<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BOC FINANCIAL CORP.
(Name of small business issuer in its charter)
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<S> <C> <C>
NORTH CAROLINA 6712 56-6511744
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
107 SOUTH CENTRAL AVENUE
LANDIS, NORTH CAROLINA 28088
(704) 857-7277
(Address and telephone number
of principal executive offices)
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STEPHEN R. TALBERT
CHIEF EXECUTIVE OFFICER
BOC FINANCIAL CORP.
107 SOUTH CENTRAL AVENUE
LANDIS, NORTH CAROLINA 28088
(704) 857-7277
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
ANTHONY GAETA, JR.
BRIAN T. ATKINSON
MOORE & VAN ALLEN, PLLC
100 NORTH TRYON STREET, FLOOR 47
CHARLOTTE, NORTH CAROLINA
28202-4003
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: To commence as soon as
practicable after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
[CAPTION]
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<S> <C> <C> <C>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFER-
SECURITIES TO BE REGISTERED REGISTERED PER UNIT ING PRICE(1)
<S> <C> <C> <C>
Common Stock,
$1.00 par value........... 925,750 $10.00 $9,257,500
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED REGISTRATION FEE
<S> <C>
Common Stock,
$1.00 par value........... $2,731
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
BOC FINANCIAL CORP.
(HOLDING COMPANY FOR
LANDIS SAVINGS BANK, INC., SSB,
TO BECOME BANK OF THE CAROLINAS)
UP TO 925,750 SHARES OF COMMON STOCK
$10.00 PER SHARE
BOC Financial Corp., a North Carolina corporation (the "Company"), is
offering up to 925,750 shares, subject to adjustment, of its common stock, par
value $1.00 per share (the "Common Stock"), in connection with the conversion of
Landis Savings Bank, SSB, Landis, North Carolina (the "Savings Bank"), from a
North Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank to be known as Landis Savings Bank, Inc., SSB (the "Converted
Savings Bank") and the issuance of the Converted Savings Bank's capital stock to
the Company pursuant to the Savings Bank's Plan of Conversion (the "Plan"). The
conversion of the Savings Bank to the Converted Savings Bank, the acquisition of
control of the Converted Savings Bank by the Company and the issuance and sale
of up to 925,750 shares of Common Stock are collectively referred to herein as
the "Stock Conversion." Immediately following completion of the Stock
Conversion, the Converted Savings Bank intends to convert from a North
Carolina-chartered stock savings bank to a North Carolina commercial bank (the
"Bank Conversion") to be known as "Bank of the Carolinas" (the "Commercial
Bank"). The Stock Conversion and the Bank Conversion are referred to
collectively herein as the "Conversion." (CONTINUED ON FOLLOWING PAGE)
PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW AND CONSIDER THE DISCUSSION
UNDER "RISK FACTORS" BEGINNING ON PAGE 8.
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS
OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
(THE "FDIC"), THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION
INSURANCE FUND (THE "SAIF"), OR ANY OTHER GOVERNMENTAL AGENCY,
INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL, AND ARE NOT GUARANTEED BY THE COMPANY OR
THE SAVINGS BANK.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC"), THE ADMINISTRATOR OF THE SAVINGS
INSTITUTIONS DIVISION OF THE NORTH CAROLINA DEPARTMENT OF COMMERCE
(THE "ADMINISTRATOR"), THE FDIC, OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SEC, THE ADMINISTRATOR, THE FDIC,
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
[CAPTION]
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<S> <C> <C> <C>
ESTIMATED UNDERWRITING
PURCHASE DISCOUNTS AND ESTIMATED
PRICE COMMISSIONS (3) PROCEEDS (3)
<S> <C> <C> <C>
Per Share........................................... $10.00 -- $10.00
Total Minimum (1)................................... $5,950,000 -- $5,950,000
Total Midpoint (1).................................. $7,000,000 -- $7,000,000
Total Maximum (1)................................... $8,050,000 -- $8,050,000
Total Maximum, as adjusted (2)...................... $9,275,500 -- $9,275,500
</TABLE>
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(1) The number of shares of Common Stock issued in the Stock Conversion will be
based upon an independent appraisal of the estimated pro forma market value
of the Company. As of December 3, 1997, such value was determined to be
$7,000,000. The aggregate purchase price of the Common Stock sold in the
Stock Conversion must be an amount equal to not less than 15% below and not
more than 15% above the estimated pro forma market value of the Company.
Consequently, the minimum aggregate purchase price of the shares being
offered is $5,950,000 and the maximum is $8,050,000. See "The
Conversion -- Stock Pricing and Number of Shares to be Issued."
(2) The aggregate purchase price of the shares being offered may be adjusted to
reflect an increase in the estimated pro forma market value of the Company
occurring subsequent to commencement of the offering. The aggregate purchase
price may not, however, be increased to an amount exceeding $9,257,500
without a resolicitation of subscribers. See "The Conversion -- Stock
Pricing and Number of Shares to be Issued."
(3) The accounting, administrative, appraisal, legal, printing, and other costs
to be incurred in connection with the Conversion are estimated to be
$450,000. In the event the Public Offering (as defined) is held, a sales
commission of up to four percent will be paid to William R. Hough & Co. for
each share of Common Stock sold in the Public Offering. See "The
Conversion -- Public Offering" and
THE DATE OF THIS PROSPECTUS IS , 1998
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The shares of the Common Stock are being offered pursuant to
nontransferable subscription rights ("Subscription Rights") in the following
order of priority: (i) depositors of the Savings Bank as of August 30, 1996 with
a $50.00 minimum deposit at that date ("Eligible Account Holders") who are
residents of Cabarrus, Iredell, and Rowan Counties in North Carolina (the "Local
Community"); (ii) Eligible Account Holders who are not residents of the Local
Community; (iii) the Company's Employee Stock Ownership Plan (the "ESOP"); (iv)
depositors of the Savings Bank with $50.00 or more on deposit as of December 31,
1997 ("Supplemental Eligible Account Holders"); (v) certain depositors and
borrowers as of , 1998 ("Other Members"); and (vi) directors,
officers, and employees of the Savings Bank. Subscription Rights will be
exercisable to purchase Common Stock in a subscription offering to be conducted
by the Company (the "Subscription Offering"). Subscription Rights received in
any of the foregoing categories will be subordinated to the Subscription Rights
received by those in a prior category. Subscription Rights are not transferable,
and persons who attempt to transfer or sell their Subscription Rights may lose
the right to subscribe for shares in the Stock Conversion and may be subject to
other sanctions and penalties. The Company may offer any shares of Common Stock
not subscribed for in the Subscription Offering in a community offering (the
"Community Offering") to residents of the Local Community, with preference given
to natural persons and trusts of natural persons. The Company may, in its
absolute discretion, reject orders in the Community Offering in whole or in
part. It is anticipated that shares of the Common Stock not otherwise subscribed
for in the Subscription and Community Offerings will be offered to members of
the general public in a public offering underwritten on a "best efforts" basis
by William R. Hough & Co., a registered broker-dealer (the "Public Offering").
See "The Conversion -- Offering of Common Stock," " -- Subscription Rights,"
" -- Community Offering," and " -- Public Offering."
The total number of shares to be issued in the Stock Conversion may be
significantly increased or decreased to reflect market and financial conditions
at the completion of the Stock Conversion. The aggregate purchase price of all
shares of Common Stock to be issued in the Stock Conversion will be based on the
estimated pro forma market value of the Company, as converted, as determined by
an independent appraisal. All shares of the Common Stock will be sold for $10.00
per share (the "Purchase Price"). Except for the ESOP, which intends to purchase
eight percent of the total number of shares of Common Stock to be issued in the
Stock Conversion, no person, including individuals on a joint account, together
with associates or persons acting in concert therewith, may purchase more than
25,000 shares, or $250,000, of Common Stock in the Offerings. No person may
purchase fewer than 25 shares.
The Subscription Offering will expire at 5:00 p.m., Eastern Time, on ,
, 1998, unless extended by the Company for up to an additional 45
days. The Community Offering, if any, may commence without notice at any time
after the commencement of the Subscription Offering and may terminate at any
time without notice, but may not terminate later than , 1998.
Subscription Rights are exercisable by completing and returning to the Savings
Bank a stock order form, in the form provided with this Prospectus (the "Stock
Order Form"), together with full payment, or appropriate instructions
authorizing withdrawal of such an amount from existing accounts at the Savings
Bank. An executed Stock Order Form, once received by the Company, may not be
modified, amended, or rescinded without the consent of the Company.
Subscriptions paid by check, cash, or money order will be held in a separate
account at the Savings Bank established specifically for this purpose, and
interest will be paid at the Savings Bank's passbook rate from the date payment
is received until the Stock Conversion is completed or terminated. In the case
of payments to be made through withdrawal from deposit accounts at the Savings
Bank, all sums authorized for withdrawal will continue to earn interest at the
contract rate until the date of the completion of the Stock Conversion. If the
Stock Conversion is not completed within 45 days after the last day of the
Subscription Offering (which date will be no later than , 1998) and
the Administrator consents to an extension of time to complete the Stock
Conversion, subscribers will be required to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest, or subscribers will
be permitted to modify or cancel their subscriptions. If the Stock Conversion is
not completed within such period or extended period, all funds held will be
promptly returned together with accrued interest, and all withdrawal
authorizations will be terminated. Such extensions may not go beyond
, 1999. See "The Conversion -- Subscriptions for Stock in the
Subscription and Community Offerings."
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN
ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND
ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT WHERE THE
CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS PROSPECTUS TO THE "SAVINGS BANK"
AND THE "CONVERTED SAVINGS BANK" SHALL BE DEEMED TO BE REFERENCES TO THE
"COMMERCIAL BANK" TO THE EXTENT SUCH REFERENCES PERTAIN TO CIRCUMSTANCES THAT
WILL EXIST SUBSEQUENT TO THE CONVERSION.
THE COMPANY
BOC Financial Corp. was incorporated under the laws of the State of North
Carolina in December 1997 at the direction of the Board of Directors of the
Savings Bank for the purpose of serving as the holding company of the Converted
Savings Bank upon its conversion from mutual to stock form, and of the
Commercial Bank following the Bank Conversion. The Company has received approval
from the Administrator, and has applied for approval from the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"), to acquire control of
the Converted Savings Bank and its successor, the Commercial Bank, subject to
satisfaction of certain conditions. Prior to the Conversion, the Company has not
engaged and will not engage in any material operations. Upon consummation of the
Conversion, the Company will have no significant assets other than the
outstanding capital stock of the Commercial Bank, a portion of the net proceeds
of the Stock Conversion, and a note receivable from the ESOP and its principal
business will be overseeing and directing the business of the Commercial Bank.
Following the Conversion, the Company will have capital in excess of the
level required to support its current asset size and level of operations. The
Company's business plan is to cause the Commercial Bank to pursue a strategy of
conservative, long-term growth through competing for loans and deposits in its
market area, establishing a new branch office in an adjacent market area, and
possibly making selective acquisitions of other financial institutions or
branches of other institutions. Except as discussed under the heading "Use of
Proceeds," the Boards of Directors of the Company and the Savings Bank currently
have no specific plans regarding new branch offices or acquisitions of other
financial institutions or their branches.
LANDIS SAVINGS BANK, SSB
The Savings Bank is a North Carolina-chartered mutual savings bank
headquartered in Landis, North Carolina and serving portions of Cabarrus,
Iredell, and Rowan Counties in North Carolina. The institution was chartered by
the State of North Carolina in 1913 and operated as a state savings and loan
association until 1986. The institution received federal insurance of its
deposit accounts in 1986, when it converted to a federal savings and loan
association under the name "Landis Federal Home Savings and Loan Association."
In 1993, the institution converted to a North Carolina-chartered savings bank,
at which time it adopted its present name of "Landis Savings Bank, SSB." At
September 30, 1997, the Savings Bank had total assets of $24.2 million, total
deposits of $19.7 million and retained income, substantially restricted, of $4.4
million.
Historically, the Savings Bank has operated as a traditional savings
institution, emphasizing the origination of loans secured by one- to four-family
("single-family") residences. In connection with its decision to pursue the
Conversion, the Board of Directors determined that the Savings Bank's market
area is not adequately served by existing financial institutions and that there
is an underserved demand for commercial and consumer loan products offered by a
truly community-oriented financial institution. As a result, the Board of
Directors has determined to refocus the Savings Bank's strategy. Pursuant to
this strategy, while continuing to pursue its existing business of originating
single-family residential mortgage loans, the Savings Bank will gradually expand
into commercial and consumer lending. The Bank Conversion is an integral part of
this strategy.
The Savings Bank is subject to examination and comprehensive regulation by
the FDIC and the Administrator, and the Savings Bank's deposits are insured up
to applicable limits by the SAIF, which is administered by the FDIC. The Savings
Bank is a member of and owns capital stock in the Federal Home Loan Bank
("FHLB") of Atlanta, which is one of 12 regional banks in the FHLB System. The
Savings Bank is further subject to regulations of the Federal Reserve Board
governing reserves to be maintained and certain other matters. Federal and state
regulations significantly affect the operations of the Savings Bank. See
"Regulation -- Depository Institution Regulation."
BANK OF THE CAROLINAS
Upon consummation of the Bank Conversion, the Commercial Bank will succeed
to all of the assets and liabilities of the Converted Savings Bank (which,
pursuant to the Stock Conversion, will have succeeded to all of the assets and
liabilities of the Savings Bank). Following the Conversion, management intends
to continue to follow the Savings Bank's strategy of
1
<PAGE>
seeking growth opportunities through gradually increasing its portfolio of
commercial and consumer loans while continuing to pursue single-family
residential mortgage loan origination.
Following the Bank Conversion, the deposits of the Commercial Bank will
continue to be insured by the SAIF and the Commercial Bank will continue to be
subject to regulation and supervision by the FDIC. The Commercial Bank will not
be subject to regulation and supervision by the Administrator. Rather, the
primary regulator of the Commercial Bank will be the North Carolina Banking
Commission (the "Commission;" as used herein, the Commission refers to the North
Carolina Commission as well as the North Carolina Commissioner of Banks, whose
powers are exercised under the supervision of the Commission.) In addition, the
Commercial Bank will remain a member of the FHLB of Atlanta. For information
regarding regulations applicable to the Converted Savings Bank and the
Commercial Bank, see "Regulation."
THE CONVERSION
The Board of Directors of the Savings Bank adopted the Plan, which provides
for both the Stock Conversion and the Bank Conversion, in September 1997.
Pursuant to the Stock Conversion, the Savings Bank will convert from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank and issue all of its outstanding capital stock to the Company, and
the Company will offer and sell shares of Common Stock in the Offerings.
Immediately thereafter, pursuant to the Bank Conversion, the Converted Savings
Bank will convert to a North Carolina commercial bank.
The Administrator has approved the Plan, subject to approval by the members
of the Savings Bank and satisfaction of certain other conditions. The
Administrator has also approved the Company's application to acquire all of the
capital stock of the Converted Savings Bank as part of the Stock Conversion. The
FDIC has issued a notification that it does not intend to object to the Stock
Conversion, subject to the satisfaction of certain conditions. The Administrator
and the Commission have conditionally approved the Bank Conversion and the
Company has applied to the Federal Reserve Board for approval to own all of the
capital stock of the Commercial Bank and thereby become a bank holding company
following completion of the Bank Conversion.
The Conversion is subject to certain conditions, including the prior
approval of the Plan at a special meeting of the members of the Savings Bank to
be held on , 1998 (the "Special Meeting"). The portion of the net proceeds
from the sale of Common Stock in the Stock Conversion to be transferred to the
Converted Savings Bank by the Company will substantially increase the Converted
Savings Bank's (and, after the Bank Conversion, the Commercial Bank's) capital
position, which will in turn increase the amount of funds available for lending
and investment and provide greater resources to support operations. The holding
company structure will provide greater flexibility than the Commercial Bank
alone would have for diversification of business activities and expansion.
Management believes that the increase in capital will enable the Commercial Bank
to compete more effectively with other types of financial services
organizations. In addition, the Conversion will enhance the future access of the
Company to the capital markets and will afford depositors of the Savings Bank
and others the opportunity to become shareholders of the Company.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Federal regulations require that the aggregate purchase price of the Common
Stock to be issued in the Stock Conversion be consistent with an independent
appraisal of the estimated pro forma market value of the Common Stock following
the Stock Conversion. The Meritas Group, Inc. ("Meritas"), a firm experienced in
valuing financial institutions, has made an independent appraisal of the
estimated aggregate pro forma market value of the Common Stock to be issued in
the Stock Conversion. Meritas has determined that as of December 3, 1997 such
estimated pro forma market value was $7,000,000. The resulting valuation range
in Meritas' appraisal, which under applicable regulations extends 15% below and
above the estimated value, is from $5,950,000 to $8,050,000 (the "Estimated
Valuation Range"). The Company, in consultation with its advisors, has
determined to offer the shares of Common Stock in the Stock Conversion at the
Purchase Price of $10.00 per share. Such appraisal is not intended and must not
be construed as a recommendation of any kind as to the advisability of
purchasing such shares or as any form of assurance that, after the Stock
Conversion, such shares may be resold at or above the Purchase Price. The
appraisal will be further updated immediately prior to the completion of the
Stock Conversion and could be increased to up to $9,257,500 without a
resolicitation of subscribers based on market and financial conditions at the
completion of the Stock Conversion.
THE SUBSCRIPTION, COMMUNITY, AND PUBLIC OFFERINGS
The shares of Common Stock to be issued in the Stock Conversion are being
offered at the Purchase Price of $7.00 per share in the Subscription Offering
pursuant to nontransferable Subscription Rights in the following order of
priority:
2
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(i) Eligible Account Holders (depositors whose accounts in the Savings Bank
totaled $50.00 or more on August 30, 1996) who are residents of the Local
Community; (ii) Eligible Account Holders who are not residents of the Local
Community; (iii) the ESOP (the Company's tax-qualified stock benefit plan); (iv)
Supplemental Eligible Account Holders (depositors whose accounts in the Savings
Bank totaled $50.00 or more on December 31, 1997, other than Eligible Account
Holders); (v) Other Members (certain depositors and borrower members of the
Savings Bank as of 1998 other than Eligible Account Holders and
Supplemental Eligible Account Holders); and (vi) directors, officers, and
employees of the Savings Bank. Subscription Rights received in any of the
foregoing categories will be subordinated to the Subscription Rights received by
those in a prior category.
The Company may offer any shares of Common Stock not subscribed for in the
Subscription Offering at the same price in the Community Offering to residents
of the Local Community by delivering a copy of this Prospectus and the Stock
Order Form to such persons. In the Community Offering, preference will be given
to natural persons and trusts of natural persons who are residents of the Local
Community. Subscription Rights will expire if not exercised by 5:00 p.m.,
Eastern Time, on , 1998, unless extended (the "Expiration Date"). The
Company and the Savings Bank reserve the absolute right to accept or reject any
orders in the Community Offering, in whole or in part, either at the time of
receipt of an order or as soon as practicable following the Expiration Date.
It is anticipated that shares of Common Stock not otherwise subscribed for
in the Subscription Offering and Community Offering, if any, may be offered at
the discretion of the Company to the general public as part of a Public Offering
underwritten on a "best efforts" basis by William R. Hough & Co., a registered
broker-dealer. See "The Conversion -- Public Offering." The Subscription,
Community, and Public Offerings are collectively referred to herein as the
"Offerings."
The Savings Bank has established a Stock Information Center, which will be
staffed with specially trained employees of the Savings Bank to coordinate the
Offerings, including tabulation of orders and answering questions about the
Offerings by telephone. All subscribers will be instructed to mail payment to
the Stock Information Center. Payment for shares of Common Stock may be made by
cash (if delivered in person), check, or money order or by authorization of
withdrawal from deposit accounts maintained with the Savings Bank (without
penalty for early withdrawal). Such funds will not be available for withdrawal
and will not be released until the Stock Conversion is completed or terminated.
See "The Conversion -- Subscriptions for Stock in Subscription and Community
Offerings."
NONTRANSFERABILITY OF SUBSCRIPTION RIGHTS
Applicable regulations of the Administrator provide that prior to the
completion of the Stock Conversion, no person shall transfer or enter into any
agreement or understanding to transfer the legal or beneficial ownership of the
Subscription Rights issued under the Plan or the shares of Common Stock to be
issued upon their exercise. Persons violating such prohibition may lose their
right to subscribe for stock in the Stock Conversion. Each person exercising
Subscription Rights will be required to certify that his or her purchase of
Common Stock is solely for the purchaser's own account and that there is no
agreement or understanding regarding the sale or transfer of such shares.
PURCHASE LIMITATIONS
No person may purchase fewer than 25 shares in the Offerings. With the
exception of the ESOP, no person, including individuals on a joint account,
together with associates or persons acting in concert therewith, may purchase
more than 25,000 shares, or $250,000, of Common Stock in the Offerings. The
Board of Directors may increase or decrease this purchase limitations at any
time, subject to any required regulatory approval. In the event of an
oversubscription, shares will be allocated as provided in the Plan. See "The
Conversion -- Subscription Rights," " -- Community Offering" and " -- Public
Offering."
INSIDER PARTICIPATION
The directors and executive officers of the Savings Bank have indicated
their intention to purchase an aggregate of $335,000 of Common Stock (33,500
shares, or 4.78% of the shares to be issued in the Stock Conversion at the
midpoint of the Estimated Valuation Range). There is no agreement among the
officers and directors and their affiliates regarding their purchases of Common
Stock.
3
<PAGE>
POTENTIAL BENEFITS OF CONVERSION TO MANAGEMENT
THE ESOP. The ESOP intends to purchase an aggregate of eight percent of the
shares of Common Stock issued in the Stock Conversion ($560,000 of Common Stock
at the midpoint of the Estimated Valuation Range). For additional information,
see "Management of the Savings Bank -- Certain Benefit Plans and
Agreements -- Employee Stock Ownership Plan."
EMPLOYMENT AGREEMENT. The Commercial Bank will enter into a three-year
employment agreement with Stephen R. Talbert, the President and Chief Executive
Officer. This agreement provides for a base annual salary, fringe benefits, and
cash payments in the event of a change in control of the Company. This agreement
may have the effect of increasing the cost of acquiring the Company, thereby
discouraging future attempts to acquire control of the Company. See "Management
of the Savings Bank -- Certain Benefit Plans and Agreements -- Employment
Agreement."
OPTION PLANS. Following consummation of the Stock Conversion, the Company
intends to submit for shareholder consideration two stock option plans for the
benefit of the directors, officers, and key employees of the Company and its
subsidiaries (the "Option Plans"), pursuant to which the Company intends to
reserve a number of authorized but unissued shares of Common Stock equal to an
aggregate of 10% of the Common Stock issued in the Stock Conversion (70,000
shares at the midpoint of the Estimated Valuation Range) for issuance pursuant
to stock options. No consideration has been given to the amount of shares to be
granted to any person under the Option Plans. The value of any options granted
under the Option Plans will be based on the increase, if any, in the market
value of the Common Stock compared to the exercise price of the options. The
exercise price of any options granted under the Option Plans will be not less
than fair market value on the date of grant. All awards under the Option Plans
are expected to vest over a period of time at a rate not greater than 20% per
year. The Company currently intends to submit the Option Plans to shareholders
at a meeting to be held not earlier than six months after the Stock Conversion.
See "Management of the Savings Bank -- Certain Benefit Plans and
Agreements -- Stock Option Plans."
MANAGEMENT RECOGNITION PLAN. Following consummation of the Stock
Conversion, the Company intends to submit for shareholder consideration a
Management Recognition Plan for the benefit of the directors, officers, and key
employees of the Company and its subsidiaries (the "MRP"). It is expected that
the MRP will be submitted to shareholders for approval at the same time as the
Option Plans. At any time following consummation of the Stock Conversion, the
MRP is expected to purchase a number of shares of Common Stock either from the
Company or in the open market equal to an aggregate of four percent of the
Common Stock issued in the Stock Conversion (28,000 shares at the midpoint of
the Estimated Valuation Range). Whether such shares purchased will be purchased
in the open market or newly issued by the Company, and the timing of such
purchases, will depend on market and other conditions and the alternative uses
of capital available to the Company. No consideration has been given to the
number of shares to be awarded to any person under the MRP. The actual value of
any awards made under the MRP will depend upon, among other factors, the market
value of the Common Stock at the time of award. At the midpoint of the Estimated
Valuation Range, the reduction to shareholders' equity to fund the MRP would be
$280,000, assuming purchases were made at the $10.00 per share Purchase Price.
All awards under the MRP are expected to be payable over a period of time, at a
rate not greater than 20% per year. See "Management of the Savings
Bank -- Certain Benefit Plans and Agreements -- Management Recognition Plan."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each subscriber receives a Prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), no Prospectus will be
mailed any later than five days prior to the Expiration Date or hand delivered
any later than two days prior to such date. Execution of a Stock Order Form will
confirm receipt or delivery in accordance with Rule 15c2-8. Stock Order Forms
will be distributed only with a Prospectus. The executed Stock Order Form must
be accompanied by payment by check, money order, bank draft, or withdrawal
authorization to an existing account at the Savings Bank. No photocopies or
faxes of Stock Order Forms or payments by wire transfer will be accepted.
To ensure that holders of Subscription Rights are properly identified as to
their stock purchase priorities, as well as for purposes of allocating shares
based on subscribers' deposit balances in the event of an oversubscription, such
persons must list all of their deposit accounts at the Savings Bank on the Stock
Order Form. Failure to list all such deposit accounts may result in the
inability of the Company to fill all or part of a subscription order. Neither
the Company, the Savings Bank, nor any of their agents shall be responsible for
any order on which all deposit accounts of the subscriber have not been fully
and accurately disclosed.
4
<PAGE>
USE OF PROCEEDS
The amount of proceeds from the sale of the Common Stock in the Stock
Conversion will depend upon the total number of shares actually sold in the
Offerings and the actual expenses of the Conversion. As a result, the actual net
proceeds from the sale of the Common Stock cannot be determined until the
Conversion is completed. Based on the sale of $7,000,000 of Common Stock in the
Subscription and Community Offerings at the midpoint of the Estimated Valuation
Range, the net proceeds are estimated to be approximately $6,550,000 after
deduction for $450,000 in estimated expenses. The Company will use 50% of the
net proceeds after deducting the principal amount of the loan to be made to the
ESOP to purchase all of the capital stock of the Converted Savings Bank. The
Converted Savings Bank will use approximately $1,600,000 of the proceeds
received from the Company in exchange for its capital stock to purchase land and
construct a building for a new branch office.
Assuming the sale of 700,000 shares of the Common Stock at the midpoint of
the Estimated Valuation Range and the purchase of eight percent of such shares
by the ESOP, the Converted Savings Bank would receive $2,995,000 in cash for all
of its capital stock, and the Company would retain approximately $2,995,000 in
cash and $560,000 in the form of a note receivable from the ESOP. The ESOP note
receivable will be for a ten-year term and carry an interest rate equal to the
prime rate as published in THE WALL STREET JOURNAL, adjusted on an annual basis.
The proceeds retained by the Company after funding the ESOP initially will be
invested in short-term and intermediate-term securities. Also, such proceeds
will be available for a variety of corporate purposes, including funding the
MRP, if the MRP is implemented, future acquisitions and diversification of
business, additional capital contributions to the Commercial Bank, dividends to
shareholders, and future repurchases of the Common Stock to the extent permitted
by applicable regulations. The Company currently has no specific plans,
intentions, arrangements, or understandings regarding any acquisitions or stock
repurchases. In addition, such funds will be available to be loaned to the
Commercial Bank, if necessary in the event and to the extent loan growth exceeds
deposit growth or for other corporate purposes. A portion of the net proceeds
may be used to acquire shares of Common Stock pursuant to the MRP. See
"Management of the Savings Bank -- Certain Benefit Plans and
Agreements -- Management Recognition Plan."
MARKET FOR THE COMMON STOCK
The Company, as a newly organized company, has never issued capital stock,
and consequently there is no established market for the Common Stock. Management
anticipates that the Common Stock will quoted in the OTC Bulletin Board Service
operated by the National Association of Securities Dealers, Inc. (the "NASD").
No assurance can be given that an active and liquid market for the Common Stock
will develop after the Conversion. See "Market for the Common Stock."
DIVIDENDS
Subject to regulatory and other considerations, the Company intends to
establish a semi-annual cash dividend following the Conversion at an initial
rate of $0.20 per share (an annual rate of $0.40 per share, or four percent
based on the $10.00 per share Purchase Price), commencing during the first six
months subsequent to the Conversion. However, declarations of dividends by the
Board of Directors will depend upon a number of factors, including investment
opportunities available to the Company, capital requirements, regulatory
limitations, including the liquidation account, the Company's financial
condition and results of operations, tax considerations, and general economic
conditions. No assurance can be given that dividends will in fact be paid on the
Common Stock or that, if paid, such dividends will not be reduced or eliminated
in future periods. See "Dividend Policy."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
5
<PAGE>
SELECTED FINANCIAL INFORMATION AND OTHER DATA OF THE SAVINGS BANK
The following summary of selected financial data of the Savings Bank does
not purport to be complete and is qualified in its entirety by reference to the
detailed information and financial statements and accompanying notes appearing
elsewhere in this Prospectus. Selected financial data at September 30, 1997 and
1996 and for the nine months ended September 30, 1997 and 1996 have been derived
from unaudited financial statements. In the opinion of management, such
information reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the selected financial data.
The results of operations for the nine months ended September 30, 1997 are not
necessarily indicative of the results which may be expected for any other
period.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ------------------
1997 1996 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
FINANCIAL CONDITION DATA:
Total assets.................................................................... $24,234 $22,470 $22,661 $20,094
Investments (1)................................................................. 5,097 2,539 3,026 2,278
Loans receivable................................................................ 18,641 18,458 18,917 17,308
Deposits........................................................................ 19,701 18,077 18,322 15,846
Retained earnings............................................................... 4,395 4,262 4,312 4,206
OPERATING DATA:
Interest income................................................................. $ 1,312 $ 1,193 $ 1,610 $ 1,510
Interest expense................................................................ 732 609 841 723
------- ------- ------- -------
Net interest income.......................................................... 580 584 769 787
Provision for loan losses....................................................... 22 4 6 1
------- ------- ------- -------
Net interest income after
provision for loan losses.................................................. 558 580 763 786
Noninterest income.............................................................. 4 5 8 2
Noninterest expense (2)......................................................... 453 488 609 509
------- ------- ------- -------
Income before income taxes................................................... 109 97 162 279
Income tax expense.............................................................. 31 30 50 101
------- ------- ------- -------
Net income................................................................... $ 78 $ 67 $ 112 $ 178
------- ------- ------- -------
------- ------- ------- -------
SELECTED OTHER DATA:
PERFORMANCE RATIOS: (3)
Return on average assets..................................................... 0.44% 0.42% 0.52% 0.90%
Return on average retained earnings.......................................... 2.37% 2.11% 2.64% 4.30%
Average retained earnings to average assets.................................. 18.61% 20.15% 19.86% 20.83%
Interest rate spread......................................................... 2.50% 2.96% 2.84% 3.20%
Net yield on average interest-earning assets................................. 3.37% 3.83% 3.71% 4.07%
Average interest-earning assets to average interest-bearing liabilities...... 120.21% 121.84% 121.53% 123.41%
Ratio of noninterest expense to average total assets......................... 2.57% 3.09% 2.85% 2.56%
ASSET QUALITY RATIOS:
Nonperforming assets to total assets......................................... 0.19% 0.04% 0.02% --
Loan loss reserves to nonperforming loans at period end...................... 63.83% 60.00% 160.00% --
NUMBER OF:
Outstanding loans............................................................ 503 506 507 501
Deposit accounts............................................................. 1,476 1,496 1,479 1,455
Full-service offices open.................................................... 1 1 1 1
</TABLE>
- ---------------
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
(2) For the year ended December 31, 1996, noninterest expense includes a special
assessment of $101,142 which was paid to recapitalize the SAIF.
(3) Amounts for the nine months ended September 30,1997 and 1996 are annualized.
6
<PAGE>
RISK FACTORS
Before investing in the shares of the Common Stock offered by this
Prospectus, prospective investors should carefully consider the matters
presented below.
ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION
At September 30, 1997, the Savings Bank's ratio of average retained income
to total assets was 18.1%. On a pro forma basis, assuming the sale of the
midpoint of 700,000 shares of Common Stock in the Stock Conversion at the
beginning of the year, the Company's ratio of shareholders' equity to total
assets would have been 33.9%. With such a high capital position as a result of
the Stock Conversion, it is doubtful that the Company will be able to quickly
deploy the capital raised in the Stock Conversion by increasing its deposits and
loans and thereby generate earnings to support its high level of capital, and,
as a result, it is expected that the Company's return on equity initially will
be lower than historical levels and will be below industry norms.
The Board of Directors of the Savings Bank has approved the development of
a branch office in a new, but contiguousmarket area to promote growth of the
institution. There are substantial direct costs, currently estimated at
approximately $1,600,000, that will be involved in acquiring the land and
building and equiping the branch. These funds will not be available to invest in
earning assets as they are disbursed for the branch. Further, there are
additional costs to new branches, including hiring and training personnel, that
may prevent the branch from attaining profitability for one to five years. These
factors will contribute to a low profitability and return on equity for such
period.
Moreover, as a result of the Conversion, expenses will increase because of
compensation costs related to the establishment of the ESOP, MRP, and the
expenses associated with being a public company. Because of the increases in
equity and expenses related to the Conversion, the return on equity is likely to
decrease significantly as compared to performance in previous years. In addition
to the branch costs and other expenses, the Company and the Commercial Bank may,
on an interim basis, invest in U.S. government securities and federal agency
securities which generally have lower yields than residential mortgage loans.
See "Use of Proceeds."
RISKS RELATED TO COMMERCIAL AND CONSUMER LENDING
Historically, the Savings Bank has operated as a traditional savings
institution, emphasizing the origination of loans secured by single-family
residences. In connection with its decision to pursue the Conversion, the Board
of Directors has determined that the Savings Bank's current and potential market
areas are not adequately served by existing financial institutions and that
there is demand for commercial and consumer loan products offered by a truly
community oriented financial institution. As a result, the Board of Directors
has determined to refocus the Savings Bank's strategy. Pursuant to this
strategy, while continuing to pursue its existing business of originating
single-family residential mortgage loans, the Savings Bank will gradually expand
into commercial and consumer lending. In furtherance of this strategy, the
institution may recruit experienced commercial and consumer lending officers and
develop new commercial and consumer loan products. The Bank Conversion is an
integral part of this strategy.
While commercial and consumer loans are generally more interest rate
sensitive and carry higher yields than do residential mortgage loans, they
generally carry a higher degree of credit risk than residential mortgage loans.
Consequently, the diversification of the Savings Bank's loan portfolio may alter
its risk profile. Moreover, provisions for loan losses may increase in the
future as the institution begins to increase its portfolio of commercial and
consumer loans.
Commercial business loans are often larger and may involve greater risk
than other types of lending. Because payments on such loans are often dependent
on successful operation of the business involved, repayment of such loans may be
subject to a greater extent to adverse conditions in the economy. The
institution will seek to minimize these risks through underwriting guidelines,
which may require certain safeguards, such as that the loan be supported by
adequate cash flow of the borrower, profitability of the business, collateral,
and personal guarantees of the individuals involved in the business. In
addition, this type of lending generally will be limited to the institution's
market area and to borrowers with whom management has prior experience or who
are otherwise well known to management.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans which are unsecured or secured by rapidly
depreciable assets. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss, or depreciation. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
7
<PAGE>
adversely affected by events such as job loss, divorce, illness, or personal
bankruptcy. See "Business of the Savings Bank -- Lending Activities -- Consumer
Lending."
UNCERTAINTY AS TO EXISTENCE OF GROWTH OPPORTUNITIES
In order to fully deploy post-Stock Conversion capital, the Commercial Bank
intends to establish one new branch office in a new, but contiguous market area
and may seek to expand into other suitable market areas by either establishing
one or more additional branches or by acquiring another financial institution or
branches of another financial institution. The ability to expand internally by
establishing new branch offices is dependent on its ability to identify
advantageous locations and generate new deposits and loans from those locations
that will create an acceptable level of net income. At the same time, the
ability to grow through selective acquisitions of other financial institutions
or branches of such institutions is dependent on successfully identifying,
acquiring, and integrating such institutions or branches. There can be no
assurance regarding the success of the new branch office or that the Commercial
Bank will be able to generate internal growth or to identify attractive
acquisition candidates, acquire such candidates on favorable terms, or
successfully integrate any acquired institutions or branches into its
operations.
EFFECT ON OPERATIONS OF DEPENDENCE ON PRIMARY MARKET AREA
The Savings Bank's primary market area consists of the communities in a
seven-mile radius around its office in Landis, North Carolina. This area
includes portions of Cabarrus, Iredell, and Rowan Counties. As of September 30,
1997, management estimates that more than 75% of its deposits and loans
originated from within its primary market area. Because of the Savings Bank's
concentration of business activities in its primary market area, its financial
condition and results of operations will depend upon economic conditions in the
area.
STRONG COMPETITION WITHIN THE MARKET AREA
Competition in the banking and financial services industry is intense. In
its market area, the Savings Bank competes with commercial banks, savings
institutions, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors have substantially greater resources and
lending limits than the Savings Bank, more experienced commercial and consumer
lending officers, and may offer certain services that the Savings Bank does not
or cannot provide. The profitability of the Savings Bank depends upon its
continued ability to successfully compete in its market area. See "Business of
the Savings Bank -- Competition."
POTENTIALLY ADVERSE IMPACT OF INTEREST RATES AND ECONOMIC CONDITIONS
The results of operations of the Savings Bank are materially affected by
general economic conditions, the monetary and fiscal policies of the federal
government and the regulatory policies of governmental authorities. The results
of operations of the Savings Bank depend to a large extent on its level of "net
interest income," which is the difference between interest income on
interest-earning assets, such as loans, and investment securities, and interest
expense on interest-bearing liabilities, such as savings deposits and
borrowings. Consequently, the Savings Bank's results of operations are
particularly sensitive to interest rate fluctuations and, accordingly, a
sustained increase in market interest rates could adversely affect the
institution's earnings.
General economic conditions also affect the credit quality of the Savings
Bank's assets. During periods of adverse economic conditions and depending on
the extent to which the income and assets of the borrowers are affected by the
declining economic conditions, the ability of the Savings Bank's borrowers to
repay loans may be affected. Prevailing economic conditions particularly affect
commercial and consumer loans. See " -- Risks Related to Commercial Business and
Consumer Lending," "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Asset/Liability Management" and " -- Interest Rate
Sensitivity Analysis" and "Business of the Savings Bank -- Lending Activities."
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION AND BYLAWS
The Company's Articles of Incorporation and Bylaws contain certain
provisions that could discourage nonnegotiated takeover attempts that certain
shareholders might deem to be in their interests or through which shareholders
might otherwise receive a premium for their shares over the then current market
price and that may tend to perpetuate existing management. These provisions
include: supermajority provisions for the approval of certain business
combinations; elimination of cumulative voting by shareholders in the election
of directors; certain provisions relating to meetings of shareholders;
restrictions on
8
<PAGE>
the acquisition of the Company's equity securities; and provisions allowing the
Board of Directors to consider nonmonetary factors in evaluating a business
combination or a tender or exchange offer. The provisions in the Company's
Articles of Incorporation requiring a supermajority vote for the approval of
certain business combinations and containing restrictions on acquisitions of the
Company's equity securities provide that the supermajority voting requirements
or acquisition restrictions do not apply to business combinations or
acquisitions meeting specified Board of Directors approval requirements. The
Company's Articles of Incorporation also authorize the issuance of 1,000,000
shares of preferred stock as well as additional shares of Common Stock up to a
total of 9,000,000 outstanding shares. These shares could be issued without
shareholder approval on terms or in circumstances that could deter a future
takeover attempt.
In addition, North Carolina law provides for certain restrictions on
acquisition of the Company, and federal and North Carolina laws contain various
restrictions on acquisitions of control of savings institutions, banks, and
their holding companies, particularly during the period following a conversion
to stock form.
The Company's Articles of Incorporation and Bylaws and statutory
provisions, as well as certain other provisions of state and federal law and
certain provisions in the Company's employee benefit plans and the employment
agreement with Mr. Talbert, may have the effect of discouraging or preventing a
future takeover attempt in which shareholders of the Company otherwise might
receive a substantial premium for their shares over then current market prices.
For a detailed discussion of those provisions, see "Management of the Savings
Bank -- Certain Benefit Plans and Agreements," "Description of Capital Stock,"
"Certain Restrictions on Acquisition" and "Certain Anti-Takeover Provisions."
POTENTIAL IMPACT ON VOTING CONTROL OF PURCHASES BY MANAGEMENT
As a result of the level of Common Stock expected to be owned by management
subsequent to the Stock Conversion as a result of individual purchases, as well
as purchases by the MRP and the Option Plans and allocations under the ESOP,
management could benefit from certain statutory and regulatory provisions, as
well as certain provisions in the Company's Articles of Incorporation and
Bylaws, that may tend to promote the continuity of existing management.
Specifically, it is currently expected that directors and executive officers
will subscribe for approximately 33,500 shares, or 4.78 percent, of the Common
Stock (assuming the sale of 700,000 shares at the midpoint of the Estimated
Valuation Range). The ESOP's purchase of 56,000 shares, or eight percent, of the
Common Stock issued in the Stock Conversion and the MRP's expected purchase of
28,000 shares, or four percent, of the Common Stock could increase the estimated
percentage of the Common Stock management will initially control to 16.79% of
all shares outstanding (assuming the sale of 700,000 shares at the midpoint of
the Estimated Valuation Range and assuming the shares purchased by the MRP are
purchased in the open market). If all of the options currently expected to be
available for grant under the Option Plans (options for 70,000 shares at the
midpoint of the Estimated Valuation Range) were exercised (which is not
anticipated), the percentage of shares controlled by such persons would be
24.35% of the total number of shares of Common Stock outstanding. Management
will thus have a substantial interest in the Company and could, if each member
of management were to act consistently with each other, have significant
influence over the outcome of any shareholder vote requiring a majority or
supermajority vote and in the election of directors. Management might thus have
the power to influence the authorization of actions that may be viewed as
contrary to the best interests of non-affiliated holders of the Common Stock.
See "Management of the Savings Bank -- Certain Benefit Plans and Agreements,"
"The Conversion -- Regulatory Restrictions on Acquisition of the Common Stock,"
"Certain Restrictions on Acquisition," "Certain Anti-Takeover Provisions," and
" -- Stock Purchases by Management."
EFFECT OF REGULATORY CHANGES ON OPERATIONS
The Savings Bank is subject to extensive regulation, supervision, and
examination by the Administrator and the FDIC. Such regulation and supervision
establishes a comprehensive framework of activities in which a savings
institution may engage and is intended primarily for the protection of
depositors and the SAIF, which is administered by the FDIC. Following the
Conversion, the Commercial Bank will be subject to the regulation and
supervision of the Commission and the FDIC, and the Company will be subject to
regulation and supervision by the Federal Reserve Board. This regulatory
structure gives the regulatory authorities extensive discretion in connection
with their supervisory and enforcement activities. Any change in such
regulation, whether by the Commission, the FDIC, the Federal Reserve Board, or
the U.S. Congress, could have a significant impact on the Commercial Bank and
its operations. See "Regulation."
VALUATION NOT INDICATIVE OF FUTURE PRICE OF COMMON STOCK
The final aggregate purchase price of the Common Stock in the Stock
Conversion will be based upon an independent appraisal. Such valuation is not
intended, and must not be construed, as a recommendation of any kind as to the
advisability of purchasing such shares of Common Stock. Because such valuation
is necessarily based upon estimates and projections of a
9
<PAGE>
number of matters, all of which are subject to change from time to time, no
assurance can be given that persons purchasing shares of Common Stock in the
Stock Conversion will thereafter be able to sell such shares at or above the
Purchase Price. See "The Conversion -- Stock Pricing and Number of Shares to be
Issued."
POSSIBLE NEGATIVE INCOME TAX CONSEQUENCES OF DISTRIBUTION OF SUBSCRIPTION RIGHTS
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders, Other Members, and directors, officers,
and employees of the Savings Bank are deemed to have an ascertainable value, the
receipt of such rights would be taxable to recipients who exercise the
Subscription Rights in an amount equal to such value, and the Savings Bank could
recognize a gain on such distribution. Whether the Subscription Rights are
considered to have ascertainable value is an inherently factual determination.
The Savings Bank has received an opinion of Meritas that such rights have no
value. The opinion of Meritas is not binding on the Internal Revenue Service
(the "IRS"). See "The Conversion -- Effect of Conversion to Stock Form on
Depositors and Borrowers of the Savings Bank -- Tax Effects."
POSSIBLE DILUTIVE EFFECT OF MRP AND STOCK OPTIONS
It is expected that following the consummation of the Stock Conversion, the
Company will adopt the Option Plans and the MRP, all of which would be subject
to shareholder approval, and that such plans would be considered and voted upon
at a meeting of the Company's shareholders to be held not less than six months
after the Stock Conversion. Under the MRP, employees and directors could be
awarded an aggregate amount of Common Stock equal to four percent of the shares
issued in the Stock Conversion, and under the Option Plans, employees and
directors could be granted options to purchase an aggregate amount of Common
Stock equal to 10% of the shares issued in the Stock Conversion at exercise
prices equal to the market price of the Common Stock on the date of grant. Under
the MRP and Option Plans, the shares issued to directors and employees could be
newly issued shares or shares purchased in the open market. In the event the
shares issued under the MRP and the Option Plans consist of newly issued shares
of Common Stock, the interests of existing shareholders would be diluted. If the
shares to fund the MRP and Option Plans are assumed to come from newly issued
shares purchased directly from the Company, and further assuming that all
options granted under the Option Plan are exercised, existing shareholders'
ownership interests will be diluted by 12.3%. At the midpoint of the Estimated
Valuation Range, if all shares under the MRP and the Option Plans were newly
issued and the exercise price for the option shares were equal to the Purchase
Price per share in the Stock Conversion, the number of outstanding shares of
Common Stock would increase from 700,000 to 798,000, pro forma shareholders'
equity per share of the outstanding Common Stock at September 30, 1997 would
have been $13.89, compared with $14.84 without such plans, and pro forma net
income per share of the outstanding Common Stock for the year ended December 31,
1996 would have been $.28, compared with $.35 without such plans. See "Pro Forma
Data" and "Management of the Savings Bank -- Certain Benefit Plans and
Agreements -- Management Recognition Plan" and " -- Stock Option Plans."
POTENTIAL COST OF THE ESOP AND MRP
It is anticipated that the ESOP will purchase eight percent of the Common
Stock sold in the Stock Conversion with funds borrowed from the Company. The
cost of acquiring the ESOP shares will be $560,000, at the midpoint of the
Estimated Valuation Range. In addition, it is possible that, following the Stock
Conversion, and subject to regulatory and shareholder approval, the Company will
implement the MRP, under which employees and directors could be awarded (at no
cost to them) an aggregate amount of Common Stock equal to four percent of the
shares issued in the Stock Conversion. Assuming the sale in the Stock Conversion
of the midpoint of the Estimated Valuation Range, and assuming the shares of
Common Stock to be awarded under the MRP cost the Purchase Price of $10.00 per
share, the reduction to shareholders' equity of funding the MRP would be
$280,000.
ESOP COMPENSATION EXPENSE
Under American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," an employer is required to record compensation expense in an
amount equal to the fair value of shares committed to be released to employees
from an employee stock ownership plan. If shares of Common Stock appreciate in
value over time, the adoption of SOP 93-6 may increase compensation expense
relating to the ESOP to be established in connection with the Stock Conversion
as compared with prior guidance which required the recognition of compensation
expense based on the cost of shares acquired by the ESOP. It is impossible to
determine at this time the extent of such impact on future net income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of New Accounting Standards -- Accounting for Employee
Stock Ownership Plans."
10
<PAGE>
ABSENCE OF MARKET FOR COMMON STOCK
The Company and the Savings Bank have never issued capital stock.
Management anticipates that the Common Stock will be quoted in the OTC Bulletin
Board Service operated by the NASD. The trading markets for securities quoted in
the OTC Bulletin Board Service typically lack the depth, liquidity, and
orderliness necessary to maintain an active market in the trading of such
securities. William R. Hough & Co. has advised the Company that it will act as a
market maker for the Common Stock subsequent to the Conversion, but is not
obligated to do so. In addition, William R. Hough & Co. and the Company will
seek to encourage and assist other broker-dealers to make a market in the Common
Stock. The development of a public trading market depends upon the existence of
willing buyers and sellers, the presence of which is not within the control of
the Company nor assured by inclusion of the Common Stock in the OTC Bulletin
Board Service. Because there can be no assurance that buyers and sellers of the
Common Stock can be readily matched, investors should consider the potential
illiquid and long-term nature of an investment in the Common Stock. There can be
no assurance that an active and liquid trading market for the Common Stock will
develop, or once developed, will continue, nor any assurance that purchasers of
the Common Stock will be able to sell their shares at or above the Purchase
Price. The absence of a liquid and active trading market, or the discontinuance
thereof, may have an adverse effect on both the price and the liquidity of the
Common Stock. See "Market for the Common Stock."
RISK OF LOSS OF PRINCIPAL
The shares of Common Stock offered by this Prospectus are not savings
accounts or deposits and are not insured or guaranteed by the FDIC, the SAIF, or
any other governmental agency, and involve investment risk, including the
possible loss of principal.
11
<PAGE>
USE OF PROCEEDS
The amount of proceeds from the sale of the Common Stock in the Stock
Conversion will depend upon the total number of shares actually sold in the
Offerings and the actual expenses of the Conversion. As a result, the actual net
proceeds from the sale of the Common Stock cannot be determined until the
Conversion is completed. It is presently estimated that the net proceeds from
the Offerings will be between $5,500,000 and $7,600,000, based on the current
Estimated Valuation Range, after deduction for $450,000 in estimated expenses.
The independent appraisal on which the aggregate purchase price of the Common
Stock is based will be updated immediately prior to completion of the Stock
Conversion. Such update could cause the appraisal and the aggregate purchase
price of the Common Stock to be increased to $9,257,500 without a resolicitation
of subscribers, resulting in estimated net proceeds of $8,807,500. The Company
has received regulatory approval from the Administrator to purchase all of the
capital stock of the Converted Savings Bank to be issued in the Stock Conversion
in exchange for at least 50% of the net proceeds after deducting the cost of the
ESOP loan. Based on the sale of 700,000 shares of Common Stock at the midpoint
of the Estimated Valuation Range and assuming the purchase of eight percent of
the shares to be issued in the Stock Conversion by the ESOP, the Savings Bank
would receive approximately $2,995,000 in cash, and the Company would retain
approximately $2,995,000 in cash and $560,000 in the form of a note receivable
from the ESOP. The ESOP note receivable will be for a ten-year term and carry an
interest rate equal to the prime rate as published in THE WALL STREET JOURNAL,
adjusted on an annual basis.
The proceeds retained by the Company, after funding the ESOP, initially
will be invested in short-term and intermediate-term securities including cash
and cash equivalents and U.S. government and agency obligations. Such proceeds
will be available for a variety of corporate purposes, including funding the
MRP, if implemented, future acquisitions and diversification of business,
additional capital contributions, dividends to shareholders, and future
repurchases of the Common Stock to the extent permitted by applicable
regulations. Approximately $1,600,000 of the proceeds to be transferred to the
Converted Savings Bank will be used to purchase land and construct a building
for a new branch office. The Company and the Savings Bank currently have no
other specific plans, intentions, arrangements, or understandings regarding
acquisitions, branch purchases, capital contributions, or stock repurchases. In
addition, proceeds retained by the Company will be available to be loaned to the
Commercial Bank if necessary in the event and to the extent loan growth exceeds
deposit growth or for other corporate purposes. Subject to regulatory and other
considerations, the Company intends to establish a semi-annual cash dividend
following the Conversion at an initial rate of approximately $0.20 per share (an
annual rate of $0.40 per share, or four percent, based on the $10.00 per share
Purchase Price), commencing during the first six months subsequent to the Stock
Conversion. See "Dividend Policy." Due to the limited nature of the Company's
business activities, the Company believes that the net proceeds retained after
the Stock Conversion, earnings on such proceeds and payments on the ESOP note
receivable will be adequate to meet the Company's financial needs until
dividends are paid by the Commercial Bank; however, no assurance can be given
that the Company will not have a need for additional funds in the future. For
additional information, see "Regulation -- Depository Institution
Regulation -- Dividend Restrictions." A portion of the net proceeds may be used
to acquire shares of Common Stock pursuant to the MRP if the MRP is implemented.
See "Management of the Savings Bank -- Certain Benefit Plans and
Agreements -- Stock Option Plans" and " -- Management Recognition Plan."
DIVIDEND POLICY
The payment of cash dividends on the Common Stock will be subject to the
requirements of applicable law and the determination by the Board of Directors
of the Company that the net income, capital, and financial condition of the
Company, industry trends, and general economic conditions justify the payment of
dividends. Subject to regulatory and other considerations, the Company intends
to establish a semi-annual cash dividend following the Conversion at a rate of
$0.20 per share (an annual rate of $0.40 per share, or four percent, based on
the $10.00 per share Purchase Price), commencing during the first six months
subsequent to the Stock Conversion. In addition, the Board of Directors may
determine, from time to time, that it is prudent to pay special nonrecurring
cash dividends in addition to or in lieu of regular cash dividends. This policy
will be periodically reviewed by the Board of Directors of the Company. Because
the Company initially will have no other significant sources of income, the
payment of dividends by the Company will depend in part upon (i) the amount of
the net proceeds from the Stock Conversion retained by the Company; (ii) the
Company's earnings on such proceeds; and (iii) the receipt of dividends from the
Commercial Bank, which are subject to various tax and regulatory restrictions.
Dividend payments by the Company are subject to regulatory restrictions under
Federal Reserve Board policy as well as to limitations under applicable
provisions of North Carolina corporate law. The Federal Reserve Board has issued
a policy statement on the payment of cash dividends by bank holding companies,
which expresses the Federal Reserve Board's view that a bank holding company
should pay cash dividends only to the extent that the company's net income for
the past year is sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the company's capital needs,
12
<PAGE>
asset quality, and overall financial condition. The Federal Reserve Board also
indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, the Federal
Reserve Board may prohibit a bank holding company from paying any dividends if
the holding company's bank subsidiary is classified as "undercapitalized." See
"Regulation -- Regulation of the Company Following the Bank
Conversion -- Dividends." Under North Carolina law, no distribution (by dividend
or share repurchase) can be made if, after giving it effect, the corporation
would not be able to pay its debts as they become due in the usual course of
business or if the corporation's total assets would be less than the sum of its
total liabilities plus the amount required to satisfy the liquidation
preferences of any senior securities. See "Regulation -- Depository Institution
Regulation -- Dividend Restrictions."
As noted above, the Company will purchase all of the capital stock of the
Converted Savings Bank to be issued in the Stock Conversion in exchange for at
least 50% of the net proceeds from the sale of the Common Stock in the Stock
Conversion after deducting the cost of the ESOP loan. Subject to the provisions
of North Carolina law noted above, the full amount retained by the Company less
amounts required to fund the ESOP in the Stock Conversion will be available for
the payment of dividends.
MARKET FOR THE COMMON STOCK
The Company has never issued capital stock to the public. Consequently,
there is no established market for the Common Stock. Management anticipates that
the Common Stock will be quoted in the OTC Bulletin Board Service operated by
the NASD. The trading markets for securities quoted in the OTC Bulletin Board
Service typically lack the depth, liquidity, and orderliness necessary to
maintain an active market in the trading of such securities. William R. Hough &
Co. has advised the Company that it will act as a market maker for the Common
Stock, but is not obligated to do so. In addition, William R. Hough & Co. and
the Company will seek to encourage and assist other broker-dealers to make a
market in the Common Stock. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements. It is impossible to ascertain whether other
broker-dealers will make a market in the Common Stock. The development of a
liquid public market depends on the existence of willing buyers and sellers, the
presence of which is not within the control of the Company nor assured by
inclusion of the Common Stock in the OTC Bulletin Board Service. Accordingly,
the number of active buyers and sellers of the Common Stock at any particular
time may be limited. Under such circumstances, investors in the Common Stock
could have difficulty disposing of their shares and should not view the Common
Stock as a short-term investment.
13
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the historical
capitalization, including deposits, of the Savings Bank at September 30, 1997
and the pro forma consolidated capitalization of the Company giving effect to
the sale of the Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range based upon the assumptions set forth
under "Pro Forma Data" and below. Depending on market and financial conditions,
the total number of shares to be issued in the Stock Conversion may be
significantly increased or decreased above or below the midpoint of the
Estimated Valuation Range. No resolicitation of subscribers and other purchasers
will be made unless the aggregate purchase price of the Common Stock sold in the
Stock Conversion is below the minimum of the Estimated Valuation Range or is
more than 15% above the maximum of the Estimated Valuation Range. A change in
the number of shares to be issued in the Stock Conversion may materially affect
the Company's pro forma capitalization. See "Pro Forma Data" and "The
Conversion -- Stock Pricing and Number of Shares to be Issued."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
-------------------------------------------------
PRO FORMA HOLDING COMPANY
CAPITALIZATION BASED UPON THE SALE
OF
-----------------------------------
595,000 700,000 805,000
LANDIS SHARES AT SHARES AT SHARES AT
SAVINGS $10.00 $10.00 $10.00
HISTORICAL PER SHARE PER SHARE PER SHARE
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Deposits (1)........................................................ $ 19,701 $19,701 $19,701 $19,701
---------- --------- --------- ---------
---------- --------- --------- ---------
Shareholders' equity:
Common stock, $1 par value, 9,000,000 shares authorized, assumed
outstanding shares are shown at column heading (2)(3).......... $ -- $ 595 $ 700 $ 805
Preferred stock, no par value, 1,000,000 shares authorized, no
shares assumed outstanding
Paid-in-capital (2)(3)............................................ -- 4,905 5,850 6,795
Less: common stock to be acquired by the MRP (3).................. -- (238) (280) (322)
Less: common stock to be acquired by the ESOP (4)................. -- (476) (560) (644)
Retained earnings -- substantially restricted (5)................. 4,395 4,395 4,395 4,395
---------- --------- --------- ---------
Total shareholders' equity (6)...................................... $ 4,395 $ 9,181 $10,105 $11,029
---------- --------- --------- ---------
---------- --------- --------- ---------
Total deposits and shareholders' equity............................. $ 24,096 $28,882 $29,806 $30,730
---------- --------- --------- ---------
---------- --------- --------- ---------
<CAPTION>
925,750
SHARES AT
$10.00
PER SHARE
---------
<S> <C>
Deposits (1)........................................................ $19,701
---------
---------
Shareholders' equity:
Common stock, $1 par value, 9,000,000 shares authorized, assumed
outstanding shares are shown at column heading (2)(3).......... $ 926
Preferred stock, no par value, 1,000,000 shares authorized, no
shares assumed outstanding
Paid-in-capital (2)(3)............................................ 7,882
Less: common stock to be acquired by the MRP (3).................. (370)
Less: common stock to be acquired by the ESOP (4)................. (741)
Retained earnings -- substantially restricted (5)................. 4,395
---------
Total shareholders' equity (6)...................................... $12,092
---------
---------
Total deposits and shareholders' equity............................. $31,793
---------
---------
</TABLE>
- ---------------
(1) Does not reflect withdrawals from savings accounts for the purchase of
Common Stock in the Stock Conversion; any withdrawals will reduce pro forma
deposits by the amount of such withdrawals.
(2) Does not reflect additional shares of Common Stock that possibly could be
purchased by participants in the Option Plans, if implemented, under which
directors, executive officers and other employees could be granted options
to purchase an aggregate amount of Common Stock equal to 10% of the shares
issued in the Stock Conversion (70,000 shares at the midpoint of the
Estimated Valuation Range) at exercise prices equal to the market price of
the Common Stock on the date of grant. Implementation of the Option Plans
will require regulatory and shareholder approval. See "Management of the
Bank -- Certain Benefit Plans and Agreements -- Stock Option Plans" and
"Risk Factors -- Possible Dilutive Effect of MRP and Stock Options."
