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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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Commission file number 000-23465
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CODDLE CREEK FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
North Carolina 56-2045998
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
347 North Main Street
Mooresville, North Carolina 28115
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (704) 664-4888
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$44,710,627 common stock, no par value, based on the closing price of such
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common stock on March 2, 1998.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 674,475 shares of common
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stock, no par value, outstanding at March 2, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of Coddle Creek Financial Corp. for the year ended
December 31, 1997, are incorporated by reference into Part I, Part II and Part
IV.
Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders of
Coddle Creek Financial Corp. to be held on April 17, 1998, are incorporated by
reference into Part III.
Portions of the Registration Statement of Coddle Creek Financial Corp. On Form
S-1, Registration No. 333-35497, dated September 12, 1997, as amended on
November 5 and 10, 1997, are incorporated by reference into Part IV.
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PART I
ITEM 1. BUSINESS
General
Prior to December 30, 1997, Mooresville Savings Bank, Inc., S.S.B. (the
"Bank") operated as a mutual North Carolina-chartered savings bank. On December
30, 1997, the Bank converted from a North Carolina-chartered mutual savings bank
to a North Carolina-chartered stock savings bank (the "Conversion"). In
connection with the Conversion, all of the issued and outstanding capital stock
of the Bank was acquired by Coddle Creek Financial Corp., a North Carolina
corporation (the "Company") which was organized to become the holding company
for the Bank. At that time, the Company had an initial public offering of its
common stock, no par value (the "Common Stock").
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's office is located at 347
North Main Street, Mooresville, North Carolina. The Company's activities
consist of investing the proceeds of its initial public offering which were
retained at the holding company level, holding the indebtedness outstanding from
the Mooresville Savings Bank, Inc., SSB Employee Stock Ownership Plan (the
"ESOP") and owning the Bank. The Company's principal sources of income are
earnings on its investments and interest payments received from the ESOP with
respect to the ESOP loan. In addition, the Company will receive any dividends
which are declared and paid by the Bank on its capital stock.
The Bank was originally chartered in 1937. It 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 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 conducts business through three (3) full service offices in
Mooresville, Cornelius and Huntersville, North Carolina. At December 31, 1997,
the Bank had total assets of $149.6 million, net loans of $102.0 million,
deposits of $99.4 million and stockholders' equity of $47.0 million.
The Bank is engaged primarily in the business of attracting retail 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 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 and its interest-earning deposit balances in other
depository institutions, and transactions 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.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the FDIC and the North Carolina Administrator, Savings
Institutions Division, North Carolina Department of Commerce (the
"Administrator"). Deposit flows and cost of funds are influenced by interest
rates on competing investments and general market rates of interest. Lending
activities are affected by the demand for financing of real estate and other
types of loans, which in turn are affected by the interest rates at which such
financing may be offered and other factors affecting local demand and
availability of funds.
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At December 31, 1997, the Company and the Bank had a total of 28 full-time
employees and 3 part-time employees.
The Company has no operations and conducts no business of its own other
than owning the Bank, investing its portion of the net proceeds received in the
Conversion and lending funds to the ESOP. Accordingly, the discussion of the
business which follows in the Form 10-K concerns the business conducted by the
Bank, unless otherwise indicated.
Lending Activities
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'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.
Approximately 96.8% of the Bank's net loan portfolio is secured by real estate.
As of December 31, 1997, all of the loans in the Bank's real estate loan
portfolio were secured by properties in North Carolina. On December 31, 1997,
the Bank's largest single outstanding loan had a balance of approximately
$493,000. This loan was performing in accordance with its original terms. In
addition to interest earned on loans, the Bank receives fees in connection with
loan originations, loan servicing, 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 $102 million at December 31, 1997 representing 68.2% of the Bank's
total assets at such date. At December 31, 1997, 79.5% of the Bank's net loan
portfolio, before net items, was composed of one-to-four family residential
mortgage loans. Multi-family residential and non-residential real estate loans
represented 3.8% on such date. Construction loans and equity line lines
represented 7.1% and 6.5%, respectively, of the Bank's loan portfolio, before
net items, on such date. As of December 31, 1997, 40.2% of the loans in the
Bank's loan portfolio, before net items, had adjustable interest rates.
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 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 December 31, 1997, approximately 82.1% 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, 28.9% had adjustable
interest rates.
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.
Historically, the Bank has not originated its one-to-four family
residential mortgage or other loans with the intention that they will be sold in
the secondary market. Accordingly, the Bank originates fixed rate one-to-four
family residential real estate loans which satisfy the Bank's underwriting
requirements and are tailored to its local community, but do not necessarily
satisfy various technical FHLMC and FNMA underwriting requirements and purchase
requirements not related to documentation.
Although the Bank believes that many of its one to four family residential
loans could be sold in the secondary market, some of such nonconforming loans
could be sold only after the Bank incurred certain costs and/or discounted
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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.
As of December 31, 1997, the Bank had 60 loan relationships with individual
borrowers in excess of $200,000, totaling approximately $15.1 million or 14.8%
of the Bank's total loan portfolio. 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.
See also Note 3 of the "Notes to Consolidated Financial Statements" in the
1997 Annual Report.
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 December 31, 1997, the Bank's investment portfolio totaled
approximately $43.4 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.
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 December 31, 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. 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 December
31, 1997, $1.3 million or 3.0% of the Bank's investment portfolio consisted of
municipal bonds issued by municipalities located in North Carolina, all of which
had an A or above rating by Moodys Investment Service..
At December 31, 1997, the market value of the Bank's investment securities
available for sale and held to maturity, excluding interest-earning deposits,
certificates of deposit and stock of the FHLB of Atlanta (all of which had a
total cost of $37.7 million) were $3.1 million and $2.7 million, respectively.
See Note 2 of "Notes to Consolidated Financial Statements" in the 1998
Annual Report.
Deposits and Borrowings
Deposits. 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.
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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 December 31, 1997, 66.1%
of the Bank's deposits consisted of certificate accounts, 18.0% consisted of
passbook savings accounts, 11.4% consisted of interest-bearing transaction
accounts and 4.5% 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.
On December 31, 1997, 1996 and 1995, the Bank's deposits totaled $99.4
million, $93.8 million, and $92.1 million, respectively.
See Note 5 to the "Notes to Consolidated Financial Statements" in the 1997
Annual Report.
Borrowings. 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. 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. The Bank had no
outstanding borrowings from the FHLB of Atlanta at December 31, 1997.
Subsidiaries
The Company has no subsidiaries other than the Bank. The Bank has no
subsidiaries.
Results of Operations
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 and FHLB advances. The Bank's
operations are affected to a much lesser degree by non-interest income, such as
transaction and other service fee income, and other sources of income. The
Bank's net income is also affected by, among other things, provisions for loan
losses and operating expenses. The Bank's principal operating expenses, aside
from interest expense, consist 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.
Market Area
The Bank's primary market area consists of the communities in an
approximately fifteen (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 thirty (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.
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Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. Draymore Manufacturing (textiles manufacturing) is the largest
employer in Mooresville. Other major employers include Burlington Industries
(textiles manufacturing) and Lake Norman Regional Medical Center.
Based upon June 30, 1997 comparative data, the Bank had approximately 21.4%
and 7.3% of the deposits in Mooresville and Iredell counties, respectively. In
addition, at June 30, 1997, the Bank had less than 1% of the deposits in
Mecklenburg County. 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 includes 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 and construction increased approximately 155% in Iredell County from
1991 to 1996, more than double the State average and more than triple the
national average. From 1990 to 1995, the population in Iredell County, where
most of the Bank's deposits and loans are originated, and Mooresville increased
by approximately 11.3% and 20.2%, respectively, which was well above national
and North Carolina averages. This growth trend is expected to continue in the
foreseeable future.
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 December 31, 1997, there were eight, nine and six depository institutions
with thirteen, nine and six offices in Mooresville, Cornelius and Huntersville,
North Carolina, respectively. Based upon June 30, 1997 comparative data, the
Bank had 21.4% and 7.3% of the deposits in Mooresville and Iredell County,
respectively. As a result of this intense competition, the Bank's branch
offices, excluding the Mooresville office, have lower levels of deposits than
the industry average.
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. While the Bank's market share of deposits has decreased in recent
years, its deposit base has grown principally due to economic growth in the
Bank's market area. The ability of 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.
Supervision and Regulation
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.
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General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class 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 Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("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.
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Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a
bank holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding company
which has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum.
Dividend and Repurchase Limitations. In connection with the Conversion,
the Bank has agreed with the FDIC that, during the first three years after
consummation of the Conversion, neither the Company nor the Bank will pay any
taxable dividend or make any other taxable distribution to its stockholders in
excess of their current or retained earnings. Also, the Company and the Bank
have agreed to notify the FDIC before making a return of capital during the
first three years following the Conversion. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during any twelve-month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to certain notice requirements with the Administrator in addition to
other 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
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outstanding shares of the Company or (ii) the average weekly volume of trading
in such shares during the preceding four calendar weeks. Provision may be made
in the future by the Company to permit affiliates to have their shares
registered for sale under the Securities Act under certain circumstances. There
are currently no demand registration rights outstanding. However, in the event
the Company at some future time determines to issue additional shares from its
authorized but unissued shares, the Company might offer registration rights to
certain of its affiliates who want to sell their shares.
Regulation of the Bank
General. Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services. In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding 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
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such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the Bank or the subsidiary
as those provided to a nonaffiliate. The term "covered transaction" includes the
making of loans or other extensions of credit to an affiliate, the purchase of
assets from an affiliate, the purchase of, or an investment in, the securities
of an affiliate, the acceptance of securities of an affiliate as collateral for
a loan or extension of credit to any person, or issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) 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
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condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the institution
at the time of termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by the FDIC.
Management is aware of no existing circumstances that could result in
termination of the deposit insurance of the Bank.
Community Reinvestment Act. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. A savings bank is evaluated and rated under three categories: a
lending test, an investment test and a service test. For each of these three
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
quantitative 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 new 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 December 31, 1997,
the Bank had a leverage ratio of 19.51%.
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 December 31, 1997, the Bank
complied with each of the capital requirements of the FDIC and the
Administrator.
Each federal banking agency was required by law to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multi-family mortgages. On August 2, 1995, the federal banking agencies
issued a joint notice of adoption of final risk-based capital rules to take
account of interest rate risk. The final regulation required an assessment of
the need for additional capital on a case-by-case basis, considering
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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 December 31, 1997, the largest aggregate amount of loans which the
Bank had to any one borrower was $662,609. 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 December 31, 1997, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $930,000.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1997, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
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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 December 31, 1997, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 32.6%. Prior to
and following that date, the Bank's liquidity ratio exceeded 10% of total
assets. At December 31, 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 $11.0 million.
Additional Limitations on Activities. FDIC law and regulations generally
provide that the Bank may not engage as principal in any type of activity, or in
any activity in an amount, not permitted for national banks, or directly acquire
or retain any equity investment of a type or in an amount not permitted for
national banks. The FDIC has authority to grant exceptions from these
prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior
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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%. As of December 31, 1997, the most
recent notification received by the Bank from the FDIC categorized the Bank as
well-capitalized.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina
adopted nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elects to do so by June 1, 1997.
States may choose to allow interstate branching prior to June 1, 1997 by opting-
in to a group of states that permits these transactions. These states generally
allow interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, no stock repurchases may be made
by the savings bank during the first year following a conversion from
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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. The Bank has also agreed to
notify the FDIC before making a return of capital during the first three years
following the Conversion.
Restrictions on Benefit Plans. FDIC regulations provide that for a period
of one year from the date of the Conversion, the Bank may not implement or adopt
a stock option plan or restricted stock plan, other than a tax-qualified plan or
ESOP, unless: (1) the plans are fully disclosed in the Conversion proxy
soliciting and stock offering material, (2) all such plans are approved by a
majority of the Company's stockholders prior to implementation and no earlier
than six months following the Conversion, (3) for stock option plans, the
exercise price must be at least equal to the market price of the stock at the
time of grant, and (4) for restricted stock plans, no stock issued in connection
with the Conversion may be used to fund the plan.
The FDIC regulations provide that, in reviewing plans submitted to the
stockholders within one year after the consummation of the Conversion, the FDIC
will presume that excessive compensation will result if stock based benefit
plans fail to satisfy percentage limitations on management stock-based benefit
plans set forth in the regulations of the Office of Thrift Supervision ("OTS").
Those regulations provide that (1) for stock option plans, the total number of
shares for which options may be granted may not exceed 10% of the shares
issued in the Conversion, (2) for restricted stock plans, the shares issued may
not exceed 3% of the shares issued in the Conversion (4% for institutions with
tangible capital of 10% or greater after the Conversion), (3) the aggregate
amount of stock purchased by the ESOP shall not exceed 10% (8% for well-
capitalized institutions utilizing a 4% restricted stock plan), (4) no
individual employee may receive more than 25% of the available awards under any
plan, and (5) directors who are not employees may not receive more than 5%
individually or 25% in the aggregate of the awards under any plan. The awards
and grants to be made under the Management Recognition Plan ("MRP") and Stock
Option Plan will conform to these requirements if such plans are submitted for
stockholder approval within one year after the Conversion is consummated.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.
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.
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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.
ITEM 2. PROPERTIES
Properties
The following table sets forth the location of the Bank's principal office
in Mooresville, North Carolina and its full service branch office in Cornelius
and Huntersville, North Carolina, as well as certain other information relating
to these offices as of December 31, 1997.
Net Book Value Deposits
Address of Property Owned (In Thousands)
------- -------------- or --------------
leased
------
Mooresville: $244,000 Owned $86,425
347 North Main Street
Mooresville, North Carolina 28115
17
<PAGE>
Address Net Book Value Owned Deposits
- ------- of Property or (In Thousands)
-------------- Leased ------------
------
Cornelius: $291,000 Owned $ 7,635
20209 Highway 73 West
Cornelius, North Carolina 28031
Huntersville: $193,000 Owned $ 5,322
401 Gilead Road
Huntersville, North Carolina 28078
$728,000 $99,382
======== =======
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 December 31, 1997
was $65,000. The total net book value of the Bank's furniture, fixtures and
equipment on December 31, 1997 was $98,000. The properties are considered by
the Bank's management to be in good condition.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine, non-material proceedings
occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1997; however, during the quarter ended December 31,
1997, the members of Mooresville Savings Bank, S.S.B. approved the Conversion.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Common Stock Information"
on page 57 in the Company's 1997 Annual Report, which section is incorporated
herein by reference. See "Item 1. BUSINESS--Regulation of the Bank--
Restrictions on Dividends and Other Capital Distributions" above for regulatory
restrictions which limit the ability of the Bank to pay dividends to the
Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Selected Consolidated Financial Data" on pages 2 and 3 of the Company's 1997
Annual Report which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
See the information set forth under Item 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis of
Financial Condition and Operating Results" on pages 4 through 17 in the
Company's 1997 Annual Report, which section is incorporated herein by reference.
18
<PAGE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 6 and 7 of the attached 1997 Annual Report to Stockholders are herein
incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
set forth on pages 19 through 55 of the Company's 1998 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
N/A.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on pages 6 and 7 of the Proxy Statement of the
1998 Annual Meeting of Stockholders (the "Proxy Statement") and "Proposal 1 -
Election of Directors -Executive Officers" on pages 8 and 9 of the Proxy
Statement, which sections are incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 5 of the Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" on page
8 and " - Executive Compensation" on pages 9 through 12 of the Proxy Statement,
which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 3
through 5 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Proposal 1 - Election of Directors - Certain
Indebtedness and Transactions of Management" on page 15 of the Proxy Statement,
which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1. Consolidated Financial Statements (contained in the Bank's 1998
Annual Report attached hereto as Exhibit (13) and incorporated herein
by reference)
19
<PAGE>
(a) Independent Auditors' Report
(b) Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996
(c) Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995
(d) Consolidated Statements of Stockholder's Equity for
the Years Ended December 31, 1997, 1996 and 1995
(e) Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995
(f) Notes to Consolidated Financial Statements
14(a)2. Financial Consolidated Statement Schedules
All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
14(a)3. Exhibits
Exhibit (3)(i) Certificate of Incorporation, incorporated
herein by reference to Exhibit (3)(i) to the
Registration Statement on Form S-1,
Registration No. 333-35497, dated September
12, 1997, and amended on November 5 and 10,
1997
Exhibit (3)(ii) Bylaws, incorporated herein by reference to
Exhibit (3)(ii) to the Registration
Statement on Form S-1, Registration No. 333-
35497, dated September 12, 1997, and amended
on November 5 and 10, 1997
Exhibit (4) Specimen Stock Certificate, incorporated
herein by reference to Exhibit (4) to the
Registration Statement on Form S-1,
Registration No. 333-35497, dated September
12, 1997, and amended on November 5 and 10,
1997
Exhibit (10)(a) Employment Agreement between Mooresville
Savings Bank, Inc., S.S.B. and George W.
Brawley, Jr.
Exhibit (10)(b) Employment Agreement between Mooresville
Savings Bank, Inc., S.S.B. and Dale W.
Brawley
Exhibit (10)(c) Employment Agreement between Mooresville
Savings Bank, Inc., S.S.B. and Billy R.
Williams
Exhibit (10)(d) Employee Stock Ownership Plan and Trust of
Mooresville Savings Bank, Inc., S.S.B.
Exhibit (10)(e) Mooresville Savings Bank, Inc., S.S.B.
Severance Plan, incorporated herein by
reference to Exhibit 10(f) to the
Registration Statement on Form S-1,
Registration No. 333-35497, dated September
12, 1997, as amended on November 5 and 10,
1997
20
<PAGE>
Exhibit (10)(f) Capital Maintenance Agreement between Coddle
Creek Financial Corp. and Mooresville
Savings Bank, Inc., S.S.B.
Exhibit (10)(g) Form of the Management Recognition Plan of
Mooresville Savings Bank, Inc., S.S.B., if
the Plan is adopted and approved by the
Stockholders of the Company within one year
after the Conversion, incorporated herein by
reference to Exhibit 10(d) to the
Registration Statement on Form S-1,
Registration No. 333-35497, dated September
12, 1997, as amended on November 5 and 10,
1997
Exhibit (10)(h) Form of the Stock Option Plan of Coddle
Creek Financial Corp., if the Plan is
adopted and approved by the Stockholders of
the Company within one year after the
Conversion, incorporated herein by reference
to Exhibit 10(e) to the Registration
Statement on Form S-1, Registration No. 333-
35497, dated September 12, 1997, as amended
on November 5 and 10, 1997
Exhibit (10)(i) (i) Amended and Restated Retirement Payment
Agreements between Mooresville Savings Bank,
Inc., S.S.B. and each of Donald R. Belk,
George W. Brawley and Claude U. Voils, Jr.
dated September 3, 1979, as amended and
restated September 8, 1997, incorporated
herein by reference to Exhibit 10(h) to the
Registration Statement on Form S-1,
Registration No. 333-35497
(ii) First Amendment to Retirement Payment
Agreement between Mooresville Savings Bank,
S.S.B. and Calvin E. Tyner dated the 8th day
of September, 1997, amending the Retirement
Payment Agreement dated September 3, 1979,
incorporated by reference to Exhibit 10(h)
to the Registration Statement on Form S-1,
Registration No. 333-35497
(iii) Amended and Restated Director's
Deferred Compensation Agreements between
Mooresville Savings Bank, Inc., S.S.B. and
each of Donald R. Belk, George W. Brawley,
Jr., Calvin E. Tyner, and Claude U. Voils,
Jr. dated January 1, 1985, as amended and
restated on March 31, 1988 and September 8,
1997, incorporated by reference to Exhibit
10(h) to the Registration Statement on Form
S-1, Registration No. 333-35497
(iv) Amended and Restated Director's
Deferred Compensation Agreements between
Mooresville Savings Bank, Inc., S.S.B. and
each of Donald R. Belk, George W. Brawley,
Jr.., Calvin E. Tyner, and Claude U. Voils,
Jr. dated December 1, 1985, as amended and
restated on September 8, 1997, incorporated
herein by reference to Exhibit 10(h) to the
Registration Statement on Form S-1,
Registration No. 333-35497
(v) Amended and Restated Retirement Payment
Agreements between Mooresville Savings Bank,
S.S.B. and George W. Brawley, Jr. dated
December 1, 1990, as amended and restated on
September 8, 1997, incorporated herein by
reference to Exhibit 10(h) to the
Registration Statement on Form S-1,
Registration No. 333-35497
(vi) Amended and Restated Retirement Payment
Agreements between Mooresville Savings Bank,
S.S.B. and Dale W. Brawley dated November 1,
1990, as amended and restated on September
8, 1997, incorporated
21
<PAGE>
herein by reference to Exhibit 10(h) to the
Registration Statement on Form S-1,
Registration No. 333-35497
(vii) Amended and Restated Retirement
Payment Agreements between Mooresville
Savings Bank, Inc., S.S.B. and each of
Donald R. Belk, Dale W. Brawley, George W.
Brawley, Jr., and Claude U. Voils, Jr. dated
March 1, 1993, as amended and restated on
September 8, 1997, incorporated herein by
reference to Exhibit 10(h) to the
Registration Statement on Form S-1,
Registration No. 333-35497
(viii) Amended and Restated Retirement
Payment Agreements between Mooresville
Savings Bank, Inc., S.S.B. and each of Dale
W. Brawley and George W. Brawley, Jr. dated
August 1, 1993, as amended on September 8,
1997, incorporated herein by reference to
Exhibit 10(h) to the Registration Statement
on Form S-1, Registration No. 333-35497
(ix) Amended and Restated Retirement Payment
Agreement between Mooresville Savings Bank,
Inc., S.S.B. and Jack G. Lawler dated June
1, 1994, as amended and restated on
September 8, 1997, incorporated herein by
reference to Exhibit 10(h) to the
Registration Statement on Form S-1,
Registration No. 333-35497
(x) Amended and Restated Supplemental Income
Agreements between Mooresville Savings Bank,
Inc., S.S.B. and each of Dale W. Brawley and
George W. Brawley, Jr. dated September 1,
1984, as amended and restated on September
17, 1997, incorporated herein by reference
to Exhibit 10(h) to the Registration
Statement on Form S-1, Registration No. 333-
35497
(xi) Amended and Restated Supplemental
Income Agreements between Mooresville
Savings Bank, Inc., S.S.B. and each of Dale
W. Brawley, George W. Brawley, Jr. and Billy
R. Williams dated November 1, 1993, as
amended and restated on September 17, 1997,
incorporated herein by reference to Exhibit
10(h) to the Registration Statement on Form
S-1, Registration No. 333-35497
Exhibit (10)(j) Mooresville Savings Bank, Inc., S.S.B. Non-
Qualified Excess Savings Plan, incorporated
herein by reference to Exhibit 10(i) to the
Registration Statement on Form S-1,
Registration No. 333-35497, dated September
12, 1997, as amended on November 5 and 10,
1997
Exhibit (11) Statement regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1997 Annual Report to Security Holders
Exhibit (21) See Item 1. "Business" for discussion of
subsidiaries
Exhibit (27) Financial Data Schedule
14(b) The Company filed no reports on Form 8-K during the last quarter
of the fiscal year ended December 31, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CODDLE CREEK FINANCIAL CORP.
Date: March 24, 1998 By: /s/ George W. Brawley, Jr
------------------------------
George W. Brawley, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ George W. Brawley. Jr. President, Chief Executive March 24, 1998
- --------------------------------------- Officer and Director
George W. Brawley, Jr.
/s/ Dale W. Brawley Executive Vice President, March 24, 1998
- --------------------------------------- Treasurer and Director
Dale W. Brawley
/s/ Billy R. Williams Chief Financial Officer, March 24, 1998
- --------------------------------------- Chief Accounting Officer,
Billy R. Williams Controller and Secretary
/s/ Willis L. Barnette Director March 24, 1998
- ---------------------------------------
Willis L. Barnette
/s/ Donald R. Belk Director March 24, 1998
- ---------------------------------------
Donald R. Belk
/s/ Jack G. Lawler Director March 24, 1998
- ---------------------------------------
Jack G. Lawler
/s/ Calvin E. Tyner Director March 24, 1998
- ---------------------------------------
Calvin E. Tyner
/s/ Claude U. Voils, Jr. Director March 24, 1998
- ---------------------------------------
Claude U. Voils, Jr.
</TABLE>
23
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- -----------
Exhibit (3)(i) Certificate of Incorporation, incorporated herein by
reference to Exhibit (3)(i) to the Registration
Statement on Form S-1, Registration No. 333-35497,
dated September 12, 1997, and amended on November 5
and 10, 1997
Exhibit (3)(ii) Bylaws, incorporated herein by reference to Exhibit
(3)(ii) to the Registration Statement on Form S-1,
Registration No. 333-35497, dated September 12, 1997,
and amended on November 5 and 10, 1997
Exhibit (4) Specimen Stock Certificate, incorporated herein by
reference to Exhibit (4) to the Registration
Statement on Form S-1, Registration No. 333-35497,
dated September 12, 1997, and amended on November 5
and 10, 1997
Exhibit (10)(a) Employment Agreement between Mooresville Savings
Bank, Inc., S.S.B. and George W. Brawley, Jr.
Exhibit (10)(b) Employment Agreement between Mooresville Savings
Bank, Inc., S.S.B. and Dale W. Brawley
Exhibit (10)(c) Employment Agreement between Mooresville Savings
Bank, Inc., S.S.B. and Billy R. Williams
Exhibit (10)(d) Employee Stock Ownership Plan and Trust of
Mooresville Savings Bank, Inc., S.S.B.
Exhibit (10)(e) Mooresville Savings Bank, Inc., S.S.B. Severance
Plan, incorporated herein by reference to Exhibit
10(f) to the Registration Statement on Form S-1,
Registration No. 333-35497, dated September 12, 1997,
and as amended on November 5 and 10, 1997
Exhibit (10)(f) Capital Maintenance Agreement between Coddle Creek
Financial Corp. and Mooresville Savings Bank, Inc.,
S.S.B.
Exhibit (10)(g) Form of the Management Recognition Plan of
Mooresville Savings Bank, Inc., S.S.B., if the Plan
is adopted and approved by the Stockholders of the
Company within one year after the Conversion,
incorporated herein by reference to Exhibit 10(d) to
the Registration Statement on Form S-1, Registration
No. 333-35497, dated September 12, 1997, as amended
on November 5 and 10, 1997
Exhibit (10)(h) Form of the Stock Option Plan of Coddle Creek
Financial Corp., if the Plan is adopted and approved
by the Stockholders of the Company within one year
after the Conversion, incorporated herein by
reference to Exhibit 10(e) to the Registration
Statement on Form S-1, Registration No. 333-35497,
dated September 12, 1997, as amended on November 5
and 10, 1997
Exhibit (10)(i) (i) Amended and Restated Retirement Payment
Agreements between Mooresville Savings Bank, Inc.,
S.S.B. and each of Donald R. Belk, George W. Brawley
and Claude U. Voils, Jr. dated September 3, 1979, as
amended and restated September 8, 1997, incorporated
herein by reference to Exhibit 10(h) to the
Registration Statement on Form S-1, Registration No.
333-35497, dated September 12, 1997, as amended on
November 5 and 10, 1997
24
<PAGE>
Exhibit No. Description
- ---------- -----------
(ii) First Amendment to Retirement Payment Agreement
between Mooresville Savings Bank, S.S.B. and Calvin
E. Tyner dated the 8th day of September, 1997,
amending the Retirement Payment Agreement dated
September 3, 1979, incorporated by reference to
Exhibit 10(h) to the Registration Statement on
Form S-1, Registration No. 333-35497
(iii) Amended and Restated Director's Deferred
Compensation Agreements between Mooresville Savings
Bank, Inc., S.S.B. and each of Donald R. Belk, George
W. Brawley, Jr., Calvin E. Tyner, and Claude U.
Voils, Jr. dated January 1, 1985, as amended and
restated on March 31, 1988 and September 8, 1997,
incorporated herein by reference to Exhibit 10(h) to
the Registration Statement on Form S-1, Registration
No. 333-35497
(iv) Amended and Restated Director's Deferred
Compensation Agreements between Mooresville Savings
Bank, Inc., S.S.B. and each of Donald R. Belk, George
W. Brawley, Jr.., Calvin E. Tyner, and Claude U.
Voils, Jr. dated December 1, 1985, as amended and
restated on September 8, 1997, incorporated herein by
reference to Exhibit 10(h) to the Registration
Statement on Form S-1, Registration No. 333-35497
(v) Amended and Restated Retirement Payment
Agreements between Mooresville Savings Bank, S.S.B.
and George W. Brawley, Jr. dated December 1, 1990, as
amended and restated on September 8, 1997,
incorporated herein by reference to Exhibit 10(h) to
the Registration Statement on Form S-1, Registration
No. 333-35497
(vi) Amended and Restated Retirement Payment
Agreement between Mooresville Savings Bank, S.S.B.
and Dale W. Brawley dated November 1, 1990, as
amended and restated on September 8, 1997,
incorporated herein by reference to Exhibit 10(h) to
the Registration Statement on Form S-1, Registration
No. 333-35497
(vii) Amended and Restated Retirement Payment
Agreements between Mooresville Savings Bank, Inc.,
S.S.B. and each of Donald R. Belk, Dale W. Brawley,
George W. Brawley, Jr., and Claude U. Voils, Jr.
dated March 1, 1993, as amended and restated on
September 8, 1997, incorporated herein by reference
to Exhibit 10(h) to the Registration Statement on
Form S-1, Registration No. 333-35497
(viii) Amended and Restated Retirement Payment
Agreements between Mooresville Savings Bank, Inc.,
S.S.B. and each of Dale W. Brawley and George W.
Brawley, Jr. dated August 1, 1993, as amended on
September 8, 1997, incorporated herein by reference
to Exhibit 10(h) to the Registration Statement on
Form S-1, Registration No. 333-35497
(ix) Amended and Restated Retirement Payment
Agreement between Mooresville Savings Bank, Inc.,
S.S.B. and Jack G. Lawler dated June 1, 1994, as
amended and restated on September 8, 1997,
incorporated herein by reference to Exhibit 10(h) to
the Registration Statement on Form S-1, Registration
No. 333-35497
(x) Amended and Restated Supplemental Income
Agreements between Mooresville Savings Bank, Inc.,
S.S.B. and each of Dale W. Brawley and George W.
Brawley, Jr. dated September 1, 1984, as amended and
restated on September 17, 1997, incorporated herein
by reference to Exhibit 10(h) to the Registration
Statement on Form S-1, Registration No. 333-35497
25
<PAGE>
Exhibit No. Description
- ---------- -----------
(xi) Amended and Restated Supplemental Income
Agreements between Mooresville Savings Bank, Inc.,
S.S.B. and each of Dale W. Brawley, George W.
Brawley, Jr. and Billy R. Williams dated November 1,
1993, as amended and restated on September 17, 1997,
incorporated herein by reference to Exhibit 10(h) to
the Registration Statement on Form S-1, Registration
No. 333-35497
Exhibit (10)(j) Mooresville Savings Bank, Inc., S.S.B. Non-Qualified
Excess Savings Plan, incorporated herein by reference
to Exhibit 10(i) to the Registration Statement on
Form S-1, Registration No. 333-35497, dated September
12, 1997, as amended on November 5 and 10, 1997
Exhibit (11) Statement regarding computation of per share earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1997 Annual Report to Security Holders
Exhibit (21) See Item 1. "Business" for discussion of subsidiaries
Exhibit (27) Financial Data Schedule
14(b) The Company filed no reports on Form 8-K during the last quarter
of the fiscal year ended December 31, 1997.
26
<PAGE>
Exhibit 10(a)
MOORESVILLE SAVINGS BANK, INC., SSB
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of December 30, 1997, by and between
Mooresville Savings Bank, Inc., SSB (hereinafter referred to as the "Savings
Bank") and George W. Brawley, Jr. (hereinafter referred to as the "Officer") and
is joined in by Coddle Creek Financial Corp., the parent holding company of the
Savings Bank (hereinafter referred to as the "Holding Company").
WHEREAS, the Officer has heretofore been employed by the Savings Bank
as its President and Chief Executive Officer; and
WHEREAS, the Savings Bank is a state-chartered stock savings bank and
the wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Savings Bank desires to retain the services of the Officer
as the President and Chief Executive Officer of the Savings Bank upon the terms
and conditions set forth herein; and
WHEREAS, the services of the Officer, his experience and knowledge of
the affairs of the Savings Bank, and his reputation and contacts in the industry
and the local community are extremely valuable to the Savings Bank; and
WHEREAS, the Savings Bank wishes to attract and retain such
well-qualified executives and it is in the best interest of the Savings Bank and
of the Officer to secure the continued services of the Officer notwithstanding
any change in control of the Savings Bank or the Holding Company; and
WHEREAS, the Savings Bank considers the establishment and maintenance
of a sound and vital management to be part of its overall corporate strategy and
to be essential to protecting and enhancing the best interests of the Savings
Bank and its stockholders; and
1
<PAGE>
WHEREAS, the parties desire to enter into this Agreement in order to
set forth the terms and conditions of the Officer's employment relationship with
the Savings Bank.
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Savings Bank hereby agrees to employ the Officer and
----------
the Officer hereby agrees to accept employment, upon the terms and conditions
stated herein, as the President and Chief Executive Officer of the Savings Bank.
The Officer shall render such administrative and management services to the
Savings Bank as are customarily performed by persons situated in a similar
executive capacity. The Officer shall promote the business of the Savings Bank
and perform such other duties as shall, from time to time, be reasonably
prescribed by the Board of Directors of the Savings Bank (the "Board").
2. Compensation. The Savings Bank shall pay the Officer during the term
------------
of this Agreement, as compensation for all service rendered by him to the
Savings Bank, a base salary at the rate of $139,200 per annum, payable in cash
not less frequently than monthly; provided that the rate of such salary shall be
reviewed by the Board not less often than annually. Such rate of salary, or
increased rate of salary, as the case may be, may be further increased from time
to time in such amounts as the Board, in its discretion, may decide. In
determining salary increases, the Board shall compensate the Officer for
increases in the cost of living and may also provide for performance or merit
increases. Participation in incentive compensation, deferred compensation,
discretionary bonus, profit-sharing, retirement, stock option and other employee
benefit plans that the Savings Bank or the Holding Company have adopted or may
from time to time adopt, and participation in any fringe benefits, shall not
reduce the salary payable to the Officer under this Section. The Officer will be
entitled to such customary fringe benefits, vacation and sick leave as
2
<PAGE>
are consistent with the normal practices and established policies of the Savings
Bank. In the event of a Change of Control (as defined in Paragraph 10), the
Officer's rate of salary shall be increased not less than six percent (6%)
annually during the term of this Agreement.
3. Discretionary Bonuses. During the term of this Agreement, the
---------------------
Officer shall be entitled in an equitable manner with all other key management
personnel of the Savings Bank, to such discretionary bonuses as may be
authorized, declared and paid by the Directors to the Savings Bank's key
management employees. No other compensation provided for in this Agreement shall
be deemed a substitute for the Officer's right to such discretionary bonuses
when and as declared by the Directors.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits. The Officer shall be entitled to participate in any plan relating to
- --------
deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical coverage, disability
coverage, education, or other retirement or employee benefits that the Savings
Bank or the Holding Company have adopted, or may, from time to time adopt, for
benefit of their executive employees and for employees generally, subject to the
eligibility rules of such plans.
The Officer shall also be entitled to participate in any other fringe
benefits which are now or may be or become applicable to the Officer or the
Savings Bank's other executive employees, including the payment of reasonable
expenses for attending annual and periodic meetings of trade associations, and
any other benefits which are commensurate with the duties and responsibilities
to be performed by the Officer under this Agreement. Additionally, the Officer
shall be entitled to such vacation and sick leave as shall be established under
uniform employee policies promulgated by the Directors. The Savings Bank shall
reimburse the Officer for all out-of-pocket reasonable and necessary business
expenses which the Officer may incur in connection with his services on behalf
of the Savings Bank.
3
<PAGE>
The Savings Bank also agrees to provide the Officer with one automobile
of an appropriate class and quality owned or leased by the Savings Bank for use
in connection with the Officer's duties hereunder.
5. Term. The initial term of employment under this Agreement shall be
----
for the period commencing upon the effective date of this Agreement and ending
three (3) calendar years from the effective date of this Agreement. On each
anniversary of the effective date of this Agreement of the Savings Bank, the
term of this Agreement shall automatically be extended for an additional one
year period beyond the then effective expiration date unless written notice from
the Savings Bank or the Officer is received 90 days prior to an anniversary date
advising the other party that this Agreement shall not be further extended;
provided that the Directors shall review the Officer's performance annually and
make a specific determination pursuant to such review to renew this Agreement
prior to the 90 day notice period.
6. Loyalty. The Officer shall devote his full efforts and entire
-------
business time to the performance of his duties and responsibilities under this
Agreement.
The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Savings Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
use of such information without the prior written consent of the Holding Company
or the Savings Bank.
7. Standards. The Officer shall perform his duties and responsibilities
---------
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The Savings Bank will provide the
Officer with the working facilities and staff customary for similar executives
and necessary for him to perform his duties.
4
<PAGE>
8. Termination and Termination Pay.
-------------------------------
(a) The Officer's employment under this Agreement shall be terminated
upon the death of the Officer during the term of this Agreement, in which event,
the Officer's estate shall be entitled to receive the compensation due the
Officer through the last day of the calendar month in which his death shall have
occurred and for a period of one month thereafter. Notwithstanding the
foregoing, in the event of the Officer's death following a change in control (as
defined in Paragraph 10), the Officer's designated beneficiary or the designated
beneficiary's estate shall be entitled to receive the compensation due the
Officer through the last day of the remaining term of this Agreement.
(b) The Officer's employment under this Agreement may be terminated at
any time by the Officer upon sixty (60) days' written notice to the Board of
Directors. Upon such termination, the Officer shall be entitled to receive
compensation through the effective date of such termination.
(c) The Board may terminate the Officer's employment at any time, but
any termination by the Board, other than termination for cause, shall not
prejudice the Officer's right to compensation or other benefits under this
Agreement. The Officer shall have no right to receive compensation or other
benefits for any period after termination for "cause." Termination for "cause"
shall include termination because of the Officer's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provisions of this
Agreement.
5
<PAGE>
9. Additional Regulatory Requirements.
----------------------------------
(a) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank may, in its discretion, (i) pay the Officer all or part of the compensation
withheld while its contract obligations were suspended and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
(b) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) of Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If the Savings Bank is in default as defined in Section 3(x)(1) of
the Federal Deposit Insurance Act (12 U.S.C. ss. 1818(x)(1)), all obligations
under this Agreement shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank, (i) by the Federal Deposit Insurance
Corporation (the "Corporation"), at the time the Corporation enters into an
agreement to provide assistance to or on behalf of the Savings Bank under the
authority contained in Section 13(c) of the Federal Deposit Insurance Act (12
U.S.C. ss. 1818(c)); or (ii) by the Administrator of the Savings Institution
Division of the North
6
<PAGE>
Carolina Department of Commerce (the "Administrator"), at the time the
Administrator approves a supervisory merger to resolve problems related to
operation of the Savings Bank or when the Savings Bank is determined by the
Administrator to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
10. Change in Control.
-----------------
(a) In the event of a "Change in Control" (as defined in Subparagraph
(b) below), the acquiror shall be prohibited, during the remainder of the term
of this Agreement, from:
(i) Assigning Officer any duties and/or responsibilities that are
inconsistent with his position, duties, responsibilities or status
at the time of the Change in Control or with his reporting
responsibilities or equivalent titles with the Savings Bank in
effect at such time; or
(ii) Adjusting Officer's annual base salary rate other than in
accordance with the provisions of Paragraph 2 of this Agreement; or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance, disability
insurance, profit sharing plans, stock option plans, stock purchase
plans, deferred compensation plans, management retention plans,
retirement plans or similar plans or benefits being provided by the
Savings Bank or the Holding Company to the Officer as of the
effective date of the Change in Control; or
(iv) Transferring Officer to a location which is an unreasonable
distance from his current principal work location, without the
Officer's express written consent.
(b) For the purposes of this Agreement, the term "Change in Control"
shall mean any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K,
as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Exchange Act; or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Holding Company or Savings Bank
7
<PAGE>
representing 25 percent or more of the combined voting power of the
outstanding Common Stock of the Holding Company or Common Stock of
the Savings Bank, as applicable; or
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any
reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board or Incumbent Holding
Company Board, as applicable, or whose nomination for election by
the Savings Bank's or Holding Company's shareholders was approved
by the Savings Bank's or Holding Company's Board of Directors or
Nominating Committee, as applicable, shall be considered as though
he or she were a member of the Incumbent Board or Incumbent Holding
Company Board, as applicable; or
(iv) either the Holding Company or the Savings Bank consolidates or
merges with or into another corporation, association or entity or
is otherwise reorganized, where neither the Holding Company nor the
Savings Bank, respectively, is the surviving corporation in such
transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Savings Bank are sold or otherwise transferred to or
are acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 10, a
transaction or event shall not be considered a Change in Control if, prior to
the consummation or occurrence of such transaction or event, Officer and Savings
Bank agree in writing that the same shall not be treated as a Change in Control
for purposes of this Agreement.
(c) In the event any dispute shall arise between the Officer and the
Savings Bank as to the terms or interpretation of this Agreement, including this
Section 10, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Section
10 or in defending against any action taken by the Savings Bank, the Savings
Bank shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
8
<PAGE>
11. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Savings Bank which shall acquire,
directly or indirectly, by conversion, merger, consolidation, purchase or
otherwise, all or substantially all of the assets of the Holding Company or the
Savings Bank.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Officer, the Officer shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
12. Modification; Waiver; Amendments. No provision of this Agreement
--------------------------------
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing, signed by the Officer and on behalf of the
Savings Bank by such officer as may be specifically designated by the Directors.
No waiver by either party hereto, at any time, of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties, except as herein otherwise provided.
13. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first hereinabove written.
MOORESVILLE SAVINGS BANK, INC., SSB
By: /s/ Calvin E. Tyner
-------------------------------------
Chairman of the Board
/s/ George W. Brawley, Jr.
-------------------------------------
(SEAL) George W. Brawley, Jr.
The foregoing Agreement is consented and agreed to by Coddle Creek
Financial Corp., the parent holding company of Mooresville Savings Bank, Inc.,
SSB.
CODDLE CREEK FINANCIAL CORP.
