXY STATEMENT.
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED AND THE ADMINISTRATOR HAS
APPROVED COMPLETION OF THE TRANSACTIONS DESCRIBED IN THE PLAN OF CONVERSION
SUBJECT TO APPROVAL BY THE MEMBERS OF THE BANK AND TO SATISFACTION OF CERTAIN
OTHER CONDITIONS. APPROVAL BY THE ADMINISTRATOR DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE ADMINISTRATOR.
3
<PAGE>
THE CONVERSION
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 __________, 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 ____, 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 ___________, 199___. 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" in the Prospectus.
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
4
<PAGE>
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 of the Company and the
Bank. See "MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan" and "--
Stock Based Benefits" in the Prospectus.
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" in the Prospectus.
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.
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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:
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" in the Prospectus. 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.
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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 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 ____, 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 ____, 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
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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.
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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 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
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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 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 ____________, 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
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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 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 _____________, 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.
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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.
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
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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 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
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<PAGE>
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" in the Prospectus.
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 ____, 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.
Persons wishing to use funds in a the Bank IRA to purchase Common Stock
must visit the Stock Information Center on or before December ____, 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
14
<PAGE>
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, 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.
15
<PAGE>
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.
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" in the Prospectus
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
16
<PAGE>
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 ____, 1997. In the event the
6,000 or 12,000 share maximum purchase limitation is increased, any subscriber
or group of subscribers in the Subscription, Community or Syndicated Community
Offering who has subscribed for the maximum amount which is increased, and
certain other large subscribers in the discretion of the 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:
17
<PAGE>
(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.
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
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<PAGE>
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
19
<PAGE>
to them of interests in the Liquidation Account; (vii) assuming the Subscription
Rights have no value, the tax basis for Common Stock purchased in the Conversion
will be the amount paid therefor; and (viii) the tax basis of interests in the
Liquidation Account will be zero. 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.
ANTICIPATED STOCK PURCHASES BY MANAGEMENT
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.
20
<PAGE>
<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>
______________________
(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" in the
Prospectus. 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" in the Prospectus. 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" in the Prospectus.
(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
21
<PAGE>
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.
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.
BENEFITS TO DIRECTORS AND EMPLOYEES
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" in the Prospectus. 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" in the
Prospectus.
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" in the Prospectus.
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.
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
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$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" in the Prospectus.
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" in
the Prospectus.
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" in the Prospectus 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 because the purchase price per share may be
higher or lower than $50.00. See "MANAGEMENT OF THE BANK -- Employee Stock
Ownership Plan" in the Prospectus.
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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" in the
Prospectus. The Company does not intend to repurchase
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any Common Stock during the first year following the Conversion.
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 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" in the Prospectus. 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.
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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 or retained earnings.
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" in the Prospectus. 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" in the Prospectus. Also, see "TAXATION -- Federal Income
Taxation" in the Prospectus 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.
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.
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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.
NO REGISTRATION REQUIREMENT
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.
LEGAL OPINIONS
The validity of the issuance of the Common Stock in the Conversion will be
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 Housley, 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 included herein have been included
herein in reliance upon the report of McGladrey & Pullen LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
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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.
ADDITIONAL INFORMATION AND ORDER FORMS
The Prospectus contains the following: audited consolidated financial
statements of the Bank for the two fiscal years ended December 31, 1996, 1995,
and the nine months ended December 31, 1994; unaudited consolidated financial
statements of the Bank for the six-month periods ended June 30, 1997 and 1996;
capitalization of the Company and the Bank; Management's Discussion and Analysis
of Financial Condition and Results of Operations; a description of the Bank's
lending and savings and investment activities; information concerning
compensation and other benefits of directors and officers; a description of the
Common Stock; anti-takeover provisions of the Company and the Bank; and
additional information about the business and financial condition of the Bank.
The Prospectus also contains forms (the "Stock Order Forms") for subscribing or
submitting an order for the Common Stock. A copy of the Prospectus accompanies
this Proxy Statement. Requests for an additional copy of the Prospectus and any
questions about the Conversion or the Special Meeting, including questions about
proxy voting procedures, should be directed to the Bank's Stock Information
Center at (704) 660-0408, 347 North Main Street, Mooresville, North Carolina
28115.
Copies of the Company's Articles of Incorporation and Bylaws are also
available. Requests for copies of those documents should be directed to the
Bank's Stock Information Center at (704) 660-0408.
The Subscription Offering will commence on November _____, 1997, and end on
December _____, 1997. Stock Order Forms for purchases of Common Stock in the
Subscription Offering must be received by the Bank on or before September ____,
1995.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK. SUCH OFFERS ARE MADE ONLY BY THE PROSPECTUS.
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