(3) Assumes a number of shares of Common Stock equal to four percent of the
Common Stock to be sold in the Stock Conversion will be purchased by the MRP
through open market purchases. The dollar amount of the Common Stock to be
purchased by the MRP is based on the $10.00 per share Purchase Price in the
Stock Conversion and represents unearned compensation and is reflected as a
reduction of capital. Such amount does not reflect possible increases or
decreases in the value of such stock relative to the Purchase Price in the
Stock Conversion. As the Savings Bank accrues compensation expense to
reflect the vesting of such shares pursuant to the MRP, the charge against
capital will be reduced accordingly. Implementation of the MRP will require
regulatory and shareholder approval. If the shares to fund the MRP are
assumed to come from authorized but unissued shares purchased by the MRP
from the Company at the Purchase Price within the year following the Stock
Conversion, at the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range, the number of outstanding shares would be
618,800, 728,000, 837,200 and 962,780, respectively, and total shareholders'
equity would be $9.4 million, $10.4 million, $11.4 million and $12.5
million, respectively. As a result of the MRP acquiring authorized but
unissued shares from the Company, shareholders'
14
<PAGE>
ownership in the Company would be diluted by approximately 3.85%. See
"Management of the Bank -- Certain Benefit Plans and
Agreements -- Management Recognition Plan," "Pro Forma Data" and "Risk
Factors -- Possible Dilutive Effect of MRP and Stock Options."
(4) Assumes eight percent of the shares of Common Stock to be sold in the Stock
Conversion are purchased by the ESOP, and that the funds used to purchase
such shares are borrowed from the Company out of net proceeds. Although
repayment of such debt will be secured solely by the shares purchased by the
ESOP, the Commercial Bank is expected to make discretionary contributions to
the ESOP in an amount at least equal to the principal and interest payments
on the ESOP debt. The approximate amount expected to be borrowed by the ESOP
is not reflected in this table as borrowed funds but is reflected as a
reduction of capital. As the Commercial Bank accrues compensation expense to
reflect the allocation of such shares pursuant to the ESOP, the charge
against capital will be reduced accordingly. See "Management of the
Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership
Plan."
(5) The retained income of the Savings Bank is substantially restricted. All
capital distributions by the Savings Bank are subject to regulatory
restrictions tied to its regulatory capital level. In addition, after the
Conversion, the Commercial Bank will be prohibited from paying any dividend
that would reduce its regulatory capital below the amount in the liquidation
account to be provided for the benefit of the Eligible Account Holders and
Supplemental Eligible Account Holders at the time of the Stock Conversion
and adjusted downward thereafter. See "Regulation -- Depository Institution
Regulation -- Dividend Restrictions" and "The Conversion -- Effect of
Conversion to Stock Form on Depositors and Borrowers of the
Bank -- Liquidation Account."
(6) Pro forma shareholders' equity information is not intended to represent the
fair market value of the Common Stock, the current value of the Savings
Bank's assets or liabilities or the amounts, if any, that would be available
for distribution to shareholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the Stock Conversion and by other factors.
15
<PAGE>
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
The Savings Bank is subject to the North Carolina savings bank requirement
that net worth, computed in accordance with the requirements of the
Administrator, equal or exceed five percent of total assets. In addition, the
Savings Bank is subject to the capital requirements of the FDIC. The FDIC
requires that institutions which receive the highest rating during their
examination process and are not experiencing or anticipating significant growth
must maintain a leverage ratio of Tier 1 capital to "total assets" (as defined
in FDIC regulations) of at least three percent. All other institutions are
required to maintain a ratio of one percent or two percent above the three
percent minimum with an absolute minimum leverage ratio of not less than four
percent. The FDIC also imposes requirements that (i) the ratio of Tier 1 capital
to risk-weighted assets equal at least four percent and (ii) the ratio of total
capital to risk-weighted assets equal at least eight percent.
After the Bank Conversion, the Commercial Bank will continue to be subject
to the FDIC's capital requirements and the Company and the Commercial Bank also
will be required to satisfy Federal Reserve Board capital requirements, which
are similar but not identical to the FDIC's capital requirements. The following
table sets forth the Savings Bank's historical capital position relative to the
various minimum Administrator and FDIC capital regulatory requirements to which
it is currently subject. The next table sets forth the Savings Bank's historical
capital position and thereafter presents pro forma data relative to such Federal
Reserve Board capital requirements to which the Commercial Bank will be subject.
Pro forma data assumes that the Common Stock has been sold as of September 30,
1997 at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range. For additional information regarding the financial
condition of the Savings Bank and the assumptions underlying the pro forma
capital calculations set forth below, see "Use of Proceeds," "Capitalization"
and "Pro Forma Data" and the financial statements and related notes appearing
elsewhere herein.
16
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA REGULATORY CAPITAL
AT SEPTEMBER 30, 1997 BASED UPON THE SALE OF (1)
------------------------------------------------------------------------------
925,750
SHARES
HISTORICAL REGULATORY AT
595,000 SHARES AT 700,000 SHARES AT 805,000 SHARES AT $10.00
CAPITAL AT PER
SEPTEMBER 30, 1997 (2) $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE SHARE
---------------------- ------------------- ------------------- ------------------- ------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS AMOUNT ASSETS AMOUNT ASSETS AMOUNT ASSETS AMOUNT
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Capital under
generally accepted
accounting
principles........ $4,395 18.1% $6,193 23.4% $6,550 24.3% $6,907 25.2% $7,318
------ --- ------ --- ------ --- ------ --- ------
------ --- ------ --- ------ --- ------ --- ------
Tier 1 capital...... $4,395 18.1% $6,193 23.4% $6,550 24.3% $6,097 25.2% $7,318
Tier 1 (leverage)
capital
requirement (3)... 969 4.0% 1,060 4.0% 1,078 4.0% 1,096 4.0% 1,116
------ --- ------ --- ------ --- ------ --- ------
Excess............ $3,426 14.1% $5,133 19.4% $5,472 20.3% $5,811 21.2% $6,202
------ --- ------ --- ------ --- ------ --- ------
------ --- ------ --- ------ --- ------ --- ------
Tier 1 capital...... $4,395 37.9% $6,193 46.5% $6,550 48.8% $6,907 51.2% $7,318
Tier 1 risk-based
capital
requirement....... 464 4.0% 533 4.0% 537 4.0% 540 4.0% 544
------ --- ------ --- ------ --- ------ --- ------
Excess............ $3,931 33.9% $5,660 42.5% $6,013 44.8% $6,367 47.2% $6,773
------ --- ------ --- ------ --- ------ --- ------
------ --- ------ --- ------ --- ------ --- ------
Total risk-based
capital........... $4,425 38.2% $6,223 46.7% $6,580 49.1% $6,937 51.4% $7,348
Total risk-based
capital
requirement....... 927 8.0% 1,066 8.0% $1,073 8.0% $1,080 8.0% $1,088
------ --- ------ --- ------ --- ------ --- ------
Excess............ $3,498 30.2% $5,158 38.7% $5,508 41.1% $5,858 43.4% $6,260
------ --- ------ --- ------ --- ------ --- ------
------ --- ------ --- ------ --- ------ --- ------
Total NC Savings
Bank capital...... $4,425 18.3% $6,223 23.5% $6,580 24.4% $6,937 25.3% $7,348
NC savings bank
Capital
Requirement....... 1,212 5.0% 1,325 5.0% 1,347 5.0% 1,370 5.0% 1,395
------ --- ------ --- ------ --- ------ --- ------
Excess............ $3,213 13.3% $4,898 18.5% $5,233 19.4% $5,568 20.3% $5,953
------ --- ------ --- ------ --- ------ --- ------
------ --- ------ --- ------ --- ------ --- ------
<CAPTION>
PERCENT OF
ASSETS
----------
<S> <C>
Capital under
generally accepted
accounting
principles........ 26.2%
---
---
Tier 1 capital...... 26.2%
Tier 1 (leverage)
capital
requirement (3)... 4.0%
---
Excess............ 22.2%
---
---
Tier 1 capital...... 53.8%
Tier 1 risk-based
capital
requirement....... 4.0%
---
Excess............ 49.8%
---
---
Total risk-based
capital........... 54.0%
Total risk-based
capital
requirement....... 8.0%
---
Excess............ 46.0%
---
---
Total NC Savings
Bank capital...... 26.3%
NC savings bank
Capital
Requirement....... 5.0%
---
Excess............ 21.3%
---
---
</TABLE>
- ---------------
(1) Assumes the Company will purchase all of the capital stock of the Converted
Savings Bank to be issued in the Stock Conversion for 50% of the net
proceeds. Assumes $1.6 million of the net proceeds distributed to the
Converted Savings Bank will be invested in a new branch facility, with the
balance of any such proceeds invested in 20% risk-weighted assets. Assumes
eight percent of the Common Stock to be sold in the Stock Conversion is
acquired by the ESOP, and that the funds used to acquire such shares are
borrowed from the Company. Although repayment of such debt will be secured
solely by the Common Stock purchased by the ESOP, the Commercial Bank is
expected to make discretionary contributions to the ESOP in an amount at
least equal to the principal and interest payments on the ESOP debt. As a
result, the table assumes a reduction to the Commercial Bank's pro forma
capital and regulatory capital to reflect the cost of funding the ESOP.
Assumes the cost of the MRP will be paid by the Commercial Bank.
(2) Based on the Savings Bank's total assets determined under generally
acccepted accounting principles for capital as determined under generally
accepted accounting principles, Tier 1 capital purposes and NC savings bank
capital guidelines, and risk-weighted assets for the purpose of the
risk-weighted capital requirements.
(3) Assumes a core capital requirement of four percent adjusted total assets,
though such level may be increased by the Federal Reserve Board as high as
five percent. See "Regulation."
17
<PAGE>
PRO FORMA DATA
The following table sets forth the actual and, after giving effect to the
Stock Conversion for the period and at the date indicated, pro forma
consolidated income, shareholders' equity and other data of the Savings Bank
prior to the Stock Conversion and of the Company following the Stock Conversion.
Unaudited pro forma consolidated income and related data have been calculated
for the nine months ended September 30, 1997 and for the year ended December 31,
1996 as if the Common Stock had been sold at the beginning of each period and
the estimated net proceeds had been invested at 5.26% at the beginning of the
year. The foregoing yield approximates the yield on the one-year U.S. Treasury
bill at December 3, 1997. (While applicable regulations provide for the use of a
yield representing the arithmetic average of the average yield on the Savings
Bank's interest-earning assets and the average cost of deposits, management
believes that the one-year Treasury bill rate represents a more realistic yield
on its investments). The pro forma after-tax yield for the Company and the
Savings Bank is assumed to be 3.37% based on an estimated combined state and
federal tax rate of 36%. No effect has been given in the pro forma shareholders'
equity calculations for the assumed earnings on the net proceeds. The pro forma
income and related data set forth below do not reflect accruals to be made with
regard to certain employee benefit plans to be adopted in connection with, and
subsequent to, the Stock Conversion. See "Management of the Savings
Bank -- Certain Benefit Plans and Agreements."
Set forth below are the estimated net proceeds to the Company, assuming the
sale of the Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range. The actual net proceeds from the sale
of the Common Stock cannot be determined until the Stock Conversion is
completed. However, net proceeds set forth on the following table are estimated
based upon the following assumptions: (i) 100% of the shares of Common Stock
will be sold in the Offerings as follows: (a) eight percent will be sold to the
ESOP and (b) the remaining shares will be sold to others in the Subscription and
Community Offerings; and (ii) other Conversion expenses, not including sales
commissions, will be approximately $450,000. The foregoing assumptions regarding
estimated purchases in the Offerings are based on reasonable market assumptions,
market conditions, and planned purchases by the ESOP. Actual expenses may vary
from those estimated. The pro forma data may not total due to rounding
differences.
18
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
---------------------------------------------------
595,000 700,000 805,000 925,750
SHARES AT SHARES AT SHARES AT SHARES AT
$10.00 $10.00 $10.00 $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Estimated net conversion proceeds:
Gross proceeds..................................................... $ 5,950 $ 7,000 $ 8,050 $ 9,258
Less offering expenses and commissions............................. (450) (450) (450) (450)
--------- ---------- ---------- ----------
Estimated net proceeds.......................................... 5,500 6,550 7,600 8,808
Less: shares to be purchased by ESOP............................... (476) (560) (644) (741)
Less: shares to be purchased by MRP................................ (238) (280) (322) (370)
Less: cost of real property addition............................... (1,600) (1,600) (1,600) (1,600)
--------- ---------- ---------- ----------
Estimated investable net proceeds............................... $ 3,186 $ 4,110 $ 5,034 $ 6,097
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income:
Historical net income.............................................. $ 78 $ 78 $ 78 $ 78
Pro forma income on investable net proceeds........................ 80 104 127 154
Pro forma ESOP adjustment (1)...................................... (23) (27) (31) (36)
Pro forma MRP adjustment (2)....................................... (23) (27) (31) (36)
--------- ---------- ---------- ----------
Pro forma net income............................................ $ 113 $ 128 $ 143 $ 161
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income per share: (3)
Historical net income.............................................. $ 0.14 $ 0.12 $ 0.10 $ 0.09
Pro forma income on investable net proceeds........................ 0.15 0.16 0.17 0.18
Pro forma ESOP adjustment (1)...................................... (0.04) (0.04) (0.04) (0.04)
Pro forma MRP adjustment (2)....................................... (0.04) (0.04) (0.04) (0.04)
--------- ---------- ---------- ----------
Pro forma net income per share.................................. $ 0.20 $ 0.20 $ 0.19 $ 0.19
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Ratio of offering price to pro forma net income per share (5)........ 36.73x 38.06x 39.11x 40.06x
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Weighted average number of shares used to calculate earnings per
share (1).......................................................... 552,160 649,600 747,040 859,096
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Shareholders' equity: (4)
Historical retained earnings....................................... $ 4,395 $ 4,395 $ 4,395 $ 4,395
Estimated net proceeds (2)......................................... 5,500 6,550 7,600 8,808
Less: shares to be acquired by ESOP (1)............................ (476) (560) (644) (741)
Less: shares acquired by MRP (2)................................... (238) (280) (322) (370)
--------- ---------- ---------- ----------
Pro forma shareholders' equity.................................. $ 9,181 $ 10,105 $ 11,029 $ 12,092
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Shareholders' equity per share: (3)(4)
Historical retained earnings....................................... $ 7.39 $ 6.28 $ 5.46 $ 4.75
Estimated net proceeds (2)......................................... 9.24 9.36 9.44 9.51
Less: shares to be acquired by ESOP (1)............................ (0.80) (0.80) (0.80) (0.80)
Less: shares acquired by MRP (2)................................... (0.40) (0.40) (0.40) (0.40)
--------- ---------- ---------- ----------
Pro forma shareholders' equity per share........................ $ 15.43 $ 14.44 $ 13.70 $ 13.06
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Offering price as a percentage of pro forma shareholders' equity
per share.......................................................... 64.81% 69.27% 72.99% 76.56%
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Number of shares used to calculate shareholders' equity
per share.......................................................... 595,000 700,000 805,000 925,750
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
- ---------------
(1) Assumes eight percent of the shares to be sold in the Stock Conversion are
purchased by the ESOP under all circumstances, and that the funds used to
purchase such shares are borrowed from the Company. The approximate amount
expected to be borrowed by the ESOP is not reflected as a liability but is
reflected as a reduction of capital. Although repayment of such debt will be
secured solely by the shares purchased by the ESOP, the Commercial Bank is
expected to make discretionary contributions to the ESOP in an amount at
least equal to the principal and interest payments on the ESOP debt. Pro
forma net income has been adjusted to give effect to such contributions,
based upon a fully amortizing debt with a ten-year term. Because the Company
will be providing the ESOP loan, only principal payments on the ESOP loan
are reflected as employee compensation and benefits expense. For purposes of
this table the Purchase Price of
19
<PAGE>
$10.00 was utilized to calculate the ESOP expense. The Commercial Bank will
record compensation expense related to the ESOP in accordance with AICPA SOP
No. 93-6. As a result, to the extent the value of the Common Stock
appreciates over time, compensation expense related to the ESOP will
increase. SOP 93-6 also changes the earnings per share computations for
leveraged ESOPs to include as outstanding only shares that have been
committed to be released to participants. For purposes of the preceding
table, it was assumed that 10% of the ESOP shares purchased in the Stock
Conversion were committed to be released. See "Management of the Savings
Bank -- Certain Benefit Plans and Agreements -- Employee Stock Ownership
Plan."
(2) Assumes a number of shares of Common Stock equal to four percent of the
Common Stock to be sold in the Stock Conversion will be purchased by the MRP
in the open market following the Stock Conversion. The dollar amount of the
Common Stock to be purchased by the MRP is based on the Purchase Price in
the Stock Conversion and represents unearned compensation and is reflected
as a reduction of capital. Such amount does not reflect possible increases
or decreases in the value of such stock relative to the Purchase Price in
the Stock Conversion. As the Commercial Bank accrues compensation expense to
reflect the vesting of such shares pursuant to the MRP, the charge against
capital will be reduced accordingly. Implementation of the MRP would require
shareholder approval. If the shares to be purchased by the MRP were newly
issued shares purchased from the Company by the MRP at the Purchase Price
rather than shares purchased in the open market, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range, pro
forma shareholders' equity per share would have been $15.22, $14.27, $13.56
and $12.94, respectively, and pro forma net income per share would have been
$.21, $.20, $.19 and $.19, respectively. As a result of the MRP acquiring
authorized but unissued shares from the Company, shareholders' ownership
interests in the Company would be diluted by approximately 3.85%. See
"Management of the Bank -- Certain Benefit Plans and Agreements --
Management Recognition Plan" and "Risk Factors -- Possible Dilutive Effect
of MRP and Stock Options."
(3) It is expected that following the consummation of the Stock Conversion the
Company will adopt the Option Plans, which would be subject to shareholder
approval. Upon approval of the Option Plans, employees and directors could
be granted options to purchase an aggregate amount of Common Stock equal to
10% of the shares issued in the Stock Conversion at exercise prices equal to
the market price of the Common Stock on the date of grant. In the event the
shares issued under the Option Plans were awarded, the interests of existing
shareholders would be diluted. At the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, if all shares under the
Option Plans were newly issued and the exercise price for the option shares
were equal to the Purchase Price in the Stock Conversion, the number of
outstanding shares of Common Stock would increase to 654,500, 770,000,
885,500, and 1,018,325, respectively, net income per share would be $14.94,
$14.03, $13.36, and $12.78, respectively, and shareholders' equity per share
would have $.21, $.20, $.20, and $.19, respectively.
(4) Consolidated shareholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The amounts shown
do not reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation. The amounts shown also
do not reflect the amounts required to be distributed in the event of
liquidation to eligible depositors from the liquidation account which will
be established upon the consummation of the Stock Conversion. Pro forma
shareholders' equity information is not intended to represent the fair
market value of the Common Stock, the current value of the Savings Bank's
assets or liabilities, or the amounts, if any, that would be available for
distribution to shareholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the Stock Conversion and by other factors.
(5) Annualized.
20
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
850,000 1,000,000 1,150,000 1,322,500
SHARES AT SHARES AT SHARES AT SHARES AT
$7.00 $7.00 $7.00 $7.00
PER SHARE PER SHARE PER SHARE PER SHARE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Estimated net conversion proceeds:
Gross proceeds....................................................... $ 5,950 $ 7,000 $ 8,050 $ 9,258
Less offering expenses and commissions............................... (450) (450) (450) (450)
--------- ---------- ---------- ----------
Estimated net proceeds............................................ 5,500 6,550 7,600 8,808
Less: shares to be purchased by ESOP................................. (476) (560) (644) (741)
Less: shares to be purchased by MRP.................................. (238) 280) (322) (370)
Less: cost of real property addition................................. (1,600) (1,600) (1,600) (1,600)
--------- ---------- ---------- ----------
Estimated investable net proceeds................................. $ 3,186 $ 4,110 $ 5,034 $ 6,097
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income:
Historical net income (1)............................................ $ 112 $ 112 $ 112 $ 112
Pro forma income on investable net proceeds.......................... 107 138 169 205
Pro forma ESOP adjustment (2)........................................ (30) (36) (41) (47)
Pro forma MRP adjustment (3)......................................... (30) (36) (41) (47)
--------- ---------- ---------- ----------
Pro forma net income.............................................. $ 158 $ 179 $ 199 $ 222
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Net income per share: (4)
Historical net income(1)............................................. $ 0.20 $ 0.17 $ 0.15 $ 0.13
Pro forma income on investable net proceeds.......................... 0.19 0.21 0.23 0.24
Pro forma ESOP adjustment (2)........................................ (0.06) (0.06) (0.06) (0.06)
Pro forma MRP adjustment (3)......................................... (0.06) (0.06) (0.06) (0.06)
--------- ---------- ---------- ----------
Pro forma net income per share.................................... $ 0.29 $ 0.28 $ 0.27 $ 0.26
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Ratio of offering price to pro forma net income per share.............. 34.87x 36.36x 37.53x 38.62x
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Weighted average number of shares used to calculate earnings per share
(2).................................................................. 552,160 649,600 747,040 859,096
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Stockholders' equity: (5)
Historical retained earnings......................................... $ 4,312 $ 4,312 $ 4,312 $ 4,312
Estimated net proceeds (3)........................................... 5,500 6,550 7,600 8,808
Less: shares to be acquired by ESOP (2).............................. (476) (560) (644) (741)
Less: shares acquired by MRP (3)..................................... (238) (280) (322) (370)
--------- ---------- ---------- ----------
Pro forma stockholders' equity.................................... $ 9,098 $ 10,022 $ 10,946 $ 12,009
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Stockholders' equity per share: (4)(5)
Historical retained earnings......................................... $ 7.25 $ 6.16 $ 5.36 $ 4.66
Estimated net proceeds (3)........................................... 9.24 9.36 9.44 9.51
Less: shares to be acquired by ESOP (2).............................. (0.80) (0.80) (0.80) (0.80)
Less: shares acquired by MRP (3)..................................... (0.40) (0.40) (0.40) (0.40)
--------- ---------- ---------- ----------
Pro forma stockholders' equity per share.......................... $ 15.29 $ 14.32 $ 13.60 $ 12.97
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Offering price as a percentage of pro forma stockholders'
equity per share..................................................... 65.40% 69.85% 73.54% 77.09%
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
Number of shares used to calculate stockholders' equity per share...... 595,000 700,000 805,000 925,750
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
- ---------------
(1) Historical net income and historical net income per share include an
after-tax charge of $61,000 taken during the year ended December 31, 1996
representing a one-time special assessment of 65.7 basis points on the
Savings Bank's deposits held as of March 31, 1995 pursuant to legislation
enacted to recapitalize the SAIF. If the one-time special assessment had
been excluded, at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range, pro forma net income per share would have
been $.40, $.37, $.35, and $.33 respectively.
(2) Assumes eight percent of the shares to be sold in the Stock Conversion are
purchased by the ESOP under all circumstances, and that the funds used to
purchase such shares are borrowed from the Company. The approximate amount
expected to be borrowed by the ESOP is not reflected as a liability but is
reflected as a reduction of capital. Although repayment of such debt will be
secured solely by the shares purchased by the ESOP, the Commercial Bank
expects to
21
<PAGE>
make discretionary contributions to the ESOP in an amount at least equal to
the principal and interest payments on the ESOP debt. Pro forma net income
has been adjusted to give effect to such contributions, based upon a fully
amortizing debt with a ten-year term. Because the Company will be providing
the ESOP loan, only principal payments on the ESOP loan are reflected as
employee compensation and benefits expense. For purposes of this table the
Purchase Price of $10.00 was utilized to calculate the ESOP expense. The
Commercial Bank will record compensation expense related to ESOP in
accordance with AICPA SOP No. 93-6. As a result, to the extent the value of
the Common Stock appreciates over time, compensation expense related to the
ESOP will increase. SOP 93-6 also changes the earnings per share
computations for leveraged ESOPs to include as outstanding only shares that
have been committed to be released to participants. For purposes of the
preceding table, it was assumed that 10% of the ESOP shares purchased in the
Stock Conversion were committed to be released. See "Management of the
Savings Bank -- Certain Benefit Plans and Agreements -- Employee Stock
Ownership Plan."
(3) Assumes a number of shares of Common Stock equal to four percent of the
Common Stock to be sold in the Stock Conversion will be purchased by the MRP
in the open market following the Stock Conversion. The dollar amount of the
Common Stock to be purchased by the MRP is based on the Purchase Price in
the Stock Conversion and represents unearned compensation and is reflected
as a reduction of capital. Such amount does not reflect possible increases
or decreases in the value of such stock relative to the Purchase Price in
the Stock Conversion. As the Commercial Bank accrues compensation expense to
reflect the vesting of such shares pursuant to the MRP, the charge against
capital will be reduced accordingly. Implementation of the MRP would require
shareholder approval. If the shares to be purchased by the MRP were newly
issued shares purchased from the Company by the MRP at the Purchase Price
rather than shares purchased in the open market, at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range, pro
forma shareholders' equity per share would have been $15.09, $14.15, $13.46
and $12.86, respectively, and pro forma net income per share would have been
$.29, $.28, $.27 and $.26, respectively. As a result of the MRP acquiring
authorized but unissued shares from the Company, shareholders' ownership
interests in the Company would be diluted by approximately 3.85%. See
"Management of the Bank -- Certain Benefit Plans and Agreements --
Management Recognition Plan" and "Risk Factors -- Possible Dilutive Effect
of MRP and Stock Options."
(4) It is expected that following the consummation of the Stock Conversion the
Company will adopt the Option Plans, which would be subject to shareholder
approval. Upon approval of the Option Plan, employees and directors could be
granted options to purchase an aggregate amount of Common Stock equal to 10%
of the shares issued in the Stock Conversion at exercise prices equal to the
market price of the Common Stock on the date of grant. In the event the
shares issued under the Option Plan consist of newly issued shares of Common
Stock and all options available for award under the Option Plans were
awarded, the interests of existing shareholders would be diluted. At the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, if all shares under the Option Plans were newly issued and
the exercise price for the option shares were equal to the Purchase Price in
the Stock Conversion, the number of outstanding shares of Common Stock would
increase to 654,500, 770,000, 885,500 and 1,018,325, respectively, net
income per share would be $14.81, $13.92, $13.27 and $12.70, respectively,
and shareholders' equity per share would have $.29, $.28, $.27 and $.27,
respectively.
(5) Consolidated shareholders' equity represents the excess of the carrying
value of the assets of the Company over its liabilities. The amounts shown
do not reflect the federal income tax consequences of the potential
restoration to income of the bad debt reserves for income tax purposes,
which would be required in the event of liquidation. The amounts shown also
do not reflect the amounts required to be distributed in the event of
liquidation to eligible depositors from the liquidation account which will
be established upon the consummation of the Stock Conversion. Pro forma
shareholders' equity information is not intended to represent the fair
market value of the Common Stock, the current value of the Savings Bank's
assets or liabilities of the amounts, if any, that would be available for
distribution to shareholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the Stock Conversion and by other factors.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of operations of the Savings Bank. The information contained in this
section should be read in conjunction with the financial statements, the
accompanying notes to financial statements, and the other sections of this
Prospectus.
The Company was incorporated under the laws of the State of North Carolina
in December 1997 at the direction of Savings Bank for the purpose of acquiring
and holding all of the outstanding stock of the Converted Savings Bank to be
issued in the Stock Conversion. The Company's principal business activities
after the Stock Conversion are expected to be conducted solely through the
Converted Savings Bank and, subsequent to the Bank Conversion, the Commercial
Bank.
The Savings Bank's principal business has historically consisted of
attracting deposits from the general public and making loans secured by
residential real estate. The primary goals of management are to increase the
Savings Bank's profitability, monitor its capital position, and enhance its
banking franchise. The Savings Bank's results of operations are dependent upon
net interest income, which is the difference between income earned on interest
earning assets, such as loans and investments, and the cost of its interest
bearing liabilities consisting primarily of deposits. Operations are affected to
a much lesser degree by noninterest income, such as transaction and other
service fee income, and other sources of income. Net income also is affected by,
among other things, provisions for loans losses and operating expenses. The
Savings 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 Savings Bank's
results of operations also are 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.
CAPITAL RESOURCES AND LIQUIDITY
The objective of the Savings Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Savings Bank's ability to meet deposit withdrawals on demand or at contractual
maturity, to repay borrowings as they mature, and to fund new loans and
investments as opportunities arise.
The Savings Bank's primary sources of internally generated funds are
principal and interest payments on loans receivable, cash flows generated from
operations, and cash flows generated by investments. External sources of funds
include increases in deposits and advances from the FHLB of Atlanta. In recent
years, advances from FHLB of Atlanta have not been a primary source of liquidity
for the Savings Bank.
North Carolina-chartered savings banks must maintain liquid assets equal to
at least 10% of total assets. The computation of liquidity under North Carolina
regulations allows the inclusion of mortgage-backed securities and investments
with readily marketable value, including investments with maturities in excess
of five years. At September 30, 1997, the Savings Bank's liquidity was 20.64%,
or $2.6 million in excess of the minimum required under North Carolina
regulations.
At September 30, 1997, the Savings Bank had outstanding $197,000 in
commitments to originate mortgage loans, $289,000 in undisbursed construction
loans, and available home equity lines of credit of $1,091,000. The Savings Bank
believes that it has adequate resources to fund loan commitments as they arise.
If the Savings Bank requires funds beyond its interest funding capabilities,
advances from the FHLB of Atlanta are available. At September 30, 1997,
approximately $8.4 million in certificates of deposit were scheduled to mature
within a year. Management expects that most of these certificates of deposit
will be renewed upon maturity.
Following the Conversion, the Company will initially conduct no business
other than holding the capital stock of the Commercial Bank and the loan it will
make to the ESOP. In order to provide sufficient funds for its operations, the
Company expects to retain and invest 50% of the net proceeds of the Conversion
remaining after making the loan to the ESOP. In the future, the Company's
primary source of funds, other than income from its investments and principal
and interest payments received from the ESOP with respect to the ESOP loan, is
expected to be dividends from the Commercial Bank. As a North Carolina-chartered
stock savings bank, the Converted Savings Bank would not be permitted to declare
or pay a cash dividend on its capital stock if the effect of such transaction
would be to reduce the net worth of the institution to an amount which is less
than the minimum amount required by applicable federal and state regulations. At
September 30, 1997, the Savings Bank
23
<PAGE>
was in compliance with all applicable capital requirements. In addition, for a
period of five years after the Conversion, the Converted Savings Bank would be
required to obtain written approval from the Administrator before declaring or
paying a cash dividend on its capital stock in an amount in excess of one-half
of the greater of (i) its net income for the most recent fiscal year-end, or
(ii) the average of its net income after dividends for the most recent fiscal
year-end and not more than two of the immediate preceding fiscal year-ends.
Following the Bank Conversion, the Commercial Bank will be subject only to
statutory limitations on the ability of North Carolina banks to declare and pay
dividends. A North Carolina bank may not declare and pay a dividend unless the
bank's capital surplus equals at least 50% of its paid-in capital.
OPERATING STRATEGY
In guiding the operations of the Savings Bank, management has implemented
various strategies designed to continue the institution's profitability while
maintaining its safety and soundness. These strategies include: (i) emphasizing
one-to-four family residential lending; (ii) maintaining assets quality; (iii)
controlling operating expenses; and (iv) monitoring interest-rate risk. It is
anticipated, subject to market conditions, that the strategies presently in
place will be continued following completion of the Conversion.
EMPHASIS ON ONE-TO-FOUR FAMILY RESIDENTIAL LENDING. Historically, the
Savings Bank has been predominantly a one-to-four family residential lender. As
of September 30, 1997, approximatley 88.10% of its total loan portfolio was
composed of permanent one-to-four family residential loans. As of such date,
1.53% of its total loan portfolio was composed of construction loans, 6.40% was
composed of home equity lines of credit, 1.92% was composed of construction
loans, 6.40% was composed of home equity lines of credit, 1.92% was composed of
home improvement loans, 1.45% was composed of commercial real estate loans and
1.10% was composed of multi-family residential loans. As a result Savings Bank
has developed expertise in mortgage loan underwriting and origination. The
Savings Bank has established methods to expand its loan originations through
contacts with realtors, homebuilders, and past and present customers. The
institution also uses advertising and community involvement to gain exposure
within the communities it operates. As of September 30, 1997, approximately $5.2
million or 31.42% of the Savings Bank's total loans secured by one-to
four-family properties was composed of adjustable rate loans.
MAINTENANCE OF ASSET QUALITY. At September 30, 1997, the Savings Bank's
ratio of nonperforming assets to total assets was 0.19%. For the nine months
needed September 30, 1997 and for the years ended December 31, 1996 and 1995,
there have been no loan charge-offs. The Savings Bank has attempted to maintain
asset quality through its underwriting and collection procedures.
MONITORING OF INTEREST-RATE RISK. Although the Savings Bank has a
significant "negative gap" and its net interest income would likely be
negatively impacted by increases in interest rates, management considers its
interest rate exposure to be at an acceptable level, given the Savings Bank's
historical operating results and capital position. See " -- Interest Rate Risk."
CONTROL OF GENERAL AND ADMINISTRATIVE EXPENSES. The Savings Bank closely
monitors its general and administrative expenses and seeks to control them while
maintaining the necessary personnel to properly serve its customers. For the
nine months ended September 30, 1997 (annualized) and the years ended December
31, 1996 and 1995, the Savings Bank's ratio of general and administrative
expenses, (exclusive of the SAIF special assessment), as a percentage of average
assets, has been 2.57%, 2.38% and 2.56%, respectively.
INTEREST RATE RISK
The Savings Bank's asset/liability management, or interest rate risk
management, program is focused primarily on evaluating and managing the
composition of its assets and liabilities in view of various interest rate
scenarios. Factors beyond the Savings Bank's control, such as market interest
rates and competition, also may have an impact on the Savings Bank's interest
income and interest expense.
In the absence of other factors, the yield or return associated with the
Savings Bank's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and conversely interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.
INTEREST RATE GAP ANALYSIS
As a part of the Savings Bank's interest rate risk management policy, the
Savings Bank calculates an interest rate "gap." Interest rate "gap" analysis is
a common, though imperfect, measure of interest rate risk, which measures the
relative dollar
24
<PAGE>
amounts of interest-earning assets and interest-bearing liabilities which
reprice within a specific time period, either through maturity or rate
adjustment. The "gap" is the difference between the amounts of such assets and
liabilities that are subject to repricing. A "negative" gap for a given period
means that the amount of interest-bearing liabilities maturing or otherwise
repricing within that period exceeds the amount of interest-earning assets
maturing or otherwise repricing within the same period. Accordingly, in a
declining interest rate environment, an institution with a negative gap would
generally be expected, absent the effects of other factors, to experience a
lower decrease in the yield of its assets relative to the cost of its
liabilities and its income should be positively affected. Conversely, the cost
of funds for an institution with a negative gap would generally be expected to
increase more quickly than the yield on its assets in a rising interest rate
environment, and such institution's net interest income generally would be
expected to be adversely affected by rising interest rates. Changes in interest
rates generally have the opposite effect on an institution with a "positive
gap."
The Savings Bank's one-year interest sensitivity gap as a percentage of
total assets at September 30, 1997 was a negative 27.75%. At September 30, 1997,
the Savings Bank's three-year and five-year cumulative interest sensitivity gaps
as a percentage of total assets were a negative 29.43% and a negative 26.26%,
respectively.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997 which are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown which reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
accounts and money market deposit accounts are assumed to be subject to
immediate repricing and depositor availability and have been placed in the
shortest period. In making the gap computations, none of the assumptions
sometimes made regarding prepayment rates and deposit decay rates have been used
for any other interest-earning assets or interest-bearing liabilities. In
addition, the table does not reflect scheduled principal payments which will be
received throughout the lives of the loans. The interest rate sensitivity of the
Savings 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.
25
<PAGE>
<TABLE>
<CAPTION>
TERMS TO REPRICING AT SEPTEMBER 30, 1997
----------------------------------------------------------------------
MORE THAN
MORE THAN 3 YEARS
1 YEAR 1 YEAR TO TO MORE THAN MORE THAN
OR LESS 3 YEARS 5 YEARS 5 YEARS 10 YEARS TOTAL
------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Real estate loans:
1-4 Family residential
Fixed......................................... $ 27 $ 174 $ 768 $ 4,479 $ 5,765 $11,213
Adjustable.................................... 5,139 -- -- -- -- 5,139
Other
Construction -- adjustable...................... 234 -- -- -- -- 234
Other real estate loans -- adjustable........... 2,027 -- -- -- -- 2,027
Other loans........................................ 58 -- -- -- -- 58
Interest-bearing cash balances....................... 26 -- -- -- 26
Federal Funds Sold................................... 2,325 -- -- -- 2,325
Investment securities................................ 801 1,758 -- -- -- 2,559
Stock in the Federal Home Loan Bank.................. -- -- -- -- 187 187
------- --------- --------- --------- --------- -------
Total interest-earning assets................. $10,637 $ 1,932 $ 768 $ 4,479 $ 5,952 $23,768
------- --------- --------- --------- --------- -------
------- --------- --------- --------- --------- -------
Interest-bearing liabilities:
Deposits
Regular passbook................................... $ 3,994 -- -- -- -- $ 3,994
Money market passbook.............................. 4,504 -- -- -- -- 4,504
Certificate accounts............................... 8,864 2,339 -- -- -- 11,203
------- --------- --------- --------- --------- -------
Total interest-bearing liabilites............. $17,362 $ 2,339 $ -- $ -- $ -- $19,701
------- --------- --------- --------- --------- -------
------- --------- --------- --------- --------- -------
Interest sensitivity gap............................. $(6,725) $ (407) $ 768 $ 4,479 $ 5,952 $ 4,067
------- --------- --------- --------- --------- -------
------- --------- --------- --------- --------- -------
Cumulative interest sensitivity gap.................. $(6,725) $(7,132) $(6,364) $(1,885) $ 4,067 $ 4,067
------- --------- --------- --------- --------- -------
------- --------- --------- --------- --------- -------
Ratio of interest-earning assets to interest-bearing
liabilities........................................ 61.27% 63.80% 67.70% 90.43% 120.64% 120.64%
------- --------- --------- --------- --------- -------
------- --------- --------- --------- --------- -------
Ratio of cumulative gap to total assets.............. (27.75)% (29.43)% (26.26)% (7.78)% 16.78% 16.78%
------- --------- --------- --------- --------- -------
------- --------- --------- --------- --------- -------
</TABLE>
NET PORTFOLIO VALUE AND NET INTEREST INCOME ANALYSIS
In addition to the interest rate gap analysis discussed above, management
monitors the Savings Bank's interest rate sensitivity through the use of a model
which estimates the change in net portfolio value ("NPV") and net interest
income in response to a range of assumed changes in market interest rates. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet items. The model estimates the effect on the Savings Banks NPV
and net interest income of instantaneous and permanent 100 to 400 basis point
increases and decreases in market interest rates. The following table presents
information regarding possible changes in the Savings Bank's NPV as of September
30, 1997, based on information provided by the FHLB of Atlanta's interest rate
risk model.
<TABLE>
<CAPTION>
CHANGE IN
INTEREST RATES NET PORTFOLIO VALUE
IN BASIS POINTS ------------------------------
(RATE SHOCK) AMOUNT $CHANGE %CHANGE
- --------------- ------ ------- -------
<S> <C> <C> <C>
Up 400 3,892 (1,002 ) (20.48)%
Up 300 4,179 (715 ) (14.61)%
Up 200 4,466 (428 ) (8.74)%
Up 100 4,680 (214 ) (4.37)%
Static 4,894 -- -- %
Down 100 4,979 85 1.73 %
Down 200 5,063 169 3.45 %
Down 300 5,168 274 5.59 %
Down 400 5,273 379 7.73 %
</TABLE>
26
<PAGE>
The following table presents the predicted effects, based on the FHLB of
Atlanta's interest rate risk model, on the Savings Bank's net interest income as
of September 30, 1997 of instantaneous and permanent 100 to 400 basis point
changes in market interest rates.
<TABLE>
<CAPTION>
CHANGE IN
INTEREST RATES NET INTEREST INCOME
IN BASIS POINTS ------------------------------
(RATE SHOCK) AMOUNT $CHANGE %CHANGE
- --------------- ------ ------- -------
<S> <C> <C> <C>
Up 400 642 (3) (0.46)%
Up 300 650 5 0.80 %
Up 200 658 13 2.06 %
Up 100 651 6 1.03 %
Static 645 -- -- %
Down 100 621 (24) (3.68)%
Down 200 597 (48) (7.36)%
Down 300 573 (72) (11.14)%
Down 400 548 (97) (14.92)%
</TABLE>
Computations of the prospective effects of hypothetical interest rate
changes are based on numerous assumptions including relative levels of market
interest rates, loan prepayments, and deposit decay, and should not be relied
upon as indicative of actual results. Further, the computations do not reflect
any actions management may undertake in response to changes in interest rates.
The tables set forth above indicate that, in the event of a 200 basis point
decrease in interest rates, the Savings Bank would be expected to experience a
3.45% increase in NPV and a 7.36% decrease in net interest income. In the event
of a 200 basis point increase in interest rates, the Savings Bank would be
expected to experience a 0.74% decrease in NPV and a 2.06% decrease in net
interest income.
Certain shortcomings are inherent in the method of analysis presented in
both the NPV and net interest income computations and in the gap computations
presented in the tables above. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, adjustable-rate mortgages have interest rate caps
which restrict changes in interest rates on a short-term basis and over the life
of the assets. The proportion of adjustable-rate loans could be reduced in
future periods if market interest rates should decline and remain at lower
levels for a sustained period due to increased refinancing activity. Further, in
the event of a change in interest rates, prepayment and early withdrawals levels
would likely deviate significantly from those assumed in the tables. Finally,
the ability of many borrowers to service their adjustable-rate debt may decrease
in the event of a sustained interest rate increase.
The Savings Bank's net income during recent periods has been positively
impacted by decreasing interest rates, and its net income in the near future is
likely to be reduced if interest rates increase. However, management did not
view the Savings Bank's interest rate sensitivity position at September 30, 1997
to be unacceptable in view of the Savings Bank's historical results of
operations and highly capitalized position. Nevertheless, in order to maintain
its interest rate risk position within levels management believes to be
acceptable, the Savings Bank has begun (i) attempting to originate adjustable
rate loans when market conditions permit and (ii) maintaining a short-term
investment portfolio.
The Savings Bank does not originate its fixed rate or adjustable rate loans
for sale, or sell its loans, in the secondary market. This tends to increase its
exposure to interest rate risk.
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 tables set forth information relating to
average balances of the Savings Bank's assets and liabilities for the nine
months ended September 30, 1997 and 1996 and the years ended December 31, 1996
and 1995. For the periods indicated, the tables reflect 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
27
<PAGE>
interest-earning asset (which reflects the impact of the net earning balance).
Nonaccruing loans were included in the computation of average balances. Weighted
average yields and costs for the nine months ended September 30, 1997 and 1996
are annualized.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
AT SEPTEMBER 30, -----------------------------------------------------
1997 1997 1996
-------------------- ------------------------------- ------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE YIELD/RATE BALANCE INTEREST YIELD/RATE BALANCE INTEREST
------- ---------- ------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing cash balances.............. $ 26 6.23% $ 27 $ 1 4.94% $ 29 $ 1
Federal funds sold.......................... 2,325 5.88% 1,242 48 5.15% 285 13
Stock in the Federal Home Loan Bank......... 187 7.25% 182 10 7.33% 166 9
Investment securities....................... 2,559 5.65% 2,734 126 6.14% 1,990 89
Loans receivable............................ 18,641 7.81% 18,792 1,127 8.00% 17,845 1,081
------- ---------- ------- -------- ---------- ------- --------
Total interest-earning assets............ 23,738 7.38% 22,977 1,312 7.61% 20,315 1,193
Non-interest-earning assets................... 496 567 712
------- ------- -------
Total assets............................. $24,234 $23,544 $21,027
------- ------- -------
------- ------- -------
Interest-bearing liabilities:
Deposits.................................... $19,701 5.11% $19,114 732 5.11% $16,674 609
------- ---------- ------- -------- ---------- ------- --------
Total interest-bearing liabilities....... 19,701 5.11% 19,114 732 5.11% 16,674 609
Non-interest-bearing liabilities.............. 138 49 116
------- ------- -------
Total liabilities........................ 19,839 19,163 16,790
Retained earnings............................. 4,395 4,381 4,237
------- ------- -------
Total liabilities and retained
earnings............................... $24,234 $23,544 $21,027
------- ------- -------
------- ------- -------
Net interest income and interest rate spread.. 2.27% $ 580 2.50% $ 584
---------- -------- ---------- --------
---------- -------- ---------- --------
Net yield on average interest-earning assets.. 3.37%
----------
----------
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 120.49% 120.21%
---------- ----------
---------- ----------
<CAPTION>
AVERAGE
YIELD/RATE
----------
<S> <C>
Interest earning assets:
Interest-bearing cash balances.............. 4.60%
Federal funds sold.......................... 6.08%
Stock in the Federal Home Loan Bank......... 7.23%
Investment securities....................... 5.96%
Loans receivable............................ 8.08%
----------
Total interest-earning assets............ 7.83%
Non-interest-earning assets...................
Total assets.............................
Interest-bearing liabilities:
Deposits.................................... 4.87%
----------
Total interest-bearing liabilities....... 4.87%
Non-interest-bearing liabilities..............
Total liabilities........................
Retained earnings.............................
Total liabilities and retained
earnings...............................
Net interest income and interest rate spread.. 2.96%
----------
----------
Net yield on average interest-earning assets.. 3.83%
----------
----------
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 121.84%
----------
----------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995
------------------------------- ------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/RATE BALANCE INTEREST
------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing cash balances.................................... $ 30 $ 2 6.67% $ 28 $ 1
Federal funds sold................................................ 412 26 6.31% 208 15
Stock in the Federal Home Loan Bank............................... 167 12 7.19% 156 11
Investment securities............................................. 2,084 125 6.00% 2,140 127
Loans receivable.................................................. 18,014 1,445 8.02% 16,784 1,356
------- -------- ---------- ------- --------
Total interest-earning assets.................................. 20,707 1,610 7.78% 19,316 1,510
Non-interest-earning assets......................................... 690 549
------- -------
Total assets................................................... $21,397 $19,865
------- -------
------- -------
Interest-bearing liabilities:
Deposits.......................................................... $17,039 841 4.94% $15,652 723
------- -------- ---------- ------- --------
Total interest-bearing liabilities............................. 17,039 841 4.94% 15,652 723
Non-interest-bearing liabilities.................................... 108 76
------- -------
Total liabilities.............................................. 17,147 15,728
Retained earnings................................................... 4,250 4,137
------- -------
Total liabilities and retained earnings........................ $21,397 $19,865
------- -------
------- -------
Net interest income and interest rate spread........................ $ 769 2.84% $ 787
-------- ---------- --------
-------- ---------- --------
Net yield on average interest-earning assets........................ 3.71%
----------
----------
Ratio of average interest-earning assets to average
interest-bearing liabilities...................................... 121.53%
----------
----------
<CAPTION>
AVERAGE
YIELD/RATE
----------
<S> <C>
Interest earning assets:
Interest-bearing cash balances.................................... 3.57%
Federal funds sold................................................ 7.21%
Stock in the Federal Home Loan Bank............................... 7.05%
Investment securities............................................. 5.93%
Loans receivable.................................................. 8.08%
----------
Total interest-earning assets.................................. 7.82%
Non-interest-earning assets.........................................
Total assets...................................................
Interest-bearing liabilities:
Deposits.......................................................... 4.62%
----------
Total interest-bearing liabilities............................. 4.62%
Non-interest-bearing liabilities....................................
Total liabilities..............................................
Retained earnings...................................................
Total liabilities and retained earnings........................
Net interest income and interest rate spread........................ 3.20%
----------
----------
Net yield on average interest-earning assets........................ 4.07%
----------
----------
Ratio of average interest-earning assets to average
interest-bearing liabilities...................................... 123.41%
----------
----------
</TABLE>
The Savings Bank also has received condition of Directors of the Savings
Bank and the Administrator have approved the Plan, subject to the Plan's
approval by the members of the Savings Bank entitled to vote on the matter and
subject to the satisfaction of certain other conditions. Such approval by the
Administrator, however, does not constitute a recommendation or endorsement of
the Plan.
29
<PAGE>
RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net changes (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER,
---------------------------------
1997 VS. 1996
---------------------------------
INCREASE (DECREASE)
DUE TO
---------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------ ---- ------ -----
<S> <C> <C> <C> <C>
Interest income:
Interest-bearing cash balances.......................................... $ -- $ -- $ -- $ --
Federal funds sold...................................................... 44 (2) (7) 35
Stock in the Federal Home Loan Bank..................................... 1 -- -- 1
Investment securities................................................... 33 3 1 37
Loans receivable........................................................ 57 (11) (1) 45
------ ---- ------ -----
Total interest-earning assets........................................ 135 (10) (7) 118
------ ---- ------ -----
Interest expense:
Deposits................................................................ 89 29 4 122
------ ---- ------ -----
Total interest-bearing liabilities................................... 89 29 4 122
------ ---- ------ -----
Change in net interest income...................................... $ 46 $(39) $(11) $ (4)
------ ---- ------ -----
------ ---- ------ -----
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 VS. 1996
---------------------------------
INCREASE (DECREASE)
DUE TO
---------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------ ---- ------ -----
<S> <C> <C> <C> <C>
Interest income:
Interest-bearing cash balances.......................................... $ -- $ 1 $ -- $ 1
Federal funds sold...................................................... 15 (2) (2) 11
Stock in the Federal Home Loan Bank..................................... 1 -- -- 1
Investment securities................................................... (3) 1 -- (2)
Loans receivable........................................................ 99 (9) (1) 89
------ ---- ------ -----
Total interest-earning assets........................................ 112 (9) (3) 100
------ ---- ------ -----
Interest expense:
Deposits................................................................ 64 50 4 118
------ ---- ------ -----
Total interest-bearing liabilities................................... 64 50 4 118
------ ---- ------ -----
Change in net interest income...................................... $ 48 $(59) $ (7) $ (18)
------ ---- ------ -----
------ ---- ------ -----
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
AND 1995
The Savings Bank has achieved moderate growth in recent periods, as total
assets increased by $2.6 million, or 12.8%, from $20.1 million at December 31,
1995 to $22.7 million at December 31, 1996. Total assets increased by an
additional $1.5 million to $24.2 million at September 30, 1997.
Most of the Savings Bank's growth during 1996 was in loans receivable,
which increased by $1.6 million, or 9.3% from $17.3 million at the beginning of
the year to $18.9 million at year-end. In addition, during 1996 federal funds
sold and investment securities increased by $575,000 and $161,000, respectively,
to $675,000 and $2.1 million, respectively, to $675,000 and $2.1 million,
respectively, at the end of the year. The growth in assets during 1996 was
funded by an increase in customer deposit accounts of $2.5 million, or 15.6%,
from $15.8 million at December 31, 1995 to $18.3 million at December 31, 1996.
This deposit growth was principally in the money market deposit accounts which
the Savings Bank began to
30
<PAGE>
offer during 1996, with such accounts totaling $2.7 million at December 31,
1996. Total retained earning increased from $4.2 million at December 31, 1995 to
$4.3 million at December 31, 1996.
Customer deposit accounts have continued to grow during the nine months
ended September 30, 1997, increasing by an additional $1.4 million, or 9.0%, to
$19.7 million. Money market deposit accounts continued to grow in popularity and
had increased to $4.5 million at September 30, 1997, an increase of $1.8
million. During the nine-month period, loans decreased by $276,000 while federal
funds sold and investment securities increased by $1.7 million and $411,000,
respectively. Total retained earnings increased from $4.3 million at December
31, 1996 to $4.4 million at September 30, 1997, as the Savings Bank continued to
substantially exceed all applicable regulatory capital requirements.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996.
NET INCOME. The Savings Bank earned net income of $78,000 during the nine
months ended September 30, 1997 as compared with net income of $67,000 during
the nine months ended September 30, 1996, an increase of $11,000. The lower
earnings during the nine months ended September 30, 1996 resulted principally
from a special insurance assessment which was imposed on all SAIF-insured
institutions by the FDIC to recapitalize the SAIF fund. The Savings Bank's
assessment was $101,000. Net of an income tax benefit of $40,000, this special
assessment decreased earnings during the first nine months of 1996 by $61,000.
Because of the unanticipated death of one of the Savings Bank's directors in
November 1997, the Savings Bank provided $67,000 of additional costs to
recognize the full value of benefits to be paid to that director's surviving
spouse under the Savings Bank's directors' retirement plan. Net of a tax benefit
of $25,000, this additional provision reduced earnings by $42,000 during the
nine months ended September 30, 1997.
NET INTEREST INCOME. Net interest income decreased by $4,000 to $584,000
during the nine months ended September 30, 1996. An increase of $118,000 in
total interest income was offset by an increase of $122,000 in total interest
expense. Average total interest-earning assets outstanding during the nine
months ended September 30, 1997 aggregated $23.0 million, an increase of $2.7
million over the average total interest-earning assets outstanding during the
corresponding period of the previous year. Of the total increase, $1.7 million
was in liquid assets which earn a lower rate of interest than do loans, with the
result that the weighted average yield on interest-earning assets decreased to
7.61% during the nine months ended September 30, 1997 as compared with a
weighted average yield of 7.83% during the nine months ended September 30, 1996.
Continued growth during the first nine months of 1997 in the money market
deposit accounts which the Bank introduced during 1996 accounted for
substantially all of the increase in the average balance of deposits outstanding
during the nine months ended September 30, 1997 as compared with the nine months
ended September 30, 1996. These accounts offer the customer an attractive rate
of interest, with the result that weighted average rate of interest paid on
deposit accounts increased to 5.11% during the nine months ended September 30,
1997 as compared with 4.87% during the nine months ended September 30, 1996.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $22,000 and
$4,000 for the nine months ended September 30, 1997 and 1996, respectively.
There were no net loan charge-offs during either period. The allowance for loan
losses totaled $30,000 at September 30, 1997. Loans are charged off against the
allowance when management believes collection is unlikely although management
intends to actively pursue collection of any loan which may be charged off.
Management decisions regarding the provision and resulting allowance are based
on both prior loan loss experience and other factors, such as existing loan
levels and types of loans outstanding, nonperforming loans, industry standards,
and general economic conditions. The loan loss allowance is an amount which
management believes will be adequate to absorb possible losses on existing
loans.
OTHER INCOME. Other income was $4,000 during the nine months ended
September 30,1997 as compared with $5,000 during the nine months ended September
20, 1996.
OTHER EXPENSES. Exclusive of the special insurance assessment and the
additional directors' retirement provision described under "Net Income" above,
other expenses remained, in the aggregate, relatively stable, decreasing
slightly from $388,000 during the nine months ended September 30, 1996 to
$386,000 during the nine months ended September 30, 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes was $31,000 and
$30,000 during the nine months ended September 30, 1997 and 1996, respectively,
which represented a percentage of income before income taxes of 28.4% and 31.0%
respectively.
31
<PAGE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995
NET INCOME. The Savings Bank earned net income of $112,000 during the year
ended December 31, 1996 as compared with net income of $178,000 during the year
ended December 31, 1995, a decrease of $66,000. The lower earnings during the
year ended December 31, 1996 resulted principally from a special insurance
assessment which was imposed on all SAIF-insured institutions by the FDIC to
recapitalize the SAIF fund. The Savings Bank's assessment was $101,000. Net of
an income tax benefit of $40,000, this special assessment decreased earnings
during the year ended December 31, 1996 by $61,000.
NET INTEREST INCOME. Net interest income decreased $18,000 to $769,000
during the year ended December 31, 1996 as compared with $787,000 during the
year ended December 31, 1995. An increase of $99,000 in total interest income
was offset by an increase of $117,000 in total interest expense. Average total
interest-earning assets outstanding during the year ended December 31, 1996
aggregated $20.7 million, an increase of $1.4 million over the average total
interest-earning assets outstanding during the previous year. The weighted
average yield on interest-earning assets decreased slightly to 7.78% during the
year ended December 31, 1996 as compared with a weighted average yield of 7.82%
during the year ended December 31, 1995. The money market deposit accounts which
the Savings Bank introduced during 1996 accounted for substantially all of the
$1.4 million increase in the average balance of deposits outstanding during 1996
as compared with 1995. These accounts offer the customer an attractive rate of
interest, with the result that weighted average rate of interest paid on deposit
accounts increased to 4.94% during the year ended December 31, 1996 as compared
with 4.62% during the prior year.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $5,000 and
$1,000 for the years ended December 31, 1996 and 1995, respectively. There were
no net loan charge-offs during either year. The allowance for loan losses
totaled $8,000 at December 31, 1996, an amount which management believed
adequate to absorb possible losses on loans existing at that date.
OTHER INCOME. Other income was $8,000 during the year ended December 31,
1996 as compared with $2,000 during the year ended December 31, 1995, an
increase of $6,000 which was principally attributable to gains of $4,000 from
the sale of investments during 1996.
OTHER EXPENSES. Exclusive of the special insurance assessment described
under "Net Income" above, other expenses remained, in the aggregate, stable,
totaling $508,000 for both 1996 and 1995. Provision for Income Taxes. The
provision for income taxes was $50,000 and $101,000 during the years ended
December 31, 1996 and 1995, respectively, which represented a percentage of
income before income taxes of 30.85 and 36.2%, respectively.
PROVISION FOR INCOME TAXES. The provision for income taxes was $50,000 and
$101,000 during the years ended December 31, 1996 and 1995, respectively, which
represented a percentage of income before income taxes of 30.85 and 36.2%,
respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related notes have been prepared in accordance
with generally accepted accounting principles, which generally require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased cost of the Savings Bank' operations. Nearly all the assets and
liabilities of the Savings Bank are financial, unlike most industrial companies.
As a result, the Savings Bank' performance is directly impacted by changes in
interest rates, which are indirectly influenced by inflationary expectations.
The Savings Bank' ability to match the interest sensitivity of its financial
assets to the interest sensitivity of its financial liabilities in its
asset/liability management may tend to minimize the effect of changes in
interest rates on the Savings Bank' performance. Changes in interest rates do
not necessarily move to the same extent as changes in the price of goods and
services. In the current interest rate environment, liquidity and the maturity
structure of the Savings Bank' assets and liabilities are critical to the
maintenance of acceptance performance levels.
IMPACT OF NEW ACCOUNTING STANDARDS
FASB STATEMENT ON EARNINGS PER SHARE. In March 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly-held common
stock or potential common stock. SFAS No. 128 simplifies the standards for
computing earnings per share ("EPS") previously found in Accounting Principles
Board ("APB") Opinion No. 15, "Earnings per Share," and makes them comparable to
international EPS standards. It replaces the
32
<PAGE>
presentation of primary EPS with the presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and the denominator of the based EPS computation to the
numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or the
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB
Opinion No. 15. SFAS No. 128 supersedes Opinion 15 and AICPA Accounting
Interpretation 1-102 of Opinion 15. SFAS No. 128 will be effective for the
Savings Bank's fiscal year ending December 31, 1997. Management does not believe
the impact of adopting SFAS No. 128 will be material to the Savings Bank's
financial statements.
FASB STATEMENT ON ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995
the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method"
of accounting for an employee stock option whereby compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period. FASB has encouraged all entities to adopt the fair value based
method; however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by APB Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess of the market price of the stock
at the grant date over the amount an employee must pay to acquire the stock.
However, most stock option plans have no intrinsic value at the grant date and,
as such, no compensation cost is recognized under APB Opinion No. 25. Entities
electing to continue use of the accounting treatment of APB Opinion No. 25 must
make certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995. Pro
forma disclosures must include the effects of all awards granted in fiscal years
beginning after December 15, 1994. The Savings Bank expects to use the
"intrinsic value based method" as prescribed by APB Opinion No. 25. Accordingly,
management does not believe the impact of adopting SFAS No. 123 will be material
to the Savings Bank's financial statements.