By: /s/ Calvin E. Tyner
-------------------------------------
Chairman of the Board
10
<PAGE>
Exhibit 10(b)
MOORESVILLE SAVINGS BANK, INC., SSB
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of December 30, 1997, by and between
Mooresville Savings Bank, Inc., SSB (hereinafter referred to as the "Savings
Bank") and Dale W. Brawley (hereinafter referred to as the "Officer") and
is joined in by Coddle Creek Financial Corp., the parent holding company of the
Savings Bank (hereinafter referred to as the "Holding Company").
WHEREAS, the Officer has heretofore been employed by the Savings Bank
as its Executive Vice President and Treasurer; and
WHEREAS, the Savings Bank is a state-chartered stock savings bank and
the wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Savings Bank desires to retain the services of the Officer
as the Executive Vice President and Treasurer of the Savings Bank upon the terms
and conditions set forth herein; and
WHEREAS, the services of the Officer, his experience and knowledge of
the affairs of the Savings Bank, and his reputation and contacts in the industry
and the local community are extremely valuable to the Savings Bank; and
WHEREAS, the Savings Bank wishes to attract and retain such
well-qualified executives and it is in the best interest of the Savings Bank and
of the Officer to secure the continued services of the Officer notwithstanding
any change in control of the Savings Bank or the Holding Company; and
WHEREAS, the Savings Bank considers the establishment and maintenance
of a sound and vital management to be part of its overall corporate strategy and
to be essential to protecting and enhancing the best interests of the Savings
Bank and its stockholders; and
1
<PAGE>
WHEREAS, the parties desire to enter into this Agreement in order to
set forth the terms and conditions of the Officer's employment relationship with
the Savings Bank.
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Savings Bank hereby agrees to employ the Officer and
----------
the Officer hereby agrees to accept employment, upon the terms and conditions
stated herein, as the President and Chief Executive Officer of the Savings Bank.
The Officer shall render such administrative and management services to the
Savings Bank as are customarily performed by persons situated in a similar
executive capacity. The Officer shall promote the business of the Savings Bank
and perform such other duties as shall, from time to time, be reasonably
prescribed by the Board of Directors of the Savings Bank (the "Board").
2. Compensation. The Savings Bank shall pay the Officer during the term
------------
of this Agreement, as compensation for all service rendered by him to the
Savings Bank, a base salary at the rate of $139,200 per annum, payable in cash
not less frequently than monthly; provided that the rate of such salary shall be
reviewed by the Board not less often than annually. Such rate of salary, or
increased rate of salary, as the case may be, may be further increased from time
to time in such amounts as the Board, in its discretion, may decide. In
determining salary increases, the Board shall compensate the Officer for
increases in the cost of living and may also provide for performance or merit
increases. Participation in incentive compensation, deferred compensation,
discretionary bonus, profit-sharing, retirement, stock option and other employee
benefit plans that the Savings Bank or the Holding Company have adopted or may
from time to time adopt, and participation in any fringe benefits, shall not
reduce the salary payable to the Officer under this Section. The Officer will be
entitled to such customary fringe benefits, vacation and sick leave as
2
<PAGE>
are consistent with the normal practices and established policies of the Savings
Bank. In the event of a Change of Control (as defined in Paragraph 10), the
Officer's rate of salary shall be increased not less than six percent (6%)
annually during the term of this Agreement.
3. Discretionary Bonuses. During the term of this Agreement, the
---------------------
Officer shall be entitled in an equitable manner with all other key management
personnel of the Savings Bank, to such discretionary bonuses as may be
authorized, declared and paid by the Directors to the Savings Bank's key
management employees. No other compensation provided for in this Agreement shall
be deemed a substitute for the Officer's right to such discretionary bonuses
when and as declared by the Directors.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits. The Officer shall be entitled to participate in any plan relating to
- --------
deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical coverage, disability
coverage, education, or other retirement or employee benefits that the Savings
Bank or the Holding Company have adopted, or may, from time to time adopt, for
benefit of their executive employees and for employees generally, subject to the
eligibility rules of such plans.
The Officer shall also be entitled to participate in any other fringe
benefits which are now or may be or become applicable to the Officer or the
Savings Bank's other executive employees, including the payment of reasonable
expenses for attending annual and periodic meetings of trade associations, and
any other benefits which are commensurate with the duties and responsibilities
to be performed by the Officer under this Agreement. Additionally, the Officer
shall be entitled to such vacation and sick leave as shall be established under
uniform employee policies promulgated by the Directors. The Savings Bank shall
reimburse the Officer for all out-of-pocket reasonable and necessary business
expenses which the Officer may incur in connection with his services on behalf
of the Savings Bank.
3
<PAGE>
The Savings Bank also agrees to provide the Officer with one automobile
of an appropriate class and quality owned or leased by the Savings Bank for use
in connection with the Officer's duties hereunder.
5. Term. The initial term of employment under this Agreement shall be
----
for the period commencing upon the effective date of this Agreement and ending
three (3) calendar years from the effective date of this Agreement. On each
anniversary of the effective date of this Agreement of the Savings Bank, the
term of this Agreement shall automatically be extended for an additional one
year period beyond the then effective expiration date unless written notice from
the Savings Bank or the Officer is received 90 days prior to an anniversary date
advising the other party that this Agreement shall not be further extended;
provided that the Directors shall review the Officer's performance annually and
make a specific determination pursuant to such review to renew this Agreement
prior to the 90 day notice period.
6. Loyalty. The Officer shall devote his full efforts and entire
-------
business time to the performance of his duties and responsibilities under this
Agreement.
The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Savings Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
use of such information without the prior written consent of the Holding Company
or the Savings Bank.
7. Standards. The Officer shall perform his duties and responsibilities
---------
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The Savings Bank will provide the
Officer with the working facilities and staff customary for similar executives
and necessary for him to perform his duties.
4
<PAGE>
8. Termination and Termination Pay.
-------------------------------
(a) The Officer's employment under this Agreement shall be terminated
upon the death of the Officer during the term of this Agreement, in which event,
the Officer's estate shall be entitled to receive the compensation due the
Officer through the last day of the calendar month in which his death shall have
occurred and for a period of one month thereafter. Notwithstanding the
foregoing, in the event of the Officer's death following a change in control (as
defined in Paragraph 10), the Officer's designated beneficiary or the designated
beneficiary's estate shall be entitled to receive the compensation due the
Officer through the last day of the remaining term of this Agreement.
(b) The Officer's employment under this Agreement may be terminated at
any time by the Officer upon sixty (60) days' written notice to the Board of
Directors. Upon such termination, the Officer shall be entitled to receive
compensation through the effective date of such termination.
(c) The Board may terminate the Officer's employment at any time, but
any termination by the Board, other than termination for cause, shall not
prejudice the Officer's right to compensation or other benefits under this
Agreement. The Officer shall have no right to receive compensation or other
benefits for any period after termination for "cause." Termination for "cause"
shall include termination because of the Officer's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provisions of this
Agreement.
5
<PAGE>
9. Additional Regulatory Requirements.
----------------------------------
(a) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Savings
Bank may, in its discretion, (i) pay the Officer all or part of the compensation
withheld while its contract obligations were suspended and (ii) reinstate (in
whole or in part) any of its obligations which were suspended.
(b) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) of Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If the Savings Bank is in default as defined in Section 3(x)(1) of
the Federal Deposit Insurance Act (12 U.S.C. (S) 1818(x)(1)), all obligations
under this Agreement shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank, (i) by the Federal Deposit Insurance
Corporation (the "Corporation"), at the time the Corporation enters into an
agreement to provide assistance to or on behalf of the Savings Bank under the
authority contained in Section 13(c) of the Federal Deposit Insurance Act (12
U.S.C. (S) 1818(c)); or (ii) by the Administrator of the Savings Institution
Division of the North
6
<PAGE>
Carolina Department of Commerce (the "Administrator"), at the time the
Administrator approves a supervisory merger to resolve problems related to
operation of the Savings Bank or when the Savings Bank is determined by the
Administrator to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by such action.
10. Change in Control.
-----------------
(a) In the event of a "Change in Control" (as defined in Subparagraph
(b) below), the acquiror shall be prohibited, during the remainder of the term
of this Agreement, from:
(i) Assigning Officer any duties and/or responsibilities that are
inconsistent with his position, duties, responsibilities or status
at the time of the Change in Control or with his reporting
responsibilities or equivalent titles with the Savings Bank in
effect at such time; or
(ii) Adjusting Officer's annual base salary rate other than in
accordance with the provisions of Paragraph 2 of this Agreement; or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance, disability
insurance, profit sharing plans, stock option plans, stock purchase
plans, deferred compensation plans, management retention plans,
retirement plans or similar plans or benefits being provided by the
Savings Bank or the Holding Company to the Officer as of the
effective date of the Change in Control; or
(iv) Transferring Officer to a location which is an unreasonable
distance from his current principal work location, without the
Officer's express written consent.
(b) For the purposes of this Agreement, the term "Change in Control"
shall mean any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K,
as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Exchange Act; or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Holding Company or Savings Bank
representing 25 percent or more of the combined voting power of
7
<PAGE>
the outstanding Common Stock of the Holding Company or Common Stock
of the Savings Bank, as applicable; or
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any
reason to constitute at least a majority thereof, provided that any
person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board or Incumbent Holding
Company Board, as applicable, or whose nomination for election by
the Savings Bank's or Holding Company's shareholders was approved
by the Savings Bank's or Holding Company's Board of Directors or
Nominating Committee, as applicable, shall be considered as though
he or she were a member of the Incumbent Board or Incumbent Holding
Company Board, as applicable; or
(iv) either the Holding Company or the Savings Bank consolidates
or merges with or into another corporation, association or entity
or is otherwise reorganized, where neither the Holding Company nor
the Savings Bank, respectively, is the surviving corporation in
such transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Savings Bank are sold or otherwise transferred to or
are acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 10, a
transaction or event shall not be considered a Change in Control if, prior to
the consummation or occurrence of such transaction or event, Officer and Savings
Bank agree in writing that the same shall not be treated as a Change in Control
for purposes of this Agreement.
(c) In the event any dispute shall arise between the Officer and the
Savings Bank as to the terms or interpretation of this Agreement, including this
Section 10, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Section
10 or in defending against any action taken by the Savings Bank, the Savings
Bank shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
8
<PAGE>
11. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Savings Bank which shall acquire,
directly or indirectly, by conversion, merger, consolidation, purchase or
otherwise, all or substantially all of the assets of the Holding Company or the
Savings Bank.
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Officer, the Officer shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
12. Modification; Waiver; Amendments. No provision of this Agreement
--------------------------------
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing, signed by the Officer and on behalf of the
Savings Bank by such officer as may be specifically designated by the Directors.
No waiver by either party hereto, at any time, of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No amendments or additions to this Agreement shall be binding unless in
writing and signed by both parties, except as herein otherwise provided.
13. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first hereinabove written.
MOORESVILLE SAVINGS BANK, INC., SSB
By: /s/ Calvin E. Tyner
------------------------------------
Chairman of the Board
(SEAL) /s/ Dale W. Brawley
------------------------------------
Dale W. Brawley
The foregoing Agreement is consented and agreed to by Coddle Creek
Financial Corp., the parent holding company of Mooresville Savings Bank, Inc.,
SSB.
CODDLE CREEK FINANCIAL CORP.
By: /s/ Calvin E. Tyner
-------------------------------------
Chairman of the Board
10
<PAGE>
Exhibit 10(c)
MOORESVILLE SAVINGS BANK, INC., SSB
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of December 30, 1997, by and between
Mooresville Savings Bank, Inc., SSB (hereinafter referred to as the "Savings
Bank") and Billy R. Williams (hereinafter referred to as the "Officer") and is
joined in by Coddle Creek Financial Corp., the parent holding company of the
Savings Bank (hereinafter referred to as the "Holding Company").
WHEREAS, the Officer has heretofore been employed by the Savings Bank as
its Secretary and Controller; and
WHEREAS, the Savings Bank is a state-chartered stock savings bank and the
wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Savings Bank desires to retain the services of the Officer as
the Secretary and Controller of the Savings Bank upon the terms and conditions
set forth herein; and
WHEREAS, the services of the Officer, his experience and knowledge of the
affairs of the Savings Bank, and his reputation and contacts in the industry and
the local community are extremely valuable to the Savings Bank; and
WHEREAS, the Savings Bank wishes to attract and retain such well-qualified
executives and it is in the best interest of the Savings Bank and of the Officer
to secure the continued services of the Officer notwithstanding any change in
control of the Savings Bank or the Holding Company; and
WHEREAS, the Savings Bank considers the establishment and maintenance of a
sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Savings Bank
and its stockholders; and
WHEREAS, the parties desire to enter into this Agreement in order to set
forth the terms
<PAGE>
and conditions of the Officer's employment relationship with the Savings Bank.
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Savings Bank hereby agrees to employ the Officer and
----------
the Officer hereby agrees to accept employment, upon the terms and conditions
stated herein, as the Secretary and Controller of the Savings Bank. The Officer
shall render such administrative and management services to the Savings Bank as
are customarily performed by persons situated in a similar executive capacity.
The Officer shall promote the business of the Savings Bank and perform such
other duties as shall, from time to time, be reasonably prescribed by the Board
of Directors of the Savings Bank (the "Board").
2. Compensation. The Savings Bank shall pay the Officer during the term
------------
of this Agreement, as compensation for all service rendered by him to the
Savings Bank, a base salary at the rate of $56,400 per annum, payable in cash
not less frequently than monthly; provided that the rate of such salary shall be
reviewed by the Board not less often than annually. Such rate of salary, or
increased rate of salary, as the case may be, may be further increased from time
to time in such amounts as the Board, in its discretion, may decide. In
determining salary increases, the Board shall compensate the Officer for
increases in the cost of living and may also provide for performance or merit
increases. Participation in incentive compensation, deferred compensation,
discretionary bonus, profit-sharing, retirement, stock option and other employee
benefit plans that the Savings Bank or the Holding Company have adopted or may
from time to time adopt, and participation in any fringe benefits, shall not
reduce the salary payable to the Officer under this Section. The Officer will
be entitled to such customary fringe benefits, vacation and sick leave as are
consistent with the normal practices and established policies of the Savings
Bank and to
2
<PAGE>
reimbursement for continuing professional education expenses and civil and
professional dues. In the event of a Change of Control (as defined in Paragraph
10), the Officer's rate of salary shall be increased not less than six percent
(6%) annually during the term of this Agreement.
3. Discretionary Bonuses. During the term of this Agreement, the Officer
---------------------
shall be entitled in an equitable manner with all other key management personnel
of the Savings Bank, to such discretionary bonuses as may be authorized,
declared and paid by the Directors to the Savings Bank's key management
employees. No other compensation provided for in this Agreement shall be deemed
a substitute for the Officer's right to such discretionary bonuses when and as
declared by the Directors.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits. The Officer shall be entitled to participate in any plan relating to
- --------
deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical coverage, disability
coverage, education, or other retirement or employee benefits that the Savings
Bank or the Holding Company have adopted, or may, from time to time adopt, for
benefit of their executive employees and for employees generally, subject to the
eligibility rules of such plans.
The Officer shall also be entitled to participate in any other fringe
benefits which are now or may be or become applicable to the Officer or the
Savings Bank's other executive employees, including the payment of reasonable
expenses for attending annual and periodic meetings of trade associations, and
any other benefits which are commensurate with the duties and responsibilities
to be performed by the Officer under this Agreement. Additionally, the Officer
shall be entitled to such vacation and sick leave as shall be established under
uniform employee policies promulgated by the Directors. The Savings Bank shall
reimburse the Officer for all out-of-pocket reasonable and necessary business
expenses which the Officer may incur in connection with his services on behalf
of the Savings Bank.
3
<PAGE>
5. Term. The initial term of employment under this Agreement shall be for
----
the period commencing upon the effective date of this Agreement and ending three
(3) calendar years from the effective date of this Agreement. On each
anniversary of the effective date of this Agreement of the Savings Bank, the
term of this Agreement shall automatically be extended for an additional one
year period beyond the then effective expiration date unless written notice from
the Savings Bank or the Officer is received 90 days prior to an anniversary date
advising the other party that this Agreement shall not be further extended;
provided that the Directors shall review the Officer's performance annually and
make a specific determination pursuant to such review to renew this Agreement
prior to the 90 day notice period.
6. Loyalty. The Officer shall devote his full efforts and entire business
-------
time to the performance of his duties and responsibilities under this Agreement.
The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Savings Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
use of such information without the prior written consent of the Holding Company
or the Savings Bank.
7. Standards. The Officer shall perform his duties and responsibilities
---------
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The Savings Bank will provide the
Officer with the working facilities and staff customary for similar executives
and necessary for him to perform his duties.
8. Termination and Termination Pay.
-------------------------------
(a) The Officer's employment under this Agreement shall be terminated upon
the death of the Officer during the term of this Agreement, in which event, the
Officer's estate shall be
4
<PAGE>
entitled to receive the compensation due the Officer through the last day of the
calendar month in which his death shall have occurred and for a period of one
month thereafter. Notwithstanding the foregoing, in the event of the Officer's
death following a change in control (as defined in Paragraph 10), the Officer's
designated beneficiary or the designated beneficiary's estate shall be entitled
to receive the compensation due the Officer through the last day of the lesser
of (i) the remaining term of this Agreement or (ii) a period of twelve months.
(b) The Officer's employment under this Agreement may be terminated at any
time by the Officer upon sixty (60) days' written notice to the Board of
Directors. Upon such termination, the Officer shall be entitled to receive
compensation through the effective date of such termination.
(c) The Board may terminate the Officer's employment at any time, but any
termination by the Board, other than termination for cause, shall not prejudice
the Officer's right to compensation or other benefits under this Agreement. The
Officer shall have no right to receive compensation or other benefits for any
period after termination for "cause." Termination for "cause" shall include
termination because of the Officer's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule, regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, or material breach of any provisions of this Agreement.
9. Additional Regulatory Requirements.
----------------------------------
(a) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(3) and (g)(1)), the Savings Bank's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
5
<PAGE>
appropriate proceedings. If the charges in the notice are dismissed, the
Savings Bank may, in its discretion, (i) pay the Officer all or part of the
compensation withheld while its contract obligations were suspended and (ii)
reinstate (in whole or in part) any of its obligations which were suspended.
(b) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Section 8(e)(4) of Section 8(g)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(c) If the Savings Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act (12 U.S.C. (S) 1818(x)(1)), all obligations under
this Agreement shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Savings Bank, (i) by the Federal Deposit Insurance
Corporation (the "Corporation"), at the time the Corporation enters into an
agreement to provide assistance to or on behalf of the Savings Bank under the
authority contained in Section 13(c) of the Federal Deposit Insurance Act (12
U.S.C. (S) 1818(c)); or (ii) by the Administrator of the Savings Institution
Division of the North Carolina Department of Commerce (the "Administrator"), at
the time the Administrator approves a supervisory merger to resolve problems
related to operation of the Savings Bank or when the Savings Bank is determined
by the Administrator to be in an unsafe or unsound condition. Any rights of the
parties that have already vested, however, shall not be affected by such action.
10. Change in Control.
-----------------
6
<PAGE>
(a) In the event of a "Change in Control" (as defined in Subparagraph (b)
below), the acquiror shall be prohibited, during the remainder of the term of
this Agreement, from:
(i) Assigning Officer any duties and/or responsibilities that are
inconsistent with his position, duties, responsibilities or status at
the time of the Change in Control or with his reporting
responsibilities or equivalent titles with the Savings Bank in effect
at such time; or
(ii) Adjusting Officer's annual base salary rate other than in
accordance with the provisions of Paragraph 2 of this Agreement; or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance, disability
insurance, profit sharing plans, stock option plans, stock purchase
plans, deferred compensation plans, management retention plans,
retirement plans or similar plans or benefits being provided by the
Savings Bank or the Holding Company to the Officer as of the effective
date of the Change in Control; or
(iv) Transferring Officer to a location which is an unreasonable
distance from his current principal work location, without the
Officer's express written consent.
(b) For the purposes of this Agreement, the term "Change in Control" shall
mean any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Exchange Act; or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Holding Company or Savings Bank
representing 25 percent or more of the combined voting power of the
outstanding Common Stock of the Holding Company or Common Stock of the
Savings Bank, as applicable; or
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any reason
to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent
7
<PAGE>
Holding Company Board, as applicable, or whose nomination for election
by the Savings Bank's or Holding Company's shareholders was approved
by the Savings Bank's or Holding Company's Board of Directors or
Nominating Committee, as applicable, shall be considered as though he
or she were a member of the Incumbent Board or Incumbent Holding
Company Board, as applicable; or
(iv) either the Holding Company or the Savings Bank consolidates or
merges with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the
Savings Bank, respectively, is the surviving corporation in such
transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Savings Bank are sold or otherwise transferred to or
are acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 10, a transaction or
event shall not be considered a Change in Control if, prior to the consummation
or occurrence of such transaction or event, Officer and Savings Bank agree in
writing that the same shall not be treated as a Change in Control for purposes
of this Agreement.
(c) In the event any dispute shall arise between the Officer and the
Savings Bank as to the terms or interpretation of this Agreement, including this
Section 10, whether instituted by formal legal proceedings or otherwise,
including any action taken by the Officer to enforce the terms of this Section
10 or in defending against any action taken by the Savings Bank, the Savings
Bank shall reimburse the Officer for all costs and expenses incurred in such
proceedings or actions, including attorney's fees, in the event the Officer
prevails in any such action.
11. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Savings Bank which shall acquire, directly
or indirectly, by conversion, merger, consolidation, purchase or otherwise, all
or substantially all of the assets of the Holding Company or the Savings Bank.
8
<PAGE>
(b) Since the Savings Bank is contracting for the unique and personal
skills of the Officer, the Officer shall be precluded from assigning or
delegating his rights or duties hereunder without first obtaining the written
consent of the Savings Bank.
12. Modification; Waiver; Amendments. No provision of this Agreement may
--------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing, signed by the Officer and on behalf of the Savings Bank
by such officer as may be specifically designated by the Directors. No waiver
by either party hereto, at any time, of any breach by the other party hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
13. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first hereinabove written.
MOORESVILLE SAVINGS BANK, INC., SSB
By: /s/ George W. Brawley, Jr.
---------------------------------------
President
/s/ Billy R. Williams
---------------------------------------
(SEAL)
Billy R. Williams
The foregoing Agreement is consented and agreed to by Coddle Creek
Financial Corp., the parent holding company of Mooresville Savings Bank, Inc.,
SSB.
CODDLE CREEK FINANCIAL CORP.
By: /s/ George W. Brawley, Jr.
---------------------------------------
President
10
<PAGE>
Exhibit 10(d)
EMPLOYEE STOCK OWNERSHIP PLAN
OF
MOORESVILLE SAVINGS BANK, SSB
Prepared By:
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
Greensboro and Raleigh, North Carolina
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
DEFINITIONS AND CONSTRUCTION..............................................2
EMPLOYEE PARTICIPANTS....................................................12
EMPLOYER CONTRIBUTIONS...................................................14
ALLOCATIONS..............................................................20
TERMINATION OF SERVICE-PARTICIPANT VESTING...............................26
TIME AND METHOD OF PAYMENT OF BENEFITS...................................32
EMPLOYER SECURITIES......................................................37
EMPLOYER ADMINISTRATIVE PROVISIONS.......................................43
ADMINISTRATION COMMITTEE.................................................44
PARTICIPANT ADMINISTRATIVE PROVISIONS....................................48
FIDUCIARIES' DUTIES......................................................52
DISCONTINUANCE, AMENDMENT AND TERMINATION................................56
THE TRUST................................................................59
TOP HEAVY RULES..........................................................60
MISCELLANEOUS............................................................64
</TABLE>
<PAGE>
NATURE OF PLAN
MOORESVILLE SAVINGS BANK, SSB (the "Company"), in order to provide its
eligible employees with an opportunity to share in the growth and prosperity of
the Company and to accumulate capital for their retirement through the
acquisition of a proprietary interest in Coddle Creek Financial Corp., of which
the Company is a wholly-owned subsidiary, establishes the Employee Stock
Ownership Plan of Mooresville Savings Bank, SSB
<PAGE>
ARTICLE I
DEFINITIONS AND CONSTRUCTION
1.01 DEFINITIONS. For the purpose of this Plan, the following
-----------
definitions shall apply unless the context requires otherwise:
(a) "Accounts or Account" shall mean the separate accounts
-------------------
maintained by the Administration Committee or Trustee to record the
interest of a Participant under the Plan.
(b) "Accrued Benefit" shall mean the amount standing in a
---------------
Participant's Account(s) as of any date derived from both Employer
contributions and Employee contributions, if any.
(c) "Act" shall mean the Employee Retirement Income Security
---
Act of 1974, as amended from time to time.
(d) "Active Participant" shall mean for each Plan Year any
------------------
Employee who satisfies the eligibility requirements of Article II and
who completes at least one thousand (1,000) Hours of Service during
such Plan Year.
(e) "Administration Committee" shall mean the Plan
------------------------
Administration Committee as from time to time constituted.
(f) "Anniversary Date" shall mean the last day of the Plan
----------------
Year.
(g) "Beneficiary" shall mean any person or fiduciary
-----------
designated by a Participant who is or may become entitled to a benefit
under the Plan following the death of the Participant. A Beneficiary
who becomes entitled to a benefit under the Plan remains a Beneficiary
under the Plan until the Trustee has fully distributed his benefit to
him. A Beneficiary's right to (and the Plan Administrator's,
Administration Committee's or Trustee's duty to provide to the
Beneficiary) information or data concerning the Plan does not arise
until he first becomes entitled to receive a benefit under the Plan.
(h) "Board of Directors" shall mean the Board of Directors of
------------------
Mooresville Savings Bank, SSB unless otherwise indicated or the context
otherwise requires.
(i) "Break in Service" shall occur in any Plan Year during
----------------
which a Participant does not complete more than five hundred (500)
Hours of Service, determined as of the end of the Plan Year.
(j) "Code" shall mean the Internal Revenue Code of 1986, as
----
amended from
2
<PAGE>
time to time.
(k) "Company" shall mean Mooresville Savings Bank, SSB or any
-------
successor thereto which shall adopt this Plan.
(l) "Compensation" shall mean, except as specifically provided
------------
elsewhere in this Plan, the Participant's earned income, wages,
salaries, fees for professional service and other amounts received for
personal services actually rendered in the course of employment with
the Employer maintaining the plan (including, but not limited to,
commissions paid salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, fringe
benefits and reimbursements or other expense allowances under a
nonaccountable plan, and elective contributions), but excluding
Christmas bonuses. "Elective contributions" are amounts excludible from
the Employee's gross income under Code (S) 402(a)(8) (relating to a
Code (S) 401(k) arrangement), Code (S) 402(h) (relating to a simplified
employee pension), Code (S) 125 (relating to a cafeteria plan) or Code
(S) 403(b) (relating to a tax-sheltered annuity) and contributed at the
Employee's election. The term "Compensation" does not include:
(i) Employer contributions (other than "elective
contributions") to a plan of deferred compensation to the
extent the contributions are not included in the gross income
of the Employee for the taxable year in which contributed, on
behalf of an Employee to a simplified employee pension plan to
the extent such contributions are excludible from the
Employee's gross income, and any distributions from a plan of
deferred compensation, regardless of whether such amounts are
includible in the gross income of the Employee when
distributed.
(ii) Amounts realized from the exercise of a
non-qualified stock option, or when restricted stock (or
property) held by an Employee either becomes freely
transferable or is no longer subject to a substantial risk of
forfeiture.
(iii) Amounts realized from the sale, exchange or
other disposition of stock acquired under a qualified stock
option.
(iv) Other amounts which receive special tax
benefits, such as premiums for group term life insurance (but
only to the extent that the premiums are not includible in the
gross income of the Employee), or contributions made by an
Employer (whether or not under a salary reduction agreement)
towards the purchase of an annuity contract described in Code
(S) 403(b) (whether or not the contributions are excludible
from the gross income of the Employee), other than "elective
contributions".
Any reference in this Plan to Compensation is a reference to
the definition in this Section 1.01(l), unless the Plan reference
specifies a modification to this definition. The Administration
Committee will take into account only Compensation actually paid for
the
3
<PAGE>
relevant period.
The Administration Committee must take into account only the
first $150,000 for Plan Years beginning after December 31, 1993 (or
such larger amount as the Commissioner of Internal Revenue may
prescribe) of any Participant's Compensation. The $150,000 Compensation
limitation applies to the combined Compensation of the Employee and of
any family member aggregated with the Employee for purposes of
determining who is an "Highly Compensated Employee" and who is either
(i) the Employee's spouse; or (ii) the Employee's lineal descendant
under the age of nineteen (19) years. If the $150,000 Compensation
limitation applies to the combined Compensation of the Employee and one
or more family members, the Administration Committee will apply the
contribution and allocation provisions of Article III by prorating the
$150,000 limitation among the affected individuals in proportion to
each such individual's Compensation determined prior to application of
this limitation.
For purposes of determining whether the Plan discriminates in
favor of Highly Compensated Employees, Compensation means Compensation
as defined in this Section 1.01(l), without regard to any exceptions.
For purposes of this nondiscrimination definition, the Employer may
elect to include all elective contributions made by the Employer on
behalf of the Employees. The Employer's election to include elective
contributions must be consistent and uniform with respect to Employees
and all plans of the Employer of any particular Plan Year. The Employer
may make this election to include elective contributions for
nondiscrimination testing purposes, irrespective of whether the
Employer includes elective contributions in the general Compensation
definition applicable to the Plan.
(m) "Disqualified Person" shall have the same meaning as
-------------------
ascribed to the term under Code ss. 4975(e)(2).
(n) "Effective Date" of this Plan shall be the 1st day of
--------------
January, 1997, except as otherwise noted.
(o) "Employee" shall mean any person on the payroll of the
--------
Employer whose wages from the Employer are subject to withholding for
purposes of Federal income taxes and for purposes of the Federal
Insurance Contributions Act. Notwithstanding the foregoing, Employee
shall not include any person on the payroll of the Employer who is
included in a unit of employees covered by an agreement which the
Secretary of Labor finds to be a collective bargaining agreement
between employee representatives and the Employer, if there is evidence
that retirement benefits were the subject of good faith bargaining
between such employee representatives and the Employer. The term
"employee representatives" does not include any organization more than
half the members of which are owners, officers or executives of the
Employer.
(p) "Employer" shall mean the Company and any corporation or
--------
other
4
<PAGE>
organization that is affiliated (as defined in Section 407(d)(7)
of the Act) with the Company which duly adopts the Plan with the
approval of the Company.
(q) "Employer Securities" shall mean the common stock issued
-------------------
by Coddle Creek Financial Corp. which shares constitute "employer
securities" under Code ss. 409(l).
(r) "Employer Securities Account" shall mean a separate
---------------------------
account maintained for each Participant and consisting of his allocable
share of Employer Securities allocated to each Participant under the
Plan.
(s) "Employment Commencement Date" shall mean the date on
----------------------------
which an Employee first performs an Hour of Service for the Employer.
(t) "Exempt Loan" shall mean a loan made to this Plan by a
-----------
Disqualified Person, or a loan to this Plan which a Disqualified Person
guarantees, provided the loan satisfies the requirements of Treas. Reg.
ss. 54.4975-7(b).
(u) "Fiscal Year" shall mean the Employer's taxable year for
-----------
federal income tax purposes.
(v) "Former Participant" shall mean any individual who has
------------------
been a Participant hereunder and who has not yet received the entire
benefit to which he is entitled under the Plan.
(w) "General Investment Account" shall mean a separate account
--------------------------
maintained for each Participant and consisting of his allocable share
of Employer contributions, forfeitures, earnings of the Trust allocable
to such account, and realized and unrealized gains and losses allocable
to such account, less any amounts distributed to the Participant or his
Beneficiary from such account and which have not been invested in
Employer Securities.
(x) "Highly Compensated Employee" shall mean an Employee who,
---------------------------
during the Plan Year or during the preceding twelve (12)-month period:
(i) is a more than five percent (5%) owner of the
Employer (applying the constructive ownership rules of
Code ss.318);
(ii) has Compensation in excess of $75,000 (as adjusted
by the Commissioner of Internal Revenue for the relevant
year);
(iii) has Compensation in excess of $50,000 (as
adjusted by the Commissioner of Internal Revenue for the
relevant year) and is part of the top-paid twenty percent
(20%) group of Employees (based on Compensation for the
relevant year); or
5
<PAGE>
(iv) has Compensation in excess of fifty percent (50%)
of the dollar amount prescribed in Code (S) 415(b)(1)(A)
(relating to defined benefit plans) and is an officer of the
Employer.
If the Employee satisfies the definition in clause (ii), (iii)
or (iv) in the Plan Year but not during the preceding twelve (12)
-month period and does not satisfy clause (i) in either period, the
Employee is a Highly Compensated Employee only if he is one of the 100
most highly compensated Employees for the Plan Year. The number of
officers taken into account under clause (iv) will not exceed the
greater of three (3) or ten percent (10%) of the total number (after
application of the exclusions under Code (S) 414(q)) of Employees, but
no more than fifty (50) officers. If no Employee satisfies the
Compensation requirement in clause (iv) for the relevant year, the
Administration Committee will treat the highest paid officer as
satisfying clause (iv) for that year.
For purposes of this definition, "Compensation" means
Compensation as defined in Section 1.01(l) but must include: (i)
elective deferrals under a Code (S) 401(k) arrangement or under a
simplified employee pension plan maintained by the Employer; and (ii)
amounts paid by the Employer which are not currently includible in the
Employee's gross income because of Code (S) 125 (cafeteria plans) or
(S) 403(b)(tax-sheltered annuities). The Administration Committee must
make the determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of the top paid
twenty percent (20%) group, the top 100 paid Employees, the number of
officers includible in clause (iv) and the relevant Compensation,
consistent with Code (S) 414(q) and regulations issued under that Code
section. The Employer may make a calendar year election to determine
the Highly Compensated Employees for the Plan Year, as prescribed by
Treasury regulations. A calendar year election must apply to all plans
and arrangements of the Employer. For purposes of applying any
nondiscrimination test required under the Plan or under the Code, in a
manner consistent with applicable Treasury regulations, the
Administration Committee will not treat as a separate Employee a family
member (a spouse, a lineal ascendant or descendant, or a spouse of a
lineal ascendant or descendant) of a Highly Compensated Employee
described in clause (i) of this Section 1.01(x), or a family member of
one of the ten (10) Highly Compensated Employees with the greatest
Compensation for the Plan Year, but will treat the Highly Compensated
Employee and all family members as a single Highly Compensated
Employee. This aggregation rule applies to a family member even if that
family member is a Highly Compensated Employee without family
aggregation.
The term "Highly Compensated Employee" also includes any
former Employee who separated from Service (or has a deemed separation
from Service, as determined under Treasury regulations) prior to the
Plan Year, performs no Service for the Employer during the Plan Year,
and was a Highly Compensated Employee either for the separation year or
any Plan Year ending on or after his fifty-fifth (55th) birthday. If
the former
6
<PAGE>
Employee's separation from Service occurred prior to January 1, 1987,
he is a Highly Compensated Employee only if he satisfied clause (i) of
this Section 1.01(x) or received Compensation in excess of $50,000
during: (i) the year of his separation from Service (or the prior
year); or (ii) any year ending after his fifty-fourth (54th) birthday.
(y) "Hour of Service" shall mean:
(i) Each Hour of Service for which the Employer,
either directly or indirectly, pays an Employee, or for which
the Employee is entitled to payment, for the performance of
duties during the Plan Year. The Administration Committee
shall credit Hours of Service under this paragraph (i) to the
Employee for the Plan Year in which the Employee performs the
duties, irrespective of when paid;
(ii) Each Hour of Service for back pay, irrespective
of mitigation of damages, to which the Employer has agreed or
for which the Employee has received an award. The
Administration Committee shall credit Hours of Service under
this paragraph (ii) to the Employee for the Plan Year(s) to
which the award or the agreement pertains rather than for the
Plan Year in which the award, agreement or payment is made;
and
(iii) Each Hour of Service for which the Employer,
either directly or indirectly, pays an Employee, or for which
the Employee is entitled to payment (irrespective of whether
the employment relationship is terminated), for reasons other
than for the performance of duties during a Plan Year, such as
leave of absence, vacation, holiday, sick leave, illness,
incapacity (including disability), layoff, jury duty or
military duty. The Administration Committee shall not credit
more than five hundred one (501) Hours of Service under this
paragraph (iii) to an Employee on account of any single
continuous period during which the Employee does not perform
any duties (whether or not such period occurs during a single
Plan Year). The Administration Committee shall credit Hours of
Service under this paragraph (iii) in accordance with the
rules of paragraphs (b) and (c) of Labor Reg. ss. 2530.200b-2,
which the Plan, by this reference, specifically incorporates
in full within this paragraph (iii).
The Administration Committee shall not credit an Hour of
Service under more than one (1) of the above paragraphs. Furthermore,
if the Administration Committee is to credit Hours of Service to an
Employee for the twelve (12) month period beginning with the Employee's
Employment Commencement Date or with an anniversary of such date, then
the twelve (12) month period shall be substituted for the term "Plan
Year" wherever the latter term appears in this Section 1.01(y). The
Administration Committee shall resolve any ambiguity with respect to
the crediting of an Hour of Service in favor of the Employee.
7
<PAGE>
The Administration Committee shall credit every Employee with
Hours of Service on the basis of the "actual" method. For purposes of
the Plan, "actual" method means the determination of Hours of Service
from records of hours worked and hours for which the Employer makes
payment or for which payment is due from the Employer. An Employee or
Participant for whom hourly records are not maintained shall be
credited with forty-five (45) Hours of Service, if compensated weekly,
ninety-five (95) Hours of Service, if compensated semimonthly, or one
hundred ninety (190) Hours of Service, if compensated monthly, for each
period described above if the Employee were hourly rated and would have
been credited with one Hour of Service under paragraphs (i), (ii) and
(iii) above.
Solely for purposes of determining whether the Employee incurs
a Break in Service under any provision of this Plan, the Administration
Committee shall credit Hours of Service during an Employee's unpaid
absence period due to maternity or paternity leave. The Administration
Committee shall consider an employee on maternity or paternity leave if
the Employee's absence is due to the Employee's pregnancy, the birth of
the Employee's child, the placement with the Employee of an adopted
child, or the care of the Employee's child immediately following the
child's birth or placement. The Administration Committee shall credit
Hours of Service under this paragraph on the basis of the number of
Hours of Service the Employee would receive if he were paid during the
absence period or, if the Administration Committee cannot determine the
number of Hours of Service the Employee would receive, on the basis of
eight (8) hours per day during the absence period. The Administration
Committee only shall credit the number of Hours of Service (up to 501
Hours of Service) necessary to prevent an Employee's Break in Service.
The Administration Committee shall credit all Hours of Service
described in this paragraph to the computation period in which the
absence period begins or, if the Employee does not need these Hours of
Service to prevent a Break in Service in the computation period in
which his absence period begins, the Administration Committee shall
credit these Hours of Service to the immediately following computation
period.
(z) "Leave of Absence" shall mean any period of absence from
the active employment of the Employer due to jury duty and compulsory
service in the Armed Forces of the United States if the Employee
returns to active Service with the Employer within ninety (90) days
after he first becomes eligible for release from such active duty. A
Leave of Absence may be granted by the Employer for sickness, accident,
vacation, disability, or other similar reasons under rules established
by it and uniformly applied by it to all individuals similarly
situated. If the Employee does not return to active Service with the
Employer within thirty (30) days of the termination of his Leave of
Absence, his Service will be deemed to have ceased on the date his
absence first commenced.
(aa) "Loan Suspense Account" shall mean an account established
for the crediting and holding of Employer Securities purchased with the
proceeds of an Exempt Loan during the pledge period and repayment of
the Exempt Loan.
8
<PAGE>
(bb) "Nonforfeitable" shall mean a Participant's or
--------------
Beneficiary's unconditional claim, legally enforceable against the
Plan, for the Participant's Accrued Benefit.
(cc) "Participant" shall mean an Employee or former Employee
-----------
who has an account balance under the Plan, or an Employee who has met
the eligibility requirements of the Plan.
(dd) "Plan" shall mean the Employee Stock Ownership Plan of
----
Mooresville Savings Bank, SSB as established herein and amended from
time to time.
(ee) "Plan Administrator" shall mean the Company unless the
------------------
Employer designates another person to hold the position of Plan
Administrator. In addition to his other duties, the Plan Administrator
shall have full responsibility for compliance with the reporting and
disclosure rules under the Act as respects this Agreement.
(ff) "Plan Entry Date" shall mean the first day of the Plan
---------------
Year and the first day of the seventh month of the Plan Year.
(gg) "Plan Year" shall mean the fiscal year of the Plan which
---------
shall be the twelve month period ending on the 31st day of December of
each year.
(hh) "Related Group" shall mean the Employers as defined in
-------------
Section 1.02.
(ii) "Segregated Account" shall mean the Participant Account
------------------
which is divided or segregated for investment or accounting purposes as
required by the Plan for which a special treatment is required.
(jj) "Service" shall mean any period of time the Employee is
-------
in the employ of the Employer, including any period the Employee is on
Leave of Absence authorized by the Employer under a uniform
non-discriminatory policy applicable to all Employees.
(kk) "Suspense Account" shall mean the Employer contributions
----------------
and forfeitures which can not be allocated pursuant to Article III.
(ll) "Trust" shall mean the separate Trust established to
-----
hold, administer, and invest the contributions made under the Plan.
(mm) "Trust Agreement" shall mean the agreement between the
---------------
Employer and the Trustee or any successor Trustee establishing the
Trust and specifying the duties of the Trustee.
(nn) "Trust Fund" shall mean all property of every kind held
----------
or acquired by the Trustee under the Trust Agreement, other than
incidental benefit insurance contracts.
9
<PAGE>
(oo) "Trustee" shall mean the persons or entities from time to
-------
time appointed as Trustee under the Trust Agreement.
(pp) "Valuation Date" shall mean the Anniversary Date of each
--------------
Plan Year or such other dates as the Administration Committee shall
from time to time require. Unless otherwise specified in the Plan, the
Administration Committee will make all Plan allocations for a
particular Plan Year as of the Valuation Date for that Plan Year.
1.02 CONTROLLED BUSINESSES/LEASED EMPLOYEES. If the Employer is a
--------------------------------------
member of a Related Group, the Plan shall treat all employees of the members of
such Related Group as if employed by a single employer for purposes of
determining Years of Service for participation and vesting. An employee shall
receive no credit for Years of Service for purposes of benefit accrual unless
employed by a member of the "Related Group" which adopts the Plan. A Related
Group is a controlled group of corporations (as defined in Code (S) 414(b)),
trades or businesses (whether or not incorporated) which are under common
control (as defined in Code (S) 414(c)) or an affiliated service group (as
defined in Code (S) 414(m) or in Code (S) 414(o)).