FASB STATEMENT ON TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1996, the FASB issued SFAS No. 125. SFAS
No. 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral. SFAS
No. 125 is effective for transfer and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. The effective date for certain provisions of SFAS No. 125
have been postponed for one year. Management anticipates that the adoption of
SFAS No. 125 should have no material impact on the financial statements of the
Savings Bank.
FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB
issued SFAS No. 130. SFAS No. 130 establishes standards of reporting and display
of comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 will be effective for the Savings Bank's
fiscal year ending December 31, 1998, and the Bank does not intend to early
adopt. Had the Savings Bank early-adopted SFAS No. 130, it would have reported
comprehensive income of $82,883, $106,185 and $223,584 for the nine months ended
September 30, 1997 and the years ended December 31, 1996 and 1995, respectively.
33
<PAGE>
BUSINESS OF THE COMPANY
The Company was organized at the direction of the Board of Directors of the
Savings Bank in December 1997 for the purpose of becoming a holding company to
own all of the outstanding capital stock of the Converted Savings Bank and,
subsequent to the Bank Conversion, the Commercial Bank. Upon completion of the
Conversion, the Commercial Bank will be a wholly-owned subsidiary of the
Company.
The Company currently is not an operating company. Following the
Conversion, the Company will be engaged primarily in the business of directing,
planning, and coordinating the business activities of the Commercial Bank. In
the future, the Company may become an operating company or acquire or organize
other operating subsidiaries, including other financial institutions, though
there are no current plans in this regard. Initially, the Company will not
maintain offices separate from those of the Commercial Bank or employ any
persons other than its officers who will not be separately compensated for such
service.
BUSINESS OF THE SAVINGS BANK
GENERAL
The Savings Bank's principal business consists of attracting deposits from
the general public and investing these funds in loans secured by first mortgages
on owner-occupied, single-family residences in the Savings Bank's market area.
The Savings Bank derives its income principally from interest earned on loans
and investments and, to a lesser extent, loan servicing and other fees and gains
on the sale of loans and investments. The Savings Bank's principal expenses are
interest expense on deposits and borrowings and noninterest expense such as
compensation and employee benefits, office occupancy expenses, and other
miscellaneous expenses. Funds for these activities are provided principally by
deposits, borrowings, repayments of outstanding loans, and investments and
operating revenues.
MARKET AREA
The Savings Bank's sole office is located in downtown Landis, North
Carolina, which is in southern Rowan County. Landis, which has a population of
approximately 2,400, was originally incorporated in 1901 along a north/south
railroad route which traverses downtown Landis. The heart of Landis' local
economy was the Linn Mill, a thread and yarn textile mill founded in 1900. With
the automation and sale of the Linn Mill to overseas interests, the Landis area
has evolved into a bedroom community for the city of Concord and Cabarrus
County. The Savings Bank's primary market area consists of portions of Iredell,
Rowan, and Cabarrus Counties, and its primary service area (in which
approximately 75% of its customers reside) consists of the area within a
seven-mile radius of its office in Landis.
The Savings Bank plans to expand its primary market area through the
establishment of a branch in a new business park development, located on
Interstate-85 at Speedway Boulevard, inside the city limits of Concord, North
Carolina, which is in Cabarrus County. This 20 acre development will house three
hotels and conference center, a regional mall, community shopping center,
commercial and professional parks, and multi-family housing. Speedway Boulevard
is the main access route to the Charlotte Motor Speedway from Interstate I-85.
Management anticipates that the branch will be constructed during the latter of
part of 1998 and will become operational during 1999. See "Use of Proceeds."
LENDING ACTIVITIES
GENERAL. The Savings Bank's loan portfolio totaled $18.6 million at
September 30, 1997, representing 76.9% of total assets at that date. It is the
Savings Bank's policy to concentrate its lending within its market area. At
September 30, 1997, $16.4 million, or 87.4% of the Savings Bank's gross loan
portfolio, consisted of single-family, residential mortgage loans.
LOAN PORTFOLIO COMPOSITION. The following table sets forth selected data
relating to the composition of the Savings Bank's loan portfolio by type of loan
at the dates indicated. At September 30, 1997, the Savings Bank had no
concentrations of loans exceeding 10% of gross loans other than as disclosed
below.
34
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
AT SEPTEMBER 30,
1997 1996 1995
--------------------- --------------------- ---------------------
PERCENTGE PERCENTGE PERCENTGE
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
TYPE OF LOAN:
Real estate loans:
One-to-four family residential
Fixed.............................................. $11,273 60.47% $11,612 61.38% $11,596 67.00%
Adjustable......................................... 5,164 27.70% 5,313 28.09% 3,815 22.04%
Multi-family residential
Adjustable......................................... 205 1.10% 224 1.18% 249 1.44%
Commercial
Fixed.............................................. -- -- -- -- 11 0.06%
Adjustable......................................... 270 1.45% 248 1.31% 267 1.54%
Construction
Adjustable......................................... 285 1.53% 413 2.18% 338 1.95%
Home equity lines of credit
Adjustable......................................... 1,194 6.41% 1,175 6.21% 985 5.69%
Home improvement loans
Fixed.............................................. -- -- 3 0.02% -- --
Adjustable......................................... 358 1.92% 261 1.38% 228 1.32%
------- ---------- ------- ---------- ------- ----------
Total real estate loans.......................... 18,749 100.58% 19,249 101.76% 17,489 101.05%
------- ---------- ------- ---------- ------- ----------
OTHER LOANS:
Loans secured by deposits
Fixed.............................................. 58 0.31% 59 0.31% 126 0.73%
------- ---------- ------- ---------- ------- ----------
Total loans...................................... 18,807 100.89% 19,308 102.07% 17,615 101.77%
LESS:
Construction loans in process......................... (51) (0.27)% (289) (1.53)% (223) (1.29)%
Allowance for loan losses............................. (30) (0.16)% (8) (0.04)% (2) (0.01)%
Deferred loan origination fees, net of costs.......... (85) (0.46)% (94) (0.50)% (82) (0.47)%
------- ---------- ------- ---------- ------- ----------
$18,641 100.00% $18,917 100.00% $17,308 100.00%
------- ---------- ------- ---------- ------- ----------
------- ---------- ------- ---------- ------- ----------
</TABLE>
LOAN MATURITIES. The following table sets forth certain information at
September 30, 1997 regarding the dollar amount of loans maturing in the Savings
Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one
year or less. The table does not include any estimate of prepayments which
significantly shorten the average life of mortgage loans and may cause the
Savings Bank's repayment experience to differ from that shown below. Loan
balances are net of loans in process.
35
<PAGE>
<TABLE>
<CAPTION>
1 YEAR MORE THAN MORE THAN MORE THAN
OR 1 YEAR TO 3 YEARS TO 5 YEARS TO MORE THAN
LESS 3 YEARS 5 YEARS 10 YEARS 10 YEARS TOTAL
------ --------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
REAL ESTATE LOANS:
1-4 Family residential
Fixed.............................................. $ 27 $ 174 $768 $4,479 $ 5,765 $11,213
Adjustable......................................... 5,139 -- -- -- -- 5,139
OTHER
Construction -- adjustable......................... 234 -- -- -- -- 234
Other -- adjustable................................ 2,027 -- -- -- -- 2,027
------ --------- ---------- ---------- --------- -------
Total real estate loans.......................... 7,427 174 768 4,479 5,765 18,613
Other loans............................................. 58 -- -- -- -- 58
------ --------- ---------- ---------- --------- -------
Less allowance for loan losses.......................... (30) -- -- -- -- (30)
------ --------- ---------- ---------- --------- -------
Total loans...................................... $7,455 $ 174 $768 $4,479 $ 5,765 $18,641
------ --------- ---------- ---------- --------- -------
------ --------- ---------- ---------- --------- -------
</TABLE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of loans can be substantially less
than their contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Savings Bank the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The
average life of mortgage loans tends to increase when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when current mortgage loan market rates are substantially
lower than rates on existing mortgage loans.
ORIGINATION OF LOANS. The Savings Bank generally has authority to originate
loans secured by real estate located throughout the United States. Consistent
with its emphasis on being a community-oriented financial institution, the
Savings Bank concentrates its lending activities in its market area. The
following table sets forth certain information with respect to the Savings
Bank's loan origination activity for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- ----------------
1997 1996 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
LOANS ORIGINATED:
One to four family residential............................... $2,303 $3,681 $4,726 $3,104
Other loans.................................................. 1,016 1,175 1,277 728
------ ------ ------ ------
Total loans originated.................................... $3,319 $4,856 $6,003 $3,832
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The Savings Bank's loan originations are derived from a number of sources,
including referrals from depositors and borrowers, repeat customers,
advertising, and calling officers as well as walk-in customers. The Savings
Bank's solicitation programs consist of advertisements in local media, in
addition to participation in various community organizations and events. Real
estate loans are originated by the Savings Bank's loan personnel. All of the
Savings Bank's loan personnel are salaried and the Savings Bank generally does
not compensate loan personnel on a commission basis for loans originated. Loan
applications generally are accepted at the Savings Bank's offices.
LOAN UNDERWRITING POLICIES. The Savings Bank's lending activities are
subject to written, non-discriminatory underwriting standards and to loan
origination procedures prescribed by the Board of Directors. Detailed loan
applications are obtained to determine the borrower's ability to repay, and the
more significant items on these applications are verified through the use of
credit reports, financial statements, and confirmations. All mortgage loans are
presented weekly to a loan committee of the Board of Directors. Individual
officers of the Savings Bank have been granted authority by the Board of
Directors to approve loans up to varying specified dollar amounts, depending
upon the type of loan. These authorities are based on aggregate borrowings of an
individual or entity. On a monthly basis, the full Board of Directors reviews
the actions taken by the loan committee.
Applications for single-family real estate loans are underwritten and
closed in accordance with the standards of the Federal Home Loan Mortgage
Corporation ("FHLMC"). Generally, upon receipt of a loan application from a
prospective
36
<PAGE>
borrower, a credit report and verifications are ordered to verify specific
information relating to the loan applicant's employment, income, and credit
standing. If a proposed loan is to be secured by a mortgage on real estate, an
appraisal of the real estate is usually undertaken either by an appraiser
approved by the Savings Bank and licensed by the State of North Carolina or by
qualified Savings Bank personnel. In the case of single-family residential
mortgage loans, except when the Savings Bank becomes aware of a particular risk
of environmental contamination, the Savings Bank generally does not obtain a
formal environmental report on the real estate at the time a loan is made. A
formal environmental report may be required in connection with nonresidential
real estate loans.
It is the Savings Bank's policy to record a lien on the real estate
securing a loan. Borrowers must also obtain hazard insurance policies prior to
closing and, when the property is in a flood plain as designated by the United
States Department of Housing and Urban Development, pay flood insurance policy
premiums.
With respect to single-family residential mortgage loans, the Savings Bank
makes a loan commitment of between 30 and 60 days for each loan approved. If the
borrower desires a longer commitment, the commitment may be extended for good
cause and upon written approval. The interest rate is guaranteed for the
commitment period.
The Savings Bank is permitted to lend up to 80% of the lesser of the
appraised value or the purchase price of the real property securing a mortgage
loan. However, if the amount of a residential loan originated or refinanced
exceeds 80% of the appraised value, the Savings Bank's policy generally is to
obtain private mortgage insurance at the borrower's expense on that portion of
the principal amount of the loan that exceeds 80% of the appraised value of the
property. The Savings Bank will make a single-family residential mortgage loan
with up to a 95% loan-to-value ratio if the required private mortgage insurance
is obtained. The Savings Bank generally limits the loan-to-value ratio on
commercial real estate mortgage loans to 75%, although the loan-to-value ratio
on commercial real estate loans in limited circumstances has been as high as
80%. The Savings Bank limits the loan-to-value ratio on multi-family residential
real estate loans to 80%.
Interest rates charged by the Savings Bank on loans are affected
principally by competitive factors, the demand for such loans and the supply of
funds available for lending purposes. These factors are, in turn, affected by
general economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies, and government
budgetary matters.
SINGLE-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Savings Bank
historically has been and continues to be an originator of single-family,
residential real estate loans in its market area. At September 30, 1997,
single-family, residential mortgage loans, excluding home improvement loans,
totaled $11.3 million, or 59.94% of the Savings Bank's gross loan portfolio.
The Savings Bank originates fixed-rate mortgage loans at competitive
interest rates. At September 30, 1997, $11.3 million, or 59.94%, of the Savings
Bank's gross loan portfolio was comprised of fixed-rate mortgage loans.
The Savings Bank also offers adjustable-rate residential mortgage loans.
The adjustable-rate loans currently offered by the Savings Bank have interest
rates which adjust every one, three, or five years from the closing date of the
loan or on an annual basis commencing after an initial fixed-rate period of one,
three, or five years in accordance with a designated index (the primary index
utilized by the Savings Bank is the weekly average yield on U.S. Treasury
securities adjusted to a constant comparable maturity equal to the loan
adjustment period, as made available by the Federal Reserve Board (the "Treasury
Rate"), plus a stipulated margin. The Savings Bank offers adjustable-rate loans
that meet FHLMC standards, as well as loans that do not meet such standards. The
Savings Bank's adjustable-rate single-family residential real estate loans that
do not meet FHLMC standards have a cap of generally 2% on any increase in the
interest rate at any adjustment date, and include a cap on the maximum interest
rate over the life of the loan, which cap generally is 3% to 4.5% above the
initial rate. In return for providing a relatively low cap on interest rate
increases over the life of the loan, the Savings Bank's adjustable-rate loans
provide for a floor on the minimum interest rate over the life of the loan,
which floor generally is 0.125% below the initial rate. Further, the Savings
Bank generally offers discounted initial rates below the fully indexed rate on
such loans. The adjustable-rate mortgage loans offered by the Savings Bank that
do conform to FHLMC standards have a cap of 6% above the initial rate over the
life of a loan but do not include a floor, may be offered with a teaser rate and
have a 25 basis point lower margin above the index on which the interest rate is
based. All of the Savings Bank's adjustable-rate loans require that any payment
adjustment resulting from a change in the interest rate of an adjustable-rate
loan be sufficient to result in full amortization of the loan by the end of the
loan term and, thus, do not permit any of the increased payment to be added to
the principal amount of the loan, or so-called negative amortization. At
September 30, 1997, $5.2 million, or 31.42%, of the Savings Bank's single-family
residential mortgage loans were adjustable-rate loans.
37
<PAGE>
The retention of adjustable-rate loans in the Savings Bank's portfolio
helps reduce the Savings Bank's exposure to increases or decreases in prevailing
market interest rates. However, there are unquantifiable credit risks resulting
from potential increases in costs to borrowers in the event of upward repricing
of adjustable-rate loans. It is possible that during periods of rising interest
rates, the risk of default on adjustable-rate loans may increase due to
increases in interest costs to borrowers. Further, although adjustable-rate
loans allow the Savings Bank to increase the sensitivity of its interest-earning
assets to changes in interest rates, the extent of this interest sensitivity is
limited by the initial fixed-rate period before the first adjustment and the
lifetime interest rate adjustment limitations. Accordingly, there can be no
assurance that yields on the Savings Bank's adjustable-rate loans will fully
adjust to compensate for increases in the Savings Bank's cost of funds.
CONSTRUCTION LENDING. The Savings Bank also offers residential and
commercial construction loans, with a substantial portion of such loans
originated to date being for the construction of owner-occupied, single-family
dwellings in the Savings Bank's primary market area. Residential construction
loans are offered primarily to individuals building their primary or secondary
residence, as well as to selected local developers to build single-family
dwellings. Generally, loans to owner/occupants for the construction of
owner-occupied, single-family residential properties are originated in
connection with the permanent loan on the property and have a construction term
of six to 18 months. Such loans are offered on a fixed-rate or adjustable-rate
basis. Interest rates on residential construction loans made to the
owner/occupant have interest rates during the construction period of 1% above
the rate offered by the Savings Bank on the permanent loan product selected by
the borrower. Upon completion of construction, the permanent loan rate will be
set at the rate then offered by the Savings Bank on that permanent loan product,
except that if the permanent loan rate would be above the construction loan rate
then the borrower can maintain the same rate as on the construction loan.
Interest rates on residential construction loans to builders are generally set
at the prime rate plus a margin of one percent and adjust monthly. Interest
rates on commercial construction loans are based on the prime rate plus a
negotiated margin of between 0% and 1% and adjust annually, with construction
terms generally not exceeding 18 months. Advances are made on a percentage of
completed basis. At September 30, 1997, $285,000, or 1.52%, of the Savings
Bank's gross loan portfolio consisted of construction loans, virtually all of
which was secured by single-family residences.
Prior to making a commitment to fund a loan, the Savings Bank requires both
an appraisal of the property by appraisers approved by the Board of Directors
and a study of the feasibility of the proposed project. The Savings Bank also
reviews and inspects each project at the commencement of construction and either
weekly or biweekly during the term of the construction loan. The Savings Bank
generally charges a one percent construction fee and no commitment fee on
construction loans.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate and the
borrower is unable to meet the Savings Bank's requirements of putting up
additional funds to cover extra costs or change orders, then the Savings Bank
will demand that the loan be paid off and, if necessary, institute foreclosure
proceedings, or refinance the loan. If the estimate of value proves to be
inaccurate, the Savings Bank may be confronted, at or prior to the maturity of
the loan, with collateral having a value which is insufficient to assure full
repayment. The Savings Bank has sought to minimize this risk by limiting
construction lending to qualified borrowers (i.e., borrowers who satisfy all
credit requirements and whose loans satisfy all other underwriting standards
which would apply to the Savings Bank's permanent mortgage loan financing for
the subject property) in the Savings Bank's market area. On loans to builders,
the Savings Bank works only with selected builders with whom it has experience
and carefully monitors the creditworthiness of the builders.
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. The Savings
Bank originates commercial real estate loans, as well as a limited amount of
multi-family residential real estate loans, generally limiting such originations
to loans secured by properties in its primary market area and to borrowers with
whom it has other loan relationships. The Savings Bank's multi-family
residential loan portfolio consists primarily of loans secured by small
apartment buildings, and the commercial real estate loan portfolio includes
loans to finance the acquisition of small office buildings and commercial and
industrial buildings. Such loans generally range in size from $100,000 to
$500,000. At September 30, 1997, the Savings Bank's multi-family residential and
commercial real estate loans totaled $205,000 and $270,000, respectively, which
amounted to 1.09% and 1.44%, respectively, of the Savings Bank's gross loan
portfolio. Multi-family and commercial real estate loans are originated either
for 15 year terms with interest rates that adjust every one, three, or five
years based on either the prime rate as quoted in THE WALL STREET JOURNAL plus a
negotiated margin of up to one percent for shorter term loans or, for longer
term loans, the Treasury Rate plus a negotiated margin of between three and four
and one-half percent, or on a fixed-rate basis with interest calculated on a
15-year amortization schedule.
38
<PAGE>
Multi-family residential and commercial real estate lending entails
significant additional risks as compared with single-family residential property
lending. Multi-family residential and commercial real estate loans typically
involve larger loan balances to single borrowers or groups of related borrowers.
The payment experience on such loans typically is dependent on the successful
operation of the real estate project, retail establishment or business. These
risks can be significantly affected by supply and demand conditions in the
market for office, retail and residential space, and, as such, may be subject to
a greater extent to adverse conditions in the economy generally. To minimize
these risks, the Savings Bank generally limits itself to its market area or to
borrowers with which it has prior experience or who are otherwise known to the
Savings Bank. It has been the Savings Bank's policy to obtain annual financial
statements of the business of the borrower or the project for which commercial
or multi-family residential real estate loans are made. In addition, in the case
of commercial mortgage loans made to a partnership or a corporation, the Savings
Bank seeks, whenever possible, to obtain personal guarantees and annual
financial statements of the principals of the partnership or corporation.
HOME EQUITY LINE OF CREDIT AND HOME IMPROVEMENT LOANS. At September 30,
1997, the Savings Bank had approximately $1.2 million in home equity line of
credit loans, representing approximately 6.35% of its gross loan portfolio. The
Savings Bank's home equity lines of credit have adjustable interest rates tied
to the prime interest rate plus a margin. The home equity lines of credit
require monthly payments until the loan is paid in full. Home equity lines of
credit are generally secured by subordinate liens against residential real
property. The Savings Bank requires that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least sufficient to cover its loan. Home equity loans are generally limited so
that the amount of such loans, along with any senior indebtedness, does not
exceed 80% of the value of the real estate security. The Savings Bank also
originates home improvement loans, which are secured by subordinate liens
against the residence being improved. Home improvement loans may carry fixed or
adjustable interest rates and are subject to repayment terms, insurance
requirements, and loan-to-value limitations similar to those applicable to home
equity lines of credit. At September 30, 1997, the Savings Bank had
approximately $358,000 of home improvement loans, representing 1.90% of its
gross loan portfolio.
OTHER LENDING ACTIVITIES. The consumer loans originated by the Savings Bank
include automobile loans, savings account loans, and miscellaneous other
consumer loans, including unsecured loans. At September 30, 1997, the Savings
Bank's consumer loans totaled $58,000, or 0.31% of the Savings Bank's gross loan
portfolio and consisted entirely of savings account loans.
The Savings Bank's automobile loans are generally underwritten in amounts
up to 75% of the lesser of the purchase price of the automobile or, with respect
to used automobiles, the loan value as published by the National Automobile
Dealers Association. The terms of most such loans do not exceed 48 months. The
Savings Bank requires that the vehicles be insured and the Savings Bank be
listed as loss payee on the insurance policy.
The Savings Bank makes savings account loans for up to 90% of the
depositor's savings account balance. The interest rate is normally two percent
above the annual percentage yield paid on the savings account, and the account
must be pledged as collateral to secure the loan. Interest generally is billed
on a quarterly basis.
Consumer lending affords the Savings Bank the opportunity to earn yields
higher than those obtainable on single-family residential lending. However,
consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of loans which are unsecured or secured by rapidly
depreciable assets such as automobiles. Repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan balance as a result of the greater likelihood of damage, loss, or
depreciation. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer and
credit card loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by events
such as job loss, divorce, illness, or personal bankruptcy. Further, the
application of various state and federal laws, including federal and state
bankruptcy and insolvency law, may limit the amount which may be recovered. In
underwriting consumer loans, the Savings Bank considers the borrower's credit
history, an analysis of the borrower's income and ability to repay the loan, and
the value of the collateral.
LOAN FEES AND SERVICING. The Savings Bank receives fees in connection with
late payments and for miscellaneous services related to its loans. The Savings
Bank also charges fees in connection with loan originations. These fees can
consist of origination, discount, construction and/or commitment fees, depending
on the type of loan. The Savings Bank generally does not service loans for
others.
NONPERFORMING LOANS AND OTHER PROBLEM ASSETS. It is management's policy to
continually monitor its loan portfolio to anticipate and address potential and
actual delinquencies. When a borrower fails to make a payment on a loan, the
Savings
39
<PAGE>
Bank takes immediate steps to have the delinquency cured and the loan restored
to current status. Loans which are delinquent more than 15 days incur a late fee
of four percent of the monthly payment of principal and interest due. As a
matter of policy, the Savings Bank will contact the borrower after the loan has
been delinquent 30 days. If payment is not promptly received, the borrower is
contacted again, and efforts are made to formulate an affirmative plan to cure
the delinquency. Generally, after any loan is delinquent 60 days or more, a
default letter is sent to the borrower. If the default is not cured after 90
days, formal legal proceedings are commenced to collect amounts owed.
Loans generally are placed on nonaccrual status, and accrued but unpaid
interest is reversed, when, in management's judgment, it is determined that the
collectibility of interest, but not necessarily principal, is doubtful.
Management is authorized to commence foreclosure proceedings for any loan upon
making a determination that it is prudent to do so. Loans are charged off when
management concludes that they are uncollectible.
Real estate acquired by the Savings Bank as a result of foreclosure is
classified as real estate acquired through foreclosure until such time as it is
sold and is recorded at the lower of the estimated fair value of the underlying
real estate or the carrying amount of the loan. Costs relating to holding or
improving such real estate are charged against income in the current period. Any
required write-down of the loan to its fair value less estimated selling costs
upon foreclosure is charged against the allowance for loan losses. At September
30, 1997, the Savings Bank held no real estate acquired as a result of
foreclosures.
The following table sets forth information with respect to the Savings
Bank's nonperforming assets at the dates indicated. At the dates shown, the
Savings Bank had no restructured loans within the meaning of Statement of
Financial Accounting Standards No. 15.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------
1997 1996 1995
---------------- ----- -------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Loans not accruing interest.............................................................. $ -- $ -- $ --
Accruing loans 90 days or more past due.................................................. 47 5 --
------ ----- -------
Total nonperforming loans........................................................... 47 5 --
Foreclosed real estate................................................................... -- -- --
------ ----- -------
Total nonperforming assets.......................................................... $ 47 $ 5 --
------ ----- -------
------ ----- -------
Nonperforming assets to total assets..................................................... 0.19% 0.02% --
------ ----- -------
------ ----- -------
</TABLE>
At September 30, 1997, an analysis of the Savings Bank's portfolio did not
reveal any impaired loans that needed to be classified under SFAS No. 114 or
118.
CLASSIFIED ASSETS. Federal regulations require that the Savings Bank
classify its assets on a regular basis. In addition, in connection with
examinations of insured institutions, examiners have authority to identify
problem assets and if appropriate, classify them in their reports of
examination. There are three classifications for problem assets: "substandard,"
"doubtful," and "loss." Substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets
have the weaknesses of substandard assets with the additional characteristic
that the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, questionable, and there is a
high possibility of loss. Loss assets are considered uncollectible and of such
little value that continuance as an asset of the institution is not warranted.
Assets classified as substandard or doubtful require a savings institution to
establish general allowances for loan losses. If an asset or portion thereof is
classified loss, a savings institution must either establish a specific
allowance for loss in the amount of the portion of the asset classified loss, or
charge off such amount. The Savings Bank regularly reviews its assets to
determine whether any assets require classification or re-classification. At
September 30, 1997, the Savings Bank had no classified assets.
ALLOWANCE FOR LOAN LOSSES. The Savings Bank's policy is to establish
reserves for estimated losses on delinquent loans when it determines that losses
are expected to be incurred on such loans. The allowance for losses on loans is
maintained at a level believed adequate by management to absorb potential losses
in the portfolio. Management's determination of the adequacy of the allowance is
based on an evaluation of the portfolio, past loss experience, current economic
conditions, volume, growth and composition of the portfolio, and other relevant
factors. The allowance is increased by provisions for loan losses which are
charged against income.
40
<PAGE>
Although management believes it uses the best information available to make
determinations with respect to the allowances for losses and believes such
allowances are adequate, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations. Management anticipates that the
Savings Bank's provisions for loan losses will increase in the future as it
implements the Board of Directors' strategy of continuing existing lines of
business while gradually expanding commercial business and consumer lending,
which loans generally entail greater risks than single-family residential
mortgage loans.
Banking regulatory agencies, including the FDIC, have adopted a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. This policy includes an arithmetic
formula for checking the reasonableness of an institution's allowance for loan
loss estimate compared to the average loss experience of the industry as a
whole. Examiners will review an institution's allowance for loan losses and
compare it against the sum of: (i) 50% of the portfolio that is classified
doubtful; (ii) 15% of the portfolio that is classified as substandard; and (iii)
for the portions of the portfolio that have not been classified (including those
loans designated as special mention), estimated credit losses over the upcoming
12 months given the facts and circumstances as of the evaluation date. This
amount is considered neither a "floor" nor a "safe harbor" of the level of
allowance for loan losses an institution should maintain, but examiners will
view a shortfall relative to the amount as an indication that they should review
management's policy on allocating these allowances to determine whether it is
reasonable based on all relevant factors.
The following table sets forth an analysis of the Savings Bank's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR
NINE MONTHS ENDED
ENDED DECEMBER
SEPTEMBER 30, 31,
--------------- ------
1997 1996 1996
---- ------ ------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance at beginning of period................................................................ $ 8 $ 2 $ 2
---- ------ ------
Loans charged off........................................................................... -- -- --
Recoveries.................................................................................. -- -- --
---- ------ ------
Net loans charged off.................................................................... -- -- --
---- ------ ------
Provision for loan losses................................................................... 22 4 6
---- ------ ------
Balance at end of period...................................................................... $30 $ 6 $ 8
---- ------ ------
---- ------ ------
Ratio of net charge-offs to average loans outstanding during the period....................... -- % -- % -- %
---- ------ ------
---- ------ ------
<CAPTION>
1995
------
<S> <C>
Balance at beginning of period................................................................ $ 2
------
Loans charged off........................................................................... --
Recoveries.................................................................................. --
------
Net loans charged off.................................................................... --
------
Provision for loan losses................................................................... --
------
Balance at end of period...................................................................... $ 2
------
------
Ratio of net charge-offs to average loans outstanding during the period....................... -- %
------
------
</TABLE>
41
<PAGE>
The following table allocates the allowance for loan losses by loan
category at the dates indicated. The allocation of the allowance to each
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
---------------------------------- ------------------------------------------------------------
1997 1996 1995
---------------------------------- ---------------------------------- ----------------------
PERCENT PERCENT PERCENT
OF PERCENT OF PERCENT OF
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE
AMOUNT OF TO TOTAL TO GROSS AMOUNT OF TO TOTAL TO GROSS AMOUNT OF TO TOTAL
ALLOWANCE ALLOWANCE LOANS ALLOWANCE ALLOWANCE LOANS ALLOWANCE ALLOWANCE
--------- --------- -------- --------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
REAL ESTATE LOANS:
One-to-four family
residential........ $12 40.00% 87.40% $ 7 87.50% 88.94% $ 2 100.00%
Multi-family
residential........ 2 6.67% 1.09% -- -- 1.18% -- --
Commercial........... 2 6.67% 1.44% -- -- 1.31% -- --
Construction......... 2 6.67% 1.51% -- -- 0.65% -- --
Home equity lines of
credit............. 10 33.33% 6.35% 1 12.50% 6.21% -- --
Home improvement
loans.............. 2 6.67% 1.90% -- -- 1.40% -- --
--- --------- -------- --- --------- -------- --- ---------
Total real estate
loans............ 30 100.00% 99.69% 8 100.00% 99.69% 2 100.00%
OTHER LOANS:
Loans secured by
deposits........... -- -- 0.31% -- -- 0.31% -- --
--- --------- -------- --- --------- -------- --- ---------
Total allowance for
loan losses...... $30 100.00% 100.00% $ 8 100.00% 100.00% $ 2 100.00%
--- --------- -------- --- --------- -------- --- ---------
--- --------- -------- --- --------- -------- --- ---------
<CAPTION>
PERCENT
OF LOANS
TO GROSS
LOANS
--------
<S> <C>
REAL ESTATE LOANS:
One-to-four family
residential........ 88.56%
Multi-family
residential........ 1.44%
Commercial........... 1.60%
Construction......... 0.66%
Home equity lines of
credit............. 5.69%
Home improvement
loans.............. 1.32%
--------
Total real estate
loans............ 99.27%
OTHER LOANS:
Loans secured by
deposits........... 0.73%
--------
Total allowance for
loan losses...... 100.00%
--------
--------
</TABLE>
INVESTMENT ACTIVITIES
GENERAL. Interest income from investment securities generally provides the
second largest source of income to the Savings Bank after interest on loans. The
Board of Directors has authorized investment in U.S. Government and agency
securities, state government obligations, municipal securities, obligations of
the FHLB, mortgage-backed securities issued by the Federal National Mortgage
Association ("FNMA") and FHLMC and any other securities authorized by the
Administrator as permissible investments. The Savings Bank's objective is to use
such investments to reduce interest rate risk, enhance yields on assets, and
provide liquidity.
Investment and aggregate investment limitations and credit quality
parameters of each class of investment are prescribed in the Savings Bank's
investment policy. The Savings Bank performs analyses on investment securities
on an ongoing basis to determine the impact on earnings and market value under
various interest rate and prepayment conditions. Securities purchases are
subject to the oversight of the Board of Directors and are reviewed on a monthly
basis. The executive officers of the Savings Bank have authority to make
specific investment decisions within the parameters determined by the Board of
Directors.
INVESTMENT SECURITIES. The Savings Bank's investment securities consist
primarily of securities issued by the U.S. Treasury and federal and state
government agency obligations. At September 30, 1997, the Savings Bank's entire
portfolio of investment securities was classified available for sale and
amounted to $2.6 million, including gross unrealized gains of $10,000. The
Savings Bank attempts to maintain a high degree of liquidity in its investment
securities portfolio by choosing those that are readily marketable. As of
September 30, 1997, the estimated weighted average life of the Savings Bank's
investment securities portfolio was approximately one year. In addition, at
September 30, 1997, the Savings Bank had $187,000 of FHLB stock, $26,000 of
interest-bearing balances in other banks, and $2.3 million of federal funds
sold.
42
<PAGE>
The following table sets forth the carrying value of the Savings Bank's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ----------------
1997 1996 1995
---------------- ------ ------
<S> <C> <C> <C>
(IN THOUSANDS)
Securities available for sale:
U.S. government and agency securities.................................................. $2,559 $2,148 $1,988
------- ------ ------
Securities held to maturity:
Mortgage-backed securities............................................................. -- -- 24
------- ------ ------
Total investment securities......................................................... 2,559 2,148 2,012
Interest-earning balances in other banks................................................. 26 33 32
Federal funds sold....................................................................... 2,325 675 100
Federal Home Loan Bank stock............................................................. 187 170 157
------- ------ ------
Total investments................................................................... $5,097 $3,026 $2,301
------- ------ ------
------- ------ ------
</TABLE>
The following table sets forth the scheduled maturities, carrying values,
amortized cost and average yields for the Savings Bank's investment securities
portfolio at September 30, 1997.
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
THROUGH FIVE YEARS THROUGH TEN YEARS
ONE YEAR OR LESS AFTER TEN YEARS TOTAL
------------------ ------------------ ------------------ ------------------ --------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE
-------- ------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency
securities....................... $ 801 5.39% $1,758 5.77% $ -- -- $ -- -- $2,559
Other:
Interest-earning balances in other
banks............................ 26 6.23% -- -- -- -- -- -- 26
Federal funds sold................. 2,325 5.88% -- -- -- -- -- -- 2,325
Federal Home Loan Bank stock....... -- -- -- -- -- -- 187 7.25% 187
-------- ------- -------- ------- --- ------- -------- ------- --------
$3,152 5.75% $1,758 5.77% $ -- -- $187 7.25% $5,097
-------- ------- -------- ------- --- ------- -------- ------- --------
-------- ------- -------- ------- --- ------- -------- ------- --------
<CAPTION>
AVERAGE
YIELD
-------
<S> <C>
Securities available for sale:
U.S. government and agency
securities....................... 5.65%
Other:
Interest-earning balances in other
banks............................ 6.23%
Federal funds sold................. 5.88%
Federal Home Loan Bank stock....... 7.25%
-------
5.81%
-------
-------
</TABLE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits are the primary source of the Savings Bank's funds for
lending, investment activities, and general operational purposes. In addition to
deposits, the Savings Bank derives funds from loan principal and interest
repayments, maturities of investment securities, and interest payments thereon.
Although loan repayments are a relatively stable source of funds, deposit
inflows and outflows are significantly influenced by general interest rates and
money market conditions. Borrowings from the FHLB of Atlanta may be used on a
short-term basis to compensate for reductions in the availability of funds, or
on a longer term basis for general operational purposes. The Converted Savings
Bank and the Commercial Bank will continue to have access to advances from the
FHLB of Atlanta.
DEPOSITS. The Savings Bank attracts deposits principally from within its
market area by offering a variety of deposit instruments, including, money
market accounts, passbook savings accounts, individual retirement accounts, and
certificates of deposit which range in maturity from seven days to three years.
Deposit terms vary according to the minimum balance required, the length of time
the funds must remain on deposit, and the interest rate. Maturities, terms,
service fees, and withdrawal penalties for its deposit accounts are established
by the Savings Bank on a periodic basis. The Savings Bank reviews its deposit
pricing on a weekly basis. In determining the characteristics of its deposit
accounts, the Savings Bank considers the rates offered by competing
institutions, lending and liquidity requirements, growth goals and federal
regulations. Management believes it prices its deposits comparably to rates
offered by its competitors. The Savings Bank does not accept brokered deposits.
The Savings Bank attempts to compete for deposits with other institutions
in its market area by offering competitively priced deposit instruments that are
tailored to the needs of its customers. Additionally, the Savings Bank seeks to
meet customers' needs by providing convenient customer service to the community,
efficient staff, and convenient hours of service. Substantially, all of the
Savings Bank's depositors are North Carolina residents.
43
<PAGE>
The following tables set forth the distribution of the Savings Bank's
deposit accounts at the dates indicated, the weighted average interest rates,
and the change in dollar amounts for each category of deposits presented.
<TABLE>
<CAPTION>
DECEMBER
SEPTEMBER 30, 1997 DECEMBER 31, 1996 31, 1995
--------------------------- --------------------------- -------
WEIGHTED INCREASE WEIGHTED INCREASE
AVERAGE % OF (DECREASE) AVERAGE % OF (DECREASE)
AMOUNT RATE TOTAL IN AMOUNT AMOUNT RATE TOTAL IN AMOUNT AMOUNT
------- -------- ------ ---------- ------- -------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Savings deposits:
Regular passbook................... $ 3,994 3.20% 20.27% $ (340) $ 4,334 3.05% 23.65% $ (1,045) $ 5,379
Money market....................... 4,504 5.37% 22.86% 1,838 2,666 5.58% 14.55% 2,666 0
------- --- ------ ---------- ------- --- ------ ---------- -------
Total demand deposits............ 8,498 4.35% 43.13% 1,498 7,000 4.01% 38.21% 1,621 5,379
------- --- ------ ---------- ------- --- ------ ---------- -------
Certificate accounts with original
maturities of (in thousands):
6 months or less................... 2,899 5.14% 14.71% (989) 3,888 5.32% 21.22% 465 3,423
Over 6 to 12 months................ 3,319 5.67% 16.85% 1,092 2,227 5.26% 12.15% 350 1,877
Over 12 months..................... 4,985 6.00% 25.30% (222) 5,207 6.26% 28.42% 40 5,167
------- --- ------ ---------- ------- --- ------ ---------- -------
Total certificates............... 11,203 5.68% 56.87% (119) 11,322 5.74% 61.79% 855 10,467
------- --- ------ ---------- ------- --- ------ ---------- -------
Total deposits................... $19,701 5.11% 100.00% $1,379 $18,322 5.08% 100.00% $ 2,476 $15,846
------- --- ------ ---------- ------- --- ------ ---------- -------
------- --- ------ ---------- ------- --- ------ ---------- -------
<CAPTION>
WEIGHTED
AVERAGE % OF
RATE TOTAL
-------- ------
<S> <C> <C>
Savings deposits:
Regular passbook................... 3.05% 33.95%
Money market....................... 0.00% 0.00%
--- ------
Total demand deposits............ 3.05% 33.95%
--- ------
Certificate accounts with original
maturities of (in thousands):
6 months or less................... 5.34% 21.60%
Over 6 to 12 months................ 5.56% 11.85%
Over 12 months..................... 5.99% 32.61%
--- ------
Total certificates............... 5.70% 66.05%
--- ------
Total deposits................... 4.80% 100.00%
--- ------
--- ------
</TABLE>
The following table sets forth the time deposits in the Bank classified by
rates at the dates indicated.
<TABLE>
<CAPTION>
MORE THAN MORE THAN
1 YEAR 1 YEAR TO 3 YEARS TO MORE THAN
OR LESS 3 YEARS 5 YEARS 5 YEARS
----------------- ----------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMOUNT AVERAGE AMOUNT AVERAGE AMOUNT AVERAGE AMOUNT AVERAGE
------ -------- ------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Certificates of $100,000 or more............. $1,856 5.88% $1,025 6.12% $ -- -- $ -- --
Certificates of less than $100,000........... 4,361 5.37% 3,961 6.07% -- -- -- --
-- --
------ --- ------ --- ------- -------
Total.................................... $6,217 5.52% $4,986 6.08% $ -- -- $ -- --
-- --
-- --
------ --- ------ --- ------- -------
------ --- ------ --- ------- -------
<CAPTION>
TOTAL
------------------
WEIGHTED
AMOUNT AVERAGE
------- --------
<S> <C> <C>
Certificates of $100,000 or more............. $ 2,881 5.96%
Certificates of less than $100,000........... 8,322 5.70%
------- ---
Total.................................... $11,203 5.77%
------- ---
------- ---
</TABLE>
The following table indicates the amount of the Savings Bank's certificates
of deposit by interest rate and by time remaining until maturity as of September
30, 1997.
<TABLE>
<CAPTION>
MATURITY
----------------------------------------------------
OVER
OVER 6 TO
3 MONTHS 3 TO 6 12 OVER
OR LESS MONTHS MONTHS 12 MONTHS TOTAL
-------- ------ ------ --------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Certificates of $100,000 or more........................................ $ 721 $ 330 $1,354 $ 476 $ 2,881
Certificates of less than $100,000...................................... 2,248 2,335 1,876 1,863 8,322
-------- ------ ------ --------- -------
Total.............................................................. $2,969 $2,665 $3,230 $ 2,339 $11,203
-------- ------ ------ --------- -------
-------- ------ ------ --------- -------
</TABLE>
In the unlikely event the Savings Bank is liquidated after the Stock
Conversion, depositors will be entitled to full payment of their deposit
accounts prior to any payment being made to the sole shareholder of the
Converted Savings Bank or the Commercial Bank, which is the Company.
BORROWINGS. Savings deposits historically have been the primary source of
funds for the Savings Bank's lending, investments and general operating
activities. The Savings Bank is authorized, however, to use advances from the
FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. The FHLB of Atlanta functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member of the FHLB System, the Savings Bank is required to
own stock in the FHLB of Atlanta and is authorized to apply for advances.
Advances are pursuant to several different programs, each of which has its own
interest rate and range of maturities. The Savings Bank has a Blanket Agreement
for advances with the FHLB under which the Savings Bank may borrow up to 75% of
assets subject to normal collateral and underwriting requirements. Advances from
the FHLB of Atlanta are secured by the Savings Bank's stock in the FHLB of
Atlanta and other eligible assets. As of December 31, 1996 and 1995 and
September 30, 1997, the Savings Bank had no advances from the FHLB of Atlanta.
The Savings Bank will remain as a member of the FHLB system following the Bank
Conversion.
COMPETITION
The Savings Bank faces strong competition in originating real estate,
commercial, and consumer loans, and in attracting deposits. The Savings Bank
competes for real estate and other loans principally on the basis of interest
rates, the types of loans it originates, the deposit products it offers and the
quality of services it provides to borrowers. The Savings Bank also competes by
offering products which are tailored to the local community. Its competition in
originating real estate loans comes primarily from other savings institutions,
commercial banks, mortgage bankers, and mortgage brokers. Commercial
44
<PAGE>
banks, credit unions, and finance companies provide vigorous competition in
consumer lending. Competition may increase as a result of the continuing
reduction of restrictions on the interstate operations of financial
institutions.
The Savings Bank attracts its deposits through its branch offices primarily
from the local communities. Consequently, competition for deposits is
principally from other savings institutions, commercial banks, credit unions and
brokers in the Savings Bank's primary market area. The Savings Bank competes for
deposits and loans by offering what it believes to be a variety of deposit
accounts at competitive rates, convenient business hours, a commitment to
outstanding customer service and a well-trained staff. The Savings Bank believes
it has developed strong relationships with local realtors and the community in
general.
Management considers the Savings Bank's primary service area for gathering
deposits and originating loans to be the area within a seven-mile radius around
its office in Landis, which includes portions of Cabarrus, Iredell, and Rowan
Counties in North Carolina. Management estimates that 75% of the Savings Bank's
customers reside in its primary service area.
PROPERTIES
The following table sets forth certain information regarding the Savings
Bank's office as of September 30, 1997.
<TABLE>
<CAPTION>
ADDRESS YEAR ACQUIRED BOOK VALUE SQUARE FOOTAGE
- ------------------------ ------------- ---------- --------------
<S> <C> <C> <C>
107 South Central Avenue 1953 $261,000 5,000
Landis, North Carolina
</TABLE>
The Savings Bank has entered into a letter of intent to acquire a one-acre
outparcel of land in a new business park on which it intends to construct a
branch office. The letter of intent provides for a purchase price of $557,377
and the execution of a definitive purchase agreement on or before January 2,
1998. The purchase transaction is expected to close during the first quarter of
1998 and is not contingent upon completion of the Conversion.
EMPLOYEES
As of November 1, 1997, the Savings Bank had six full-time employees, none
of whom were represented by a collective bargaining agreement. Management
considers the Savings Bank's relationships with its employees to be good.
LEGAL PROCEEDINGS
From time to time, the Savings Bank is a party to various legal proceedings
incident to its business. At December 1, 1997, there were no legal proceedings
to which the Savings Bank was a party, or to which any of their property was
subject, which were expected by management to result in a material loss to the
Savings Bank. There are no pending regulatory proceedings to which the Company
or the Savings Bank is a party or to which any of their properties is subject
which are currently expected to result in a material loss.
45
<PAGE>
REGULATION
DEPOSITORY INSTITUTION REGULATION
GENERAL. The Savings Bank is a North Carolina-chartered savings bank and a
member of the FHLB of Atlanta and its deposits are insured by the FDIC through
the SAIF. As a North Carolina savings bank, the Savings Bank is subject to
regulation and supervision by the Administrator and the FDIC as to matters such
as capital standards, mergers, establishment of branch offices, subsidiary
investments and activities, and general investment authority. The Administrator
and the FDIC periodically examine the Savings Bank for compliance with various
regulatory requirements and for safe and sound operations. The FDIC also has the
authority to conduct special examinations of the Savings Bank because its
deposits are insured by the SAIF. The Savings Bank must file reports with the
Administrator describing its activities and financial condition and must obtain
the approval from the Administrator and the FDIC prior to entering into certain
transactions, such as mergers with, or acquisitions of, other depository
institutions.
Upon consummation of the Bank Conversion, the Commercial Bank will be a
North Carolina commercial bank and its deposit accounts will continue to be
insured by the SAIF. The Commercial Bank will be subject to supervision,
examination, and regulation by the Commissioner and the FDIC as to matters such
as capital standards, mergers, subsidiary investments and activities, and
establishment of branch offices, and it will remain subject to the FDIC's
authority to conduct special examinations. The Commercial Bank will be required
to file reports with the Commissioner and the FDIC concerning its activities and
financial condition and will be required to obtain regulatory approvals prior to
entering into certain transactions, including mergers with, or acquisitions of,
other depository institutions.
As a federally insured depository institution, the Savings Bank is, and the
Converted Savings Bank and the Commercial Bank will be, subject to various
regulations promulgated by the Federal Reserve Board, including Regulation B
(Equal Credit Opportunity), Regulation D (Reserve Requirements), Regulation E
(Electronic Fund Transfers), Regulation Z (Truth in Lending), Regulation CC
(Availability of Funds and Collection of Checks), and Regulation DD (Truth in
Savings).
The system of regulation and supervision applicable to the Savings Bank,
the Converted Savings Bank, and the Commercial Bank establishes a comprehensive
framework for their operations and is intended primarily for the protection of
the FDIC and depositors. Changes in the regulatory framework could have a
material effect on the Savings Bank, the Converted Savings Bank and the
Commercial Bank and their respective operations that in turn, could have a
material effect on the Company.
CAPITAL REQUIREMENTS. The Federal Reserve Board and the FDIC have
established guidelines with respect to the maintenance of appropriate levels of
capital by bank holding companies with consolidated assets of $150 million or
less and state non-member banks, respectively. The regulations impose two sets
of capital adequacy requirements: minimum leverage rules, which require bank
holding companies and state non-member banks to maintain a specified minimum
ratio of capital to total assets, and risk-based capital rules, which require
the maintenance of specified minimum ratios of capital to "risk-weighted"
assets. The regulations of the FDIC and the Federal Reserve Board require bank
holding companies and state non-member banks, respectively, to maintain a
minimum leverage ratio of "Tier 1 capital" to total assets of 3.0%. Tier 1
capital is the sum of common shareholders' equity, certain perpetual preferred
stock (which must be noncumulative with respect to banks), including any related
surplus, and minority interests in consolidated subsidiaries; minus all
intangible assets (other than certain purchased mortgage servicing rights and
purchased credit card receivables), identified losses, and investments in
certain subsidiaries. As a SAIF-insured, state-chartered bank, the Savings Bank
must also deduct from Tier 1 capital an amount equal to its investments in, and
extensions of credit to, subsidiaries engaged in activities that are not
permissible for national banks, other than debt and equity investments in
subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities or in subsidiary depository institutions or their
holding companies. Although setting a minimum 3.0% leverage ratio, the capital
regulations state that only the strongest bank holding companies and banks, with
composite examination ratings of 1 under the rating system used by the federal
bank regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. Any bank or bank holding companies experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve Board has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital to total assets in making an
overall assessment of capital.
46
<PAGE>
In addition to the leverage ratio, the regulations of the Federal Reserve
Board and the FDIC require bank holding companies and state-chartered nonmember
banks to maintain a minimum ratio of qualifying total capital to risk-weighted
assets of at least 8.0%, of which at least four percentage points must be Tier 1
capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or
supplementary capital items which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and
preferred stock with a maturity of 20 years or more, and certain other capital
instruments. The includible amount of Tier 2 capital cannot exceed the
institution's Tier 1 capital. Qualifying total capital is further reduced by the
amount of the institution's investments in banking and finance subsidiaries that
are not consolidated for regulatory capital purposes, reciprocal cross-holdings
of capital securities issued by other banks, and certain other deductions. The
risk-based capital regulations assign balance sheet assets and the credit
equivalent amounts of certain off-balance sheet items to one of four broad risk
weight categories. The aggregate dollar amount of each category is multiplied by
the risk weight assigned to that category based principally on the degree of
credit risk associated with the obligor. The sum of these weighted values equals
the bank holding company or the bank's risk-weighted assets.
The federal bank regulators, including the Federal Reserve Board and the
FDIC, have proposed to revise their risk-based capital requirements to ensure
that such requirements provide for explicit consideration of interest rate risk.
Under the proposed rule, a bank's interest rate risk exposure would be
quantified using either the measurement system set forth in the proposal or the
bank's internal model for measuring such exposure, if such model is determined
to be adequate by the bank's examiner. If the dollar amount of a bank's interest
rate risk exposure, as measured under either measurement system, exceeds 1% of
the bank's total assets, the bank would be required under the proposed rule to
hold additional capital equal to the dollar amount of the excess. Management of
the Savings Bank has not determined what effect, if any, the FDIC's proposed
interest rate risk component would have on the Savings Bank's capital if adopted
as proposed. The FDIC has adopted a regulation that provides that the FDIC may
take into account whether a bank has significant risks from concentrations of
credit or nontraditional activities in determining the adequacy of its capital.
The Savings Bank has not been advised that it will be required to maintain any
additional capital under this regulation. The proposed interest rate risk
component would not apply to bank holding companies on a consolidated basis.
In addition to FDIC regulatory capital requirements, the Administrator
requires that net worth equal at least 5% of total assets. Intangible assets
must be deducted from net worth and assets when computing compliance with this
requirement.
At September 30, 1997, the Savings Bank complied with each of the capital
requirements of the FDIC and the Administrator. For a description of the Savings
Bank's required and actual capital levels on September 30, 1997, see "Historical
and Pro Forma Regulatory Capital Compliance."
Following the Bank Conversion, the Commercial Bank will be subject to the
Commissioner's capital surplus regulation which requires commercial banks to
maintain a capital surplus of at least 50% of common capital. Common capital is
defined as the total of the par value of shares times the number of shares
outstanding.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. A
"significantly undercapitalized" institution may be subject to regulatory
demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior regulatory approval and the institution is prohibited
from making payments of principal or interest on its subordinated debt. If an
institution's ratio of tangible capital to total assets falls below a "critical
capital level," the institution will be subject to conservatorship or
receivership within 90 days unless periodic determinations are made that
forbearance from such action would better protect the deposit insurance fund.
Federal banking regulators have adopted regulations implementing the prompt
corrective action provisions of FDICIA. Under these regulations, the federal
banking regulators will generally measure a depository institution's capital
adequacy on the basis of the institution's total risk-based capital ratio (the
ratio of its total capital to risk-weighted assets), Tier 1 risk-
47
<PAGE>
based capital ratio (the ratio of its core capital to risk-weighted assets) and
leverage ratio (the ratio of its core capital to adjusted total assets).
Under the regulations, an institution that is not subject to an order or
written directive by its primary federal regulator to meet or maintain a
specific capital level will be deemed "well capitalized" if it also has: (i) a
total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
An "adequately capitalized" depository institution is an institution that does
not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 risk-based capital ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the depository institution has a composite 1 CAMEL rating). An "undercapitalized
institution" is a depository institution that has (i) a total risk-based capital
ratio less than 8.0%; or (ii) a Tier 1 risk- based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or less than 3.0% if the
institution has a composite 1 CAMEL rating). A "significantly undercapitalized"
institution is defined as a depository institution that has: (i) a total
risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%. A
"critically undercapitalized" institution is defined as a depository institution
that has a ratio of "tangible equity" to total assets of less than 2.0%.
Tangible equity is defined as core capital plus cumulative perpetual preferred
stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The
appropriate federal banking agency may reclassify a well capitalized depository
institution as adequately capitalized and may require an adequately capitalized
or undercapitalized institution to comply with the supervisory actions
applicable to institutions in the next lower capital category (but may not
reclassify a significantly undercapitalized institution as critically
under-capitalized) if it determines, after notice and an opportunity for a
hearing, that the institution is in an unsafe or unsound condition or that the
institution has received and not corrected a less-than-satisfactory rating for
any CAMEL rating category. At September 30, 1997, the Savings Bank was
classified as "well capitalized" under FDIC regulations, and management of the
Savings Bank believes that the Commercial Bank will, immediately after the
Conversion, also be classified as "well-capitalized."
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency was required to establish safety and soundness
standards for institutions under its authority. The interagency guidelines
require depository institutions to maintain internal controls and information
systems and internal audit systems that are appropriate for the size, nature and
scope of the institution's business. The guidelines also establish certain basic
standards for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The guidelines further provide that depository
institutions should maintain safeguards to prevent the payment of compensation,
fees and benefits that are excessive or that could lead to material financial
loss, and should take into account factors such as comparable compensation
practices at comparable institutions. If the appropriate federal banking agency
determines that a depository institution is not in compliance with the safety
and soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A depository institution must
submit an acceptable compliance plan to its primary federal regulator within 30
days of receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Savings Bank already substantially meets all the standards
adopted in the interagency guidelines, and therefore does not believe that
implementation of these regulatory standards will materially affect the
operations of the Savings Bank or the Commercial Bank.
COMMUNITY REINVESTMENT ACT. The Savings Bank, like other financial
institutions, is subject to the Community Reinvestment Act ("CRA"). The purpose
of the CRA is to encourage financial institutions to help meet the credit needs
of their entire communities, including the needs of low-and moderate-income
neighborhoods. During the Savings Bank's last compliance examination, the
Savings Bank received an "outstanding" rating with respect to CRA compliance.
The Savings Bank's rating with respect to CRA compliance would be a factor to be
considered by the Federal Reserve Board and the FDIC in considering applications
submitted by the Savings Bank to acquire branches or to acquire or combine with
other financial institutions and take other actions and, if such rating was less
than "satisfactory," could result in the denial of such applications.
The federal banking regulatory agencies have issued a revision of the CRA
regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs. Under the regulations, a bank will first be
evaluated and rated under three categories: a lending test, an investment test
and a service test. For each of these three tests, the savings bank will be
given a rating of either "outstanding," "high satisfactory," "low satisfactory,"
"needs to improve," or "substantial non-compliance." A set of criteria for each
rating has been developed and is included in the regulation. If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantitative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to its service area
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should be considered. The ratings received under the three tests will be used to
determine the overall composite CRA rating. The composite ratings will be the
same as those that are currently given: "outstanding," "satisfactory," "needs to
improve" or "substantial non-compliance."
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System consists of 12 district
FHLBs subject to supervision and regulation by the Federal Housing Finance Board
("FHFB"). The FHLBs provide a central credit facility primarily for member
institutions. As a member of the FHLB of Atlanta, the Savings Bank is required
to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount
at least equal to 1% of the aggregate unpaid principal of its home mortgage
loans, home purchase contracts, and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB of Atlanta, whichever
is greater. The Savings Bank was in compliance with this requirement with
investment in FHLB of Atlanta stock at September 30, 1997 of $187,000. The FHLB
of Atlanta serves as a reserve or central bank for its member institutions
within its assigned district. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It offers advances to
members in accordance with policies and procedures established by the FHFB and
the Board of Directors of the FHLB of Atlanta. Long-term advances may only be
made for the purpose of providing funds for residential housing finance. At
September 30, 1997, the Savings Bank had no long-term advances or short-term
advances outstanding from the FHLB of Atlanta. Upon completion of the Bank
Conversion, the Commercial Bank will continue to be a member of the FHLB of
Atlanta.
RESERVES. Pursuant to regulations of the Federal Reserve Board, the Savings
Bank must maintain average daily reserves against their transaction accounts. No
reserves are required to be maintained on the first $4.3 million of transaction
accounts, reserves equal to 3% must be maintained on the next $52.0 million of
transaction accounts, plus 10% on the remainder. This percentage is subject to
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a noninterest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of September 30, 1997,
the Savings Bank met its reserve requirements.
Upon consummation of the Bank Conversion, the Commercial Bank will be
subject to the reserve requirements of North Carolina commercial banks. North
Carolina law requires state non-member banks to maintain, at all times, a
reserve fund in an amount set by regulation of the Commission.
DEPOSIT INSURANCE. The Savings Bank is required to pay assessments based on
a percentage of its insured deposits to the FDIC for insurance of its deposits
by the SAIF. Under the FDIC's risk-based deposit insurance assessment system,
the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations. Based
on the data reported to regulators for the date closest to the last day of the
seventh month preceding the semi-annual assessment period, institutions are
assigned to one of three capital groups -- well capitalized, adequately
capitalized or undercapitalized -- using the same percentage criteria as in the
prompt corrective action regulations. See " -- Prompt Corrective Regulatory
Action." Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken. The assessment rate for SAIF members had ranged from 0.23% of
deposits for well capitalized institutions in Subgroup A to 0.31% of deposits
for undercapitalized institutions in Subgroup C while assessments for over 90%
of the BIF members had been the statutory minimum of $2,000. Recently enacted
legislation provided for a one-time assessment of 65.7 basis points of insured
deposits as of March 31, 1995, that fully capitalized the SAIF and had the
effect of reducing future SAIF assessments. Accordingly, although the special
assessment resulted in a one-time charge to the Savings Bank of approximately
$101,000 pre-tax, the recapitalization of the SAIF had the effect of reducing
the Savings Bank's and the Commercial Bank's future deposit insurance premiums
to the SAIF. Under the recently enacted legislation, both BIF and SAIF members
will be assessed an amount for the Financing Corporation Bond payments. BIF
members will be assessed approximately 1.3 basis points while the SAIF rate will
be approximately 6.4 basis points until January 1, 2000. At that time, BIF and
SAIF members will begin pro rata sharing of the payment at an expected rate of
2.43 basis points.
Although the Commercial Bank, as a North Carolina commercial bank, would
qualify for insurance of deposits by the BIF of the FDIC, substantial entrance
and exit fees apply to conversions from SAIF to BIF insurance. Accordingly,
following
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the Bank Conversion, the Commercial Bank will remain a member of the SAIF, which
will insure the deposits of the Commercial Bank to a maximum of $100,000 for
each depositor. Because the Converted Savings Bank (and the Commercial Bank)
will continue to be a SAIF member, its deposit insurance assessments will be
determined on the same basis as the deposit insurance assessments paid by the
Savings Bank.