The Plan also shall treat an Employee who is a Leased Employee as an
employee of the Employer. However, the Employer shall treat contributions or
benefits provided the Leased Employee by the leasing organization as
contributions or benefits provided by the Employer to the extent attributable to
services the Leased Employee performed for the Employer. A "Leased Employee" is
an individual (who otherwise is not an employee of the Employer) who, pursuant
to a leasing agreement between the Employer and any other person, has performed
services for the Employer (or for the Employer and any persons related to the
Employer within the meaning of Code (S) 144(a)(3)) on a substantially full-time
basis for at least one year and who performs services historically performed by
employees in the Employer's business field.
Notwithstanding the preceding provisions of this paragraph, the Plan
shall not treat an employee as a Leased Employee if, prior to the application of
this exception, twenty percent (20%) or less of the Employer's Employees (other
than Highly Compensated Employees) are leased employees, and the leasing
organization covers the employee in a money purchase pension plan providing
immediate participation for all employees of the leasing organization (other
than employees who perform substantially all of their services for the leasing
organization or whose compensation from the leasing organization in each Plan
Year during the four-year period ending with the Plan Year is less than $1,000),
full immediate vesting, and a nonintegrated contribution formula equal to at
least ten percent (10%) of the employee's compensation without regard to
employment by the leasing organization on a specified date.
1.03 CHANGE IN NON-PARTICIPATING STATUS. If an Employee does not
----------------------------------
participate in the Plan by reason of employment within an excluded
classification, service with the Employer will be counted for purposes of
determining participation and vesting should the Employee's status change to a
non-excluded classification.
10
<PAGE>
1.04 SERVICE FOR PREDECESSOR EMPLOYER. If the Employer maintains the
--------------------------------
plan of a predecessor employer, the Plan shall treat service of the Employee
with the predecessor employer as service with the Employer. If the Plan the
Employer maintains is not the plan of a predecessor employer, no credit shall be
given unless specifically provided for in this Plan.
1.05 WORD USAGE. Words used in the masculine shall apply to the
----------
feminine where applicable, and wherever the context of the Plan dictates, the
plural shall be read as the singular and the singular as the plural.
1.06 CONSTRUCTION. It is the intention of the Employer that the Plan be
------------
qualified under the provisions of the Code and the Act and all provisions hereof
shall be construed to that result.
11
<PAGE>
ARTICLE II
EMPLOYEE PARTICIPANTS
2.01 ELIGIBILITY. Each Employee shall become a Participant in the Plan
-----------
on the Plan Entry Date (if he is employed on that date) coincident with or
immediately following the date on which he completes one (1) year of Service
with the Employer and attains the age of twenty-one (21) years. Employees
otherwise eligible on the Effective Date shall begin participation immediately.
2.02 YEAR OF SERVICE - PARTICIPATION. For purposes of participation
-------------------------------
under Section 2.01, the Plan shall take into account all of an Employee's Years
of Service with the Employer. Year of Service shall mean a twelve (12)
consecutive month period during which the Employee completes not less than one
thousand (1,000) Hours of Service. The initial eligibility computation period is
the first twelve (12) consecutive month period measured from the Employment
Commencement Date. After the initial eligibility computation period, the Plan
measures the eligibility computation period as the twelve (12) consecutive month
period beginning with each anniversary of an Employee's Employment Commencement
Date.
2.03 BREAK IN SERVICE - PARTICIPATION. For purposes of participation in
--------------------------------
the Plan, the Plan shall not apply any Break in Service rules.
2.04 PARTICIPATION UPON RE-EMPLOYMENT. A Participant whose employment
--------------------------------
terminates shall re-enter the Plan as a Participant on the date of his
re-employment. An Employee who terminates his employment after satisfying the
eligibility requirements of the Plan but before becoming a Participant shall
enter the Plan as a Participant on the later of the Plan Entry Date on which he
would have entered the Plan had he not terminated employment, or the date of his
re-employment. Any other Employee whose employment terminates and who is
subsequently re-employed shall become a Participant in accordance with the
provisions of Sections 2.01 and 2.02.
2.05 OMISSION OF ELIGIBLE EMPLOYEE. If, in any fiscal year, any
-----------------------------
Employee who should be included as a Participant in the Plan is erroneously
omitted and discovery of such omission is not made until after a contribution by
the Employer for the year has been made and allocated, the Employer shall make a
subsequent contribution with respect to the omitted Employee in the amount which
the Employer would have contributed with respect to him had he not been omitted.
Such contribution shall be made regardless of whether or not it is deductible in
whole or in part in any taxable year under applicable provisions of the Internal
Revenue Code by the Employer.
2.06 INCLUSION OF INELIGIBLE EMPLOYEE. If, in any fiscal year, any
--------------------------------
person who should not have been included as a Participant in the Plan is
erroneously included and discovery of such incorrect inclusion is not made until
after a contribution for the year has been made and
12
<PAGE>
allocated, the Employer shall not be entitled to recover the contribution made
with respect to the ineligible person regardless of whether or not a deduction
is allowable with respect to such contribution. In such event, the amount
contributed with respect to the ineligible person shall constitute a forfeiture
for the Plan Year in which the discovery is made.
13
<PAGE>
ARTICLE III
EMPLOYER CONTRIBUTIONS
3.01 EMPLOYER CONTRIBUTIONS. For each Plan Year that ends with or
----------------------
within the Employer's taxable year, the Employer shall contribute to the Trust
such amount as the Board of Directors may from time to time deem advisable. The
Employer shall make all contributions without regard to current or accumulated
earnings and profits for the taxable year or years ending with or within such
Plan Year. The Employer's contribution shall not exceed the Maximum Permissible
Amount as hereinafter defined.
3.02 DETERMINATION OF CONTRIBUTION. The Employer, from its records,
-----------------------------
shall determine the amount of any contributions to be made by it to the Trust
under the terms of the Plan; provided however, the contribution of the Employer
shall be paid in cash to the extent needed to provide the Trust with cash
sufficient to pay any currently maturing obligations under any Exempt Loan,
notwithstanding the direction of the Board of Directors.
3.03 TIME AND METHOD OF PAYMENT OF CONTRIBUTION. The Employer may pay
------------------------------------------
its contribution for each Plan Year in one (1) or more installments, without
interest. The Employer's contribution for any Plan Year shall be due on the last
day of its taxable year with or within which such Plan Year ends, and, unless
paid before, shall be payable then or as soon thereafter as practicable, but not
later than the time prescribed by law for filing the Employer's federal income
tax return (including extensions thereof) for such taxable year, without
interest. Contributions made after the end of the Plan Year but prior to the
filing of the Employer's federal income tax return shall be deemed a
contribution for the Employer's taxable year to which such tax return relates,
unless the contribution shall be accompanied by the Employer's signed statement
to the Trustee that payment is on account of another taxable year. Contributions
shall be paid in cash or in Employer Securities. All contributions for each Plan
Year shall be deemed to be paid as of the last day of such Plan Year.
3.04 RETURN OF EMPLOYER CONTRIBUTIONS. Notwithstanding any provision
--------------------------------
herein to the contrary (other than Section 2.06), upon the Employer's request, a
contribution which was made upon a mistake of fact, conditioned upon initial
qualification of the Plan, or disallowed as a deduction under Code (S) 404 shall
be returned to the Employer within one year after payment of the contribution or
denial of the qualification or deduction, as the case may be. The Trustee will
not increase the amount of the Employer contribution returnable under this
Section 3.04 for any earnings attributable to the contribution, but the Trustee
will decrease the Employer contribution returnable for any losses attributable
to it. The Trustee may require the Employer to furnish it whatever evidence the
Trustee deems necessary to enable the Trustee to confirm the amount the Employer
has requested be returned is properly returnable under ERISA.
3.05 LIMITATIONS ON ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. The amount
----------------------------------------------------
of Annual Additions which the Administration Committee may allocate under this
Plan on
14
<PAGE>
a Participant's behalf for a Limitation Year may not exceed the Maximum
Permissible Amount. If the amount the Employer otherwise would contribute to the
Participant's Account would cause the Annual Additions for the Limitation Year
to exceed the Maximum Permissible Amount, the Employer will reduce the amount of
its contribution so the Annual Additions for the Limitation Year will equal the
Maximum Permissible Amount. If an allocation of Employer contributions, pursuant
to Section 3.04, would result in an Excess Amount (other than an Excess Amount
resulting from the circumstances described in Section 3.05(b)) to the
Participant's Account, the Administration Committee will reallocate the Excess
Amount to the remaining Participants who are eligible for an allocation of
Employer contributions for the Plan Year in which the Limitation Year ends. The
Administration Committee will make this reallocation on the basis of the
allocation method under the Plan as if the Participant whose Account otherwise
would receive the Excess Amount is not eligible for an allocation of Employer
Contributions.
(a) Estimation of Compensation. Prior to the determination of
--------------------------
the Participant's actual Compensation for a Limitation Year, the
Administration Committee may determine the Maximum Permissible Amount
on the basis of the Participant's estimated annual Compensation for
such Limitation Year. The Administration Committee must make this
determination on a reasonable and uniform basis for all Participants
similarly situated. The Administration Committee must reduce any
Employer contributions (including any allocation of forfeitures) based
on estimated annual Compensation by any Excess Amounts carried over
from prior years. As soon as is administratively feasible after the end
of the Limitation Year, the Administration Committee will determine the
Maximum Permissible Amount for such Limitation Year on the basis of the
Participant's actual Compensation for such Limitation Year.
(b) Disposition of Excess Amount. If, pursuant to Section
----------------------------
3.05(a), or because of the allocation of forfeitures, there is an
Excess Amount with respect to a Participant for a Limitation Year, the
Administration Committee will dispose of such Excess Amount as follows:
(1) The Administration Committee will return any
nondeductible voluntary Employee contributions to the
Participant to the extent that the return would reduce the
Excess Amount.
(2) If, after the application of paragraph (1), an
Excess Amount still exists, and the Plan covers the
Participant at the end of the Limitation Year, then the
Administration Committee will use the Excess Amount(s) to
reduce future Employer contributions (including any allocation
of forfeitures) under the Plan for the next Limitation Year
and for each succeeding Limitation Year, as is necessary, for
the Participant.
(3) If, after the application of paragraph (1), an
Excess Amount still exists, and the Plan does not cover the
Participant at the end of the Limitation
15
<PAGE>
Year, then the Administration Committee will hold the Excess
Amount unallocated in a suspense account. The Administration
Committee will apply the suspense account to reduce Employer
contributions (including allocation of forfeitures) for all
remaining Participants in the next Limitation Year, and in
each succeeding Limitation Year if necessary.
(4) The Administration Committee will not distribute
any Excess Amount(s) to Participants or to former
Participants.
(c) More Than One Plan. The Employer may contribute under
------------------
another defined contribution plan in addition to its contributions
under this Plan. If the Administration Committee allocated an Excess
Amount to a Participant's Account on an allocation date of this Plan
which coincides with an allocation date of the other defined
contribution plan, the Administration Committee will attribute the
total Excess Amount allocated as of such date to the other defined
contribution plan.
(d) Defined Benefit Plan Limitation. If the Participant
-------------------------------
presently participates, or has ever participated under a defined
benefit plan maintained by the Employer, then the sum of the defined
benefit plan fraction and the defined contribution plan fraction for
the Participant for that Limitation Year must not exceed 1.0. To the
extent necessary to satisfy this limitation, the Employer will reduce
its contribution or allocation on behalf of the Participant to the
defined contribution plan under which the Participant participates and
then, if necessary, the Participant's projected annual benefit under
the defined benefit plan under which the Participant participates.
3.06 DEFINITIONS - ARTICLE III. For purposes of this Article
-------------------------
III, the following terms have the following meanings:
(a) "100% Limitation" - If the 100% Limitation applies, the
Administration Committee must determine the denominator of the defined
benefit plan fraction and the denominator of the defined contribution
plan fraction by substituting 100% for 125%. The 100% limitation
applies only if: (i) the Plan's top heavy ratio exceeds 90%; or (ii)
the Plan's top heavy ratio is greater than 60%, and the Employer does
not provide extra minimum benefits which satisfy Code (S) 416(h)(2).
(b) "Annual Addition" - The sum of the following amounts
allocated on behalf of a Participant for a Limitation Year: (i) all
Employer contributions; (ii) all forfeitures; and (iii) all Employee
contributions. Except to the extent provided in Treasury regulations,
Annual Additions include excess contributions described in Code (S)
401(k) and excess aggregate contributions described in Code (S) 401(m),
irrespective of whether the Plan distributes or forfeits such excess
amounts. Excess deferrals under Code (S) 402(g) are not Annual
Additions unless distributed after the correction period described in
Code (S) 402(g). Annual Additions also include Excess Amounts reapplied
to reduce
16
<PAGE>
Employer contributions under Section 3.05. Amounts allocated after
March 31, 1984, to an individual medical account (as defined in Code
(S) 415(l)(2)) included as part of a defined benefit plan maintained by
the Employer are Annual Additions. Furthermore, Annual Additions
include contributions paid or accrued after December 31, 1985, for
taxable years ending after December 31, 1985, attributable to
post-retirement medical benefits allocated to the separate account of a
key employee (as defined in Code (S) 419A(d)(3)) under a welfare
benefit fund (as defined in Code (S) 419(e)) maintained by the
Employer, but only for purposes of the dollar limitation applicable to
the Maximum Permissible Amount.
(c) "Compensation" - Compensation as determined under the
general definition of Compensation in Section 1.01 except it does not
include elective contributions.
(d) "Defined benefit plan" - A retirement plan which does not
provide for individual accounts for Employer contributions. The
Administration Committee must treat all defined benefit plans (whether
or not terminated) maintained by the Employer as a single plan.
(e) "Defined Benefit Plan Fraction" -
Projected annual benefit of the Participant
under the defined benefit plan(s)
-------------------------------------------------------------
The lesser of (i) 125% (subject to the "100% Limitation"
in paragraph (a)) of the dollar limitation
in effect under Code (S) 415(b)(1)(A) for
the Limitation Year, or (ii) 140% of the
Participant's average Compensation for his
high three (3) consecutive Years of Service
To determine the denominator of this fraction, the
Administration Committee will make any adjustment required under Code
(S) 415(b) and will determine a Year of Service as a Plan Year in which
the Employee completed at least 1,000 Hours of Service. The "projected
annual benefit" is the annual retirement benefit (adjusted to an
actuarially equivalent straight life annuity if the plan expresses such
benefit in a form other than a straight life annuity or qualified joint
and survivor annuity) of the Participant under the terms of the defined
benefit plan on the assumptions he continues employment until his
normal retirement age (or current age, if later) as stated in the
defined benefit plan, his compensation continues at the same rate as in
effect in the Limitation Year under consideration until the date of his
normal retirement age and all other relevant factors used to determine
benefits under the defined benefit plan remain constant as of the
current Limitation Year for all future Limitation Years.
Current Accrued Benefit. If the Participant accrued benefits
in one or more
17
<PAGE>
defined benefit plans maintained by the Employer which were in
existence on May 5, 1986, the dollar limitation used in the denominator
of this fraction will not be less than the Participant's Current
Accrued Benefit. A Participant's Current Accrued Benefit is the sum of
the annual benefits under such defined benefit plans which the
Participant had accrued as of the end of the 1986 Limitation Year (the
last Limitation Year beginning before January 1, 1987), determined
without regard to any change in the terms or conditions of the Plan
made after May 5, 1986, and without regard to any cost of living
adjustment occurring after May 5, 1986. This Current Accrued Benefit
rule applies only if the defined benefit plans individually and in the
aggregate satisfied the requirements of Code (S) 415 as in effect at
the end of the 1986 Limitation Year.
(f) "Defined contribution plan" - A retirement plan which
provides for an individual account for each participant and for
benefits based solely on the amount contributed to the participant's
account, and any income, expenses, gains and losses, and any
forfeitures of accounts of other participants which the plan may
allocate to such participant's account. The Administration Committee
must treat all defined contribution plans (whether or not terminated)
maintained by the Employer as a single plan. Solely for the purposes of
the limitations of this Article III, the Administration Committee will
treat employee contributions made to a defined benefit plan maintained
by the Employer as a separate defined contribution plan. The
Administration Committee also will treat as a defined contribution plan
an individual medical account (as defined in Code (S) 415(l)(2))
included as part of a defined benefit plan maintained by the Employer
and, for taxable years ending after December 31, 1985, a welfare
benefit fund under Code (S) 419(e) maintained by the Employer to the
extent there are post-retirement medical benefits allocated to the
separate account of a key employee (as defined in Code (S) 419(d)(3)).
(g) "Defined Contribution Plan Fraction" -
The sum, as of the close of the Limitation Year,
of the Annual Additions to the Participant's
Account under the defined contribution plan(s)
-------------------------------------------------------------
The sum of the lesser of the following amounts determined
for the Limitation Year and for each prior Year of Service
with the Employer: (i) 125% (subject to the "100% Limitation"
in paragraph (a)) of the dollar limitation in effect under
Code (S) 415(c)(1)(A) for the Limitation Year (determined
without regard to the special dollar limitations for employee
stock ownership plans), or (ii) 35% of the Participant's
Compensation for the Limitation Year
For purposes of determining the defined contribution plan
fraction, the Administration Committee will not recompute Annual
Additions in Limitation Years beginning prior to January 1, 1987, to
treat all Employee contributions as Annual Additions. If the Plan
18
<PAGE>
satisfied Code (S)415 for Limitation Years beginning prior to January
1, 1987, the Administration Committee will redetermine the defined
contribution plan fraction and the defined benefit plan fraction as of
the end of the 1986 Limitation Year, in accordance with this Section
3.06. If the sum of the redetermined fractions exceeds 1.0, the
Administration Committee will subtract permanently from the numerator
of the defined contribution plan fraction an amount equal to the
product of (1) the excess of the sum of the fractions over 1.0, times
(2) the denominator of the defined contribution plan fraction. In
making the adjustment, the Administration Committee must disregard any
accrued benefit under the defined benefit plan which is in excess of
the Current Accrued Benefit. This Plan continues any transitional rules
applicable to the determination of the defined contribution plan
fraction under the Employer's Plan as of the end of the 1986 Limitation
Year.
(h) "Employer" - The Employer that adopts this Plan and any
related employers described in Section 1.02. Solely for purposes of
applying the limitations of this Article III, the Administration
Committee will determine related employers described in Section 1.02 by
modifying Code (S)414(b) and (c) in accordance with Code (S)415(h).
(i) "Excess Amount" - The excess of the Participant's Annual
Additions for the Limitation Year over the Maximum Permissible Amount.
(j) "Limitation Year" - The Plan Year. If the Employer amends
the Limitation Year to a different 12 consecutive month period, the new
Limitation Year must begin on a date within the Limitation Year for
which the Employer makes the amendment, creating a short Limitation
Year.
(k) "Maximum Permissible Amount" - The lesser of (i) $30,000
(or, if greater, one-fourth of the defined benefit dollar limitation
under Code(S) 415(b)(1)(A)), or (ii) 25% of the Participant's
Compensation for the Limitation Year. If there is a short Limitation
Year because of a change in Limitation Year, the Administration
Committee will multiply the $30,000 (or adjusted) limitation by the
following fraction:
Number of months in the short Limitation Year
-------------------------------------------------
12
19
<PAGE>
ARTICLE IV
ALLOCATIONS
4.01 PARTICIPANT ACCOUNTS. For each Participant, the Administration
--------------------
Committee shall establish an Employer Securities Account to reflect a
Participant's interest in Employer Securities held by the Trust and shall
establish an account designated as the General Investments Account to reflect
the Participant's interest in the Trust Fund attributable to assets other than
Employer Securities.
If a Participant re-enters the Plan subsequent to his having a
Forfeiture Break in Service, a separate Account for the Participant's
pre-Forfeiture Break in Service Accrued Benefit and a separate Account for his
post-Forfeiture Break in Service Accrued Benefit, unless the Participant's
entire Accrued Benefit under the Plan is one hundred percent (100%)
Nonforfeitable, shall be maintained.
4.02 VALUATION OF ACCOUNTS. The value of each Participant's Accrued
---------------------
Benefit shall consist of that proportion of the net worth (at fair market value)
of the Trust Fund which the net credit balance in his Account bears to the total
net credit balance in the Accounts of all Participants. For purposes of a
distribution under the Plan, the value of a Participant's Accrued Benefit
attributable to his General Investment Account shall be its value as of the
Valuation Date, or other valuation date, immediately preceding the date of the
distribution.
As of the Anniversary Date of each Plan Year, the Administration
Committee first shall reduce the General Investments Accounts (excluding
segregated Accounts) for any forfeitures arising under Section 5.05 and then
shall allocate the net income (or net loss) from the Trust and the increase or
decrease in the fair market value of the assets of the Trust for the Plan Year
pro rata to the General Investments Accounts of the Participants under the Plan
as the General Investments Accounts stood at the beginning of the current Plan
Year, but excluding the amount of any General Investments Account which the
Trustee has fully distributed since the immediately preceding Valuation Date or
utilized for the purchase of Employer Securities. In making its allocations, the
Administration Committee shall exclude Employer Securities allocated to Employer
Securities Accounts, stock dividends on allocated Employer Securities, and
payments by the Trust on an Exempt Loan. The Administration Committee shall
include as income any cash dividends on Employer Securities except cash
dividends which the Administration Committee has directed the Trustee to
distribute in accordance with Section 7.03.
A segregated investment account receives all income it earns and bears
all expense or loss it incurs. As of the Valuation Date, the Administration
Committee must reduce a segregated investment account for any forfeiture arising
under Section 5.05 after the Administration Committee has made all other
allocations, changes or adjustments to such Account for the Plan Year.
20
<PAGE>
In making a forfeiture reduction, the Administration Committee shall
forfeit pro rata from a Participant's General Investments Account and from any
segregated investment account before making a forfeiture from his Employer
Securities Account.
4.03 ALLOCATIONS TO PARTICIPANTS' ACCOUNTS. Subject to the limitations
-------------------------------------
of Article III, Code (S)415, and Section 4.08 of the Plan:
(a) Employer Securities Account. As of the Anniversary Date of
---------------------------
each Plan Year, the Administration Committee first shall reduce the
Employer Securities Accounts for any forfeitures arising under Section
5.05 and then shall credit the Employer Securities Account maintained
for each Participant with the Participant's allocable share of Employer
Securities (including fractional shares) purchased and paid for by the
Trust or contributed in kind to the Trust, with any forfeitures of
Employer Securities and with any stock dividends on Employer Securities
allocated to his Employer Securities Account. Employer Securities
purchased or contributed in kind shall be allocated as of the
Anniversary Date among the Participants in accordance with the ratio of
the Participant's Compensation to the total Compensation of all
Participants. The Administration Committee shall allocate Employer
Securities acquired with an Exempt Loan in accordance with Section
4.04. Except as otherwise specifically provided in Section 4.04, the
Administration Committee shall base allocations to the Participants'
Accounts on dollar values expressed as shares of Employer Securities or
on the basis of actual shares where there is a single class of Employer
Securities. Employer Securities purchased with the proceeds of the
General Investment Account will be allocated directly to the same
Participant's Employer Securities Account.
(b) General Investments Account. Employer contributions and
---------------------------
forfeitures not allocated under Section 4.03 (a) above shall be
allocated as of the Anniversary Date among the Participants in
accordance with the ratio of the Participant's Compensation to the
total Compensation of all Participants.
(c) Dividends on Employer Securities. The Administration
--------------------------------
Committee will allocate any cash dividends the Employer pays with
respect to Employer Securities to the General Investments Accounts of
Participants in the same ratio, determined on the dividend declaration
date, that Employer Securities allocated to a Participant's Employer
Securities Account bear to the Employer Securities allocated to all
Employer Securities Accounts. The Administration Committee will not
allocate to the General Investments Accounts any cash dividends the
Employer directs the Trustee to apply to the payment of an Exempt Loan
nor any cash dividends the Administration Committee directs the Trustee
to distribute in accordance with Section 7.03. If the Employer directs
the Trustee to apply cash dividends on Employer Securities to the
payment of an Exempt Loan, the Administration Committee first will
allocate the released Employer Securities to the Participants' Employer
Securities
21
<PAGE>
Accounts in the same ratio, determined on the dividend declaration
date, that Employer Securities allocated to a Participant's Employer
Securities Account bear to the Employer Securities allocated to all
Employer Securities Accounts. If the dividends are to qualify under
Section 404(k) of the Code: (i) First, allocation of released Employer
Securities must equal the greater of the shares of released Employer
Securities equal to the fair market value of the cash dividends
attributable to the allocated Employer Securities, or equal to the
number of shares of all released Employer Securities attributable to
the cash dividends on allocated Employer Securities and (ii) if any
released Employer Securities remain unallocated after the first
allocation, the Administration Committee will allocate these remaining
released Employer Securities under this Section 4.03 as if the Employer
has made an Employer contribution equal to the amount of the cash
dividend attributable to the unallocated Employer Securities.
4.04 EXEMPT LOAN PROCEEDS ALLOCATION LIMITATION. In withdrawing assets
------------------------------------------
from the Loan Suspense Account, the Trustee shall apply the provisions of Treas.
Reg. (S)(S)54.4975-7(b)(8) and (15) as if all securities in the Loan Suspense
Account were encumbered. Upon the payment of any portion of the loan, the
Trustee shall effect the release of assets in the Loan Suspense Account from
encumbrances. For each Plan Year during the duration of the loan, the number of
Employer Securities released must equal the number of encumbered Employer
Securities held immediately before release for the current Plan Year multiplied
by a fraction. The numerator of the fraction is the amount of principal and
interest paid for the Plan Year. The denominator of the fraction is the sum of
the numerator plus the principal and interest to be paid for all future Plan
Years. The number of future Plan Years under the loan must be definitely
ascertainable and must be determined without taking into account any possible
extension or renewal periods. If the interest rate under the loan is variable,
the interest to be paid in future Plan Years must be computed by using the
interest rate applicable as of the end of the Plan Year. If collateral includes
more than one (1) class of Employer Securities, the number of Employer
Securities of each class to be released for a Plan Year must be determined by
applying the same fraction to each such class. The Administration Committee
shall allocate assets withdrawn from the Loan Suspense Account to the Accounts
of Participants who otherwise share in the allocation of the Employer's
contribution for the Plan Year for which the Trustee has paid the portion of the
loan resulting in the release of the assets. The Administration Committee
consistently shall make this allocation as of each Anniversary Date on the basis
of non-monetary units, taking into account the relative Compensation of all such
Participants for such Plan Year.
The Administration Committee may also elect at the initiation of the
Exempt Loan to have the Employer Securities released from the Loan Suspense
Account solely with reference to principal payments. However, if release is
determined with reference to principal payments only, the following additional
rules apply: (1) the Exempt Loan must provide for annual payments of principal
and interest at a cumulative rate that is not less rapid at any time than level
annual payments of such amounts for 10 years; (2) interest included in any
payment is disregarded only to the extent that it would be determined to be
interest under standard loan amortization tables; and (3) the entire duration of
the Exempt Loan repayment period does not exceed 10 years, even in the event of
a renewal, extension or refinancing of the Exempt Loan.
22
<PAGE>
4.05 EXCESS ALLOCATIONS. The excess amount of any allocations shall be
------------------
distributed or reallocated as provided in Article III.
4.06 EMPLOYER CONTRIBUTIONS CONSIDERED MADE ON LAST DAY OF PLAN YEAR.
---------------------------------------------------------------
For purposes of this Article IV, the Employer's contribution under the Plan
which remains unallocated on the last day of any Plan Year will be considered to
have been made on the last day of that year, regardless of when paid to the
Trustee.
4.07 ACCRUAL OF BENEFITS. The Administration Committee shall determine
-------------------
a Participant's Accrued Benefit on the basis of the Limitation Year. In
allocating Employer contributions and forfeitures to a Participant's Accounts,
the Administration Committee shall only take into account the Compensation
earned during that part of the Limitation Year the Employee is actually a
Participant in the Plan.
4.08 PARTICIPANTS TO WHOM EMPLOYER CONTRIBUTIONS AND FORFEITURES WILL
----------------------------------------------------------------
BE ALLOCATED. The Employer contributions for any Limitation Year, plus any
- ------------
forfeitures which arose under the Plan during that year, will be allocated among
and credited to the Accounts of:
(a) Participants who complete 1,000 Hours of Service during
the Limitation Year and who are in the employ of the Employer on the
Anniversary Date; provided, however, that an Employee who enters or
re-enters the Plan as a Participant on any date other than the first
day of the Limitation Year shall be considered to have completed 1,000
Hours of Service for purposes of allocation of Employer contributions
and Forfeitures for the Limitation Year in which he enters or re-enters
the Plan as a Participant;
(b) Participants on Leave of Absence on the Anniversary Date
who received Compensation from the Employer during the Limitation Year;
and
(c) Participants who died, retired, or became permanently
disabled during the Limitation Year who received Compensation from the
Employer during that year.
(d) Highly Compensated Participants, otherwise qualifying for
an allocation, shall be limited to no more than one-third (1/3) of the
contributions which are deductible under Code (S) 404(a)(9)(B) and
forfeitures of Employer Securities purchased with proceeds of an Exempt
Loan, which limitations shall be applied pro rata to the limited Highly
Compensated Participants.
Notwithstanding the foregoing, in the case of a sale to the Plan in which a
seller elects nonrecognition of gain under Code (S) 1042 of Employer
Securities, no portion of such Employer Securities acquired may be allocated or
accrue (directly or indirectly under any plan of the Employer meeting the
requirements of (S) 401(a) of the Code) during the "nonallocation period" to
23
<PAGE>
(i) any Participant who makes an election under (S) 1042 of the Code,
(ii) any individual who is related to the Participant within the meaning of
(S) 267(b) of the Code (this provision shall not apply to lineal
descendants of the electing Participant if the aggregate amount
allocated to the benefit of all such lienal descendants during the
"nonallocation period" does not exceed more than five percent (5%) of
the Employer Securities (or amounts allocated in lieu thereof) held by
the Plan which are attributable to the sale to the Plan by the
Participant related to such descendants (within the meaning of (S)
267(c) of the Code) or
(iii) any other person who owns (after application of Code (S) 318(a) and
without regard to the employee trust exception of Code (S)
318(a)(2)(B(i)) more than twenty-five percent (25%) of any class of
outstanding stock of the Employer which issued such Employer Securities
or of any corporation which is a member of the same controlled group of
corporations or of the total value of such class of outstanding stock
of any such corporation as defined in (S) 409 of the Code.
The "nonallocation period" shall mean the period beginning on the date of the
sale of the Employer Securities and ending on the later of the date which is 10
years after the date of sale or the date of the plan allocation attributable to
the final payment of the Exempt Loan.
4.09 EQUITABLE ALLOCATIONS. If the Administration Committee determines
---------------------
in making any valuation, allocation, correction or addition of interest to any
Account under the provisions of the Plan that the strict application of the
provisions of the Plan will not produce an equitable and nondiscriminatory
allocation among the Accounts of the Participants, it may modify any procedure
specified in the Plan for the purpose of achieving an equitable and
nondiscriminatory allocation in accordance with the general concepts of the
Plan; provided, however, that any such modification shall not reduce any
Participant's Accrued Benefit and shall be consistent with the provisions of
(S) 401(a)(4) of the Code. Should the Administration Committee in good faith
determine that certain expenses of administration paid by the Trustee during the
Plan Year under consideration are not general, ordinary, and usual and should
not equitably be borne by all Participants, but should be borne only by one or
more Participants, for whom or because of whom such expenses were incurred, the
Administration Committee shall make suitable adjustments by debiting the
particular Account or Accounts of such one or more Participants, Former
Participants, or Beneficiaries; provided, however, that any such adjustment must
be nondiscriminatory and consistent with the provisions of (S) 401(a) of the
Code.
4.10 VALUATION OF THE TRUST FUND. The Administration Committee shall
---------------------------
direct the Trustee, as of each Valuation Date, and at such other date or dates
deemed necessary by the Administration Committee, to determine the net worth of
the assets comprising the Trust Fund. In determining such net worth, the Trustee
shall value the assets comprising the Trust Fund at their fair market value as
of the Valuation Date. With respect to activities carried on by the Plan, an
independent appraiser meeting requirements similar to those prescribed by
regulations under
24
<PAGE>
Code (S) 170(a)(1) must perform all valuations of Employer Securities which are
not readily tradeable on an established securities market. The valuation
requirement of the immediately preceding sentence applies to all Employer
Securities acquired by the Plan. Fair market value of Employer Securities means
the value (i) determined as of the date of the exercise of an option if the
exercise is by a Disqualified Person, or (ii) in all other cases, determined as
of the most recent Valuation Date.
4.11 ALLOCATION DOES NOT CREATE RIGHTS. No Participant shall acquire
---------------------------------
any right to or interest in any specific asset of the Trust as a result of the
allocations provided for in the Plan.
25
<PAGE>
ARTICLE V
TERMINATION OF SERVICE-PARTICIPANT VESTING
5.01 NORMAL RETIREMENT. A Participant's Normal Retirement Age
-----------------
(hereinafter so-called) is age sixty-five (65). A Participant who remains in the
employ of the Employer after attaining Normal Retirement Age shall continue to
participate in Employer contributions until the date of his actual retirement.
Upon termination of a Participant's employment for any reason after attaining
Normal Retirement Age, the Administration Committee shall direct the Trustee to
make payment of the full value of the Participant's Accrued Benefit to him at
such times and in such manner as provided in Article VI hereof. The value of the
Participant's Accrued Benefit shall be determined as of the Anniversary Date
which is on or, if not on, immediately follows the date of the Participant's
employment termination. Provided however, the Trustee may, at the direction of
the Administration Committee, value the Participant's Accrued Benefit as of the
Anniversary Date immediately preceding the date of the Participant's employment
termination, for purposes of making an immediate distribution to the Participant
of his Accrued Benefit, and shall make a subsequent lump sum distribution to the
Participant of any additional benefit accruing subsequent to the date of his
termination through and including the Valuation Date immediately following the
date of the Participant's termination of employment. Immediate distributions may
be reduced by the Trustee to take into account declines in market value.
5.02 EARLY RETIREMENT. A Participant who is at least sixty-two (62)
----------------
years of age and who has completed ten (10) Years of Service may elect to take
early retirement. In the event that a Participant makes such an election, the
Administration Committee shall direct the Trustee to make payment of the full
value of the Participant's Accrued Benefit to him at such times and in such
manner as provided in Article VI hereof. The value of the Participant's Accrued
Benefit shall be determined as of the Anniversary Date which is on or, if not
on, immediately follows the date of the Participant's employment termination.
Provided however, the Trustee may, at the direction of the Administration
Committee, value the Participant's Accrued Benefit as of the Anniversary Date
immediately preceding the date of the Participant's employment termination, for
purposes of making an immediate distribution to the Participant of his Accrued
Benefit, and shall make a subsequent lump sum distribution to the Participant of
any additional benefit accruing subsequent to the date of his termination
through and including the Valuation Date immediately following the date of the
Participant's termination of employment. Immediate distributions may be reduced
by the Trustee to take into account declines in market value.
5.03 DISABILITY. A Participant who becomes permanently disabled shall
----------
have the full value of his Accrued Benefit paid to him at such times and in such
manner as provided in Article VI hereof. The value of a disabled Participant's
Accrued Benefit shall be determined as of the Valuation Date which is on, or if
not on, which immediately follows the date of the Participant's termination of
employment due to disability. Provided however, the Trustee may, at the
direction of the Administration Committee, value the Participant's Accrued
Benefit as of the Valuation Date immediately preceding the date of the
Participant's employment termination, for purposes of
26
<PAGE>
making an immediate distribution to the Participant of his Accrued Benefit, and
shall make a subsequent lump sum distribution to the Participant of any
additional benefit accruing subsequent to the date of his termination through
and including the Valuation Date immediately following the date of the
Participant's termination of employment. A Participant shall be considered
"disabled" if he is unable to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment that can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than twelve (12) months. The disability of a
Participant shall be determined by a licensed physician chosen by the
Administration Committee. However, if the condition constitutes total disability
under the Federal Social Security Acts, the Administration Committee may rely
upon such determination that the Participant is totally disabled for purposes of
this Plan. The Administration Committee shall apply the provisions of this
Section 5.03 in a non-discriminatory, consistent and uniform manner.
5.04 DEATH. Upon the death of a Participant, his Beneficiary shall be
-----
entitled to receive the full value of the deceased Participant's Accrued Benefit
determined as of the Valuation Date which is on or, if not on, which immediately
follows the date of such Participant's death, at such times and in such manner
as provided in Article VI hereof. Provided however, the Trustee may, at the
direction of the Administration Committee, value the Participant's Accrued
Benefit as of the Valuation Date immediately preceding the date of the
Participant's death, for purposes of making an immediate distribution to the
Participant's Beneficiary of his Accrued Benefit, and shall make a subsequent
lump sum distribution to said Beneficiary of any additional benefit accruing
subsequent to the date of the Participant's death through and including the
Valuation Date immediately following the date of the Participant's death.
5.05 TERMINATION OF SERVICE PRIOR TO NORMAL RETIREMENT AGE. If a
-----------------------------------------------------
Participant's employment terminates prior to Normal Retirement Age for any
reason other than death or permanent disability, then for each Year of Service
he shall receive a percentage of his Accrued Benefit derived from Employer
contributions and forfeitures allocated to Participant Accounts (the balance
being a forfeiture) equal to the following percentage:
---------------------------------------------------------
Years of Service Percentage of Accrued
With the Employer Benefit Payable
---------------------------------------------------------
Less than 5 years 0%
5 years or more 100%
---------------------------------------------------------
27
<PAGE>
Forfeitures shall be reallocated among the remaining Participants who
are entitled to share in Employer contributions and forfeitures for the Plan
Year in which such forfeiture occurs in accordance with the provisions of
Section 4.08. A Participant shall be 100% vested in his Accounts upon the
attainment of Normal Retirement Age, death or permanent disability.
5.06 YEAR OF SERVICE - VESTING. For purposes of vesting under Section
-------------------------
5.05, Year of Service means any Plan Year during which an Employee completes not
less than 1,000 Hours of Service.
5.07 BREAK IN SERVICE - VESTING. For purposes of this Article V, a
--------------------------
Participant incurs a "Break in Service" if during any Plan Year he does not
complete more than 500 Hours of Service.
5.08 INCLUDED YEARS OF SERVICE - VESTING. For purposes of determining
-----------------------------------
"Years of Service" under Section 5.06, the Plan takes into account all Years of
Service an Employee completes with the Employer except any Year of Service
before a Break in Service if the number of consecutive Breaks in Service equals
or exceeds the greater of five (5) or the aggregate number of Years of Service
prior to the Break. This exception applies only if the Participant is 0% vested
in his Accrued Benefit derived from Employer contributions at the time he has a
Break in Service. Furthermore, the aggregate number of Years of Service before a
Break in Service does not include Years of Service not required to be taken into
account under this exception by reason of any prior Break in Service.
For the sole purpose of determining a Participant's nonforfeitable
percentage of his Accrued Benefit derived from Employer contributions which
accrued for his benefit prior to a Forfeiture Break in Service, the Plan
disregards any Year of Service after the Participant first incurs a Forfeiture
Break in Service. The Participant incurs a Forfeiture Break in Service when he
incurs five (5) consecutive Breaks in Service.
The Plan does not apply the Break in Service rule under Code (S)
411(a)(6)(B). Therefore, an Employee need not complete a Year of Service after a
Break in Service before the Plan takes into account the Employee's otherwise
includible Years of Service under this Section 5.08.
5.09 FORFEITURE OCCURS. A Participant's forfeiture, if any, of his
-----------------
Accrued Benefit derived from Employer contributions occurs under the Plan on the
earlier of:
(a) The last day of the Plan Year in which the Participant
first incurs a Forfeiture Break in Service; or
(b) The date the Participant receives a cash-out distribution.
The Administration Committee determines the percentage of a
Participant's Accrued Benefit forfeiture, if any, under this Section
5.09 solely by reference to
28
<PAGE>
the vesting schedule of Section 5.05. A Participant does not forfeit
any portion of his Accrued Benefit for any other reason or cause except
as expressly provided by this Section 5.09 or as provided under the
Plan's unclaimed account procedure. Any forfeiture of a Participant's
Accrued Benefit shall be made first from the Participant's General
Investment Account, and after it is exhausted, from the Participant's
Employer Securities Account, in accordance with applicable Treasury
regulations.
5.10 CASH-OUT DISTRIBUTIONS TO PARTIALLY-VESTED PARTICIPANTS/
--------------------------------------------------------
RESTORATION OF FORFEITED ACCRUED BENEFIT. If, pursuant to Article VI, a
- ----------------------------------------
partially-vested Participant receives a cash-out distribution before he incurs a
Forfeiture Break in Service (as defined in Section 5.08), the cash-out
distribution will result in an immediate forfeiture of the nonvested portion of
the Participant's Accrued Benefit derived from Employer contributions, as
provided in Section 5.09. A partially-vested Participant is a Participant whose
Nonforfeitable percentage determined under Section 5.05 is less than 100%. A
cash-out distribution is a distribution of the entire present value of the
Participant's Nonforfeitable Accrued Benefit.
(a) Restoration and Conditions upon Restoration. A
-------------------------------------------
partially-vested Participant who is re-employed by the Employer after
receiving a cash-out distribution of the Nonforfeitable percentage of
his Accrued Benefit may repay the Trustee the amount of the cash-out
distribution attributable to Employer contributions, unless the
Participant no longer has a right to restoration under the requirements
of this Section 5.10. If a partially-vested Participant makes the
cash-out distribution repayment, the Administration Committee, subject
to the conditions of this Section 5.10(a), must restore his Accrued
Benefit attributable to Employer contributions to the same dollar
amount as the dollar amount of his Accrued Benefit on the Valuation
Date, or other valuation date, immediately preceding the date of the
cash-out distribution, unadjusted for any gains or losses occurring
subsequent to that Valuation Date, or other valuation date. Restoration
of the Participant's Accrued Benefit includes restoration of all Code
(S). 411(d)(6) protected benefits with respect to that restored Accrued
Benefit, in accordance with applicable Treasury regulations.
The Administration Committee will not restore a re-employed
Participant's Accrued Benefit under this Section 5.10(a) if:
(1) five (5) years or more have elapsed since the
Participant's first re-employment date with the Employer
following the cash-out distribution; or
(2) the Participant incurred a Forfeiture Break in
Service (as defined in Section 5.08). This condition also
applies if the Participant makes repayment within the Plan
Year in which he incurs the Forfeiture Break in Service and
that Forfeiture Break in Service would result in a complete
forfeiture of the amount the Administration Committee
otherwise would restore.
29
<PAGE>
(b) Time and Method of Restoration. If neither of the two
------------------------------
conditions preventing restoration of the Participant's Accrued Benefit
applies, the Administration Committee will restore the Participant's
Accrued Benefit as of the Plan Year Valuation Date coincident with or
immediately following the repayment. To restore the Participant's
Accrued Benefit, the Administration Committee, to the extent necessary,
will allocate to the Participant's Account:
(1) first, from the amount, if any, of Participant
forfeitures the Administration Committee would otherwise
allocate under Section 5.05;
(2) second, from the amount, if any, of the Trust Fund
net income or gain for the Plan Year; and
(3) third, from the Employer contribution for the Plan
Year to the extent made under a discretionary formula.
To the extent the amounts described in clauses (1), (2) and (3) are
insufficient to enable the Administration Committee to make the
required restoration, the Employer must contribute, without regard to
any requirement or condition of Section 3.01, the additional amount
necessary to enable the Administration Committee to make the required
restoration. If, for a particular Plan Year, the Administration
Committee must restore the Accrued Benefit of more than one re-employed
Participant, then the Administration Committee will make the
restoration allocations to each such Participant's Account in the same
proportion that a Participant's restored amount for the Plan Year bears
to the restored amount for the Plan Year of all re-employed
Participants. The Administration Committee will not take into account
any allocation under this Section 5.10 in applying the limitation on
allocations under Article III.
(c) 0% Vested Participant. The deemed cash-out rule applies to
---------------------
a 0% vested Participant. A 0% vested Participant is a Participant whose
Accrued Benefit derived from Employer contributions is entirely
forfeitable at the time of his separation from Service. Under the
deemed cash-out rule, the Administration Committee will treat the 0%
vested Participant as having received a cash-out distribution on the
date of the Participant's separation from Service or, if the
Participant's Account is entitled to an allocation of Employer
contributions for the Plan Year in which he separates from Service, on
the last day of that Plan Year. For purposes of applying the
restoration provisions of this Section 5.10, the Administration
Committee will treat the 0% vested Participant as repaying his cash-out
"distribution" on the first date of his re-employment with the
Employer.
5.11 SEGREGATED INVESTMENT ACCOUNT FOR REPAID AMOUNT. Until the
-----------------------------------------------
Administration Committee restores the Participant's Accrued Benefit, as
described in Section 5.10, the Trustee will invest the cash-out amount the
Participant has repaid in a segregated
30
<PAGE>
investment account maintained solely for that Participant. The Trustee must
invest the amount in the Participant's segregated investment account in
Federally insured interest bearing savings account(s) or time deposit(s) (or a
combination of both), or in other fixed income investments. Until commingled
with the balance of the Trust Fund on the date the Administration Committee
restores the Participant's Accrued Benefit, the Participant's segregated
investment account remains a part of the Trust, but it alone shares in any
income it earns and it alone bears any expense or loss it incurs. The
Administration Committee will direct the Trustee to repay to the Participant as
soon as is administratively practicable the full amount of the Participant's
segregated investment account if the Administration Committee determines either
of the conditions of Section 5.10(a) prevents restoration as of the applicable
Valuation Date, notwithstanding the Participant's repayment.
31
<PAGE>
ARTICLE VI
TIME AND METHOD OF PAYMENT OF BENEFITS
6.01 DISTRIBUTION AND PAYMENT REQUIREMENTS. Unless the Participant
-------------------------------------
elects in writing to have the Trustee apply other distribution provisions of the
Plan, the Trustee must distribute the Nonforfeitable portion of the
Participant's Accrued Benefit no later than the time prescribed by this Section
6.01, irrespective of any other provision of the Plan. The distribution
provisions of this Section 6.01 are subject to the consent and form of
distribution requirements of the Plan.
(a) Retirement, Disability and Death. If the Participant
--------------------------------
separates from Service by reason of the attainment of Normal Retirement
Age, death, or disability, the Administration Committee will direct the
Trustee to commence distribution of the Accrued Benefit not later than
the 60th day after the close of the Plan Year in which the applicable
event occurs or separation from Service, if later.
(b) Other Separation from Service. If the Participant
-----------------------------
separates from Service for any reason other than by reason of the
attainment of Normal Retirement Age, death or disability, the
Administration Committee will direct the Trustee to commence
distribution of the Participant's Nonforfeitable Accrued Benefit not
later than one year after the close of the fifth Plan Year following
the Plan Year in which the Participant separated from Service. If the
Participant resumes employment with the Employer on or before the last
day of the fifth Plan Year following the Plan Year of his separation
from Service, the mandatory distribution provisions of this paragraph
(b) do not apply. For purposes of this Section 6.01(b), the Accrued
Benefit does not include any Employer Securities acquired with the
proceeds of an Exempt Loan until the close of the Plan Year in which
the borrower repays the Exempt Loan in full.
(c) Required Beginning Date. If any distribution commencement
-----------------------
date described under Paragraph (a) of this Section 6.01, either by Plan
provision or by Participant election (or nonelection), is later than
the Participant's Required Beginning Date, the Administration Committee
instead must direct the Trustee to make distribution under this Section
6.01 on the Participant's Required Beginning Date. A Participant's
Required Beginning Date is the April 1 following the close of the
calendar year in which the Participant attains age 70 1/2. A mandatory
distribution at the Participant's Required Beginning Date will be in
lump sum unless an alternate method is provided for in the Plan.
(d) Distribution in Excess of $3500. No distribution shall be
-------------------------------
made to a Participant without the Participant's consent if the
Nonforfeitable Accrued Benefit shall exceed $3500, unless the
Participant shall have attained Normal Retirement Age. For Plan Years
beginning after December 31, 1997, the $3,500 amount shall be increased
to $5,000.
32
<PAGE>
(e) Death of the Participant. The Administration Committee
------------------------
will direct the Trustee, in accordance with this Section, to distribute
to the Participant's Beneficiary the Participant's Nonforfeitable
Accrued Benefit remaining in the Trust at the time of the Participant's
death subject to the requirements of Code ss. 401(a)(9) and any
regulations issued thereunder.
(1) Deceased Participant's Nonforfeitable Accrued
---------------------------------------------
Benefit Does Not Exceed $3,500. The Administration Committee
------------------------------
must direct the Trustee to distribute the deceased
Participant's Nonforfeitable Accrued Benefit in lump sum, as
soon as administratively practicable following the
Participant's death or, if later, the date on which the
Administration Committee receives notification of or otherwise
confirms the Participant's death. For Plan Years beginning
after December 31, 1997, the $3,500 amount shall be increased
to $5,000.
(2) Deceased Participant's Nonforfeitable Accrued
---------------------------------------------
Benefit Exceeds $3,500. The Administration Committee will
----------------------
direct the Trustee to distribute the deceased Participant's
Nonforfeitable Accrued Benefit at the time and in the method
elected by the Participant or, if applicable, by the
Beneficiary, as permitted under this Article VI. In the
absence of an election the Administration Committee will
direct the Trustee to distribute the Participant's
undistributed Nonforfeitable Accrued Benefit in lump sum on
the first distribution date following the close of the Plan
Year in which the Participant's death occurs or, if later, the
first distribution date following the date the Administration
Committee receives notification of or otherwise confirms the
Participant's death. For Plan Years beginning after December
31, 1997, the $3,500 amount shall be increased to $5,000.
If the death benefit is payable in full to the Participant's
surviving spouse, the surviving spouse, in addition to the distribution
options provided in this Section, may elect, if available, distribution
at any time or in any form this Article VI would permit for a
Participant.
(f) Distribution Date. A distribution date, unless otherwise
-----------------
specified within the Plan, is the first day of each month of each Plan
Year or as soon as administratively practicable thereafter.
6.02 ELECTION AND MANNER OF PAYMENT. Not earlier than ninety (90) days,
------------------------------
but not later than thirty (30) days, before the Participant's distribution date,
the Administration Committee shall provide a benefit notice to the Participant.
The notice shall explain the options and material features available to the
Participant regarding the benefit distribution and the Participant's right to
defer distribution until attainment of Normal Retirement Age.
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The Administration Committee will direct the Trustee to make
distribution of the Accrued Benefit in a lump sum. In the event any part of the
Accrued Benefit is subject to the "put option" of Section 7.01 and the
distribution for all Participants exceeds $50,000, the Administrative Committee
may defer payment of the distribution over a period of years, not exceeding five
(5) years from the date a Participant is entitled to receive his Accrued
Benefit. The Administrative Committee shall make its decision to defer payment
of the distribution over the deferred period based upon the availability of
liquid assets of the Trust and the Company which will be required in the
distributions. If a Participant's Accrued Benefit attributable to Employer
Securities exceeds $500,000, the maximum payment period, subject to a contrary
election by the Participant, is five (5) years plus one additional year (but no
more than five (5) additional years) for each $100,000 (or fraction of $100,000)
by which the Employer Securities Account exceeds $500,000. The Administration
Committee will apply this Section 6.02 by adjusting the $500,000 and $100,000
limitations by the adjustment factor prescribed by the Secretary of the Treasury
under Code ss. 415(d).
6.03 ANNUITY DISTRIBUTIONS TO PARTICIPANTS AND SURVIVING SPOUSES. The
-----------------------------------------------------------
joint and survivor annuity requirements do not apply to this Plan. The Plan does
not provide any annuity distribution to Participants nor to surviving spouses.
6.04 DISTRIBUTIONS UNDER DOMESTIC RELATIONS ORDERS. Nothing contained
---------------------------------------------
in this Plan prevents the Trustee, in accordance with the direction of the
Administration Committee, from complying with the provisions of a qualified
domestic relations order (as defined in Code ss. 414(p)). This Plan specifically
permits distribution to an alternate payee under a qualified domestic relations
order at any time, irrespective of whether the Participant has attained his
earliest retirement age (as defined under Code ss. 414(p)) under the Plan. A
distribution to an alternate payee prior to the Participant's attainment of
earliest retirement age is available only if: (1) the order specifies
distribution at that time or permits an agreement between the Plan and the
alternate payee to authorize an earlier distribution; and (2) if the present
value of the alternate payee's benefits under the Plan exceeds $3,500 ($5,000
for Plan Years beginning after December 31, 1997), and the order requires, the
alternate payee consents to any distribution occurring prior to the
Participant's attainment of earliest retirement age. Nothing in this Section
6.05 permits a Participant to receive distribution at a time otherwise not
permitted under the Plan nor does it permit the alternate payee to receive a
form of payment not permitted under the Plan.
The Administration Committee must establish reasonable procedures to
determine the qualified status of a domestic relations order. Upon receiving a
domestic relations order, the Administration Committee promptly will notify the
Participant and any alternate payee named in the order, in writing, of the
receipt of the order and the Plan's procedures for determining the qualified
status of the order. Within a reasonable period of time after receiving the
domestic relations order, the Administration Committee must determine the
qualified status of the order and must notify the Participant and each alternate
payee, in writing, of its determination. The Administration Committee must
provide notice under this paragraph by mailing to the individual's address
specified in the domestic relations order, or in a manner consistent with
applicable
34
<PAGE>
regulations.
If any portion of the Participant's Nonforfeitable Accrued Benefit is
payable during the period the Administration Committee is making its
determination of the qualified status of the domestic relations order, the
Administration Committee must make a separate accounting of the amounts payable.
If the Administration Committee determines the order is a qualified domestic
relations order within eighteen (18) months of the date amounts first are
payable following receipt of the order, the Administration Committee will direct
the Trustee to distribute the payable amounts in accordance with the order. If
the Administration Committee does not make its determination of the qualified
status of the order within the 18-month determination period, the Administration
Committee will direct the Trustee to distribute the payable amounts in the
manner the Plan would distribute if the order did not exist and will apply the
order prospectively if the Administration Committee later determines the order
is a qualified domestic relations order.
To the extent it is not inconsistent with the provisions of the
qualified domestic relations order, the Administration Committee may direct the
Trustee to invest any partitioned amount in a segregated subaccount or separate
account and to invest the account in Federally insured, interest-bearing savings
account(s) or time deposit(s) (or a combination of both), or in other fixed
income investments. A segregated subaccount remains a part of the Trust, but it
alone shares in any income it earns, and it alone bears any expense or loss it
incurs. The Trustee will make any payments or distributions required under this
Section 6.04 by separate benefit checks or other separate distribution to the
alternate payee(s).
6.05 DISTRIBUTION DEMAND FOR EMPLOYER SECURITIES. Distribution of a
-------------------------------------------
Participant's benefit may be made in cash or Employer Securities or both,
provided, however, that if a Participant or Beneficiary so demands, such benefit
shall be distributed only in the form of Employer Securities. Prior to making a
distribution of benefits, the Administrator shall advise the Participant or his
Beneficiary, in writing, of the right to demand that benefits be distributed
solely in Employer Securities.
If a Participant or Beneficiary demands that benefits be distributed
solely in Employer Securities, distribution of a Participant's benefit will be
made entirely in whole shares or other units of Employer Securities. Any balance
in a Participant's General Investment Account will be applied to acquire for
distribution the maximum number of whole shares or other units of Employer
Securities at the then fair market value. Any fractional unit value unexpended
will be distributed in cash. If Employer Securities are not available for
purchase by the Trustee, then the Trustee shall hold such balance until Employer
Securities are acquired and then make such distribution, subject to this
Article.
If the charter or bylaws of the Company restrict the ownership of
substantially all outstanding shares of Employer Securities to current Employees
and the Trust, the distribution of a Participant's Accrued Benefit may be made
entirely in cash without granting him the right to demand distribution in
Employer Securities. Alternatively, Employer Securities may be
35
<PAGE>
distributed subject to the requirement that they be immediately resold to the
Company under payment terms that comply with Section 7.01.
Any balance in a Participant's segregated investment account is not
subject to the demand right that benefits be distributed in the form of Employer
Securities.
The Trustee will make distribution from the Trust only on instructions
from the Plan Administrator.
6.06 ROLLOVER OF LUMP SUM DISTRIBUTION. This Section applies to all
---------------------------------
distributions other than the distribution of Employer Securities.
Notwithstanding any provision of the Plan to the contrary that would otherwise
limit a distributee's election under this Article, a distributee may elect, at
the time and in the manner prescribed by the Plan Administrator, to have any
portion of an eligible rollover distribution paid directly to an eligible
retirement plan specified by the distributee in a direct rollover.
For purposes of this Section, the following definitions apply:
(a) "Eligible rollover distribution." An eligible rollover
distribution is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover distribution does
not include: (i) any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary, or for a
specified period of ten (10) years or more; (ii) any distribution to the extent
such distribution is required under Code ss.401(a)(9); and (iii) the portion of
any distribution that is not includible in gross income (determined without
regard to the exclusion of net unrealized appreciation with respect to Employer
Securities).
(b) "Eligible retirement plan." An eligible retirement plan is
an individual retirement account described in Code ss.408(a), an individual
retirement annuity described in Code ss.408(b), an annuity plan described in
Code ss.403(a), or a qualified trust described in Code ss.401(a), that accepts
the distributee's eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an eligible retirement
plan is an individual retirement account or individual retirement annuity.
(c) "Distributee." A distributee includes an Employee or
former Employee. In addition, the Employee's or former Employee's surviving
spouse and the Employee's or former Employee's spouse or former spouse who is
the alternate payee under a qualified domestic relations order, as defined in
Code ss.414(p), are distributees with regard to the interest of the spouse or
former spouse.
(d) "Direct rollover." A direct rollover is a payment by the
Plan to the eligible retirement plan specified by the distributee.
36
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ARTICLE VII
EMPLOYER SECURITIES
7.01 PUT OPTION. The Employer will issue a "put option" to each
----------
Participant receiving a distribution of Employer Securities from the Trust if
the Employer Securities are not publicly traded. The put option will permit the
Participant to sell the Employer Securities to the Employer, at any time during
two option periods, at the current fair market value.
The first put option period runs for a period of at least sixty (60)
days commencing on the date of distribution of Employer Securities to the
Participant. The second put option period runs for a period of at least sixty
(60) days commencing after the new determination of the fair market value of
Employer Securities by the Administration Committee and notice to the
Participant of the new fair market value. A Disqualified Person shall be
required to wait for the determination of the next current fair market value
determination as required by Section 4.10.
If a Participant (or his Beneficiary) exercises his put option, the
Employer must purchase the Employer Securities at fair market value upon the
terms provided under this Section 7.01. The Employer may grant the Trust an
option to assume the Employer's rights and obligations at the time a Participant
exercises an option under this Section 7.01.
If the Employer (or the Trustee, at the direction of the Administration
Committee) exercises an option to purchase a Participant's Employer Securities
pursuant to an offer given under this Section 7.01, the purchaser(s) must make
payment in lump sum or, if the distribution to the Participant (or to his
Beneficiary) constitutes a Total Distribution, in substantially equal
installments over a period not exceeding five (5) years, subject to the
Participant's election for a longer payment period than five (5) years. A "Total
Distribution" to a Participant (or to a Beneficiary) is the distribution, within
one taxable year of the recipient, of the entire balance to the Participant's
credit under the Plan.
In the case of a distribution which is not a Total Distribution or
which is a Total Distribution with respect to which the purchaser(s) will make
payment in lump sum, the purchaser(s) must pay the Participant (or Beneficiary)
the fair market value of the Employer Securities repurchased no later than
thirty (30) days after the date the Participant (or Beneficiary) exercises the
put option. In the case of a Total Distribution with respect to which the
purchaser(s) will make installment payments, the purchaser(s) must make the
first installment payment no later than thirty (30) days after the Participant
(or Beneficiary) exercises the put option. For installment amounts not paid
within thirty (30) days of the exercise of the put option, the purchaser(s) must
evidence the balance of the purchase price by executing a promissory note,
delivered to the selling Participant at the Closing. The note delivered at
Closing must bear a reasonable rate of interest, determined as of the Closing
Date, and the purchaser(s) must provide adequate security. The note must provide
for equal annual installments with interest payable with each installment, the
first installment being due and payable one year after the Closing Date. The
note further must provide
37
<PAGE>
for acceleration in the event of thirty (30) days' default of the payment on
interest or principal and must grant to the maker of the note the right to
prepay the note in whole or in part at any time or times without penalty;
provided however, the purchaser(s) may not have the right to make any prepayment
during the calendar year or fiscal year of the Participant (or Beneficiary) in
which the Closing Date occurs.
In the case of a purchase from a Disqualified Person, all purchases of
Employer Securities shall be made at prices which, in the judgment of an
Independent Appraiser, do not exceed the fair market value of such shares as of
the date of the transaction.
The requirements of this Section 7.01 shall not apply to the
distribution of any portion of a Participant's Accrued Benefit which has been
diversified or transferred to another plan pursuant to the provisions of Section
7.02 hereof.
Notwithstanding the foregoing, the foregoing shall not be applicable to
a financial institution as defined in Code ss. 581 which is prohibited from
redeeming or purchasing its own securities, if the Participant has been provided
the option to receive its distribution from the Plan in cash.
The protections and rights described in this Section 7.01 are
nonterminable with respect to all Employer Securities acquired with an Exempt
Loan. Should this Plan cease to be an employee stock ownership plan, or should
the Exempt Loan be repaid, Employer Securities acquired with the proceeds of an
Exempt Loan will continue to be subject to the provisions of this Section 7.01
after the loan is paid.
7.02 DIVERSIFICATION OF INVESTMENTS. Within ninety (90) days after the
------------------------------
close of each Plan Year in the Qualified Election Period, each Participant who
has attained age fifty-five (55) and has completed ten (10) years of
participation under the Plan shall be permitted to direct the Plan as to the
investment of at least twenty-five percent (25%) of the number of shares ever
allocated to the Employer Securities Account, less those shares previously
diversified and or distributed. In the case of the sixth (6th) year of the
Qualified Election Period, the preceding sentence shall be applied by
substituting "fifty percent (50%)" for "twenty-five percent (25%)." The
Participant's direction shall be effective no later than ninety (90) days after
the close of the Plan Year.
For purposes of this Section, Qualified Election Period shall mean the
six (6) Plan Year periods beginning with the Plan Year in which the Participant
was first eligible to make the election.
The Administration Committee shall offer at least three (3) investment
options (not inconsistent with regulations prescribed by Internal Revenue
Service regulations) to each Participant who makes an election under this
Section 7.02 and such funds shall be held in a segregated investment account
under the General Investment Account.
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<PAGE>
In lieu of offering such investment options, the Administration
Committee may direct that all amounts subject to Participant elections under
this Section 7.02 be distributed to Participants. All such distributions shall
be distributed within ninety (90) days after the close of the Plan Year and
shall be subject to the requirements of Article VI of this Plan.
In lieu of receiving a cash distribution under this Section 7.02, a
Participant may direct the Plan to transfer his distribution to another
qualified plan of the Company which accepts such transfers, provided that such
plan permits employee-directed investments and does not invest in Employer
Securities to a substantial degree. Such transfer shall be made within ninety
(90) days after the close of the Plan Year.
7.03 CASH DIVIDENDS. Cash dividends, if any, on shares of Employer
--------------
Securities allocated to Participant Accounts may be accumulated in the Trust or
may be paid to Participants currently as determined in the discretion of the
Board of Directors of the Company, exercised in a uniform and nondiscriminatory
manner. Provided that if the Plan is primarily invested in Employer Securities,
it is intended that the Company shall be allowed a deduction with respect to any
dividends paid on shares of Employer Securities of any class held by the Plan on
the record date to the extent such dividends are paid in cash directly to the
Participants, or their Beneficiaries, or are paid to the Plan and are
distributed from the Plan to the Participants or their Beneficiaries not later
than ninety (90) days after the close of the Plan Year in which paid. Provided
further that if the Plan is primarily invested in Employer Securities and the
dividends otherwise qualify as a deductible dividend under Section 404(k) of the
Code, it is also intended that the Company shall be allowed a deduction for any
dividends paid on shares of Employer Securities (whether or not allocated) and
used to make payments on an Exempt Loan, provided that in the case of dividends
paid on allocated shares, Employer Securities having a fair market value equal
to the dividends will be allocated to such Participants for the year in which
such dividends would otherwise have been allocated to such Participants.
7.04 RIGHT OF FIRST REFUSAL. If any Participant (or Beneficiary) who
----------------------
receives Employer Securities which are not publicly traded, under this Plan
desires to dispose of any of his Employer Securities for any reason during his
lifetime (whether by sale, assignment, gift or any other method of transfer), he
first must offer the Employer Securities for sale to the Employer. The
Administration Committee may require a Participant (or Beneficiary) entitled to
a distribution of Employer Securities to execute an appropriate stock transfer
agreement (evidencing the right of first refusal) prior to receiving a
certificate for Employer Securities.
In the case of an offer by a third party, the offer of the Employer is
subject to all the terms and conditions set forth in Section 7.01, based on the
price equal to the fair market value per share and payable in accordance with
the terms of Section 7.01, unless the selling price and terms offered to the
Participant by the third party are more favorable to the Participant than the
selling price and terms of Section 7.01, in which event, the selling price and
terms of the offer of the third party apply. The Employer must give written
notice to the offering Participant of its acceptance
39
<PAGE>
of the Participant's offer within fourteen (14) days after the Participant has
given written notice to the Employer, or the Employer's rights under this
Section 7.04 will lapse. The Employer may grant the Plan the option to assume
the Employer's rights and obligations with respect to all or any part of the
Employer Securities offered to the Employer under this Section 7.04.
7.05 VOTING EMPLOYER SECURITIES. The Trustee shall vote all Employer
--------------------------
Securities held by it as part of the Plan assets unless provided otherwise
hereinafter:
(a) If any agreement entered into by the Trust provides for
voting of any shares of Employer Securities pledged as security for any
obligation of the Plan, then such shares of Employer Securities shall
be voted in accordance with such agreement. Otherwise, the Trustee
shall vote the Employer Securities pledged.
(b) If the Employer has a registration-type class of securities,
each Participant or Beneficiary shall be entitled to direct the Trustee
as to the manner in which the Employer Securities which are allocated
to the Employer Securities Account of such Participant or Beneficiary
is to be voted.
(c) If the Employer does not have a registration-type class of
securities, each Participant or Beneficiary in the Plan shall be
entitled to direct the Trustee as to the manner in which voting rights
on shares of Employer Securities which are allocated to the Employer
Securities Account of such Participant or Beneficiary are to be
exercised with respect to any corporate matter which involves the
voting of such shares with respect to the approval or disapproval of
any corporate merger or consolidation, recapitalization,
reclassification, liquidation, dissolution, sale of substantially all
assets of a trade or business, or such similar transaction as
prescribed in applicable regulations.
(d) If the Employer does not have a registration-type class of
securities and the by-laws of the Employer require the Plan to vote an
issue in a manner that reflects a one-man, one-vote philosophy, each
Participant or Beneficiary shall be entitled to cast one vote on an
issue and the Trustee shall vote the shares held by the Plan in
proportion to the results of the votes cast on the issue by the
Participants and Beneficiaries. The Trustee may not vote Employer
Securities which a Participant or Beneficiary, pursuant to this
Section, fails to exercise unless compelled to by Department of Labor
rules and regulations.
(e) For purposes of this Section 7.05, the term "registration-
type class of securities" means: (i) a class of securities required to
be registered under Section 12 of the Securities Exchange Act of 1934;
and (ii) a class of securities which would be required to be so
registered except for the exemption from registration provided in
subsection (g)(2)(H) of such Section 12.
7.06 LOANS TO PURCHASE EMPLOYER SECURITIES. The Trustee is
-------------------------------------
specifically
40
<PAGE>
authorized to borrow money or to assume indebtedness for the purpose of
acquiring Employer Securities, subject to the following terms and conditions
which shall apply to the Exempt Loan:
(a) The Trustee will use the proceeds of the loan within a
reasonable time after receipt only for any or all of the following
purposes: (i) to acquire Employer Securities, (ii) to repay such loan,
or (iii) to repay a prior Exempt Loan. Except as provided in this
Section 7.06, no Employer Security acquired with the proceeds of an
Exempt Loan may be subject to a put, call or other option, or buy-sell
or similar arrangement while held by and when distributed from this
Plan, whether or not this Plan is then an employee stock ownership
plan.
(b) The interest rate of the Exempt Loan may not be more than
a reasonable rate of interest.
(c) Any collateral the Trustee pledges to the creditor must
consist only of the assets purchased by the borrowed funds and those
assets the Trust used as collateral on the prior Exempt Loan repaid
with the proceeds of the current Exempt Loan.
(d) The creditor may have no recourse against the Trust under
the Exempt Loan except with respect to such collateral given for the
Exempt Loan, contributions (other than contributions of Employer
Securities) that the Employer makes to the Trust to meet its
obligations under the Exempt Loan, and earnings attributable to such
collateral and the investment of such contributions. The payment made
with respect to an Exempt Loan by the Plan during a Plan Year must not
exceed an amount equal to the sum of such contributions and earnings
received during or prior to the year less such payments in prior years.
The Administration Committee and the Trustee must account separately
for such contributions and earnings in the books of account of the Plan
until the Trust repays the Exempt Loan.
(e) In the event of default upon the loan, the value of Plan
assets transferred in satisfaction of the Exempt Loan must not exceed
the amount of the default, and if the lender is a Disqualified Person,
the Exempt Loan must provide for transfer of Plan assets upon default
only upon and to the extent of the failure of the Plan to meet the
payment schedule of the Exempt Loan.
(f) The Trustee must add and maintain all assets acquired with
the proceeds of an Exempt Loan in a Loan Suspense Account. In
withdrawing assets from the Loan Suspense Account, the Trustee will
apply the provisions of Treas. Reg. (S)(S) 54.4975-7(b)(8) and (15) as
if all securities in the Loan Suspense Account were encumbered. Upon
the payment of any portion of the loan, the Trustee will effect the
release of assets in the Loan Suspense Account from encumbrances. For
each Plan Year during the duration of the Exempt Loan, the number of
Employer Securities released must equal the number of encumbered
Employer Securities held immediately before release for the current
Plan
41
<PAGE>
Year multiplied by a fraction. The numerator of the fraction is the
amount of principal and interest paid for the Plan Year. The
denominator of the fraction is the sum of the numerator plus the
principal and interest to be paid for all future Plan Years. The number
of future Plan Years under the loan must be definitely ascertainable
and must be determined without taking into account any possible
extension or renewal periods. If the interest rate under the Exempt
Loan is variable, the interest to be paid in future Plan Years must be
computed by using the interest rate applicable as of the end of the
Plan Year. If collateral includes more than one class of Employer
Securities, the number of Employer Securities of each class to be
released for a Plan Year must be determined by applying the same
fraction to each such class. The Administration Committee will allocate
assets withdrawn from the Loan Suspense Account to the Accounts of
Participants who otherwise share in the allocation of the Employer's
contribution for the Plan Year for which the Trustee has paid the
portion of the Exempt Loan resulting in the release of the assets. The
Administration Committee consistently will make this allocation as of
each Anniversary Date on the basis of non-monetary units, taking into
account the relative Compensation of all such Participants for such
Plan Year.
The Administration Committee may also elect at the initiation of
the Exempt Loan to have the Employer Securities released from the Loan
Suspense Account solely with reference to principal payments. However,
if release is determined with reference to principal payments only, the
following additional rules apply: (1) the Exempt Loan must provide for
annual payments of principal and interest at a cumulative rate that is
not less rapid at any time than level annual payments of such amounts
for ten (10) years; (2) interest included in any payment is disregarded
only to the extent that it would be determined to be interest under
standard loan amortization tables; and (3) the entire duration of the
Exempt Loan repayment period does not exceed ten (10) years, even in
the event of a renewal, extension or refinancing of the Exempt Loan.
(g) The loan must be for a specific term and may not be payable
at the demand of any person except in the case of default.
(h) Notwithstanding the fact this Plan ceases to be an employee
stock ownership plan, Employer Securities acquired with the proceeds of
an Exempt Loan will continue after the Trustee repays the loan to be
subject to the provisions of Section 7.01 and 7.04 (if applicable) as
required by Treas. Reg. (S)(S) 54.4975-7(b)(4), (10), (11) and (12)
relating to put, call or other options and to buy-sell or similar
arrangements, and shall not be subjected to any additional puts, calls,
options, buy-sell or similar arrangements while held by or when
distributed from the Plan, except to the extent provided therein.
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<PAGE>
ARTICLE VIII
EMPLOYER ADMINISTRATIVE PROVISIONS
8.01 INFORMATION. The Employer shall, upon request or as may be
-----------
specifically required hereunder, furnish or cause to be furnished, all of the
information or documentation which is necessary or required by the
Administration Committee and Trustee to perform their respective duties and
functions under the Plan. The Employer's records as to the current information
the Employer furnishes to the Administration Committee and Trustee shall be
conclusive as to all persons.
8.02 NO LIABILITY. The Employer assumes no obligation or responsibility
------------
to any of the Employees, Participants, or Beneficiaries for any act of, or
failure to act, on the part of the Administration Committee (unless the Employer
is the Administration Committee), or the Plan Administrator (unless the Employer
is the Plan Administrator).
8.03 EMPLOYER ACTION. Any action required of the Employer shall be by
---------------
resolution of its Board of Directors or by a person authorized to act by Board
resolution.
8.04 INDEMNITY. The Employer agrees it will indemnify and save harmless
---------
the Board of Directors, individual Trustee(s), and the members of the
Administration Committee, and each of them, from and against any and all loss
resulting from liability to which the Board of Directors, individual Trustee(s),
and the Administration Committee, or the members of the Board of Directors and
Administration Committee, may be subjected by reason of any act or conduct
(except willful or reckless misconduct) in their official capacities in the
administration of this Plan or Trust or both, including all expenses reasonably
incurred in their defense, in case the Employer fails to provide such defense.
The indemnification provisions of this Section 8.04 shall not relieve the Board
of Directors, individual Trustee(s), or any members of the Administration
Committee from any liability each may have under the Act for breach of a
fiduciary duty.
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ARTICLE IX
ADMINISTRATION COMMITTEE
9.01 APPOINTMENT OF COMMITTEE. The Employer shall appoint an
------------------------
Administration Committee to administer the Plan, the members of which may or may
not be Participants in the Plan.
9.02 TERM. Each member of the Administration Committee shall serve
----
until his successor is appointed. Any member of the Administration Committee may
be removed by the Board of Directors, with or without cause, which shall have
the power to fill any vacancy which may occur. An Administration Committee
member may resign upon written notice to the Employer.
9.03 COMPENSATION. The members of the Administration Committee shall
------------
serve without compensation for services as such, but the Employer shall pay all
expenses, including the expenses for any bond required under Act (S) 412. To the
extent such expenses are not paid by the Employer, they shall be paid by the
Trustee from the Trust Fund.
9.04 POWERS OF ADMINISTRATION COMMITTEE. The Administration Committee
----------------------------------
shall have the following powers and duties, which it shall exercise under the
Plan in a uniform and nondiscriminatory manner:
(a) To direct the administration of the Plan in accordance with
the provisions herein set forth;
(b) To adopt rules of procedure and regulations necessary for
the administration of the Plan provided the rules are not inconsistent
with the terms of the Plan;
(c) To determine all questions with regard to rights of
Employees, Participants, and Beneficiaries under the Plan, including
but not limited to rights of eligibility of an Employee to participate
in the Plan, the value of a Participant's Accrued Benefit, and the
Accrued Benefit of each Participant;
(d) To enforce the terms of the Plan and the rules and
regulations it adopts;
(e) To direct the Trustee as respects the crediting and
distribution of the Trust and all other matters within its discretion
as provided in the Trust Agreement;
(f) To review and render decisions respecting a claim for (or
denial of a claim for) a benefit under the Plan;
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<PAGE>
(g) To furnish the Employer with information which the Employer
may require for tax or other purposes;
(h) To engage the service of counsel (who may, if appropriate,
be counsel for the Employer) and agents whom it may deem advisable to
assist it with the performance of its duties;
(i) To prescribe procedures to be followed by distributees in
obtaining benefits;
(j) To receive from the Employer and from Employees such
information as shall be necessary for the proper administration of the
Plan;
(k) To receive and review reports of the financial condition and
of the receipts and disbursements of the Trust Fund from the Trustee;
(l) To establish a nondiscriminatory policy which the Trustee
shall observe in making loans, if any, to Participants;
(m) To maintain, or cause to be maintained, separate Accounts in
the name of each Participant to reflect each Participant's Accrued
Benefit under the Plan;
(n) To select a secretary, who need not be a member of the
Administration Committee;
(o) To interpret and construe the Plan;
(p) To select the issuing company or companies from which
insurance contracts, if any, shall be purchased as provided herein; and
to determine the form, type, and kind of such contract;
(q) To engage the services of an Investment Manager or Managers
(as defined in Act (S) 3(38)), each of whom shall have full power and
authority to manage, acquire or dispose of (or direct the Trustee with
respect to such acquisition or disposition) any plan asset under its
control; and
(r) To direct the Trustee in the investment, reinvestment, and
disposition of the Trust Fund as provided in the Trust Agreement.
9.05 MANNER OF ACTION. The decision of a majority of the members of the
----------------
Administration Committee appointed and qualified shall control. In case of a
vacancy in the membership of the Administration Committee, the remaining members
of the Administration Committee may exercise any and all of the powers,
authorities, duties, and discretions conferred
45
<PAGE>
upon such Administration Committee pending the filling of the vacancy. The
Administration Committee may, but need not, call or hold formal meetings. Any
decisions made or action taken pursuant to written approval of a majority of the
then members shall be sufficient. The Administration Committee shall maintain
adequate records of its decisions.
9.06 AUTHORIZED REPRESENTATIVE. The Administration Committee may
-------------------------
authorize any one of its members, or its secretary, to sign on its behalf any
notice, directions, applications, certificates, consents, approvals, waivers,
letters, or other documents. The Administration Committee must evidence this
authority by an instrument signed by all its respective members and filed with
the Trustee.
9.07 NONDISCRIMINATION. The Administration Committee shall administer
-----------------
the Plan in a uniform, nondiscriminatory manner for the exclusive benefit of the
Participants and their Beneficiaries.
9.08 INTERESTED MEMBER. No member of the Administration Committee may
-----------------
decide or determine any matter concerning the distribution, nature, or method of
settlement of his own benefits under the Plan unless there is only one person
acting alone in the capacity as the Administration Committee.
9.09 FUNDING POLICY. The Administration Committee shall review, not
--------------
less often than annually, all pertinent Employee information and Plan data in
order to establish the funding policy of the Plan and to determine the
appropriate methods of carrying out the Plan's objectives. The Administration
Committee shall communicate annually to the Trustee and to any Plan Investment
Manager the Plan's short-term and long-term financial needs so investment policy
can be coordinated with Plan financial requirements.
9.10 INDIVIDUAL STATEMENT. As soon as practicable after the Valuation
--------------------
Date of each Plan Year but within the time prescribed by the Act and the
regulations under the Act, the Administration Committee will deliver to each
Participant (and to each Beneficiary) a statement reflecting the condition of
his Accrued Benefit in the Trust as of that date and such other information the
Act requires be furnished the Participant or Beneficiary. No Participant, except
a member of the Administration Committee, shall have the right to inspect the
records reflecting the Account of any other Participant.
9.11 BOOKS AND RECORDS. The Administration Committee shall maintain, or
-----------------
cause to be maintained, records which will adequately disclose at all times the
state of the Trust Fund and of each separate interest therein. The books, forms,
and methods of accounting shall be the responsibility of the Administration
Committee.
9.12 UNCLAIMED ACCOUNT PROCEDURE. Neither the Trustee nor the
---------------------------
Administration Committee shall be obliged to search for, or ascertain the
whereabouts of, any Participant or Beneficiary. The Administration Committee, by
certified or registered mail addressed to his last known address of record with
the Administration Committee or the
46
<PAGE>
Employer, shall notify any Participant or Beneficiary that he is entitled to a
distribution under this Plan, and the notice shall quote the provisions of this
Section. If the Participant or Beneficiary fails to claim his distributive share
or make his whereabouts known in writing to the Administration Committee within
six (6) months from the date of mailing of the notice, or before this Plan is
terminated or discontinued, whichever should first occur, the Administration
Committee shall direct the Trustee to segregate the Participant's unclaimed
Accrued Benefit in a segregated interest bearing Account in the name of the
Participant or Beneficiary. The Administration Committee shall then notify the
Social Security Administration of the Participant's (or Beneficiary's) failure
to claim the distribution to which he is entitled. The Administration Committee
shall request the Social Security Administration to notify the Participant (or
Beneficiary) in accord with the procedures it has established for this purpose.
The segregated Account shall be entitled to all income it earns and shall bear
all expense or loss it incurs.
47
<PAGE>
ARTICLE X
PARTICIPANT ADMINISTRATIVE PROVISIONS
10.01 BENEFICIARY DESIGNATION. Any Participant may from time to time
-----------------------
designate, in writing, any person or persons, contingently or successively, to
whom the Trustee shall pay his Accrued Benefit in the event of his death. A
Participant's Beneficiary designation shall not be valid unless the
Participant's spouse consents to the Beneficiary designation. A Participant's
Beneficiary designation does not require spousal consent if the Participant's
spouse is the Participant's designated Beneficiary, or if the Participant and
his spouse were not married throughout the one-year period ending on the date of
the Participant's death. The spousal consent shall be in a manner consistent
with (S) 401(a)(11) and (S) 417(a)(2)(A) of the Code, shall be in writing, shall
acknowledge the effect of the consent, and shall be witnessed by a notary public
or the Plan Administrator (or his representative). The Administration Committee
shall prescribe the form for the written designation of Beneficiary and, upon
the Participant's filing the form with the Administration Committee, it
effectively shall revoke all designations filed prior to that date by the same
Participant.
10.02 NO BENEFICIARY DESIGNATION. If a Participant fails to name a
--------------------------
Beneficiary in accordance with Section 10.01, or if the Beneficiary named by a
Participant predeceases him or dies before complete distribution of the
Participant's Accrued Benefit, then the Trustee shall pay the Participant's
Accrued Benefit in accordance with Article VII hereof in the following order of
priority:
(a) To the Participant's surviving spouse;
(b) To the Participant's surviving children, including adopted
children, in equal shares;
(c) To the Participant's surviving parents, in equal shares; or
(d) To the legal representative of the estate of the last to
die of the Participant and his Beneficiary.
The Administration Committee shall direct the Trustee as to the method
and to whom the Trustee shall make payment under this Section 10.02.
10.03 PERSONAL DATA TO ADMINISTRATION COMMITTEE. Each Participant and
-----------------------------------------
Beneficiary must furnish to the Administration Committee evidence, data, or
information as the Administration Committee considers necessary or desirable for
the purpose of administering the Plan. The provisions of this Plan are effective
for the benefit of each Participant upon the condition precedent that each
Participant will furnish promptly full, true, and complete evidence, data, and
information when requested by the Administration Committee, provided the
48
<PAGE>
Administration Committee shall advise each Participant of the effect of his
failure to comply with its request.
10.04 ADDRESS FOR NOTIFICATION. Each Participant and each Beneficiary
------------------------
of a deceased Participant shall file with the Administration Committee, in
writing, his post office address, and each subsequent change of such post office
address. Any payment or distribution hereunder, and any communication addressed
to a Participant or his Beneficiary, mailed to the last address filed with the
Administration Committee, or if no such address has been filed, then to the last
address indicated on the records of the Employer, shall be deemed to have been
delivered to the Participant or his Beneficiary on the date that such
distribution or communication is deposited in the United States Mail, postage
prepaid.
10.05 ASSIGNMENT OR ALIENATION. Subject to Code (S) 414(p) relating to
------------------------
qualified domestic relations orders, no benefit payable under the Plan shall be
subject in any manner to alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, including any such liability which is for alimony or
other payments for the support of a spouse or former spouse, or for any other
relative of the Participant, prior to actually being received by the person
entitled to the benefit under the terms of the Plan. The Trust Fund shall not in
any manner be liable for, or subject to, the debts, contracts, liabilities,
engagements, or torts of any person entitled to benefits hereunder.
10.06 LITIGATION AGAINST THE TRUST. If any legal action which is filed
----------------------------
against the Trustee, Board of Directors, or the Administration Committee, or
against any member or members of the Administration Committee or Board of
Directors, by or on behalf of any Participant or Beneficiary, results adversely
to the Participant or to the Beneficiary, the Trustee shall reimburse itself,
the Board of Directors, Administration Committee, and any member or members of
the Administration Committee or Board of Directors, all costs and fees expended
by it or them by surcharging all costs and fees against the same payable under
the Plan to the Participant or to the Beneficiary, but only to the extent a
court of competent jurisdiction specifically authorizes and directs any such
surcharges.