LIQUIDITY REQUIREMENTS. FDIC policy requires that banks maintain an average
daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state, or federal agency
obligations) in an amount which it deems adequate to protect safety and
soundness of the bank. The FDIC currently has no specific level which it
requires. Under the FDIC's calculation method, management calculated the Savings
Bank's liquidity ratio as 20.7% of total assets at September 30, 1997, which
management believes is adequate.
The Savings Bank also is subject to the Administrator's requirement that
the ratio of liquid assets to total assets equal at least 10%. The computation
of liquidity under North Carolina regulations allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily ascertainable market value, including investments
with maturities in excess of five years. At September 30, 1997, the Savings
Bank's liquidity ratio was in excess of the North Carolina regulations.
DIVIDEND RESTRICTIONS. Under FDIC regulations, the Savings Bank is
prohibited from making any capital distributions if after making the
distribution, the Savings Bank would have: (i) a total risk-based capital ratio
of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or
(iii) a leverage ratio of less than 4.0%.
Earnings of the Savings Bank appropriated to bad debt reserves and deducted
for Federal income tax purposes are not available for payment of cash dividends
or other distributions to shareholders without payment of taxes at the then
current tax rate by the Savings Bank on the amount of earnings removed from the
pre-1988 reserves for such distributions. The Savings Bank intends to make full
use of this favorable tax treatment and does not contemplate use of any earnings
in a manner which would create federal tax liabilities.
The Savings Bank may not pay dividends on its capital stock if its
regulatory capital would thereby be reduced below the amount then required for
the liquidation account established for the benefit of certain depositors of the
Savings Bank at the time of the Stock Conversion.
The Company is subject to limitations on dividends imposed by the Federal
Reserve Board. See " -- Regulation of the Company Following the
Conversion -- Dividends."
LIMITS ON LOANS TO ONE BORROWER. The Savings Bank generally is subject to
both FDIC regulations and North Carolina law regarding loans to any one
borrower, including related entities. Under applicable law, with certain limited
exceptions, loans and extensions of credit by a savings institution to a person
outstanding at one time and not fully secured by collateral having a market
value at least equal to the amount of the loan or extension of credit shall not
exceed 15% of net worth. Loans and extensions of credit fully secured by readily
marketable collateral may comprise an additional 10% of net worth. Applicable
law additionally authorizes savings institutions to make loans to one borrower,
for any purpose: (i) in an amount not to exceed $500,000; (ii) in an amount not
to exceed the lesser of $30,000,000 or 30% of net worth to develop residential
housing, provided (a) the purchase price of each single-family dwelling in the
development does not exceed $500,000 and (b) the aggregate amount of loans made
under this authority does not exceed 150% of net worth; or (iii) loans to
finance the sale of real property in satisfaction of debts previously contracted
in good faith, not to exceed 50% of net worth. Under these limits, the Savings
Bank's loans to one borrower were limited to $658,000 at September 30, 1997. At
that date, the Savings Bank had no lending relationships in excess of the
loans-to-one-borrower limit. At September 30, 1997, the Savings Bank's largest
lending relationship was a $556,000 million relationship consisting of two
residential real estate loans. All loans within this relationship were current
and performing in accordance with their terms at September 30, 1997.
Following the Bank Conversion, the Commercial Bank will be subject to North
Carolina statutory law with respect to limits on loans to one borrower which are
substantially the same as those for the Savings Bank.
TRANSACTIONS WITH RELATED PARTIES. Transactions between a state non-member
bank and any affiliate are governed by Sections 23A and 23B of the Federal
Reserve Act. An affiliate of a state non-member bank is any company or entity
which controls, is controlled by or is under common control with the state
non-member bank. In a holding company context, the parent holding company of a
state non-member bank (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution or state non-member bank. Generally, Sections 23A and 23B (i) limit
the extent to which an institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and contain an aggregate limit on all
such transactions
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with all affiliates to an amount equal to 20% of such capital stock and surplus
and (ii) require that all such transactions be on terms substantially the same,
or at least as favorable, to the institution or subsidiary as those provided to
a non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no state non-member bank may (i) loan or otherwise extend credit to an
affiliate, except for any affiliate which engages only in activities which are
permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the state non-member bank.
State non-member banks also are subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve's Regulation O
thereunder on loans to executive officers, directors and principal shareholders.
Under Section 22(h), loans to a director, executive officer and to a greater
than 10% shareholder of a state non-member bank and certain affiliated interests
of such persons, may not exceed, together with all other outstanding loans to
such person and affiliated interests, the institution's loans-to-one-borrower
limit and all loans to such persons may not exceed the institution's unimpaired
capital and unimpaired surplus. Section 22(h) also prohibits loans, above
amounts prescribed by the appropriate federal banking agency, to directors,
executive officers and greater than 10% shareholders of a savings institution,
and their respective affiliates, unless such loan is approved in advance by a
majority of the board of directors of the institution with any "interested"
director not participating in the voting. Regulation O prescribes the loan
amount (which includes all other outstanding loans to such person) as to which
such prior board of director approval is required as being the greater of
$25,000 or 5% of capital and surplus (up to $500,000). Further, Section 22(h)
requires that loans to directors, executive officers and principal shareholders
be made on terms substantially the same as offered in comparable transactions to
other persons. Section 22(h) also generally prohibits a depository institution
from paying the overdrafts of any of its executive officers or directors.
State non-member banks also are subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers and the restrictions of 12 U.S.C. (S). 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, requires approval by the board of directors of a depository
institution for extension of credit to executive officers of the institution,
and imposes reporting requirements for and additional restrictions on the type,
amount and terms of credits to such officers. Section 1972 (i) prohibits a
depository institution from extending credit to or offering any other services,
or fixing or varying the consideration for such extension of credit or service,
on the condition that the customer obtain some additional service from the
institution or certain of its affiliates or not obtain services of a competitor
of the institution, subject to certain exceptions, and (ii) prohibits extensions
of credit to executive officers, directors, and greater than 10% shareholders of
a depository institution by any other institution which has a correspondent
banking relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
RESTRICTIONS ON CERTAIN ACTIVITIES. Under FDICIA, state-chartered banks
with deposits insured by the FDIC are generally prohibited from acquiring or
retaining any equity investment of a type or in an amount that is not
permissible for a national bank. The foregoing limitation, however, does not
prohibit FDIC-insured state banks from acquiring or retaining an equity
investment in a subsidiary in which the bank is a majority owner.
State-chartered banks are also prohibited from engaging as principal in any type
of activity that is not permissible for a national bank and subsidiaries of
state-chartered, FDIC-insured state banks may not engage as principal in any
type of activity that is not permissible for a subsidiary of a national bank
unless in either case the FDIC determines that the activity would pose no
significant risk to the appropriate deposit insurance fund and the bank is, and
continues to be, in compliance with applicable capital standards.
The FDIC has adopted regulations to clarify the foregoing restrictions on
activities of FDIC-insured state-chartered banks and their subsidiaries. Under
the regulations, the term activity refers to the authorized conduct of business
by an insured state bank and includes acquiring or retaining any investment
other than an equity investment. An activity permissible for a national bank
includes any activity expressly authorized for national banks by statute or
recognized as permissible in regulations, official circulars or bulletins or in
any order or written interpretation issued by the Office of the Comptroller of
the Currency ("OCC"). In its regulations, the FDIC indicates that it will not
permit state banks to directly engage in commercial ventures or directly or
indirectly engage in any insurance underwriting activity other than to the
extent such activities are permissible for a national bank or a national bank
subsidiary or except for certain other limited forms of insurance underwriting
permitted under the regulations. Under the regulations, the FDIC permits state
banks that meet applicable minimum
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capital requirements to engage as principal in certain activities that are not
permissible to national banks including guaranteeing obligations of others,
activities which the Federal Reserve Board has found by regulation or order to
be closely related to banking and certain securities activities conducted
through subsidiaries.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North
Carolina-chartered savings bank cannot invest more than 15% of its total assets
in business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
REGULATION OF THE COMPANY FOLLOWING THE BANK CONVERSION
GENERAL. Upon consummation of the Bank Conversion, the Company, as the sole
shareholder of the Savings Bank, will become a bank holding company and will
register as such with the Federal Reserve Board. Bank holding companies are
subject to comprehensive regulation by the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and the regulations of the
Federal Reserve Board. As a bank holding company, the Company will be required
to file with the Federal Reserve Board annual reports and such additional
information as the Federal Reserve Board may require, and will be subject to
regular examinations by the Federal Reserve Board. The Federal Reserve Board
also has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under the BHCA, a bank holding company must obtain Federal Reserve Board
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company. Satisfactory
financial condition, particularly with respect to capital adequacy, and a
satisfactory CRA rating generally are prerequisites to obtaining federal
regulatory approval to make acquisitions.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company has no present plans to engage in
any of these activities.
Under the BHCA, any company must obtain approval of the Federal Reserve
Board prior to acquiring control of the Company or the Savings Bank. For
purposes of the BHCA, "control" is defined as ownership of more than 25% of any
class of voting securities of the Company or the Savings Bank, the ability to
control the election of a majority of the directors, or the exercise of a
controlling influence over management or policies of the Company or the Savings
Bank. In addition, the Change in Bank Control Act and the related regulations of
the Federal Reserve Board require any person or persons acting in concert
(except for companies required to make application under the BHCA), to file a
written notice with the Federal Reserve Board before such person or persons may
acquire control of the Company or the Savings Bank. The Change in Bank Control
Act defines "control" as the power, directly or indirectly, to vote 25% or more
of any voting securities or to direct the management or policies of a bank
holding company or an insured bank.
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The Federal Reserve Board has adopted guidelines regarding the capital
adequacy of bank holding companies, which require bank holding companies to
maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See " -- Depository Institution Regulation -- Capital
Requirements."
INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Act") was enacted to ease restrictions on
interstate banking. Effective September 29, 1995, the Act allows the Federal
Reserve Board to approve an application of an adequately capitalized and
adequately managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Act also prohibits the Federal Reserve Board from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. The Act does not affect the
authority of states to limit the percentage of total insured deposits in the
state which may be held or controlled by a bank or bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, the Act authorizes the federal banking agencies to approve
interstate merger transactions without regard to whether such transaction is
prohibited by the law of any state, unless the home state of one of the banks
opts out of the Act by adopting a law after the date of enactment of the Act and
prior to June 1, 1997 that applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks. North
Carolina has enacted legislation permitting interstate banking transactions.
Interstate acquisitions of branches will be permitted only if the law of the
state in which the branch is located permits such acquisitions. Interstate
mergers and branch acquisitions will also be subject to the nationwide and
statewide insured deposit concentration amounts described above.
The Act authorizes the FDIC to approve interstate branching de novo by
state banks only in states which specifically allow for such branching. The
Riegle-Neal Act also requires the appropriate federal banking agencies to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
These regulations must include guidelines to ensure that interstate branches
operated by an out-of-state bank in a host state are reasonably helping to meet
the credit needs of the communities which they serve.
DIVIDENDS. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve Board's view that a bank holding company should pay cash dividends only
to the extent that the company's net income for the past year is sufficient to
cover both the cash dividends and a rate of earning retention that is consistent
with the company's capital needs, asset quality and overall financial condition.
The Federal Reserve Board also indicated that it would be inappropriate for a
company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the prompt corrective action regulations adopted
by the Federal Reserve Board pursuant to FDICIA, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized". See
" -- Depository Institution Regulation -- Prompt Corrective Regulatory Action."
Bank holding companies are required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the their
consolidated retained earnings. The Federal Reserve Board may disapprove such a
purchase or redemption if it determines that the proposal would constitute an
unsafe or unsound practice or would violate any law, regulation, Federal Reserve
Board order, or any condition imposed by, or written agreement with, the Federal
Reserve Board.
FEDERAL SECURITIES LAW
The Company has filed with the SEC a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of the Common Stock to be issued in the Stock Conversion. Upon completion of the
Stock Conversion, the Common Stock will be registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
will then be subject to the information, proxy solicitation, insider trading
restrictions, and other requirements of the Exchange Act.
The registration under the Securities Act of the Common Stock does not
cover the resale of such shares. Shares of the Common Stock purchased by persons
who are not affiliates of the Company may be resold without registration. Shares
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purchased by an affiliate of the Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Company meets the
current public information requirements of Rule 144 under the Securities Act,
each affiliate of the Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) one percent of the outstanding shares of the Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks. Provision may be made in the future by the Company to permit
affiliates to have their shares registered for sale under the Securities Act
under certain circumstances. There are currently no demand registration rights
outstanding. However, in the event the Company at some future time determines to
issue additional shares from its authorized but unissued shares, the Company
might offer registration rights to certain of its affiliates who want to sell
their shares.
TAXATION
GENERAL
The Savings Bank files a federal income tax return based on a fiscal year
ending December 31.
FEDERAL INCOME TAXATION
Savings institutions such as the Savings Bank are subject to the provisions
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"),
in the same general manner as other corporations. Through tax years beginning
before December 31, 1995, institutions such as the Savings Bank which met
certain definitional tests and other conditions prescribed by the Internal
Revenue Code benefited from certain favorable provisions regarding their
deductions from taxable income for annual additions to their bad debt reserve.
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans," which generally are loans secured by interests
in certain real property, and "nonqualifying loans", which are all other loans.
The bad debt reserve deduction with respect to nonqualifying loans must be based
on actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method"). Under the experience method, the bad debt deduction for an addition to
the reserve for qualifying real property loans was an amount determined under a
formula based generally on the bad debts actually sustained by a savings
institution over a period of years. Under the percentage of taxable income
method, the bad debt reserve deduction for qualifying real property loans was
computed as 8% of a savings institution's taxable income, with certain
adjustments. The Savings Bank generally elected to use the method which has
resulted in the greatest deductions for federal income tax purposes in any given
year.
Legislation that is effective for tax years beginning after December 31,
1995 requires institutions to recapture into taxable income over a six taxable
year period the portion of the tax loan reserve that exceeds the pre-1988 tax
loan loss reserve. The Savings Bank will no longer be allowed to use the reserve
method for tax loan loss provisions, but would be allowed to use the experience
method of accounting for bad debts. There will be no future effect on net income
from the recapture because the taxes on these bad debts reserves has already
been accrued as a deferred tax liability.
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of New Accounting
Standards" and the financial statements and related notes appearing elsewhere
herein.
STATE INCOME TAXATION
Under North Carolina law, the corporate income tax currently is 7.50% of
federal taxable income as computed under the Internal Revenue Code, subject to
certain prescribed adjustments. This rate will be reduced to 7.25% for 1998,
7.00% for 1999, and 6.9% for 2000 and thereafter. An annual state franchise tax
is imposed at a rate of 0.15% applied to the greatest of the institutions (i)
capital stock, surplus and undivided profits, (ii) investment in tangible
property in North Carolina or (iii) appraised valuation of property in North
Carolina.
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MANAGEMENT OF THE COMPANY
The directors and officers of the Company are the same individuals who
serve as directors and officers of the Savings Bank. Their biographical
information is set forth under "Management of the Savings Bank -- Directors and
Officers." The six current directors of the Company will serve for one year
terms or until their successors are elected and qualified, beginning with the
first annual meeting of shareholders following the Stock Conversion. Three year
staggered terms will automatically be implemented, if at any point in time, the
number of directors is increased to nine or more. Under the Company's Bylaws, no
person over 70 years of age shall be eligible for election or appointment to the
Board of Directors, and no director may serve after the annual meeting of
shareholders immediately following reaching 70 years of age. The Company's six
initial directors are not subject to this age limitation.
Among other committees, the Board of Directors of the Company will have
standing audit, compensation, and nominating committees. The Audit Committee
will consist of Messrs. Corriher, Land, and Drye. The function of this committee
will be to examine and approve the audit report prepared by the independent
auditors of the Company, to review and recommend the independent auditors to be
engaged by the Company, to review the internal audit function and internal
accounting controls of the Company and the Commercial Bank, and to review and
approve audit policies. The Compensation, Pension, and Benefits Committee will
consist of Messrs. Corriher, Land, and Drye and Lynne Scott Safrit. This
Committee will make recommendations to the Board of Directors regarding salaries
and incentive compensation for executive officers and other employees of the
Company and the Commercial Bank and administer the Company's stock plans. The
Nominating Committee will consist of Messrs. Corriher and Land and Susan Linn
Norvell. This committee will consider candidates for the Board of Directors.
The officers of the Company will be elected annually and hold office until
their respective successors have been elected and qualified or until death,
resignation, or removal by the Board of Directors.
Since the formation of the Company, none of the officers, directors, or
other personnel have received remuneration from the Company. Information
concerning the principal occupations and employment of the directors and
officers of the Company during the past five years is set forth under
"Management of the Savings Bank -- Directors and Officers." Officers and
directors of the Company will be compensated as described below under
"Management of the Savings Bank -- Executive Compensation."
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MANAGEMENT OF THE SAVINGS BANK
DIRECTORS AND OFFICERS
Because the Savings Bank is a mutual savings bank, its members elect its
Board of Directors. Upon completion of the Stock Conversion, the directors of
the Savings Bank immediately prior to the Stock Conversion will continue to
serve as directors of the Converted Savings Bank and then the Commercial Bank.
Currently, the term of each director is one year, and all of the members of the
Board of Directors stand for election each year. This will continue to be the
case for the Commercial Bank following the Bank Conversion. Because the Company
will own all the issued and outstanding capital stock of the Commercial Bank
following the Conversion, the Board of Directors of the Company will elect the
directors of the Commercial Bank. The Board of Directors of the Savings Bank has
standing loan, rules, compensation, audit, nominating, CRA, and
asset/liabilities committees. Subsequent to the Conversion, the audit,
nominating, and compensation committees will be dissolved and equivalent
committees will be formed by the Board of Directors of the Company.
The following table sets forth certain information with respect to the
individuals who serve currently as directors and officers of the Savings Bank.
There are no arrangements or understandings between the Savings Bank and any
director pursuant to which such person has been elected a director of the
Savings Bank, and no director is related to any other director or officer by
blood, marriage, or adoption. Other than Mr. Talbert, no director who also
serves as an officer of the Savings Bank receives compensation for such service.
<TABLE>
<CAPTION>
AGE AT
SEPTEMBER 30,
NAME 1997 POSITION
- ------------------- ------------- -------------------------------------------------
<S> <C> <C>
Stephen R. Talbert 52 President, Chief Executive Officer, and Director
Thomas P. Corriher 68 Chairman of the Board and Vice President
Henry H. Land 55 Secretary, Treasurer, and Director
John A. Drye 33 Director
Susan Linn Norvell 43 Director
Lynne Scott Safrit 39 Director
</TABLE>
Presented below is certain information concerning the directors of the
Savings Bank. Unless otherwise stated, all directors have held the positions
indicated for at least the past five years.
STEPHEN R. TALBERT has been employed by the Savings Bank since 1971 and has
served as Chief Executive Officer since 1988. Mr. Talbert has been a director of
the Savings Bank since 1986.
THOMAS P. CORRIHER is retired. Prior to this retirement in 1984, Mr.
Corriher served as Assistant Secretary for Cannon Mills Company.
HENRY H. LAND has been a partner in McClary, Stocks, Smith & Land, P.A., a
certified public accounting firm in Kannapolis, North Carolina since 1988.
JOHN A. DRYE has been Vice President of Clay Wright Insurance Agency, Inc.,
a property and casualty insurance agency in Landis, North Carolina since 1991.
SUSAN LINN NORVELL is currently a homemaker. She was employed as a legal
assistant for Edward P. Norvell, Attorney at Law from 1995 until 1997.
LYNNE SCOTT SAFRIT has served as President and a director of Castle &
Cooke, Inc. since October 1995 and President and Chief Executive Officer of
Atlantic American Properties, Inc., in Kannapolis, North Carolina since 1989.
These affiliated companies are involved in commercial property development and
the management of office, industrial, retail, multi-family, country club, and
residential properties.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the President and
Chief Executive Officer of the Savings Bank during the year ended December 31,
1996.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------ ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) COMPENSATION ($)
- --------------------------------------------------------------------- ------------ ----------------
<S> <C> <C>
Stephen R. Talbert
Chief Executive Officer............................................ 68,541 17,644(1)
</TABLE>
- ---------------
(1) Includes $9,600 of directors' and committee fees paid to Mr. Talbert during
1996 and $8,044 in contributions made by the Savings Bank to Mr. Talbert's
account under the Landis Savings Bank, SSB Profit Sharing Plan (the "Profit
Sharing Plan").
DIRECTOR COMPENSATION
Each member of the Board of Directors receives a fee of $300 for each
regular and special meeting attended and $100 for each committee meeting
attended. The Chairman receives an additional fee of $100 for each Board meeting
attended. Directors also are eligible to participate in a retirement plan. See
" -- Certain Benefit Plans and Agreements."
CERTAIN BENEFIT PLANS AND AGREEMENTS
GENERAL. In connection with the Stock Conversion, the Commercial Bank will
enter into a three-year employment agreement with Mr. Talbert. The Board of
Directors of the Company also will implement certain stock incentive plans in
connection with the Conversion. In addition, the Savings Bank has existing
defined contribution and directors' retirement plans which will remain in effect
after the Conversion.
PROFIT SHARING PLAN. The Savings Bank maintains the Profit Sharing Plan,
which is a defined contribution plan designed to qualify under Section 401(a) of
the Code. An employee is eligible to participate in the Profit Sharing Plan on
or after having attained age 21 and having worked one year from the date of hire
(or during a calendar year). The Savings Bank makes an annual contribution to
the Profit Sharing Plan in an amount determined each year by the Board of
Directors. Employees generally are 20% vested after three years of service, and
continue to vest at the rate of 20% per year in years four through seven.
Benefits are paid at the time of a participant's death, retirement, disability
or termination of employment and, under limited circumstances, may be withdrawn
prior to the participant's termination of service. Account balances are paid in
a lump sum distribution. Contributions are not taxable to participating
employees until such funds are distributed to them. The earnings attributable to
a participant's account accumulate tax free until they are distributed to the
participant or his or her beneficiary.
1998 STOCK OPTION PLANS. The Board of Directors of the Company intends to
submit two option plans for approval to shareholders at a meeting which is
expected to be held not earlier than six months following completion of the
Stock Conversion (hereinafter the "Option Plan" or "Option Plans"). No options
shall be awarded under the Option Plans unless shareholder approval is obtained.
The purpose of the Option Plans is to provide additional incentive to
directors and employees by facilitating their purchase of Common Stock. Each
Option Plan will have a term of 10 years from the date of its approval by the
Company's shareholders, after which no awards may be made. Pursuant to the
Option Plans, a number of shares equal to 10% of the shares of Common Stock that
are issued in the Stock Conversion would be reserved for future issuance by the
Company, in the form of newly issued shares upon exercise of stock options
("Options"). If Options should expire, become unexercisable or be forfeited for
any reason without having been exercised or having become vested in full, the
shares of Common Stock subject to such Options would be available for the grant
of additional Options under such Plan, unless the Option Plan shall have been
terminated.
It is expected that the Option Plans will be administered by a committee of
at least two directors of the Company who are non-employee directors within the
meaning of the federal securities laws or by the full Board of Directors (such
committee, or the full Board of Directors, as applicable, is hereinafter
referred to as the "Option Committee"). The Option Committee will select the
persons to whom Options are to be granted, the number of shares to be subject to
such Options, and the terms and conditions of such Options (provided that any
discretion exercised by the Option Committee must be consistent with the terms
of each Option Plan). Options will be available for grants to directors and key
employees of the Company and
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<PAGE>
any subsidiaries. No specific award determinations have been made. The initial
grant of Options under each Option Plan is expected to occur on the date the
Option Plans receive shareholder approval.
It is intended that Options granted under the Option Plan for officers and
employees will constitute incentive stock options (Options that afford favorable
tax treatment to recipients upon compliance with certain restrictions pursuant
to Section 422 of the Code and that do not result in tax deductions to the
Company unless participants fail to comply with Section 422 of the Code)
("ISOs"). The Option Plan in which directors are eligible to participate will
grant Options that do not so qualify ("Non-ISOs"). The exercise price for
Options may not be less than 100% of the fair market value of the shares on the
date of the grant. The Option Plans permit the Option Committee to impose
transfer restrictions, such as a right of first refusal, on the Common Stock
that optionees may purchase. Options may be transferred to family members or
trusts under specified circumstances, but may not otherwise be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution.
No Option under either Option Plan shall be exercisable after the
expiration of ten years from the date it is granted; provided, however, that in
the case of any employee who owns more than 10% of the outstanding Common Stock
at the time an ISO is granted, the option price for the ISO shall not be less
than 110% of the fair market value of the shares on the date of the grant, and
the ISO shall not be exercisable after the expiration of five years from the
date it is granted. If the Option Plans are implemented within one year after
completion of the Stock Conversion, Options are expected to become exercisable
at the rate of 20% per year, beginning one year from the date of grant. If an
optionee dies or terminates service due to disability while serving as an
employee or non-employee director, all unvested Options will become 100% vested
and immediately exercisable. If the Option Plans are implemented more than one
year after the completion of the Stock Conversion, (i) each Option is expected
to become exercisable at the rate of 20% per year, beginning one year from the
grant date, and (ii) the Options may also accelerate to 100% upon an optionee's
retirement or termination of service in connection with a change in control. An
otherwise unexpired Option shall, unless otherwise determined by the Option
Committee, cease to be exercisable upon (i) an employee's termination of
employment for "just cause" (as defined in each Option Plan), (ii) the date
three months after an employee terminates service for a reason other than just
cause, death, or disability, (iii) the date one year after an employee
terminates service due to disability, or (iv) the date two years after
termination of such service due to the employee's death. Options granted to
non-employee directors will automatically expire one year after termination of
service on the Board of Directors (two years in the event of death and
disability).
The Company will receive no monetary consideration for the granting of
Options under either Option Plan, and will receive no monetary consideration
other than the Option exercise price for each share issued to optionees upon the
exercise of Options. The Option exercise price may be paid in cash or Common
Stock or a combination of cash and Common Stock. Upon an optionee's exercise of
any Option, the Company intends to pay the optionee a cash amount equal to any
dividends declared on the underlying shares between the date of grant and the
date of exercise of the Option. The exercise of Options will be subject to such
terms and conditions established by the Option Committee as are set forth in a
written agreement between the Option Committee and the optionee (to be entered
into at the time an Option is granted). In the event that the fair market value
per share of the Common Stock falls below the option price of previously granted
Options, the Option Committee will have the authority, with the consent of the
optionee, to cancel outstanding Options and to reissue new Options at the then
current fair market price per share of the Common Stock.
EMPLOYEE STOCK OWNERSHIP PLAN. The Company's Board of Directors has adopted
an employee stock ownership plan ("ESOP"), effective as of January 1, 1998.
Directors who are not employees will not participate in the ESOP. The Company
will submit an application to the IRS for a letter of determination as to the
tax-qualified status of the ESOP. Although no assurances can be given, the
Company expects the ESOP to receive a favorable letter of determination from the
IRS.
The ESOP is to be funded by contributions made by the Company or the
Commercial Bank in cash or shares of Common Stock. The ESOP intends to borrow
funds from the Company in an amount sufficient to purchase eight percent of the
Common Stock issued in the Stock Conversion. This loan will be secured by the
shares of Common Stock purchased and earnings thereon. Shares purchased with
such loan proceeds will be held in a suspense account for allocation among
participants as the loan is repaid. The Commercial Bank is expected to
contribute sufficient funds to the ESOP to repay such loan over a ten-year
period, plus such other amounts as the Company's Board of Directors may
determine in its discretion.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of their annual wages subject
to federal income tax withholding, plus any amounts which are not includible in
the compensation of participants under Sections 125, 402(e)(3), 402(h)(i)(B),
403(b), or 457 of the Code, which includes salary deferrals to a cafeteria or
401(k) plan. Participants must be actively employed on the last day of the plan
year and be credited with at least 1,000 hours in a plan year in order to
receive an allocation. Each participant's vested interest under the ESOP is
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<PAGE>
determined according to the following schedule: 20% after three years and 20%
per year in years four through seven. For vesting purposes, a year of service
means any plan year in which an employee completes at least 1,000 hours of
service (whether before or after the ESOP's effective date). Vesting accelerates
to 100% upon a participant's attainment of retirement, death, or disability.
Forfeitures will be reallocated to participants on the same basis as other
contributions. Benefits are payable upon a participant's retirement, death,
disability or separation from service and will be paid in a lump sum or
installments in whole shares of Common Stock (with cash paid in lieu of
fractional shares). Benefits paid to a participant in Common Stock that is not
publicly traded on an established securities market will be subject both to a
right of first refusal by the Company and to a put option by the participant.
Cash dividends paid on allocated shares may be paid to participants or used to
repay the ESOP loan, and cash dividends on unallocated shares are expected to be
used to repay the ESOP loan.
It is expected that the Company will administer the ESOP and that directors
will be appointed as trustees of the ESOP (the "ESOP Trustees"). The ESOP
Trustees must vote all allocated shares held in the ESOP in accordance with the
instructions of the participants. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees in the
same proportion as the participant-directed voting of allocated shares.
MANAGEMENT RECOGNITION PLAN. The Company's Board of Directors intends to
submit the MRP for approval to shareholders at a meeting of the Company's
shareholders, which is expected to be held not earlier than six months following
completion of the Stock Conversion. The purpose of the MRP is to enable the
Company and the Savings Bank to retain personnel of experience and ability in
key positions of responsibility. Those eligible to receive benefits under the
MRP will be such directors and key employees as are selected by a committee of
the Company's Board of Directors (the "MRP Committee"). It is expected that the
MRP Committee will initially consist of the Company's full Board of Directors.
The Company's directors are expected to act by majority as trustees of the trust
associated with the MRP (the "MRP Trust"). The trustees of the MRP Trust (the
"MRP Trustees") will have the responsibility to hold and invest all funds
contributed to the MRP Trust. Shares held in the MRP Trust will be voted by the
MRP Trustees in the same proportion as the trustee of the Company's ESOP trust
votes Common Stock held therein, and will be distributed as the award vests.
At any time following consummation of the Stock Conversion, the Savings
Bank or the Company will contribute sufficient funds to the MRP Trust so that
the MRP Trust can purchase a number of shares of Common Stock equal to up to a
4% of the number of shares of Common Stock issued in the Stock Conversion.
Whether such shares purchased will be purchased in the open market or newly
issued by the Company, and the timing of such purchases, will depend on market
and other conditions and the alternative uses of capital available to the
Company. The compensation expense for the Company for MRP awards will equal the
fair market value of the Common Stock on the date of the grant, pro-rated over
the years during which vesting occurs. The shares awarded pursuant to the MRP
will be in the form of awards which may be transferred to family members or
trusts under specified circumstances, but may not otherwise be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution. If the MRP is implemented
within one year following completion of the Stock Conversion, the MRP awards
will be payable over a period specified by the Board of Directors, which shall
not be faster than 20% per year, beginning one year from the date of the award.
All shares subject to an MRP award held by a participant whose service with the
Company or the Savings Bank terminates due to death or disability, shall be
deemed 100% vested as of the participant's last day of service with the Savings
Bank or Company. Awards will also become 100% vested upon a participant's
retirement or termination of service with the Savings Bank or the Company in
connection with a change in control of the Savings Bank or the Company. If a
participant terminates employment for reasons other than death or disability (or
retirement or a change in control, if applicable), he or she forfeits all rights
to the allocated shares under restriction.
The Company's Board of Directors can terminate the MRP at any time, and, if
it does so, any shares not allocated will revert to the Company. No specific
award determinations have been made. The initial grant of awards under the MRP
is expected to occur on the date the MRP receives shareholder approval. No
awards shall be made prior to shareholder approval of the MRP.
DIRECTORS' RETIREMENT PLAN. The Savings Bank has implemented a Directors'
Retirement Plan to acknowledge and further encourage the continued service of
qualified individuals on the Board of Directors (the "DRP"). The DRP is unfunded
and consists of two tiers for benefit purposes. Directors who have attained the
age of 65 years on the date of adoption of the DRP (June 2, 1997) have
retirement benefits that vest over a five-year period. All other directors have
retirement benefits that vest over a 10-year period but only after having served
ten full years as a director. All directors are entitled to the benefit of
$12,000 per year for 10 years. Benefits become immediately vested upon death or
disability and are available, subject to vesting, upon attainment of age 65
while serving on the Board of Directors.
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<PAGE>
EMPLOYMENT AGREEMENT. The Commercial Bank will enter into an employment
agreement (the"Employment Agreement") under which Stephen R. Talbert will serve
as President and Chief Executive Officer of the Commercial Bank. In such
capacities, Mr. Talbert will be responsible for overseeing all operations of the
Commercial Bank, and for implementing the policies adopted by the Board of
Directors.
Subject to regulatory approvals, the Employment Agreement will become
effective on the date of completion of the Conversion and will provide for a
term of three years, with an annual base salary of $88,200. On each anniversary
date of the commencement of the Employment Agreement, the term of Mr. Talbert's
employment will be extended for an additional one-year period beyond the then
effective expiration date, upon a determination by the Board of Directors that
the performance of Mr. Talbert has met the required performance standards and
that such Employment Agreement should be extended. The Employment Agreement
provides Mr. Talbert with a salary review by the Board of Directors not less
often than annually, as well as with inclusion in any discretionary bonus plans,
retirement and medical plans, customary fringe benefits, vacation and sick
leave. The Employment Agreement will terminate upon Mr. Talbert's death, may
terminate upon Mr. Talbert's disability, and is terminable by the Commercial
Bank for "just cause" (as defined in the Employment Agreement). In the event of
termination for just cause, no severance benefits are available. If the
Commercial Bank terminates Mr. Talbert without just cause, Mr. Talbert will be
entitled to a continuation of his salary and benefits from the date of
termination through the remaining term of the Employment Agreement. If the
Employment Agreement is terminated due to Mr. Talbert's "disability" (as defined
in the Employment Agreement), Mr. Talbert will be entitled to a continuation of
his salary and benefits through the date of such termination, including any
period prior to the establishment of his disability. In the event of Mr.
Talbert's death during the term of the Employment Agreement, his estate will be
entitled to receive his salary through the last day of the calendar month in
which death occurred. Mr. Talbert is able to voluntarily terminate his
Employment Agreement by providing 90 days' written notice to the Board of
Directors of the Commercial Bank, in which case Mr. Talbert is entitled to
receive only his compensation, vested rights, and benefits up to the date of
termination.
In the event of (i) Mr. Talbert's involuntary termination of employment
other than for "just cause" within 24 months of a change in control or (ii) Mr.
Talbert's voluntary termination after the occurrence of certain specified events
occurring within 24 months of a change in control which have not been consented
to by Mr.Talbert, he will be paid within 10 days of such termination an amount
equal to the difference between (i) 2.99 times his "base amount," as defined in
Section 280G(b)(3) of the Code, and (ii) the sum of any other parachute
payments, as defined under Section 280G(b)(2) of the Code, that Mr. Talbert
receives on account of the change in control. "Change in control" generally
refers to the acquisition, by any person or entity, of the ownership or power to
vote more than 25% of the Commercial Bank's or Company's voting stock, the
control of the election of a majority of the Commercial Bank's or the Company's
directors, or the exercise of a controlling influence over the management or
policies of the Commercial Bank or the Company. In addition, under the
Employment Agreement, a change in control occurs when, during any consecutive
two-year period, directors of the Company or the Commercial Bank at the
beginning of such period cease to constitute a majority of the Board of
Directors of the Company or the Commercial Bank, unless the election of
replacement directors was approved by a majority vote of the initial directors
then in office. These provisions may have an anti-takeover effect by making it
more costly for a potential acquirer to obtain control of the Company or the
Commercial Bank. For more information, see "Certain Anti-Takeover Provisions."
In the event that Mr. Talbert prevails over the Company and the Commercial Bank,
or obtains a written settlement, in a legal dispute as to the Employment
Agreement, he will be reimbursed for his legal and other expenses.
TRANSACTIONS WITH MANAGEMENT
The Savings Bank offers loans to its directors and officers. These loans
currently are made in the ordinary course of business with the same collateral,
interest rates and underwriting criteria as those of comparable transactions
prevailing at the time and do not involve more than the normal risk of
collectibility or present other unfavorable features. Under current law, the
Savings Bank's loans to directors and executive officers are required to be made
on substantially the same terms, including interest rates, as those prevailing
for comparable transactions and must not involve more than the normal risk of
repayment or present other unfavorable features. Furthermore, all loans to such
persons must be approved in advance by a disinterested majority of the Board of
Directors. At September 30, 1997, the Savings Bank's loans to directors and
executive officers totaled $319,000, or 7.3% of the Savings Bank's retained
income, at that date.
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THE CONVERSION
GENERAL
On September 29, 1997, the Board of Directors of the Savings Bank
unanimously adopted, subject to approval by the Administrator and the members of
the Savings Bank, and to the nonobjection by the FDIC, the Plan, pursuant to
which the Savings Bank will convert from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank, become a
wholly-owned subsidiary of the Company, and immediately thereafter convert to a
North Carolina commercial bank under the name "Bank of the Carolinas." The
Administrator has approved the Plan subject to, among other things, approval of
the Plan by the members of the Savings Bank. In addition, the FDIC has issued
its conditional non-objection to the Plan and the Stock Conversion. Such
approval and notice do not constitute recommendations or endorsements of the
Plan. A Special Meeting of the Savings Bank's members has been called for the
purpose of approving the Plan, which meeting is to be held on ,
1998.
The Stock Conversion will be accomplished through the amendment of the
Savings Bank's existing North Carolina mutual certificate of incorporation and
bylaws to read in the form of North Carolina stock certificate of incorporation
and bylaws to authorize the issuance of capital stock by the Converted Savings
Bank, the issuance of all the Converted Savings Bank's capital stock to be
outstanding upon consummation of the Stock Conversion to the Company, and the
offer and sale of the Common Stock of the Company. Upon issuance of the
Converted Savings Bank's capital stock to the Company, the Converted Savings
Bank will be a wholly-owned subsidiary of the Company. Immediately following
consummation of the Stock Conversion, the Board of Directors of the Savings Bank
intends to effectuate the Bank Conversion by converting the Converted Savings
Bank to the Commercial Bank. The Bank Conversion will be accomplished through
the amendment of the Converted Savings Bank's certificate of incorporation to
the form appropriate for a North Carolina commercial bank. Upon completion of
the Bank Conversion, the Commercial Bank will be a wholly-owned subsidiary of
the Company.
The Company has applied to the Federal Reserve Board for approval to become
the holding company of the Converted Savings Bank subject to the satisfaction of
certain conditions and to acquire all of the capital stock of the Converted
Savings Bank to be issued in the Stock Conversion in exchange for at least 50%
of the net proceeds from the sale of Common Stock in the Stock Conversion after
deducting the principal amount of the ESOP Plan. The Stock Conversion will be
effected only upon completion of the sale of all of the shares of Common Stock
to be issued by the Company pursuant to the Plan. The Savings Bank has received
approval from the Administrator and the Commission, subject to certain
conditions, of the conversion of the Converted Savings Bank to a North Carolina
commercial bank, and the Company has applied to the Federal Reserve Board for
approval of the Company's continued ownership of 100% of the stock of the
Commercial Bank following the Bank Conversion.
The aggregate purchase price of the Common Stock to be issued in the Stock
Conversion will be within the Estimated Valuation Range of $5,950,000 to
$8,050,000, which may be increased to $9,257,500, based upon an independent
appraisal of the estimated pro forma market value of the Common Stock prepared
by Meritas. All shares of the Common Stock to be issued and sold in the Stock
Conversion will be sold at the same price. The independent appraisal will be
updated, if necessary, and the final aggregate price of the shares of the Common
Stock will be determined at the completion of the Offerings. Meritas is
experienced in the valuation and appraisal of financial institutions. For
additional information, see " -- Stock Pricing and Number of Shares to be
Issued."
The following is a brief summary of material aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the Plan.
A copy of the Plan is available for inspection at any office of the Savings Bank
and at the office of the Administrator. The Plan is also filed as an exhibit to
the Registration Statement of which this Prospectus is a part, copies of which
may be obtained from the SEC. See "Additional Information."
OFFERING OF COMMON STOCK
Under the Plan, the Company is offering shares of the Common Stock first to
Eligible Account Holders who are residents of the Local Community, second to
Eligible Account Holders who are not residents of the Local Community, third to
the ESOP, fourth to Supplemental Eligible Account Holders, fifth to Other
Members who are not Eligible Account Holders or Supplemental Eligible Account
Holders, and sixth to directors, officers, and employees of the Savings Bank in
the Subscription Offering. Subscription Rights received in any of the foregoing
categories will be subordinated to the Subscription Rights received by those in
a prior category. To the extent shares remain available for purchase after the
Subscription Offering, the Company may offer the remaining shares to residents
of the Local Community in the Community Offering. In the Community Offering,
preference will be given to natural persons and trusts of natural persons who
are residents of the Local
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Community. The occurrence of the Community Offering is subject to the
availability of shares of the Common Stock for purchase after satisfaction of
all subscriptions in the Subscription Offering. Additionally, all purchases in
the Community Offering are subject to the maximum and minimum purchase
limitations set forth in the Plan and the right of the Company to reject any
such orders, in whole or in part.
The Plan further provides that, if feasible, any shares of Common Stock not
purchased in the Subscription and Community Offerings, may be offered for sale
to the general public in a Public Offering underwritten by W.R. Hough on a "best
efforts" basis. If the Public Offering is determined not to be feasible, the
Savings Bank will immediately consult with the regulatory authorities to
determine the most viable alternative available to effect the completion of the
Stock Conversion. Should no viable alternative exist, the Savings Bank may
terminate the Stock Conversion with the concurrence of the FDIC and the
Administrator. The Plan provides that the Conversion must be completed within 12
months after approval of the Plan at the Special Meeting, which time period may
be extended up to an additional 12 months by amendment to the Plan. In the event
that the Stock Conversion is not effected, the Savings Bank will remain a North
Carolina-chartered mutual savings bank, all subscription funds will be promptly
returned to subscribers with interest earned thereon, and all withdrawal
authorizations will be cancelled. The completion of the Offerings is subject to
market conditions and other factors beyond the Savings Bank's control. No
assurance can be given as to the length of time after approval of the Plan at
the Special Meeting that will be required to complete the sale of the Common
Stock to be offered in the Stock Conversion. If delays are experienced,
significant changes may occur in the estimated pro forma market value of the
Company upon consummation of the Stock Conversion, together with corresponding
changes in the offering price and the net proceeds realized from the sale of the
Common Stock. The Savings Bank would also incur substantial additional printing,
legal and accounting expenses in completing the Stock Conversion. In the event
the Stock Conversion is terminated, the Savings Bank would be required to charge
all Stock Conversion expenses against current income.
BUSINESS PURPOSES FOR THE STOCK CONVERSION
The Board of Directors of the Savings Bank has formed the Company to serve
upon consummation of the Conversion as a holding company with the Converted
Savings Bank (and, following the Bank Conversion, the Commercial Bank) as its
subsidiary. The portion of the net proceeds from the sale of the Common Stock in
the Stock Conversion to be transferred to the Converted Savings Bank by the
Company will substantially increase the Converted Savings Bank's capital
position which will in turn increase the amount of funds available for lending
and investment and provide greater resources to support both current operations
and future expansion. Except as discussed under "Use of Proceeds," there are no
current agreements or understandings for such expansion. The holding company
structure will provide greater flexibility than the Commercial Bank alone would
have for diversification of business activities and geographic expansion.
Management believes that this increased capital and operating flexibility will
enable the Commercial Bank to compete more effectively with other types of
financial services organizations. In addition, the Stock Conversion will also
enhance the future access of the Company to the capital markets.
The Board of Directors of the Savings Bank has undertaken the Bank
Conversion to allow the Commercial Bank to continue to pursue its expanding
lines of business. The Commercial Bank intends to gradually increase its
portfolio of commercial and consumer loans. See "Summary -- Landis Savings Bank,
SSB" and "Risk Factors -- Risks Related to Commercial and Consumer Lending."
This strategy can be more effectively developed if the institution can operate
under regulatory requirements applicable to a North Carolina commercial bank
rather than a North Carolina-chartered savings bank. See "Regulation
-- Depository Institution Regulation."
After completion of the Stock Conversion, the unissued Common Stock and
preferred stock authorized by the Articles of Incorporation will permit the
Company, subject to market conditions, to raise additional equity capital
through further sales of securities and to issue securities in connection with
possible acquisitions. At the present time, the Company has no plans with
respect to additional offerings of securities, other than the issuance of
additional shares under the MRP or the Option Plans, if implemented. Following
completion of the Stock Conversion, the Company also will be able to use stock-
related incentive programs to attract and retain executive and other personnel
for itself and its subsidiaries. See "Management of the Savings Bank -- Certain
Benefit Plans and Agreements."
EFFECT OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF THE SAVINGS
BANK
GENERAL. Each depositor in a mutual savings institution such as the Savings
Bank has both a deposit account and a pro rata ownership interest in the
retained earnings of that institution based upon the balance in his or her
deposit account. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from such
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deposit account. Any other depositor who opens a deposit account obtains a pro
rata interest in the retained earnings of the institution without any additional
payment beyond the amount of the deposit. A depositor who reduces or closes his
or her account receives a portion or all of the balance in the account but
nothing for his or her ownership interest, which is lost to the extent that the
balance in the account is reduced.
Consequently, depositors normally do not have a way to realize the value of
their ownership, which has realizable value only in the unlikely event that the
mutual institution is liquidated. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual retained earnings
after other claims are paid.
Upon consummation of the Stock Conversion, permanent nonwithdrawable
capital stock will be created to represent the ownership of the institution. The
stock is separate and apart from deposit accounts and is not and cannot be
insured by the FDIC. Transferable certificates will be issued to evidence
ownership of the stock, which will enable the stock to be sold or traded, if a
purchaser is available, with no effect on any account held in the Converted
Savings Bank. Under the Plan, all of the capital stock of the Converted Savings
Bank will be acquired by the Company in exchange for a portion of the net
proceeds from the sale of the Common Stock in the Stock Conversion. The Common
Stock will represent an ownership interest in the Company and will be issued
upon consummation of the Stock Conversion to persons who elect to participate in
the Stock Conversion by purchasing the shares being offered.
CONTINUITY. During the Conversion process, the normal business of the
Savings Bank of accepting deposits and making loans will continue without
interruption. The Converted Savings Bank will continue to be subject to
regulation by the Administrator and the FDIC, and the Commercial Bank will be
subject to regulation by the Commission and the FDIC, and FDIC insurance of
accounts will continue without interruption. After the Conversion, the Converted
Savings Bank and the Commercial Bank will continue to provide services for
depositors and borrowers under current policies and by its present management
and staff.
The Board of Directors serving the Savings Bank at the time of the Stock
Conversion will serve as the Board of Directors of the Converted Savings Bank,
and then the Commercial Bank after the Bank Conversion. The Board of Directors
of the Company will consist of the individuals currently serving on the Board of
Directors of the Savings Bank. All current officers of the Savings Bank will
retain their positions with the Converted Savings Bank, and then the Commercial
Bank, after the Conversion.
VOTING RIGHTS. Upon the completion of the Conversion, depositor and
borrower members as such will have no voting rights in the Converted Savings
Bank, the Commercial Bank, or the Company and, therefore, will not be able to
elect directors of the Converted Savings Bank, the Commercial Bank, or the
Company or to control their affairs. Currently these rights are accorded to
depositors of the Savings Bank. Subsequent to the Stock Conversion, voting
rights will be vested exclusively in the shareholders of the Company which, in
turn, will own all of the stock of the Converted Savings Bank and, following the
Bank Conversion, the Commercial Bank. Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the shareholders of the
Company, subject to the provisions of the Company's Articles of Incorporation.
After the Bank Conversion, holders of savings accounts in and obligors on
loans of the Converted Savings Bank and the Commercial Bank will not have voting
rights. Exclusive voting rights with respect to the Company shall be vested in
the holders of the Common Stock. Holders of savings accounts in and obligors on
loans of the Converted Savings Bank and the Commercial Bank will not have any
voting rights in the Company except and to the extent that such persons become
shareholders of the Company, and the Company will have exclusive voting rights
with respect to the Converted Savings Bank and the Commercial Bank.
DEPOSIT ACCOUNTS AND LOANS. The Savings Bank's deposit accounts, the
balances of individual accounts, and existing federal deposit insurance coverage
will not be affected by the Conversion. Furthermore, the Conversion will not
affect the loan accounts, the balances of these accounts, and the obligations of
the borrowers under their individual contractual arrangements with the Savings
Bank.
TAX EFFECTS. The Savings Bank has received an opinion from its special
counsel, Moore & Van Allen, PLLC, as to the material federal income tax
consequences of the Conversion to the Savings Bank and the Commercial Bank, and
as to the generally applicable material federal income tax consequences of the
Conversion to the Savings Bank's account holders and to persons who purchase
Common Stock in the Stock Conversion. The opinion provides that the Conversion
will constitute one or more reorganizations for federal income tax purposes
under Section 368(a)(1)(F) of the Code. Among other things, the opinion also
provides that: (i) no gain or loss will be recognized by the Savings Bank in its
mutual or stock form by reason of the Stock Conversion; (ii) no gain or loss
will be recognized by its account holders upon the issuance to them of accounts
in the Converted Savings Bank in stock form immediately after the Stock
Conversion, in the same dollar amounts and on the
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same terms and conditions as their accounts at the Savings Bank immediately
prior to the Stock Conversion; (iii) the tax basis of each account holder's
interest in the liquidation account will be equal to the value, if any, of that
interest; (iv) the tax basis of the Common Stock purchased in the Stock
Conversion will be equal to the amount paid therefor increased, in the case of
Common Stock acquired pursuant to the exercise of Subscription Rights, by the
fair market value, if any, of the Subscription Rights exercised; (v) the holding
period for the Common Stock purchased in the Stock Conversion will commence upon
the exercise of such holder's Subscription Rights and otherwise on the day
following the date of such purchase; (vi) gain or loss will be recognized to
account holders upon the receipt of liquidation rights or the receipt or
exercise of Subscription Rights in the Stock Conversion, to the extent such
liquidation rights and Subscription Rights are deemed to have value, as
discussed below; and (vii) as a result of the recently enacted Public Law
104-188, the Savings Bank and its successors (including the Converted Savings
Bank and the Commercial Bank) will be required to recapture the applicable
excess reserves into gross income ratably over a six taxable year period. The
applicable excess reserves are the excess, if any, of (1) the balance of its
reserves as of the close of its last taxable year beginning before January 1,
1996, over (2) the greater of the balance of (a) its pre-1988 reserves, or (b)
what the Savings Bank's reserves would have been at the close of its last
taxable year beginning before January 1, 1996, had the Savings Bank always used
the experience method (the six-year average method).
The opinion of Moore & Van Allen, PLLC is based in part upon, and subject
to the continuing validity in all material respects through the date of the
Conversion of, various representations of the Savings Bank and upon certain
assumptions and qualifications, including that the Conversion is consummated in
the manner and according to the terms provided in the Plan. Such opinion is also
based upon the Code, regulations now in effect or proposed thereunder, current
administrative rulings and practice and judicial authority, all of which are
subject to change and such change may be made with retroactive effect. Unlike
private letter rulings received from the IRS, an opinion is not binding upon the
IRS and there can be no assurance that the IRS will not take a position contrary
to the positions reflected in such opinion, or that such opinion will be upheld
by the courts if challenged by the IRS.
Moore & Van Allen, PLLC has advised the Savings Bank that an interest in a
liquidation account has been treated by the IRS, in a series of private letter
rulings which do not constitute formal precedent, as having nominal, if any,
fair market value and therefore it is likely that the interests in the
liquidation account established by the Savings Bank as part of the Stock
Conversion will similarly be treated as having nominal, if any, fair market
value. Accordingly, it is likely that such depositors of the Savings Bank who
receive an interest in such liquidation account established by the Savings Bank
pursuant to the Stock Conversion will not recognize any gain or loss upon such
receipt.
Moore & Van Allen, PLLC has further advised the Savings Bank that the
federal income tax treatment of the receipt of Subscription Rights pursuant to
the Stock Conversion is uncertain, and recent private letter rulings issued by
the IRS have been in conflict. For instance, the IRS adopted the position in one
private ruling that Subscription Rights will be deemed to have been received to
the extent of the minimum pro rata distribution of such rights, together with
the rights actually exercised in excess of such pro rata distribution, and with
gain recognized to the extent of the combined fair market value of the pro rata
distribution of Subscription Rights plus the Subscription Rights actually
exercised. Persons who do not exercise their Subscription Rights under this
analysis would recognize gain upon receipt of rights equal to the fair market
value of such rights, regardless of exercise, and would recognize a
corresponding loss upon the expiration of unexercised rights that may be
available to offset the previously recognized gain. Under another IRS private
ruling, Subscription Rights were deemed to have been received only to the extent
actually exercised. This private ruling required that gain be recognized only if
the holder of such rights exercised such rights, and that no loss be recognized
if such rights were allowed to expire unexercised. There is no authority that
clearly resolves this conflict among these private rulings, which may not be
relied upon for precedential effect. However, based upon express provisions of
the Code and in the absence of contrary authoritative guidance, Moore & Van
Allen, PLLC has provided in its opinion that gain will be recognized upon the
receipt rather than the exercise of Subscription Rights. Further, also based
upon a published IRS ruling and consistent with recognition of gain upon receipt
rather than exercise of the Subscription Rights, Moore & Van Allen, PLLC has
provided in its opinion that the subsequent exercise of the Subscription Rights
will not give rise to gain or loss. Regardless of the position eventually
adopted by the IRS, the tax consequences of the receipt of the Subscription
Rights will depend, in part, upon their valuation for federal income tax
purposes.
If the Subscription Rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders, Supplemental
Eligible Account Holders, and other eligible members who exercise their
Subscription Rights, even though such persons would have received no cash from
which to pay taxes on such taxable income. The Savings Bank could also recognize
a gain on the distribution of such Subscription Rights in an amount equal to
their aggregate value. In the opinion of Meritas, whose opinion is not binding
upon the IRS, the Subscription Rights do not have any value, based on the fact
that such rights are acquired by the recipients without cost, are
non-transferable and of short duration, and afford
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the recipients the right only to purchase shares of the Common Stock at a price
equal to its estimated fair market value, which will be the same price as the
price paid by purchasers in the Community Offering and the Public Offering for
unsubscribed shares of Common Stock. Eligible Account Holders, Supplemental
Eligible Account Holders , and other eligible members who exercise their
Subscription Rights are encouraged to consult with their own tax advisors as to
the tax consequences in the event that the Subscription Rights are deemed to
have a fair market value. Because the fair market value, if any, of the
Subscription Rights issued in the Stock Conversion depends primarily upon the
existence of certain facts rather than the resolution of legal issues, Moore &
Van Allen, PLLC, has neither adopted the opinion of Meritas as its own nor
incorporated such opinion of Meritas into its opinion issued in connection with
Conversion.
THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH MAY
BE RELEVANT TO EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ACCOUNT HOLDER, AND
OTHER MEMBER ENTITLED TO SPECIAL TREATMENT UNDER THE CODE, SUCH AS TRUSTS,
INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS, INSURANCE
COMPANIES AND ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS,
AND OTHER MEMBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. DUE TO
THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH ELIGIBLE ACCOUNT HOLDER,
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER, AND OTHER MEMBER IS URGED TO CONSULT HIS
OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH FEDERAL AND STATE
INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND CIRCUMSTANCES,
INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND ALSO AS TO ANY
OTHER TAX CONSEQUENCES ARISING OUT OF THE CONVERSION.
LIQUIDATION ACCOUNT. In the unlikely event of a complete liquidation of the
Savings Bank in its present mutual form, each holder of a deposit account in the
Savings Bank would receive his pro rata share of any assets of the Savings Bank
remaining after payment of claims of all creditors (including the claims of all
depositors to the withdrawal value of their accounts). His pro rata share of
such remaining assets would be the same proportion of such assets as the value
of his deposit account was to the total of the value of all deposit accounts in
the Savings Bank at the time of liquidation.
After the Stock Conversion, each deposit account holder on a complete
liquidation would have a claim of the same general priority as the claims of all
other general creditors of the Savings Bank. Therefore, except as described
below, his claim would be solely in the amount of the balance in his deposit
account plus accrued interest. He would have no interest in the value of the
Savings Bank above that amount.
The Plan provides for the establishment, upon the completion of the Stock
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the net worth of the Savings Bank as of the date of its latest statement of
financial condition contained in the final Prospectus. Each Eligible Account
Holder and each Supplemental Eligible Account Holder would be entitled, on a
complete liquidation of the Converted Savings Bank (or the Commercial Bank)
after completion of the Stock Conversion, to an interest in the liquidation
account. Each Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account held in the Savings Bank on August
30, 1996 and each Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each qualifying deposit held in the
Savings Bank on December 31, 1997. The interest as to each qualifying deposit
account would be in the same proportion of the total liquidation account as the
balance of such qualifying deposit account was to the balance in all deposit
accounts of Eligible Account Holders and Supplemental Eligible Account Holders
on such date. However, if the amount in the qualifying deposit account on any
annual closing date of the Savings Bank subsequent to the relevant eligibility
date is less than the amount in such account on the relevant eligibility date,
or any subsequent closing date, then the Eligible Account Holder's or
Supplemental Eligible Account Holder's interest in the liquidation account would
be reduced from time to time by an amount proportionate to any such reductions,
and such interest would cease to exist if he ceases to maintain an account at
the Converted Savings Bank or Commercial Bank that has the same Social Security
number as appeared on his account(s) at the relevant eligibility date. The
interest in the liquidation account would never be increased, notwithstanding
any increase in the related deposit account after the Stock Conversion.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders were satisfied would be
distributed to the entity or persons holding the Savings Bank's capital stock at
that time.
The Bank Conversion shall not be deemed to be a complete liquidation of the
Converted Savings Bank for purposes of the distribution of the liquidation
account. Upon consummation of the Bank Conversion, the liquidation account, and
all rights and obligations of the Converted Savings Bank in connection
therewith, shall be assumed by the Commercial Bank.
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A merger, consolidation, sale of bulk assets, or similar combination or
transaction with an FDIC-insured institution in which the Savings Bank is not
the surviving insured institution would not be considered to be a
"liquidation"under which distribution of the liquidation account could be made.
In such a transaction, the liquidation account would be assumed by the surviving
institution.
The creation and maintenance of the liquidation account will not restrict
the use or application of any of the capital accounts of the Savings Bank,
except that the Savings Bank may not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect of such dividend or
repurchase would be to cause its retained earnings to be reduced below the
aggregate amount then required for the liquidation account.
SUBSCRIPTION RIGHTS
Nontransferable Subscription Rights to subscribe for shares of the Common
Stock have been issued to all persons entitled to subscribe for stock in the
Subscription Offering at no cost to such persons. The amount of the Common Stock
which these parties may subscribe for will be determined, in part, by the total
stock to be issued, and the availability of stock for purchase under the
categories set forth in the Plan.
Preference categories have been established for the allocation of the
Common Stock to the extent that shares are available. These categories are as
follows:
SUBSCRIPTION CATEGORY NO. 1 is reserved for Eligible Account Holders who
are residents of the Local Community, i.e., qualifying depositors of the Savings
Bank on August 30, 1996, who, including individuals on a joint account, will
each receive nontransferable Subscription Rights to subscribe for up to $250,000
worth of Common Stock in the Subscription Offering. See " -- Limitations on
Purchases of Shares." If the exercise of Subscription Rights in this category
results in an oversubscription, shares shall be allocated among such subscribing
Eligible Account Holders so as to permit each such Eligible Account Holder, to
the extent possible, to purchase a number of shares sufficient to make his total
allocation equal 100 shares or the amount subscribed for, whichever is less. Any
shares not so allocated shall be allocated among the subscribing Eligible
Account Holders on an equitable basis related to the amounts of their respective
qualifying deposits, as compared to the total qualifying deposits of all
subscribing Eligible Account Holders who are residents of the Local Community.