10.07 INFORMATION AVAILABLE. Any Participant in the Plan or any
---------------------
Beneficiary may examine copies of the summary plan description, the latest
annual report, any bargaining agreement, this Plan, contracts, or any other
instrument under which the Plan was established or is operated. The
Administration Committee will maintain all of the items listed in this Section
in its office, or in such other place or places as may be designated from time
to time in order to comply with the regulations issued under the Act, for
examination during reasonable business hours. Upon the written request of a
Participant or Beneficiary, the Administration Committee shall furnish him with
a copy of any item listed in this Section. The Administration Committee may make
a reasonable charge to the requesting person for the copy so furnished.
10.08 BENEFICIARY'S RIGHT TO INFORMATION. A Beneficiary's right to (and
----------------------------------
the Administration Committee's duty to provide to the Beneficiary) information
or data concerning
49
<PAGE>
the Plan shall not arise until he first becomes entitled to receive a benefit
under the Plan.
10.09 APPEAL PROCEDURE FOR DENIAL OF BENEFITS. The Administration
---------------------------------------
Committee shall provide adequate notice in writing to any Participant or to any
Beneficiary ("Claimant") whose claim for benefits under the Plan has been
denied. The Administration Committee's notice to the Claimant shall set forth:
(a) The specific reason for the denial;
(b) Specific references to pertinent Plan provisions on which
the Administration Committee based its denial;
(c) A description of any additional material and information
needed for the Claimant to perfect his claim and an explanation of why
the material or information is needed;
(d) A statement that the Claimant may;
(i) Request a review upon written application to the
Administration Committee;
(ii) Review pertinent Plan documents; and
(iii) Submit issues and comments in writing; and
(e) That any appeal the Claimant wishes to make of the adverse
determination must be in writing to the Administration Committee within
seventy-five (75) days after receipt of the Administration Committee's
notice of denial of benefits. The Administration Committee's notice
must further advise the Claimant that his failure to appeal the action
to the Administration Committee in writing within the seventy-five
(75)-day period will render the Administration Committee's
determination final, binding, and conclusive.
If the Claimant should appeal to the Administration Committee, he, or
his duly authorized representative, may submit, in writing, whatever issues and
comments he, or his duly authorized representative, feels are pertinent. The
Administration Committee shall re-examine all facts related to the appeal and
make a final determination as to whether the denial of benefits is justified
under the circumstances. The Administration Committee shall advise the Claimant
of its decision within sixty (60) days of the Claimant's written request for
review, unless special circumstances (such as a hearing) would make a rendering
of a decision within the sixty (60) day limit infeasible, but in no event shall
the Administration Committee render a decision respecting a denial for a claim
for benefits later than one hundred twenty (120) days after its receipt of a
request for review. A written statement stating the decision on review, the
specific reasons for the decision, and the specific Plan provisions on which the
decision is based shall be mailed or delivered to the
50
<PAGE>
Claimant within such sixty (60) (or one hundred twenty (120)) day period.
The Administration Committee's notice of denial of benefits shall
identify the name of each member of the Administration Committee and the name
and address of the Administration Committee member to whom the Claimant may
forward his appeal.
10.10 NO RIGHTS IMPLIED. Nothing contained in this Plan, or any
-----------------
modification or amendment to the Plan, or in the creation of any benefit, or the
payment of any benefit, shall give any Employee, Participant, or any Beneficiary
any right to continue employment, or any legal or equitable right against the
Employer or any officer, director, or Employee of the Employer, or its agents or
employees, except as expressly provided by the Plan, or the Act.
10.11 NOTICE OF CHANGE OF TERMS. The Plan Administrator, within the
-------------------------
time prescribed by the Act and the applicable regulations, shall furnish all
Participants and Beneficiaries a summary description of any material amendment
to the Plan or notice of discontinuance of the Plan and all other information
required by the Act to be furnished without charge.
51
<PAGE>
ARTICLE XI
FIDUCIARIES' DUTIES
11.01 NAMED FIDUCIARY. The "Named Fiduciary" of the Plan shall consist
---------------
of the following:
(a) The Employer;
(b) The Administration Committee;
(c) The Trustee; and
(d) Such other person or persons that are designated to carry
out fiduciary responsibilities under the Plan in accordance with
Section 11.03(c) hereof.
Any person or group of persons may serve in more than one fiduciary capacity
with respect to the Plan. A Named Fiduciary may employ one or more persons to
render advice with regard to any responsibility such Named Fiduciary has under
the Plan.
11.02 ALLOCATION OF RESPONSIBILITIES. The powers and responsibilities
------------------------------
of the Named Fiduciary are hereby allocated as indicated below:
(a) Employer. The Employer shall be responsible for all
--------
functions assigned or reserved to it under the Plan and Trust
Agreement. Any authority assigned or reserved to the Employer under the
Plan and Trust Agreement shall be exercised by resolution of the
Employer's Board of Directors.
(b) Administration Committee. The Administration Committee
------------------------
shall have the responsibility and authority to control the operation
and administration of the Plan in accordance with the terms of the Plan
and Trust Agreement, except with respect to duties and responsibilities
specifically allocated to other fiduciaries. The Administration
Committee shall have the responsibility and authority to control the
investment of the Trust Fund in accordance with the terms of the Plan
and Trust Agreement, except with respect to duties and responsibilities
specifically allocated to other fiduciaries. The Administration
Committee shall have the authority to issue written directions to the
Trustee to the extent provided in the Trust Agreement. The Trustee
shall follow the Administration Committee's directions unless it is
clear that the actions to be taken under those directions would be
violations of applicable fiduciary standards or would be contrary to
the terms of the Plan or Trust Agreement.
(c) Trustee. The Trustee shall have the duties and
-------
responsibilities set out in the Trust Agreement, subject, however, to
direction by the Administration Committee as
52
<PAGE>
set out in the Trust Agreement.
(d) Allocation. Powers and responsibilities may be allocated
----------
to other fiduciaries in accordance with Section 11.03 hereof, or as
otherwise provided herein or in the Trust Agreement.
This Article is intended to allocate to each Named Fiduciary the individual
responsibility for the prudent execution of the functions assigned to it, and
none of such responsibilities or any other responsibility shall be shared by two
or more of such Named Fiduciaries unless such sharing shall be provided by a
specified provision of the Plan or Trust Agreement.
11.03 PROCEDURES FOR DELEGATION AND ALLOCATION OF RESPONSIBILITIES.
------------------------------------------------------------
Fiduciary responsibilities may be allocated as follows:
(a) The Administration Committee may specifically allocate
responsibilities to a specified member or members of the Administration
Committee.
(b) The Administration Committee may designate a person or
persons other than a Named Fiduciary to carry out fiduciary
responsibilities under the Plan. This authority shall not cause any
person or persons employed to perform ministerial acts and services for
the Plan to be deemed fiduciaries of the Plan.
(c) The Administration Committee may appoint an Investment
Manager or managers to manage (including the power to acquire and
dispose of) the assets of the Plan (or a portion thereof).
(d) If at any time there be more than one Trustee serving
under the Trust Agreement, such Trustees may allocate specific
responsibilities, obligations, or duties among themselves in such
manner as they shall agree.
Any allocation of responsibilities pursuant to this Section shall be made by
filing a written notice thereof with the Administration Committee specifically
designating the person or persons to whom such responsibilities or duties are
allocated and specifically setting out the particular duties and
responsibilities with respect to which the allocation or designation is made.
11.04 GENERAL FIDUCIARY STANDARDS. Subject to Section 11.05 hereof, a
---------------------------
Named Fiduciary shall discharge his duties with respect to the Plan solely in
the interest of the Participants and their Beneficiaries,
(a) for the exclusive purpose of providing benefits to
Participants and their Beneficiaries and defraying reasonable expenses
of administering the Plan; and
(b) with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters
53
<PAGE>
would use in the conduct of any enterprise of a like character and with
like aims; and
(c) by diversifying the investments of the Plan, other than
the investment in Employer Securities, so as to minimize the risk of
large losses, unless under the circumstances it is clearly prudent not
to do so; and
(d) in accordance with the documents and instruments governing
the Plan, insofar as such documents and instruments are consistent with
the provisions of Title I of the Act.
11.05 LIABILITY AMONG CO-NAMED FIDUCIARIES.
------------------------------------
(a) General. Except for any liability which he may have under
-------
the Act, a fiduciary shall not be liable for the breach of a fiduciary
duty or responsibility by another fiduciary of the Plan except in the
following circumstances:
(i) He participates knowingly in, or knowingly undertakes
to conceal, an act or omission of such other fiduciary, knowing
such act or omission is a breach;
(ii) By his failure to comply with the general fiduciary
standards set out in Section 11.04 hereof in the administration
of his specific responsibilities which give rise to his status as
a fiduciary to commit a breach; or
(iii) He has knowledge of a breach by such other fiduciary
and he does not undertake reasonable efforts under the
circumstances to remedy the breach.
(b) Co-Trustees. In the event that there are two or more
-----------
Trustees serving under the Trust Agreement, each should use reasonable
care to prevent a Co-Trustee from committing a breach of fiduciary
responsibility and they shall jointly manage and control assets of the
Plan, except that in the event of an allocation of responsibilities,
obligations, or duties, a Trustee to whom such responsibilities,
obligations, or duties have not been allocated shall not be liable to
any person by reason of this Section, either individually or as a
Trustee, for any loss resulting to the Plan arising from the acts or
omissions on the part of the Trustee to whom such responsibilities,
obligations, or duties have been allocated.
(c) Liability Where Allocation is in Effect. To the extent
---------------------------------------
that fiduciary responsibilities are specifically allocated by a Named
Fiduciary, or pursuant to the express terms hereof, to any person or
persons, then such Named Fiduciary shall not be liable for any act or
omission of such person in carrying out such responsibility except to
the extent that the Named Fiduciary violated Section 11.04 hereof: (i)
with respect to such allocation or designation, (ii) with respect to
the establishment or implementation of the procedure for making such an
allocation or designation, (iii) in continuing the allocation or
54
<PAGE>
designation, or (iv) the Named Fiduciary would otherwise be liable in
accordance with this Section 11.05.
(d) Liability of Trustee Following Administration Committee
-------------------------------------------------------
Directions. No Trustee shall be liable for following instructions of
----------
the Administration Committee given pursuant to Section 11.02(b) and (c)
hereof.
(e) No Responsibility for Employer Action. Neither the Trustee
-------------------------------------
nor the Administration Committee shall have any obligation or
responsibility with respect to any action required by the Plan to be
taken by the Employer, any Participant or eligible Employee, or the
failure of any of the above persons to act or make any payment or
contribution, or to otherwise provide any benefit contemplated under
this Plan, nor shall the Trustee or the Administration Committee be
required to collect any contribution required under the Plan, or
determine the correctness of the amount of any Employer contribution.
(f) No Duty to Inquire. Neither the Trustee nor the
------------------
Administration Committee shall have any obligation to inquire into or
be responsible for any action or failure to act on the part of others.
(g) Liability of Trustee Where Investment Manager Appointed.
-------------------------------------------------------
If an Investment Manager has been appointed pursuant to Section
11.03(c) hereof, then neither the Trustee nor the Administration
Committee shall be liable for the acts or omissions of such Investment
Manager, or be under any obligation to invest or otherwise manage any
assets of the Plan which are subject to the management of such
Investment Manager.
(h) Successor Fiduciary. No Named Fiduciary shall be liable
-------------------
with respect to any breach of fiduciary duty if such breach was
committed before he became a Named Fiduciary or after he ceased to be a
Named Fiduciary.
55
<PAGE>
ARTICLE XII
DISCONTINUANCE, AMENDMENT AND TERMINATION
12.01 DISCONTINUANCE. The Employer shall have the right, at any time,
--------------
to suspend or discontinue its contribution under the Plan.
12.02 AUTHORITY TO AMEND THE PLAN. The Employer may amend the Plan at
---------------------------
any time. However, it shall be impossible, at any time before the satisfaction
of all liabilities hereunder, for any monies to revert to the Employer or be
used for any purpose other than the exclusive benefit of the Participants and
persons claiming through them.
Provided however, that the amendment of the Plan (including any
Restatement) shall not:
(a) revise the vested Accrued Benefit of a Participant
determined as of the later of the date such amendment is adopted, or
the date such amendment becomes effective, if such revised vested
Accrued Benefit is less than that computed under the Plan without
regard to such amendment; or
(b) revise the vesting schedule under the Plan unless each
Participant having at least three (3) years or more of Service is
permitted to elect within a reasonable period after the adoption of
such amendment to have his vested Accrued Benefit computed under the
Plan without regard to such amendment. For Plan Years beginning prior
to January 1, 1989, the election described above applies only to
Participants having at least five (5) Years of Service with the
Employer. A reasonable period for purposes of this Section 12.02(b)
shall be a period which begins no later than the date the Plan
amendment is adopted and ends no later than the last to occur of the
following:
(i) sixty (60) days after the day the Plan
amendment is adopted;
(ii) sixty (60) days after the day on which the Plan
amendment becomes effective; or
(iii) sixty (60) days after a Participant is issued
written notice of the Plan amendment.
Provided further, no amendment shall:
(a) Authorize or permit any of the Trust Fund (other than the
part which is required to pay taxes and administration expenses) to be
used for or diverted to purposes other than for the exclusive benefit
of the Participants or their Beneficiaries;
(b) Cause or permit any portion of the Trust Fund to revert to
or become the
56
<PAGE>
property of the Employer;
(c) Increase the duties or responsibilities of the Trustee or
the Administration Committee without the written consent of the
affected Trustee or the affected member of the Administration
Committee.
The Employer shall make all amendments in writing. Each amendment shall state
the date to which it is either retroactively or prospectively effective.
12.03 TERMINATION. The Employer shall have the right to terminate the
-----------
Plan at any time. The Plan shall terminate upon the first to occur of the
following:
(a) The date terminated by action of the Board of Directors;
(b) The date the Employer shall be judicially declared
bankrupt or insolvent; or
(c) The dissolution, merger, consolidation, or reorganization
of the Employer or the sale by the Employer of all or substantially all
of its assets, unless the successor or purchaser makes provisions to
continue the Plan, in which event the successor or purchaser shall be
substituted as the Employer under this Plan.
12.04 VESTING ON TERMINATION OR SUSPENSION. Notwithstanding any other
------------------------------------
provision of the Plan to the contrary, upon the date of full or partial
termination of the Plan, or, upon complete discontinuance of contributions to
the Plan, an affected Participant's right to his Accrued Benefit shall be one
hundred percent (100%) Nonforfeitable. The Administration Committee shall
interpret and administer this Section 12.04 in accord with the intent and scope
of the regulations issued under Code (S) 411(d)(3).
12.05 PROCEDURE ON TERMINATION. In the event of termination of the Plan
------------------------
or permanent discontinuance of Employer contributions, the Employer shall, in
its sole discretion, authorize any one of the following procedures:
(a) Continue Plan. To continue the Plan in operation in all
-------------
respects until the Trustee has distributed all benefits under the Plan,
except that no further persons shall become Participants, no further
Employee contributions shall be made, all Accounts shall be fully
vested, and no further payments shall be made except in distribution of
the Trust Fund and payment of administration expenses; or
(b) Liquidate Plan. To wind up and liquidate the Plan and
--------------
Trust and distribute the assets thereof after deduction of all expenses
to the Participants, Former Participants, and Beneficiaries in
accordance with their respective Accounts as then constituted. If the
Employer makes no election before termination, then this subsection (b)
will govern distribution of the Trust Fund.
57
<PAGE>
12.06 MERGER. The Trustee shall not consent to, or be a party to, any
------
merger or consolidation with another plan, or to a transfer of assets or
liabilities to another plan, unless immediately after the merger, consolidation,
or transfer, the surviving Plan provides each Participant a benefit equal to or
greater than the benefit each Participant would have received had the Plan
terminated immediately before the merger, consolidation, or transfer.
12.07 NOTICE OF CHANGE OF TERMS. The Administration Committee, within
-------------------------
the time prescribed by the Act and applicable regulations, shall furnish all
Participants and Beneficiaries a summary description of any material amendment
to the Plan or notice of discontinuance of the Plan and all other information
required by the Act to be furnished without charge.
12.08 INITIAL QUALIFICATION. Notwithstanding any other provisions of
---------------------
this Plan, the Employer's adoption of this Plan is subject to the condition
precedent that the Plan initially shall be approved and deemed qualified by the
Internal Revenue Service as satisfying the requirements of (S) 401(a) of the
Code and that the Trust shall be entitled to exemption under the provisions of
(S) 501(a). In the event the Employer shall fail to secure such initial
determination, the contributions made by the Employer together with any income
received or accrued thereon less any expenses paid shall be returned to the
Employer and the Plan and Trust shall terminate. No Participant or Beneficiary
shall have any right or claim to the Trust Fund or to any benefit under the Plan
before the Internal Revenue Service initially determines that the Plan and Trust
qualify under the provisions of (S)(S) 401(a) and 501(a) of the Code.
12.09 REVERSION OF EXCESS ACCOUNT. Notwithstanding any provisions
---------------------------
contained herein to the contrary, the Employer reserves the right to recover
upon the termination of the Plan and Trust Fund any amounts held in an excess
account that cannot be allocated to the accounts of Participants and their
Beneficiaries in the year of termination because of the limitations contained in
Article III of the Plan and (S) 415 of the Code after the satisfaction of all
fixed and contingent obligations to Participants and their Beneficiaries under
the Plan.
58
<PAGE>
ARTICLE XIII
THE TRUST
13.01 PURPOSE OF THE TRUST FUND. A Trust Fund has been created and will
-------------------------
be maintained for the purposes of the Plan, and the assets thereof shall be
invested in accordance with the terms of the Trust Agreement. The primary
purpose of the Plan is for the investment in Employer Securities. The Trustee
will apply contributions to pay any outstanding obligations of the Trust
incurred for the purchase of Employer Securities or they may be applied to
purchase additional Employer Securities from current shareholders, treasury
shares, or newly issued shares from the Company. All contributions will be paid
into the Trust Fund, and all benefits under the Plan will be paid from the Trust
Fund.
13.02 APPOINTMENT OF TRUSTEE. Trustee(s) shall be appointed by the
----------------------
Board of Directors to administer the Trust Fund. The Trustee's obligations,
duties, and responsibilities shall be governed solely by the terms of the Trust
Agreement.
13.03 EXCLUSIVE BENEFIT OF PARTICIPANTS. Subject to Sections 3.04 and
---------------------------------
12.08 hereof, the Trust Fund will be used and applied only in accordance with
the provisions of the Plan to provide the benefits thereof, and no part of the
corpus or income of the Trust Fund shall be used for or diverted to purposes
other than for the exclusive benefit of the Participants and their Beneficiaries
and with respect to expenses of administration. Notwithstanding the preceding
sentence, as provided in Section 12.09 hereof, the Employer reserves the right
to recover any amounts held in an excess account at the termination of the Trust
Fund that cannot be allocated to the accounts of Participants and their
Beneficiaries in the year of termination because of the limitations contained in
Article III of the Plan and (S) 415 of the Code.
13.04 BENEFITS SUPPORTED ONLY BY THE TRUST FUND. Any person having any
-----------------------------------------
claim under the Plan will look solely to the assets of the Trust Fund for
satisfaction.
59
<PAGE>
ARTICLE XIV
TOP HEAVY RULES
14.01 MINIMUM EMPLOYER CONTRIBUTION. If this Plan is top heavy in any
-----------------------------
Plan Year, the Plan guarantees a minimum contribution (subject to the provisions
of this Article XIV) of three percent (3%) of Compensation for each Non-Key
Employee who is a Participant employed by the Employer on the Valuation Date of
the Plan Year, without regard to Hours of Service completed by such Participant
during the Plan Year. The Plan satisfies the guaranteed minimum contribution for
the Non-Key Employee if the Non-Key Employee's contribution rate is at least
equal to the minimum contribution. For purposes of this paragraph, a Non-Key
Employee Participant includes any Employee otherwise eligible to participate in
the Plan but who is not a Participant because his Compensation does not exceed a
specified level.
If the contribution rate for the Key Employee with the highest
contribution rate is less than three percent (3%), the guaranteed minimum
contribution for Non-Key Employees shall equal the highest contribution rate
received by a Key Employee. The contribution rate is the sum of Employer
contributions (not including Employer contributions to Social Security) and
forfeitures allocated to the Participant's Account for the Plan Year divided by
his Compensation for the Plan Year. For purposes of determining the minimum
contribution, the Administration Committee shall consider contributions made to
any plan pursuant to a salary reduction agreement or similar arrangement as
Employer contributions with respect to Highly Compensated Employees, but shall
not consider such contributions as Employer contributions with respect to
non-Highly Compensated Employees. To determine the contribution rate, the
Administration Committee shall consider all qualified top heavy defined
contribution plans maintained by the Employer as a single plan.
14.02 ADDITIONAL CONTRIBUTION. If the contribution rate for the Plan
-----------------------
Year with respect to a Non-Key Employee described in Section 14.01 is less then
the minimum contribution, the Employer will increase its contribution for such
Employee to the extent necessary so his contribution rate for the Plan Year will
equal the guaranteed minimum contribution. The Administration Committee shall
allocate the additional contribution to the Account of the Non-Key Employee for
whom the Employer makes the contribution.
14.03 DETERMINATION OF TOP HEAVY STATUS. The Plan is top heavy for a
---------------------------------
Plan Year if the top heavy ratio as of the Determination Date exceeds sixty
percent (60%). The top heavy ratio is a fraction, the numerator of which is the
sum of the present value of Accrued Benefits of all Key Employees as of the
Determination Date, the contributions due as of the Determination Date, and
distributions made within the five (5) Plan Year period ending on the
Determination Date, and the denominator of which is a similar sum determined for
all Employees. The Administration Committee shall calculate the top heavy ratio
by disregarding the Accrued Benefit of any Non-Key Employee who was formerly a
Key Employee. The Administration Committee shall calculate the top heavy ratio
by disregarding the Accrued Benefit (including
60
<PAGE>
distributions, if any, of the Accrued Benefit) of an individual who has not
performed any service for the Employer during the five (5) Plan Year period
ending on the Determination Date. The Administration Committee shall calculate
the top heavy ratio, including the extent to which it must take into account
distributions, rollovers and transfers, in accordance with Code (S) 416 and the
regulations under that Code section.
If the Employer maintains other qualified plans (including a simplified
employee pension plan), this Plan is top heavy only if it is a part of the
Required Aggregation Group, and the top heavy ratio for both the Required
Aggregation Group and the Permissive Aggregation Group exceeds sixty percent
(60%). The Administration Committee will calculate the top heavy ratio in the
same manner as required by the first paragraph of this Section 14.03, taking
into account all plans within the Aggregation Group. To the extent the
Administration Committee must take into account distributions to a Participant,
the Administration Committee shall include distributions from a terminated plan
which would have been part of the Required Aggregation Group if it were in
existence on the Determination Date. The Administration Committee shall
calculate the present value of Accrued Benefits and the other amounts the
Administration Committee must take into account under defined benefit plans or
simplified employee pension plans included within the group in accordance with
the terms of those plans, Code (S) 416 and the regulations under that Code
section. If an aggregated plan does not have a valuation date coinciding with
the Determination Date, the Administration Committee shall value the Accrued
Benefits in the aggregated plan as of the most recent valuation date falling
within the twelve-month period ending on the Determination Date. The
Administration Committee shall calculate the top heavy ratio with reference to
the Determination Dates that fall within the same calendar year.
14.04 LIMITATION ON ALLOCATIONS. If, during any Limitation Year, this
-------------------------
Plan is top heavy, the Administration Committee shall apply the limitations of
Article III to a Participant by substituting "100%" for "125%" each place it
appears in Section 3.06. This Section 14.04 shall not apply if:
(a) The contribution rate for a Non-Key Employee who
participates only in the defined contribution plan(s) would satisfy
Section 14.01 if the Administration Committee substituted four percent
(4%) for three percent (3%).
(b) A Non-Key Employee who participates in the top heavy
defined benefit plan(s) receives an extra minimum contribution or
benefit which satisfies Code (S) 416(h)(2); and
(c) The top heavy ratio does not exceed ninety percent (90%).
14.05 DEFINITIONS. For purposes of applying the provisions of this
-----------
Article XIV:
(a) "Key Employee" shall mean, as of any Determination Date,
any Employee or former Employee (or Beneficiary of such Employee) who,
at any time
61
<PAGE>
during the Plan Year (which includes the Determination Date) or during
the preceding four (4) Plan Years, is an officer (having annual
Compensation in excess of 150% of the Code (S) 415(c)(1)(A) limitation
in effect for any such Plan Years) of the Employer, one of the
Employees (having annual Compensation in excess of the Code (S)
415(c)(1)(A) limitation in effect for any such Plan Years) owning the
ten (10) largest interests in the Employer, a more than five percent
(5%) owner of the Employer, or a more than one percent (1%) owner of
the Employer who has annual Compensation of more than $150,000. The
constructive ownership rules of Code (S) 318 (or the principles of that
section, in the case of an unincorporated Employer,) will apply to
determine ownership in the Employer. The Administration Committee will
make the determination of who is a Key Employee in accordance with Code
(S) 416(i) and the regulations under that Code section.
(b) "Non-Key Employee" is an Employee who does not meet the
definition of Key Employee.
(c) "Required Aggregation Group" means:
(1) Each qualified plan of the Employer in which at least
one (1) Key Employee participates; and
(2) Any other qualified plan of the Employer which enables
a plan described in (1) to meet the requirements of Code (S)
401(a)(4) or Code (S) 410.
(d) "Permissive Aggregation Group" is the Required Aggregation
Group plus any other qualified plans maintained by the Employer, but
only if such group would satisfy in the aggregate the requirements of
Code (S) 401(a)(4) and Code (S) 410. The Administration Committee shall
determine which plans to take into account in determining the
Permissive Aggregation Group.
(e) "Employer" shall mean all the members of a controlled
group of corporations (as defined in Code (S) 414(b)), of a commonly
controlled group of trades or businesses (whether or not incorporated)
(as defined in Code (S) 414(c)), or an affiliated service group (as
defined in Code (S) 414(m)), of which the Employer is a part. However,
the Administration Committee shall not aggregate ownership interests in
more than one member of a related group to determine whether an
individual is a Key Employee because of his ownership interest in the
Employer.
(f) "Determination Date" for any Plan Year is the Valuation
Date of the preceding Plan Year or, in the case of the first Plan Year
of the Plan, the Valuation Date of that Plan Year.
62
<PAGE>
14.06 MINIMUM VESTING. For any Plan Year in which this Plan is top
---------------
heavy, the minimum vesting schedule will automatically apply to the Plan, unless
the vesting schedule specified in Section 5.05 of the Plan results in more rapid
vesting for Participants.
If the minimum vesting schedule automatically applies, it shall apply
to all benefits within the meaning of (S) 411(a)(7) of the Code except those
attributable to Employee contributions, including benefits accrued before the
effective date of Code (S) 416 and benefits accrued before the Plan became top
heavy. Further, no reduction in vested benefits may occur in the event the
Plan's status as top heavy changes for any Plan Year. However, this Section does
not apply to the Accrued Benefit of any Employee who does not have an Hour of
Service after the Plan has initially become top heavy, and such Employee's
Accrued Benefit attributable to Employer contributions and forfeitures will be
determined without regard to this Section.
The nonforfeitable interest of each Employee in his or her Accrued
Benefit attributable to Employer Contributions shall be determined on the basis
of the following:
20% vesting after 2 years of service
40% vesting after 3 years of service
60% vesting after 4 years of service
80% vesting after 5 years of service
100% vesting after 6 years of service
Should the Plan cease to be top heavy, the above-stated vesting schedule shall
revert to that stated in Article V subject to the conditions of Article XII and
it shall be deemed that all Participants having three (3) or more years of
Service shall have elected to retain the schedule stated in this Section if it
results in more rapid vesting.
14.07 NONAPPLICATION OF THIS ARTICLE. If the Participant is provided
------------------------------
with the minimum benefit required by (S) 416 of the Code which is subject to the
above-stated vesting schedule in another plan of the Employer, the provisions of
this Article XIV will have no application.
63
<PAGE>
ARTICLE XV
MISCELLANEOUS
15.01 EXECUTION OF RECEIPTS AND RELEASES. Any payment to any
----------------------------------
Participant, or to his legal representative or Beneficiary, in accordance with
the provisions of the Plan, shall to the extent thereof be in full satisfaction
of all claims hereunder against the Plan and Trust. The Administration Committee
may require such a Participant, legal representative, or Beneficiary, as a
condition precedent to such payment, to execute a receipt and release therefor
in such form as it shall determine.
15.02 NO GUARANTEE OF INTERESTS. Neither the Trustee, the
-------------------------
Administration Committee, nor the Employer guarantee the Trust Fund from loss or
depreciation. The Employer does not guarantee the payment of any money which may
be due or may become due to any person from the Trust Fund. The liability of the
Administration Committee and the Trustee to make any payment from the Trust Fund
is limited to the then available assets of the Trust.
15.03 PAYMENT OF EXPENSES. All expenses incident to the administration,
-------------------
termination, protection of the Plan and Trust, including but not limited to
legal, accounting, and Trustee fees, shall be paid by the Employer, except that
in case of failure of the Employer to pay the expenses, they will be paid from
the Trust Fund, and until paid, shall constitute a first and prior claim and
lien against the Trust Fund.
15.04 EMPLOYER RECORDS. Records of the Employer as to an Employee's or
----------------
Participant's period of employment, termination of employment and the reason
therefor, leaves of absence, re-employment, and compensation will be conclusive
on all persons, unless determined to be incorrect.
15.05 INTERPRETATIONS AND ADJUSTMENTS. To the extent permitted by law,
-------------------------------
an interpretation of the Plan and a decision of any matter within the Named
Fiduciary's discretion made in good faith is binding on all persons. A
misstatement or other mistake of fact shall be corrected when it becomes known
and the person responsible shall make such adjustment on account thereof as he
considers equitable and practicable.
15.06 UNIFORM RULES. In the administration of the Plan, uniform rules
-------------
will be applied to all Participants similarly situated.
15.07 EVIDENCE. Evidence required of anyone under the Plan may be by
--------
certificate, affidavit, document, or other information which the person acting
on it considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
15.08 SEVERABILITY. In the event any provision of the Plan shall be
------------
held to be illegal or invalid for any reason, the illegal or invalid provisions
of the Plan shall be fully severable and
64
<PAGE>
the Plan shall be construed and enforced as if the illegal or invalid provision
had never been included herein.
15.09 NOTICE. Any notice required to be given herein by the Trustee,
------
the Employer, or the Administration Committee, shall be deemed delivered, when
(a) personally delivered, or (b) placed in the United States mail, postage
prepaid, in an envelope addressed to the last known address of the person to
whom the notice is given.
15.10 WAIVER OF NOTICE. Any person entitled to notice under the Plan
----------------
may waive the notice.
15.11 SUCCESSORS. The Plan shall be binding upon all persons entitled
----------
to benefits under the Plan, their respective heirs and legal representatives,
upon the Employer, its successors and assigns, and upon the Trustee, the
Administration Committee, and their successors.
15.12 HEADINGS. The titles and headings of Articles and Sections are
--------
included for convenience of reference only and are not to be considered in
construction of the provisions hereof.
15.13 GOVERNING LAW. All questions arising with respect to the
-------------
provisions of this Agreement shall be determined by application of the laws of
the State of North Carolina except to the extent North Carolina law is preempted
by Federal statute.
Signed the 5th day of December, 1997, effective as of the 1st day of
January, 1997.
MOORESVILLE SAVINGS BANK, SSB
By: /s/ George W. Brawley, Jr.
---------------------------------
President
ATTEST:
/s/ Billy R. Williams
- ----------------------------
Secretary
65
<PAGE>
EMPLOYEE STOCK OWNERSHIP TRUST
OF
MOORESVILLE SAVINGS BANK, SSB
Prepared By:
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
Greensboro and Raleigh, North Carolina
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C>
RECITALS...............................................................................1
TITLE AND DESCRIPTIONS.................................................................2
1.01 TITLE...............................................................2
1.02 TERMS DEFINED IN PLAN...............................................2
1.03 WORD USAGE..........................................................2
PLAN AND TRUST COMPLEMENTARY...........................................................3
2.01 COMPLEMENTARY.......................................................3
2.02 INTENT TO QUALIFY...................................................3
CONTRIBUTIONS..........................................................................4
3.01 CONTRIBUTIONS.......................................................4
3.02 COMMINGLING OF FUNDS................................................4
PAYMENTS FROM TRUST FUND...............................................................5
4.01 DISTRIBUTIONS.......................................................5
4.02 DIRECTION BY PLAN ADMINISTRATOR.....................................5
4.03 TRUST FUND FOR EXCLUSIVE BENEFIT OF PARTICIPANTS....................5
4.04 LIABILITY FOR PAYMENTS..............................................5
4.05 RETURN OF EMPLOYER CONTRIBUTIONS....................................5
4.06 PAYMENT IN THE EVENT OF DISABILITY OR INCAPACITY....................5
INVESTMENT OF TRUST FUND...............................................................7
5.01 INVESTMENTS.........................................................7
5.02 INVESTMENT MANAGER..................................................7
5.03 DIRECTION OF INVESTMENTS............................................8
5.04 SEPARATE INVESTMENT ACCOUNTS........................................9
5.05 INVESTMENT IN POOLED FUND...........................................9
POWERS OF THE TRUSTEE.................................................................10
6.01 INVESTMENT POWERS..................................................10
6.02 ANCILLARY TRUSTEE..................................................12
ADMINISTRATIVE PROVISIONS.............................................................14
7.01 ACCOUNTS AND RECORDS...............................................14
7.02 INTENTION TO QUALIFY...............................................14
7.03 PLAN ADMINISTRATOR ACTION..........................................14
7.04 VALUATION OF TRUST.................................................14
</TABLE>
<PAGE>
<TABLE>
Page
<S> <C> <C>
7.05 EMPLOYER ACTION....................................................15
7.06 RELIANCE ON WRITTEN INSTRUMENT.....................................15
7.07 LIABILITY FOR PAYMENT OF FUNDS.....................................15
7.08 LIABILITY OF TRUSTEE...............................................15
7.09 COURT PROCEEDINGS..................................................15
7.10 PARTIES TO LITIGATION..............................................15
7.11 THIRD PARTY........................................................15
7.12 AUTHORIZATION WITH RESPECT TO TAXES................................16
7.13 CONSULTATION WITH COUNSEL..........................................16
7.14 NO INTEREST IN EMPLOYER............................................16
7.15 FEES AND EXPENSES..................................................16
7.16 BONDING OF TRUSTEE.................................................16
7.17 RELATIONSHIP OF FIDUCIARIES........................................16
7.18 PRUDENT MAN RULE...................................................17
7.19 ALIENATION.........................................................17
7.20 LIMITATION ON LIABILITY - IF INVESTMENT MANAGER
APPOINTED..................................................17
7.21 INSURANCE COMPANY PROTECTED........................................17
TRUSTEE LIABILITY.....................................................................18
8.01 TRUSTEE LIABILITY..................................................18
SUBSTITUTION OF TRUSTEE...............................................................19
9.01 TRUSTEE............................................................19
9.02 RESIGNATION........................................................19
9.03 REMOVAL............................................................19
9.04 SUCCESSION OF TRUSTEE..............................................19
9.05 MERGER OF CORPORATE TRUSTEE........................................19
AMENDMENT AND TERMINATION.............................................................20
10.01 AMENDMENT..........................................................20
10.02 TERMINATION........................................................20
10.03 SUSPENSION OF CONTRIBUTIONS........................................20
10.04 MERGER OR CONSOLIDATION............................................20
10.05 REVERSION OF SUSPENSE ACCOUNT......................................20
OTHER EMPLOYERS; SUCCESSOR EMPLOYERS..................................................21
11.01 ADOPTION BY OTHER EMPLOYERS........................................21
11.02 CONTINUATION BY EMPLOYER'S SUCCESSOR...............................21
MISCELLANEOUS PROVISIONS..............................................................22
12.01 CONTRIBUTIONS NOT RECOVERABLE......................................22
12.02 LIMITATIONS ON PARTICIPANTS' RIGHTS................................22
12.03 INDEMNIFICATION OF INDIVIDUAL TRUSTEE..............................22
12.04 RECEIPT OF RELEASE.................................................22
</TABLE>
<PAGE>
<TABLE>
Page
<S> <C> <C>
12.05 ACCEPTANCE.........................................................22
12.06 ACCOUNTING PERIOD..................................................22
12.07 TITLE OF TRUST ASSETS..............................................22
12.08 NOTICE.............................................................23
12.09 HEADINGS...........................................................23
12.10 GOVERNING LAW......................................................23
12.11 EXECUTIONS AND COUNTERPARTS........................................23
</TABLE>
<PAGE>
EMPLOYEE STOCK OWNERSHIP TRUST
OF
MOORESVILLE SAVINGS BANK, SSB
This Agreement by and between MOORESVILLE SAVINGS BANK, SSB, a North
Carolina corporation (the "Employer" and sometimes referred to herein as the
"Company"), and the undersigned Trustee(s) (the "Trustee").
RECITALS
--------
WHEREAS, MOORESVILLE SAVINGS BANK, SSB has adopted an Employee Stock
Ownership Plan for the benefit of its employees;
NOW, THEREFORE, the Employee Stock Ownership Trust of Mooresville
Savings Bank, SSB is hereby adopted in its entirety so that it shall provide as
follows:
1
<PAGE>
ARTICLE I
TITLE AND DESCRIPTIONS
1.01 TITLE. This Trust Agreement shall be known as the Employee Stock
-----
Ownership Trust of Mooresville Savings Bank, SSB.
1.02 TERMS DEFINED IN PLAN. The definitions set forth in the Plan are
---------------------
hereby incorporated by reference.
1.03 WORD USAGE. Words used in the masculine shall apply to the
----------
feminine where applicable, and wherever the context of the Plan dictates, the
plural shall be read as the singular and the singular as the plural.
2
<PAGE>
ARTICLE II
PLAN AND TRUST COMPLEMENTARY
2.01 COMPLEMENTARY. This Trust Agreement is established effective as of
-------------
the 1st day of January, 1997. The Trustee's rights, powers, titles, duties,
responsibilities, discretions, and immunities shall be governed solely by this
Trust Agreement except as specifically referenced in the provisions of the Plan.
2.02 INTENT TO QUALIFY. The Plan and Trust are intended to satisfy the
-----------------
requirements of Sections 401 and 501 of the Code and the requirements of the
Act, and all provisions hereof shall be construed to that result.
3
<PAGE>
ARTICLE III
CONTRIBUTIONS
3.01 CONTRIBUTIONS. The Trustee shall receive all contributions made to
-------------
it in cash or in other property acceptable to it. All contributions so received
together with the income therefrom and any other increment thereon shall be
held, managed, and administered by the Trustee pursuant to the terms of the Plan
and Trust without distinction between principal and income. The Trustee shall be
accountable to the Employer for the funds contributed to it by the Employer, but
shall have no duty to administer the Plan nor to determine that the
contributions received from the Employer comply with the provisions of the Plan
or that the assets of the Trust are adequate to provide any benefit payable
pursuant to the Plan. The Trustee shall not be obligated to collect any
contributions from the Employer, nor be obligated to see that funds deposited
with it are deposited according to the provisions of the Plan.
3.02 COMMINGLING OF FUNDS. Unless otherwise directed by the Plan
--------------------
Administrator, the Trustee shall hold, invest, and administer the Trust assets
as a single fund without identification of any part of the Trust assets to the
Employer or to any Participant or group of Participants or their Beneficiaries.
4
<PAGE>
ARTICLE IV
PAYMENTS FROM TRUST FUND
4.01 DISTRIBUTIONS. Payments shall be made from the Trust Fund by the
-------------
Trustee to such persons, in such manner, at such times, and in such amounts as
the Plan Administrator shall from time to time direct in writing, provided,
however, the Trustee may withhold compliance with the Plan Administrator's
direction to the extent that, and so long as, the Trustee shall deem such
withholding necessary to insure payment of the Trustee's expenses or to protect
the Trustee against liability for taxes or any other liability.
4.02 DIRECTION BY PLAN ADMINISTRATOR. The Trustee shall not be liable
-------------------------------
for any distribution made or acts done by it pursuant to written directions of
the Plan Administrator. The Trustee shall not be obligated to inquire as to
whether any payee or distributee is entitled to any payment or whether the
distribution is proper or within the terms of the Plan, or as to the manner of
making any payment or distribution. The Trustee shall be accountable only to the
Plan Administrator for any payment or distribution made by it on the order or
direction of the Plan Administrator.
4.03 TRUST FUND FOR EXCLUSIVE BENEFIT OF PARTICIPANTS. Subject to
------------------------------------------------
Section 4.05 hereof, it shall be impossible, at any time, for any part of the
Trust Fund, other than such part as is required to pay taxes and administration
expenses, to revert to the Employer, or to be used for, or diverted to, purposes
other than for the exclusive benefit of the Participants, Former Participants,
or their Beneficiaries prior to the satisfaction of all liabilities under the
Plan. The term "liability" as used herein includes both fixed and contingent
obligations owed to the Participants and their Beneficiaries. It shall be
impossible for the Employer to recover any portion of the Trust Fund other than
such amounts, if any, as may remain in the Trust Fund because of erroneous
actuarial calculations, after the satisfaction of all fixed and contingent
obligations to Participants and their Beneficiaries under the Plan.
4.04 LIABILITY FOR PAYMENTS. The liability of the Trustee to make
----------------------
payments from the Trust Fund is limited to the available assets of the Trust.
4.05 RETURN OF EMPLOYER CONTRIBUTIONS. Notwithstanding any provisions
--------------------------------
herein to the contrary, upon the Employer's request, a contribution which was
made upon a mistake of fact, conditioned upon qualification of the Plan, or upon
deductibility of the contribution under Section 404 of the Code, shall be
returned to the Employer within one year after payment of the contribution,
denial of the qualification, or disallowance of the deduction (to the extent
disallowed), as the case may be.
4.06 PAYMENT IN THE EVENT OF DISABILITY OR INCAPACITY. If any person
------------------------------------------------
entitled to benefits hereunder (the "Payee") shall be under a legal disability,
or, in the sole judgment of the Plan Administrator, shall be unable to apply
such payment in furtherance of his own interest and advantage, payments
hereunder may be made in any one or more of the
5
<PAGE>
following ways as directed by the Plan Administrator:
(a) To the Payee directly;
(b) To the guardian of his person or his estate;
(c) To a relative of the Payee, to be expended for his
benefit; or
(d) To the custodian of the Payee under any Uniform Gifts (or
Transfers) to Minors Act.