To ensure a proper allocation of Common Stock, each Eligible Account Holder must
list on his Stock Order Form all accounts in which he has an ownership interest.
Failure to list all such deposit accounts may result in the inability of the
Company or the Savings Bank to fill all or part of a subscription order. Neither
the Company, the Savings Bank, nor any of their agents shall be responsible for
orders on which all deposit accounts have not been fully and accurately
disclosed. A qualifying deposit is the amount (required to be at least $50.00)
contained in a deposit account in the Savings Bank on August 30, 1996.
Subscription Rights received by directors and officers of the Savings Bank and
their associates in this category based on their increased deposits in the
Savings Bank in the one-year period preceding August 30, 1996 are subordinated
to the Subscription Rights of other Eligible Account Holders who are residents
of the Local Community.
SUBSCRIPTION CATEGORY NO. 2 is reserved for Eligible Account Holders who
are not residents of the Local Community, i.e., qualifying depositors of the
Savings Bank on August 30, 1996, who, including individuals on a joint account,
will each receive nontransferable Subscription Rights to subscribe for up to
$250,000 worth of Common Stock in the Subscription Offering. See
" -- Limitations on Purchases of Shares." If the exercise of Subscription Rights
in this category results in an oversubscription, shares shall be allocated among
such subscribing Eligible Account Holders so as to permit each such Eligible
Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation equal 100 shares or the amount
subscribed for, whichever is less. Any shares not so allocated shall be
allocated among the subscribing Eligible Account Holders on an equitable basis
related to the amounts of their respective qualifying deposits, as compared to
the total qualifying deposits of all subscribing Eligible Account Holders who
are not residents of the Local Community. To ensure a proper allocation of
Common Stock, each Eligible Account Holder must list on his Stock Order Form all
accounts in which he has an ownership interest. Failure to list all such deposit
accounts may result in the inability of the Company or the Savings Bank to fill
all or part of a subscription order. Neither the Company, the Savings Bank, nor
any of their agents shall be responsible for orders on which all deposit
accounts have not been fully and accurately disclosed. A qualifying deposit is
the amount (required to be at least $50.00) contained in a deposit account in
the Savings Bank on August 30, 1996. Subscription Rights received by directors
and officers of the Savings Bank and their associates in this category based on
their increased deposits in the Savings Bank in the one-year period preceding
August 30, 1996 are subordinated to the Subscription Rights of other Eligible
Account Holders who are not residents of the Local Community.
SUBSCRIPTION CATEGORY NO. 3 is reserved for the ESOP, which shall receive
nontransferable Subscription Rights to purchase in the aggregate up to eight
percent of the shares issued in the Stock Conversion. If all the shares of
Common Stock
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offered in the Subscription Offering are purchased by Eligible Account Holders,
then the ESOP will purchase shares in the open market following consummation of
the Stock Conversion and will not purchase newly issued shares from the Company.
SUBSCRIPTION CATEGORY NO. 4 is reserved for the Savings Bank's Supplemental
Eligible Account Holders, i.e., qualifying depositors of the Savings Bank on the
last day of the calendar quarter preceding the Administrator's approval of the
Plan (December 31, 1997) who, including individuals on a joint account, will
each receive nontransferable Subscription Rights to subscribe for up to $250,000
worth of Common Stock in the Subscription Offering. See " -- Limitations on
Purchases of Shares." If the exercise of Subscription Rights in this category
results in an oversubscription, shares shall be allocated among subscribing
Supplemental Eligible Account Holders, so as to permit each such Supplemental
Eligible Account Holder, to the extent possible, to purchase a number of shares
sufficient to make his total allocation equal 100 shares or the amount
subscribed for, whichever is less, and any shares not so allocated shall be
allocated among the subscribing Supplemental Eligible Account Holders on an
equitable basis related to the amounts of their respective qualifying deposits,
as compared to the total qualifying deposits of all subscribing Supplemental
Eligible Account Holders who are not residents of the Local Community. To ensure
a proper allocation of Common Stock, each Supplemental Eligible Account Holder
must list on his Stock Order Form all accounts in which he has an ownership
interest. Failure to list all such deposit accounts may result in the inability
of the Company or the Savings Bank to fill all or part of a subscription order.
Neither the Company, the Savings Bank, nor any of their agents shall be
responsible for orders on which all deposit accounts have not been fully and
accurately disclosed. A qualifying deposit is the amount (required to be at
least $50.00) contained in a deposit account in the Savings Bank on December 31,
1997. Subscription Rights received by directors and officers of the Savings Bank
and their associates in this category based on their increased deposits in the
Savings Bank in the one-year period preceding December 31, 1997 are subordinated
to the Subscription Rights of other Supplemental Eligible Account Holders.
Subscriptions in this Category No. 4 will be filled only to the extent that
there are sufficient shares of Common Stock remaining after satisfaction of
subscriptions by Category Nos. 1, 2 and 3.
SUBSCRIPTION CATEGORY NO. 5 is reserved for Other Members, i.e., certain
depositors and borrowers who are members of the Savings Bank as of the Voting
Record Date entitled to vote at the Special Meeting but who are not Eligible
Account Holders or Supplemental Eligible Account Holders. To the extent then
available following subscriptions by Eligible Account Holders, the ESOP, and
Supplemental Eligible Account Holders, Other Members, including individuals on a
joint account, will receive, without payment therefor, nontransferable
Subscription Rights to subscribe for up to $250,000 worth of Common Stock in the
Subscription Offering. See " -- Limitations on Purchases of Shares." In the
event that Other Members subscribe for a number of shares which, when added to
the shares subscribed for by Eligible Account Holders, the ESOP, and
Supplemental Eligible Account Holders, is in excess of the total number of
shares offered in the Stock Conversion, the subscriptions of such Other Members
will be allocated pro rata among subscribing Other Members on an equitable basis
as determined by the Board of Directors.
SUBSCRIPTION CATEGORY NO. 6 is reserved for directors, officers, and
employees of the Savings Bank as of the date of commencement of the Subscription
Offering. To the extent then available following subscriptions by Eligible
Account Holders, the ESOP, Supplemental Eligible Account Holders, and Other
Members, directors, officers, and employees of the Savings Bank will receive,
without payment therefor, nontransferable Subscription Rights to subscribe for
up to $250,000 worth of Common Stock in the Subscription Offering. See
" -- Limitations on Purchases of Shares." In the event that directors, officers,
and employees subscribe for a number of shares which, when added to the shares
subscribed for by Eligible Account Holders, the ESOP, Supplemental Eligible
Account Holders, and Other Members is in excess of the total number of shares
offered in the Stock Conversion, the subscriptions of such persons will be
allocated on an equitable basis as determined by the Board of Directors.
The Company will make reasonable efforts to comply with the securities laws
of all states in the United States in which persons entitled to subscribe for
the Common Stock pursuant to the Plan reside. However, no person will be offered
or allowed to purchase any Common Stock under the Plan if he resides in a
foreign country or in a state of the United States with respect to which any or
all of the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares under the Plan reside in such state or foreign country;
(ii) the granting of Subscription Rights or the offer or sale of shares of
Common Stock to such persons would require the Company or the Savings Bank or
their employees to register, under the securities laws of such state, as a
broker, dealer, salesman, or agent or to register or otherwise qualify its
securities for sale in such state or foreign country; and (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise. No payments will be made in lieu of the granting of Subscription
Rights to any such person.
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COMMUNITY OFFERING
To the extent shares remain available for purchase after the Subscription
Offering, the Company may offer any such remaining shares of the Common Stock to
residents of the Local Community and to whom the Company delivers a copy of this
Prospectus and a Stock Order Form. The occurrence of the Community Offering is
subject to the availability of shares of Common Stock for purchase after
satisfaction of all orders received in the Subscription Offering. The Community
Offering, if any, may terminate at any time without notice, but may not
terminate later than , 1998. The right of any person to purchase shares in
the Community Offering, if any, is subject to the absolute right of the Company
and the Savings Bank to accept or reject such purchases in whole or in part. The
Company presently intends to terminate the Community Offering, if any, as soon
as it has received orders for all shares available for purchase in the Stock
Conversion.
The term "resident" as used herein means any natural person who occupies a
dwelling within the Local Community, has an intention to remain within the Local
Community for a period of time (manifested by establishing a physical, ongoing,
nontransitory presence within the Local Community) and continues to reside in
the Local Community during the Subscription and Community Offerings. The Savings
Bank may utilize deposit or loan records or such other evidence provided to it
to make the determination whether a person is residing in the Local Community.
To the extent the person is a corporation or other business entity, the
principal place of business or headquarters shall determine whether the
corporation or entity is a resident. To the extent the person is a personal
benefit plan, the circumstances of the beneficiary shall apply with respect to
this definition. In the case of all other benefit plans, circumstances of the
beneficiary shall be examined for purposes of this definition. In all cases,
however, such determination shall be in the sole discretion of the Savings Bank.
If all of the Common Stock offered in the Subscription Offering is
subscribed for, there will be no Community Offering. In the event an
insufficient number of shares are available to fill orders in the Community
Offering, the available shares will be allocated on an equal number of shares
per order basis until all orders have been filled with a preference given to
natural persons and trusts of natural persons. If the Community Offering extends
beyond 45 days following the expiration of the Subscription Offering,
subscribers will have the right to increase, decrease, or rescind subscriptions
for stock previously submitted. Purchasers in the Community Offering, together
with their associates and groups acting in concert, are each eligible to
purchase up to $250,000 of the Common Stock issued in the Stock Conversion.
Except as noted below, cash and checks received in the Community Offering
will be placed in segregated savings accounts (each insured by the FDIC up to
the applicable $100,000 limit) established specifically for this purpose.
Interest will be paid on orders made by check, in cash, or by money order at the
Savings Bank's passbook rate from the date the payment is received by the
Company until the consummation of the Stock Conversion. In the event that the
Stock Conversion is not consummated for any reason, all funds submitted pursuant
to the Community Offering will be promptly refunded with interest as described
above.
PUBLIC OFFERING
All shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, may be offered for sale to the general public in a Public
Offering to be underwritten by William R. Hough & Co. on a "best efforts" basis.
The Public Offering, if any, will be conducted to achieve the widest
distribution of Common Stock. Neither William R. Hough & Co. nor any other
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Public Offering. Common Stock sold in the
Public Offering will be sold at the same price as in the Subscription and
Community Offerings.
Individual purchasers in the Public Offering may purchase up to $250,000 of
the Common Stock in the Stock Conversion with any associate or group of persons
acting in concert. The Savings Bank shall be directly responsible for the
payment of selling commissions to other licensed broker-dealers participating in
the Public Offering. Other broker-dealers may participate under selected dealers
agreements, and William R. Hough & Co. and such selected dealers may receive
fees aggregating up to a maximum of four percent of the amount of the stock sold
by the selected dealers in the Public Offering.
During the Subscription and Community Offerings, selected dealers may only
solicit indications of interest from their customers to place orders with the
Company as of a certain date ("Order Date") for the purchase of shares of Common
Stock. When and if William R. Hough & Co. and the Company believe that enough
indications and orders have been received in the Offerings to consummate the
Stock Conversion, William R. Hough & Co. will request, as of the Order Date,
selected dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected dealers will
send confirmations of the orders to such customers on the next business day
after the Order Date. Selected dealers may debit the accounts of their customers
on a date which will be three business days from the Order Date ("Settlement
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Date"). Customers who authorize selected dealers to debit their brokerage
accounts are required to have the funds for payment in their account on but not
before the Settlement Date. On the Settlement Date, selected dealers will remit
funds to the account that the Company established for each selected dealer.
After payment has been received by the Company from selected dealers, funds will
earn interest at the Savings Bank's passbook savings rate until the consummation
of the Stock Conversion. In the event the Stock Conversion is not consummated as
described above, funds with interest will be returned promptly to the selected
dealers, who, in turn, will promptly credit its customers' brokerage account.
The Public Offering, if any, will terminate no more than 45 days following
the completion of the Subscription Offering, unless extended by the Company with
the approval of the Administrator. In the event the Community Offering is
extended beyond 45 days following the expiration of this Subscription Offering,
subscribers will have the right to increase, decrease, or rescind subscriptions
for stock previously submitted. The Public Offering may run concurrently with
the Subscription and Community Offerings or subsequent to such offerings.
SUBSCRIPTIONS FOR STOCK IN THE SUBSCRIPTION AND COMMUNITY OFFERINGS
EXPIRATION DATE. The Subscription Offering will expire at 5:00 p.m.,
Eastern Time, on , , 1998 unless extended by the Board of Directors of the
Savings Bank for up to an additional 45 days, to no later than , 1998.
Such date and time are referred to herein as the "Expiration Date." Subscription
rights not exercised prior to the Expiration Date will be void. The Community
Offering, if any, may terminate at any time without notice, but may not
terminate later than , 1998.
USE OF STOCK ORDER FORMS. Rights to subscribe may only be exercised by
completion of a Stock Order Form. Any person receiving a Stock Order Form who
desires to subscribe for shares of stock must do so prior to the Expiration Date
by delivering (by mail or in person) to the office of the Savings Bank a
properly executed and completed Stock Order Form, together with full payment for
all shares for which the subscription is made. All checks or money orders must
be made payable to "BOC FINANCIAL CORP." No photocopies or faxes of Stock Order
Forms or payments by wire transfer will be accepted. The Stock Order Form must
be received by the Expiration Date. All subscription rights under the Plan will
expire on the Expiration Date, whether or not the Company has been able to
locate each person entitled to such subscription rights. Once tendered,
subscription orders cannot be revoked.
Each subscription right may be exercised only by the person to whom it is
issued and only for his or her own account. The subscription rights granted
under the Plan are nontransferable; persons who attempt to transfer their
subscription rights may lose the right to subscribe for stock in the Stock
Conversion and may be subject to other sanctions and penalties. Each person
subscribing for shares is required to represent to the Company that he or she is
purchasing such shares for his or her own account and that he or she has no
agreement or understanding with any other person for the sale or transfer of
such shares.
In the event Stock Order Forms (i) are not delivered and are returned to
the Company by the United States Postal Service or the Company is unable to
locate the addressee, or (ii) are not returned or are received after the
Expiration Date, or (iii) are defectively completed or executed, or (iv) are not
accompanied by the full required payment for the shares subscribed for
(including instances where a savings account or certificate balance from which
withdrawal is authorized is insufficient to fund the amount of such required
payment), the Subscription Rights of the person to whom such rights have been
granted will lapse as though such person failed to return the completed Stock
Order Form within the time period specified. However, the Company or the Savings
Bank may, but will not be required to, waive any irregularity on any Stock Order
Form or require the submission of a corrected Stock Order Form or the remittance
of full payment for subscribed shares by such date as the Company or the Savings
Bank may specify. The interpretation by the Company and the Savings Bank of the
terms and conditions of the Plan and of the Stock Order Form will be final.
PAYMENT FOR SHARES. Payment for all subscribed shares of Common Stock will
be required to accompany all completed Stock Order Forms for subscriptions to be
valid. Payment for subscribed shares may be made (i) in cash, if delivered in
person, (ii) by check or money order, or (iii) by authorization of withdrawal
from deposit accounts maintained with the Savings Bank. Appropriate means by
which such withdrawals may be authorized are provided in the Stock Order Form.
Once such a withdrawal has been authorized, none of the designated withdrawal
amount may be used by a subscriber for any purpose other than to purchase stock
for which subscription has been made while the Plan remains in effect. In the
case of payments authorized to be made through withdrawal from deposit accounts,
all sums authorized for withdrawal will continue to earn interest at the
contract rate until the date of consummation of the sale. In the case of
payments made in cash or by check or money order such funds will be placed in a
single segregated savings account established specifically for this purpose
(with the account as a whole insured by the FDIC up to the applicable $100,000
limit) and interest will be paid at the Savings Bank's passbook rate from the
date payment is received until the Stock Conversion is completed or terminated.
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Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
partial withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate evidencing the remaining
balance will earn interest at the Savings Bank's passbook rate subsequent to the
withdrawal. An executed Stock Order Form, once received by the Company, may not
be modified, amended, or rescinded without the consent of the Company, unless
the Stock Conversion is not completed within 45 days of the termination of the
Subscription Offering. If an extension of the period of time to complete the
Stock Conversion is approved by the Administrator, subscribers will be
resolicited and must affirmatively reconfirm their orders prior to the
expiration of the resolicitation offering, or their subscription funds will be
promptly refunded. Subscribers may also modify or cancel their subscriptions.
Interest will be paid on such funds at the Savings Bank's passbook rate during
the 45-day period and any approved extension period.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Subscription and Community Offerings, provided
that such IRAs are not maintained at the Savings Bank. Persons with IRAs
maintained at the Savings Bank must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Subscription and Community Offerings. Depositors interested in using funds in
their IRA to purchase Common Stock should contact the Savings Bank's Stock
Information Center at (704) 857-7277 as soon as possible so that the necessary
forms may be forwarded for execution and returned prior to the Expiration Date
of the Subscription Offering.
The ESOP will not be required to pay for the shares subscribed for at the
time it subscribes, but may pay for such shares upon consummation of the
Subscription and Community Offerings.
SHARES PURCHASED. Certificates representing shares of the Common Stock will
be delivered to subscribers as soon as practicable after closing of the Stock
Conversion.
PLAN OF DISTRIBUTION FOR THE SUBSCRIPTION AND COMMUNITY OFFERINGS
Officers of the Savings Bank are available at the Savings Bank's office to
provide offering materials to prospective investors, to answer their questions
(but only to the extent such information is derived from this Prospectus) and to
receive completed Stock Order Forms from prospective subscribers. None of the
Savings Bank's directors, officers, or employees will receive any commissions or
other compensation for their efforts in connection with sales of shares of the
Common Stock. Although information regarding the stock offering is available at
the Savings Bank's office, an investment in the Common Stock is not a deposit,
and the Common Stock is not federally insured.
The directors, officers, and employees of the Savings Bank who will be
involved in selling stock are expected to be exempt from the requirement to
register with the SEC as broker-dealers within the meaning of Rule 3a4-1 under
the Exchange Act. Such persons will qualify under the safe harbor provisions of
that rule on the basis of paragraphs (a)(4) (ii) and/or (iii), i.e., management
of the Savings Bank expects that such persons either (x) will perform
substantial duties for the Company in its business, will not otherwise be
broker-dealers and are not expected to participate in another offering in the
next twelve months, or (y) will limit their activities to preparing written
communications, responding to customer inquiries, and/or performing
ministerial/clerical functions.
The Savings Bank and the Company have engaged Meritas as financial advisor
to provide certain conversion advice and record keeping services in connection
with the Subscription and Community Offerings. The services of Meritas in this
capacity will be limited to (i) training and educating the Savings Bank's
employees who will be performing certain ministerial functions in the
Subscription and Community Offerings regarding the mechanics and regulatory
requirements of the stock sales process and the solicitation of proxies from
members and (ii) keeping records of orders for shares of Common Stock. For its
services rendered in this capacity, Meritas will receive a fixed fee in the
amount of $40,000. Meritas also will be reimbursed for its reasonable
out-of-pocket expenses. The Company and the Savings Bank have agreed to
indemnify Meritas for reasonable costs and expenses in connection with certain
claims or liabilities arising form the performance of these services. Meritas
will not solicit offers to purchase Common Stock on behalf of the Company.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Meritas, which is experienced in the evaluation and appraisal of savings
institutions involved in the conversion process, has been retained by the
Savings Bank to prepare an appraisal of the estimated pro forma market value of
the Common Stock to be sold pursuant to the Stock Conversion. Meritas will
receive a fixed fee of $37,500 for its appraisal services and the preparation of
a business plan, plus $2,500 for each appraisal update report. Meritas also will
be reimbursed for its reasonable
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out-of-pocket expenses. The Savings Bank has agreed to indemnify Meritas under
certain circumstances against any losses, damages, expenses, or liability
arising out of the Savings Bank's engagement of Meritas for the appraisal.
Meritas has determined as of December 3, 1997 that the estimated pro forma
market value of the stock to be issued by the Company in the Stock Conversion
was $7,000,000. In determining the reasonableness and adequacy of the appraisal
submitted by Meritas, the Boards of Directors of the Savings Bank and the
Company reviewed with Meritas the methodology and the appropriateness of
assumptions used by Meritas in preparing the appraisal. The Company, has
determined to offer the shares in the Stock Conversion at the Purchase Price of
$10.00 per share. The price per share was determined based on a number of
factors, including the market price per share of the stock of other financial
institutions. With the consent of the Administrator and the FDIC, however, the
appraiser may establish a range of value for the stock of approximately 15% on
either side of the estimated value to allow for fluctuations in the aggregate
value of the stock due to changes in the market and other factors from the time
of commencement of the Subscription Offering until completion of the Community
Offering. Accordingly, Meritas has established a range of value of from
$5,950,000 to $8,050,000 for the Stock Conversion. Meritas will either confirm
the continuing validity of its appraisal or provide an updated appraisal
immediately prior to the completion of the Stock Conversion.
The appraisal has been prepared by Meritas in reliance upon the information
contained in this Prospectus, including the financial statements appearing
elsewhere in this Prospectus. Meritas also considered the following factors,
among others: the present and projected operating results and financial
condition of the Savings Bank and the economic and demographic conditions in the
Savings Bank's existing market area; certain historical, financial, and other
information relating to the Savings Bank; a comparative evaluation of the
operating and financial statistics of the Savings Bank with those of other
similarly situated savings institutions located in North Carolina and other
regions of the United States; the aggregate size of the offering of Common
Stock; the impact of the Stock Conversion on the Savings Bank's and the
Company's net worth and earnings potential; the proposed dividend policy of the
Company; and the trading market for securities of comparable institutions and
general conditions in the market for such securities.
Should it be determined at the close of the offering that the aggregate pro
forma market value of the Common Stock is higher or lower than $7,000,000, but
is nonetheless within the Estimated Valuation Range or within 15% above the
maximum of such range, the Company will make an appropriate adjustment by
raising or lowering by no more than 15% the total number of shares being offered
(within a range from 595,000 shares to 805,000 shares). Unless permitted by the
Company or otherwise required by the FDIC or the Administrator, no
resolicitation of subscribers and other purchasers will be made because of any
such change in the number of shares to be issued unless the aggregate purchase
price of the Common Stock sold in the Stock Conversion is below the minimum of
the Estimated Valuation Range or is more than $9,257,500 (i.e., 15% above the
maximum of the Estimated Valuation Range). If the aggregate purchase price falls
outside the range of from $5,950,000 to $8,050,000, subscribers and other
purchasers will be resolicited and given the opportunity to continue their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation, or their
subscription funds will be promptly refunded with interest at the Savings Bank's
passbook rate. Subscribers will also be given the opportunity to increase,
decrease, or rescind their orders. Any change in the Estimated Valuation Range
must be approved by the Administrator. The establishment of any new price range
may be effected without a resolicitation of votes from the Savings Bank's
members to approve the Plan.
The appraisal is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Common
Stock. In preparing the valuation, Meritas has relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Savings Bank. Meritas did not independently verify the financial statements
and other information provided by the Savings Bank, nor did Meritas value
independently the assets and liabilities of the Savings Bank. The valuation
considers the Savings Bank and the Company only as a going concern and should
not be considered as an indication of the liquidation value of the Savings Bank
and the Company. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons purchasing the
Common Stock will thereafter be able to sell such shares at prices equal to or
above the price or prices paid for it. Copies of the appraisal report of Meritas
setting forth the method and assumptions for such appraisal are on file and
available for inspection at the offices set forth under "Additional
Information"and at the office of the Savings Bank. Further, any subsequent
updated appraisal also will be filed with such offices and will be available for
inspection.
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LIMITATIONS ON PURCHASE OF SHARES
The Plan provides for certain additional limitations to be placed upon the
purchase of shares by eligible subscribers and others in the Stock Conversion.
Each subscriber must subscribe for a minimum of 25 shares. The ESOP may purchase
up to an aggregate of eight percent of the shares of the Common Stock to be
issued in the Stock Conversion. Except for the ESOP, no person exercising
Subscription Rights, including individuals on a joint account, may purchase more
than 25,000 shares, or $250,000, of Common Stock. No person, including
associates of and persons acting in concert with such person, may purchase more
than 25,000 shares, or $250,000, of Common Stock in the Community Offering and
the Public Offering. Shares purchased by the ESOP and attributable to a
participant thereunder shall not be aggregated with shares purchased by such
participant or any other purchaser of Common Stock in the Stock Conversion. For
purposes of the Plan, the directors of the Company and the Savings Bank are not
deemed to be associates or a group acting in concert solely by reason of their
Board membership.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the Savings
Bank's members, purchase limitations may be increased or decreased at the sole
discretion of the Company and the Savings Bank at any time. If such amount is
increased, subscribers for the maximum amount will be given the opportunity to
increase their subscriptions up to the then applicable limit, subject to the
rights and preferences of any person who has priority Subscription Rights. In
the event that the purchase limitation is decreased after commencement of the
Subscription and Community Offerings, the orders of any person who subscribed
for the maximum number of shares of Common Stock shall be decreased by the
minimum amount necessary so that such person shall be in compliance with the
then maximum number of shares permitted to be subscribed for by such person.
The term "associate" of a person is defined to mean: (i) any corporation or
organization (other than the Savings Bank or the Company) of which such person
is an officer or partner or is directly or indirectly the beneficial owner of
10% or more of any equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as a trustee or in a similar fiduciary capacity, provided, however, such
term shall not include any employee stock benefit plan of the Savings Bank in
which such person has a substantial beneficial interest or serves as a trustee
or in a similar fiduciary capacity; and (iii) any relative or spouse of such
person, or any relative of such spouse, who either has the same home as such
person or who is a director of the Savings Bank or the Company or any of their
subsidiaries. Directors are not treated as associates solely because of their
membership on the Board of Directors.
Each person purchasing Common Stock in the Stock Conversion shall be deemed
to confirm that such purchase does not conflict with the purchase limitations
under the Plan or otherwise imposed by law, rule, or regulation. In the event
that such purchase limitations are violated by any person (including any
associate or group of persons affiliated or otherwise acting in concert with
such person), the Company shall have the right to purchase from such person at
the aggregate purchase price all shares acquired by such person in excess of
such purchase limitations or, if such excess shares have been sold by such
person, to receive the difference between the aggregate purchase price paid for
such excess shares and the price at which such excess shares were sold by such
person. This right of the Company to purchase such excess shares shall be
assignable by the Company. In addition, persons who violate the purchase
limitations may be subject to sanctions and penalties imposed by the
Administrator.
Stock purchased pursuant to the Stock Conversion will be freely
transferable, except for shares purchased by directors and officers of the
Savings Bank and the Company. See " -- Limitations on Resales by Management."
In addition, under guidelines of the NASD, members of the NASD and their
associates are subject to certain restrictions on the transfer of securities
purchased in accordance with Subscription Rights and to certain reporting
requirements upon purchase of such securities.
Depending upon market conditions, the Boards of Directors of the Company
and the Savings Bank, with the approval of the Administrator, may increase or
decrease any of the above purchase limitations. In the event of such an increase
or decrease, no further approval of members of the Savings Bank would be
required. North Carolina regulations authorize a plan of conversion to provide a
maximum purchase limitation of a percentage not to exceed five percent except
for tax-qualified employee stock benefit plans which may purchase in the
aggregate not more than eight percent.
REGULATORY RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK
Applicable regulations prohibit any person from making an offer, announcing
an intent to make an offer, entering into any other arrangement to purchase
Common Stock or acquiring Common Stock or Subscription Rights in the Company
from another person prior to completion of the Stock Conversion. Further, no
person may make an offer or announcement of an
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offer to purchase shares or actually acquire shares in the Company for a period
of three years from the date of the completion of the Stock Conversion, if, upon
the completion of such offer or acquisition, that person would become the
beneficial owner of more than 10% of the Company's outstanding stock, without
the prior written approval of the Administrator. The Administrator has defined
the word "person"to include any individual, group acting in concert,
corporation, partnership, association, joint stock company, trust,
unincorporated organization, or similar company, a syndicate or any group formed
for the purpose of acquiring, holding, or disposing of securities of an insured
institution. However, offers made exclusively to the Company or underwriters or
members of a selling group acting on behalf of the Company for resale to the
general public are excepted. Moreover, when any person, directly or indirectly,
acquires beneficial ownership of more than 10% of the Company's capital stock
following the Stock Conversion within such three-year period without the prior
approval of the Administrator, the Common Stock beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matter submitted to the shareholders for a vote. These regulations will not
apply to the Company and the Commercial Bank subsequent to the Bank Conversion.
See "Certain Anti-Takeover Provisions in the Articles of Incorporation and
Bylaws."
In addition to the foregoing restrictions, any person or group of persons
acting in concert who propose to acquire 10% or more of the Company's
outstanding shares will be presumed under Federal Reserve Board regulations, to
be acquiring control of the Company and will be required to submit prior notice
to the Federal Reserve Board under the Change in Bank Control Act and the
Federal Reserve Board regulations thereunder. Furthermore, following the Bank
Conversion, the acquisition of control of the Company by any company will be
subject to the prior approval of the Federal Reserve Board under the Bank
Holding Company Act and the Commissioner under North Carolina law. See "Certain
Restrictions on Acquisition of the Company, the Converted Savings Bank, and the
Savings Bank."
STOCK PURCHASES BY MANAGEMENT
Directors, officers, and employees of the Savings Bank will be entitled to
subscribe for shares of Common Stock in the Subscription Offering to the extent
they qualify as eligible subscribers. The following table sets forth for each of
the executive officers and directors the aggregate dollar amount of Common Stock
for which each such person has informed the Company he or she intends to
purchase.
<TABLE>
<CAPTION>
SHARES
PURCHASED
DOLLAR NUMBER OF AS A
AMOUNT SHARES PERCENTAGE
TO BE TO BE OF SHARES
NAME PURCHASED PURCHASED OFFERED (*)
- ----------------------------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
Stephen R. Talbert....................................................................... $ 25,000 2,500 0.36%
Thomas P. Corriher....................................................................... 100,000 10,000 1.43
Henry H. Land............................................................................ 30,000 3,000 0.43
John A. Drye............................................................................. 50,000 5,000 0.71
Susan Linn Norvell....................................................................... 80,000 8,000 1.14
Lynne Scott Safrit....................................................................... 50,000 5,000 0.71
--------- --------- -----------
Totals.............................................................................. $ 335,000 33,500 4.78%
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ---------------
* Percentage computations assume the issuance of 700,000 shares in the
Offerings, the midpoint of the Estimated Valuation Range.
RESTRICTIONS ON REPURCHASE OF STOCK
Upon consummation of the Bank Conversion, the Company's ability to
repurchase its capital stock will be governed by the Federal Reserve Board's
regulations. Under the Federal Reserve Board's regulations, any bank holding
company that is not well-capitalized and not in generally satisfactory condition
must notify the Federal Reserve Board before purchasing or redeeming its equity
securities if the gross consideration for the purchase or redemption, when
aggregated with the net consideration paid by the company for all purchases and
redemptions during the preceding 12 months, is equal to 10% or more of the
company's consolidated retained earnings. The Federal Reserve Board may
disapprove a proposed purchase or redemption if it finds that the proposal would
constitute an unsafe or unsound practice or would violate any directive of,
condition imposed by or written agreement with, the Federal Reserve Board. Under
the Federal Reserve Board's regulations, no such prior notice of repurchases is
required to be given by a bank holding company that has received one of the two
highest examination ratings at its most recent supervisory inspection, is not
the subject of any unresolved supervisory issues
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and is, and after giving effect to the proposed repurchase will continue to be,
well-capitalized. The Company has no specific plans regarding possible stock
repurchases during the first year following the Stock Conversion.
LIMITATIONS ON RESALES BY MANAGEMENT
Shares of the Common Stock purchased by directors or officers of the
Company and the Savings Bank in the Stock Conversion will be subject to the
restriction that such shares may not be sold for a period of one year following
completion of the Stock Conversion, except in the event of the death of the
original purchaser or in any exchange of such shares in connection with a merger
or acquisition of the Company approved by the applicable regulatory authorities.
Accordingly, shares of the Common Stock issued by the Company to directors and
officers shall bear a legend giving appropriate notice of the restriction
imposed upon it and, in addition, the Company will give appropriate instructions
to the transfer agent for the Common Stock with respect to the applicable
restriction for transfer of any restricted stock. Any shares issued to directors
and officers as a stock dividend, stock split or otherwise with respect to
restricted stock shall be subject to the same restrictions. Shares acquired
otherwise than in the Stock Conversion, such as under the Company's Option Plan,
would not be subject to such restrictions. To the extent directors and officers
are deemed affiliates of the Company, all shares of the Common Stock acquired by
such directors and officers will be subject to certain resale restrictions and
may be resold pursuant to Rule 144 under the Securities Act. See
"Regulation -- Regulation of the Company -- Federal Securities Law."
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Savings Bank will be final. The Plan provides that the Savings Bank's Board of
Directors shall have the sole discretion to interpret and apply the provisions
of the Plan to particular facts and circumstances and to make all determinations
necessary or desirable to implement such provisions, including but not limited
to matters with respect to giving preference in the Community Offering to
natural persons and trusts of natural persons who are permanent residents of the
Local Community, and any and all interpretations, applications and
determinations made by the Board of Directors in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Savings Bank and its members
and subscribers in the Subscription and Community Offerings, subject to the
authority of the FDIC and the Administrator.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended by a two-thirds vote of the
Board of Directors at any time prior to submission of the Plan and proxy
materials to the Savings Bank's members. After submission of the Plan and proxy
materials to the members, the Plan may be amended by a two-thirds vote of the
Board of Directors at any time prior to the Special Meeting and at any time
following the Special Meeting with the concurrence of the FDIC and the
Administrator. In its discretion, the Board of Directors may modify or terminate
the Plan upon the order of the regulatory authorities without a resolicitation
of proxies or another Special Meeting. However, any modification of the Plan
resulting in a material change in the terms of the Conversion would require a
resolicitation of proxies and another meeting of shareholders.
The Plan further provides that in the event that mandatory new regulations
pertaining to conversions are adopted by the FDIC, the Administrator, the
Commission, the Federal Reserve Board or any successor agency prior to
completion of the Conversion, the Plan will be amended to conform to such
regulations without a resolicitation of proxies or another Special Meeting. In
the event that such new conversion regulations contain optional provisions, the
Plan may be amended to utilize such optional provisions at the discretion of the
Board of Directors without a resolicitation of proxies or another Special
Meeting. By adoption of the Plan, the Savings Bank's members will be deemed to
have authorized amendment of the Plan under the circumstances described above.
CONDITIONS AND TERMINATION
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total outstanding votes of
the members of the Savings Bank and the sale of all shares of the Common Stock
within 12 months following approval of the Plan by the members, which time
period may be extended an additional 12 months by an amendment to the Plan. If
these conditions are not satisfied, the Plan will be terminated, and the Savings
Bank will continue its business in the mutual form of organization. The Plan may
be terminated by the Board of Directors at any time prior to the Special Meeting
and, with the approval of the FDIC and the Administrator, by the Board of
Directors at any time thereafter.
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CERTAIN RESTRICTIONS ON ACQUISITION
CONVERSION REGULATIONS
Applicable North Carolina regulations provide that for a period of three
years following the Stock Conversion, the prior written approval of the
Administrator will be required before any person may, directly or indirectly,
acquire beneficial ownership of or make any offer to acquire any stock or other
equity security of the Company if, after the acquisition or consummation of such
offer, such person would be the beneficial owner of more than 10% of such class
of stock or other class of equity security of the Company. If any person were to
so acquire the beneficial ownership of more than 10% of any class of any equity
security without prior written approval, the securities beneficially owned in
excess of 10% would not be counted as shares entitled to vote and would not be
voted or counted as voting shares in connection with any matter submitted to
shareholders for a vote. Approval is not required for (i) any offer with a view
toward public resale made exclusively to the Company or its underwriters or the
selling group acting on its behalf or (ii) any offer to acquire or acquisition
of beneficial ownership of more than 10% of the common stock of the Company by a
corporation whose ownership is or will be substantially the same as the
ownership of the Company, provided that the offer or acquisition is made more
than one year following the consummation of the Stock Conversion. The regulation
provides that within one year following the Stock Conversion, the Administrator
would approve the acquisition of more than 10% of beneficial ownership only to
protect the safety and soundness of the institution. During the second and third
years after the Stock Conversion, the Administrator may approve such an
acquisition upon a finding that (i) the acquisition is necessary to protect the
safety and soundness of the Company and the Savings Bank or the Board of
Directors of the Company and the Savings Bank support the acquisition and (ii)
the acquiror is of good character and integrity and possesses satisfactory
managerial skills, the acquiror will be a source of financial strength to the
Company and the Savings Bank and the public interests will not be adversely
affected.
CHANGE IN BANK CONTROL ACT AND BANK HOLDING COMPANY ACT
The Change in Bank Control Act, together with North Carolina regulations,
require that the consent of the Administrator and Federal Reserve Board be
obtained prior to any person or company acquiring "control" of a North
Carolina-chartered savings bank or a North Carolina-chartered savings bank
holding company. The consent of the Commission and the Federal Reserve Board is
required to be obtained prior to any person or company acquiring "control" of a
North Carolina-chartered commercial bank. Upon acquiring control, such acquiror
will be deemed to be a bank holding company. Control is conclusively presumed to
exist if, among other things, an individual or company acquires the power,
directly or indirectly, to direct the management or policies of the Company or
the Savings Bank or to vote 25% or more of any class of voting stock. Control is
rebuttably presumed to exist under the Change in Bank Control Act if, among
other things, a person acquires more than 10% of any class of voting stock, and
the issuer's securities are registered under Section 12 of the Exchange Act or
the person would be the single largest shareholder. Restrictions applicable to
the operations of bank holding companies and conditions imposed by the Federal
Reserve Board in connection with its approval of such acquisitions may deter
potential acquirors from seeking to obtain control of the Company. See
"Regulation -- Regulation of the Company Following the Stock Conversion" and
" -- Regulation of the Company Following the Bank Conversion."
CERTAIN ANTI-TAKEOVER PROVISIONS
While the Boards of Directors of the Savings Bank and the Company are not
aware of any effort that might be made to obtain control of the Company after
the Conversion, the Board of Directors, as discussed below, believes that it is
appropriate to include certain provisions as part of the Company's Articles of
Incorporation to protect the interests of the Company and its shareholders from
hostile takeovers which the Board of Directors might conclude are not in the
best interests of the Converted Savings Bank or the Commercial Bank, the Company
or the Company's shareholders. These provisions may have the effect of
discouraging a future takeover attempt which is not approved by the Board of
Directors but which individual shareholders may deem to be in their best
interests or in which shareholders may receive a substantial premium for their
shares over then current market prices. As a result, shareholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions also will render the removal of the current Board of
Directors or management of the Company more difficult.
The following discussion is a general summary of certain provisions of the
Articles of Incorporation and Bylaws of the Company which may be deemed to have
such an "anti-takeover" effect. The description of these provisions is
necessarily general and reference should be made in each case to the Articles of
Incorporation and Bylaws of the Company. For information regarding how to obtain
a copy of these documents without charge, see "Additional Information."
75
<PAGE>
CLASSIFIED BOARD OF DIRECTORS AND RELATED PROVISIONS
The Company's Articles of Incorporation provide that should the Board of
Directors consist of nine or more members, the Board is to be divided into three
classes which shall be as nearly equal in number as possible. The directors in
each class will hold office following their initial appointment to office for
terms of one year, two years and three years, respectively, and, upon
reelection, will serve for terms of three years thereafter. Each director will
serve until his or her successor is elected and qualified. If the Board consists
of fewer than nine members, each member shall be elected annually to a one-year
term.
A classified board of directors could make it more difficult for
shareholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the Board of
Directors. Since the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the shareholders to
change a majority, whereas a majority of a non-classified board may be changed
in one year.
Management of the Company believes that the staggered election of directors
tends to promote continuity of management because only one-third of the Board of
Directors is subject to election each year. Staggered terms guarantee that in
the ordinary course approximately two-thirds of the directors, or more, at any
one time have had at least one year's experience as directors of the Company,
and moderate the pace of changes in the Board of Directors by extending the
minimum time required to elect a majority of directors from one to two years.
SHAREHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH PRINCIPAL
SHAREHOLDERS
The Company's Articles of Incorporation require the approval of the holders
of at least 75% of the Company's outstanding shares of voting stock to approve
any agreement, plan, or arrangement proceeding for the merger or consolidation
of the Company. Under North Carolina law, absent this provision, mergers,
consolidations and sales of substantially all of the assets of the Company must,
subject to certain exceptions, be approved by the vote of the holders of at
least a majority of the outstanding shares of the Common Stock. The increased
voting requirements in the Company's Articles of Incorporation apply except in
cases where the proposed transaction has been approved in advance by a majority
of the Company's Board of Directors.
LIMITATIONS ON CALL OF MEETINGS OF SHAREHOLDERS
The Company's Bylaws provide that special meetings of shareholders may only
be called by the Company's Board of Directors, Chairman, or President.
Shareholders are not authorized to call a special meeting.
ABSENCE OF CUMULATIVE VOTING
The Company's Articles of Incorporation do not permit cumulative voting by
shareholders for the election of the Company's directors. The absence of
cumulative voting rights effectively means that the holders of a majority of the
shares voted at a meeting of shareholders may, if they so choose, elect all
directors of the Company to be elected at that meeting, thus precluding minority
shareholder representation on the Company's Board of Directors.
BOARD CONSIDERATION OF CERTAIN NONMONETARY FACTORS IN THE EVENT OF AN OFFER BY
ANOTHER PARTY
The Articles of Incorporation of the Company direct the Board of Directors,
in evaluating a merger, consolidation, or other business combination transaction
(hereinafter a "Business Combination") or a tender or exchange offer, to
consider, in addition to the adequacy of the amount to be paid in connection
with any such transaction, certain specified factors and any other factors the
board deems relevant, including (i) the social and economic effects of the
transaction on the Company and its subsidiaries, employees, depositors, loan and
other customers, creditors and other elements of the communities in which the
Company and its subsidiaries operate or are located; (ii) the business and
financial condition and earnings prospects of the acquiring person or entity;
and (iii) the competence, experience and integrity of the acquiring person or
entity and its or their management; and (iv) the prospects for a successful
conclusion of the Business Combination. By having these standards in the
Articles of Incorporation of the Company, the Board of Directors may be in a
stronger position to oppose any proposed Business Combination or tender or
exchange offer if the board concludes that the transaction would not be in the
best interest of the Company, even if the price offered is significantly greater
than the then market price of any equity security of the Company.
The Board of Directors feels a responsibility for maintaining the financial
and business integrity of the Company. Savings institutions and banks and their
holding companies occupy positions of special trust in the communities they
serve. They
76
<PAGE>
also provide opportunities for abuse by those who are not of sufficient
experience or competence or financial means to act professionally and
responsibly with respect to management of a financial institution. It is of
concern to the Company that it be managed in the interest of the communities
that it serves and that it and its subsidiary bank maintain its integrity as an
institution.
One effect of this provision might be to encourage consultation by an
offeror with the Board of Directors prior to or after commencing a tender offer
in an attempt to prevent a contest from developing. This provision thus may
strengthen the Board of Directors' position in dealing with any potential
offeror which might attempt to effect a takeover of the Company. The provision
will not make a Business Combination regarded by the Board of Directors as being
in the interests of the Company more difficult to accomplish, but it will permit
the Board of Directors to determine whether a Business Combination or tender or
exchange offer is not in the interests of the Company (and thus to oppose it) on
the basis of various factors deemed relevant.
AUTHORIZATION OF PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of preferred stock, which conceivably could represent an
additional class of stock required to approve any proposed acquisition. The
Company is authorized to issue preferred stock from time to time in one or more
series subject to applicable provisions of law, and the Board of Directors is
authorized to fix the powers, designations, preferences and relative,
participating, optional and other special rights of such shares, including
voting rights and conversion rights. Issuance of the preferred stock could
adversely affect the relative voting rights of holders of the Common Stock. In
the event of a proposed merger, tender offer or other attempt to gain control of
the Company that the Board of Directors did not approve, it might be possible
for the Board of Directors to authorize the issuance of a series of preferred
stock with rights and preferences that would impede the completion of such a
transaction. An effect of the possible issuance of preferred stock, therefore,
may be to deter a future takeover attempt. The Board of Directors has no present
plans or understandings for the issuance of any preferred stock and does not
intend to issue any preferred stock except on terms which the Board of Directors
deems to be in the best interests of the Company and its shareholders. This
preferred stock, none of which has been issued by the Company, together with
authorized but unissued shares of Common Stock (the Articles of Incorporation
authorizes the issuance of up to 9,000,000 shares of Common Stock), also could
represent additional capital required to be purchased by the acquiror.
PROCEDURES FOR SHAREHOLDER NOMINATIONS
The Company's Bylaws provide that any shareholder desiring to make a
nomination for the election of directors at a meeting of shareholders must
submit written notice to the Secretary of the Company not less than 120 days in
advance of the meeting. Management believes that it is in the best interests of
the Company and its shareholders to provide sufficient time to enable management
to disclose to shareholders information about a dissident slate of nominations
for directors. This advance notice requirement may also give management time to
solicit its own proxies in an attempt to defeat any dissident slate of
nominations should management determine that doing so is in the best interest of
shareholders generally.
SHAREHOLDER PROTECTION ACT. The Company is subject to the North Carolina
Shareholder Protection Act. The Shareholder Protection Act requires that, unless
certain "fair price" and other conditions are met, the affirmative vote of the
holders of 95% of the voting shares of a corporation is necessary to adopt or
authorize a business combination with any other entity, if that entity is the
beneficial owner, directory or indirectly, or more than 20% of the voting shares
of the corporation. This provision may have the effect of discouraging a change
of control by allowing minority shareholders to prevent a transaction favored by
a majority of the shareholders.
CONTROL SHARE ACQUISITION ACT. The Company is also subject to the North
Carolina Control Share Acquisition Act which provides that any person or party
who acquires "control shares" (defined therein as a number of shares which, when
added to other shares held, gives the holder voting power in the election of
directors equal to 20%, 33 1/3%, or a majority of all voting power) may only
vote those shares if the remaining shareholders of the Company, by resolution,
permit them to be voted. If the shareholders of the Company permit the control
shares to be accorded voting rights and the holder of the control shares has a
majority of all voting power for the election of directors, the other
shareholders of the Company have the right to the redemption of their shares at
the fair value as the day prior to the date on which the vote was taken which
gave voting rights to the control shares. The Control Share Act could discourage
a person form acquiring a large number of shares of the Company if, the purpose
is to seek control for the Company after obtaining a control position. Some
shareholders may determine this provision as not in their best interests.
77
<PAGE>
BENEFIT PLANS
In addition to the provisions of the Company's Articles of Incorporation
and Bylaws described above, certain benefit plans of the Company adopted in
connection with the Conversion contain provisions which also may discourage
hostile takeover attempts which the Board of Directors of the Company might
conclude are not in the best interests of the Company, its shareholders. For a
description of the benefit plans and the provisions of such plans relating to
changes in control of the Company, see "Management of the Savings
Bank -- Certain Benefit Plans and Agreements."
CERTAIN ANTI-TAKEOVER PROVISIONS IN THE COMPANY'S ARTICLES OF INCORPORATION AND
BYLAWS
The Boards of Directors of the Company and the Savings Bank believe that
the provisions described above reduce the Company's vulnerability to takeover
attempts and certain other transactions which have not been negotiated with and
approved by its Board of Directors. These provisions will also assist the
Company and the Converted Savings Bank (or the Commercial Bank) in the orderly
deployment of the net proceeds of the Stock Conversion into productive assets
during the initial period after the Stock Conversion. The Boards of Directors of
the Company and the Savings Bank believe these provisions are in the best
interests of the Converted Savings Bank (and the Commercial Bank) and of the
Company and its shareholders. In the judgment of the Boards of Directors of the
Company and the Savings Bank, the Company's Board of Directors is in the best
position to consider all relevant factors and to negotiate for what is in the
best interests of the shareholders and the Company's other constituents.
Accordingly, the Boards of Directors of the Company and the Savings Bank believe
that it is in the best interests of the Company and its shareholders to
encourage potential acquirors to negotiate directly with the Company's Board of
Directors, and that these provisions will encourage such negotiations and
discourage nonnegotiated takeover attempts. It is also the view of the Board of
Directors of the Company that these provisions should not discourage persons
from proposing a merger or other transaction at prices reflective of the true
value of the Company and which is in the best interests of all shareholders.
Attempts to acquire control of financial institutions and their holding
companies have become increasingly common. Takeover attempts which have not been
negotiated with and approved by the Board of Directors present to shareholders
the risk of a takeover on terms which may be less favorable than might otherwise
be available. A transaction which is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for the Company and
shareholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause great expense. Although a tender offer or
other takeover attempt may be made at a price substantially above then current
market prices, such offers are sometimes made for less than all the outstanding
shares of a target company. As a result, shareholders may be presented with the
alternative of partially liquidating their investment at a time that may be
disadvantageous, or retaining their investment in an enterprise which is under
different management and whose objectives may not be similar to those of the
remaining shareholders. The concentration of control that could result from a
tender offer or other takeover attempt could also deprive the Company's
remaining shareholders of certain protective provisions of the Exchange Act.
Despite the belief of the Company and the Savings Bank as to the benefits
to shareholders of these provisions of the Company's Articles of Incorporation
and Bylaws, these provisions may also have the effect of discouraging a future
takeover attempt which would not be approved by the Company's Board of Directors
but pursuant to which the shareholders may receive a substantial premium for
their shares over then current market prices. As a result, shareholders who
might desire to participate in such a transaction may not have any opportunity
to do so. Such provisions will also render the removal of the Company's Board of
Directors and management more difficult and may tend to stabilize the Company's
stock price, thus limiting gains which might otherwise be reflected in price
increases due to a potential merger or acquisition. The Board of Directors,
however, has concluded that the potential benefits of these provisions outweigh
the possible disadvantages. Pursuant to applicable regulations, at any annual or
special meeting of its shareholders after the Stock Conversion, the Company may
adopt additional provisions in its Articles of Incorporation regarding the
acquisition of its equity securities that would be permitted to a North Carolina
corporation.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 9,000,000 shares of Common Stock, par
value $1.00 per share, and 1,000,000 shares of preferred stock, no par value per
share. If the Option Plans are adopted and implemented, the Company will reserve
78
<PAGE>
for future issuance under the Option Plans an amount of authorized but unissued
shares of Common Stock equal to 10% of the shares to be issued in the Stock
Conversion. The capital stock of the Company will represent nonwithdrawable
capital, will not be an account of an insurable type, and will not be insured by
the FDIC or any other federal or state governmental agency.
COMMON STOCK VOTING RIGHTS. Each share of the Common Stock will have the
same relative rights and will be identical in all respects with every other
share of the Common Stock. The holders of the Common Stock will possess
exclusive voting rights in the Company, except to the extent that shares of
preferred stock issued in the future may have voting rights, if any. Each holder
of shares of the Common Stock will be entitled to one vote for each share held
of record on all matters submitted to a vote of holders of shares of the Common
Stock. For information regarding a possible reduction in voting rights, see
"Certain Anti-Takeover Provisions in the Articles of Incorporation and
Bylaws -- Restrictions on Acquisitions of Securities."
DIVIDENDS. The Company may, from time to time, declare dividends to the
holders of the Common Stock, who will be entitled to share equally in any such
dividends. For information as to cash dividends, see "Dividend Policy",
"Regulation -- Depository Institution Regulation -- Dividend Restrictions" and
"Taxation."
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Converted Savings Bank (or the Commercial Bank), the Company, as holder of
all of the Converted Savings Bank's (or Commercial Bank's) capital stock, would
be entitled to receive all assets of the Converted Savings Bank (or the
Commercial Bank) after payment of all debts and liabilities of the Converted
Savings Bank (or the Commercial Bank) and after distribution of the balance in
the liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders. In the event of a liquidation, dissolution or winding up of the
Company, each holder of shares of the Common Stock would be entitled to receive,
after payment of all debts and liabilities of the Company, a pro rata portion of
all assets of the Company available for distribution to holders of the Common
Stock. If any preferred stock is issued, the holders thereof may have a priority
in liquidation or dissolution over the holders of the Common Stock. The Bank
Conversion shall not be considered a "liquidation" of the Converted Savings
Bank, and the Commercial Bank will continue to maintain the liquidation account
established by the Converted Savings Bank in the Stock Conversion according to
the same terms. For information regarding limitations on acquisition of shares
of the Common Stock, see "Certain Restrictions on Acquisition of the Company,
the Converted Savings Bank and the Commercial Bank," "Certain Anti-Takeover
Provisions in the Articles of Incorporation and Bylaws" and "The
Conversion -- Regulatory Restrictions on Acquisition of the Common Stock."
OTHER CHARACTERISTICS. Holders of the Common Stock will not have preemptive
rights with respect to any additional shares of the Common Stock which may be
issued. The Common Stock is not subject to call for redemption, and the
outstanding shares of the Common Stock, when issued and upon receipt by the
Company of the full purchase price therefor, will be fully paid and
nonassessable.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for the
Common Stock will be Registrar & Transfer Co., Cranford, New Jersey.
PREFERRED STOCK
None of the 1,000,000 authorized shares of preferred stock of the Company
will be issued in the Stock Conversion. After the Stock Conversion is completed,
the Board of Directors of the Company will be authorized to issue preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares and the qualifications, limitations and
restrictions thereof. The preferred stock may rank prior to the Common Stock as
to dividend rights or liquidation preferences, or both, and may have full or
limited voting rights. The Board of Directors has no present intention to issue
any of the preferred stock. Should the Board of Directors of the Company
subsequently issue preferred stock, no holder of any such stock shall have any
preemptive right to subscribe for or purchase any stock or any other securities
of the Company other than such, if any, as the Board of Directors, in its sole
discretion, may determine and at such price or prices and upon such other terms
as the Board of Directors, in its sole discretion, may fix.
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to the
Exchange Act upon the completion of the Stock Conversion and will not deregister
said shares for a period of at least three years following the completion of the
Stock Conversion. Upon such registration, the proxy and tender offer rules,
insider trading reporting and restrictions, annual and periodic reporting and
other requirements of the Exchange Act will be applicable. The Company intends
to have a fiscal year end of December 31.
79
<PAGE>
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for the Company by
Moore & Van Allen, PLLC, Charlotte, North Carolina. Moore & Van Allen, PLLC has
consented to the references herein to its opinion. Certain legal matters will be
passed upon for W. R. Hough by .
TAX OPINION
The federal income tax consequences of the Stock Conversion will be passed
upon by Moore & Van Allen, PLLC, Charlotte, North Carolina. Moore & Van Allen,
PLLC has consented to the references herein to its opinion.
EXPERTS
The financial statements of Landis Savings Bank, SSB at December 30, 1996
and 1995 and for the two years then ended have been included herein in reliance
upon the report of Dixon Odom PLLC, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
Meritas has consented to the publication herein of the summary of its
appraisal report to the Savings Bank setting forth its opinion as to the
estimated pro forma aggregate market value of the Common Stock to be issued in
the Stock Conversion and the value of Subscription Rights to purchase the Common
Stock and to the use of its name and statements with respect to it appearing
herein.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form SB-2
(File No. 333- ) under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the SEC. Such information may be inspected at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies may be obtained at prescribed rates
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC at 75 Park Place,
Fourteenth Floor, New York, New York 10007 and Room 3190, John C. Kluczynski
Building, 230 South Dearborn Street, Chicago, Illinois 60604. Copies of such
material can be obtained by mail from the SEC at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the SEC maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
address for the SEC's Website is "http://www.sec.gov". The statements contained
in this Prospectus as to the contents of any contract or other document filed as
an exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Savings Bank has filed an Application to Convert a Mutual Savings Bank
to a Stock Owned Savings Bank and an Acquisition Application with the
Administrator. Pursuant to the North Carolina conversion regulations, this
Prospectus omits certain information contained in such Applications. The
Applications, which include a copy of Meritas's appraisal, may be inspected at
the office of the Administrator, Savings Institutions Division, North Carolina
Department of Commerce, Tower Building, Suite 301, 1110 Navaho Drive, Raleigh,
North Carolina 27609. Copies of the Plan of Conversion, which includes copies of
the Commercial Bank's proposed Certificate of Incorporation and Bylaws, are
available for inspection at the office of the Savings Bank and may be obtained
by writing to the Savings Bank at 107 South Central Avenue, Landis, North
Carolina 28088; Attention: Stephen R. Talbert, President, or by telephoning the
Savings Bank at (704) 857-7277. A copy of Meritas' independent appraisal report
is also available for inspection at the Stock Information Center.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report........................................................................................... F-2
Statements of Financial Condition as of
December 31, 1996 and 1995........................................................................................... F-3
Statements of Operations for the Years Ended
December 31, 1996 and 1995........................................................................................... F-4
Statements of Retained Earnings for the Years Ended
December 31, 1996 and 1995........................................................................................... F-5
Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995........................................................................................... F-6
Notes to Financial Statements.......................................................................................... F-8
Statements of Financial Condition as of
September 30, 1997 and 1996 (Unaudited).............................................................................. F-21
Statements of Operations for the Nine Months Ended
September 30, 1997 and 1996 (Unaudited).............................................................................. F-22
Statements of Retained Earnings for the Nine Months Ended
September 30, 1997 and 1996 (Unaudited).............................................................................. F-23
Stements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996 (Unaudited).............................................................................. F-24
Note to Financial Statements (Unaudited)............................................................................... F-25
</TABLE>
Schedules -- All Schedules are omitted because the required information is not
applicable or is presented in the financial statements or accompanying notes.