The Trustee shall not be obligated to determine whether any Payee is a minor or
is so incapacitated, but may rely on the Plan Administrator's directions as to
payment of benefits. The Plan Administrator's determination of minority or
incapacity of the Payee shall be final. Any payment made by the Trustee pursuant
to the powers herein conferred shall operate as a complete discharge of all
obligations of the Trustee and the Plan Administrator, to the extent of the
distributions so made.
6
<PAGE>
ARTICLE V
INVESTMENT OF TRUST FUND
5.01 INVESTMENTS. The Trust Fund, except such estimated amounts as in
-----------
the opinion of the Trustee are required by current payments and expenses, shall
be invested and reinvested by the Trustee without distinction between principal
and income in Employer Securities unless specifically provided to the contrary.
It is specifically acknowledged that the purpose of this Trust is to invest in
Employer Securities as provided in the Act. Subject to the provisions of this
Article V and Article VI hereof, the Trustee is authorized to invest and
reinvest the Trust Fund in such bonds, notes, debentures, mortgages,
interest-bearing accounts and certificates (including those maintained by the
Trustee, if the Trustee is a bank), investment trust certificates, preferred or
common stock, real estate, savings and loan accounts, interest in oil, gas and
minerals, Insurance Contracts, with or without cash surrender value, or in such
other property, real, personal or mixed, either within or without the state of
North Carolina, without being limited by any statute or rule of law regarding
investments by trustees. The Trustee may invest in any common collective trust
fund or pooled investment fund (which could constitute a permissible investment
with respect to the Plan) maintained by any bank (including itself, if the
Trustee is a bank) in North Carolina or in any other state of the United States.
The Trustee may hold any portion of the Trust Fund in cash for a reasonable
period pending investment or payment of expenses or benefits. The Trustee shall
have the further right, to the extent permissible under applicable law and the
Plan, to (a) purchase, sell, exchange, and retain preferred or common stocks or
other marketable obligations, consisting of bonds, debentures, notes,
certificates, or other evidences of indebtedness, issued by an Employer or by an
Affiliate and (b) acquire and hold parcels or real property (and related
personal property) which is leased, or is to be leased, to an Employer or to an
Affiliate. For the purposes of this Section, an Affiliate shall mean any
corporation which is an Affiliate (within the meaning of Section 407(d)(7) of
the Act) of any Employer.
5.02 INVESTMENT MANAGER. The Plan Administrator is given the power to
------------------
appoint one or more Investment Managers (herein so called) to exercise full
investment management authority with respect to all or a portion of the assets
of the Trust Fund and to authorize payment of the fees and expenses of such
Investment Manager from the assets of the Trust Fund. In the event the Plan
Administrator exercises this right, the Plan Administrator shall certify to the
Trustee and such Investment Manager the scope of the duties and responsibilities
of the Investment Manager. Such Investment Manager shall be either (a)
registered as an investment adviser under the Investment Advisers Act of 1940,
(b) a bank, as defined in the Investment Advisers Act of 1940, or (c) an
insurance company qualified to manage, acquire or dispose of plan assets under
the laws of more than one state. Upon its appointment, the Investment Manager
shall certify and acknowledge in writing to the Plan Administrator and the
Trustee that he is a fiduciary with respect to the Plan and Trust, and that he
has assumed the duties and responsibilities conferred upon him by the Plan
Administrator. The duties, responsibilities, and authority of any such
Investment Manager may be revoked or modified by the Plan Administrator at any
time by written notice to such Investment Manager and to the Trustee. Any
Investment
7
<PAGE>
Manager duly appointed and authorized by the Plan Administrator, shall, during
the period of his appointment, possess fully and absolutely those powers,
rights, and duties of the Trustee (to the extent delegated by the Plan
Administrator and to the extent permissible under the terms of this Trust
Agreement) with respect to the investment or reinvestment of that portion of the
plan assets over which such Investment Manager has investment management
authority. During any period of time when such Investment Manager is so
appointed and serving, and with respect to those assets of the Trust Fund over
which such Investment Manager exercises investment management authority, the
Trustee's responsibility shall be limited to holding such assets as a custodian,
providing accounting services, disbursing benefits as authorized, and executing
such investment instructions only as directed by such Investment Manager. The
Trustee shall not be responsible for any acts or omissions of such Investment
Manager. Any certificates or other instrument duly signed by such Investment
Manager (or the authorized representative of such Investment Manager),
purporting to evidence any instruction, direction or order of such Investment
Manager with respect to the investment of those assets of the Plan over which
the Investment Manager has investment management authority shall be accepted by
the Trustee as conclusive proof thereof. The Trustee shall also be fully
protected in acting in good faith upon any notice, instruction, direction,
order, certification, opinion, letter, telegram, or other document believed by
the Trustee to be genuine and to be by such Investment Manager (or the
authorized representative of such Investment Manager). The Trustee shall not be
liable for any action taken or omitted by such Investment Manager or for any
mistakes of judgment or other action made, taken or omitted by the Trustee in
good faith upon direction of such Investment Manager.
5.03 DIRECTION OF INVESTMENTS. Notwithstanding any provision contained
------------------------
herein to the contrary, the Plan Administrator shall have the right and power at
any time and from time to time (but shall not be obliged) to direct the Trustee
in writing to purchase, sell, lease, retain, or otherwise act for the Trustee in
regard to any property, real, personal, or mixed, tangible or intangible and the
Trustee shall comply with and carry out such directions without being liable or
responsible in any way for any losses or unfavorable results resulting from its
compliance with such directions; provided that:
(a) So long as, and to the extent that, the Plan Administrator
fails to deliver directions to the Trustee under this Section, the
Trustee shall manage, control, invest, and reinvest the Trust Fund
under the powers granted in Article VI hereof with the same force and
effect as if this Section were not a part of this Agreement.
(b) No person dealing with the Trustee shall be required to
determine whether any sale or purchase by the Trustee has been
authorized or directed by the Plan Administrator, but each person shall
be fully protected in dealing with the Trustee in the same manner as if
this Section were not a part of this Agreement; and
(c) The Plan Administrator shall not direct the Trustee to
invest in the stocks, bonds, notes, debentures, or other obligations of
an Employer or any of its subsidiaries, whether domestic or foreign,
nor direct the purchase of any such investment or any other
property from, or sell to, an Employer or any of its subsidiaries
without first obtaining a
8
<PAGE>
prior ruling from the Internal Revenue Service that such purchase or
sale would not adversely affect the qualified status of this Trust
under Section 401(a) of the Code. The Trustee, in its sole discretion,
may refuse to comply with any direction of the Plan Administrator which
the Trustee deems to be improper or contrary to the provisions of the
Plan or any applicable Federal or state statutes.
5.04 SEPARATE INVESTMENT ACCOUNTS. The Plan Administrator may direct
----------------------------
the Trustee to maintain separate Investment Accounts (herein so called) for each
Participant and Beneficiary. The Administration Committee may direct the Trustee
as to the investment of each separate Investment Account and the Trustee shall
be fully protected with respect to any investment so made. If separate
Investment Accounts are established, as of the Valuation Date for each
Limitation Year, the Trustee shall allocate and credit the net income (or net
loss) of each Participant's segregated Investment Account solely to such
Investment Account.
5.05 INVESTMENT IN POOLED FUND. If a bank is acting as Trustee, the
-------------------------
Plan Administrator may specifically authorize the Trustee to invest all or any
portion of the assets comprising the Trust Fund in any collective investment
trust which at the time of the investment provides for the pooling of the assets
of plans described in Section 401(a) of the Code. This authorization applies
solely to a collective investment trust the Trustee maintains and only if the
Trustee has received a determination letter from the Internal Revenue Service to
the effect the collective investment trust is exempt from Federal income tax.
The provisions of the collective investment trust agreement, as amended by the
Trustee from time to time, are by this reference incorporated within the Plan
and this Trust. The provisions of the collective investment trust shall govern
any investment of Plan assets in that trust.
9
<PAGE>
ARTICLE VI
POWERS OF THE TRUSTEE
6.01 INVESTMENT POWERS. Subject to the provisions of Article VIII, the
-----------------
Trustee is authorized and empowered, but not by way of limitation, with the
following powers, rights, and duties:
(a) Property Transactions. To sell, exchange, convey,
---------------------
transfer, or dispose of and also to grant options with respect to any
property, whether real or personal, at any time held by it, and any
sale may be made by private contract or by public auction, and no
person dealing with the Trustee shall be bound to see to the
application of the purchase money or to inquire into the validity,
expediency, or propriety of any such sale or other disposition.
(b) Operation and Lease. To retain, manage, operate, repair,
-------------------
and improve and to mortgage or lease for any period and on such terms
as the Trustee shall deem proper any
real estate or personal property held by the Trustee, including power
to demolish any buildings or other improvements in whole or in part; to
erect buildings or other improvements; to make leases that may extend
beyond the term of the Trust; and to foreclose, extend, renew, assign,
release or partially release and discharge mortgages or other liens.
(c) Vote. To vote in person or by proxy, with or without power
----
of substitution, any stocks, bonds, or other securities held in Trust.
(d) Stock Rights. To exercise any options appurtenant to any
------------
stocks, bonds, or other securities for the conversion thereof into
other stocks, bonds or securities, or to exercise any rights to
subscribe for additional stocks, bonds, or other securities and to make
any and all necessary payments thereof; to join in, dissent from, or
oppose the reorganization, recapitalization, consolidation, sale, or
merger of corporations or properties in which it may be interested as
Trustee, upon such terms and conditions as it may deem wise and to
accept any securities which may be issued upon any such reorganization,
recapitalization, consolidation, sale, or merger and thereafter to hold
the same.
(e) Bank Trustee: Transaction by Trustee with Itself. If the
------------------------------------------------
Trustee is a bank, to contract or otherwise enter into transactions
between itself as Trustee and as a bank, between itself as Trustee and
the Employer, its subsidiaries and affiliates or any of them, or
between itself as Trustee and any other institution for which it then,
theretofore, or thereafter may be acting as Trustee, subject to the
provisions of the Act.
(f) Borrow. To borrow money from any source in such amounts
------
and upon such terms and for such purposes as the Trustee may determine
and in connection
10
<PAGE>
therewith to execute promissory notes, mortgages, or other obligations
and to pledge or mortgage any Trust assets as security.
(g) Cash. To retain in cash so much of the Trust Fund as it
----
may deem advisable to satisfy liquidity needs of the Plan and to
deposit any cash held in the Trust Fund in a bank account without
liability for the highest rate of interest available, including, if a
bank is acting as Trustee, specified authority to invest in deposits of
the Trustee.
(h) Investments. To invest and reinvest all or any part of the
-----------
Trust Fund in bonds, debentures, mortgages, notes, common or preferred
stocks, with or without par value, real estate, and such other property
as the Trustee deems proper.
(i) Mineral Investments. To purchase, convey, lease, and
-------------------
otherwise deal with oil, gas and other minerals, mineral rights, and
royalties; to operate and develop oil, gas, and other mineral
properties and interest, including, but not limited to, the power to
make and release oil, gas, and mineral leases and subleases; to make
mineral deeds and royalty transfers; to create, reserve and dispose of
overriding royalties, oil payments, gas payments, and any other
interests; to execute division orders and transfer orders; to enter
into development and drilling contracts, operating agreements and
utilization agreements; and to make agreements for present or future
pooling of any and all interests in oil, gas and other minerals.
(j) Agents. To employ and compensate accountants, attorneys,
------
brokers, attorneys-in-fact, attorneys-at-law, tax specialists,
appraisers, and other advisers and agents deemed by the Trustee
necessary or appropriate for the proper administration of the Trust
created hereunder.
(k) Nominee. To hold securities or other property in the name
-------
of the Trustee or its nominee, or in another form as it may deem best,
with or without disclosing the trust relationship.
(l) Documents. To make, execute and deliver any and all
---------
contracts, deeds, leases, waivers, releases, guaranties, pledges,
conveyances, powers of attorney, or other instruments necessary or
proper for the accomplishment of any of the powers herein granted.
(m) Litigation. To begin, maintain, or defend any litigation
----------
necessary in connection with the administration of the Plan, except
that the Trustee shall not be obliged or required to do so unless
indemnified to its satisfaction.
(n) Compromise Claims. To compromise, arbitrate, contest, or
-----------------
abandon any claims or demands.
(o) Taxes. To file all tax returns required of the Trustee and
-----
pay any estate, inheritance, income, or other tax, charge or assessment
attributable to any benefit payable
11
<PAGE>
under the Plan required of the Trustee; to defer making payment of any
tax, charge, or assessment if it is indemnified to its satisfaction in
the premises; and to require before making any payment a release or
other document from any lawful taxing authority.
(p) Retention of Funds. To retain any funds or property
------------------
subject to any dispute, and to decline to make payment or delivery of
the funds or property until final adjudication is made by a court of
competent jurisdiction.
(q) Common Funds. To invest in undivided interests, in common
------------
with any other trust, or trusts, however created, or any other
individual, or individuals, including investments in so-called "common
funds", or in partnerships or joint ventures, operated or created by
any person, trust, or corporation.
(r) Loans. To invest in loans to a Participant in accord with
-----
the loan policy established by the Plan Administrator, provided any
loan is adequately secured, bears a reasonable rate of interest,
provides for repayment within a specified time, and otherwise conforms
to the Participant loan exemption provided by the Code.
(s) General Authorization. To exercise all the further rights,
---------------------
powers, options, and privileges granted, provided for, or vested in
trustees generally under applicable Federal and North Carolina laws, as
amended from time to time, it being intended that, except as herein
otherwise provided, the powers conferred upon the Trustee herein shall
not be construed as being in limitation of any authority conferred by
law, but shall be construed as in addition thereto.
Notwithstanding anything in the Plan or Trust to the contrary, the Trustee shall
not be required by any fiduciary to engage in any action, nor make any
investment which constitutes a prohibited transaction or is otherwise contrary
to the provisions of Sections 406, 407, 408, and 2003 of the Act, or which is
otherwise contrary to law or the terms of the Plan or Trust.
6.02 ANCILLARY TRUSTEE. Whenever and as often as the Trustee deems such
-----------------
action desirable, it may by written instrument appoint any person or corporation
in any State of the United States to act as "Ancillary Trustee" with respect to
any portion of the Trust Fund then held or about to be acquired on behalf of the
Trust. Each such Ancillary Trustee shall have such rights, powers, duties, and
discretions as are delegated to it by the Trustee, but shall exercise the same
subject to limitations or further directions of the Trustee as shall be
specified in the instrument evidencing its appointment.
The Ancillary Trustee may resign or may be removed by the Trustee as to
all or any portion of the assets so held at any time or from time to time by
written instrument delivered one to the other, and the Trustee may thereupon
appoint another Ancillary Trustee as successor to whom such assets shall be
transferred, or may itself receive such assets in termination of the Ancillary
Trusteeship to that extent. Each Ancillary Trustee shall be accountable solely
to the Trustee. The Trustee may pay the Ancillary Trustee reasonable
compensation and may absolve it
12
<PAGE>
from any requirement that it post bond or other security.
13
<PAGE>
ARTICLE VII
ADMINISTRATIVE PROVISIONS
7.01 ACCOUNTS AND RECORDS. The Trustee shall maintain accurate records
--------------------
and accounts of all transactions hereunder, which shall be available at all
reasonable times for inspection or audit by any person or persons designated by
the Plan Administrator. If the Plan Administrator so directs, the Trustee shall
submit to the Plan Administrator such interim valuations, reports, or other
information as the Plan Administrator may reasonably require. Within ninety (90)
days following (a) the close of each Plan Year or (b) the effective date of the
removal or resignation of the Trustee, the Trustee shall file with the Plan
Administrator a written account setting forth all transactions effected by it
subsequent to the end of the period for the last previous report and account, in
such form and detail as the Plan Administrator may request. The approval of any
such report and account by the Plan Administrator shall be a full acquittance
and discharge by the Plan Administrator of the Trustee with respect to the
matters therein set forth. Nothing herein contained, however, shall be deemed to
preclude the Trustee from its right to have its accounts judicially settled by a
court of competent jurisdiction, in which event only the Trustee and the
Employer shall be necessary parties.
7.02 INTENTION TO QUALIFY. It is intended that this Trust and Plan
--------------------
constitute a qualified trust under Section 401(a) of the Code and that this
Trust constitutes a tax-exempt trust under Section 501 of the Code, and until
advised to the contrary in writing, the Trustee may assume that the Trust is so
qualified and is entitled to the exemption from Federal income taxes provided
for in said sections. In the event the Trustee at any time believes such
exemption to be uncertain, the Trustee may take such steps and withhold such
payments as it deems necessary to protect itself.
7.03 PLAN ADMINISTRATOR ACTION. The Employer shall promptly notify the
-------------------------
Trustee of the name of the Plan Administrator as of the date of this Agreement
and of any subsequent changes in the Plan Administrator. In the absence of any
notification of changes, the Trustee may assume that the Plan Administrator is
the same as last reported by the Employer to the Trustee. The Plan Administrator
shall furnish the Trustee with all the necessary factual information required by
it to perform its duties as Trustee hereunder, including a specimen signature of
the Plan Administrator. The Trustee shall not be required to verify the facts so
furnished by the Plan Administrator. The Trustee, in following the directions of
the Plan Administrator, is authorized to act upon the written instructions of
the Plan Administrator and shall not be liable for its acts with respect to
payments from the Trust Fund when following such instructions or directions, or
for failure to act in the absence of such instructions or directions.
7.04 VALUATION OF TRUST. The Trustee shall value the Trust Fund as of
------------------
the end of the Plan Year to determine the fair market value of its assets. The
Trustee shall value the Trust Fund on such other date(s) as may be necessary for
the purpose of the Plan and Trust.
7.05 EMPLOYER ACTION. Any action by an Employer hereunder, pursuant to
---------------
the
14
<PAGE>
Plan, shall be evidenced by a certified copy of a resolution of its Board of
Directors, or by written instrument executed by any person authorized by the
Board of Directors to take such action, and the Trustee shall be fully protected
in acting in accordance with such written instrument or resolution delivered to
it.
7.06 RELIANCE ON WRITTEN INSTRUMENT. The Trustee shall be fully
------------------------------
protected in acting upon any instrument, certificate, resolution, instruction,
direction, order, opinion, letter, telegram, or other document believed by it to
be genuine, and to be signed or presented by the proper person or persons, and
the Trustee shall be under no duty to make any investigation or inquiry as to
any statement contained in any such writing but may accept the same as
conclusive evidence of the truth and accuracy of the statements therein
contained.
7.07 LIABILITY FOR PAYMENT OF FUNDS. The Trustee shall not be liable
------------------------------
for its action in making payment or delivery of any cash or other property to
any person at the direction of the Plan Administrator and, in the event of
litigation, the Trustee shall not be liable for declining to make delivery
thereof until final adjudication shall be made in a court of competent
jurisdiction by agreement of the parties. The Trustee, at its discretion, may
bring any action in the nature of an interpleader, but shall not be obligated to
do so.
7.08 LIABILITY OF TRUSTEE. The Trustee shall not be liable for any
--------------------
action taken or omitted upon direction of the Plan Administrator or the
Employer. If at any given time the Plan Administrator or the Employer should
fail to give directions or instructions to the Trustee as provided in this
Agreement, the Trustee shall act or refrain from acting without such directions
or instructions and may exercise its own discretion and judgment as seems
appropriate and advisable under the circumstances in carrying out the purposes
of this Agreement, without liability to the Plan Administrator or the Employer
therefor.
7.09 COURT PROCEEDINGS. The Trustee may institute, maintain, or defend
-----------------
any litigation necessary in connection with the administration of the Trust
Fund, provided, the Trustee shall be under no duty or obligation to do so unless
it shall have been indemnified to its satisfaction against all expenses and
liabilities which it may sustain or reasonably anticipate by reason thereof. All
costs and expenses of litigation for which the Trustee would be liable shall be
paid by the Employer, or if not paid by the Employer, from the Trust Fund.
7.10 PARTIES TO LITIGATION. Except as otherwise provided by the Act,
---------------------
only the Employer, the Plan Administrator, and the Trustee shall be necessary
parties to any court proceeding involving the Trustee or the Trust Fund. No
Participant or Beneficiary shall be entitled to any notice of process unless
required by the Act. Any final judgment entered in any proceeding shall be
binding upon the Employer, the Plan Administrator, the Trustee, Participants,
and Beneficiaries.
7.11 THIRD PARTY. No person dealing with the Trustee shall be obligated
-----------
to see to the proper application of any money paid or property delivered to the
Trustee, or to inquire whether the Trustee has acted pursuant to any of the
terms of the Plan. Each person dealing with
15
<PAGE>
the Trustee may act upon any notice, request, or representation in writing by
the Trustee, or by the Trustee's duly authorized agent, and shall not be liable
to any person whomever in so doing. The certificate of the Trustee that it is
acting in accordance with the Plan shall be conclusive in favor of the person
relying on the certificate.
7.12 AUTHORIZATION WITH RESPECT TO TAXES. The Trustee may pay out of
-----------------------------------
the Trust Fund all real and personal property taxes, income taxes, and other
taxes of any and all kinds levied or assessed under existing or future laws
against the Trust Fund, or against the Trustee by reason of its office. The
Trustee is further authorized, but not required, to withhold from distributions
to any payee such sum as the Trustee may reasonably estimate as necessary to
cover Federal and states taxes for which the Trustee may be liable, which are,
or may be, assessed with regard to the amount distributable to such payee. Prior
to making any payment or distribution hereunder, the Trustee may require such
releases or other documents from any lawful taxing authority and may require
such indemnity from any payee or distributee as the Trustee shall reasonably
deem necessary for its protection.
7.13 CONSULTATION WITH COUNSEL. Trustee may consult with legal counsel,
-------------------------
who may be counsel for the Employer, if appropriate, with respect to any of its
rights, duties, or obligations hereunder.
7.14 NO INTEREST IN EMPLOYER. Neither the creation of this Trust nor
-----------------------
anything contained in this Agreement shall be construed as giving any person
entitled to benefits hereunder or other employee of the Employer any equity or
other interest in the assets, business, or affairs of the Employer.
7.15 FEES AND EXPENSES. The Trustee shall be reimbursed for all of its
-----------------
expenses and shall be paid such reasonable fees as may be agreed upon from time
to time by the Employer and the Trustee. Such fees and compensation shall be
paid from the Trust Fund if not paid by the Employer; provided, however, that
any person who already receives full-time pay from the Employer shall not
receive any fees for his services as Trustee.
7.16 BONDING OF TRUSTEE. The Trustee shall not be required to furnish
------------------
any bond or security for the performance of its powers and duties hereunder,
unless, irrespective of this provision, the Trustee is required to do so by
state or Federal statute or regulation.
7.17 RELATIONSHIP OF FIDUCIARIES. It is the intent of all fiduciaries
---------------------------
under the Plan and Trust that each fiduciary shall be solely responsible for its
own acts or omissions. Except to the extent imposed by the Act or the Code, no
fiduciary shall have the duty to question whether any other fiduciary is
fulfilling all of the responsibilities imposed upon such other fiduciary by the
Act or by any regulations or rulings issued thereunder. No fiduciary shall have
any liability for a breach of fiduciary responsibility of another fiduciary with
respect to the Plan and this Trust unless he participates knowingly in such
breach, knowingly undertakes to conceal such breach, has actual knowledge of
such breach and fails to take reasonable remedial action to remedy said breach
or, through his negligence in performing his own specific fiduciary
16
<PAGE>
responsibilities which give rise to his status as a fiduciary, has enabled such
other fiduciary to commit a breach of the latter's fiduciary responsibilities.
7.18 PRUDENT MAN RULE. The Trustee, the Plan Administrator, and all
----------------
other Fiduciaries with respect to the Plan and Trust are required to discharge
their duties solely in the interests of Participants and Beneficiaries and for
the exclusive purpose of providing benefits to Participants and Beneficiaries
and defraying reasonable expenses of administration with the care, skill,
prudence, and diligence, under the circumstances then prevailing, that a prudent
man acting in a like capacity and familiar with such matters would use in the
conduct of an enterprise of like character and with like aims by diversifying
the investments so as to minimize the risks of large losses unless under the
circumstances it is clearly prudent not to do so, and in accordance with the
Plan, this Trust Agreement, the rules and directions of the Plan Administrator
and the provisions of the Act.
7.19 ALIENATION. Except as otherwise provided in the Plan, the
----------
benefits, proceeds, payments, or claims of any Participant or Beneficiary
payable from the Trust assets shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary, including any such liability which is for alimony or other payments
for support of a spouse or former spouse. Any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, garnish, levy, or otherwise dispose of
or execute upon any right or benefit payable hereunder shall be void. The Trust
assets shall not in any manner be liable for or subject to the debts, contracts,
liabilities, engagements, or torts of any Participant entitled to benefits
hereunder and such benefits shall not be considered an asset of the Participant
in the event of his insolvency or bankruptcy.
7.20 LIMITATION ON LIABILITY - IF INVESTMENT MANAGER APPOINTED. The
---------------------------------------------------------
Trustee shall not be liable for the acts or omissions of any Investment Manager
or Managers the Plan Administrator may appoint, nor shall the Trustee be under
any obligation to invest or otherwise manage any assets of the Plan which is
subject to the management of a properly appointed Investment Manager.
7.21 INSURANCE COMPANY PROTECTED. No insurance company shall be under
---------------------------
any duty to inquire into the terms of this Trust Agreement or see to the
application of any proceeds of insurance paid to the Trustee pursuant to any
policy of insurance payable to this Trust. The receipt of the Trustee for any
such payment shall be a full and complete acquittance to the insurance company
making payment.
17
<PAGE>
ARTICLE VIII
TRUSTEE LIABILITY
8.01 TRUSTEE LIABILITY. Notwithstanding any provision in this Trust
-----------------
Agreement to the contrary, the Trustee shall be subject to the standards of
conduct, and shall have the powers and immunities set out in Article VI of the
Plan.
18
<PAGE>
ARTICLE IX
SUBSTITUTION OF TRUSTEE
9.01 TRUSTEE. There shall be one or more individual Trustees or one
-------
corporate Trustee, or any combination thereof, as determined from time to time
by the Company. Each Trustee shall serve until a successor Trustee shall be
named by the Company or until such Trustee's resignation, death, incapacity, or
removal, in which event the Company shall name a successor Trustee. The word
"Trustee" as used herein, shall include the original and any successor Trustee
or Trustees, whether corporate or individual.
9.02 RESIGNATION. Any Trustee may resign at any time upon giving sixty
-----------
(60) days' written notice in advance to the Company and to the Plan
Administrator unless such notice shall be waived.
9.03 REMOVAL. The Company, by giving thirty (30) days' written notice
-------
in advance to the Trustee, may remove any Trustee with or without cause.
9.04 SUCCESSION OF TRUSTEE. Each successor Trustee shall succeed to the
---------------------
title to the Trust vested in his predecessor by accepting in writing his
appointment as successor Trustee and filing the acceptance with the former
Trustee and the Plan Administrator without the signing or filing of any further
statement. The resigning or removed Trustee, upon receipt of acceptance in
writing of the Trust by the successor Trustee, shall execute all documents and
do all acts necessary to vest the title of record in any successor Trustee. Each
successor Trustee shall have and enjoy all of the powers, both discretionary and
ministerial, conferred under this Agreement upon his predecessor. No successor
Trustee shall be personally liable for any act or failure to act of any
predecessor Trustee.
9.05 MERGER OF CORPORATE TRUSTEE. If any corporate Trustee should,
---------------------------
before or after qualification, change its name, become consolidated or merged
with another corporation or otherwise should reorganize, any resulting
corporation which succeeds to the fiduciary business of such corporate Trustee
shall become a Trustee hereunder in lieu of such corporate Trustee.
19
<PAGE>
ARTICLE X
AMENDMENT AND TERMINATION
10.01 AMENDMENT. The Company shall have the right at any time by an
---------
instrument in writing to amend the Trust in any manner provided no amendment
shall:
(a) Authorize or permit any of the Trust Fund (other than the
part which is required to pay taxes and administration expenses) to be
used for or diverted to purposes other than for the exclusive benefit
of the Participants or their Beneficiaries.
(b) Cause or permit any portion of the Trust Fund to revert to
or become the property of the Employer.
(c) Increase the duties or responsibilities of the Trustee
without the written consent of the affected Trustee.
10.02 TERMINATION. This Trust may be terminated at any time by the
-----------
Company by delivery to the Trustee of a copy of the resolution of the Board of
Directors specifying such termination. In the event of termination of the Trust,
the Trustee shall distribute all property then constituting the Trust Fund, less
any amounts constituting charges against the Trust Fund, in such manner and at
such times as may be directed by the Plan Administrator. This Trust shall
automatically terminate when no cash or other property remains in the Trust.
10.03 SUSPENSION OF CONTRIBUTIONS. Nothing in this Agreement shall be
---------------------------
construed to prevent the Employer from suspending contributions to the Trust for
any period whatsoever or permanently. Such a suspension, whether temporary or
permanent, shall not, of itself, terminate the Trust.
10.04 MERGER OR CONSOLIDATION. The Plan and this Trust shall not be
-----------------------
merged or consolidated with, nor shall its assets or liabilities be transferred
to, any other plan unless each Participant in the Plan (if the Plan then
terminated) would receive a benefit immediately after the merger, consolidation
or transfer which is equal to or greater than the benefit such Participants,
respectively, would have been entitled to receive immediately before the merger,
consolidation, or transfer (if the Plan had been terminated). Where the
foregoing requirements are satisfied the Plan and this Trust may be merged or
consolidated with another qualified plan and trust.
10.05 REVERSION OF SUSPENSE ACCOUNT. Notwithstanding any provisions
-----------------------------
contained herein to the contrary, the Employer reserves the right upon
termination of the Plan and trust to recover any amounts held in a Suspense
Account that cannot be allocated to the accounts of Participants and their
Beneficiaries in the year of termination because of the limitations contained in
Article III of the Plan and Section 415 of the Code after the satisfaction of
all fixed and contingent obligations to Participants and their Beneficiaries
under the Plan.
ARTICLE XI
20
<PAGE>
OTHER EMPLOYERS; SUCCESSOR EMPLOYERS
11.01 ADOPTION BY OTHER EMPLOYERS. Pursuant to the Plan, any business
---------------------------
entity, which is eligible to and does in fact adopt the Plan, may pursuant to
resolutions of its board of directors, adopt this Trust by written instrument,
duly executed, acknowledged, and delivered to the Trustee, the Plan
Administrator, and the Board of Directors of the Company.
11.02 CONTINUATION BY EMPLOYER'S SUCCESSOR. Any corporation succeeding
------------------------------------
to the interest of an Employer by sale, transfer, consolidation, merger, or
bankruptcy, may elect to continue this Trust by adopting this Trust Agreement
and assuming the duties and responsibilities of the Plan and Trust, or such
corporation may establish a separate plan and trust for the continuation of
benefits for its employees in which event the Trust Fund, held on behalf of the
Employees or the prior Employer, shall (subject to Section 10.04 hereof) be
transferred to the trustee of the new trust.
21
<PAGE>
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.01 CONTRIBUTIONS NOT RECOVERABLE. Except where contributions are
-----------------------------
required to be returned to the Employer by the provisions of the Plan as
permitted or required by the Act or by the Code, no part of the principal or
income of this Trust shall be used for, or diverted to, purposes other than the
exclusive benefit of Participants or Beneficiaries.
12.02 LIMITATIONS ON PARTICIPANTS' RIGHTS. Participation in this Trust
-----------------------------------
shall not give the Employee the right to be retained as an Employee of the
Employer or any right or interest in this Trust other than as herein provided.
The Employer reserves the right to dismiss any Employee without any liability
for any claim either against this Trust, except to the extent provided herein,
or against the Employer. All benefits payable hereunder shall be provided solely
from the assets of the Trust.
12.03 INDEMNIFICATION OF INDIVIDUAL TRUSTEE. The Employer hereby agrees
-------------------------------------
to indemnify and hold harmless any individual Trustee for any claim, suit,
judgment, or liability arising from the performance of the Trustee hereunder and
as otherwise required by the Plan, so long as such claim, suit, judgment, or
liability does not result from the willful or reckless misconduct of the
individual Trustee. The Trustee assumes no obligation or responsibility with
respect to any action required by this Trust Agreement or by the Plan on the
part of the Employer.
12.04 RECEIPT OF RELEASE. Any payment to any Participant or Beneficiary
------------------
in accordance with the provisions of this Trust shall, to the extent thereof, be
in full satisfaction of all claims against the Trustee, the Plan Administrator,
and the Employer and the Trustee may require such Participant or Beneficiary, as
a condition precedent to such payment, to execute a receipt and release to such
effect.
12.05 ACCEPTANCE. The Trustee accepts the Trust created under the Plan
----------
and agrees to perform the obligations imposed therein.
12.06 ACCOUNTING PERIOD. This Trust shall adopt for accounting purposes
-----------------
the fiscal year beginning January 1 of each year and ending on the last day of
December.
12.07 TITLE OF TRUST ASSETS. The legal and equitable title and
---------------------
ownership of all assets at any time constituting a part of the Trust Fund shall
be and remain with the Trustee and neither the Employer nor any Participant
shall ever have legal or equitable estate therein, save and except that a
Participant shall be entitled to receive distributions as and when lawfully made
under the terms of the Plan and this Trust.
12.08 NOTICE. Any notices required to be given herein by the Trustee
------
shall be deemed delivered when placed in the United States mails, postage
prepaid, in an envelope addressed to the last known address of the person to
whom the notice is given.
22
<PAGE>
12.09 HEADINGS. The titles and headings of Articles and Sections are
--------
included for convenience of reference only and are not to be considered in
construction of the provisions hereof.
12.10 GOVERNING LAW. All questions arising with respect to the
-------------
provisions of this Agreement shall be determined by application of the laws of
the State of North Carolina except to the extent North Carolina law is
superseded by Federal statute.
12.11 EXECUTIONS AND COUNTERPARTS. This Agreement may be executed in a
---------------------------
number of counterparts, each of which shall be deemed an original.
IT WITNESS WHEREOF, this Agreement has been executed this the 5th day
of December 1997, effective as of the 1st day of January, 1997.
A S E M P L O Y E R
-------------------
MOORESVILLE SAVINGS BANK, SSB
By: /s/ George W Brawley, Jr.
--------------------------------------
George W. Brawley, Jr.
President
ATTEST:
/s/ Billy R. Williams
- ----------------------------------------
Secretary
(Corporate Seal)
A S T R U S T E E
-----------------
/s/ Willis L. Barnette (SEAL)
-----------------------------
Willis L. Barnette
/s/ Jack G. Lawler (SEAL)
-----------------------------
Jack G. Lawler
/s/ Claude U. Voils, Jr. (SEAL)
-----------------------------
Claude U. Voils, Jr.
23
<PAGE>
Exhibit 10(f)
STATE OF NORTH CAROLINA
COUNTY OF IREDELL CAPITAL MAINTENANCE AGREEMENT
This Capital Maintenance Agreement (the "Agreement"), dated as of
December 30, 1997, by and between Coddle Creek Financial Corp., Mooresville,
North Carolina, a North Carolina-chartered bank holding company (the "Holding
Company") and Mooresville Savings Bank, Inc., SSB, a North Carolina-chartered
stock savings bank (the "Savings Bank").
WHEREAS, the Savings Bank has applied to the Administrator,
Savings Institutions Division, North Carolina Department of Commerce (the
"Administrator") for permission to convert from a North Carolina mutual savings
bank to a North Carolina stock owned savings bank (the "Conversion"); and
WHEREAS, as a part of the Conversion, the Holding Company has
applied to the Administrator for permission to acquire all of the capital stock
issued by the Savings Bank in the Conversion (the "Acquisition") and to sell
shares of the Holding Company's common stock to certain persons in a
subscription and a community offering and, if necessary, in a syndicated
community offering; and
WHEREAS, the Administrator, the Holding Company and the Savings
Bank wish to protect the interests of the depositors of the Savings Bank and the
Savings Association Insurance Fund; and
WHEREAS, by letter dated November 10, 1997, the Administrator
has approved the Conversion and the Acquisition conditional upon, among other
things, the Holding Company and the Savings Bank entering this Agreement (the
"Approval").
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, the parties agree that, following the
Conversion and Acquisition, the Holding Company and the Savings Bank will
maintain the capital of the Savings Bank at all times in compliance with the
applicable capital requirements of all federal and state regulatory agencies
having supervisory authority over the Savings Bank, including the capital
requirements of the Administrator and the Federal Deposit Insurance Corporation.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by each
director of the Holding Company and the Savings Bank.
DIRECTORS OF CODDLE CREEK DIRECTORS OF MOORESVILLE
SAVINGS
FINANCIAL CORP.: BANK, INC., SSB:
/s/ Willis L. Barnette /s/ Willis L. Barnette
- ---------------------------------- ----------------------------------
Willis L. Barnette Willis L. Barnette
/s/ Donald R. Belk /s/ Donald R. Belk
- ---------------------------------- ----------------------------------
Donald R. Belk Donald R. Belk
/s/ Dale W. Brawley
- ----------------------------------
Dale W. Brawley
/s/ George W. Brawley, Jr. /s/ George W. Brawley, Jr.
- ---------------------------------- ----------------------------------
George W. Brawley, Jr. George W. Brawley, Jr.
/s/ Jack G. Lawler /s/ Jack G. Lawler
- ---------------------------------- ----------------------------------
Jack G. Lawler Jack G. Lawler
/s/ Calvin E. Tyner /s/ Calvin E. Tyner
- ---------------------------------- ----------------------------------
Calvin E. Tyner Calvin E. Tyner
/s/ Claude U. Voils, Jr. /s/ Claude U. Voils, Jr.
- ---------------------------------- ----------------------------------
Claude U. Voils, Jr. Claude U. Voils, Jr.
2
<PAGE>
EXHIBIT 11
The computation for earnings per share is based on net income earned from
the date of Conversion, December 30, 1997, to the end of the 1997 fiscal year
and is insufficient to compute a per share number. For purposes of this
computation, the number of shares of common stock purchased by the Bank's
employee stock ownership plan which have not been allocated to participant
accounts are not assumed to be outstanding.
<PAGE>
EXHIBIT 12
Ratios are derived from monthly balances except for ratios derived from
period-end balances. Management does not believe the use of month-end balances
has caused a material difference in the information provided.
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Report to Stockholders 1
Selected Consolidated Financial Data 2-3
Management's Discussion and Analysis 4-17
Independent Auditor's Report 18
Consolidated Financial Statements:
Statements of financial condition at December 31, 1997 and 1996 19
Statements of income for the years ended December 31, 1997, 1996 and 1995 21
Statements of stockholders' equity for the years ended December 31, 1997, 1996 22-23
and 1995
Statements of cash flows for the years ended December 31, 1997, 1996 and 1995 24-26
Notes to Consolidated Financial Statements 27-55
Corporate Information 57
</TABLE>
This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of Coddle Creek Financial Corp 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.
<PAGE>
[LETTERHEAD OF COODLE CREEK FINANCIAL CORP. APPEARS HERE]
Report to Stockholders
Dear Stockholder:
Fiscal 1997 was a historic year for your bank. On December 30, 1997, Mooresville
Savings converted from a state chartered mutual savings bank to a state
chartered stock savings bank and became a wholly-owned subsidiary of Coddle
Creek Financial Corp. As part of the conversion, Coddle Creek issued 674,475
shares of common stock, generating additional capital of $33.7 million. The
response to our initial public offering was tremendous, as noted by the large
oversubscription.
The Company's consolidated total assets totaled $149.6 million at December 31,
1997 compared to $112.6 million a year earlier, representing a 33% increase as a
result of the stock offering. Total stockholders' equity amounted to $47.0
million at December 31, 1997, resulting in a book value per share of $69.67. A
detail of financial results and other information is contained in the
accompanying 1997 Annual Report and Proxy Statement.
The Company is dedicated to providing high quality service for all of our
customers. The Board of Directors continues to study various methods of
increasing the value of your investment. In the future, the Board will consider
such issues as regular cash dividends, special dividends and the Company's
repurchase of outstanding common stock.
On behalf of the Board of Directors, management and staff, we would like to
thank you for your loyalty and confidence as demonstrated by your investment in
Coddle Creek Financial Corp.
Sincerely,
/s/ George W. Brawley, Jr.
George W. Brawley, Jr.
President and CEO
1
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31, March 31,
--------------------------------------------------------- --------------
1997 1996 1995 1994 1994
--------------------------------------------------------- --------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $ 149,585 $ 112,552 $ 108,033 $ 99,966 $ 98,869
Investments securities (1) 43,441 10,889 13,903 14,220 16,585
Loans receivable, net (5) 101,982 97,951 90,555 82,453 79,031
Deposits 99,382 93,785 92,103 85,105 84,863
Stockholders' equity (2) 46,993 14,412 13,726 12,883 12,208
Book value per share (2) 69.67 - - - -
<CAPTION>
For the Years Ended
-------------------------------------------------------
December 31, March 31,
------------------------------------------------------- --------------
1997 1996 1995 1994\\(4)\\ 1994
------------------------------------------------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest and dividend income $ 8,997 $ 8,679 $ 7,946 $ 5,544 $ 7,386
Interest expense 4,820 4,658 4,416 2,607 3,804
------------------------------------------------------- --------------
Net interest income 4,177 4,021 3,530 2,937 3,582
Provision for loan losses 335 - 12 18 103
Noninterest income 192 200 190 149 233
Noninterest expense 2,993 3,146 2,624 2,032 2,578
------------------------------------------------------- -----------
Income before income taxes 1,041 1,075 1,084 1,036 1,134
Income tax expense 374 354 304 361 418
------------------------------------------------------- --------------
Income before cumulative effect of
a change in accounting principle 667 721 780 675 716
Cumulative effect on prior years of
changing to a different method
of accounting for income taxes - - - - 78
------------------------------------------------------- --------------
Net income $ 667 $ 721 $ 780 $ 675 $ 794
======================================================= ==============
</TABLE>
(Continued)
2
<PAGE>
<TABLE>
<CAPTION>
At or For the Years Ended
-------------------------------------------------------
December 31, March 31,
------------------------------------------------------- -----------
1997\\(6)\\ 1996\\(6)\\ 1995\\(6)\\ 1994\\(4)(6)\\ 1994\\(7)\\
------------------------------------------------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Other Data:
Number of outstanding loans 2,482 2,476 2,432 2,281 2,259
Number of deposit accounts 7,957 7,752 7,730 7,248 7,599
Number of full-service offices 3 3 3 3 3
Return on average assets 0.58% 0.66% 0.75% 0.68% 0.80%
Return on average equity 4.55% 5.37% 6.05% 5.55% 6.72%
Average equity to average assets 12.87% 12.27% 12.37% 12.21% 11.88%
Interest rate spread 2.87% 3.08% 2.85% 3.53% 3.25%
Net yield on average
interest-earning assets 3.68% 3.74% 3.49% 4.05% 4.16%
Average interest-earning assets to
average interest-earning liabilities 119.06% 115.21% 114.59% 114.44% 111.90%
Ratio of non-interest expense to
average total assets 2.62% 2.88% 2.52% 2.04% 2.59%
Nonperforming assets to total assets (3) 1.02% 1.11% 1.11% 1.18% 2.33%
Nonperforming loans to total loans (3) 1.36% 1.23% 1.25% 1.37% 2.80%
Allowance for loan losses to
nonperforming loans (3) 47.83% 31.11% 32.95% 33.67% 16.75%
Allowance for loan losses to total loans 0.68% 0.40% 0.44% 0.48% 0.49%
Provision for loan losses to total
loans receivable, net 0.33% 0.00% 0.01% 0.03% 0.13%
Net charge-offs to average loans
outstanding 0.03% 0.01% 0.01% 0.01% 0.01%
Stockholders' equity to total assets 31.42% 12.80% 12.71% 12.89% 12.35%
</TABLE>
(1)Includes interest-earning deposits, certificates of deposit, FHLB stock and
investment securities.
(2)On December 30, 1997, Mooresville Savings converted from a state chartered
mutual savings bank to a state chartered stock savings bank and became a
wholly-owned subsidiary of Coddle Creek Financial Corp.
(3)Nonperforming loans include nonaccrual loans and accruing loans past due 90
days or more.
(4)The operating data for December 31, 1994 is for the nine-month period
beginning April 1, 1994 and ending December 31, 1994 due to a change in
year ends.
(5)Loans, net, represents gross loans less net deferred loan fees, undisbursed
loan funds and allowance for loan losses.
(6)Ratios are derived from monthly balances except for ratios derived from
period-end balances. Management does not believe the use of month-end
balances has caused a material difference in the information provided.
(7)Ratios are derived from quarter-end balance except for ratios derived from
period-end balances. Management does not believe the use of quarter-end
balances has caused a material difference in the information provided.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
The following discussion and analysis of financial condition and the
results of operations is intended to assist in understanding the financial
condition and changes therein and results of operations of the Company. This
discussion and analysis is intended to compliment, and should be read in
conjunction with the audited financial statements of the Company and related
notes appearing elsewhere in this annual report to stockholders.
Description of Business
Coddle Creek Financial Corp. (the "Company") was incorporated under
laws of the State of North Carolina for the purpose of becoming the bank holding
company of Mooresville Savings Bank, S.S.B. (the "Bank," or "Mooresville
Savings") in connection with the Bank's conversion from a state chartered mutual
savings bank to a state chartered stock savings bank (the "Conversion"),
pursuant to its Plan of Conversion. The Company was organized to acquire all of
the common stock of Mooresville Savings upon its conversion to stock form. A
subscription and community offering of the Company's shares closed on December
30, 1997, at which time the Company acquired all of the shares of the Bank and
commenced operations.
In accordance with the Plan of Conversion, the Company issued 674,475
shares of common stock at the price of $50 per share which resulted in proceeds
of $32,494,000, net of conversion costs. The Company transferred $14,134,000 of
the net proceeds to Mooresville Savings for the purchase of all of the capital
stock of the Bank.
The Company has no operations and conducts no business of its own other
than owning Mooresville Savings, investing its portion of the net proceeds
received in the conversion, and lending funds to the Employee Stock Ownership
Plan (the "ESOP") which was formed in connection with the Conversion. The
principal business of the Bank is accepting deposits from the general public and
using those deposits and other sources of funds to make loans secured by real
estate and other forms of collateral located in the Bank's primary market area
of northern Mecklenburg and southern Iredell counties of North Carolina.
Mooresville Savings' results of operations depend primarily on its 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 also affected by noninterest income, such as
miscellaneous income from loans, customer deposit account service charges, and
other sources of revenue. The Bank's principal operating expenses, aside from
interest expense, consist of compensation and associated benefits, federal
deposit insurance premiums, occupancy costs, and other general and
administrative expenses.
The Company did not commence operations until December 30, 1997;
therefore, the following discussion and analysis contains the financial results
for Mooresville Savings for the years ended December 31, 1997, 1996 and 1995.
Because the Company has no operations and conducts no business other than as
described above, the discussion contained in this "Management's Discussion and
Analysis" concerns primarily the business of the Bank. However, for ease of
reading and because the financial statements are presented on a consolidated
basis, the Company and the Bank are collectively referred to herein as the
"Company" unless otherwise noted.
4
<PAGE>
Comparison of Financial Condition at December 31, 1997, 1996 and 1995
Total assets of the Company amounted to $149.6 million, $112.6 million
and $108.0 million at December 31, 1997, 1996 and 1995, respectively. The growth
from December 31, 1995 to December 31, 1997 can primarily be attributed to the
increase in loans receivable and cash and cash equivalents, funded by proceeds
from the Conversion, savings deposit growth and a decrease in investment
securities (excluding interest-bearing deposits).
The principal category of earnings assets is loans receivable, which
amounted to $102.0 million, $98.0 million and $90.6 million at December 31,
1997, 1996 and 1995, respectively. The Bank was able to increase the size of its
loan portfolio during 1997 and 1996 primarily through its marketing efforts in
the origination of permanent residential 1-4 family mortgages, residential
construction and home equity loans. All other categories of the Bank's loan
portfolio have remained fairly constant from 1995 to 1997. Loan originations for
the year ended December 31, 1997 totaled $27.4 million, other net changes
totaled $0.3 million while loan principal repayments totaled $23.1 million as
the loan portfolio increased by $4.0 million. Loan originations for the year
ended December 31, 1996 totaled $25.9 million, other net changes totaled $0.2
million while principal repayments totaled $18.7 million for a net increase in
the loan portfolio of $7.4 million over 1995. The growth was primarily in the
residential 1-4 family and home equity categories. Management believes that its
marketing efforts, competitive rates and contacts within its community
contributed to the increased loan demand. The Bank maintains underwriting and
credit standards designed to maintain the quality of the loan portfolio.
Nonperforming loans at December 31, 1997, 1996 and 1995 totaled $1,449,000,
$1,247,000 and $1,202,000, respectively, and were 1.36%, 1.23% and 1.25% of
total loans, respectively.
In addition to loans, the Company invests in U. S. Treasury, Government
and federal agency and municipal securities. Management does not engage in the
practice of trading securities, rather, the Company's investment portfolio
consists of securities designated as available for sale or held to maturity.
Investment securities, including interest-bearing deposits, at December 31,
1997, 1996 and 1995 totaled $43.4 million, $10.9 million and $13.9 million,
respectively. The securities portfolio increased by $32.5 million for the year
ended December 31, 1997 from December 31, 1996 as $2.0 million in securities
matured and interest-bearing deposits increased $34.4 million due to cash
received in the stock conversion. The securities portfolio decreased by $3.0
million for the year ended December 31, 1996 from December 31, 1995 as the Bank
utilized maturing investments to fund loan originations.
Savings deposits amounted to $99.4 million at December 31, 1997, an
increase of $5.6 million from $93.8 million at December 31, 1996. At December
31, 1996, deposits increased by $1.7 million from $92.1 million at December 31,
1995. The Bank focused its marketing efforts on building depositor relationships
and setting its deposit rates in the local market to compete favorably with
rates offered by competitors.
Stockholders' equity increased by $32.6 million during 1997, primarily
due to the proceeds received in the Conversion, less $577,000 for the issuance
of the note receivable to the ESOP. Stockholders' equity increased due to net
income of $667,000, $721,000 and $780,000 for the years ending December 31,
1997, 1996 and 1995, respectively. The unrealized gain on securities available
for sale, net of tax, amounted to $25,000, $28,000 and $63,000 at December 31,
1997, 1996 and 1995, respectively.
5
<PAGE>
Market Risk
The Company's net income is dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest bearing liabilities, falling interest rates could result in a decrease
in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management meets on a
regular basis to review the Company's interest risk rate position and
profitability, and to recommend adjustments for consideration by the board of
directors. Management also reviews the Bank's securities portfolio, formulates
investment strategies, and oversees the timing and implementation of
transactions to assure attainment of the Board's objectives in the most
effective manner. Notwithstanding the Company's interest rate risk management
activities, the potential for changing interest rates is an uncertainty that can
have adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long and short term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company's results of operations and net portfolio
values remain vulnerable to increase in interest rates to fluctuations in the
difference between long-and short-term interest rates.
Consistent with the asset/liability management philosophy above, the
Company has taken certain several steps to manage its market rate risk. In order
to mitigate and manage interest rate risk, the Bank has adopted the following
policies: (i) investing excess liquidity in shorter terms on adjustable rate
instruments, with maturities or reprieving periods for three years or less; (ii)
promoting mortgage loans with 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 tables following provide information about the Company's financial
instruments that are sensitive to changes in interest rates.
6
<PAGE>
<TABLE>
<CAPTION>
Loans Receivable (A)
Expected Maturity Date
Years Ending December 31,
-----------------------------------------------------------------------------------------------------
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate $ 2,119 $ 717 $ 763 $ 392 $ 196 $ 58,883 $ 63,070 $ 64,966
Average interest rate 9.01 % 9.32 % 10.36 % 9.21 % 9.08 % 8.01 %
Variable Rate $ 39,605 $ - $ - $ - $ - $ - $ 39,605 $ 39,605
Average interest rate 8.09 % - % - % - % - % - %
<CAPTION>
Investment Securities (B)
Expected Maturity Date
Year Ending December 31,
-----------------------------------------------------------------------------------------------------
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing cash $ 36,649 $ - $ - $ - $ - $ - $ 36,649 $ 36,649
Average interest rate 5.56 % - % - % - % - % - %
Certificates of deposit $ 100 $ - $ - $ - $ - $ - $ 100 $ 100
Average interest rate 6.10 % - % - % - % - % - %
Securities available for sale $ 1,205 $ 609 $ 453 $ 787 $ - $ - $ 3,054 $ 3,054
Average interest rate 6.55 % 6.90 % 6.13 % 7.38 % - % - %
Securities held to maturity $ 1,100 $ 201 $ 225 $ - $ 154 $ 1,028 $ 2,708 $ 2,734
Average interest rate 6.52 % 5.99 % 6.48 % - % 4.80 % 5.91 %
Nonmarketable equity securities $ - $ - $ - $ - $ - $ 930 $ 930 $ 930
Average interest rate - % - % - % - % - % 7.25 %
<CAPTION>
Debt Obligations (C)
Expected Maturity Date
Years Ending December 31,
----------------------------------------------------------------------------------------------------
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deposits $ 68,557 $ 11,496 $ 1,677 $ 758 $ 11,915 $ - $ 94,403 $ 94,712
Average interest rate 4.20 % 5.54 % 5.41 % 5.44 % 6.85 % - %
</TABLE>
(A) For loans receivable the table presents principle cash flows by fixed and
adjustable rate. The table includes contractual maturities including scheduled
principal repayments adjusted for estimated prepayments. The table presents fair
values at December 31, 1997 and weighted average interest rates by maturity
dates.
(B) For investment securities, including securities available for sale,
securities held to maturity, and nonmarketable equity securities, the table
presents contractual maturities. Interest-bearing cash is a due on demand
financial instrument and is presented in the due in one year category.
Nonmarketable equity securities have no contractual maturity and are placed in
the longest expected maturity date. The table presents fair values at December
31, 1997 and weighted average interest rates by maturity dates.
(C) For deposits the table presents principle cash flows and weighted average
interest rates by expected maturity dates. The table utilizes anticipated decay
rates on deposits and present fair values at December 31, 1997.
7
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1997, 1996,
and 1995
Net Income. Net income for the years ended December 31, 1997, 1996, and
1995 amounted to $667,000, $721,000 and $780,000, respectively. Net income
decreased in 1997 from 1996 primarily due to providing additional provisions for
loans losses and recording additional compensation expense as a result of the
termination of the Bank's defined benefit pension plan. Additionally, total
non-interest expense decreased in 1997 due to a one-time special assessment of
$520,000 that occurred in 1996 as a result of the legislation to recapitalize
the Savings Association Insurance Fund ("SAIF"), which was also the primary
cause for the decrease in net income in 1996 from 1995 offset by an increase of
$491,000 in net interest income due to improved spreads and increase in net
interest-earning assets.
Net Interest Income. Net interest income amounted to $4.2 million, $4.0
million and $3.5 million during the years ended December 31, 1997, 1996, and
1995, respectively. The average outstanding balance of interest-earning assets
in excess of interest-bearing liabilities amounted to $18.2 million, $14.2
million and $12.9 million during 1997, 1996 and 1995, respectively. The Bank's
interest rate spread increased from 2.85% in 1995 to 3.08% in 1996, but
decreased to 2.87% in 1997 as a result of a slight increase in the Bank's cost
of funds coupled with a slight decrease in the yield on interest-earning assets.
The higher balance of interest-earning assets in 1997 more than offset the
decrease of 21 basis points in the Bank's interest rate spread, resulting in
$156,000 in higher net interest income. 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
decrease in net interest income for the year ended December 31, 1995 was
primarily due to a decrease in interest rate spread.
Interest Income. Interest income amounted to $9.0 million, $8.7 million
and $7.9 million for the years ended December 31, 1997, 1996, and 1995,
respectively. The Bank's average yield on interest-earning assets increased from
7.86% in 1995 to 8.07% in 1996 but decreased to 7.93% in 1997. The primary
interest-earning asset is loans receivable, which experienced a slight decrease
in average yield of 2 basis points during 1997 and a slight increase of 11 basis
points during 1996. However, the average outstanding balance increased from
$86.4 million in 1995 to $95.5 million in 1996 and to $100.5 million in 1997,
which is the primary reason for the increase in interest income. The other
significant interest-earning asset is investment securities, which experienced a
decrease in the average outstanding balance of $4.0 million from $11.9 million
in 1995 to $7.9 million in 1997. The decline in investment income is due to the
Bank utilizing maturing investments to fund loan growth, which has a higher
yield.
Interest Expense. Interest expense amounted to $4.8 million, $4.7
million and $4.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The modest increase in interest expense is due to slight increases
in the average outstanding balances of interest-bearing liabilities, including
Federal Home Loan Bank advances, during 1996 and 1997. These average balances
amounted to $95.2 million, $93.3 million and $88.2 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The change in the overall cost
of funds from 1995 to 1997 was not significant.
8
<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 Company's assets and liabilities for the years ended
December 31, 1997, 1996, and 1995. 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 earnings balance).
<TABLE>
<CAPTION>
At December 31, For the Year Ended December 31,
1997 1997 1996
----------------------------------------------------------------------------------
Average Yield/ Average Average Average Average
Rate Balance Interest Yield/Rate Balance Interest Yield/Rate
----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits 5.56% $ 5,003 $ 148 2.96% $ 1,900 $ 88 4.63%
Investments (1) 6.57% 7,879 482 6.12% 10,141 628 6.19%
Loans receivable, net (4) 8.14% 100,505 8,367 8.32% 95,453 7,963 8.34%
-------- -------- -------- ------
Total interest-earning assets 7.78% 113,387 8,997 7.93% 107,494 8,679 8.07%
Other assets 658 1,901
-------- --------
Total assets $ 114,045 $ 109,395
======== ========
Interest-earning liabilities:
NOW and Money market 3.04% $ 11,738 $ 241 2.05% $ 11,113 $ 220 1.98%
Passbook accounts 3.00% 11,644 401 3.44% 11,480 322 2.80%
Certificates of deposit 5.65% 70,669 4,081 5.77% 69,877 4,082 5.84%
FHLB advances 1,183 97 8.20% 833 34 4.08%
-------- -------- -------- ------
Total interest-bearing liabilities 5.10% 95,234 4,820 5.06% 93,303 4,658 4.99%
Other liabilities 4,139 2,670
Stockholders' equity 14,672 13,422
-------- --------
Total liabilities and stockholders' equity $ 114,045 $ 109,395
========= =========
Net interest income and interest rate spread (2) 2.68% $ 4,177 2.87% $ 4,021 3.08%
Net yield on interest-earning assets (3) ========= 3.68% ====== 3.74%
Ratio of average interest-earning assets to average 119.06% 115.21%
interest-earning liabilities
<CAPTION>
For the Year Ended December 31,
1995
--------------------------------------
Average Average
Balance Interest Yield/Rate
--------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 2,773 $ 158 5.70%
Investments (1) 11,871 670 5.64%
Loans receivable, net (4) 86,446 7,118 8.23%
-------- --------
Total interest-earning assets 101,090 7,946 7.86%
Other assets 3,079
--------
Total assets $ 104,196
========
Interest-earning liabilities:
NOW and Money market $ 11,611 $ 278 2.39%
Passbook accounts 11,006 365 3.32%
Certificates of deposit 65,602 3,773 5.75%
FHLB advances - - -
-------- --------
Total interest-bearing liabilities 88,219 4,416 5.01%
Other liabilities 3,065
Stockholders' equity 12,885
---------
Total liabilities and stockholders' equity $ 104,169
=========
Net interest income and interest rate spread (2) $ 3,530 2.85%
=========
Net yield on interest-earning assets (3) 3.49%
Ratio of average interest-earning assets to average 114.59%
interest-earning liabilities
</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) Loans placed on nonaccruing status have been included in the computation of
average balances.
9
<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 rates (changes in rate multiplied by the
prior period's volume), and (iii) changes in rate/volume (change in rate times
the change in volume).
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
-----------------------------------------------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- ------- ------- ----- -------- ------- ------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits $ 144 $ (32) $ (52) $ 60 $ (50) $ (30) $ 10 $ (70)
Investments (140) (7) 1 (146) (98) 65 (9) (42)
Loans receivable 421 (19) 2 404 741 95 9 845
-----------------------------------------------------------------------------------
Total interest income $ 425 $ (58) $ (49) $ 318 $ 593 $ 130 $ 10 $ 733
-----------------------------------------------------------------------------------
Interest expense:
NOW and money market
accounts $ 12 $ 8 $ 1 $ 21 $ (12) $ (48) $ 2 $ (58)
Passbook accounts 5 73 1 79 16 (57) (2) (43)
Certificates of deposit 46 (49) 2 (1) 246 59 4 309
FHLB advances 14 34 15 63 - - 34 34
-----------------------------------------------------------------------------------
Total interest expense $ 77 $ 66 $ 19 $ 162 $ 250 $ (46) $ 38 $ 242
-----------------------------------------------------------------------------------
Net Interest Income $ 348 $ (124) $ (68) $ 156 $ 343 $ 176 $ (28) $ 491
===================================================================================
<CAPTION>
Year Ended December 31, 1995
Nine Month ended December 31, 1994
Increase (Decrease) Due to
--------------------------------------------
Rate/
Volume Rate Volume Net
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Interest income:
Interest-bearing deposits $ (8) $ 64 $ (5) $ 51
Investments (18) 220 (8) 194
Loans receivable 314 1,728 115 2,157
--------------------------------------------
Total interest income $ 288 $ 2,012 $ 102 $ 2,402
--------------------------------------------
Interest expense:
NOW and money market
accounts $ (30) $ 96 (13) $ 53
Passbook accounts (5) 106 (2) 99
Certificates of deposit 205 1,324 128 1,657
FHLB advances - - - -
--------------------------------------------
Total interest expense $ 170 $ 1,526 $ 113 $ 1,809
--------------------------------------------
Net Interest Income $ 118 $ 486 $ (11) $ 593
============================================
</TABLE>
10
<PAGE>
Provision for Loan Losses and Asset Quality. The Bank's provision for
loan losses amounted to $335,000, $-0- and $12,000 in 1997, 1996 and 1995. The
provision, which is charged to operations, and the resulting loan loss
allowances are amounts Mooresville Savings' management believes will be adequate
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. During the year ended
December 31, 1997 management determined that its allowance for loan losses
should be increased to more closely reflect the credit risk inherent in the loan
portfolio resulting from the changing economic environment of the Bank's market
area and manufacturing plant closings.
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 $1.1 million at December 31, 1997 and 1996,
respectively. Foreclosures or real estate transfers in lieu of foreclosures
amounted to $81,000, $-0- and $-0- in 1997, 1996 and 1995, respectively. The
Bank has adopted policies to monitor, and increase when necessary, levels of
loan loss allowances. At December 31, 1997, the Bank's level of general
valuation allowances for loan losses amounted to $693,000, which management
believes is adequate to absorb potential losses in its loan portfolio.
Noninterest Income. Noninterest income amounted to $192,000, $200,000
and $190,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Noninterest income consists primarily of service charges and fees associated
with the Bank's checking accounts.
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 expense.
Noninterest expense amounted to $3.0 million, $3.1 million and $2.6 million for
the years ended December 31, 1997, 1996 and 1995, respectively. Compensation
increased $455,000 and $145,000 during the years ended December 31, 1997 and
1996, respectively primarily due to recording a $275,000 charge to compensation
expense in 1997 as a result of the termination of the Bank's defined benefit
pension plan and pension and supplemental income benefit expense. The Bank paid
a special one-time SAIF assessment of $520,000 in 1996. Occupancy expenses and
data processing increased nominally during the years ended December 31, 1997,
1996 and 1995. Federal insurance premium expense decreased $165,000 during 1997
as the SAIF assessment incurred in 1996 resulted in lower deposit premiums for
the following year.
Income Taxes. The Company's effective income tax rate was 35.9%, 32.9%
and 28.0% for the years ended December 31, 1997, 1996 and 1995, respectively.
The lower 1996 and 1995 effective income rates were due to permanent differences
of nontaxable interest income. The effective rate for 1997 reflects normal
expected rates on taxable income.
Capital Resources and Liquidity
The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all of its financial commitments.
Liquidity management addresses the Bank's ability to meet deposit withdrawals
either on demand or at contractual maturity, to repay borrowings, if any, as
they mature and to originate new loans and make investments as opportunities
arise.
11
<PAGE>
Significant liquidity sources for the Bank are proceeds from the sale
of stock, cash provided by new savings deposits, operating activities, sale or
maturity of investments, principal and interest payments on loans receivable 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 provided $819,000, $724,000 and $693,000 for the
years ended December 31, 1997, 1996 and 1995, 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.
Financing activities provided $36.1 million, $3.6 million and $6.9 million for
the years ended December 31, 1997, 1996 and 1995, respectively. The large
increase in 1997 was due to $32.5 million in net proceeds received from issuance
of common stock.
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 1997, 1996 and 1995, loans outstanding
increased $4.0 million, $7.4 million and $8.1 million, respectively.
As a state chartered savings bank, Mooresville Savings must meet
certain liquidity requirements which are established by the Administrator of the
North Carolina Savings Institutions Division. The Bank's liquidity ratio at
December 31, 1997, as computed under such regulations, was in excess of such
requirements. Given its excess liquidity and its ability to borrow from the FHLB
of Atlanta, the Bank believes that it will have sufficient funds available to
meet anticipated future loan commitments, unexpected deposit withdrawals, or
other cash requirements.
Asset/Liability Management
The Bank's asset/liability management, or interest rate risk
management, is focused primarily on evaluating and managing the Bank's net
interest income given various risk criteria. Factors beyond the Bank's control,
such as the effects of changes in market interest rates and competition, may
also have an impact on the management of interest rate risk.
In the absence of other factors, the Bank's overall yield on
interest-earning assets will increase as will its cost of funds on its
interest-bearing liabilities when market rates increase over an extended period
of time. Inversely, the Bank's yields and cost of funds will decrease when
market rates decline. The Bank is able to manage these swings to some extent by
attempting to control the maturity or rate adjustments of its interest-earning
assets and interest-bearing liabilities over given periods of time.
The Bank's "gap" is typically described as the difference between the
amounts of such assets and liabilities which reprice within a period of time. In
a declining interest rate environment, a negative gap, or a situation where the
Bank's interest-bearing liabilities subject to repricing exceed the level of
interest-earning assets which will mature or reprice, will have a favorable
impact on the Bank's net interest income. Conversely, an increase in general
market rates over a sustained period of time will tend to affect the Bank's net
interest income adversely. At December 31, 1997, the Bank had a positive gap
position of 6.77% as a result of proceeds received from the sale of stock in
December being invested in interest-bearing deposits.
12
<PAGE>
In order to minimize the potential effects of adverse material and
prolonged increases or decreases in market interest rates on the Bank's
operations, 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 or intermediate term interest-earning assets, the
solicitation of transaction deposit accounts which are less sensitive to changes
in interest rates and can be repriced rapidly, and to a lesser extent, the
origination of adjustable rate mortgage loans.
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. The Bank has approximately $39.5 million in
certificates maturing in 1998 and management believes that substantially all of
the maturing certificates will be renewed.
The Bank's asset/liability management program has generally helped to
decrease the exposure of its earnings to interest rate increases. The Bank
anticipates a resulting negative gap position as it reinvests its large
interest-bearing cash balances into long-term investments and loans which will
be adversely impacted during prolonged periods of rising interest rates and
positively affected during prolonged periods of interest rate declines.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1997, which are
projected to reprice or mature in each of the future time periods shown. The
computations were made without using assumptions for loan prepayments or deposit
decline. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature within a given period were determined in accordance with
contractual terms of the assets or liabilities. In making the computations, all
adjustable rate loans were considered to be due at the end of the next upcoming
adjustment period. Fixed rate loans are reflected at their contractual
maturities with consideration given to scheduled payments. Marketable equity
securities and savings accounts with no stated maturities are subject to
immediate repricing and availability and have been classified in the earliest
category. FHLB of Atlanta stock must be maintained at certain regulatory levels
and is classified in the more than ten category. 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.
13
<PAGE>
<TABLE>
<CAPTION>
Terms to Repricing at December 31, 1997
----------------------------------------------------------------------
More than More than
1 Year 1 Year 3 Years to More than
or Less 3 Years 5 Years 5 Years Total
---------- ---------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets (1):
Loans Receivable:
Adjustable rate residential 1-4 family $ 24,477 $ - $ - $ - $ 24,477
Fixed rate residential 1-4 family (2) 214 749 2,330 58,404 61,697
Other real estate loans - adjustable 8,515 - - - 8,515
Other real estate loans - fixed (2) 803 21 242 307 1,373
Construction 4,277 - - - 4,277
Other loans 1,102 710 352 172 2,336
--------- --------- --------- --------- ---------
Total loans 39,388 1,480 2,924 58,883 102,675
Interest-bearing deposits 36,649 - - - 36,649
investments 2,405 1,487 942 1,028 5,862
FHLB Stock - - - 930 930
--------- --------- --------- --------- ---------
Total interest-earning assets $ 78,442 $ 2,967 $ 3,866 $ 60,841 $ 146,116
========= ========= ========= ========= =========
Interest-bearing liabilities:
Deposits:
Certificates of deposit $ 39,535 $ 13,173 $ 758 $ 11,915 $ 65,381
Money market deposit accounts 4,823 - - - 4,823
NOW accounts 6,428 - - - 6,428
Passbook savings 17,771 - - - 17,771
--------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 68,557 $ 13,173 $ 758 $ 11,915 $ 94,403
========= ========= ========= ========= =========
Interest sensitivity gap per report $ 9,885 $ (10,206) $ 3,108 $ 48,926 $ 51,713
Cumulative interest sensitivity gap 9,885 (321) 2,787 51,713 51,713
Cumulative gap as a percentage of
total interest-earning assets 6.77% -0.22% 1.91% 35.39% 35.39%
Cumulative interest-earning assets
as a percentage of interest-bearing liabilities 114.42% 99.61% 103.38% 154.78% 154.78%
</TABLE>
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) Based upon historical repayment experience.
14
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and accompanying footnotes have been prepared
in accordance with generally accepted accounting principles ("GAAP"), which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of the
Company are primarily monetary in nature and changes in market interest rates
have a greater impact on it's performance than do the effects of inflation.
Impact of New Accounting Standards
The FASB has issued SFAS No. 123, "Accounting for Awards of Stock-Based
Compensation to Employees." The statement defines a fair value-based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value-based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("Opinion 25"). Under the fair value-based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value-based method, compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date or other measurement
date over the amount an employee must pay to acquire the stock. Most fixed stock
option plans- the most common type of stock compensation plan - have no
intrinsic value at grant date, and under Opinion 25 no compensation cost is
recognized for them. Compensation cost is recognized for other types of
stock-based compensation plans under Opinion 25, including plans with variable,
usually performance-based, features. This statement requires that an employer's
financial statements include certain disclosures about stock-based employee
compensation arrangements regardless of the method used to account for them. The
Statement is not expected to have a significant effect on the Company's
financial statements because should the Company approve certain stock option
plans in the future 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 pro forma effects in the notes to the financial
statements of not utilizing the fair value method prescribed in SFAS No. 123.
The FASB has issued SFAS No. 128, "Earnings Per Share," which is
effective for the Company's interim period's ending after December 15, 1997,
specifies the computation, presentation and disclosure requirements for earnings
per share. The computation for earnings per share is based on net income earned
from the date of conversion, December 30, 1997, to the end of the 1997 fiscal
year and net income is insufficient to compute per share number.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income,"
which the Company has not been required to adopt as of December 31, 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.
15
<PAGE>
Deposit Insurance/SAIF Recapitalization
For 1996, SAIF-insured institutions paid deposit insurance assessment
rates of $0.23 to $0.31 per $100 of deposits. In contrast, institutions insured
by the FDIC's Bank Insurance Fund (the "BIF") that were well capitalized and
without any significant supervisory concerns paid the minimum annual assessment
of $2,000, and all other BIF-insured institutions paid deposit insurance
assessment rates of $0.03 to $0.27 per $100 of deposits. In response to the
SAIF/BIF assessment disparity, the Deposit Funds Insurance Act of 1996 (the
"Funds Act") was enacted into law on September 30, 1996.
The Funds Act authorized the FDIC to impose a special assessment on all
institutions with SAIF-assessable deposits in the amount necessary to
recapitalize the SAIF. As implemented by the FDIC, institutions with
SAIF-assessable deposits paid a special assessment, subject to adjustment, of
65.7 basis points per $100 of the SAIF-assessable deposits held at March 31,
1995. Based on the foregoing, the Bank charged $520,000 against pretax earnings
for the year ended September 30, 1996. This assessment is deductible in the
taxable year paid.
Due to the recapitalization of the SAIF, the FDIC reduced the
assessment rate for SAIF-assessable deposits for periods beginning on October 1,
1996. The assessment rates range from 18 to 27 basis points per $100 of deposits
for the last calendar quarter of 1996 and range from -0- to 27 basis points per
$100 of deposits for subsequent assessment periods. However, the Funds Act also
provides that the FDIC cannot assess regular insurance assessments for an
insurance fund unless required to maintain or achieve the designated reserve
ratio of 1.25% per $100 of deposits, except for institutions that are not
classified as "well capitalized" or that have moderately severe or
unsatisfactory financial, operational, or compliance weaknesses as determined by
the FDIC. The Bank has not been so classified.
Accordingly, assuming the designated reserve ratio is maintained by the
SAIF after collection of the special assessment, the Bank will pay substantially
lower regular SAIF assessments compared to those paid by the Bank in recent
years, as long as it maintains its current regulatory status.
In addition, the Funds Act expanded the assessment base for the payment
of interest on FICO bonds, which were issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation, to include the deposits of both BIF and SAIF insured institutions
beginning January 1, 1997. Until December 31, 1999, or until such earlier date
on which the last savings association ceases to exist, the rate of assessment
for BIF insured deposits will be one-fifth of the rate imposed on
SAIF-assessable deposits. The current estimate of the assessment rate for the
payment of the FICO interest is approximately 1.3 basis points for
BIF-assessable deposits and 6.4 basis points for SAIF-assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, assuming the prior elimination of the thrift charter. The
Secretary of the Treasury was required to conduct a study of the relevant
factors for the development of a common charter for banks and thrifts and report
conclusions and findings to Congress.
16
<PAGE>
Recapture of Tax Bad Debt Reserves
Prior to the enactment of the Small Business Job Protection Act of 1996
(the "1996 Act") on August 20, 1996, thrift institutions which met certain
definitional tests, were permitted to establish tax reserves for bad debts and
to deduct annual additions to such reserves in arriving at taxable income. The
Bank was permitted to compute the annual bad debt deduction based upon an
experience method or a percentage equal to 8.0% of the Bank's taxable income
(the "PTI Method") before such bad debt deduction, subject to certain
limitations. Under the 1996 Act, the PTI Method was repealed and the Bank is
required to use the experience method for computing its annual bad debt
deduction for taxable years beginning on or after October 1, 1996.
The Bank will also have to recapture its excess tax bad debt reserves
which have accumulated since 1988, amounting to approximately $67,000, over a
six year period. The tax associated with the recaptured reserves is
approximately $26,000. The recapture was scheduled to begin with the Bank's 1996
year, but could be delayed up to two years if the Bank originated 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 or 1997. Recapture will begin in 1998. Deferred income taxes
have been previously established for the taxes associated with the recaptured
reserves and the ultimate payment of the related taxes will not result in a
charge to earnings.
Year 2000
At the turn of the century, computer-based information systems will be
faced with the problems potentially affecting hardware, software, networks,
processing platforms, as well as customer and vendor interdependencies. The
Company has established a committee and is in the process of assessing the
effect of Year 2000 on the Bank's operating plans and systems. The Company is
developing a plan for identifying, renovating, testing and implementing its
systems for Year 2000 processing and internal control requirements. The cost for
becoming Year 2000 compliant has not been determined, however, management feels
it will not be material to the Company's financial statements.
17
<PAGE>
[LETTERHEAD OF MCGLADREY & PULLEN, LLP APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Coddle Creek Financial Corp.
Mooresville, North Carolina
We have audited the accompanying consolidated statements of financial condition
of Coddle Creek Financial Corp. and subsidiary as of December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three year period ended December 31,
1997. These financial statements are the responsibility of the Company'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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Coddle Creek
Financial Corp. and subsidiary as of December 31, 1997 and 1996 and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
January 16, 1998
18
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
ASSETS 1997 1996
- --------------------------------------------------------------------------------
Cash
Interest-bearing deposits (Note 2) $ 36,649,000 $ 2,253,000
Noninterest-bearing deposits 422,000 422,000
Certificates of deposit (Note 2) 100,000 100,000
Securities available for sale (Note 2) 3,054,000 3,959,000
Securities held to maturity (Fair value 1997
$2,734,000; 1996 $3,705,000) (Notes 2 and 5) 2,708,000 3,708,000
Federal Home Loan Bank stock (Note 2) 930,000 869,000
Loans receivable, net (Note 3) 101,982,000 97,951,000
Office properties and equipment, net (Note 4) 891,000 922,000
Accrued interest receivable:
Investment securities 95,000 96,000
Loans receivable 660,000 618,000
Cash value of life insurance (Note 6) 971,000 838,000
Real estate owned 81,000 -
Deferred income taxes (Note 8) 1,008,000 713,000
Income tax refund claim receivable 1,000 42,000
Prepaid expenses and other assets 33,000 61,000
----------------------------
Total assets $ 149,585,000 $112,552,000
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
Deposits (Note 5) $ 99,382,000 $ 93,785,000
Advances from Federal Home Loan Bank - 2,000,000
Advances from borrowers for taxes and insurance 105,000 105,000
Accounts payable and other liabilities (Note 6) 835,000 245,000
Deferred compensation (Note 6) 2,270,000 2,005,000
----------------------------
Total liabilities 102,592,000 98,140,000
----------------------------
Commitments (Notes 6 and 10)
Stockholders' Equity: (Note 7)
Preferred stock, authorized 5,000,000 shares;
none issued - -
Common stock, no par value, authorized
20,000,000 shares; issued 674,475 shares
in 1997; issued -0- shares in 1996 - -
Additional paid-in capital 32,494,000
Unrealized gain on securities available for
sale, net (Note 2) 25,000 28,000
Unearned ESOP shares (577,000) -
Retained earnings, substantially restricted
(Notes 7 and 8) 15,051,000 14,384,000
----------------------------
Total stockholders' equity 46,993,000 14,412,000
----------------------------
Total liabilities and stockholders'
equity $ 149,585,000 $112,552,000
============================
See Notes to Consolidated Financial Statements.
19
<PAGE>
(This page intentionally left blank)
20
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 8,367,000 $ 7,963,000 $ 7,118,000
Investment securities 482,000 628,000 670,000
Other 148,000 88,000 158,000
---------------------------------------------------------
8,997,000 8,679,000 7,946,000
---------------------------------------------------------
Interest expense:
Deposits (Note 5) 4,723,000 4,624,000 4,416,000
Federal Home Loan Bank advances 97,000 34,000
---------------------------------------------------------
4,820,000 4,658,000 4,416,000
---------------------------------------------------------
Net interest income 4,177,000 4,021,000 3,530,000
Provision for loan losses (Note 3) 335,000 - 12,000
---------------------------------------------------------
Net interest income after
provision for loan losses 3,842,000 4,021,000 3,518,000
---------------------------------------------------------
Noninterest income 192,000 200,000 190,000
---------------------------------------------------------
Other expenses:
Compensation and employee benefits (Note 6) 2,131,000 1,676,000 1,531,000
Net occupancy 191,000 162,000 259,000
Deposit insurance premiums 45,000 210,000 195,000
Special SAIF assessment (Note 12) - 520,000 -
Data processing 168,000 169,000 168,000
Other 458,000 409,000 471,000
---------------------------------------------------------
2,993,000 3,146,000 2,624,000
---------------------------------------------------------
Income before income taxes 1,041,000 1,075,000 1,084,000
Income taxes (Note 8) 374,000 354,000 304,000
---------------------------------------------------------
Net income $ 667,000 $ 721,000 $ 780,000
=========================================================
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized Gain
Additional On Securities Unearned
Paid-in Available For ESOP
Capital Sale, Net Shares
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1994 $ - $ - $ -
Net income - - -
Net change in unrealized gain on
securities available for sale, net - 63,000 -
----------------------------------------------------------------
Balance, December 31, 1995 - 63,000 -
Net income - - -
Net change in unrealized gain on
securities available for sale, net - (35,000) -
----------------------------------------------------------------
Balance, December 31, 1996 - 28,000 -
Net proceeds from issuance of
common stock 32,494,000 - -
Purchase of common stock by the ESOP - - (577,000)
Net income - - -
Net change in unrealized gain on
securities available for sale, net - (3,000) -
----------------------------------------------------------------
Balance, December 31, 1997 $ 32,494,000 $ 25,000 $ (577,000)
================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Retained
Earnings, Total
Substantially Stockholders'
Restricted Equity
-------------------------------------
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 -- 63,000
-------------------------------------
Balance, December 31, 1995 13,663,000 13,726,000
Net income 721,000 721,000
Net change in unrealized gain on
securities available for sale, net -- (35,000)
-------------------------------------
Balance, December 31, 1996 14,384,000 14,412,000
Net proceeds from issuance of
common stock -- 32,494,000
Purchase of common stock by the ESOP -- (577,000)
Net income 667,000 667,000
Net change in unrealized gain on
securities available for sale, net -- (3,000)
-------------------------------------
Balance, December 31, 1997 $ 15,051,000 $ 46,993,000
=====================================
See Notes to Consolidated Financial Statements.
23
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 667,000 $ 721,000 $ 780,000
Adjustments to reconcile net
income to net
cash provided by operating
activities:
Provision for loan losses 335,000 - 12,000
Provision for depreciation 72,000 77,000 92,000
Provision for deferred income taxes (293,000) (72,000) (113,000)
Amortization of deferred loan fees (162,000) (142,000) (139,000)
Changes in assets and liabilities:
(Increase) decrease in:
Interest receivable (41,000) (16,000) (84,000)
Cash value of life insurance (133,000) (106,000) (155,000)
Income tax refund claim
receivable 41,000 80,000 (51,000)
Prepaid expenses and other
assets 28,000 (15,000) 4,000
Increase (decrease) in:
Interest payable 27,000 28,000 82,000
Accounts payable and other
liabilities 13,000 (97,000) (32,000)
Deferred compensation 265,000 266,000 297,000
----------------------------------------
Net cash provided by
operating activities 819,000 724,000 693,000
----------------------------------------
(Continued)
24
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Investing Activities
Proceeds from maturities of
certificates of deposit 100,000 100,000 100,000
Purchases of certificates of deposit (100,000) -- (100,000)
Purchases of securities available for sale -- (951,000) (500,000)
Proceeds from maturities of securities
available for sale 900,000 446,000 --
Purchases of securities held to maturity -- (498,000) (2,425,000)
Proceeds from maturities of securities
held to maturity 1,000,000 3,500,000 3,894,000
Purchase of Federal Home Loan Bank stock (61,000) (45,000) --
Originations and principal payments on
loans receivable, net (4,303,000) (7,254,000) (7,975,000)
Purchases of office properties and equipment (41,000) (39,000) (52,000)
Proceeds from the sale of real estate owned 18,000 -- --
----------------------------------------
Net cash used in
investing activities (2,487,000) (4,741,000) (7,058,000)
----------------------------------------
Cash Flows From Financing Activities
Net increase in deposits 5,570,000 1,654,000 6,916,000
Proceeds from Federal Home
Loan Bank advances 4,000,000 3,000,000 --
Payments on Federal Home
Loan Bank advances (6,000,000) (1,000,000) --
Decrease in advances from borrowers
for taxes and insurance -- (18,000) (41,000)
Net proceeds from issuance of common stock 32,494,000 -- --
----------------------------------------
Net cash provided by
financing activities 36,064,000 3,636,000 6,875,000
----------------------------------------
</TABLE>
(Continued)
25
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash equivalents
and cash equivalents 34,396,000 (381,000) 510,000
Cash and cash equivalents:
Beginning 2,675,000 3,056,000 2,546,000
-------------------------------------------------
Ending $ 37,071,000 $ 2,675,000 $ 3,056,000
=================================================
Supplemental Schedule of Cash and
and Cash Equivalents
Interest-bearing $ 36,649,000 $ 2,253,000 $ 2,657,000
Noninterest-bearing 422,000 422,000 399,000
-------------------------------------------------
$ 37,071,000 $ 2,675,000 $ 3,056,000
=================================================
Supplemental Schedule of
Cash Flow Information
Cash payments for:
Interest $ 4,793,000 $ 4,630,000 $ 4,334,000
Income taxes 624,000 346,000 242,000
Supplemental Disclosures of Noncash
Transactions
Transfers from securities held to
maturity to securities available for sale -- -- 3,408,000
Change in unrealized gain on securities
available for sale, net of deferred income taxes (3,000) (35,000) 63,000
Real estate acquired in the settlement of loans 99,000 -- --
Loan to ESOP for purchase of stock 577,000 -- --
Account payable to ESOP 577,000 -- --
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
Conversion and organization of holding company: On December 30, 1997, pursuant
- -----------------------------------------------
to a Plan of Conversion which was approved by its members and regulators,
Mooresville Savings Bank, S.S.B. ("Mooresville Savings" or the "Bank") converted
from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank (the "Conversion"), and became a
wholly-owned subsidiary of Coddle Creek Financial Corp. (the "Company"). The
Company was formed to acquire all of the common stock of the Bank upon its
conversion to stock form. The Company has no operations and conducts no business
of its own other than owning the Bank, investing its portion of the net proceeds
received in the Conversion, and lending funds to the Employee Stock Ownership
Plan (the "ESOP") which was formed in connection with the Conversion.