All financial statements of BOC Financial Corp. have been omitted because
BOC Financial Corp., Inc. has not yet issued any stock, has no assets and no
liabilities and has not conducted any business other than of an organizational
nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
LANDIS SAVINGS BANK, SSB
Landis, North Carolina
We have audited the accompanying statements of financial condition of
Landis Savings Bank, SSB as of December 31, 1996 and 1995 and the related
statements of operations, retained earnings, and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Landis Savings Bank, SSB at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
DIXON ODOM PLLC
Sanford, North Carolina
October 23, 1997
F-2
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash on hand and in banks...................................................................... $ 307,474 $ 100,023
Interest-earning balances in other banks....................................................... 33,190 32,458
Federal funds sold............................................................................. 675,000 100,000
Investment securities available for sale, at fair value (amortized cost of $2,146,388 and
$1,975,591 at December 31, 1996 and 1995, respectively) (Note B)............................. 2,148,475 1,987,739
Investment securities held to maturity, at amortized cost (fair value of $23,584 at December
31, 1995) (Note B)........................................................................... -- 23,151
Loans receivable, net (Note C)................................................................. 18,916,960 17,307,687
Accrued interest receivable.................................................................... 40,440 34,477
Premises and equipment, net (Note D)........................................................... 291,100 275,520
Stock in the Federal Home Loan Bank, at cost................................................... 170,200 157,500
Other assets................................................................................... 78,589 75,674
----------- -----------
TOTAL ASSETS................................................................................... $22,661,428 $20,094,229
----------- -----------
----------- -----------
LIABILITIES AND NET RETAINED EARNINGS
Deposit accounts (Note G)...................................................................... $18,322,484 $15,845,546
Advance payments from borrowers for property taxes and insurance............................... 8,794 7,086
Accrued expenses and other liabilities......................................................... 17,652 35,284
----------- -----------
TOTAL LIABILITIES.............................................................................. 18,348,930 15,887,916
----------- -----------
Commitments and contingencies (Notes C and L)
Retained earnings, substantially restricted.................................................... 4,312,498 4,206,313
----------- -----------
TOTAL LIABILITIES AND NET RETAINED EARNINGS.................................................... $22,661,428 $20,094,229
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans........................................................................................... $1,445,284 $1,355,524
Investments..................................................................................... 136,781 138,369
Deposits in other banks and federal funds sold.................................................. 27,485 16,362
---------- ----------
TOTAL INTEREST INCOME............................................................................. 1,609,550 1,510,255
---------- ----------
INTEREST EXPENSE
Deposit accounts................................................................................ 840,658 723,424
---------- ----------
NET INTEREST INCOME............................................................................... 768,892 786,831
PROVISION FOR LOAN LOSSES......................................................................... 5,200 900
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............................................... 763,692 785,931
---------- ----------
OTHER INCOME
Transaction and other service fee income........................................................ 3,803 1,910
Gain (loss) on sale of investment securities.................................................... 4,008 (297)
---------- ----------
TOTAL OTHER INCOME................................................................................ 7,811 1,613
OTHER EXPENSES
Personnel costs................................................................................. 294,888 314,187
Occupancy....................................................................................... 47,077 43,285
Data processing and outside service fees........................................................ 72,679 54,936
Deposit insurance premiums...................................................................... 27,275 35,210
SAIF special assessment (Note I)................................................................ 101,142 --
Other........................................................................................... 66,805 61,066
---------- ----------
TOTAL OTHER EXPENSES.............................................................................. 609,866 508,684
---------- ----------
INCOME BEFORE INCOME TAXES........................................................................ 161,637 278,860
INCOME TAX EXPENSE................................................................................ 49,790 100,928
---------- ----------
NET INCOME........................................................................................ $ 111,847 $ 177,932
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED TOTAL
RETAINED HOLDING RETAINED
EARNINGS GAINS (LOSSES) EARNINGS
---------- -------------- ----------
<S> <C> <C> <C>
Balance at December 31, 1994........................................................ $4,021,545 $(38,816) $3,982,729
Net income.......................................................................... 177,932 -- 177,932
Unrealized holding gains (losses), net of income taxes of $29,736................... -- 45,652 45,652
---------- -------------- ----------
Balance at December 31, 1995........................................................ 4,199,477 6,836 4,206,313
Net income.......................................................................... 111,847 -- 111,847
Unrealized holding gains (losses), net of income tax benefit of $4,400.............. -- (5,662) (5,662)
---------- -------------- ----------
Balance at December 31, 1996........................................................ $4,311,324 $ 1,174 $4,312,498
---------- -------------- ----------
---------- -------------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................... $ 111,847 $ 177,932
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation............................................................................... 25,250 23,730
Amortization, net.......................................................................... (34,701) (17,687)
(Gain) loss on sale of assets, net......................................................... (4,008) 297
Provision for loan losses.................................................................. 5,200 900
Deferred income taxes...................................................................... 1,807 4,711
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable....................................... (5,963) 1,849
Increase in other assets................................................................. (323) (14,541)
Decrease in accrued expenses and other liabilities....................................... (17,632) (9,675)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................................... 81,477 167,516
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-earning balances in other banks...................................... (732) (6,677)
Net (increase) decrease in federal funds sold................................................. (575,000) 175,000
Purchases of available for sale investment securities......................................... (2,293,012) (972,270)
Proceeds from maturities of:
Available for sale investment securities................................................... 1,325,000 200,000
Held to maturity investment securities..................................................... 23,151 9,534
Proceeds from sales of available for sale investment securities............................... 800,868 897,438
Purchase of Federal Home Loan Bank stock...................................................... (12,700) (6,000)
Net increase in loans......................................................................... (1,579,417) (1,275,583)
Purchase of premises and equipment............................................................ (40,830) (7,983)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES........................................................... $(2,352,672) $ (986,541)
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in savings accounts..................................................... $1,620,600 $ (719,816)
Net increase in certificates of deposit......................................................... 856,338 1,520,725
Net increase (decrease) in advance payments from borrowers for taxes and insurance.............. 1,708 (4,309)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................................................... 2,478,646 796,600
---------- ----------
NET INCREASE (DECREASE) IN CASH ON HAND AND IN BANKS.............................................. 207,451 (22,425)
CASH ON HAND AND IN BANKS, BEGINNING.............................................................. 100,023 122,448
---------- ----------
CASH ON HAND AND IN BANKS, ENDING................................................................. $ 307,474 $ 100,023
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest..................................................................................... $ 840,658 $ 723,424
---------- ----------
---------- ----------
Income taxes................................................................................. $ 65,933 $ 145,374
---------- ----------
---------- ----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Unrealized holding gains (losses) on available for sale investment securities, net of
deferred income taxes....................................................................... $ 5,662 $ (45,652)
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Landis Savings Bank, SSB of Landis, North Carolina ("Landis Savings" or
"Bank") is an operating mutual savings bank chartered in North Carolina. The
Bank is primarily engaged in the business of obtaining savings deposits from and
providing loans to the general public.
NATURE OF BUSINESS
Landis Savings maintains its offices and conducts its primary business in
Landis, North Carolina. The Bank is primarily engaged in the business of
attracting deposits from the general public and using such deposits to make
mortgage loans secured by one-to-four family residential real estate located in
its primary market area. The Bank also makes home equity line of credit loans,
multi-family residential loans, commercial loans, construction loans and loans
secured by deposit accounts. Landis Savings has been and intends to continue to
be a community-oriented financial institution offering a variety of financial
services to meet the needs of the community it serves.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly sensitive to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
A majority of the Bank's loan portfolio consists of single-family
residential loans in its market area. The regional economy is currently stable
and consists of various types of industry. Real estate prices in this market are
also stable; however, the ultimate collectibility of a substantial portion of
the Bank's loan portfolio is susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
INVESTMENT SECURITIES
The Bank classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading securities at
December 31, 1996 or 1995. Securities held to maturity are those securities for
which the Bank has the ability and intent to hold to maturity. All other
securities are classified as available for sale.
Available for sale securities consist of investment securities not
classified as trading securities or held to maturity securities and are recorded
at fair value. Held to maturity securities are recorded at cost, adjusted for
the amortization or accretion of premiums or discounts. Unrealized holding gains
and losses, net of the related tax effect, on securities available for sale are
excluded from earnings and are reported as a separate component of retained
earnings until realized. Transfers of securities between categories are recorded
at fair value at the date of transfer. Unrealized holding gains or losses
associated with transfers of securities from held to maturity to available for
sale are recorded as a separate component of retained earnings.
F-8
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- Continued
A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and losses are
included in earnings and the costs of securities sold are derived using the
specific identification method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired. Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received on
such loans are applied as a reduction of the loan principal balance. Interest
income on other nonaccrual loans is recognized only to the extent of interest
payments received.
The Bank accounts for impaired loans in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for
Impairment of a Loan," amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosure." A loan is impaired
when, based on current information and events, it is probable that all amounts
due according to the contractual terms of the loan agreement will not be
collected. Impaired loans are measured based on the present value of expected
future cash flows, discounted at the loan's effective interest rate or at the
loan's observable market price, or the fair value of the collateral of the loan
if the loan is collateral dependent. Interest income from impaired loans is
recognized using the cash basis method of accounting during the time within that
period in which the loans were impaired.
ALLOWANCE FOR LOAN LOSSES
The Bank provides for loan losses on the allowance method. Accordingly, all
loan losses are charged to the related allowance and all recoveries are credited
to it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
is adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation of premises and equipment is recorded using
straight-line and accelerated methods over the estimated useful lives of the
related assets.
Expenditures for maintenance and repairs are charged to expense as
incurred, while those for improvements are capitalized. The costs and
accumulated depreciation relating to premises and equipment retired or otherwise
disposed of are eliminated from the accounts, and any resulting gains or losses
are credited or charged to earnings.
F-9
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- Continued
INVESTMENT IN FEDERAL HOME LOAN BANK STOCK
As a requirement for membership, the Bank invests in stock of the Federal
Home Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
Real estate acquired in settlement of loans is carried at the lower of cost
or fair value less estimated costs to dispose. Generally accepted accounting
principles define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.
INCOME TAXES
Deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Future tax benefits are recognized to the extent that realization of such
benefits is more likely than not. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which the assets and liabilities are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income tax expense in the period that includes the
enactment date.
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Bank's assets and liabilities
result in deferred tax assets, applicable accounting standards require an
evaluation of the probability of being able to realize the future benefits
indicated by such assets. A valuation allowance is provided when it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. In assessing the realizability of the deferred tax assets, management
considers the scheduled reversals of deferred tax liabilities, projected future
taxable income, and tax planning strategies.
A deferred tax liability is not recognized for portions of the allowance
for loan losses for income tax purposes in excess of the financial statement
balance, as described in Note J. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
BENEFIT PLANS
The Bank has a profit sharing plan that covers substantially all of the
Bank's employees and qualifies under the provisions of (section mark)401(a) of
the Internal Revenue Code. The Board of Directors determines discretionary
contributions on an annual basis. The Bank also has a non-contributory
director's retirement plan that covers all eligible directors. The expense for
the plan is accrued monthly assuming a 6% discount rate and 100% vesting of
benefits. Payment of benefits is based on age and vesting requirements outlined
in the plan. In 1995, the Bank terminated its defined benefit retirement plan.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT ON EARNINGS PER SHARE. In March 1996, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128. The Statement establishes standards for computing
and presenting earnings per share and applies to entities with publicly held
common stock or potential common stock. This Statement simplifies the standards
for computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share" ("EPS"), and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
the presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could
F-10
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES -- Continued
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Diluted EPS is computed similarly to
fully diluted EPS pursuant to APB Opinion No. 15. This Statement supersedes
Opinion 15 and AICPA Accounting Interpretations 1-102 of Opinion 15. This
Statement will be effective for financial statements issued for periods ending
after December 15, 1997. Management does not believe the impact of adopting SFAS
No. 128 will be material to the Bank's financial statements.
FASB STATEMENT ON ACCOUNTING FOR STOCK-BASED COMPENSATION. In October 1995,
the FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method"
of accounting for an employee stock option whereby compensation cost is measured
at the grant date based on the value of the award and is recognized over the
service period. FASB has encouraged all entities to adopt the fair value based
method; however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by APB Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess of the market price of the stock
at the grant date over the amount an employee must pay to acquire the stock.
However, most stock option plans have no intrinsic value at the grant date and,
as such, no compensation cost is recognized under APB Opinion No. 25. Entities
electing to continue use of the accounting treatment of APB Opinion No. 25 must
make certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995. Pro
forma disclosures must include the effects of all awards granted in fiscal years
beginning after December 15, 1994. The Bank expects to use the "intrinsic value
based method" as prescribed by APB Opinion No. 25. Accordingly, management does
not believe the impact of adopting SFAS No. 123 will be material to the Bank's
financial statements.
FASB STATEMENT ON TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES. In June 1995, the FASB issued SFAS No. 125. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. This Statement is effective for transfer and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1995, and is to be applied prospectively. The effective date for certain
provisions of this Statement has been postponed for one year. Management
anticipates that the adoption of the Statement should have no material impact on
its financial statements.
FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1996, the FASB
issued SFAS No. 130. This Statement establishes standards of reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. In addition to net income as has been historically
determined, comprehensive income for the Bank would include unrealized holding
gains and losses on available for sale securities. This Statement will be
effective for the Bank's fiscal year ending December 31, 1998, and the Bank does
not intend to early adopt. Had the Bank early-adopted this Statement, it would
have reported comprehensive income of $106,185 and $223,584 for the years ended
December 31, 1996 and 1995, respectively.
F-11
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE B -- INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major
classification:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U. S. government securities and obligations of U. S. government
agencies............................................................ $2,146,388 $ 4,196 $2,109 $2,148,475
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U. S. government securities and obligations of U. S. government
agencies............................................................ $1,975,591 $ 12,774 $ 626 $1,987,739
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Securities held-to-maturity:
Mortgage-backed securities............................................. $ 23,151 $ 433 $ -- $ 23,584
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The amortized cost and fair values of securities available for sale at
December 31, 1996 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES HELD TO
MATURITY
------------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due within one year....................................................... $ 649,546 $ 650,305
Due after one year through five years..................................... 1,496,842 1,498,170
Due after five years through ten years.................................... -- --
Due after ten years....................................................... -- --
---------- ----------
$2,146,388 $2,148,475
---------- ----------
---------- ----------
</TABLE>
Proceeds from maturities and sales of investment securities available for
sale during the year ended December 31, 1996 were $1,325,000 and $800,868,
respectively. Gross gains of $4,088 were realized on those sales. Proceeds from
maturities of investment securities held to maturity during the year ended
December 31, 1996 were $23,151. No gains or losses were realized on those
maturities.
Proceeds from maturities and sales of investment securities available for
sale during the year ended December 31, 1995 were $200,000 and $897,438,
respectively. Gross gains and losses of $1,000 and $1,297, respectively, were
realized on those sales. Proceeds from maturities of investment securities held
to maturity during the year ended December 31, 1995 were $9,534. No gains or
losses were realized on those maturities.
Securities with a carrying value of $0 and $199,032 at December 31, 1996
and 1995, respectively, were pledged to secure public monies on deposit as
required by law.
F-12
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE C -- LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Type of loan:
Real estate loans:
One-to-four family residential
Fixed........................................................... $11,611,870 $11,596,017
Adjustable...................................................... 5,313,349 3,815,181
Multi-family residential
Adjustable...................................................... 224,531 248,752
Commercial
Fixed........................................................... -- 10,854
Adjustable...................................................... 248,245 267,392
Construction
Adjustable...................................................... 413,000 338,000
Home equity lines of credit
Adjustable...................................................... 1,174,895 984,825
Home improvement loans
Fixed........................................................... 3,023 --
Adjustable...................................................... 260,554 227,908
----------- -----------
Total real estate loans.............................................. 19,249,467 17,488,929
----------- -----------
Other loans:
Loans secured by deposits
Fixed........................................................... 58,524 126,421
----------- -----------
Total loans............................................................ 19,307,991 17,615,350
Less:
Construction loans in process........................................ (289,044) (222,750)
Allowance for loan losses............................................ (7,600) (2,400)
Deferred loan origination fees, net of costs......................... (94,387) (82,513)
----------- -----------
$18,916,960 $17,307,687
----------- -----------
----------- -----------
</TABLE>
At December 31, 1996 and 1995, the Bank had no loans in nonaccrual status.
The allowance for loan losses is summarized as follows:
<TABLE>
<S> <C> <C>
Balance at beginning of year....................................................... $2,400 $1,500
------ ------
Loans charged off:
Real estate...................................................................... -- --
Other............................................................................ -- --
------ ------
Total loans charged off............................................................ -- --
------ ------
Recoveries:
Real estate...................................................................... -- --
Other............................................................................ -- --
------ ------
Total loan recoveries.............................................................. -- --
------ ------
Provision for loan losses.......................................................... 5,200 900
------ ------
Balance at end of year............................................................. $7,600 $2,400
------ ------
------ ------
</TABLE>
F-13
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE C -- LOANS RECEIVABLE -- Continued
At December 31, 1996, the Bank had mortgage loan commitments outstanding of
$196,800 and pre-approved but unused lines of credit totaling $1,091,000. In
management's opinion, these commitments, and undisbursed proceeds on
construction loans in process reflected above, represent no more than normal
lending risk to the Bank and will be funded from normal sources of liquidity.
The Bank has had loan transactions with its directors and executive
officers. Such loans were made in the ordinary course of business and also on
substantially the same terms and collateral as those comparable transactions
prevailing at the time and did not involve more than the normal risk of
collectibility or present other unfavorable features. A summary of related party
loan transactions is as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Balance at beginning of year................................................ $ 239,646 $ 269,116
Additional borrowings....................................................... 115,456 11,500
Loan repayments............................................................. (164,942) (40,970)
--------- ---------
Balance at end of year...................................................... $ 190,160 $ 239,646
--------- ---------
--------- ---------
</TABLE>
NOTE D -- PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Land........................................................................ $ 16,000 $ 16,000
Building and improvements................................................... 371,236 361,691
Furniture and equipment..................................................... 147,503 160,078
--------- ---------
534,739 537,769
Accumulated depreciation.................................................... (243,639) (262,249)
--------- ---------
$ 291,100 $ 275,520
--------- ---------
--------- ---------
</TABLE>
NOTE E -- FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
NOTE F -- ADVANCES FROM FEDERAL HOME LOAN BANK
The Bank has a $2,000,000 line of credit from the Federal Home Loan Bank,
which is secured by a blanket floating lien on the Bank's one-to-four family
residential mortgage loans. As of December 31, 1996, there were no advances on
this line of credit.
F-14
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE G -- DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at December 31, 1996 and 1995
follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Savings deposits:
Regular passbook....................................................... $ 4,333,767 3.05% $ 5,378,920 3.05%
Money market........................................................... 2,665,753 5.58% -- 0.00%
----------- -----------
6,999,520 4.01% 5,378,920 3.05%
----------- -----------
Certificates of deposit.................................................. 11,322,964 5.74% 10,466,626 5.70%
----------- -----------
Total deposit accounts................................................... $18,322,484 5.08% $15,845,546 4.80%
----------- -----------
----------- -----------
</TABLE>
The weighted average cost of deposit accounts was 5.08% and 4.80% at
December 31, 1996 and 1995, respectively.
A summary of certificate accounts by maturity as of December 31, 1996
follows:
<TABLE>
<CAPTION>
LESS THAN $100,000
$100,000 OR MORE TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
Three months or less...................................... $2,854,056 $ 780,476 $ 3,634,532
Over three months through twelve months................... 3,617,983 1,131,458 4,749,441
Over one year through three years......................... 2,523,271 415,720 2,938,991
Over three years.......................................... -- -- --
---------- ---------- -----------
Total certificate accounts................................ $8,995,310 $2,327,654 $11,322,964
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
Interest expense on deposits for the years ended December 31, 1996 and 1995
is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Regular passbook savings...................................................... $144,488 $168,648
Money market savings.......................................................... 74,822 --
Certificates of deposit....................................................... 622,362 556,231
-------- --------
841,672 724,879
Penalties for early withdrawal................................................ 1,014 1,455
-------- --------
$840,658 $723,424
-------- --------
-------- --------
</TABLE>
NOTE H -- EMPLOYEE AND DIRECTOR BENEFIT PLANS
PENSION PLAN
The Bank terminated its qualified, noncontributory defined benefit
retirement plan during 1995. The pension expense incurred during the years ended
December 31, 1996 and 1995 was $7,510 and $77,634, respectively.
PROFIT SHARING PLAN
On June 26, 1996, the Bank adopted a profit sharing plan under the
provisions of (section mark)401(a) of the Internal Revenue Code. Under the plan,
the directors of the Bank contribute a discretionary amount to the plan at the
end of each plan year. Participation in the plan is available to any employee of
the Bank who has at least one year of service of 1,000 hours or more with the
Bank. Also, a participant's share of the employer contributions begins vesting
at a rate of 20% per year after three years of service and is considered fully
vested after 7 years of service. Plan benefits are paid out at retirement age
(65) or other times as described in the plan. For the plan year ended December
31, 1996, the Bank incurred $18,000 of expense in the form of contributions to
the plan.
F-15
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE H -- EMPLOYEE AND DIRECTOR BENEFIT PLANS -- Continued
DIRECTORS' RETIREMENT PLAN
A directors' retirement plan, effective June 1, 1997, was adopted for the
purpose of providing retirement benefits to members of the Board of Directors
who provide expertise in direction of the Bank's growth and to ensure that the
Bank will have their continued assistance in the future. All directors are
eligible to participate in the plan. Retirement benefits, to the extent earned,
will be payable to a participant who has attained the age of 70 years and has
retired from service on the Board. For participants who have attained the age of
65 as of June 1, 1997, benefits are earned over a five-year period beginning on
the first anniversary of the plan at a rate of 20% per year. For all other
participants, benefits are at a rate of 10% per year commencing on the first
anniversary following the participant's tenth year of service as a member of the
Board of Directors. Full retirement benefits are provided in the event of death
or permanent disability.
NOTE I -- 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 required the Bank to pay an amount equal to 65.7 basis points of its
SAIF-assessable deposit base as of March 31, 1995, which resulted in a charge to
income during the year ended December 31, 1996 of $101,142.
NOTE J -- INCOME TAXES
The components of income tax expense are as follows for the years ended
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Current tax expense............................................................ $43,583 $125,952
Net deferred expense (benefit) included in operations.......................... 6,207 (25,024)
------- --------
$49,790 $100,928
------- --------
------- --------
</TABLE>
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes were as follows for the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Income tax at federal statutory rate........................................... $54,957 $ 94,812
State income tax, net of federal tax benefit................................... 1,913 10,202
Effect of graduated rate brackets.............................................. (9,346) (2,599)
Other.......................................................................... 2,266 (1,487)
------- --------
$49,790 $100,928
------- --------
------- --------
</TABLE>
F-16
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE J -- INCOME TAXES -- Continued
Deferred tax assets and liabilities arising from temporary differences at
December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets relating to:
Allowance for loan losses..................................................... $ 2,973 $ 940
Accrued/prepaid pension expense............................................... -- 11,738
Loan fees and costs........................................................... 33,585 30,087
------- -------
Gross deferred tax assets....................................................... 36,558 42,765
Valuation allowance............................................................. -- --
------- -------
Net deferred tax assets......................................................... 36,558 42,765
------- -------
Deferred tax liabilities relating to:
FHLB stock dividends.......................................................... 26,842 26,842
Unrealized gains on investment securities available for sale.................. 913 5,313
------- -------
Total deferred tax liabilities.................................................. 27,755 32,155
------- -------
Net deferred tax assets......................................................... $ 8,803 $10,610
------- -------
------- -------
</TABLE>
Retained earnings at December 31, 1996 includes approximately $748,443 for
which no deferred income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions for income tax
purposes only. Reductions of the amount so allocated for purposes other than tax
bad debt losses or adjustments arising from carryback of net operating losses
would create income for tax purposes only, which would be subject to the then
current corporate income tax rate.
During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on these pre-1987 bad debt reserves. Further, the
use of the reserve method is now required for all thrifts.
NOTE K -- REGULATORY RESTRICTIONS
CAPITAL REQUIREMENTS
The Bank is regulated by the Federal Deposit Insurance Corporation ("FDIC")
and the Administrator, Savings Institutions Division, North Carolina Department
of Commerce (the "Administrator").
The Bank is subject to the capital requirements of the FDIC and the
Administrator. The FDIC requires the Bank to maintain minimum ratios of Tier 1
capital to risk-weighted assets and total capital to risk-weighted assets of 4%
and 8%, respectively. Tier 1 capital consists of total retained earnings
calculated in accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier 1 capital plus certain
adjustments, the only one of which applies to the Bank is the allowance for
possible loan losses. Risk-weighted assets refer to the on- and off-balance
sheet exposures of the Bank adjusted for their relative risk levels using
formulas set forth in FDIC regulations. The Bank is also subject to an FDIC
leverage capital requirement, which calls for a minimum ratio of Tier 1 capital
(as defined above) to quarterly average total assets of 3% to 5%, depending on
the institution's composite ratings as determined by its regulators. The
Administrator requires a net worth equal to at least 5% of total assets.
F-17
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE K -- REGULATORY RESTRICTIONS -- Continued
At December 31, 1996, the Bank was in compliance with all of the
aforementioned capital requirements as shown below:
<TABLE>
<CAPTION>
LEVERAGE TIER 1 RISK
RATIO ADJUSTED RISK BASED N.C. SAVINGS
TIER 1 CAPITAL CAPITAL CAPITAL BANK CAPITAL
-------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Retained earnings................................................... $4,312,498 $ 4,312,498 $4,312,498 $ 4,312,498
Unrealized loss on securities....................................... -- -- -- --
Loan loss allowance................................................. -- -- 7,600 7,600
-------------- ----------- ---------- ------------
Regulatory capital.................................................. 4,312,498 4,312,498 4,320,098 4,320,098
Minimum capital requirement......................................... 642,000 401,000 802,000 1,133,000
-------------- ----------- ---------- ------------
Excess regulatory capital........................................... $3,670,498 $ 3,911,498 $3,518,098 $ 3,187,098
-------------- ----------- ---------- ------------
-------------- ----------- ---------- ------------
</TABLE>
NOTE L -- CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its
primary lending area of Landis, North Carolina. The Bank's underwriting policies
require such loans to be made at no greater than 80% loan-to-value based upon
appraised values unless private mortgage insurance is obtained. These loans are
secured by the underlying properties.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit on mortgage
loans and equity lines of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the statements of financial condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
A summary of the contract amount of the Bank's exposure to off-balance
sheet risk as of December 31, 1996 is as follows:
<TABLE>
<S> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans.......................................... $ 196,800
Undisbursed construction loans........................................................ 289,000
Undisbursed lines of credit........................................................... 1,091,000
</TABLE>
NOTE M -- DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The Bank has implemented Statement of Financial Accounting Standards No.
107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS ("SFAS 107"), which
requires disclosure of the estimated fair values of the Bank's financial
instruments whether or not recognized in the balance sheet, where it is
practical to estimate that value. Such instruments include cash,
interest-earning balances, federal funds sold, investment securities, loans,
stock in the Federal Home Loan Bank of Atlanta, deposit accounts, and
commitments. Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no active market readily exists for a portion of
the Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
F-18
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE M -- DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS -- Continued
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH ON HAND AND IN BANKS, INTEREST BEARING BALANCES IN OTHER BANKS, AND
FEDERAL FUNDS SOLD
The carrying amounts for these approximate fair value because of the
short maturities of those instruments.
INVESTMENT SECURITIES
Fair value for investment securities equals quoted market price if
such information is available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
LOANS
For certain homogenous categories of loans, such as residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
STOCK IN FEDERAL HOME LOAN BANK OF ATLANTA
The fair value for FHLB stock is its carrying value, since this is the
amount for which it could be redeemed. There is no active market for this
stock and the Bank is required to maintain a minimum balance based on the
unpaid principal of home mortgage loans.
DEPOSIT LIABILITIES
The fair value of savings deposits is the amount payable on demand at
the reporting date. The fair value of fixed maturity certificates of
deposit is estimated using rates currently offered for deposits of similar
remaining maturities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
With regard to financial instruments with off-balance sheet risk
discussed in Note L, it is not practicable to estimate the fair value of
future financing commitments.
The carrying amounts and estimated fair values of the Bank's financial
instruments, none of which are held for trading purposes, are as follows at
December 31, 1996:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Financial assets:
Cash, interest bearing balances, federal funds sold.................. $ 1,015,664 $ 1,015,664
Investment securities................................................ 2,148,475 2,148,364
Loans................................................................ 18,916,960 19,109,960
Stock in Federal Home Loan Bank of Atlanta........................... 170,200 170,200
Financial liabilities -- Deposits...................................... 18,322,484 18,097,595
</TABLE>
NOTE N -- PLAN OF CONVERSION
On September 29, 1997, the Board of Directors of the Bank unanimously
adopted a Plan of Holding Company Conversion whereby the Bank will convert from
a North Carolina-charted mutual savings bank to a North Carolina-chartered stock
commercial bank and will become a wholly-owned subsidiary of a holding company
formed in connection with the Conversion. The holding company will issue common
stock to be sold in the Conversion and will use that portion of the net proceeds
thereof which it does not retain to purchase the capital stock of the Bank. The
Plan is subject to approval by regulatory authorities and the members of the
Bank at a special meeting.
F-19
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE N -- PLAN OF CONVERSION -- Continued
The stockholders of the holding company will be asked to approve a proposed
stock option plan and a proposed management recognition plan at a meeting of the
stockholders after the Conversion. Shares issued to directors and employees
under these plans may be from authorized but unissued shares of common stock or
they may be purchased in the open market. In the event that options or shares
are issued under these plans, such issuances will be included in the earnings
per share calculation; thus, the interests of existing stockholders will be
diluted.
At the time of Conversion, the Bank will establish a liquidation account in
an amount equal to its net worth as reflected in its latest statement of
financial condition used in its final conversion prospectus. The liquidation
account will be maintained for the benefit of eligible deposit account holders
who continue to maintain their deposit accounts in the Bank after conversion.
Only in the event of a complete liquidation will each eligible deposit account
holder be entitled to receive a subaccount balance for deposit accounts then
held before any liquidation distribution may be made with respect to common
stock. Dividends paid by the Bank subsequent to the Conversion cannot be paid
from this liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations.
No Conversion costs had been incurred as of December 31, 1996. If the
Conversion is ultimately successful, Conversion costs will be accounted for as a
reduction of the stock proceeds. If the Conversion is unsuccessful, Conversion
costs will be charged to the Bank's operations.
F-20
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Cash on hand and in banks...................................................................... $ 91,360 $ 1,057,774
Interest-bearing balances in other banks....................................................... 26,167 29,679
Federal funds sold............................................................................. 2,325,000 525,000
Investment securities available for sale, at fair value........................................ 2,559,251 1,813,830
Loans receivable, net.......................................................................... 18,640,913 18,457,667
Accrued interest receivable.................................................................... 43,706 25,499
Premises and equipment, net.................................................................... 291,714 279,070
Stock in the Federal Home Loan Bank, at cost................................................... 187,200 170,200
Other assets................................................................................... 68,839 110,889
----------- -----------
TOTAL ASSETS................................................................................. $24,234,150 $22,469,608
----------- -----------
----------- -----------
LIABILITIES AND NET RETAINED EARNINGS
Deposit accounts............................................................................... $19,700,661 $18,077,350
Advance payments from borrowers for property taxes and insurance............................... 2,749 4,275
Accrued expenses and other liabilities......................................................... 135,359 126,266
----------- -----------
TOTAL LIABILITIES............................................................................ 19,838,769 18,207,891
----------- -----------
Retained earnings, substantially restricted.................................................... 4,395,381 4,261,717
----------- -----------
TOTAL LIABILITIES AND NET RETAINED EARNINGS.................................................. $24,234,150 $22,469,608
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-21
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans........................................................................................... $1,126,467 $1,080,909
Investments..................................................................................... 135,903 97,848
Deposits in other banks and federal funds sold.................................................. 49,151 14,679
---------- ----------
TOTAL INTEREST INCOME............................................................................. 1,311,521 1,193,436
---------- ----------
INTEREST EXPENSE
Deposit accounts................................................................................ 731,541 609,217
---------- ----------
NET INTEREST INCOME............................................................................... 579,980 584,219
PROVISION FOR LOAN LOSSES......................................................................... 21,900 3,700
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES............................................... 558,080 580,519
---------- ----------
OTHER INCOME
Transaction and other service fee income........................................................ 1,855 3,366
Gain on sale of investment securities........................................................... 2,423 2,033
---------- ----------
TOTAL OTHER INCOME................................................................................ 4,278 5,399
---------- ----------
OTHER EXPENSES
Personnel costs................................................................................. 273,940 186,323
Occupancy....................................................................................... 32,980 33,324
Data processing and outside service fees........................................................ 45,875 57,873
Deposit insurance premiums...................................................................... 8,785 25,261
SAIF special assessment......................................................................... -- 101,142
Other........................................................................................... 91,617 85,091
---------- ----------
TOTAL OTHER EXPENSES.............................................................................. 453,197 489,014
---------- ----------
INCOME BEFORE INCOME TAXES........................................................................ 109,161 96,904
INCOME TAX EXPENSE................................................................................ 31,000 30,000
---------- ----------
NET INCOME........................................................................................ $ 78,161 $ 66,904
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-22
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF RETAINED EARNINGS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED TOTAL
RETAINED HOLDING RETAINED
EARNINGS GAINS (LOSSES) EARNINGS
---------- -------------- ----------
<S> <C> <C> <C>
Balance at December 31, 1995........................................................ $4,199,477 $ 6,836 $4,206,313
Net income.......................................................................... 66,904 -- 66,904
Unrealized holding gains (losses), net of income taxes of $7,560.................... -- (11,500) (11,500)
---------- -------------- ----------
Balance at September 30, 1996....................................................... $4,266,381 $ (4,664) $4,261,717
---------- -------------- ----------
---------- -------------- ----------
Balance at December 31, 1996........................................................ $4,311,324 $ 1,174 $4,312,498
Net income.......................................................................... 78,161 -- 78,161
Unrealized holding gains (losses), net of income taxes of $3,670.................... -- 4,722 4,722
---------- -------------- ----------
Balance at September 30, 1997....................................................... $4,389,485 $ 5,896 $4,395,381
---------- -------------- ----------
---------- -------------- ----------
</TABLE>
See accompanying notes.
F-23
<PAGE>
LANDIS SAVINGS BANK, SSB
STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................................... $ 78,161 $ 66,904
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation............................................................................... 21,375 17,868
Amortization, net.......................................................................... (24,708) (27,658)
Gain on sale of assets, net................................................................ (2,423) (2,033)
Provision for loan losses.................................................................. 21,900 3,700
Deferred compensation...................................................................... 80,900 --
Deferred income taxes...................................................................... (39,000) (7,560)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable....................................... (3,266) 8,978
(Increase) decrease in other assets...................................................... 45,080 (20,096)
Increase in accrued expenses and other liabilities....................................... 36,807 90,982
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................................... 214,826 131,085
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-earning balances in other banks...................................... 7,023 2,779
Net increase in federal funds sold............................................................ (1,650,000) (425,000)
Purchases of available for sale investment securities......................................... (1,746,638) (1,394,387)
Proceeds from maturities of:
Available for sale investment securities................................................... 500,000 1,150,000
Held to maturity investment securities..................................................... -- 23,151
Proceeds from sales of available for sale investment securities............................... 848,218 400,243
Purchase of Federal Home Loan Bank stock...................................................... (17,000) (12,700)
Net (increase) decrease in loans.............................................................. 277,314 (1,124,995)
Purchase of premises and equipment............................................................ (21,989) (21,418)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES........................................................... (1,803,072) (1,402,327)
----------- -----------
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings accounts.............................................................. $ 1,498,198 $ 1,401,843
Net increase (decrease) in certificates of deposit............................................ (120,021) 829,961
Net decrease in advance payments from borrowers for taxes and insurance....................... (6,045) (2,811)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................................................... 1,372,132 2,228,993
----------- -----------
NET INCREASE (DECREASE) IN CASH ON HAND AND IN BANKS............................................ (216,114) 957,751
CASH ON HAND AND IN BANKS, BEGINNING............................................................ 307,474 100,023
----------- -----------
CASH ON HAND AND IN BANKS, ENDING............................................................... $ 91,360 $ 1,057,774
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest................................................................................... $ 731,541 $ 609,217
----------- -----------
----------- -----------
Income taxes............................................................................... $ 21,820 $ 65,933
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized holding gains (losses) on available for sale investment securities,
net of deferred income taxes............................................................. $ (4,722) $ 11,500
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-24
<PAGE>
LANDIS SAVINGS BANK, SSB
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997 AND 1996
NOTE A -- BASIS OF PRESENTATION
All adjustments considered necessary for a fair presentation of the results
for the interim periods presented have been included (such adjustments are
normal and recurring in nature). Operating results for the nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
NOTE B -- PLAN OF CONVERSION
On September 29, 1997, the Board of Directors of the Bank approved a
proposed plan to convert the Bank from a North Carolina-chartered mutual savings
bank to a North Carolina-chartered stock commercial bank. The proposed Plan of
Conversion contemplates the organization of a holding company which will acquire
and own all the shares of the Bank issued in the Conversion. The Plan of
Conversion is subject to the approval of various regulatory agencies.
At the time of the Conversion, the Bank will establish a liquidation
account in an amount equal to its net worth as reflected in its latest statement
of financial condition used in its final conversion offering circular. The
liquidation account will be maintained for the benefit of eligible deposit
account holders who continue to maintain their deposit accounts in the Bank
after conversion. Only in the event of a complete liquidation will each eligible
deposit account holder be entitled to receive a liquidation account in the
amount of the then current adjusted subaccount balance for the deposit accounts
then held before any liquidation distribution may be made with respect to common
stock. Dividends paid by the Bank subsequent to the Conversion cannot be paid
from this liquidation account.
The Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations.
If the Conversion is ultimately successful, Conversion costs will be
accounted for as a reduction of the stock sale proceeds. If the Conversion is
unsuccessful, Conversion costs will be charged to the Bank's operations.
NOTE C -- 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 required the Bank to pay an amount equal to 65.7 basis points of its
SAIF-assessable deposit base as of March 31, 1995, which resulted in a charge to
income during the nine months ended September 30, 1996 of $101,142.
NOTE D -- DIRECTORS' RETIREMENT PLAN
On June 1, 1997, a directors' retirement plan was implemented. The plan
provides that, as directors become qualified to earn benefits, such benefits
will be earned over periods of service, ranging from five years to ten years,
but that full benefits will be provided in the event of death or permanent
disability. In early November 1997, one of the participating directors died
unexpectedly, resulting in an acceleration of recognition of the costs of
benefits to be provided to his beneficiary. The total cost of director
retirement benefits provided during the nine months ended September 30, 1997 was
approximately $81,000.
F-25
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERINGS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................... 1
Selected Financial Information and Other Data of the
Savings Bank....................................... 6
Risk Factors......................................... 7
Use of Proceeds...................................... 12
Dividend Policy...................................... 12
Market for the Common Stock.......................... 13
Capitalization....................................... 14
Historical and Pro Forma Regulatory Capital
Compliance......................................... 16
Pro Forma Data....................................... 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 23
Business of the Company.............................. 34
Business of the Savings Bank......................... 34
Regulation........................................... 46
Taxation............................................. 54
Management of the Company............................ 55
Management of the Savings Bank....................... 56
The Conversion....................................... 61
Certain Restrictions on Acquisition.................. 75
Certain Anti-takeover Provisions..................... 75
Description of Capital Stock......................... 78
Registration Requirements............................ 79
Legal Opinions....................................... 80
Tax Opinion.......................................... 80
Experts.............................................. 80
Additional Information............................... 80
Financial Statements................................. F-1
</TABLE>
UP TO 925,750 SHARES
BOC FINANCIAL CORP.
COMMON STOCK
----------------
PROSPECTUS
----------------
, 1998
UNTIL , 1998 ( DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of BOC Financial Corp. (the "Company" or the
"Registrant") provide that, to the fullest extent permitted by the North
Carolina Business Corporation Act (the "NCBCA"), no person who serves as a
director shall be personally liable to the Company or any of its shareholders or
otherwise for monetary damages for breach of any duty as director.
The Bylaws of the Company provide that any person who at any time serves or
has served as a director or officer of the Company, or who, while serving as a
director or officer of the Company, serves or has served at the request of the
Company as a director, officer, partner, trustee, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, or as a
trustee or administrator under an employee benefit plan, shall have a right to
be indemnified by the Company to the fullest extent permitted by law against (a)
reasonable expenses, including attorneys' fees, incurred by him or her in
connection with any threatened, pending, or completed civil, criminal,
administrative, investigative, or arbitrative action, suit, or proceeding (and
any appeal therein), whether or not brought by or on behalf of the Company,
seeking to hold him or her liable by reason of the fact that he or she is or was
acting in such capacity, and (b) reasonable payments made by him or her in
satisfaction of any judgment, money decree, fine (including an excise tax
assessed with respect to an employee benefit plan), or penalty for which he or
she may have become liable in any such action, suit, or proceeding, or in
connection with a settlement approved by the Board of Directors of any such
action, suit, or proceeding. Sections 55-8-50 through 55-8-58 of the NCBCA
contain provisions prescribing the extent to which directors and officers shall
or may be indemnified. Section 55-8-51 of the NCBCA permits a corporation, with
certain exceptions, to indemnify a present or former director against liability
if (i) the director conducted himself in good faith, (ii) the director
reasonably believed (x) that the director's conduct in the director's official
capacity with the corporation was in its best interests and (y) in all other
cases the director's conduct was at least not opposed to the corporation's best
interests, and (iii) in the case of any criminal proceeding, the director had no
reasonable cause to believe the director's conduct was unlawful. A corporation
may not indemnify a director in connection with a proceeding by or in the right
of the corporation in which the director was adjudged liable to the corporation
or in connection with a proceeding charging improper personal benefit to the
director. The above standard of conduct is determined by the board of directors,
a committee or special legal counsel, or the shareholders as prescribed in
Section 55-8-55.
Sections 55-8-52 and 55-8-56 of the NCBCA require a corporation to
indemnify a director or officer in the defense of any proceeding to which the
director or officer was a party against reasonable expenses when the director or
officer is wholly successful in the director's or officer's defense, unless the
articles of incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if the director or officer is
adjudged fairly and reasonably so entitled under Section 55-8-54.
In addition, Section 55-8-57 permits a corporation to provide for
indemnification of directors, officers, employees, or agents, in its articles of
incorporation or bylaws or by contract or resolution, against liability in
various proceedings and to purchase and maintain insurance policies on behalf of
these individuals.
The foregoing is only a general summary of certain aspects of North
Carolina law dealing with indemnification of directors and officers and does not
purport to be complete. It is qualified in its entirety by reference to the
relevant statutes, which contain detailed specific provisions regarding the
circumstances under which and the person for whose benefit indemnifications
shall or may be made.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration and regulatory application fees............................................. $ 25,500*
State filing fees........................................................................ 12,500*
Legal fees............................................................................... 120,000*
Accounting fees.......................................................................... 70,000*
Postage and printing costs............................................................... 60,000*
Appraisal and business plan preparation fees............................................. 45,000*
Conversion advice, agent and record keeping costs........................................ 47,000*
Stand-by sales agency fees and expenses.................................................. 50,000*
Transfer agent and certificates.......................................................... 5,000*
Other.................................................................................... 15,000*
---------
Total............................................................................... $450,000*
---------
---------
</TABLE>
- ---------------
* Indicates an estimate.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 27. EXHIBITS.
The exhibits filed as a part of this registration statement are as follows:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Engagement letter dated December 12, 1997 by and between Landis Savings Bank, SSB and
William R. Hough & Company
1.2 Form of Sales Agency Agreement by and between BOC Financial Corp. and William R. Hough & Company*
2 Plan of Conversion of Landis Savings Bank, SSB
3.1 Articles of Incorporation of BOC Financial Corp.
3.2 Bylaws of BOC Financial Corp.
4 Form of stock certificate of BOC Financial Corp.*
5 Opinion of Moore & Van Allen, PLLC regarding legality of the Common Stock
8 Opinion of Moore & Van Allen, PLLC regarding certain tax matters
10.1 Letter agreement dated September 29, 1997 regarding conversion advice and record keeping by and between
Landis Savings Bank, SSB and The Meritas Group, Inc.
10.2 Letter agreement dated September 29, 1997 regarding appraisal and business planning services by and
between Landis Savings Bank, SSB and The Meritas Group, Inc.
10.3 Form of BOC Financial Corp. Employee Stock Ownership Plan and Trust
10.4 Form of BOC Financial Corp. 1998 Management Recognition Plan
10.5 Form of BOC Financial Corp. 1998 Nonstatutory Stock Option Plan
10.6 Form of BOC Financial Corp. 1998 Incentive Stock Option Plan
10.7 Form of Employment Agreement by and between Landis Savings Bank, Inc., SSB and
Stephen R. Talbert
10.8 Letter of Intent, dated December 2, 1997, between Interstate Combined Ventures and Landis Savings Bank,
SSB
21 Subsidiaries of BOC Financial Corp.*
23.1 Consent of Dixon Odom PLLC
23.2 Consent of The Meritas Group, Inc.
23.3 Consent of Moore & Van Allen, PLLC (included with Exhibit No. 5)
24 Power of Attorney (included in the Signature Page)
27 Financial Data Schedule
99.1 Appraisal Report of The Meritas Group, Inc.*
99.2 Form of Stock Order Form
99.3 Form of Proxy Statement of Landis Savings Bank, SSB
</TABLE>
- ---------------
* To be filed by amendment
II-2
<PAGE>
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the U.S. Securities and Commission (the "Commission") pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective Registration
Statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For the purpose of determining any liability under the Securities Act,
treat each such post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering thereof.
(3) Remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act, and is therefore,
unenforceable.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Charlotte,
State of North Carolina, on December 12, 1997.
BOC FINANCIAL CORP.
By: /s/______STEPHEN R. TALBERT________
STEPHEN R. TALBERT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen R. Talbert as his or her
attorney-in-fact, with power of substitution, for him in any and all capacities,
to sign any amendments or supplements to this Registration Statement or any
other instruments he deems necessary or appropriate, and to file the same, with
the exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.
In accordance with the requirements of the Securities act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------------- ------------------
<S> <C> <C>
/s/STEPHEN R. TALBERT President, Chief Executive Officer, December 12, 1997
--------------------- and Director
STEPHEN R. TALBERT
/s/THOMAS P. CORRIHER Chairman, Vice President, December 12, 1997
---------------------- and Director
THOMAS P. CORRIHER
/s/HENRY H. LAND Secretary, Treasurer and Director December 12, 1997
----------------
HENRY H. LAND
/s/JOHN A. DRYE Director December 12, 1997
---------------
JOHN A. DRYE
/s/SUSAN LINN NORVELL Director December 12, 1997
---------------------
SUSAN LINN NORVELL
/s/LYNNE SCOTT SAFRIT Director December 12, 1997
---------------------
LYNNE SCOTT SAFRIT
/s/LISA B. ASHLEY Chief Financial Officer December 12, 1997
-----------------
LISA B. ASHLEY (Principal Accounting Officer)
</TABLE>
II-4
Exhibit 1.1
WILLIAM R. HOUGH & CO. (R)
100 Second Avenue South
Suite 800
St. Petersburg, Florida 33701-4386
(813) 895-8880 (800) 800-0061 FAX: (813) 895-8895
Board of Directors December 2, 1997
Landis Savings Bank, SSB
107 South Central Avenue
Landis, NC 28088
Re: Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement by Landis
Savings Bank, SSB (the "Bank") of William R. Hough & Co., Inc ("WRH") to act as
a standby underwriter in the sale of common stock issued by a holding company to
be formed in connection with the conversion of the Bank from the mutual to the
capital stock form of organization. The shares will be offered and sold in
concurrent subscription and community offerings and, if necessary, in an
underwriting public offering (collectively, the "Offering").
WRH will assist the Bank in the Offerings as follows:
1. as financial advisor to the management of the Bank;
2. assisting with informational meetings for prospective investors
during the subscription and community offerings;
3. conduct the public offering by underwriting on a "best efforts"
basis any shares not sold in the subscription and community
offerings;
4. being a market maker in the Bank's stock after the Offerings and
assisting the Bank in:
a. listing its stock on the Nasdaq SmallCap Market; or
b. if the Bank does not qualify for Nasdaq SmallCap Market listing,
to list the Bank's stock on the OTC Bulletin Board; and
5. assist the Bank in encouraging other broker-dealer firms to make a
market in the Bank's stock after the Offerings.
<PAGE>
Board of Directors
Landis Savings Bank, S.S.B.
December 2, 1997
Page 2
WRH shall receive the following compensation for its services:
1. a financial advisory fee of $25,000, payable $10,000 upon the
signing of this letter and $15,000 upon the completion of the
Offerings;
2. a commission of 4.0% of the aggregate dollar amount of shares sold
by WRH in the public offering; and
3. reimbursement for all reasonable and accountable expenses,
including legal fees, incurred by it whether or not the Offerings
are successfully concluded. Such expenses will not exceed $25,000
without the permission of the Bank.
It is agreed that the Bank will pay all other expenses of the Offerings
including but not limited to its attorney's fees, NASD filing fees, filing and
registration fees, and fees of either WRH's attorneys or the Bank's attorneys
relating to any required state securities law filings, telephone charges, air
freight, rental equipment, supplies, transfer agent charges, fees relating to
auditing and accounting and costs of printing all documents necessary in
connection with the foregoing.
Except for the financial advisory fee and obligation to reimburse WRH for
allocable expenses, which is intended to be a legally binding obligation of the
parties, this letter does not constitute an agreement on the part WRH to
underwrite all or any portion of the Offerings or perform any other services,
and does not constitute an agreement to enter into any such agreement, but
reflects WRH's present intention of proceeding to work with the Bank toward the
completion of the proposed Offerings.
The terms of this letter will be superseded by, and will be of no effect
if, a written sales agency agreement is executed and delivered by the parties
thereto.
This proposal, of course, is based on our present understanding of the
Bank, its industry and existing market conditions and, therefore, may be revised
based on our due diligence review and changing market conditions.
For purposes of WRH's obligations to file certain documents and to make
certain representations to the NASD in connection with the Offerings, the Bank
warrants that: (a) the Bank has not privately placed any securities within the
last 18 months; (b) there have been no material dealings within the last 12
months between the Bank and any NASD member or any person related to or
associated with any such member; (c) none of the officers or directors of the
Bank are affiliated or associated with NASD; (d) except as contemplated by this
letter with WRH and a letter agreemenet, dated September 30, 1997, by and
between the Bank and The Meritas Group, Inc. regarding certain appraisal and
business planning services, the Bank has no financial or management consulting
contracts outstanding with any other person; (e) the Bank has not granted WRH a
right of first refusal with respect to the underwriting of any future offering
of the Bank's stock; and (f) there has been no intermediary between WRH and the
Bank in connection with the public offering of the Bank's shares and no person
is being compensated in any manner for providing such service.
<PAGE>
Board of Directors
Landis Savings Bank, S.S.B.
December 2, 1997
Page 3
The Bank agrees to indemnify and hold harmless WRH, its officers, directors
and controlling persons against all losses, claims, damages or liabilities,
joint or several, and all legal or other expenses reasonably incurred by them in
connection with the investigation or defense thereof (collectively, "Losses"),
to which they may become subject under the securities laws or under the common
law, that arise out of or are based upon the Offerings or the engagement
hereunder of WRH unless it is determined by final judgment of a court having
jurisdiction over the matter that such Losses are primarily a result of WRH's
willfull misconduct or gross negligence.
I look forward to the opportunity to work with you towards successful
completion of the Offerings. Please acknowledge your agreement to the foregoing
by signing below and returning to WRH one copy of this letter, along with the
initial financial advisory payment of $10,000. This proposal is valid for a
period of thirty (30) days.
Sincerely,
WILLIAM R. HOUGH & CO.
/s/ Ronald W. Goff
------------------
Ronald W. Goff
First Vice President
Accepted and Agreed to this
10th day of December, 1997
LANDIS SAVINGS BANK, SSB
By:/s/ Steven R. Talbert
---------------------
Steven R. Talbert
President and Chief Executive Officer
PLAN OF CONVERSION
DATED AS OF
SEPTEMBER 29, 1997
----------------------------------
LANDIS SAVINGS BANK, SSB
Landis, North Carolina
<PAGE>
LANDIS SAVINGS BANK, SSB
Landis, North Carolina
Plan of Conversion
From Mutual to Stock Organization
and
From a Savings Bank to a Commercial Bank
I. General.
On September 29, 1997, the Board of Directors of Landis Savings Bank, SSB,
Landis, North Carolina (the "Savings Bank"), after careful study and
consideration, adopted by unanimous vote this Plan of Conversion (the "Plan"),
which provides for (i) the conversion of the Savings Bank from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank (the "Converted Savings Bank"), (ii) the subsequent conversion of
the Converted Savings Bank to a North Carolina-chartered commercial Bank (the
"Commercial Bank"); and (iii) the concurrent formation of a North Carolina
business corporation to serve as the holding company for the Converted Savings
Bank and its successor Commercial Bank. Capitalized terms hereinafter used in
this Paragraph I shall have the meaning ascribed to such terms in Paragraph II
of the Plan.
Pursuant to the Plan, shares of Conversion Stock issuable by the Holding
Company will be offered as part of the Stock Conversion in the Subscription
Offering pursuant to non-transferable Subscription Rights at a predetermined and
uniform price, first to Eligible Account Holders who are Residents of the Local
Community, second to Eligible Account Holders who are not Residents of the Local
Community, third to the Tax-Qualified Employee Stock Benefit Plan, fourth to
Supplemental Eligible Account Holders, fifth to Other Members of the Savings
Bank, and sixth to Officers, directors, and employees of the Savings Bank.
Concurrently with or following the Subscription Offering, shares not subscribed
for in the Subscription Offering may be offered to certain members of the
general public in the Community Offering. Shares remaining may then be offered
to the general public in an underwritten public offering or otherwise. The
aggregate Purchase Price of the Conversion Stock will be based upon an
independent appraisal of the Savings Bank and will reflect the estimated pro
forma market value of the Converted Savings Bank, as a subsidiary of the Holding
Company.
Either prior to or immediately following consummation of the Stock
Conversion, the Holding Company, as the sole shareholder of the Converted
Savings Bank, shall approve the Bank Conversion, and the Converted Savings Bank
shall take such actions as may be necessary to consummate the Bank Conversion.
The Stock Conversion is subject to the regulations of the FDIC pursuant to
the Federal Deposit Insurance Act and Sections 303.15 and 333.4 of the FDIC
Rules and Regulations and to the regulations of the Administrator, pursuant to
Subchapter 16G of Chapter 16 of Title 4 of the North Carolina Administrative
Code and Section 54C-33 of the General Statutes of North
<PAGE>
Carolina. The Bank Conversion is subject to the requirements of Section 53-17.2
of the General Statutes of North Carolina and the regulations of the
Commissioner promulgated thereunder.
Consummation of the Stock Conversion is subject to the prior written notice
of non-objection by the FDIC and to approval of the Plan and the Stock
Conversion by the Administrator and by Members of the Savings Bank at a special
meeting of the Members to be called to consider the Stock Conversion.
Consummation of the Bank Conversion requires approval of the Commissioner of
Banks and the Federal Reserve Board.
It is the desire of the Board of Directors to attract new capital to the
Savings Bank to increase its net worth, to support future savings growth, to
increase the amount of funds available for other lending and investment, to
provide greater resources for the expansion of customer services, to facilitate
future expansion and, because applicable laws and regulations do not provide for
the organization of mutual North Carolina commercial banks, to enable the
Savings Bank to complete the Bank Conversion. The purpose of the Bank Conversion
is to provide the Savings Bank with additional operating flexibility and enhance
its ability to provide, over the long-term, a broader range of banking products
and services to its community. It is the further desire of the Board of
Directors to reorganize the Converted Savings Bank (or the Commercial Bank upon
the Bank Conversion) as the wholly owned subsidiary of the Holding Company to
enhance flexibility of operations, diversification of business opportunities and
financial capability for business and regulatory purposes and to enable the
Commercial Bank to compete more effectively with other financial service
organizations.
No change will be made in the Board of Directors or management of the
Savings Bank as a result of the Conversion.
II. Definitions.
Acting in Concert: The term "Acting in Concert" means: (i) knowing
participation in a joint activity or interdependent conscious parallel action
towards a common goal whether or not pursuant to an express agreement; or (ii) a
combination or pooling of voting or other interests in the securities of an
issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. Any
person (as defined by 12 C.F.R. ss.563b.2(a)(26)) Acting in Concert with another
person ("other party") shall also be deemed to be Acting in Concert with any
person who is also Acting in Concert with that other party, except that any
Tax-Qualified Employee Stock Benefit Plan will not be deemed to be Acting in
Concert with its trustee or a person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and stock held by
the Tax-Qualified Employee Benefit Plan will be aggregated.
Acquisition Application: The term "Acquisition Application" means the
application to the Administrator for approval of the Holding Company's
acquisition of all of the Capital Stock of the Converted Savings Bank.
Administrator: The term "Administrator" means the Administrator, Savings
Institutions Division, North Carolina Department of Commerce.
2
<PAGE>
Application: The term "Application" means the Application to Convert a
Mutual Savings Bank Into a Stock Owned Savings Bank submitted to the
Administrator for approval of the Stock Conversion.
Associate: The term "Associate," when used to indicate a relationship with
any person, means: (i) any corporation or organization (other than the Savings
Bank, the Holding Company, or a majority-owned subsidiary of the Savings Bank or
the Holding Company) of which such person is an officer or partner or is,
directly or indirectly, the beneficial owner of 10% or more of any class of
equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, except that such term shall not include a
Tax-Qualified Employee Stock Benefit Plan in which a person has a substantial
beneficial interest or serves as a trustee in a similar fiduciary capacity, and
(iii) any relative or spouse of such person, or any relative of such spouse, who
has the same home as such person or who is a director of the Savings Bank or the
Holding Company, or any of their subsidiaries.
Bank Conversion: The term "Bank Conversion" means the conversion of the
Converted Savings Bank from a North Carolina-chartered stock savings bank to a
North Carolina-chartered commercial bank.
Capital Stock: The term "Capital Stock" means any and all authorized shares
of capital stock issued by the Converted Savings Bank in connection with the
Stock Conversion.
Commercial Bank: The term "Commercial Bank" means the North
Carolina-chartered commercial bank resulting from the Bank Conversion.
Commissioner: The term "Commissioner" means the North Carolina Commissioner
of Banks.
Community Offering: The term "Community Offering" means the offering of
shares of Conversion Stock to certain members of the general public by the
Holding Company concurrently with or following the Subscription Offering, giving
preference to natural persons and trusts of natural persons (including
individual retirement and Keogh retirement accounts and personal trusts in which
such natural persons have substantial interests) who are permanent Residents in
the Local Community.
Conversion: The term "Conversion" means the Stock Conversion or the Bank
Conversion, as the context may require.
Conversion Stock: The term "Conversion Stock" means the shares of common
stock to be issued and sold by the Holding Company pursuant to the Plan in
connection with the Stock Conversion.
3
<PAGE>
Converted Savings Bank: The term "Converted Savings Bank" means Landis
Savings Bank, Inc., SSB, a North Carolina-chartered capital stock savings bank
resulting from the Stock Conversion.
Eligibility Record Date: The term "Eligibility Record Date" means the close
of business on August 30, 1996.
Eligible Account Holder: The term "Eligible Account Holder" means the
holder of a Qualifying Deposit in the Savings Bank on the Eligibility Record
Date.
FDIC: The term "FDIC" means the Federal Deposit Insurance Corporation.
Federal Reserve Board: The term "Federal Reserve Board" means the Board of
Governors of the Federal Reserve System.
Holding Company: The term "Holding Company" means a corporation to be
incorporated by the Savings Bank under North Carolina law for the purpose of
becoming a savings and loan holding company for the Converted Savings Bank and,
following the Bank Conversion, a bank holding company for the Commercial Bank.
Holding Company Stock: The term "Holding Company Stock" means any and all
authorized shares of stock of the Holding Company.
Independent Appraiser: The term "Independent Appraiser" means a person
independent of the Savings Bank, experienced and expert in the area of financial
institution valuations, and acceptable to the FDIC and the Administrator,
retained by the Savings Bank to prepare an appraisal of the pro forma market
value of the Converted Savings Bank as a subsidiary of the Holding Company.
Liquidation Account: The term "Liquidation Account" means the account
established by the Converted Savings Bank pursuant to Paragraph XIII of the
Plan.
Local Community: The term "Local Community" means the following North
Carolina counties: Cabarrus, Iredell, and Rowan.
Market Maker: The term "Market Maker" means a dealer (i.e., any person who
engages either for all or part of such person's time, directly or indirectly as
agent, broker or principal in the business of offering, buying, selling or
otherwise dealing or trading in securities issued by another person) who, with
respect to a particular security: (i)(a) regularly publishes bona fide,
competitive bid and offer quotations in a recognized interdealer quotation
system or (b) furnishes bona fide competitive bid and offer quotations on
request; and (ii) is ready, willing and able to effect transactions in
reasonable quantities at its quoted prices with other brokers or dealers.
Member: The term "Member" means any person or entity who qualifies as a
member of the Savings Bank under its certificate of incorporation and bylaws
prior to the Stock Conversion.
4
<PAGE>
Notice: The term "Notice" means the Notice of Intent to Convert to Stock
Form submitted to the FDIC to obtain written notice of non-objection to the
Stock Conversion.
Officer: The term "Officer" means an executive officer of the Holding
Company or the Savings Bank (as applicable), including the Chairman of the
Board, President, Executive Vice Presidents, Senior Vice Presidents in charge of
principal business functions, Secretary and Treasurer.
Order Form: The term "Order Form" means the order form or forms to be used
by Eligible Account Holders, Supplemental Eligible Account Holders, and other
persons eligible to purchase Conversion Stock pursuant to the Plan.
Other Member: The term "Other Member" means any person, other than an
Eligible Account Holder or a Supplemental Eligible Account Holder, who is a
Member as of the Voting Record Date.
Plan: The term "Plan" means this Plan of Conversion which provides for the
conversion of the Savings Bank from a North Carolina-chartered mutual savings
bank to a North Carolina-chartered stock savings bank (i.e., the Converted
Savings Bank), the concurrent formation of a holding company for the Converted
Savings Bank, the subsequent conversion of the Converted Savings Bank from a
North Carolina-chartered stock savings bank to a North Carolina-chartered
commercial bank (i.e., the Commercial Bank).
Qualifying Deposit: The term "Qualifying Deposit" means the savings balance
in any Savings Account in the Savings Bank as of the close of business on the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable, which is equal to or greater than $50.00.
Registration Statement: The term "Registration Statement" means the
Registration Statement on Form SB-2 or other appropriate form and any amendments
thereto filed by the Holding Company with the SEC pursuant to the Securities Act
of 1933, as amended, to register shares of Conversion Stock.
Resident: The term "Resident," as used in this Plan in relation to the
preference afforded natural persons and trusts of natural persons in the Local
Community, means any natural person who occupies a dwelling within the Local
Community, has an intention to remain within the Local Community for a period of
time (manifested by establishing a physical, ongoing, non-transitory presence
within the Local Community) and continues to reside therein at the time of the
Subscription and Community Offerings. The Savings Bank may utilize deposit or
loan records or such other evidence provided to it to make the determination as
to whether a person is residing in the Local Community. To the extent the
"person" is a corporation or other business entity, the principal place of
business or headquarters shall be within the Local Community. To the extent the
"person" is a personal benefit plan, the circumstances of the beneficiary shall
apply with respect to this definition. In the case of all other benefit plans,
circumstances of the trustee shall be examined for purposes of this definition.
In all cases, such determination shall be in the sole discretion of the Savings
Bank.
5
<PAGE>
Sale: The terms "sale' and "sell" mean every contract to sell or otherwise
dispose of a security or an interest in a security for value, but such terms do
not include an exchange of securities in connection with a merger or acquisition
approved by the FDIC or the Administrator or any other state or federal agency
having jurisdiction.
Savings Account: The term "Savings Account" means a withdrawable deposit in
the Savings Bank, a withdrawable deposit in the Converted Savings Bank after the
Stock Conversion, and a withdrawable deposit in the Commercial Bank after the
Bank Conversion.
Savings Bank: The term "Bank" means Landis Savings Bank, SSB, in its form
as a North Carolina-chartered mutual savings bank.
SEC: The term "SEC" means the United States Securities and Exchange
Commission.
Special Meeting: The term "Special Meeting" means the Special Meeting of
Members to be called for the purpose of submitting the Plan to the Members for
their approval.
State Conversion Applications: The term "State Conversion Applications"
means the following: (i) the Application submitted to the Administrator for
approval of the Stock Conversion; (ii) the application submitted to the
Commissioner for approval of the Bank Conversion; (iii) the Application to
Convert to a State Bank Charter submitted to the Administrator; and (iv) the
application submitted to the Commissioner for acquisition of a North Carolina
bank by a bank holding company.
Stock Conversion: The term "Stock Conversion" means: (i) the amendment of
the Savings Bank's certificate of incorporation and bylaws to authorize issuance
of shares of Capital Stock by the Converted Savings Bank and to conform to the
requirements of a North Carolina capital stock savings bank under the laws of
the State of North Carolina and applicable regulations; (ii) the issuance and
sale of Conversion Stock by the Holding Company in the Subscription and
Community offerings and/or in an underwritten public offering or otherwise; and
(iii) the purchase by the Holding Company of all the Capital Stock of the
Converted Savings Bank to be issued in the Stock Conversion immediately
following or concurrently with the close of the sale of the Conversion Stock.
Subscription Offering: The term "Subscription Offering" means the offering
of shares of Conversion Stock to Eligible Account Holders who are Residents of
the Local Community, Eligible Account Holders who are not Residents of the Local
Community, the Tax-Qualified Employee Stock Benefit Plan, Supplemental Eligible
Account Holders, Other Members, and Officers, directors and employees of the
Savings Bank under the Plan (including individual and Keogh retirement accounts
and personal trusts in which such natural persons have substantial interests).
Subscription and Community Prospectus: The term "Subscription and Community
Prospectus" means the final prospectus to be used in connection with the
Subscription and Community Offerings.
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Subscription Rights: The term "Subscription Rights" means non-transferable,
non-negotiable, personal rights of Eligible Account Holders who are Residents of
the Local Community, Eligible Account Holders who are not Residents of the Local
Community, the Tax-Qualified Employee Stock Benefit Plan, Supplemental Eligible
Account Holders, Other Members, and Officers, directors, and employees of the
Savings Bank (including individual and Keogh retirement accounts and personal
trusts in which such natural persons have substantial interests) to purchase
Conversion Stock offered under the Plan in connection with the Stock Conversion.
Supplemental Eligibility Record Date: The term "Supplemental Eligibility
Record Date" means the last day of the calendar quarter preceding the approval
of the Plan by the Administrator.
Supplemental Eligible Account Holder: The term "Supplemental Eligible
Account Holder" means the holder of a Qualifying Deposit in the Savings Bank
(other than Officers and directors and their Associates) on the Supplemental
Eligibility Record Date.
Tax-Qualified Employee Stock Benefit Plan: The term "Tax-Qualified Employee
Stock Benefit Plan" means the tax-qualified Employee Stock Ownership Plan
adopted by the Board of Directors of the Holding Company to be effective upon
consummation of the Stock Conversion.
Voting Record Date: The term "Voting Record Date" means the date fixed by
the Board of Directors of the Savings Bank to determine Members of the Savings
Bank entitled to vote at the Special Meeting.
Y-3 Application: The term "Y-3 Application" means the application submitted
to the Federal Reserve Board on Federal Reserve Board Form FR Y-3 for approval
for the Holding Company to maintain control of the Savings Bank and the
Commercial Bank.
III. Steps Prior to Submission of the Plan to the Members for Approval.
Prior to submission of the Plan to its Members for approval, the Savings
Bank must receive the Notice from the FDIC, approval of the Application from the
Administrator, and all other approvals from the appropriate regulatory
authorities for consummation of the Conversion in accordance with applicable
laws and regulations. The following steps must be taken prior to receipt of such
regulatory approvals:
A. The Board of Directors shall adopt the Plan by not less than a
two-thirds vote.
B. Promptly after adoption of the Plan by the Board of Directors, the
Savings Bank shall notify its Members of the adoption of the Plan by
publishing a statement in a newspaper having a general circulation in
Landis, North Carolina and/or by mailing a letter to each of its Members
notifying them of the adoption of the Plan.
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C. Copies of the Plan adopted by the Board of Directors shall be made
available for inspection at the office of the Savings Bank.
D. The Savings Bank shall cause the Holding Company to be incorporated
under state law, and the Board of Directors of the Holding Company shall
concur in the Plan by at least a two-thirds vote.
E. Promptly following the adoption of this Plan, the Savings Bank
shall file the State Conversion Applications, and the Holding Company shall
file a draft Y-3 Application.
F. As soon as practicable following the adoption of this Plan, the
Savings Bank shall file the Application with the Administrator and the
Notice with the FDIC, and the Holding Company shall file the Registration
Statement, the Acquisition Application and the final Y-3 Application. Upon
receipt of notification from the Administrator and the FDIC that the
Application and the Notice, respectively, are properly executed and not
materially incomplete, the Savings Bank shall publish notice of the filing
of the Application in a newspaper having a general circulation in Landis,
North Carolina and shall publish such other notices of the Conversion as
may be required in connection with the Acquisition Application, the Y-3
Application, and the State Conversion Applications by the regulations and
policies of the Administrator, the FDIC, the Federal Reserve Board, and the
Commissioner, as applicable. The Savings Bank also shall prominently
display a copy of such notice in its office.
G. The Board of Directors of the Savings Bank may, at any time, elect
not to proceed with the Bank Conversion, in which event the State
Conversion Applications pertaining to the Bank Conversion shall be
withdrawn. In the event the Bank Conversion is not pursued, any references
to the Bank Conversion in this Plan shall be deemed to constitute
references to the Stock Conversion and references to the Commercial Bank
shall be deemed to constitute references to the Converted Savings Bank.
H. The Savings Bank shall obtain an opinion of its tax advisors or a
favorable ruling from the United States Internal Revenue Service which
shall state that the Stock Conversion will not result in any gain or loss
for federal income tax purposes to the Savings Bank. Receipt of a favorable
opinion or ruling is a condition precedent to completion of the Conversion.
IV. Meeting of Members.
Following receipt of the Notice from the FDIC and approval of the
Application by the Administrator, the Special Meeting to vote on the Plan shall
be scheduled in accordance with the Savings Bank's certificate of incorporation
and bylaws and applicable regulations. Notice of the Special Meeting shall be
given by means of a proxy statement authorized for use by the FDIC and the
Administrator. Following receipt of approval of the Application and at least 20
days but not more than 45 days prior to the Special Meeting, the Savings Bank
will distribute proxy solicitation materials to all voting Members as of the
Voting Record Date established for voting
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at the Special Meeting. Proxy materials will also be sent to each beneficial
holder of an Individual Retirement Account or beneficiary of any other trust
account where the name of the beneficial holder is disclosed on the Savings
Bank's records. The proxy solicitation materials will include a copy of the
Proxy Statement and other documents authorized for use by the regulatory
authorities and may also include a Subscription and Community Prospectus as
provided in Paragraph VI below. The Savings Bank will also advise each Eligible
Account Holder and Supplemental Eligible Account Holder not entitled to vote at
the Special Meeting of the proposed Conversion and the scheduled Special Meeting
and provide a postage paid card on which to indicate whether he or she wishes to
receive the Subscription and Community Prospectus, if the Subscription Offering
is not held concurrently with the proxy solicitation of Members for the Special
Meeting.
Pursuant to applicable regulations, an affirmative vote of at least a
majority of the total votes that Members are eligible and entitled to cast will
be required for approval of the Plan. Voting may be in person or by proxy.
By voting in favor of the adoption of the Plan and the Conversion, the
Members will be voting in favor of (i) the Stock Conversion and the adoption by
the Savings Bank of the certificate of incorporation and Bylaws in the forms
attached as Exhibits A and B to this Plan and (ii) the subsequent Bank
Conversion and the adoption by the Converted Savings Bank of the North Carolina
commercial bank certificate of incorporation and bylaws in the forms attached as
Exhibits C and D to this Plan.
The Administrator shall be notified of the actions of the Members at the
Special Meeting promptly following the Special Meeting.
V. Summary Proxy Statement.
The Proxy Statement furnished to Members may be in summary form, provided
that a statement is made in bold-faced type that a more detailed description of
the proposed transaction may be obtained by returning an enclosed postage paid
card or other written communication requesting a supplemental information
statement. Without prior approval from the FDIC and the Administrator, the
Special Meeting shall not be held fewer than 20 days after the last day on which
the supplemental information statement is mailed to Members requesting the same.
The supplemental information statement may be combined with the Subscription and
Community Prospectus if the Subscription Offering is commenced concurrently with
the proxy solicitation of Members for the Special Meeting.
VI. Offering Documents.
The Holding Company may commence the Subscription Offering and, provided
that the Subscription Offering has commenced, may commence the Community
Offering concurrently with or during the proxy solicitation of Members and may
close the Subscription and Community Offerings before the Special Meeting,
provided that the offer and sale of the Conversion Stock shall be conditioned
upon approval of the Plan by the Members at the Special Meeting.
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The Savings Bank may require Eligible Account Holders, Supplemental
Eligible Account Holders, and Other Members to return to the Savings Bank by a
reasonable date certain a postage-paid written communication requesting receipt
of a Subscription and Community Prospectus in order to be entitled to receive a
Subscription and Community Prospectus, provided that the Subscription Offering
shall not be closed until the expiration of 30 days after mailing proxy
solicitation materials to voting Members and a postage-paid written
communication to non-voting Eligible Account Holders and Supplemental Eligible
Account Holders. If the Subscription Offering is commenced within 45 days after
the Special Meeting, the Savings Bank shall transmit, no more than 30 days prior
to the commencement of the Subscription Offering, to each voting Member who had
been furnished with proxy solicitation materials and to each non-voting Eligible
Account Holder and Supplemental Eligible Account Holder written notice of the
commencement of the Subscription Offering which shall state that the Savings
Bank is not required to furnish a Subscription and Community Prospectus to them
unless they return by a reasonable date certain a postage-paid written
communication requesting the receipt of the Subscription and Community
Prospectus.
Prior to commencement of the Subscription and Community offerings, the
Holding Company shall file the Registration Statement with the SEC pursuant to
the Securities Act of 1933, as amended. The Holding Company shall not distribute
the Subscription and Community Prospectus until the Registration Statement
containing the same has been declared effective by the SEC and the
aforementioned documents have been approved or authorized for use by the FDIC
and the Administrator. The Subscription and Community Prospectus may be combined
with the Proxy Statement for the Special Meeting.
VII. Consummation of Conversion.
A. Consummation of the Stock Conversion.
The date of consummation of the Stock Conversion will be the
effective date of the amendment of the Savings Bank's certificate of
incorporation to read in the form of Exhibit A, which shall be the
date of the issuance and sale of the Conversion Stock. After receipt
of all orders for Conversion Stock, and concurrently with the
execution thereof, the amendment of the Savings Bank's certificate of
incorporation and bylaws will be declared effective by the
Administrator, the amended bylaws in the form of Exhibit B approved by
the Members will become effective, and the Savings Bank will thereby
be and become the Converted Savings Bank. At such time, the Conversion
Stock will be issued and sold by the Holding Company, the Capital
Stock to be issued in the Conversion will be issued and sold to the
Holding Company, and the Converted Savings Bank will become a
wholly-owned subsidiary of the Holding Company. The Converted Savings
Bank will issue to the Holding Company 100,000 shares of its common
stock, representing all of the shares of Capital Stock to be issued by
the Converted Savings Bank in the Stock Conversion, and the Holding
Company will make payment to the Converted Savings Bank of at least 50
percent of the aggregate net proceeds realized by the Holding Company
from the sale of the Conversion Stock under the Plan, or such
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other portion of the aggregate net proceeds as may be authorized or
required by the FDIC or the Administrator.
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B. Consummation of the Bank Conversion.
The Bank Conversion shall be deemed to occur and shall be
effective upon completion of all actions necessary or appropriate
under applicable North Carolina statutes and regulations and the
policies of the Commissioner, the Federal Reserve Board, and the
Administrator to complete the conversion of the Converted Savings Bank
to a North Carolina commercial bank, including without limitation the
approval of the Bank Conversion by the Holding Company, as the sole
stockholder of the Converted Savings Bank, and the Converted Savings
Bank will thereby be and become the Commercial Bank. The Bank
Conversion shall be consummated as soon as practicable following the
consummation of the Stock Conversion as described in Paragraph VII.A.
herein.
VIII. Stock Offering.
A. General.
The aggregate purchase price of all shares of Conversion Stock
which will be offered and sold will be equal to the estimated pro
forma market value of the Converted Savings Bank, as a subsidiary of
the Holding Company, as determined by an independent appraisal. The
exact number of shares of Conversion Stock to be offered will be
determined by the Board of Directors of the Savings Bank and the Board
of Directors of the Holding Company, or their respective designees, in
conjunction with the determination of the Purchase Price (as that term
is defined in Paragraph VIII.B. below). The number of shares to be
offered may be subsequently adjusted prior to completion of the Stock
Conversion as provided below.
B. Independent Evaluation and Purchase Price of Shares.
All shares of Conversion Stock sold in the Stock Conversion will
be sold at a uniform price per share referred to in this Plan as the
"Purchase Price." The Purchase Price and the total number of shares of
Conversion Stock to be offered in the Stock Conversion will be
determined by the Board of Directors of the Savings Bank and the Board
of Directors of the Holding Company, or their respective designees,
immediately prior to the simultaneous completion of all such sales
contemplated by this Plan on the basis of the estimated pro forma
market value of the Converted Savings Bank, as a subsidiary of the
Holding Company, at such time. The estimated pro forma market value of
the Converted Savings Bank, as a subsidiary of the Holding Company,
will be determined for such purpose by an Independent Appraiser on the
basis of such appropriate factors as are not inconsistent with
applicable regulations. Immediately prior to the Subscription and
Community Offerings, a subscription price range of shares for the
offerings will be established (the "Valuation Range"), which will vary
from 15% above to 15% below the midpoint of such range. The number of
shares of Conversion Stock ultimately issued and sold will be
determined at the close of the Subscription and Community Offerings
and any other offering. The subscription price range and the number of
shares to be offered may be changed subsequent to the Subscription and
Community Offerings as the result of any appraisal updates prior to
the completion of the Stock Conversion, without notifying eligible
purchasers in the Subscription and
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Community Offerings and without a resolicitation of subscriptions,
provided the aggregate Purchase Price is not below the low end or more
than 15 percent above the high end of the Valuation Range previously
approved by the FDIC and the Administrator or if, in the opinion of
the Boards of Directors of the Savings Bank and the Holding Company,
the new Valuation Range established by the appraisal update does not
result in a materially different capital position of the Converted
Savings Bank.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent
Appraiser confirms to the Savings Bank and Holding Company and to the
FDIC and the Administrator that, to the best knowledge of the
Independent Appraiser, nothing of a material nature has occurred
which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the
Conversion Stock at the Purchase Price is incompatible with its
estimate of the aggregate consolidated pro forma market value the
Converted Savings Bank, as a subsidiary of the Holding Company. If
such confirmation is not received, the Savings Bank may cancel the
Subscription and Community Offerings and/or any other offering, extend
the Stock Conversion, establish a new Valuation Range, extend, reopen
or hold new Subscription and Community Offerings and/or other
offerings or take such other action as the FDIC and the Administrator
may permit.
C. Subscription Offering.
Non-transferable Subscription Rights to purchase shares of
Conversion Stock will be issued at no cost to Eligible Account Holders
who are Residents of the Local Community, Eligible Account Holders who
are not Residents of the Local Community, the Tax-Qualified Employee
Stock Benefit Plans, Supplemental Eligible Account Holders, Other
Members of the Savings Bank, and Officers, directors and employees of
the Savings Bank pursuant to priorities established by applicable
regulations. All shares must be sold, and, to the extent that
Conversion Stock is available, no subscriber will be allowed to
purchase fewer than 25 shares of Conversion Stock, provided that this
number shall be decreased if the aggregate purchase price exceeds
$500. The priorities established by applicable regulations for the
purchase of shares are as follows:
1. Category No. 1: Eligible Account Holders who are Residents of
the Local Community.
a. Each Eligible Account Holder who is a Resident of the
Local Community, including individuals on a joint account, shall
receive, without payment, non-transferable Subscription Rights to
purchase Conversion Stock in an amount equal to the maximum
purchase limitation in the Community Offering.
b. Non-transferable Subscription Rights to purchase
Conversion Stock received by Officers and directors of the
Savings Bank and their Associates who are Residents of the Local
Community based on their increased deposits in
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the Savings Bank in the one-year period preceding the Eligibility
Record Date shall be subordinated to all other subscriptions
involving the exercise of nontransferable Subscription Rights to
purchase shares pursuant to this Category.
c. In the event of an oversubscription for shares of
Conversion Stock pursuant to this Category, shares of Conversion
Stock shall be allocated among subscribing Eligible Account
Holders who are Residents of the Local Community, as follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Eligible Account Holders who are Residents of
the Local Community so as to permit each such Eligible
Account Holder, to the extent possible, to purchase a number
of shares of Conversion Stock sufficient to make its total
allocation equal to 100 shares or the total amount of its
subscription, whichever is less.
(II) Any shares not so allocated shall be allocated
among the subscribing Eligible Account Holders who are
Residents of the Local Community on an equitable basis,
related to the amounts of their respective Qualifying
Deposits, as compared to the total Qualifying Deposits of
all such subscribing Eligible Account Holders.
2. Category No. 2: Eligible Account Holders Who Are Not Residents of
the Local Community.
a. Each Eligible Account Holder who is not a Resident of the
Local Community, including individuals on a joint account, shall
receive, without payment, non-transferable Subscription Rights to
purchase Conversion Stock in an amount equal to the maximum purchase
limitation in the Community Offering.
b. Non-transferable Subscription Rights to purchase Conversion
Stock received by Officers and directors of the Savings Bank and their
Associates based on their increased deposits in the Savings Bank in
the one-year period preceding the Eligibility Record Date shall be
subordinated to all other subscriptions involving the exercise of
nontransferable Subscription Rights to purchase shares pursuant to
this Category.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among subscribing Eligible Account Holders who are not
Residents of the Local Community as follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Eligible Account Holders who are not Residents of the
Local Community so as to permit each such Eligible Account
Holder, to the extent possible, to purchase a number of shares of
Conversion Stock
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sufficient to make its total allocation equal to 100 shares or
the total amount of its subscription, whichever is less.
(II) Any shares not so allocated shall be allocated among
the subscribing Eligible Account Holders who are not Residents of
the Local Community on an equitable basis, related to the amounts
of their respective Qualifying Deposits, as compared to the total
Qualifying Deposits of all such subscribing Eligible Account
Holders.
3. Category No. 3: Tax-Qualified Employee Stock Benefit Plan.
a. The Tax-Qualified Employee Stock Benefit Plan shall receive,
without payment, non-transferable Subscription Rights to purchase up
to 8% of the shares of Conversion Stock issued in the Stock
Conversion.
b. Subscription rights received in this Category shall be
subordinated to the Subscription Rights received by Eligible Account
Holders pursuant to Categories No. 1 and No. 2.
c. In the event there is an oversubscription of shares of
Conversion Stock and, as a result, the Tax-Qualified Employee Stock
Benefit Plan is unable to purchase in the Stock Conversion an amount
equal to 8% of the total number of shares offered and sold in the
Stock Conversion, then the Board of Directors of the Holding Company
intends to, and shall be authorized to, approve the purchase by the
Tax-Qualified Employee Stock Benefit Plan in the open market after the
Stock Conversion, of such shares as are necessary for the
Tax-Qualified Employee Stock Benefit Plan to purchase a number of
shares equal to 8% of the total number of shares of Conversion Stock
issued in the Stock Conversion. Any purchases made by the
Tax-Qualified Employee Stock Benefit Plan may be purchased with funds
borrowed from the Holding Company.
4. Category No. 4: Supplemental Eligible Account Holders.
a. In the event that the Eligibility Record Date is more than 15
months prior to the date of the latest amendment of the Application
filed prior to Administrator and FDIC approval, then each Supplemental
Eligible Account Holder, including individuals on a joint account,
shall receive, without payment, non-transferable Subscription Rights
to purchase Conversion Stock in an amount equal to the maximum
purchase limitation in the Community Offering.
b. Subscription Rights received pursuant to this Category shall
be subordinated to the Subscription Rights received by the Eligible
Account Holders and by the Tax-Qualified Employee Stock Benefit Plan
pursuant to Category Nos. 1, 2 and 3.
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c. Any non-transferable Subscription Rights to purchase shares
received by an Eligible Account Holder in accordance with Category No.
1 and Category No. 2 shall reduce to the extent thereof the
Subscription Rights to be distributed to such Eligible Account Holder
pursuant to this Category.
d. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, shares of Conversion Stock shall be
allocated among the subscribing Supplemental Eligible Account Holders
as follows:
(I) Shares of Conversion Stock shall be allocated among
subscribing Supplemental Eligible Account Holders so as to permit
each such Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares of Conversion Stock
sufficient to make its total allocation (including the number of
shares of Conversion Stock, if any, allocated in accordance with
Category Nos. 1 and 2) equal to 100 shares of Conversion Stock or
the total amount of its subscription, whichever is less.
(II) Any shares of Conversion Stock not allocated in
accordance with subparagraph (I) above shall be allocated among
the subscribing Supplemental Eligible Account Holders on an
equitable basis, related to the amounts of their respective
Qualifying Deposits on the Supplemental Eligibility Record Date
as compared to the total Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders in each case on the
Supplemental Eligibility Record Date.
5. Category No. 5: Other Members.
a. Each Other Member, including individuals on a joint account,
other than those Members who are Eligible Account Holders or
Supplemental Eligible Account Holders, shall receive, without payment,
non-transferable Subscription Rights to purchase Conversion Stock in
an amount equal to the maximum purchase limitation in the Community
Offering.
b. Subscription Rights received pursuant to this Category shall
be subordinated to the Subscription Rights received by Eligible
Account Holders, the Tax-Qualified Employee Stock Benefit Plan and
Supplemental Eligible Account Holders pursuant to Category Nos. 1, 2,
3, and 4.
c. In the event of an oversubscription for shares of Conversion
Stock pursuant to this Category, the shares of Conversion Stock
available shall be allocated among subscribing Other Members as to
permit each subscribing Other Member, to the extent possible, to
purchase a number of shares sufficient to make his or her total
allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Other Members. The shares
remaining thereafter will be allocated among subscribing Other Members
whose
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subscriptions remain unsatisfied on an equitable basis as determined
by the Board of Directors.
6. Category No. 6: Directors, Officers and Employees.
a. Each director and Officer of the Savings Bank, and each
employee of the Savings Bank, as of the date of the commencement of
the Subscription Offering shall receive, without payment, Subscription
Rights to purchase an amount of Conversion Stock equal to the maximum
purchase limitation in the Community Offering. Subscription Rights
received pursuant to this Category shall be subordinated to all
Subscription Rights received pursuant to Category Nos. 1-5. Any
Subscription Rights received by a director, Officer, or employee in
accordance with Category Nos. 1, 2, or 4 shall reduce, to the extent
thereof, the Subscription Rights to be distributed to such director,
Officer or employee pursuant to this Category.
b. In the event of an oversubscription for shares of Conversion
Stock under this Category, the shares available shall be allocated
among the subscribing directors, Officers and employees of the Savings
Bank whose subscriptions are not satisfied pro rata on the basis of
the amounts of their respective subscriptions. All computations shall
be rounded down to the nearest whole share.
Order Forms may provide that the maximum purchase limitation shall be based
on the midpoint of the Valuation Range. In the event the aggregate Purchase
Price of the Conversion Stock issued and sold is below the midpoint of the
Valuation Range, that portion of subscriptions in excess of the maximum purchase
limitation will be refunded. In the event the aggregate Purchase Price of
Conversion Stock issued and sold is above the midpoint of the Valuation Range,
persons who have subscribed for the maximum purchase limitation may be given the
opportunity to increase their subscriptions so as to purchase the maximum number
of shares subject to the availability of shares. The Savings Bank will not
otherwise notify subscribers of any change in the number of shares of Conversion
Stock offered.
D. Community Offering.
1. Any shares of Conversion Stock not purchased through the
exercise of Subscription Rights in the Subscription Offering may be
sold in a Community Offering, which may commence concurrently with the
Subscription Offering. Shares of Conversion Stock will be offered in
the Community Offering to Residents of the Local Community, giving
preference to natural persons and the trusts of natural persons
(including individual retirement and Keogh retirement accounts and
personal trusts in which such natural persons have substantial
interests) who are Residents of the Local Community. The Community
Offering may commence concurrently with or as soon as practicable
after the completion of the Subscription Offering and must be
completed within 45 days after the last day of the Subscription
offering, unless extended by the Holding Company with the approval of
the FDIC and the Administrator. The
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offering price of the Conversion Stock in the Community Offering will
be the same price paid for such stock by Eligible Account Holders and
other persons in the Subscription Offering. If sufficient shares are
not available to satisfy all orders in the Community Offering, the
shares available will be allocated by the Holding Company in its
discretion. The Holding Company shall have the right to accept or
reject orders in the Community Offering in whole or in part.
2. Orders accepted in the Community Offering shall be filled up
to a maximum of 2% of the Conversion Stock, and thereafter remaining
shares shall be allocated on an equal number of shares basis per order
until all orders have been filled.
3. The Conversion Stock to be offered in the Community Offering
will be offered and sold in a manner that will achieve the widest
distribution of the Conversion Stock.
E. Public Offering.
Any shares of Conversion Stock not purchased in the Subscription
and Community Offerings may be sold to the general public in an
offering underwritten by a registered broker-dealer on a "firm
commitment" or "best efforts" basis. The Public Offering, if any, will
commence as soon as practicable after completion of the Community
Offering. The offering price of the Conversion Stock sold in the
Public Offering shall be the same price paid for the Conversion Stock
by Eligible Account Holders and other persons in the Subscription and
Community Offerings. The purchase limitations contained in Paragraph
VIII.F shall apply to all purchases of Conversion Stock in the Public
Offering.
F. Limitations Upon Purchases of Shares of Conversion Stock.
The following additional limitations and exceptions shall apply
to all purchases of Conversion Stock:
1. No person may purchase fewer than 25 shares of Conversion
Stock in the Stock Conversion, to the extent such shares are
available, subject to the provisions of Paragraph VIII.C herein.
2. Directors of the Holding Company and the Savings Bank shall
not be deemed to be Associates or a group Acting in Concert with other
directors solely as a result of membership on the Board of Directors
of the Holding Company or the Savings Bank or any of their
subsidiaries.
3. Purchases of shares of Conversion Stock in the Stock
Conversion by any person, whether or not aggregated with purchases by
an Associate of that person, or a group of persons Acting in Concert,
shall not exceed $250,000 of the
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Conversion Stock, except that the Tax-Qualified Employee Stock Benefit
Plan may purchase up to 8% of the total shares of Conversion Stock to
be issued in the Stock Conversion, and shares purchased by the
Tax-Qualified Employee Stock Benefit Plan and attributable to a
participant thereunder shall not be aggregated with shares purchased
by such participant or any other purchaser of Conversion Stock in the
Stock Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, the Holding Company and the Savings Bank
may increase or decrease any of the purchase limitations set forth herein
at any time. In the event that the individual purchase limitation is
increased after commencement of the Subscription and Community Offerings,
the Holding Company and the Savings Bank shall permit any person who
subscribed for the maximum number of shares of Conversion Stock to purchase
an additional number of shares, such that such person shall be permitted to
subscribe for the then maximum number of shares permitted to be subscribed
for by such person, subject to the rights and preferences of any person who
has priority Subscription Rights. In the event that either the individual
purchase limitation or the number of shares of Conversion Stock to be sold
in the Stock Conversion is decreased after commencement of the Subscription
and Community Offerings, the orders of any person who subscribed for the
maximum number of shares of Conversion Stock shall be decreased by the
minimum amount necessary so that such person shall be in compliance with
the then maximum number of shares permitted to be subscribed for by such
person.
Each person purchasing Conversion Stock in the Stock Conversion shall
be deemed to confirm that such purchase does not conflict with the purchase
limitations under the Plan or otherwise imposed by law, rule or regulation.
In the event that such purchase limitations are violated by any person
(including any Associate or group of persons affiliated or otherwise Acting
in Concert with such person), the Holding Company shall have the right to
purchase from such person at the actual Purchase Price per share all shares
acquired by such person in excess of such purchase limitations or, if such
excess shares have been sold by such person, to receive the difference
between the actual Purchase Price per share paid for such excess shares and
the price at which such excess shares were sold by such person. This right
of the Holding Company to purchase such excess shares shall be assignable
by the Holding Company.
G. Restrictions on and Other Characteristics of Stock Being Sold.
1. Transferability.
Except as provided in Paragraph XIV below, Conversion Stock
purchased by persons other than directors and Officers of the Savings
Bank and directors and Officers of the Holding Company will be
transferable without restriction. Conversion Stock purchased by such
directors or Officers shall not be sold or transferred for a period of
one year from the effective date of the Stock Conversion except for
any sale or transfer of such shares (i) following the death of the
original purchaser, (ii) resulting from an exchange of securities in a
merger or
19
<PAGE>
acquisition approved by the applicable regulatory authorities, (iii)
approved by the Administrator upon a determination that the
restriction imposes a substantial personal financial hardship on the
individuals due to changed unforeseeable circumstances outside the
control of the individual, or (iv) following consummation of the Bank
Conversion unless the Administrator's approval of or the FDIC's notice
of intent not to object to the Stock Conversion otherwise requires.
The Conversion Stock issued by the Holding Company to such
directors and Officers shall bear the following legend giving
appropriate notice of the one-year holding period restriction:
"The shares of stock evidenced by this Certificate are restricted
as to transfer for a period of one year from the date of this
Certificate pursuant to applicable regulations of the
Administrator, Savings Institutions Division, North Carolina
Department of Commerce. Except in the event of the death of the
registered holder, the shares represented by this Certificate may
not be sold prior thereto without a legal opinion of counsel for
the Holding Company that said sale is permissible under the
provisions of applicable laws and regulations."
In addition, the Holding Company shall give appropriate
instructions to the transfer agent for the Holding Company Stock with
respect to the applicable restrictions relating to the transfer of
restricted stock. Any shares of Holding Company Stock subsequently
issued as a stock dividend, stock split or otherwise, with respect to
any such restricted stock, shall be subject to the same holding period
restrictions for such directors and Officers as may be then applicable
to such restricted stock.
2. Repurchase and Dividend Rights.
Without the prior written approval of the Administrator, the
Converted Savings Bank may not repurchase any of its capital stock for
a period of five (5) years after the date of the Stock Conversion.
Subject to the Administrator's regulations, the Converted Savings Bank
may not declare or pay a cash dividend on any of its capital stock if
the effect thereof would cause the regulatory capital of the Converted
Savings Bank to be reduced below (a) the amount required for the
Liquidation Account or (b) the net worth requirements of the
Administrator or the minimum capital requirements of the FDIC.
Furthermore, without the prior approval of the Administrator, the
Converted Savings Bank may not, for a period of five (5) years after
the date of the Stock Conversion, declare or pay a cash dividend on
its capital stock in an amount in excess of one-half (1/2) of the
greater of (x) the Converted Savings Bank's net income for the most
recent fiscal year end or (y) the average of the Converted Savings
Bank's net income after dividends for the most recent fiscal year end
and not more than two (2) of the immediately preceding fiscal years,
if applicable.
20
<PAGE>
The above limitations shall not preclude payments of dividends or
repurchases of capital stock by the Converted Savings Bank in the
event applicable federal or state regulatory limitations are
liberalized subsequent to the Stock Conversion. Subsequent to the Bank
Conversion, the Commercial Bank will be subject to the stock
repurchase and dividend restrictions applicable to a North
Carolina-chartered bank.
3. Voting Rights.
After the Stock Conversion, holders of Savings Accounts in and
obligors on loans of the Savings Bank will not have voting rights in
the Converted Savings Bank. After the Bank Conversion, holding of
Savings Accounts in and obligors on loans of the Converted Savings
Bank will not have voting rights in the Commercial Bank. Exclusive
voting rights with respect to the Holding Company shall be vested in
the holders of Holding Company Stock. Holders of Savings Accounts in
and obligors on loans of the Converted Savings Bank and the Commercial
Bank will not have any voting rights in the Holding Company except and
to the extent that such persons become shareholders of the Holding
Company, and the Holding Company will have exclusive voting rights
with respect to the Converted Savings Bank's, and the Commercial
Bank's Capital Stock. Each shareholder of the Holding Company will be
entitled to vote on any matters coming before the shareholders of the
Holding Company for consideration and will be entitled to one vote for
each share of Holding Company Stock owned by said shareholder.
4. Purchases by Officers, Directors and Associates Following the
Stock Conversion.
Without the prior written approval of the Administrator, Officers
and directors of the Converted Savings Bank and Officers and directors
of the Holding Company, and their Associates, shall be prohibited for
a period of three years following completion of the Stock Conversion
from purchasing outstanding shares of Holding Company Stock, except
from a broker or dealer registered with the Secretary of State of
North Carolina and/or the SEC. Notwithstanding the preceding sentence,
this restriction shall not apply to (i) negotiated transactions
involving more than 1% of the total outstanding shares of Holding
Company Stock, (ii) purchases made and shares held by a Tax-Qualified
Employee Stock Benefit Plan or non-tax-qualified employee stock
benefit plans which may be attributable to Officers or directors may
be made without the Administrator's approval or the use of a broker or
dealer, and (iii) any transaction occurring after the consummation of
the Bank Conversion as set forth in Paragraph VII.B. herein unless
FDIC's notice of intent not to object to the Bank Conversion otherwise
requires.
21
<PAGE>
H. Mailing of Offering Materials and Collation of Subscriptions.
The sale of all shares of Conversion Stock offered pursuant to the
Plan must be completed within 12 months after approval of the Plan at the
Special Meeting, which time period may be extended up to an additional 12
months by amendment to this Plan. After approval of the Plan by the
appropriate regulatory authorities and the declaration of the effectiveness
of the Registration Statement by the SEC, the Holding Company shall
distribute the Subscription and Community Prospectus and Order Forms for
the purchase of shares in accordance with the terms of the Plan.
The recipient of an Order Form will be provided neither fewer than 20
days nor more than 45 days from the date of mailing, unless extended, to
complete, execute and return properly the Order Form to the Holding Company
or the Savings Bank. Self-addressed, postage paid return envelopes will
accompany these forms when mailed. The Savings Bank or Holding Company will
collate the returned executed Order Forms upon completion of the
Subscription Offering. Failure of any eligible subscriber to return a
properly completed and executed Order Form within the prescribed time
limits shall be deemed a waiver and a release by such person of any rights
to purchase shares of Conversion Stock hereunder.
The sale of all shares of Conversion Stock shall be completed within
45 days after the last day of the Subscription Offering unless extended by
the Holding Company and the Savings Bank with the approval of the FDIC and
the Administrator.
I. Method of Payment.
Payment for all shares of Conversion Stock subscribed for in the
Subscription and Community Offerings must be received in full by the
Savings Bank or the Holding Company, together with a properly completed and
executed Order Forms, on or prior to the expiration date specified thereon;
provided, however, that payment by Tax-Qualified Employee Stock Benefit
Plan for Conversion Stock may be made to the Savings Bank concurrently with
the completion of the Stock Conversion.
Payment for all shares of Conversion Stock may be made in cash (if
delivered in person) or by check or money order, or, if the subscriber has
a Savings Account in the Savings Bank (including a certificate of deposit),
the subscriber may authorize the Savings Bank to charge the subscriber's
Savings Account for the purchase amount. The Savings Bank shall pay
interest at not less than its then current savings account rate on all
amounts paid in cash or by check or money order to purchase shares of
Conversion Stock in the Subscription and Community Offerings from the date
payment is received until the Stock Conversion is completed or terminated.
The Savings Bank shall not knowingly loan funds or otherwise extend credit
to any person for the purpose of purchasing Conversion Stock.
22
<PAGE>
If a subscriber authorizes the Savings Bank to charge its Savings
Account, the funds may remain in the subscriber's Savings Account and
continue to earn interest, but may not be used by the subscriber until all
Conversion Stock has been sold or the Stock Conversion is terminated,
whichever is earlier. The withdrawal will be given effect only concurrently
with the sale of all shares of Conversion Stock in the Stock Conversion and
only to the extent necessary to satisfy the subscription at a price equal
to the Purchase Price. The Savings Bank will allow subscribers to purchase
shares of Conversion Stock by withdrawing funds from certificate accounts
without the assessment of early withdrawal penalties. In the case of early
withdrawal of only a portion of such account, the certificate evidencing
such account shall be canceled if the remaining balance of the account is
less than the applicable minimum balance requirement. In that event, the
remaining balance will earn interest at the Savings Bank's then current
savings account rate. This waiver of the early withdrawal penalty is
applicable only to withdrawals made in connection with the purchase of
Conversion Stock under the Plan.
Tax-Qualified Employee Stock Benefit Plans may subscribe for shares by
submitting an Order Form, and in the case of an employee stock ownership
plan together with evidence of a loan commitment from the Holding Company
or an unrelated financial institution for the purchase of the shares of the
Conversion Stock, during the Subscription Offering and by making payment
for the shares of Conversion Stock on the date of the closing of the Stock
Conversion. Following the Stock Conversion, the Converted Savings Bank and
the Commercial Bank may make scheduled discretionary payments to such
Tax-Qualified Employee Stock Benefit Plans provided such contributions do
not cause the Converted Savings Bank or the Commercial Bank to fail to meet
net worth or other regulatory capital requirements.
J. Undelivered, Defective or Late Order Forms; Insufficient Payment.
In the event an Order Form: (i) is not delivered and is returned to
the Holding Company or the Savings Bank by the United States Postal Service
(or the Holding Company or the Savings Bank is unable to locate the
addressee); (ii) is not received by the Holding Company or the Savings
Bank, or is received by the Holding Company or the Savings Bank after
termination of the date specified thereon; (iii) is defectively completed
or executed; or (iv) is not accompanied by the total required payment for
the shares of Conversion Stock subscribed for (including cases in which the
subscribers' Savings Accounts are insufficient to cover the authorized
withdrawal for the required payment), the Subscription Rights of the person
to whom such rights have been granted will not be honored and will be
treated as though such person failed to return the completed Order Form
within the time period specified therein. Alternatively, the Holding
Company or the Savings Bank may, but will not be required to, waive any
irregularity relating to any Order Form or require the submission of a
corrected Order Form or the remittance of full payment for subscribed
shares of Conversion Stock by such date as the Holding Company or the
Savings Bank may specify. Subscription orders, once tendered, cannot be
revoked. The Holding Company's and Bank's
23
<PAGE>
interpretation of the terms and conditions of this Plan and acceptability
of the Order Forms will be final and conclusive.
K. Members in Non-Qualified States or in Foreign Countries.
The Holding Company will make reasonable efforts to comply with the
securities laws of all states in the United States in which persons
entitled to subscribe for Conversion Stock pursuant to the Plan reside.
However, no such person will be offered or receive any Conversion Stock
under this Plan who resides in a foreign country or who resides in a state
of the United States with respect to which any or all of the following
apply: (i) a small number of persons otherwise eligible to subscribe for
shares of Conversion Stock under this Plan reside in such state or foreign
country; (ii) the granting of Subscription Rights or the offer or sale of
shares of Conversion Stock to such person would require the Holding Company
or the Savings Bank or their employees to register, under the securities
laws of such state, as a broker, dealer, salesman or agent or to register
or otherwise qualify its securities for sale in such state or foreign
country; and (iii) such registration or qualification would be
impracticable for reasons of cost or otherwise. No payments will be made in
lieu of the granting of Subscription Rights to any such person.
L. Sales Commissions.
Sales commissions may be paid as determined by the Boards of Directors
of the Savings Bank and the Holding Company or their designees to
securities dealers assisting subscribers in making purchases of Conversion
Stock in the Subscription Offering or in the Community Offering, if the
securities dealer is named by the subscriber on the Order Form. In
addition, a sales commission may be paid to a securities dealer for
advising and consulting with respect to, or for managing the sale of
Conversion Stock in, the Subscription Offering, the Community Offering or
any other offering.
IX. Certificate of Incorporation and Bylaws.
As part of the Stock Conversion, a North Carolina stock certificate of
incorporation and bylaws will be adopted to authorize the Converted Savings Bank
to operate as a North Carolina capital stock savings bank. By approving the
Plan, the Members of the Savings Bank will thereby approve amending the Savings
Bank's existing certificate of incorporation and bylaws to read in the form of
Exhibit A and Exhibit B, respectively. Prior to completion of the Stock
Conversion, the proposed North Carolina stock certificate of incorporation and
bylaws may be amended in accordance with the provisions and limitations for
amending the Plan under Paragraph XV below. The effective date of the amendment
of the Savings Bank's existing certificate of incorporation and bylaws to read
in the form of a North Carolina stock certificate of incorporation and bylaws
shall be the date of the issuance of the Conversion Stock, which shall be the
date of consummation of the Stock Conversion.
As part of the Bank Conversion, a North Carolina commercial bank
certificate of incorporation and bylaws will be adopted in connection with the
conversion of the Converted Savings Bank to a North Carolina commercial bank. By
approving the Plan, the Members of the
24
<PAGE>
Savings Bank will thereby approve such North Carolina commercial bank
certificate of incorporation and bylaws in the form of Exhibit C and Exhibit D,
respectively. Prior to completion of the Bank Conversion, the North Carolina
commercial bank certificate of incorporation and bylaws may be amended in
accordance with the provisions and limitations for amending the Plan under
Paragraph XV below. The effective date of the certificate of incorporation and
bylaws of the Commercial Bank shall be the date of the consummation of the Bank
Conversion.
X. Registration and Market Making.
In connection and concurrently with the Stock Conversion, the Holding
Company shall register the Holding Company Stock with the SEC pursuant to the
Securities Exchange Act of 1934, as amended, and shall undertake not to
deregister the Holding Company Stock for a period of three years thereafter.
The Holding Company shall use its best efforts to encourage and assist
various Market Makers to establish and maintain a market for the Holding Company
Stock. The Holding Company shall also use its best efforts to have the Holding
Company Stock quoted on the Nasdaq or listed on a national or regional
securities exchange.
XI. Status of Savings Accounts and Loans Subsequent to Conversion.
All Savings Accounts in the Savings Bank will retain the same status after
Conversion as these accounts had prior to the Conversion. Subject to Paragraph
VIII.I. hereof, each holder of a Savings Account in the Savings Bank shall
retain, without payment, a withdrawable Savings Account or Savings Accounts in
the Converted Savings Bank, equal in dollar amount and on the same terms and
conditions (except with respect to voting and liquidation rights) as in effect
prior to consummation of the Stock Conversion. Each person holding a Savings
Account at the Converted Savings Bank as of immediately prior to consummation of
the Bank Conversion as set forth in Paragraph VII.B. herein shall receive,
without payment, a withdrawable Savings Account or Savings Accounts in the
Commercial Bank equal in dollar amount and on the same terms and conditions as
in effect as of immediately prior to the consummation of the Bank Conversion.
All Savings Accounts will continue to be insured by the Savings Association
Insurance Fund of the FDIC up to the applicable limits of insurance coverage.
All loans shall retain the same status after the Conversion as these loans had
prior to Conversion.
After the Stock Conversion, holders of Savings Accounts in and obligors on
loans of the Savings Bank will not have voting rights in the Converted Savings
Bank. After the Bank Conversion, holders of Savings Accounts in and obligors on
loans of the Converted Savings Bank will not have voting rights in the
Commercial Bank. Exclusive voting rights with respect to the Holding Company
shall be vested in the holders of the Conversion Stock. Holders of Savings
Accounts in and obligors on loans of the Converted Savings Bank and the
Commercial Bank will not have any voting rights in the Holding Company except
and to the extent that such persons become stockholders of the Holding Company,
and the Holding Company will have exclusive voting rights with respect to the
Converted Savings Bank's and the Commercial Bank's Capital Stock.
25
<PAGE>
XII. Effect of Conversion.
Upon consummation of the Stock Conversion, the corporate existence of the
Savings Bank shall not cease, but the Converted Savings Bank shall be deemed to
be a continuation of the Savings Bank, and shall succeed to all the rights,
interests, duties and obligations of the Savings Bank as in existence as of
immediately prior to the consummation of the Stock Conversion as described in
Paragraph VII.A. herein, including but not limited to all rights and interests
of the Savings Bank in and to its assets and properties, whether real, personal
or mixed.
Upon completion of the Bank Conversion, the corporate existence of the
Converted Savings Bank shall not cease, but the Commercial Bank shall be deemed
to be a continuation of the Converted Savings Bank, and shall succeed to all the
rights, interests, duties and obligations of the Converted Savings Bank as in
existence as of immediately prior to the consummation of the Bank Conversion as
described in Paragraph VII.B. herein, including but not limited to all rights
and interests of the Converted Savings Bank in and to its assets and properties,
whether real, personal or mixed.
XIII. Liquidation Account.
After the Conversion, holders of Savings Accounts will not be entitled to
share in the residual assets after liquidation of the Converted Savings Bank or
the Commercial Bank. However, pursuant to applicable regulations, the Savings
Bank shall, at the time of the Stock Conversion, establish a Liquidation Account
in an amount equal to its net worth as of the date of the latest statement of
financial condition contained in the final prospectus to be used in connection
with the Stock Conversion. The function of the Liquidation Account is to
establish a priority on liquidation, and, except as provided in Paragraph
VIII.G.2. above, the existence of the Liquidation Account shall not operate to
restrict the use or application of any of the net worth accounts of the
Converted Savings Bank.
The Liquidation Account shall be maintained by the Converted Savings Bank
subsequent to the Stock conversion for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders who retain their Savings Accounts in
the Converted Savings Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder shall, with respect to each Savings Account held, have a
related inchoate interest in a portion of the Liquidation Account ("subaccount
balance').
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder and/or a Supplemental Eligible Account Holder shall be determined
by multiplying the opening balance in the Liquidation Account by a fraction of
which the numerator is the amount of the qualifying deposit in the related
Savings Account and the denominator is the total amount of the qualifying
deposits of all Eligible Account Holders and Supplemental Eligible Account
Holders in the Savings Bank. Such initial subaccount balance shall not be
increased but shall be subject to downward adjustment as provided below.
26
<PAGE>
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder to which the subaccount relates at the
close of business on any annual closing date subsequent to the Eligibility
Record Date or Supplemental Eligibility Record Date is less than the lesser of
(i) the deposit balance in such Savings Account at the close of business on any
annual closing date subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date, or (ii) the amount of the Qualifying
Deposit in such Savings Account on the Eligibility Record Date or the
Supplemental Eligibility Record Date, then the subaccount balance for such
savings account shall be adjusted by reducing such subaccount balance in an
amount proportionate to the reduction in such deposit balance. In the event of a
downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any increase in the deposit balance of the related Savings
Account. If any such Savings Account is closed, the related subaccount balance
shall be reduced to zero.
In the event of a complete liquidation of the Converted Savings Bank (and
only in such event), each Eligible Account Holder and Supplemental Eligible
Account Holder shall be entitled to receive a liquidation distribution from the
Liquidation Account in the amount of the then-current adjusted subaccount
balances for Savings Accounts then field before any liquidation distribution may
be made to stockholders. No merger, consolidation, sale of bulk assets or
similar combination or transaction with another institution insured by the FDIC
shall be considered to be a complete liquidation for these purposes. In such
transactions, the Liquidation Account shall be assumed by the surviving
institution.
The Bank Conversion shall not be deemed to be a complete liquidation of the
Converted Savings Bank for purposes of the distribution of the Liquidation
Account. Upon consummation of the Bank Conversion, the Liquidation Account, and
all rights and obligations of the Converted Savings Bank in connection
therewith, shall be assumed by the Commercial Bank.
The Liquidation Account shall be maintained by the Commercial Bank, under
the same rules and conditions applicable to the Converted Savings Bank,
subsequent to the Bank Conversion for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders who retain their Savings Accounts in
the Commercial Bank.
XIV. Management.
The Holding Company, the Converted Savings Bank, or the Commercial Bank, as
appropriate, will enter into contracts of employment with one or more Officers,
approve and adopt the Tax-Qualified Employee Stock Benefit Plan; and, subject to
approval by the shareholders of the Holding Company, the Holding Company will
approve and adopt stock option plans and a restricted stock award plan for
selected Officers, employees, and directors.
XV. Interpretation and Amendment or Termination of the Plan.
The Savings Bank's Board of Directors shall have the sole discretion to
interpret and apply the provisions of the Plan to particular facts and
circumstances and to make all determinations necessary or desirable to implement
such provisions, including but not limited to matters with respect to giving
preference to natural persons and trusts of natural persons who are
27
<PAGE>
permanent Residents of the Local Community, and any and all interpretations,
applications and determinations made by the Board of Directors in good faith and
on the basis of such information and assistance as was then reasonably available
for such purpose shall be conclusive and binding upon the Savings Bank and its
Members and subscribers in the Subscription and Community offerings, subject to
the authority of the FDIC and the Administrator.
If deemed necessary or desirable, the Plan may be substantively amended at
any time prior to submission of the Plan and proxy materials to the Members by a
two-thirds vote of the Savings Bank's Board of Directors. After submission of
the Plan and proxy materials to the Members, the Plan may be amended by a
two-thirds vote of the Savings Bank's Board of Directors at any time prior to
the Special Meeting and at any time following such Special Meeting with the
concurrence of the FDIC and the Administrator. In its discretion, the Board of
Directors may modify or terminate the Plan upon the order of the regulatory
authorities without a resolicitation of proxies or another Special Meeting.
In the event that mandatory new regulations pertaining to the Conversion
are adopted by the FDIC, the Administrator, the Federal Reserve Board, or the
Commissioner, or any successor agency, prior to the completion of the
Conversion, the Plan will be amended to conform to the new mandatory regulations
without a resolicitation of proxies or another Special Meeting. In the event
that new conversion regulations adopted by the FDIC, the Administrator, the
Federal Reserve Board, or the Commissioner, or any successor agency, prior to
completion of the Conversion contain optional provisions, the Plan may be
amended to utilize such optional provisions at the discretion of the Board of
Directors without a resolicitation of proxies or another Special Meeting.
By adoption of the Plan, the Savings Bank's Members authorize the Board of
Directors to amend and/or terminate the Plan under the circumstances set forth
above.
XVI. Expenses of the Conversion.
The Holding Company and the Savings Bank will use their best efforts to
assure that expenses incurred in connection with the Conversion shall be
reasonable.
XVII. Contributions to the Tax-Qualified Employee Stock Benefit Plan.
The Holding Company, the Converted Savings Bank and the Commercial Bank may
make scheduled discretionary contributions to the Tax-Qualified Employee Stock
Benefit Plan, provided such contributions do not cause the Converted Savings
Bank or the Commercial Bank to fail to meet then-applicable regulatory capital
requirements.
28
<PAGE>
EXHIBIT A
Certificate of Incorporation
of the
Converted Savings Bank
<PAGE>
EXHIBIT B
Bylaws of the
Converted Savings Bank
2
<PAGE>
EXHIBIT C
Certificate of Incorporation
of the
Commercial Bank
3
<PAGE>
EXHIBIT D
Bylaws of the
Commercial Bank
4
<PAGE>
EXHIBIT E
Articles of Incorporation
of the Holding Company
5
<PAGE>
EXHIBIT F
Bylaws of the Holding Company
6
ARTICLES OF INCORPORATION
OF
BOC Financial Corp.
The undersigned entity hereby makes and acknowledges these Articles of
Incorporation for the purpose of forming a business corporation under and by
virtue of the laws of the State of North Carolina as contained in Chapter 55 of
the General Statutes of North Carolina, entitled "North Carolina Business
Corporation Act," and the several amendments thereto, and to that end hereby
sets forth the following:
ARTICLE I
The name of the corporation is BOC Financial Corp. (herein referred to as
the "Corporation").
ARTICLE II
The Corporation shall have authority to issue a total of 10,000,000 shares of
capital stock. The capital stock shall consist of 9,000,000 shares of Common
Stock, $1.00 par value per share, each with one vote per share, and 1,000,000
shares of Preferred Stock, no par value. The preferences, limitations and
relative rights of the shares of Preferred Stock shall be as designated by the
Board of Directors and may be issued in one or more series.
ARTICLE III
The street address of the initial registered office of the Corporation is 107
South Central Avenue, Rowan County, Landis, North Carolina 28088; the mailing
address of the initial registered office of the Corporation is 107 South Central
Avenue, Landis, Rowan County, North Carolina 28088; and, the name of the initial
registered agent at such address is Stephen R. Talbert.
ARTICLE IV
The name of the incorporator is Landis Savings Bank, and the address of the
incorporator is 107 South Central Avenue, Landis, North Carolina 28088.
ARTICLE V
To the fullest extent permitted by the North Carolina Business Corporation Act
as it exists or may hereafter be amended, no person who is serving or who has
served as a director of the Corporation shall be personally liable to the
Corporation or any of its shareholders or otherwise for monetary damages for
breach of any duty as a director. No amendment or repeal of this article, nor
the adoption of any provision to these Articles of Incorporation inconsistent
with this article, shall eliminate or reduce the protection granted herein with
respect to any matter that occurred prior to such amendment, repeal, or
adoption.
<PAGE>
ARTICLE VI
In connection with the exercise of its or their judgment in determining what is
in the best interests of the Corporation and its shareholders, the Board of
Directors of the Corporation, any committee of the Board of Directors, or any
individual directors may, but shall not be required to, in addition to
considering the long-term and short-term interests of the shareholders, consider
any of the following factors and any other factors which it or they deem
relevant: (a) the social and economic effects of the matter to be considered on
the Corporation and its subsidiaries, its and their employees, depositors,
customers, and creditors, and the communities in which the Corporation and its
subsidiaries operate or are located; and (b) when evaluating a business
combination or a proposal by another Person or Persons to make a business
combination or a tender or exchange offer or any other proposal relating to a
potential change of control of the Corporation (i) the business and financial
condition and earnings prospects of the acquiring Person or Persons, including,
but not limited to, debt service and other existing financial obligations,
financial obligations to be incurred in connection with the acquisition, and
other likely financial obligations of the acquiring Person or Persons, and the
possible effect of such conditions upon the Corporation and its subsidiaries and
the communities in which the Corporation and its subsidiaries operate or are
located, (ii) the competence, experience, and integrity of the acquiring Person
or Persons and its or their management, and (iii) the prospects for successful
conclusion of the business combination, offer or proposal. The provisions of
this Article VII shall be deemed solely to grant discretionary authority to the
directors and shall not be deemed to provide to any constituency the right to be
considered. As used in this Article VII, the term "Person" means any individual,
partnership, firm, corporation, association, trust, unincorporated organization
or other entity; and, when two or more Persons act as a partnership, limited
partnership, syndicate, or other group acting in concert for the purpose of
acquiring, holding, voting or disposing of securities of the Corporation, such
partnership, limited partnership, syndicate or group shall also be deemed
"Person" for purposes of this Article VII.
ARTICLE VII
Any agreement, plan or arrangement providing for the merger or consolidation of
the Corporation with any other corporation, foreign or domestic, or the sale,
lease or exchange of all or substantially all of the assets of the Corporation
which require prior shareholder approval under North Carolina law shall only be
effected after the prior approval of the holders of at least three-fourths of
the outstanding shares of all classes of capital stock of the Corporation,
voting together as a single class, unless class voting rights are specifically
permitted for any class of capital stock of the Corporation. Notwithstanding the
foregoing, the requirement of approval of at least three-fourths of the
outstanding shares as set forth above shall not be applicable and only such
affirmative vote as is required by North Carolina law shall be required, if any
such transation shall have been approved by a majority of the members of the
Board of Directors.
2
<PAGE>
This ______ day of ___________, 1997.
LANDIS SAVINGS BANK
____________________________________
By: Stephen R. Talbert, President
Prepared by and return to:
Anthony Gaeta, Jr.
For the firm of
Moore & Van Allen, PLLC
Post Office Box 26507
Raleigh, NC 27611
Telephone: (919) 821-6223
BYLAWS
OF
BOC Financial Corp.
Index
-----
ARTICLE I
Offices
-------
Section 1. Principal Office
Section 2. Registered Office
Section 3. Other Offices
ARTICLE II
Meetings of Shareholders
------------------------
Section 1. Place of Meetings
Section 2. Annual Meetings
Section 3. Substitute Annual Meeting
Section 4. Special Meetings
Section 5. Notice of Meetings
Section 6. Waiver of Notice
Section 7. Voting Lists
Section 8. Voting Group
Section 9. Quorum
Section 10. Proxies
Section 11. Voting of Shares
Section 12. Fixing Record Date
ARTICLE III
Directors
---------
Section 1. General Powers
Section 2. Number, Term and Qualifications
Section 3. Nominations
Section 4. Election of Directors
Section 5. Removal
Section 6. Vacancies
Section 7. Chairman of the Board
Section 8. Compensation
Section 9. Appointment of Committees
<PAGE>
ARTICLE IV
Meetings of Directors
---------------------
Section 1. Regular Meetings
Section 2. Special Meetings
Section 3. Notice of Meetings
Section 4. Waiver of Notice
Section 5. Quorum
Section 6. Manner of Acting
Section 7. Presumption of Assent
Section 8. Informal Action by Directors
ARTICLE V
Officers
--------
Section 1. Number
Section 2. Election and Term
Section 3. Removal and Resignation
Section 4. Compensation
Section 5. President
Section 6. Vice Presidents
Section 7. Assistant Vice Presidents
Section 8. Secretary
Section 9. Assistant Secretaries
Section 10. Treasurer
Section 11. Assistant Treasurers
ARTICLE VI
Contracts, Loans, Checks and Deposits
-------------------------------------
Section 1. Contracts
Section 2. Loans
Section 3. Checks and Drafts
Section 4. Deposits
ARTICLE VII
Certificates for Shares and Their Transfer
------------------------------------------
Section 1. Certificates for Shares
Section 2. Transfer of Shares
Section 3. Lost Certificates
Section 4. Holder of Record
Section 5. Reacquired Shares
<PAGE>
ARTICLE VIII
General Provisions
------------------
Section 1. Distributions
Section 2. Seal
Section 3. Amendments
Section 4. Fiscal Year
Section 5. Indemnification
<PAGE>
ARTICLE I
Offices
- -------
Section 1. Principal Office: The principal office of the Corporation shall
be located in Landis, North Carolina.