Nature of business: 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's primary regulators
are the Federal Deposit Insurance Company ("FDIC") and the Administrator of the
North Carolina Savings Institutions Division (the "NC Administrator"). The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF")
of the FDIC.
The following is a description of the significant accounting policies used in
the preparation of the accompanying financial statements.
Principles of consolidation: The consolidated financial statements include the
- ----------------------------
accounts of Coddle Creek Financial Corp. and its wholly-owned subsidiary,
Mooresville Savings Bank, S.S.B., for the year ended December 31, 1997. The
Company capitalized on December 30, 1997, therefore, the consolidated financial
statements for the years ended December 31, 1997, 1996 and 1995 include the
operations of the Bank only. All significant intercompany transactions and
balances have been eliminated in consolidation.
Basis of financial statement presentation: The accounting and reporting policies
- ------------------------------------------
of the Company 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 and disclosure of contingent
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 Company includes all interest and noninterest-bearing cash accounts,
which are not subject to withdrawal restrictions or penalties. For purposes of
the statement of cash flows, the Company considers all highly liquid debt
instruments with original maturities when purchased of three months or less to
be cash equivalents. The Company maintains deposits with financial institutions
which are in excess of the federally-insured amounts.
27
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
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.
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,
----------------------------------------------------------------
requires that management classify 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.
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.
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 could 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 on 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.
28
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
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.
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, 1997 and 1996 which it
considered to be impaired, there is no SFAS No. 114 allowance for unpaid loans
at December 31, 1997 and 1996.
Real estate owned: Real estate owned is initially recorded at estimated fair
- ------------------
value at the date of foreclosure, establishing a new cost basis. Based on
periodic evaluations by management, the carrying values are reduced where they
exceed fair value minus estimated costs to sell. Costs relating to the
development and improvement of the property are capitalized, while holding costs
of the property are charged to expense in the period incurred.
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, when
collectibility of interest is not in doubt. At the time a loan becomes
nonperforming and collectibility of principle is in doubt, the loan is placed on
nonaccrual status by establishing an allowance for uncollected interest. When a
loan is on non-accrual status interest income is recognized only to the extent
cash payments are received. If and when management determines that the
collectibility of principal and interest is no longer in doubt, the loan is
returned to performing status and the reserve for uncollected interest is
reversed. The Bank anticipates that it will account for interest on impaired
loans in a similar fashion in the future if and when it has impaired loans.
Loan-origination fees and related costs: Loan fees and certain direct loan
- ----------------------------------------
origination costs are deferred, and the net fee or cost is recognized as an
adjustment to interest income using the interest method over the contractual
life of the loans, adjusted for actual prepayments.
Office properties and equipment: Office properties and equipment are stated at
- --------------------------------
cost less accumulated depreciation which is computed principally by the
straight-line method.
29
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
Benefit plans: The Bank had a noncontributory defined benefit pension plan
- --------------
covering all employees who meet the eligibility requirements, which was
terminated during 1997. To have been eligible, an employee must have been 21
years of age and have completed one year of continuous service. The plan
provided benefits based on the career earnings of each participant which were
subject to certain reductions if the employee retires before reaching age 62.
The Bank's funding policy was to make the maximum annual contribution that was
deductible for income tax purposes.
The Bank has a 401(k) plan covering substantially all of its employees. The Bank
matches 50% of the qualified employees contributions, limited to 6% 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 term of active service of the directors.
The Bank has a ESOP which covers substantially all of its employees.
Contributions to the plan are based upon the amortization requirement of the
ESOP's debt to the Company, subject to compensation limitations, and are
expensed in accordance with the AICPA's Statement of Position 93-6, Employer's
Accounting for Employee Stock Ownership Plans.
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.
Earnings per share: The computation for earnings per share is based on net
- -------------------
income earned from the date of conversion, December 30, 1997, to the end of the
1997 fiscal year and is insufficient to compute a per share number. For purposes
of this computation, the number of shares of common stock purchased by the
Bank's employee stock ownership plan which have not been allocated to
participant accounts are not assumed to be outstanding.
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 Company's financial instruments are not necessarily indicative of
the amounts the Company 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.
30
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Summary of Significant Accounting Policies
(Continued)
The fair value estimates presented are based on pertinent information available
to management as of December 31, 1997 and 1996. 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 Company 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.
31
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities
The amortized cost and fair values of securities as of December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------------------
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 $ 3,013,000 $ 43,000 $ (2,000) $ 3,054,000
============================================================================
Securities held to maturity:
U.S. Government and federal
agencies obligations $ 1,435,000 $ 4,000 $ $ 1,439,000
Municipal obligations 1,273,000 22,000 1,295,000
----------------------------------------------------------------------------
$ 2,708,000 $ 26,000 $ $ 2,734,000
============================================================================
Other investments:
Interest-earning deposits $ 36,649,000 $ $ $ 36,649,000
Certificates of deposit 100,000 100,000
Federal Home Loan Bank stock 930,000 930,000
----------------------------------------------------------------------------
$ 37,679,000 37,679,000
============================================================================
<CAPTION>
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 $ 2,235,000 $ 10,000 $ $ 2,245,000
Municipal obligations 1,473,000 9,000 (22,000) 1,460,000
---------------------------------------------------------------------------
$ 3,708,000 $ 19,000 $ (22,000) $ 3,705,000
===========================================================================
</TABLE>
32
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities (Continued)
<TABLE>
<S> <C> <C> <C> <C>
Other investments:
Interest-earning deposits $ 2,253,000 $ - $ - $ 2,253,000
Certificates of deposit 100,000 - - 100,000
Federal Home Loan Bank stock 869,000 - - 869,000
----------------------------------------------------------------
$ 3,222,000 $ - $ - $ 3,222,000
================================================================
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1997 by
contractual maturity are shown below.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------------------------------
<S> <C> <C>
Securities available for sale:
Due in one year or less $ 1,200,000 $ 1,205,000
Due after one year through five years 1,813,000 1,849,000
---------------------------------
$ 3,013,000 $ 3,054,000
=================================
Securities held to maturity:
Due in one year or less $ 1,100,000 $ 1,103,000
Due after one year through five years 580,000 582,000
Due after five years through ten years 1,018,000 1,039,000
Due after ten years 10,000 10,000
---------------------------------
$ 2,708,000 $ 2,734,000
=================================
</TABLE>
There were no sales of investment securities for the years ended December 31,
1997, 1996 and 1995.
The change in net unrealized gains and losses shown as a separate component of
equity for the year ended December 31, 1997 and 1996 is as shown below:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Balance in equity component, beginning $ 28,000 $ 63,000
Change in unrealized gains (losses) (5,000) (58,000)
Change in deferred income taxes 2,000 23,000
-----------------------------
Balance in equity component, ending $ 25,000 $ 28,000
=============================
</TABLE>
33
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Securities (Continued)
The following table sets forth certain information regarding the carrying value
and contractual maturities of the Company's investment portfolio at December 31,
1997:
<TABLE>
<CAPTION>
Carrying Value
----------------------------------------------------------------------------
After One After Five
Year Through Years Through After
One Year Five Years Ten Years Ten Years Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency $ 1,205,000 $ 1,591,000 $ -- $ -- 2,796,000
Federal Home Loan Bank bonds -- 258,000 -- -- 258,000
Securities held to maturity:
U.S. government and agency 700,000 100,000 -- -- 800,000
Municipal bonds -- 255,000 1,018,000 -- 1,273,000
Federal Home Loan Bank bonds 400,000 225,000 -- 10,000 635,000
Other investments:
Interest-earning deposits 36,649,000 -- -- -- 36,649,000
Certificates of Deposit 100,000 -- -- -- 100,000
Federal Home Loan Bank stock -- -- -- 930,000 930,000
----------------------------------------------------------------------------
$ 39,054,000 $ 2,429,000 $ 1,018,000 $ 940,000 $ 43,441,000
============================================================================
</TABLE>
The following table sets forth the weighted average yield by maturity of the
Company's investment portfolio at December 31, 1997:
<TABLE>
<CAPTION>
After One After Five
Year Through Years Through After
One Year Five Years Ten Years Ten Years Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency 6.55% 6.95% -- -- 6.78%
Federal Home Loan Bank bonds -- 6.64% -- -- 6.64%
Securities held to maturity:
U.S. government and agency 6.61% 6.38% -- -- 6.57%
Municipal bonds -- 5.12% 5.91% -- 5.75%
Federal Home Loan Bank bonds 6.36% 6.48% -- 4.80% 6.38%
Other investments:
Interest-earning deposits 5.56% -- -- -- 5.56%
Certificates of Deposit 6.10% -- -- -- 6.10%
Federal Home Loan Bank stock -- -- -- 7.25% 7.25%
----------------------------------------------------------------------------
6.46% 6.66% 5.91% 7.22% 6.47%
============================================================================
</TABLE>
34
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable
Loans receivable at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
Percentage Percentage
Amount of Total Amount of Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four family residential $ 84,647,000 83.00% $ 85,341,000 87.13 %
Multi-family residential 856,000 0.84% 761,000 0.78 %
Nonresidential 3,156,000 3.09% 2,711,000 2.76 %
Construction 7,529,000 7.38% 4,086,000 4.17 %
Equity line 6,909,000 6.79% 4,947,000 5.05 %
-------------------------------------------------------------------
Total real estate loans 103,097,000 101.10% 97,846,000 99.89 %
-------------------------------------------------------------------
Consumer Loans:
Installment loans 2,446,000 2.40% 2,397,000 2.45 %
Other 995,000 0.97% 941,000 0.96 %
-------------------------------------------------------------------
Total consumer loans 3,441,000 3.37% 3,338,000 3.41 %
-------------------------------------------------------------------
Total gross loans 106,538,000 104.47% 101,184,000 1103.30 %
-------------------------------------------------------------------
Less:
Construction loans in process (3,252,000) (3.19)% (2,321,000) 2.37 %
Net deferred loan fees (611,000) (0.60)% (524,000) 0.53 %
Allowance for loan losses (693,000) (0.68)% (388,000) 0.40 %
-------------------------------------------------------------------
(4,556,000) (4.47)% (3,233,000) 3.30 %
-------------------------------------------------------------------
$ 101,982,000 100.00% $ 97,951,000 100.00 %
===================================================================
</TABLE>
The following table sets forth the time to contractual maturity of the Bank's
loan portfolio at December 31, 1997. Loans which have adjustable rates are shown
as being due in the period during which rate 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.
35
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------
More than Greater
One Year 1 Year to than
or Less 5 Years 5 Years Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustable rate residential 1-4 family $ 24,477,000 $ - $ - $ 24,477,000
Fixed rate residential 1-4 family 214,000 3,079,000 58,404,000 61,697,000
Other real estate loans - adjustable 8,515,000 - - 8,515,000
Other real estate loans - fixed 803,000 263,000 307,000 1,373,000
Construction 4,277,000 - - 4,277,000
Other loans 1,102,000 1,062,000 172,000 2,336,000
Allowance for loan losses (693,000) - - (693,000)
------------------------------------------------------------------------
Totals $ 38,695,000 $ 4,404,000 $ 58,883,000 $ 101,982,000
========================================================================
</TABLE>
The following table sets forth the dollar amount at December 31, 1997 of all
loans maturing or repricing on or after December 31, 1998 which have fixed or
adjustable interest rates.
Fixed Adjustable
Rates Rates
-------------------------------------
Residential 1 - 4 family $ 61,483,000 $ -
Other 570,000 1,234,000
-------------------------------------
$ 62,053,000 $ 1,234,000
=====================================
The following is an analysis of the allowance for loan losses for the year ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 388,000 $ 396,000 $ 396,000
--------------------------------------------------------
Loans charged off:
Real Estate (32,000) (13,000) -
Consumer - - (13,000)
--------------------------------------------------------
Total loans charged off (32,000) (13,000) (13,000)
--------------------------------------------------------
Recoveries:
Real Estate 2,000 - 1,000
Consumer - 5,000 -
--------------------------------------------------------
Total recoveries 2,000 5,000 1,000
--------------------------------------------------------
Provision for loan losses 335,000 - 12,000
--------------------------------------------------------
Balance at end of year $ 693,000 $ 388,000 $ 396,000
========================================================
Ratio of net charge-offs to average loans outstanding 0.03% 0.01% 0.01%
========================================================
</TABLE>
36
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
The allocation of the allowance for loan losses applicable to each category of
loans at December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------------
Percent of Percent of
Allowance to Percent of Allowance to Percent of
Amount of Total Loans to Amount of Total Loans to
Allowance Allowance Total Loans Allowance Allowance Total Loans
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family $ 315,000 45.45% 79.45% $ 258,000 66.49% 84.34%
residential
Multi-family residential - - 0.80% - 0.75%
Nonresidential - - 2.96% - 2.68%
Construction - - 7.07% - 4.04%
Equity line 18,000 2.60% 6.49% 19,000 4.90% 4.89%
----------------------------------------------------------------------------------
Total real estate loans 333,000 48.05% 96.77% 277,000 71.39% 96.70%
----------------------------------------------------------------------------------
Consumer loans:
Installment loans 40,000 5.77% 2.30% 27,000 6.96% 2.37%
Other 3,000 0.43 0.93% 4,000 1.03% 0.93%
----------------------------------------------------------------------------------
Total consumer loans 43,000 6.20% 3.23% 31,000 7.99% 3.30%
----------------------------------------------------------------------------------
Unallocated 317,000 45.75% - 80,000 20.62% -
----------------------------------------------------------------------------------
$ 693,000 100.00% 100.00% $ 388,000 100.00% 100.00%
==================================================================================
<CAPTION>
1995
------------------------------------------------
Percent of Percent of
Amount of Allowance to Loans to
Allowance Total Allowance Total Loans
------------------------------------------------
<S> <C> <C> <C>
Real estate loans:
One-to-four family residential $ 356,000 89.90% 81.67%
Multi-family residential - - 0.78%
Nonresidential - - 2.12%
Construction - - 9.00%
Equity line 13,000 3.28% 3.00%
------------------------------------------------
Total real estate loans 369,000 93.18% 96.57%
------------------------------------------------
Consumer loans:
Installment loans $ 15,000 3.79% 2.49%
Other 4,000 1.01% 0.94%
------------------------------------------------
Total consumer loans 19,000 4.80% 3.43%
------------------------------------------------
Unallocated 8,000 2.02% -
------------------------------------------------
$ 396,000 100.00% 100.00%
================================================
</TABLE>
37
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
------------------------------------------------
SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income
-------------------------------------------------------
Recognition and Disclosures, requires that the Bank establish a specific
- ---------------------------
allowance on impaired loans and disclosure of the Bank's method of accounting
for interest income on impaired loans. The Bank assesses loans delinquent more
than 90 days for impairment. Such loans amounted to approximately $1,449,000 and
$1,247,000 at December 31, 1997 and 1996, respectively. These loans are
primarily collateral dependent and management has determined that the underlying
collateral is in excess of the carrying amounts. As a result, the Bank has
determined that specific allowances on these loans is not required.
Nonperforming loans for which interest has been reduced totaled approximately
$1,076,000, and $1,104,000 at December 31, 1997, and 1996, respectively and are
the credits identified by management as those borrowers with loan repayment
concerns. The differences between interest income that would have been recorded
under the original terms of such loans and the interest income actually
recognized totaled $58,000, $54,000, and $32,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
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 date indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 1,076,000 $ 1,104,000 $ 518,000
Accruing loans past due 90 days or more 373,000 143,000 684,000
Troubled debt restructuring - - -
Foreclosed real estate 81,000 - -
--------------------------------------------------------
Total non-performing assets $ 1,530,000 $ 1,247,000 $ 1,202,000
========================================================
Non-performing loans to total gross loans 1.36% 1.23% 1.25%
======================================================
Non-performing assets to total assets 1.02% 1.11% 1.11%
======================================================
Total assets $ 149,585,000 $ 112,552,000 $ 108,033,000
Total gross loans $ 106,538,000 $ 101,184,000 $ 96,359,000
</TABLE>
38
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 4. Office Properties and Equipment
Office properties and equipment at December 31 consist of the following:
1997 1996
--------------------------------------
Cost:
Land $ 364,000 $ 364,000
Buildings 879,000 879,000
Building improvements 175,000 175,000
Furniture and fixtures 578,000 544,000
Automobiles 47,000 47,000
--------------------------------------
2,043,000 2,009,000
Less accumulated depreciation 1,152,000 1,087,000
--------------------------------------
$ 891,000 $ 922,000
======================================
39
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Note 5. Deposits
Deposits at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Percent Amount Rate Percent
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
deposits $ 4,539,000 - % 4.5 % $ 1,319,000 - 1.4 %
NOW accounts 6,428,000 3.00 6.5 5,644,000 1.08% 6.0
Money market 4,823,000 3.67 4.9 4,180,000 2.91% 4.5
Passbook savings 17,771,000 3.00 18.0 11,487,000 3.00% 12.3
----------------------------------------------------------------------------------
33,561,000 33.9 22,630,000 24.2
----------------------------------------------------------------------------------
Certificates of deposit:
2.00% to 3.99% 310,000 0.3 477,000 0.5
4.00% to 5.99% 46,477,000 47.0 48,151,000 51.6
6.00% to 7.99% 18,538,000 18.7 21,971,000 23.5
8.00% to 9.99% 56,000 0.0 92,000 0.1
10.00% to 11.99% - - 51,000 0.1
----------------------------------------------------------------------------------
65,381,000 5.65% 66.1 70,742,000 5.78% 75.8
----------------------------------------------------------------------------------
98,942,000 100.0 % 93,372,000 100.0 %
=========== ============
Accrued interest payable 440,000 413,000
-------------------------------- ---------------------------
$ 99,382,000 5.10% $ 93,785,000 4.92%
================================ ===========================
<CAPTION>
1995
---------------------------------------
Weighted
Average
Amount Rate Percent
---------------------------------------
<S> <C> <C> <C>
Noninterest-bearing deposits $ 943,000 - 1.0 %
NOW accounts 7,359,000 2.40% 8.0
Money market 4,826,000 3.00% 5.3
Passbook savings 11,225,000 3.50% 12.3
---------------------------------------
24,353,000 26.6
---------------------------------------
Certificates of deposit:
2.00% to 3.99% 470,000 0.5
4.00% to 5.99% 34,199,000 37.3
6.00% to 7.99% 32,534,000 35.4
8.00% to 9.99% 162,000 0.2
10.00% to 11.99% - -
---------------------------------------
67,365,000 5.80% 73.4
---------------------------------------
91,718,000 100.0 %
============
Accrued interest payable 385,000
---------------------------
$ 92,103,000 5.03%
===========================
</TABLE>
40
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Note 5. Deposits (Continued)
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $10,982,000 and $11,876,000 at December 31, 1997 and
December 31, 1996, respectively.
The aggregate amount of certificates of deposit by maturity with a minimum
denomination of $100,000 at December 31, 1997 is as follows:
Maturity Period:
Within 3 months or less $ 2,434,000
Over 3 months through 6 months 761,000
Over 6 months through 12 months 2,058,000
Over 12 months 5,729,000
-------------------
$ 10,982,000
===================
At December 31, 1997, the scheduled maturities of certificates of deposits are
as follows:
Year Ending December 31, Amount
------------------------ -------------------
1998 $ 39,535,000
1999 11,496,000
2000 1,677,000
2001 758,000
2002 and thereafter 11,915,000
-------------------
$ 65,381,000
===================
Interest expense on deposits for the year ended December 31, 1997, 1996 and 1995
is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
NOW and money market $ 241,000 $ 220,000 $ 278,000
Passbook savings 401,000 322,000 365,000
Certificates of deposit 4,081,000 4,082,000 3,773,000
---------------------------------------------------------
$ 4,723,000 $ 4,624,000 $ 4,416,000
=========================================================
</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 December 31, 1997.
41
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Note 6. Employee Benefit Plans
The Bank had a defined benefit pension plan covering substantially all of its
employees, which was terminated during 1997. Upon termination, the Bank made
contributions to the plan so that it was fully funded, and the participants were
then paid out of the plan assets. All participants were paid by December 31,
1997, therefore there is no prepaid or accrued pension cost at December 31,
1997. Pension expense was $378,000, $109,000 and $120,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The expense for 1997 is net of a
curtailment gain of $297,000.
The components of pension cost charged to expense for the years ended December
31, 1997, 1996 and 1995 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 61,000 $ 66,000 $ 70,000
Interest cost on projected benefit obligation 139,000 131,000 129,000
Actual return on plan assets (109,000) (95,000) (89,000)
Amortization of unrecognized net asset from initial
application of SFAS No. 87 12,000 7,000 10,000
Additional cost to fully fund the plan
upon termination 275,000 - -
-------------------------------------------------------
$ 378,000 $ 109,000 $ 120,000
=======================================================
</TABLE>
The following table sets forth the funded status of the pension plan as of
December 31, 1996, and the amount recognized in the accompanying statement of
financial condition:
<TABLE>
<CAPTION>
1996
-------------------
<S> <C>
Actuarial present value of benefit obligations:
Vested portion $ (1,554,000)
Nonvested portion (6,000)
-------------------
(1,560,000)
Effect of projected future compensation levels (461,000)
-------------------
Projected benefits (2,021,000)
Plan assets at fair value, primarily certificates of deposit, on
deposit at the Bank 1,464,000
-------------------
Projected benefit obligations in excess of plan assets (557,000)
Unrecognized prior service cost 88,000
Unrecognized net loss 126,000
Unrecognized net transition obligation (recognized over 28 years) 207,000
-------------------
Accrued pension cost on statement of financial condition $ (136,000)
===================
</TABLE>
42
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 6. Employee Benefit Plans (Continued)
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 December 31, 1996. The expected long-term rate of
return on assets was 7.0% at December 31, 1996.
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 $79,000, $70,000 and $68,000 for the year ended December 31, 1997, 1996 and
1995, respectively.
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 $971,000 and $838,000 at December 31, 1997 and 1996,
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 $2,270,000 and $2,005,000 at December 31, 1997 and 1996,
respectively. The expense related to the agreements for the years ended December
31, 1997, 1996 and 1995 amounted to $350,000, $333,000 and $339,000,
respectively. The discount rate of 7% was used in determining the present value
of the future obligation at December 31, 1997 and 1996, respectively.
Note 7. Stockholders' Equity
On December 30, 1997, Coddle Creek Financial Corp. completed and closed its
stock offering. Gross proceeds from the sale of 674,475 shares amounted to
$33,724,000 and were reduced by conversion costs of $1,230,000. Up to $4,225,000
of these net proceeds will be loaned to the ESOP to purchase up to 53,958 shares
in the open market. The Company transferred $14,134,000 of the net proceeds to
Mooresville Savings Bank for the purchase of all of the common stock of the
Bank, and retained the remaining net proceeds.
Concurrent with the Conversion, the Bank established a liquidation account in an
amount equal to its net worth as reflected in its latest statement of financial
condition contained in the definitive prospectus used in connection with the
Company's initial public offering. The liquidation account will be maintained
for the benefit of eligible deposit account holders and supplemental eligible
deposit account holders who continue to maintain their deposit accounts in the
Bank after the Conversion. Only in the event of a complete liquidation will
eligible deposit account holders and supplemental eligible deposit account
holders be entitled to receive a liquidation distribution from the liquidation
account in the amount of the then current adjusted sub-account balance for
deposit accounts then held before any liquidation distribution may be made with
respect to common stockholders. Dividends paid by the Bank subsequent to the
Conversion cannot be paid from this liquidation account.
43
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Stockholders' Equity (Continued)
Subject to applicable law, the Board of Directors of Coddle Creek Financial
Corp. or Mooresville Savings Bank may each provide for the payment of dividends.
Future declarations of cash dividends, if any, by the Company may depend upon
dividend payments by the Bank to the Company. Subject to regulations promulgated
by the NC Administrator, the Bank will not be permitted to pay dividends on its
common stock if its stockholder's equity would be reduced below the amount
required for the liquidation account or its capital requirement. The Company
converted stock form on December 30, 1997 and has paid no dividends for the year
ended December 31, 1997.
For a period of five years after its conversion from mutual to stock form,
Mooresville Savings Bank must obtain the written approval from the NC
Administrator before declaring or paying a cash dividend to Coddle Creek
Financial Corp. on its capital stock in an amount in excess of one-half of the
greater of (i) the Bank's net income for the most recent fiscal year end or (ii)
the average of the Bank's net income after dividends for the most recent fiscal
year end and not more than two of the immediately preceding fiscal year ends.
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 or the Bank will pay any taxable dividend or make any taxable
distribution in excess of their current and retained earnings. The Company and
the Bank have agreed to notify the FDIC before making a return of capital during
the first three years following the Conversion.
The Bank is subject to various regulatory capital requirements administered by
the federal 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 the Bank to have a minimum leverage ratio of Tier I Capital
(principally consisting of retained earnings and any future common stockholders'
equity, less any intangible assets) to all 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 NC Administrator requires a net worth equal to
at least 5% of total assets. The Bank complied with all of the capital
requirements at December 31, 1997.
44
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Stockholders' Equity (Continued)
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the components of regulatory
capital at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1997
---------------------------------------------------------------------
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) $ 29,210 $ 29,210 $ 29,210 $ 29,210
Unrealized gain on securities
available for sale (25) (25) (25) (25)
Supplemental capital items:
General valuation allowance - - 693 693
--------------------------------------------------------------------
Regulatory capital 29,185 29,185 29,878 29,878
Minimum capital requirement 5,983 2,783 5,565 7,479
--------------------------------------------------------------------
Excess regulatory capital $ 23,202 $ 26,402 $ 24,313 $ 22,399
====================================================================
Total assets at December 31, 1997 $ 149,585 $ 149,585
============== ================
Risk-weighted assets at
December 31, 1997 $ 69,566 $ 69,566
================================
Capital as a percentage of assets:
Actual 19.51% 41.95% 42.95% 19.97%
Required 4.00 4.00 8.00 5.00
--------------------------------------------------------------------
Excess 15.51% 37.95% 34.95% 14.97%
====================================================================
</TABLE>
45
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
--------------------------------------------------------------------
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.
As of December 31, 1997, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
total capital to risk weighted assets of 10%, Tier I Capital to risk weighted
assets of 6% and Tier I Capital to total assets of 5% or $6,957,000, $4,174,000,
and $7,479,000, respectively. There are no conditions or events since that
notification that management believes have changed the Bank's category.
46
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Income Tax Matters
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to the tax bad debt reserve established for the
purpose of absorbing losses. Through 1995, 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 was
passed in 1996 that eliminated the percentage of taxable income method as an
option for computing bad debt deductions for 1996 and all future years. The Bank
is still permitted to take deductions for bad debts, but is required to compute
such deductions using an experience method. The Bank's bad debt deduction was
$30,000 and $8,000 in 1997 and 1996, respectively.
In conjunction with the change in computing the tax bad debt deduction, the Bank
will also have to recapture its excess tax bad debt reserves which have
accumulated since 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 could be
delayed up to two years if the Bank originated 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 or 1997.
Recapture will begin in 1998. Deferred income taxes have been previously
established for the taxes associated with the recaptured reserves and the
ultimate payment of the related 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 December 31, 1997 and 1996, retained earnings contain certain
historical additions to the bad debt reserve for income tax purposes of
approximately $3,816,000, the balance prior to 1988, 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 this pre-1998 reserve is 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 December 31, 1997 and 1996.
47
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 December 31:
1997 1996
-------------------------------
Deferred tax assets:
Interest income on non performing assets $ 18,000 $ 21,000
Deferred compensation 884,000 784,000
Allowance for loan losses 270,000 152,000
Pension plan 149,000 53,000
-------------------------------
1,321,000 1,010,000
-------------------------------
Deferred tax liabilities:
Property and equipment 105,000 102,000
FHLB stock dividends 136,000 136,000
Section 401(k) contribution 6,000 1,000
Deferred loan fees 17,000 8,000
Tax bad debt reserves 26,000 26,000
Unrealized gains on securities 16,000 18,000
FHLB accrued dividend 7,000 6,000
-------------------------------
313,000 297,000
-------------------------------
Net deferred tax asset $ 1,008,000 $ 713,000
===============================
At December 31, 1997 and 1996, no valuation allowance was recorded for deferred
tax assets.
Income tax expense (credits) for the year ended December 31, 1997, 1996 and 1995
consists of the following:
1997 1996 1995
-----------------------------------------------------
Current $ 667,000 $ 426,000 $ 417,000
Deferred (293,000) (72,000) (113,000)
-----------------------------------------------------
$ 374,000 $ 354,000 $ 304,000
=====================================================
48
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 8. Income Tax Matters (Continued)
A reconciliation of the federal income tax rate to the effective tax rate for
the year ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from:
Nontaxable income (2.1) (2.5) (5.8)
Nondeductible expense 1.2 - -
State income tax, net of federal benefit 1.6 1.2 1.2
Underaccrual 1.1 - (0.4)
Other 0.1 0.2 (1.0)
------------------------------------------------
Effective tax rate 35.9% 32.9% 28.0%
================================================
</TABLE>
Note 9. Employee Stock Ownership Plan
The Bank has established an employee stock ownership plan (ESOP) to benefit all
qualified employees. At December 31, 1997, the ESOP has purchased 7,500 shares
of common stock in the open market subsequent to the Conversion with proceeds
received from a loan from the Company. The ESOP intends to purchase additional
shares of common stock in the open market with additional loan proceeds from the
Company, up to a total of $4,225,000.
The Company's note receivable is to be repaid based upon 15 annual installments
of principal and interest on December 31 of each year through December 31, 2012.
Interest is based upon prime, which will be adjusted and paid annually. The note
may be prepaid without penalty. The unallocated shares of stock held by the ESOP
are pledged as collateral for the debt. The ESOP is funded by contributions made
by the Bank in amounts sufficient to retire the debt. At December 31, 1997 the
outstanding balance of the note receivable is $577,000, and is presented as a
reduction of stockholders' equity.
Shares are released as the debt is repaid and earnings from the common stock
held by the ESOP are allocated among participants on the basis of compensation
in the year of allocation. Benefits become 100% vested after five years of
credited service. Forfeitures of nonvested benefits will be reallocated among
remaining participating employees in the same proportion as contributions.
Dividends on unallocated shares may be used by the ESOP to repay the debt to the
Company and are not reported as dividends but as additional compensation expense
in the financial statements. Dividends on allocated or committed to be allocated
shares may also be used to repay the debt to the Company and are reported as
dividends in the financial statements.
At December 31, 1997, no shares held by the ESOP have been released or committed
to be released to the plan's participants for purposes of computing earnings per
share. The fair value of the unallocated shares amounted to approximately
$577,000 at December 31, 1997.
49
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Employee Stock Ownership Plan (Continued)
The ESOP has a put option which requires the Company to repurchase its common
stock from participants in the ESOP who are eligible to receive benefits under
the terms of the plan and elect to receive cash in exchange for their common
stock. There is no potential commitment for the put option at December 31, 1997,
as no ESOP shares have been released. However, there will be a future commitment
based on the fair value of the shares released.
Note 4. Commitments, Contingencies 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
December 31, 1997. Commitments, which are disbursed subject to certain
limitations, extend over varying periods of time with the majority subject to
disbursement over a 6-month period. A summary of these commitments, except for
undisbursed loan funds is as follows:
<TABLE>
<CAPTION>
Fixed Rate Variable Rate Total
--------------------------------------------------------
<S> <C> <C> <C>
Commitments to extend credit, mortgage loans $ 2,237,000 $ - $ 2,237,000
Unused home equity loans and lines of credit 3,503,000 3,503,000
</TABLE>
The Bank has made loans to its officers and directors in the normal course of
business. The following is an analysis of the loans to officers and directors
for the year ended December 31, 1997:
Balance, beginning $ 779,000
Originations 85,000
Payments (200,000)
---------------
Balance, ending $ 664,000
===============
Additionally, officers and directors maintain deposits with the Bank in the
normal course of business. Such deposits amounted to approximately $1,577,000 at
December 31, 1997.
The Company's stockholders will be asked to consider at a future stockholders'
meeting, approval of a management recognition plan. Such a plan is designed to
provide the directors, officers and certain employees of the Bank with an
ownership interest in the Company to encourage their continued service to the
Bank. Up to 26,979 shares of the Company's stock or 4% of the shares issued in
the conversion to stock form would be awarded under the plan. The stockholders
will also be asked to approve a stock option plan for directors, officers and
employees of the Bank. The plan may provide for the issuance of incentive or
non-incentive options. As many as 67,448 shares or 10% of the shares issued in
the conversion to stock form are expected to be reserved for future issuance
under the stock option plan. The Company may elect to fund any approved plan
through the issuance of authorized but unissued shares, or may elect to purchase
the shares to fund the plan in the open market. Before any plan is implemented,
regulatory approval must be obtained.
50
<PAGE>
CODDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 10. Commitments, Contingencies and Related Party Transactions (Continued)
The Bank has entered into employment agreements with certain key employees in
order to establish their duties and compensation and to provide for their
continued employment with the Bank. 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.
Note 5. Fair Value of Financial Instruments
The following table reflects a comparison of carrying amounts and the fair
values of the financial instruments as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash
Interest-bearing deposits $ 36,649,000 $ 36,649,000 $ 2,253,000 $ 2,253,000
Noninterest-bearing deposits 422,000 422,000 422,000 422,000
Certificates of deposit 100,000 100,000 100,000 100,000
Investments 5,762,000 5,788,000 7,667,000 7,664,000
Loans receivable 101,982,000 104,571,000 97,951,000 99,451,000
Accrued interest receivable 755,000 755,000 714,000 714,000
FHLB stock 930,000 930,000 869,000 869,000
Financial liabilities:
Deposits 99,382,000 99,251,000 93,785,000 92,483,000
Advances from FHLB - - 2,000,000 2,000,000
Advances from borrowers for
taxes and insurance 105,000 105,000 105,000 105,000
</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 Company and, thus, should not be interpreted to represent
the market or liquidation value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
51
<PAGE>
CUDDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Fair Value of Financial Instruments (Continued)
Cash and Certificates of Deposits: The carrying amounts 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 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 statement of financial condition 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 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 was equal to approximately 65 basis points of the SAIF assessable
deposit base as of March 31, 1995. The expense recorded for the special
assessment for the year ended December 31, 1996 amounted to $520,000.
52
<PAGE>
CUDDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Parent Company Financial Data
The following are condensed financial statements for Coddle Creek Financial
Corp. as of and for the period ended December 31, 1997. The Company had no
operations during the period December 30, 1997 through December 31, 1997.
Condensed Statement of Financial Condition
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash $ 9,371,000
Investment in Mooresville Savings Bank, S.S.B. 29,210,000
Due From Mooresville Savings Bank, S.S.B. 8,989,000
---------------
Total assets $ 47,570,000
===============
Liabilities, accounts payable $ 577,000
---------------
Stockholders' Equity:
Additional paid-in capital 32,494,000
Unrealized gain on securities available for sale, net of tax 25,000
Note receivable, ESOP (577,000)
Retained earnings 15,051,000
---------------
Total stockholders' equity 46,993,000
---------------
Total liabilities and stockholders' equity $ 47,570,000
===============
</TABLE>
53
<PAGE>
CUDDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Parent Company Financial Data (Continued)
Condensed Statement of Cash Flows
For the Period from December 30, 1997 through December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Investing Activities:
Initial investment in Mooresville Savings Bank $ (14,134,000)
Due from Mooresville Savings Bank (8,989,000)
---------------
Net cash used in investing activities (23,123,000)
---------------
Cash Flows from Financing Activities:
Net proceeds from issuance of common stock 32,494,000
---------------
Net increase in cash 9,371,000
Cash - beginning -
---------------
Cash - ending $ 9,371,000
===============
Supplemental Disclosures of Noncash Transactions
Loan to ESOP for purchase of stock $ 577,000
Account payable to ESOP 577,000
</TABLE>
Note 14. Future Reporting Requirements
The FASB has issued SFAS No. 123, Accounting for Awards of Stock-Based
Compensation to Employees. The statement defines a fair value-based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value-based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("Opinion 25"). Under the fair value-based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period, which is usually the vesting period.
Under the intrinsic value-based method, compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date or other measurement
date over the amount an employee must pay to acquire the stock. Most fixed stock
option plans- the most common type of stock compensation plan - have no
intrinsic value at grant date, and under Opinion 25 no compensation cost is
recognized for them. Compensation cost is recognized for other types of
stock-based compensation plans under Opinion 25, including plans with variable,
usually performance-based, features. This statement requires that an employer's
financial statements include certain disclosures about stock-based employee
compensation arrangements
54
<PAGE>
CUDDLE CREEK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Future Reporting Requirements (Continued)
regardless of the method used to account for them. The Statement is not expected
to have a significant effect on the Company's financial statements because
should the Company approve certain stock option plans in the future management
is expected to elect to use the accounting and reporting permitted by APB
Opinion No. 25 and will disclose the differences, if any, as proforma effects in
the notes to the financial statements of not utilizing the fair value method
prescribed in SFAS No. 123.
The FASB has issued SFAS No. 128, Earnings Per Share, which the Company has not
been required to adopt as of December 31, 1997. The Statement, which will be
effective for the Company's interim period ending March 31, 1998, specifies the
computation, presentation and disclosure requirements for earnings per share.
The FASB has issued SFAS No. 130, Reporting Comprehensive Income, which the
Company has not been required to adopt as of December 31, 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.
Note 15. Year 2000
At the turn of the century, computer-based information systems will be faced
with the problems potentially affecting hardware, software, networks, processing
platforms, as well as customer and vendor interdependencies. The Company has
established a committee and is in the process of assessing the effect of Year
2000 on the Bank's operating plans and systems. The Company is developing a plan
for identifying, renovating, testing and implementing its systems for Year 2000
processing and internal control requirements. The cost for becoming Year 2000
compliant has not been determined, however, management feels it will not be
material to the Company's financial statements.
55
<PAGE>
(This page intentionally left blank)
56
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
EXECUTIVE OFFICERS:
George W. Brawley, Jr. Dale W. Brawley Billy R. Williams
President and CEO Executive Vice President Secretary/Controller
DIRECTORS:
Dr. Calvin E. Tyner
Chairman, Retired Veteran
George W. Brawley, Jr. Dale W. Brawley Claude U. Voils, Jr.
President and CEO of Moorseville Executive Vice President of Retired Chemist
Savings Bank Moorseville Savings Bank of National Starch
Jack G. Lawler Willis Barnette Donald R. Belk
Retired President of President of Custom Products, Inc. President of E.F. Belk & Son
Taltronics Electrical Contractors
<CAPTION>
<S> <C>
Stock Transfer Agent Annual Meeting
Registrar and Transfer Company The 1998 annual meeting of stockholders of
10 Commerce Drive Coddle Creek Financial Corp. will be held at
Cranford, NJ 07016 5:00 P.M.on April 17, 1998 at the Company's
corporate office at 347 North Main Street,
Special Legal Counsel Mooresville, NC.
Brooks, Pierce, McLendon, Form 10-K
Humphrey & Leonard, LLP A copy of Form 10-K, including the financial statements,
2000 Renaissance Plaza as filed with the Securities and Exchange Commission will
230 North Elm Street be furnished without charge to the Company's stockholders
Greensboro, NC 27420 upon written request to Coddle Creek Financial Corp.,
Attn: George Brawley, President
347 Main Street, P.O. Box 117, Moorseville, NC 28115
Independent Auditors
McGladrey & Pullen, LLP Corporate Office
One Morrocroft Centre 347 North Main Street
6805 Morrison Boulevard, Suite 200 P.O. Box 117
Charlotte, NC 28211 Mooresville, NC 28115
</TABLE>
Common Stock Information
On December 30, 1997, the Company issued 674,475 shares of common stock. The
Company's common stock is traded on the over the counter market with quotations
available through the OTC Electronic Bulletin Board under the symbol "CDLC" and
began trading on December 31, 1997. At December 31, 1997, there were
approximately 500 shareholders of record, not including the number of persons or
entities where stock is held in nominee or "street" name through various
brokerage firms or banks. The Company paid no dividend for the year ended
December 31, 1997. For the quarter ended December 31, 1997 the high and low
sales price for the common stock was $77.00 and $74.25, respectively.
57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CODDLE CREEK
FINANCIAL CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 422 422
<INT-BEARING-DEPOSITS> 36,649 2,253
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 3,054 3,959
<INVESTMENTS-CARRYING> 3,738 4,677
<INVESTMENTS-MARKET> 3,764 4,674
<LOANS> 101,982 97,951
<ALLOWANCE> 693 388
<TOTAL-ASSETS> 149,585 112,552
<DEPOSITS> 99,382 93,785
<SHORT-TERM> 0 2,000
<LIABILITIES-OTHER> 3,210 2,355
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 46,993 14,412
<TOTAL-LIABILITIES-AND-EQUITY> 149,585 112,552
<INTEREST-LOAN> 8,367 7,963
<INTEREST-INVEST> 482 628
<INTEREST-OTHER> 148 88
<INTEREST-TOTAL> 8,997 8,679
<INTEREST-DEPOSIT> 4,723 4,624
<INTEREST-EXPENSE> 4,820 4,658
<INTEREST-INCOME-NET> 4,177 4,021
<LOAN-LOSSES> 335 0
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 2,993 3,146
<INCOME-PRETAX> 1,041 1,075
<INCOME-PRE-EXTRAORDINARY> 1,041 1,075
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 667 721
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.93 8.07
<LOANS-NON> 1,076 1,104
<LOANS-PAST> 1,449 1,247
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 388 396
<CHARGE-OFFS> 32 13
<RECOVERIES> 2 5
<ALLOWANCE-CLOSE> 693 388
<ALLOWANCE-DOMESTIC> 376 308
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 317 80
</TABLE>