Section 2. Registered Office: The registered office of the Corporation
required by law to be maintained in the State of North Carolina may be, but need
not be, identical with the principal office.
Section 3. Other Offices: The Corporation may have offices at such other
places, either within or without the State of North Carolina, as the Board of
Directors from time to time may determine, or as the affairs of the Corporation
from time to time may require.
ARTICLE II
Meetings of Shareholders
- ------------------------
Section 1. Place of Meetings: All meetings of shareholders shall be held at
the principal office of the Corporation or at such other place, either within or
without the State of North Carolina, as shall be designated in the notice of the
meeting or agreed upon by a majority of the shareholders entitled to vote
thereat.
Section 2. Annual Meetings: The annual meeting of shareholders of the
Corporation, for the purpose of electing directors of the Corporation and for
the transaction of such other business as properly may be brought before the
meeting, shall be held within 120 days of the end of the fiscal year on any day,
except Saturday, Sunday or a legal or banking holiday, as may be determined by
the Board of Directors.
Section 3. Substitute Annual Meeting: If the annual meeting shall not be
held as provided in Section 2 of this Article, a substitute annual meeting may
be called in accordance with the provisions of Section 4 of this Article. A
meeting so called shall be designated and treated for all purposes as the annual
meeting.
Section 4. Special Meetings: Special meetings of the shareholders may be
called at any time by (a) the Chairman of the Board, (b) the President of the
Corporation, (c) or the Board of Directors of the Corporation.
Section 5. Notice of Meetings: Written or printed notice stating the time,
place and date of the meeting shall be delivered not less than ten (10) nor more
than sixty (60) days before the date thereof, either in person or by mail, by or
at the direction of the President or other qualified person calling the meeting
to each shareholder of record entitled to vote at such meeting unless applicable
law or the Corporation's articles of incorporation require that such notice
shall be given to all shareholders with respect to such meeting. If mailed, such
notice shall be deemed to be effective when deposited in the United States mail,
correctly addressed to the shareholder at the shareholder's address
<PAGE>
as it appears on the current record of shareholders of the Corporation, with
postage thereon prepaid.
In the case of an annual or substitute annual meeting, the notice of
meeting need not specifically state the business to be transacted thereat unless
such a statement expressly is required by the provisions of the North Carolina
Business Corporation Act. In the case of a special meeting, the notice of
meeting specifically shall state the purpose or purposes for which the meeting
is called.
If any meeting of shareholders is adjourned to a different date, time, or
place, notice need not be given of the new date, time, or place if the new date,
time, or place is announced at the meeting before adjournment and if a new
record date is not fixed for the adjourned meeting. If a new record date for the
adjourned meeting is or must be fixed pursuant to North Carolina law, notice of
the adjourned meeting must be given as provided in this Section to persons who
are shareholders as of the new record date.
Section 6. Waiver of Notice: Any shareholder may waive notice of any
meeting before or after the meeting. The waiver must be in writing, signed by
the shareholder, and delivered to the Corporation for inclusion in the minutes
or filing with the corporate records. A shareholder's attendance, in person or
by proxy, at a meeting (a) waives objection to lack of notice or defective
notice of the meeting, unless the shareholder or the shareholder's proxy at the
beginning of the meeting objects to holding the meeting or transacting business
thereat, and (b) waives objection to consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder or the shareholder's proxy objects to considering
the matter before it is voted upon.
Section 7. Voting Lists: Before each meeting of shareholders, an
alphabetical list of the shareholders entitled to notice of such meeting shall
be prepared by the Secretary of the Corporation. The list shall be arranged by
voting group and within each voting group by class or series of shares and show
the address of and the number of shares held by each shareholder. The list shall
be kept on file at the principal office of the Corporation for the period
beginning two (2) business days after notice of the meeting is given and
continuing through the meeting, and shall be available for inspection by any
shareholder or the agent or attorney of any shareholder at any time prior to the
meeting during regular business hours and at any time during the meeting or any
adjournment thereof. The list shall be prima facie evidence as to who are the
shareholders entitled to examine the list and the shareholders of record
entitled to vote at any meeting of the shareholders.
Section 8. Voting Group: All shares of one or more classes or series that
under the Corporation's articles of incorporation or the North Carolina Business
Corporation Act are entitled to vote and be counted together collectively on a
matter at a meeting of shareholders constitute a voting group. All shares
entitled by the Corporation's articles of incorporation or the North Carolina
Business Corporation Act to vote generally on a matter are for that purpose a
single voting group. Classes or series of shares shall not be
<PAGE>
entitled to vote separately by voting group unless expressly authorized by the
Corporation's articles of incorporation or specifically required by law.
Section 9. Quorum: Shares entitled to vote as a separate voting group may
take action on a matter at a meeting of shareholders only if a quorum of those
shares is present at the meeting. A majority of the votes entitled to be cast on
the matter by the voting group shall constitute a quorum of that voting group
for action on that matter.
Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
In the absence of a quorum at the opening of any meeting of shareholders,
such meeting may be adjourned from time to time by a vote of the majority of the
votes cast on the motion to adjourn; and at any adjourned meeting any business
may be transacted which might have been transacted at the original meeting if a
quorum exists with respect to the matter proposed.
Section 10. Proxies: Shares may be voted either in person or by one or more
agents authorized by a written proxy executed by the shareholder or by the
shareholder's duly authorized attorney-in-fact. A proxy is not valid after the
expiration of eleven (11) months from the date of its execution unless the
person executing it specifies therein the length of time for which it is to
continue in force, or limits its use to a particular meeting.
Section 11. Voting of Shares: Subject to the provisions of the
Corporation's articles of incorporation, each outstanding share shall be
entitled to one vote on each matter submitted to a vote at a meeting of
shareholders.
Except in the election of directors as provided in Section 4 of Article
III, if a quorum exists, action on a matter by a voting group at a meeting of
shareholders is approved if the votes cast within the voting group favoring the
action exceed the votes cast opposing the action, unless a greater vote is
required by law or by the Corporation's articles of incorporation or these
Bylaws.
Absent special circumstances, shares of the Corporation are not entitled to
vote if they are owned, directly or indirectly, by another corporation in which
the Corporation owns, directly or indirectly, a majority of the shares entitled
to vote for directors of the second corporation; provided that this provision
does not limit the power of the Corporation to vote its own shares held by it in
a fiduciary capacity.
Section 12. Fixing Record Date: The Board of Directors of the Corporation
may fix a future date as the record date for one or more voting groups in order
to determine (a) the shareholders entitled to notice of a meeting of
shareholders, (b) the shareholders entitled to demand a special meeting, (c) the
shareholders entitled to vote, or (d) the shareholders entitled to take any
other action. A record date fixed under this Section may not be more than
seventy (70) days before the meeting or action requiring a determination of
shareholders.
<PAGE>
A determination of shareholders entitled to notice of or to vote at a
meeting of shareholders is effective for any adjournment of the meeting unless
the Board of Directors fixes a new record date for the adjourned meeting, which
it must do if the meeting is adjourned to a date more than one hundred twenty
(120) days after the date fixed for the original meeting.
If no record date is fixed by the Board of Directors for the determination
of shareholders entitled to notice of or to vote at a meeting of shareholders,
the close of business on the day before the first notice of the meeting is
delivered to shareholders shall be the record date for such determination of
shareholders.
ARTICLE III
Directors
- ---------
Section 1. General Powers: The business and affairs of the Corporation
shall be directed by the Board of Directors or by such Executive Committee or
other committees as the Board may establish pursuant to these Bylaws.
Section 2. Number, Term and Qualifications: The number of directors
constituting the Board of Directors of the Corporation shall be not less than
five (5) nor more than eighteen (18) as from time to time may be fixed or
changed within said minimum and maximum by the shareholders or by a majority of
the full Board of Directors. If the number of directors is nine (9) or more, the
directors shall be divided into three classes, as nearly equal in number as
possible, with the term of office of the first class to expire at the first
annual meeting of shareholders after their election, the term of office of the
second class to expire at the second annual meeting of shareholders after their
election, and the term of office of the third class to expire at the third
annual meeting of shareholders after their election. At each annual meeting of
shareholders following such initial classification and election, directors
elected to succeed those directors whose terms expire shall be elected for a
term of three years or until their successors are elected and shall qualify. In
the event of any increase or decrease in the number of directors, the additional
or eliminated directorships shall be so classified or chosen so that all classes
of directors shall remain and become equal in number, as nearly as possible. In
the event of the death, resignation, retirement, removal or disqualification of
a director, a successor shall be elected to serve only until the next meeting of
shareholders at which directors are elected.
No person shall be elected, re-elected or appointed as a director after
attaining seventy (70) years of age. In the event a director attains the age of
seventy (70) years during his term, such director shall serve until the next
annual meeting, at which time his successor shall be elected by the shareholders
for the remainder of the unexpired term; provided, however, that the foregoing
age limitation shall not apply to any initial director of the Corporation.
<PAGE>
Section 3. Nominations: Nominations for election to the Board of Directors
may be made by the Board of Directors or a committee thereof, and, subject to
the conditions described below, any shareholder of common stock entitled to vote
at that meeting for the election of directors. To be eligible for consideration
at the meeting of shareholders, all nominations for election to the Board of
Directors, other than those made by the Board of Directors or its committee,
shall be in writing and must be delivered to the Secretary of the Corporation
not less than one hundred and twenty (120) days prior to the meeting of
shareholders.
Section 4. Election of Directors: Except as provided in Section 5 of this
Article, the directors shall be elected at the annual meeting of the
shareholders; and those persons who receive the highest number of votes at a
meeting at which a quorum is present shall be deemed to have been elected.
Section 5. Removal: Any director may be removed from office at any time
with or without cause by a vote of shareholders whenever the number of votes
cast in favor of removal of the director exceeds the number of votes cast
against such removal. If a director is elected by a voting group of
shareholders, only the shareholders of that voting group may participate in the
vote to remove such director. A director may not be removed by the shareholders
at a meeting unless the notice of the meeting states that the purpose, or one of
the purposes, of the meeting is removal of the director. If any directors are so
removed, new directors may be elected at the same meeting.
Section 6. Vacancies: If a vacancy occurs in the Board of Directors,
including without limitation a vacancy resulting from an increase in the number
of directors or from the failure by the shareholders to elect the full
authorized number of directors, the shareholders may fill the vacancy or the
Board of Directors may fill the vacancy. If the directors remaining in office do
not constitute a quorum of the Board, the directors may fill the vacancy by the
affirmative vote of a majority of the remaining directors, or by the sole
remaining director, as the case may be. If the vacant directorship was held by a
director elected by a voting group, only the remaining directors or director
elected by that voting group or the holders of shares of that voting group are
entitled to fill the vacancy. The term of a director elected to fill a vacancy
expires at the next meeting of shareholders at which directors are elected.
Section 7. Chairman of the Board: There shall be a Chairman of the Board of
Directors elected by the directors from their number at any meeting of the
Board. The Chairman shall preside at all meetings of the Board of Directors and
perform such other duties as may be directed by the Board.
Section 8. Compensation: The Board of Directors may compensate directors
for their services as such and may provide for the payment or reimbursement of
all expenses incurred by directors in attending regular and special meetings of
the Board.
Section 9. Appointment of Committees: The Board of Directors, by resolution
of a majority of the number of directors in office, shall designate three or
more directors to constitute an Executive Committee and may designate such other
committees as the
<PAGE>
Board shall deem advisable, each of which, to the extent authorized by law and
provided in such resolution, shall have and may exercise such authority of the
Board of Directors in the management of the Corporation as the Board shall
determine. The designation of any committee and the delegation thereto of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility or liability imposed upon the Board of Directors,
or any member thereof, by law.
ARTICLE IV
Meetings of Directors
- ---------------------
Section 1. Regular Meetings: A regular meeting of the Board of Directors
shall be held immediately after, and at the same place as, the annual meeting of
shareholders. In addition, the Board of Directors may provide, by resolution,
the time and place, either within or without the State of North Carolina, for
the holding of additional regular meetings, provided that at least one meeting
shall be held each quarter.
Section 2. Special Meetings: Special meetings of the Board of Directors may
be called by or at the request of the Chairman of the Board, the President or a
majority of the directors. Such meetings may be held either within or without
the State of North Carolina.
Section 3. Notice of Meetings: Regular meetings of the Board of Directors
may be held without notice. The person or persons calling a special meeting of
the Board of Directors, at least twenty-four (24) hours before the meeting,
shall give notice thereof by any usual means of communication. Such notice need
not specify the purpose for which the meeting is called. Any duly convened
regular or special meeting may be adjourned by the directors to a later time
without further notice.
Section 4. Waiver of Notice: Any director may waive notice of any meeting
before or after the meeting. The waiver must be in writing, signed by the
director entitled to the notice, and delivered to the Corporation for inclusion
in the minutes or filing with the corporate records. The attendance by a
director at, or the participation of a director in, a meeting shall constitute a
waiver of any required notice of such meeting, unless the director, at the
beginning of the meeting (or promptly upon the director's arrival thereat),
objects to holding the meeting or to transacting any business at the meeting and
does not thereafter vote for or assent to action taken at the meeting.
Section 5. Quorum: Unless the Corporation's articles of incorporation
provide otherwise, a majority of the number of directors fixed by or pursuant to
these Bylaws shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors.
Section 6. Manner of Acting: Except as otherwise provided in the
Corporation's articles of incorporation or these Bylaws or by applicable law,
the act of the majority of the directors present at a meeting at which a quorum
is present shall be the act of the
<PAGE>
Board of Directors. A director may not vote at a directors' meeting by proxy or
otherwise act by proxy at a meeting of the Board of Directors.
Section 7. Presumption of Assent: A director of the Corporation who is
present at a meeting of the Board of Directors or at a meeting of any committee
of the Board of Directors at which action on any corporate matter is taken shall
be presumed to have assented to the action taken unless (a) such director
objects at the beginning of the meeting (or promptly upon the director's arrival
thereat) to holding the meeting or to transacting any business at the meeting,
or (b) such director's contrary vote is recorded or such director's dissent or
abstention from the action taken otherwise is entered in the minutes of the
meeting, or (c) such director files written notice of dissent or abstention to
such action with the person presiding at the meeting before the adjournment
thereof or forwards such notice by registered mail to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right of
dissent or abstention is not available to a director who voted in favor of the
action taken.
Section 8. Informal Action by Directors: Action required or permitted to be
taken at a meeting of the Board of Directors may be taken without a meeting if
the action is taken by all members of the Board and evidenced by one or more
written consents signed by each director before or after such action, describing
the action taken, and delivered to the Secretary of the Corporation for
inclusion in the minutes or filing with the corporate records.
ARTICLE V
Officers
- --------
Section 1. Number: The officers of the Corporation shall consist of a
President, one or more Vice Presidents, a Secretary, a Treasurer and such
Assistant Vice Presidents, Secretaries, Treasurers and other officers as the
Board of Directors from time to time may elect. Any two (2) or more offices may
be held by the same person, except that no officer may act in more than one
capacity where action of two (2) or more officers is required.
Section 2. Election and Term: The President of the Corporation shall be
elected by the Board of Directors. The remaining officers of the Corporation
shall be elected upon the recommendation of the President and approval of the
Board of Directors. Such elections may be held at any regular or special meeting
of the Board. Each officer shall hold office until such officer's death,
resignation, retirement, removal or disqualification, or until the election and
qualification of such officer's successor. Each officer and employee of the
Corporation shall give bond of suitable amount with security to be approved by
the Board of Directors. Each bond shall be issued upon such form as may be
approved by the Commissioner of Banks of North Carolina by a bonding company
authorized to do business in North Carolina with the premium to be paid by the
Corporation.
<PAGE>
Section 3. Removal and Resignation: Any officer or agent elected or
appointed by the Board of Directors may be removed by the Board with or without
cause; but such removal shall be without prejudice to the contract rights, if
any, of the person so removed.
An officer may resign at any time by notifying the Corporation, orally or
in writing, of such resignation. A resignation shall be effective upon receipt
by the Corporation unless it specifies in writing a later effective date. In the
event a resignation so specifies a later effective date, the Board of Directors
may fill the pending vacancy prior to such date; however, the successor to the
resigning officer may not take office until the effective date. An officer's
resignation does not affect the Corporation's contract rights, if any, with such
officer.
Section 4. Compensation: The compensation of all officers of the
Corporation shall be fixed by the Board of Directors. The election of an officer
does not of itself create any contract rights.
Section 5. President: The President shall be the chief executive officer of
the Corporation and, subject to the control of the Board of Directors, shall
supervise and control the management of the Corporation in accordance with these
Bylaws.
The President, when present, shall preside at all meetings of shareholders.
The President, with any other proper officer, may sign certificates for shares
of the Corporation and any deeds, leases, mortgages, bonds, contracts or other
instruments which lawfully may be executed on behalf of the Corporation, except
where required or permitted by law otherwise to be signed and executed and
except where the signing and execution thereof shall be delegated by the Board
of Directors to some other officer or agent. In general, the President shall
perform all duties incident to the office of President and such other duties as
from time to time may be assigned by the Board of Directors.
Section 6. Vice Presidents: In the absence of the President or in the event
of the President's death, inability or refusal to act, the Vice President
designated by the President and the Chairman of the Board, unless otherwise
determined by the Board of Directors, shall perform the duties of the President,
and when so acting shall have all the powers of and be subject to all the
restrictions upon the President. Any Vice President, with any other proper
officer, may sign certificates for shares of the Corporation and shall perform
such other duties as from time to time may be assigned by the President or by
the Board of Directors.
Section 7. Assistant Vice President: The Assistant Vice President shall, in
the absence or disability of their superior officers, perform the duties and
exercise the powers of those offices, and they shall, in general, perform such
other duties as shall be assigned to them by the President or their superior
officers.
Section 8. Secretary: The Secretary shall keep accurate records of the acts
and proceedings of all meetings of shareholders and directors. The Secretary
shall give all notices required by law and by these Bylaws. The Secretary shall
have general charge of the corporate books and records and of the corporate
seal, and shall affix the corporate
<PAGE>
seal to any lawfully executed instrument requiring it. The Secretary shall keep
all records required by law at the principal office of the Corporation. The
Secretary shall have general charge of the stock transfer books of the
Corporation and shall keep, at the registered or principal office of the
Corporation, a record of shareholders showing the name and address of each
shareholder and the number and class of the shares held by each. The Secretary,
with any other proper officer, may sign certificates for shares of the
Corporation and shall sign such instruments as may require the Secretary's
signature. In general, the Secretary shall perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
by the President or by the Board of Directors.
Section 9. Assistant Secretaries: In the absence of the Secretary or in the
event of the Secretary's death, inability or refusal to act, the Assistant
Secretaries in the order of their length of service as Assistant Secretaries,
unless otherwise determined by the Board of Directors, shall perform the duties
of the Secretary, and when so acting shall have all the powers of and be subject
to all the restrictions upon the Secretary. They shall perform such other duties
as from time to time may be assigned by the Secretary, by the President, or by
the Board of Directors. Any Assistant Secretary, with any other proper officer,
may sign certificates for shares of the Corporation.
Section 10. Treasurer: The Treasurer shall have custody of all funds and
securities belonging to the Corporation and shall receive, deposit or disburse
the same under the direction of the Board of Directors. The Treasurer shall
maintain appropriate accounting records as required by law and shall prepare, or
cause to be prepared, annual financial statements of the Corporation that
include a balance sheet as of the end of the fiscal year and an income and cash
flow statement for that year, which statements, or a written notice of their
availability, shall be mailed to each shareholder within one hundred twenty
(120) days after the end of such fiscal year. The Treasurer, with any other
proper officer, may sign certificates for shares of the Corporation. In general,
the Treasurer shall perform all duties incident to the office of Treasurer and
such other duties as from time to time may be assigned by the President or by
the Board of Directors.
Section 11. Assistant Treasurers: In the absence of the Treasurer or in the
event of the Treasurer's death, inability or refusal to act, the Assistant
Treasurers in the order of their length of service as Assistant Treasurers,
unless otherwise determined by the Board of Directors, shall perform the duties
of the Treasurer, and when so acting shall have all the powers of and be subject
to all the restrictions upon the Treasurer. Any Assistant Treasurer, with any
other proper officer, may sign certificates for shares of the Corporation. They
shall perform such other duties as from time to time may be assigned by the
Treasurer, by the President, or by the Board of Directors.
ARTICLE VI
Contracts, Loans, Checks and Deposits
- -------------------------------------
Section 1. Contracts: The Board of Directors may authorize any officer or
officers or any agent or agents, to enter into any contract or to execute and
deliver any
<PAGE>
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances. The Board of Directors may
enter into employment contracts for any length of time it deems wise.
Section 2. Loans: No loans shall be contracted on behalf of the Corporation
and no evidences of indebtedness shall be issued in its name unless authorized
by a resolution adopted by the Board of Directors. Such authority may be general
or specific in nature and scope.
Section 3. Checks and Drafts: All checks, drafts or other orders for the
payment of money issued in the name of the Corporation shall be signed by such
officer or officers or such agent or agents of the Corporation and in such
manner as from time to time shall be determined by resolution of the Board of
Directors.
Section 4. Deposits: All funds of the Corporation not otherwise employed
from time to time shall be deposited to the credit of the Corporation in such
depositories as the Board of Directors shall direct.
ARTICLE VII
Certificates for Shares and Their Transfer
- ------------------------------------------
Section 1. Certificates for Shares: Certificates representing shares of the
Corporation may be issued in such form as the Board of Directors shall determine
to every shareholder for the fully paid shares owned thereby and shall indicate
thereon or reference any and all restrictive conditions of said shares. The
certificates shall be in such form as required by law and as determined by the
Board of Directors and shall be signed by the President or any Vice President
and either the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer. All certificates for shares shall be numbered consecutively
or otherwise identified; and the name and address of the persons to whom they
are issued, with the number of shares and the date of issue, shall be entered on
the stock transfer books of the Corporation.
Section 2. Transfer of Shares: Transfer of shares shall be made on the
stock transfer books of the Corporation only upon surrender of the certificates
for the shares sought to be transferred by the record holder thereof or by such
shareholder's duly authorized agent, transferee or legal representative. All
certificates surrendered for transfer shall be canceled before new certificates
for the transferred shares shall be issued. Transfer of shares may be restricted
by an agreement of the shareholder(s).
Section 3. Lost Certificates: The Board of Directors may authorize the
issuance of a new share certificate in place of a certificate theretofore issued
by the Corporation claimed to have been lost or destroyed, upon receipt of an
affidavit to such fact from the person claiming the loss or destruction. When
authorizing such issuance of a new certificate, the Board shall require the
claimant to give the Corporation a bond in such sum as the Board may direct to
indemnify the Corporation against loss from any claim with respect to the
certificate claimed to have been lost or destroyed; provided, however,
<PAGE>
that the Board, by resolution reciting the circumstances justifying such action,
may authorize the issuance of the new certificate without requiring such a bond.
Section 4. Holder of Record: Except as otherwise required by law, the
Corporation may treat as absolute owner of shares and as the person exclusively
entitled to receive notification and distributions, to vote and otherwise to
exercise the rights, powers and privileges of ownership of such shares, the
person in whose name the shares stand of record on its books.
Section 5. Reacquired Shares: Shares of the Corporation that have been
issued and thereafter reacquired by the Corporation shall constitute authorized
but unissued shares.
ARTICLE VIII
General Provisions
- ------------------
Section 1. Distributions: The Board of Directors from time to time may
authorize, and the Corporation may pay, distributions and share dividends on the
Corporation's outstanding shares in the manner and upon the terms and conditions
provided by law and by the Corporation's articles of incorporation.
Section 2. Seal: The corporate seal of the Corporation shall consist of two
concentric circles between which is the name of the Corporation and in the
center of which is inscribed SEAL; and such seal, in the form approved and
adopted by the Board of Directors, shall be the corporate seal of the
Corporation.
Section 3. Amendments: Except to the extent otherwise provided in the
Corporation's articles of incorporation or by law, these Bylaws may be amended
or repealed and new bylaws may be adopted by a vote of the Board of Directors.
No bylaw adopted, amended or repealed by the shareholders shall be readopted,
amended or repealed by the Board of Directors unless the Corporation's articles
of incorporation or a bylaw adopted by the shareholders authorizes the Board of
Directors to adopt, amend or repeal that particular bylaw or the Bylaws
generally.
The shareholders may amend or repeal these Bylaws even though these Bylaws
also may be amended or repealed by the Board of Directors.
Section 4. Fiscal Year: The fiscal year of the Corporation shall be the
calendar year ending December 31 of each year.
Section 5. Indemnification: The Corporation shall indemnify any person who
is or was a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding (and any appeal therein), whether civil,
criminal, administrative, arbitrative or investigative and whether or not
brought by or on behalf of the Corporation, by reason of the fact that such
party is or was a director, officer, employee or agent of the Corporation, or is
or was serving at the request of the
<PAGE>
Corporation as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise or as
a trustee or administrator under an employee benefit plan, or arising out of
such party's activities in any of the foregoing capacities, against all
liability and litigation expense, including reasonable attorneys' fees;
PROVIDED, however, that the Corporation shall not indemnify any such person
against liability or expense incurred on account of such person's activities
which were at the time taken known or believed by such person to be clearly in
conflict with the best interests of the Corporation. The Corporation likewise
shall indemnify any such person for all reasonable costs and expenses (including
attorneys' fees) incurred by such person in connection with the enforcement of
such person's right to indemnification granted herein. The Corporation shall pay
all expenses incurred by any director, officer, employee or agent in defending a
civil or criminal action, suit or proceeding in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director, officer, employee or agent to repay such amount unless
it ultimately shall be determined that such party is entitled to be indemnified
by the Corporation against such expenses.
The Board of Directors of the Corporation shall take all such action as may
be necessary and appropriate to authorize the Corporation to pay the
indemnification required by this bylaw, including without limitation a
determination by a majority vote of disinterested directors that the activities
giving rise to the liability or expense for which indemnification is requested
were not, at the time taken, known or believed by the person requesting
indemnification to be clearly in conflict with the best interests of the
Corporation.
Any person who at any time after the adoption of this bylaw serves or has
served in any of the aforesaid capacities for or on behalf of the Corporation
shall be deemed to be doing or to have done so in reliance upon, and as
consideration for, the right of indemnification provided herein. Such right
shall inure to the benefit of the legal representatives of any such person and
shall not be exclusive of, but shall be in addition to, any rights to which such
person may be entitled apart from the provision of this bylaw.
Exhibit 5
MOORE & VAN ALLEN, PLLC
ATTORNEYS AT LAW
NATIONSBANK CORPORATE CENTER
100 NORTH TRYON STREET, FLOOR 47
CHARLOTTE, NORTH CAROLINA 28202-4003
(704)331-1000
December 12, 1997
BOC Financial Corp.
107 South Central Avenue
Landis, North Carolina 28088
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We are acting as counsel for BOC Financial Corp., a North Carolina
corporation (the "Company"), in connection with the registration by the Company
under the Securities Act of 1933, as amended, on Form SB-2 (the "Registration
Statement") of 925,750 shares (the "Shares") of the Company's common stock, par
value $1.00 per share. The Shares will be offered and sold to the public by the
Company.
We have examined the originals or photocopies or certified copies of
such records of the Company, certificates of officers of the Company and public
officials and other documents as we have deemed relevant and appropriate as the
basis for the opinion hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all original
documents submitted to us, the conformity to the originals of all documents
submitted to us as certified copies or photocopies and the authenticity of the
originals of such documents.
Based upon such examination, and relying upon statements of fact
contained in the documents which we have examined, we are of the opinion that
the Shares have been duly authorized and will be validly issued, fully paid and
nonassessable when issued, delivered and paid for as contemplated by the
Registration Statement.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the related Prospectus.
Very truly yours,
MOORE & VAN ALLEN, PLLC
December __, 1997
Board of Directors
Landis Savings Bank, SSB
107 South Central Avenue
Landis, North Carolina 28088
Re: Conversion of Landis Savings Bank, SSB from a North
Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank and its simultaneous
acquisition by BOC Financial Corp., a North Carolina savings
bank holding company, followed by the conversion of the stock
savings bank to a North Carolina commercial bank
Members of the Board:
You have requested our opinions regarding certain income tax
consequences in connection with the proposed conversion of Landis Savings Bank,
SSB ("Landis Mutual") from a North Carolina-chartered mutual savings bank with
federally insured deposit accounts to Landis Savings Bank, Inc., SSB, a North
Carolina-chartered stock savings bank with federally insured deposit accounts
("Landis"), and the simultaneous acquisition of Landis as a wholly-owned
subsidiary by BOC Financial Corp., a savings bank holding company organized
under North Carolina law ("Holding Company"). This reorganization and conversion
of Landis Mutual and acquisition of Landis by the Holding Company shall be
referred to as the "Stock Conversion." Following the Stock Conversion Landis
will amend its certificate of incorporation to the form appropriate for a North
Carolina commercial bank (the "Bank Conversion"). The Stock Conversion and the
Bank Conversion are referred to collectively as the "Conversion." Terms not
otherwise defined in this letter shall have the meanings assigned to them in the
Plan of Conversion adopted by the Board of Directors of Landis Mutual on ______,
1997 (the "Plan").
In connection with our opinions, we have reviewed copies of
applications filed by Landis Mutual and the Holding Company with the
Administrator, North Carolina Savings Institutions Division, and with the
Federal Reserve Board to effect the Conversion (the "Applications"), Chapters
54C and 105 of the North Carolina General Statutes, and applicable federal laws,
rules and regulations, including the Internal Revenue Code of 1986, as amended
(the "Code"). We have examined the Plan, Landis Mutual's existing Certificate of
Incorporation and Bylaws, the Amended Certificate of Incorporation for Landis,
the Bylaws for Landis, the corporate minutes approving the Conversion and
related records of Landis Mutual. We have also examined the Holding Company's
Articles of Incorporation, Bylaws, corporate minutes approving the Conversion
and related records. In addition, we have examined certificates of officials of
Landis Mutual, Landis and the Holding Company, the Registration Statement of the
Holding Company on Form SB-2, which the Holding Company intends to file with the
Securities and Exchange Commission on or about __________, 1997 (the
"Registration Statement") containing a proposed Prospectus (hereinafter referred
to as the "Prospectus") and such other documents as we have deemed necessary or
appropriate for purposes of giving the opinions set forth in this letter. We
have assumed the authenticity of all documents presented to us as originals, the
conformity to the
<PAGE>
originals of all documents presented to us as copies, and the genuineness of all
signatures of individuals, and we know of no reason such assumptions are
unwarranted for purposes of the opinions expressed herein. We have assumed that
all statements made in the above-described documents are accurate and complete,
and will be accurate and complete at all times from now through the consummation
of the Conversion. We have not independently verified any factual matter
relating to the Conversion in connection with the preparation of our opinions
herein and, accordingly, such opinions do not take into account any matters not
set forth herein which might have been disclosed by independent verification. We
have further assumed that the Conversion will be consummated pursuant to the
terms of the Plan.
In issuing the opinions set forth below, we have also assumed the
accuracy of the following representations of Landis Mutual:
1. The fair market value of the deposit accounts and the interest
in the Liquidation Account received by each Eligible Account
Holder and Supplemental Eligible Account Holder in Landis
pursuant to the Stock Conversion will, in each instance, be
equal to the fair market value of the deposit accounts and the
proprietary interest of each such Eligible Account Holder and
Supplemental Eligible Account Holder in Landis Mutual
surrendered in the Stock Conversion. The aggregate fair market
value of the deposit accounts and interests in the Liquidation
Account held by Eligible Account Holders as of the close of
business on the Eligibility Record Date will equal or exceed
99% of the aggregate fair market value of all deposit accounts
in Landis Mutual (including accounts of less than $50) as of
the close of business on that date. The aggregate fair market
value of the deposit accounts and interests in the Liquidation
Account held by Supplemental Eligible Account Holders,
officers and directors of Landis Mutual and their associates
as of the close of business on the Supplemental Eligibility
Record Date will equal or exceed 99% of the aggregate fair
market value of all deposit accounts in Landis Mutual
(including accounts of less than $50) as of the close of
business on that date.
2. The Subscription Rights to purchase Conversion Stock received
in the Conversion by each recipient have no fair market value.
This assumption is based upon your representation and the
opinion of The Meritas Group, Inc. that such Subscription
Rights have no fair market value because they will be acquired
by recipients without cost, are nontransferable and afford the
recipients the right only to purchase Conversion Stock at a
price equal to its estimated fair market value as of the date
such rights are issued, which will be the same price paid by
all purchasers in the Conversion.
3. Immediately following the Conversion, the Eligible Account
Holders and Supplemental Eligible Account Holders will own all
of the outstanding interests in the Liquidation Account and
will own such interests solely by reason of their ownership of
deposits and proprietary interests in Landis Mutual on the
Eligibility Record Date and Supplemental Eligibility Record
Date, respectively. Pursuant to the Plan, no additional
interests in the Liquidation Account shall be issued following
the Conversion.
<PAGE>
4. Immediately following the consummation of the Conversion,
Landis will possess the same assets and liabilities as Landis
Mutual held immediately before the Conversion, plus proceeds
from the sale of Conversion Stock less proceeds retained by
the Holding Company, less assets used to pay expenses incurred
in the Conversion. Assets of Landis Mutual used to pay
expenses of the Conversion and all distributions (except for
regular, normal interest payments made by Landis Mutual
immediately before the Conversion) in the aggregate will
constitute less than 1% of the net assets of Landis Mutual.
5. Except for Landis Mutual's agreement to sell all of Landis'
issued and outstanding common stock to the Holding Company in
the Conversion, at the time of the Conversion, Landis Mutual
will not have outstanding any warrants, options, convertible
securities, or any other type of right pursuant to which any
person could acquire stock in Landis Mutual.
6. Landis has no plan or intention to reacquire any of its common
stock issued to the Holding Company in the Conversion. Landis
has no plan or intention to issue additional shares of its
common stock following the Conversion. The common stock of
Landis issued to the Holding Company in the Conversion will
not be callable or subject to a put option.
7. Landis has no plan or intention to sell or otherwise dispose
of any of the assets of Landis Mutual acquired in the
Conversion, except for dispositions made in the ordinary
course of business.
8. The liabilities of Landis Mutual assumed by Landis and the
liabilities, if any, to which the transferred assets are
subject were incurred by Landis Mutual in the ordinary course
of its business and are associated with the assets
transferred.
9. Following the Conversion, Landis will continue the historic
business of Landis Mutual, will use a significant portion of
Landis Mutual's historic business assets in Landis' business,
and will continue to engage in the same business in
substantially the same manner as engaged in by Landis Mutual
before the Conversion.
10. Landis Mutual and Landis (treated as one entity for purposes
of this representation) and the Holding Company will each pay
their own expenses attributable to the Conversion.
11. Landis Mutual is not under the jurisdiction of a court as a
debtor under (i) Title 11 of the United States Code, or (ii) a
receivership, foreclosure, or similar proceeding in a federal
or state court.
12. None of the compensation received by an employee of Landis
Mutual or Landis who is also an Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member will be
separate consideration for, or allocable to, his or her status
as an Eligible Account Holder, Supplemental Eligible Account
Holder or Other Member. None of the interests in the
Liquidation Account of Landis received by
<PAGE>
an employee of Landis Mutual or Landis who is an Eligible
Account Holder or Supplemental Eligible Account Holder will be
separate consideration for, or allocable to, any employment
agreement or arrangement. All compensation paid to Eligible
Account Holders and Supplemental Eligible Account Holders who
are also employees of Landis Mutual or Landis will be for
services actually rendered and commensurate with amounts paid
to third parties bargaining at arm's-length for similar
services. Officers, directors and other employees may in the
future be issued restricted common stock of the Holding
Company for future services pursuant to two proposed stock
option plans for the benefit of the directors, officers and
key employees of the Holding Company and its subsidiaries
described in the Prospectus (the "Option Plans") and the
Management Recognition Plan for the benefit of the directors
and officers of the Holding Company and Landis described in
the Prospectus (the "MRP").
13. No Eligible Account Holder or Supplemental Eligible Account
Holder will be excluded from participating in the Liquidation
Account.
14. The Holding Company has no plan or intention to redeem or
otherwise acquire any of the Conversion Stock to be issued
pursuant to the Conversion, except as disclosed in the
Prospectus regarding possible purchases to fund the ESOP, MRP
and Option Plans. The Holding Company has no plan or intention
to sell or otherwise dispose of the common stock of Landis
received by it in the Conversion. The Conversion Stock issued
in the Conversion will not be callable or subject to a put
option.
15. At the time of Conversion, the fair market value of the assets
of Landis Mutual on a going-concern basis will equal or exceed
the amount of its liabilities plus the amount of liabilities
to which its assets are subject. Immediately before the
Conversion, Landis Mutual will have a positive net worth.
16. No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders or any other grantee of
Subscription Rights in lieu of (i) Subscription Rights for
Conversion Stock, or (ii) an interest in the Liquidation
Account of Landis.
17. There is no plan or intention for Landis to be liquidated or
merged with another corporation following the conversion.
18. The Conversion described herein is motivated by valid business
purposes and not by tax avoidance purposes.
19. After the Conversion, Landis will continue the corporate
existence and business of Landis Mutual with only the
following changes:
(i) An amended and restated Certificate of
Incorporation to allow for the issuance of capital stock of
Landis,
<PAGE>
(ii) New corporate Bylaws, and
(iii) Amendments to the Certificate of Incorporation
of Landis to convert Landis to a commercial bank.
20. There exists no intercorporate indebtedness between Landis
Mutual and Landis (treated as one entity for purposes of this
representation) and the Holding Company, that was issued,
acquired, or will be settled at a discount.
21. In the Stock Conversion, the Holding Company will acquire 100%
of the issued and outstanding common stock of Landis.
22. Neither Landis Mutual and Landis (treated as one entity for
purposes of this representation) nor the Holding Company is an
"investment company," as defined in Section 368(a)(2)(F)(iii)
and (iv) of the Code.
Based upon the foregoing assumptions, our opinions with respect to the
federal and North Carolina income tax consequences of the Conversion are as
follows (for purposes of the opinions set forth below, Eligible Account Holders
shall include, if applicable pursuant to the Plan, Supplemental Eligible Account
Holders):
1. The Stock Conversion of Landis Mutual from a North
Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank will qualify as a
reorganization within the meaning of Section 368(a) of the
Code, and neither Landis Mutual nor Landis will recognize any
gain or loss as a result of such reorganization. Revenue
Ruling 80-105, 1980-1 C.B. 78. Landis Mutual in its form as a
North Carolina-chartered mutual savings bank and Landis in its
form as a North Carolina-chartered stock savings bank will
each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code. Landis will not recognize any gain
or loss as a result of the further charter amendments which
effect the Bank Conversion.
2. Landis' basis in each of Landis Mutual's assets will be the
same as Landis Mutual's basis immediately prior to the
Conversion, pursuant to Section 362(b) of the Code.
3. No gain or loss will be recognized by the Holding Company upon
receipt of money in exchange for the shares of the Conversion
Stock issued pursuant to the exercise of the Subscription
Rights issued therefor, pursuant to Section 1032(a) of the
Code.
4. No gain or loss will be recognized by Landis upon receipt of
money from the Holding Company in exchange for the shares of
its common stock to be issued to the Holding Company in the
Conversion, pursuant to Section 1032(a) of the Code.
5. The holding period of the Landis assets after the Conversion
will include the period during which the assets were held by
Landis Mutual prior to the Conversion, pursuant to Section
1223(2) of the Code.
<PAGE>
6. Gain or loss, if any, will be realized by an Eligible Account
Holder on the exchange of such person's deposit account and
proprietary interest in Landis Mutual for (i) a withdrawable
deposit account in Landis in the same dollar amount as such
person's deposit account in Landis Mutual immediately prior to
the Conversion, (ii) such person's interest in the Liquidation
Account of Landis, and (iii) Subscription Rights to purchase
the Conversion Stock. Such gain, if any, will be recognized by
an Eligible Account Holder only to the extent of the fair
market value of such person's interest in the Subscription
Rights received. Section 1001 of the Code. You have
represented to us that the Subscription Rights to purchase
Conversion Stock have no fair market value. Accordingly, gain
recognized by an Eligible Account Holder as a result of the
Conversion is limited to an amount not in excess of the fair
market value of such person's interest in the Subscription
Rights received in the Conversion. Paulsen v. Commissioner,
469 U.S. 131, 139 (1985), quoting Society for Savings v.
Bowers, 349 U.S. 143, 150 (1955).
7.. The basis of the deposit account in Landis received by an
Eligible Account Holder will be the cost of such deposit
account. The cost basis of such deposit account in Landis (i)
will be equal to the fair market value of such deposit account
in Landis and (ii) will be equal to such person's basis in his
or her deposit account in Landis Mutual exchanged therefor,
pursuant to Section 1012 of the Code.
8. The basis of the interest in the Liquidation Account received
by an Eligible Account Holder will be equal to the cost of
such interest. The cost of the Liquidation Account will be the
fair market value of the proprietary interest in Landis Mutual
given for the Liquidation Account, pursuant to Section 1012 of
the Code. An interest in the Liquidation Account will be
deemed to have no value, or nominal, if any, fair market
value. Paulsen v. Commissioner, 469 U.S. 131, 139 (1985)
(quoting Society for Savings v. Bowers, 349 U.S. 143, 150
(1955)).
9. The basis of Subscription Rights received by an Eligible
Account Holder will be zero, increased by the gain, if any,
recognized on their receipt, pursuant to Section 1012 of the
Code. Gain is recognized only to the extent of the fair market
value of the Subscription Rights. You have represented to us
that the Subscription Rights to purchase Conversion Stock have
no fair market value. Accordingly, the basis of the
Subscription Rights received by an Eligible Account Holder
will be zero.
10. The basis of the Conversion Stock purchased pursuant to the
exercise of Subscription Rights will be the purchase price
thereof, pursuant to Section 1012 of the Code.
11. The holding period of the Conversion Stock acquired through
the exercise of Subscription Rights will commence upon the
date of such exercise, pursuant to Section 1223(6) of the
Code.
12. For purposes of Section 381 of the Code, Landis will be
treated just as Landis Mutual would have been treated had
there been no reorganization of Landis
<PAGE>
Mutual from a North Carolina-chartered mutual savings bank to
a North Carolina-chartered stock savings bank. Accordingly,
and with regard only to the reorganization of Landis Mutual
into Landis, the tax attributes of Landis Mutual enumerated in
Section 381(c) of the Code shall be taken into account by
Landis as if there had been no reorganization. Treasury
Regulation ss1.381(b)(1)(a)(2).
13. For North Carolina income tax purposes, the Conversion will be
treated in a manner identical to the way the Conversion is
treated pursuant to the Code. Sections 105-130.3, 105-130.5,
105-134.5, and 105-134.6 of the North Carolina General
Statutes.
No opinion is expressed with regard to the following:
1. The tax treatment of any aspect of the Conversion that is not
specifically set forth and addressed in the foregoing
opinions.
2. The status, including without limitation, the tax treatment,
of Landis Mutual's and Landis' bad-debt reserves before or
after the Conversion.
3. For purposes of Section 381 of the Code, the effect upon
Landis Mutual and Landis of the acquisition of all of the
common stock of Landis by the Holding Company in the Stock
Conversion.
The opinions herein expressed represent only our best judgments with
respect to the interpretation of published material and are not binding upon the
Internal Revenue Service or the courts. Our opinions are limited to matters of
North Carolina and federal law.
The opinions contained herein are rendered solely for your benefit and
for the benefit of purchasers of Conversion Stock and may not be used for any
other purpose whatsoever or relied upon by, published or communicated to any
other party without our prior written consent in each instance. We hereby
consent to the inclusion of this letter as an exhibit to the Applications being
filed by Landis Mutual with the Administrator and as an exhibit to the
Registration Statement.
Sincerely,
MOORE & VAN ALLEN, PLLC
(Letterhead)
The Meritas Group, Inc.
1829 East Franklin Street, Suite 600
Chapel Hill, NC 27514
Phone 919-968-9500 Fax 919-303-9055
- --------------------------------------------------------------------------
September 29, 1997
Board of Directors
Landis Savings Bank, SSB
107 South Central Avenue
Landis, NC 28088
Re: Conversion Advice and Record Keeping Contract
Ladies and Gentlemen:
This letter, if accepted by you, sets forth the agreement between Landis Savings
Bank, SSB ("the Savings Bank" or "Landis Savings") and The Meritas Group, Inc.
("Meritas"), whereby Landis Savings engages Meritas to provide conversion
advisory services for the Savings Bank's conversion from mutual to stock form.
In acting as an advisor to Landis Savings, Meritas shall assist the Savings Bank
with respect to record keeping regarding solicitation of offers to subscribe for
stock and to the mechanics of the mutual to stock conversion process. Meritas
will not be involved in soliciting offers to purchase common stock on behalf
of Landis Savings.
Section 1. CONVERSION ADVISORY ASSISTANCE. Meritas will assist the Savings
Bank with the establishment and supervision of the "back office" or
record keeping operations with regard to proxy solicitation and
conversion stock sales commonly known as the "Conversion Center".
Conversion activities for which Meritas will assist the Savings
Bank include the following:
(a) Develop marketing materials, including letters sent to
customers, question and answer brochures, and a slide
presentation for community meetings, all subject to review by
legal counsel.
(b) Set up the Conversion Center's record keeping system to track
stock sales and distribute prospectus materials.
(c) Together with the Savings Bank's legal counsel, train the
Conversion Center's staff to respond to customers' mail and
telephone inquiries, assist customers with their stock
subscriptions, and send order confirmations.
(d) Coordinate community meetings and record attendance.
(e) Assist the Conversion Center's staff in tabulating votes.
<PAGE>
Board of Directors
September 29, 1997
Page 2
(f) Establish a system for implementing the over subscription
procedures described in the Plan of Conversion and, if there
is an over subscription, assist in the employment of that
system.
(g) Assist the Conversion Center's staff with closing activities,
including mailing of interest checks, preparing 1099
information, sending "welcome" letters to shareholders,
account balancing, final stock information tabulation, and
preparing stockholder records for the transfer agent.
Section 2. SAVINGS BANK ASSISTANCE. In staffing the Conversion Center for
performing the tasks outlined above, Meritas will require at least
two of the Savings Bank's employees (or temporary personnel) to
work in the conversion center on a full-time basis.
Meritas agrees to devote its best efforts to the successful
completion of the proposed conversion and agrees to keep all
information developed in the course of its engagement
confidential.
Section 3. PAYMENT. The Savings Bank agrees to pay Meritas conversion
advisory fees of $40,000 and to reimburse Meritas for all
reasonable out-of-pocket expenses. Payment of the advisory fee
shall be made according to the following schedule:
$10,000 paid upon execution of this Letter Agreement;
$10,000 to be paid upon the commencement of the subscription
offering;
$10,000 to be paid upon closing of the subscription offering; and
$10,000 to be paid upon completion of the conversion.
Meritas shall also be reimbursed for all out-of-pocket expenses,
including travel, transfer agent charges, messenger services,
rental equipment, and supplies, as incurred and billed.
Section 4. INDEMNIFICATION. To the extent permitted by applicable law, the
Savings Bank shall indemnify and hold harmless Meritas and its
directors, officers, employees, agents and contractors in
connection with the services called for under this Letter
Agreement, from and against any and all loss, cost, damage, claim,
liability or expense of any kind, including reasonable attorneys'
fees and other expenses incurred in investigating, preparing to
defend and defending any claim or claims (specifically including,
but not being limited to, claims under federal and state securities
laws) in any manner arising out of any misstatement or untrue
statement of any material fact contained in the information,
supplied by the Savings Bank to
<PAGE>
Board of Directors
September 29, 1997
Page 3
Meritas, or by an omission to state a material fact in the
information so provided that is required to be stated therein or is
necessary in order to make the statement therein not false or
misleading.
Section 5. TERMINATION OF LETTER AGREEMENT. This Letter Agreement may be
terminated by either party upon 30 days written notice.
Notwithstanding any other provision of this Letter Agreement, (i)
in the event that this Letter Agreement is terminated after its
execution, but before the commencement of the subscription
offering, the Savings Bank shall be obligated to pay Meritas not
more than $10,000, excluding expenses; (ii) in the event that this
Letter Agreement is terminated after the commencement of the
subscription offering, but before the closing of the subscription
offering, the Savings Bank shall be obligated to pay Meritas not
more than $20,000 and (iii) in the event that this Letter Agreement
is terminated after the closing of the subscription offering, the
Savings Bank shall be obligated to pay Meritas not more than
$40,000, excluding expenses.
* * * * *
In order to accept this Letter Agreement, please acknowledge your consent to the
foregoing by dating and executing the enclosed duplicate of this Letter
Agreement, and return it Meritas.
Yours very truly
The Meritas Group, Inc.
/s/ Sam A. Harris
Sam A. Harris, President
Agreed to:
Landis Savings Bank, SSB
By: /s/ Stephen R. Talbert
- -----------------------------
Its: Chief Executive Officer
- -----------------------------
Date: October 27, 1997
- ------------------------------
(Letterhead)
The Meritas Group, Inc.
1829 East Franklin Street, Suite 600
Chapel Hill, NC 27514
Phone 919-968-9500 Fax 919-303-9055
- --------------------------------------------------------------------------
September 29, 1997
Board of Directors
Landis Savings Bank, SSB
107 South Central Avenue
Landis, NC 28088
Re: Appraisal and Business Planning Services
Ladies and Gentlemen:
This letter, if accepted by you, sets forth the agreement between Landis Savings
Bank, SSB ("the Savings Bank" or "Landis Savings") and The Meritas Group, Inc.
("Meritas"), whereby Landis Savings engages Meritas to determine the estimated
pro forma market value of the shares of common stock that are proposed to be
issued in connection with the conversion from mutual to stock form and
simultaneous conversion to a commercial bank charter. Further, this Letter
Agreement covers the business planning services in connection with the
conversion activities, including use of proceeds considerations.
Section 1. APPRAISAL. Meritas shall determine the pro forma fair market value
of the shares of Landis Savings to be issued and sold in
conjunction with the conversion from mutual to stock form of the
Savings Bank. Meritas will perform the valuation and deliver a
written appraisal report to the Savings Bank on or before a
mutually agreed upon date. Meritas further agrees to perform such
other services as are necessary or required of the appraiser
including the preparation of such appraisal updates as may be
needed. It is understood that the services of Meritas under this
Letter Agreement shall be limited as described above.
Section 2. BUSINESS PLAN. Meritas will assist the Savings Bank in preparing,
in a form acceptable to the appropriate regulators, a new three
year business plan which will specifically address the use of the
proceeds generated by the mutual to stock form conversion and
operations as a commercial bank.
Section 3. PAYMENT. The Savings Bank agrees to pay Meritas an appraisal fee
of $25,000, a fee for assistance with the three year business plan
of $12,500 and to reimburse Meritas for all reasonable out-of-
pocket expenses necessary and incident to the completion of the
appraisal. Payment of the appraisal fee shall be made according to
the following schedule:
$5,000 upon execution of this Letter Agreement;
<PAGE>
Board of Directors
September 29, 1997
Page 2
$15,000 upon completion of due diligence;
$10,000 upon delivery of the completed apparisal report; and
$7,500 upon delivery of the completed business plan
In the event that an appraisal update is required, the Savings Bank
agrees to pay Meritas an additional fee of $2,500 for the
preparation of each such update, payable upon delivery of the
report.
Out-of-pocket expenses, including travel, messenger services,
information resources, computer time, and duplicating, shall be
paid to Meritas as incurred and billed.
Section 4. NECESSARY ACCESS AND INFORMATION. The obligations of Meritas
under this Letter Agreement will be subject to the following
conditions and limitations
(a) Meritas shall receive such information with respect to
the business and financial condition of the Savings Bank as
Meritas reasonably may request in order to make the
valuation. Such information shall include, but not be
limited to, annual financial statements, periodic regulatory
filings, material agreements, debt instruments and corporate
books and records.
(b) If required, Meritas shall receive the representation
and warranty of the Savings Bank to Meritas that information
provided to Meritas does not and will not, at any time
relevant hereto, contain any misstatement or untrue
statement of a material fact or omit to state any and all
material facts required to be stated therein or necessary to
make the statements therein not false or misleading in light
of the circumstances under which they were made.
(c) The valuation performed by Meritas will, in certain
respects, be dependent on the accuracy of information
provided to Meritas. Meritas is not obligated to confirm the
accuracy or completeness of any information provided to it
by the Savings Bank.
Board of Directors
September 29, 1997
Page 3
Section 5. INDEMNIFICATION OF MERITAS.
(a) The Savings Bank shall indemnify and hold harmless Meritas and its
directors, officers, employees, agents and contractors in
connection with the services called for under this Letter
Agreement, from and against any and all loss, cost, damage, claim,
liability or expense of any kind, including reasonable attorneys'
fees and other expenses incurred in investigating, preparing to
defend any claim or claims (specifically including, but not being
limited to, claims under federal and state securities laws) in any
manner arising out of any misstatement or untrue statement of a
material fact contained in the information supplied by the Savings
Bank to Meritas, or by an omission to state a material fact in the
information so provided that is required to be stated therein or
is necessary in order to make the statement therein not false or
misleading.
(b) Meritas shall not be entitled to indemnification pursuant to
Paragraph 4(a) above where, with regard to the basis for such
claim, Meritas had actual knowledge that a statement of a fact
material to the valuation and contained in the information supplied
by the Savings Bank was untrue, or where Meritas had actual
knowledge that a material fact was omitted from the information so
provided and that such material fact was necessary in order to make
the statement made to Meritas not false or misleading.
(c) Meritas additionally shall not be entitled to indemnification
pursuant to Paragraph 4(a) above, notwithstanding its lack of
actual knowledge of an intentional misstatement or omission of a
material fact in the information provided to Meritas, if Meritas
is determined to have been grossly negligent in the preparation of
its valuation.
Section 6. CHANGE IN SCOPE. If unforeseen events occur so as to materially
change the nature or the work content of the valuation services
described in this Letter Agreement, the terms of this Letter
Agreement shall be subject to renegotiation by the Savings Bank
and Meritas. Such unforeseen events shall include, but not be
limited to, major changes in the regulatory environment of the
Savings Bank affecting the analysis relevant to a valuation of the
Savings Bank, or major changes in the Savings Bank's management or
operating policies during the course of the valuation analysis
work.
<PAGE>
Board of Directors
September 29, 1997
Page 4
Section 7. INDEPENDENCE. The Savings Bank and Meritas are not affiliated, and
neither the Savings Bank nor Meritas has an economic interest in,
or is held in common with, the other and neither has derived a
significant portion of its gross revenue, receipts or net income
for any period from transactions with the offer.
Section 8. PUBLICITY. The Savings Bank agrees to allow Meritas to publish, at
its own expense, a "tombstone" or similar announcements to the
effect that the conversion was completed and that Meritas acted as
appraiser in connection with the transaction.
* * * * *
In order to accept this proposal, please acknowledge your consent to the
foregoing by dating and executing the enclosed duplicate of this Letter
Agreement, and return it together with a check payable to Meritas in the amount
of $5,000. This proposal is valid for a period of thirty (30) days from the
date hereof.
Yours very truly
The Meritas Group, Inc.
/s/ Sam A. Harris
Sam A. Harris, President
Agreed to:
Landis Savings Bank, SSB
By: /s/ Stephen R. Talbert
- -----------------------------
Its: Chief Executive Officer
- -----------------------------
Date: October 27, 1997
- ------------------------------
<PAGE>
BOC FINANCIAL CORP.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
EFFECTIVE
JANUARY 1, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS..................................................1
ARTICLE II - ADMINISTRATION.............................................13
2.1 POWERS AND RESPONSIBILITIES
OF THE EMPLOYER.......................................13
(a) Appointment and Removal of
Trustee
and Administrator............................13
(b) Funding Policy and Method....................13
(c) Review of Performance of
Fiduciaries..................................13
2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY...............14
2.3 ALLOCATION AND DELEGATION OF
RESPONSIBILITIES......................................14
2.4 POWERS AND RESPONSIBILITIES OF THE
ADMINISTRATOR.........................................14
(a) Primary Responsibility of
Administrator................................14
(b) Powers and Duties of
Administrator................................15
2.5 RECORDS AND REPORTS...................................16
2.6 APPOINTMENT OF ADVISERS...............................16
2.7 INFORMATION FROM EMPLOYER.............................16
2.8 PAYMENT OF EXPENSES...................................16
2.9 MAJORITY ACTIONS......................................16
2.10 QUALIFIED DOMESTIC RELATIONS ORDER
PROCEDURES............................................17
(a) Notification of Receipt......................17
(b) Review of Order..............................17
(c) Notification of Qualified Status.............17
(d) Notification of Non-Qualified Status.........18
(e) Final Determination Made.....................18
(f) No Final Determination Made..................18
2.11 CLAIMS PROCEDURE......................................18
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2.12 CLAIMS REVIEW PROCEDURE...............................19
ARTICLE III - ELIGIBILITY 19
3.1 CONDITIONS OF ELIGIBILITY.............................19
3.2 EFFECTIVE DATE OF PARTICIPATION.......................19
3.3 DETERMINATION OF ELIGIBILITY..........................20
3.4 TERMINATION OF ELIGIBILITY............................20
3.5 OMISSION OF ELIGIBLE EMPLOYEE.........................20
3.6 INCLUSION OF INELIGIBLE EMPLOYEE......................20
ARTICLE IV - CONTRIBUTION AND ALLOCATION................................21
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION.......21
(a) Discretionary Contribution...................21
(b) Maximum Amount Allowable.....................21
(c) Top Heavy Contribution.......................21
4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION............21
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES
AND EARNINGS..........................................21
(a) Establishment of Account.....................21
(b) Employer Contributions.......................21
(c) Company Stock................................22
(d) Earnings and Losses..........................22
(e) Insurance....................................23
(f) Unallocated Company Stock Suspense Account...23
(g) Forfeitures..................................23
(h) Minimum Allocations Required for
Top Heavy Plan Years.........................24
(i) Minimum Allocation for Key Employees.........24
(j) Employment Requirements for Minimum
Allocations..................................24
(k) Limitation on Compensation...................25
(l) Allocation for Deceased Participants.........25
(m) Allocations for Disabled Participants........25
(n) Allocations for Retired Participants.........25
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(o) Allocations for Terminated Participants......25
(p) Separate Accounts for Reemployed
Participants................................ 26
(q) Failsafe Contribution........................26
4.4 MAXIMUM ANNUAL ADDITIONS..............................27
(a) Limits on Annual Additions...................27
(b) Annual Additions.............................27
(c) Exceptions to Annual Additions...............27
(d) Limitation Year..............................28
(e) Annual Adjustments to Limitation.............28
(f) Consolidation of Plans.......................28
(g) Consolidation of Employers...................28
(h) Consolidation of Employers under
Code Section 413.............................28
(i) Special Rules Where Participants Are in
More Than One Defined Contribution Plan......28
(j) Future Adjustment............................29
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS.............29
(a) Procedure for Adjustments For
Excessive Annual Addition....................29
(b) Determination of Excess Amounts..............30
(c) Section 415 Suspense Account.................30
(d) Limitation on Distribution of Excess
Amounts......................................30
4.6 DIRECTED INVESTMENT ACCOUNT...........................30
(a) Diversification Requirements.................30
(b) Accounting...................................31
4.7 TOP HEAVY RULES.......................................31
(a) Top Heavy Plan Requirements..................31
(b) Determination of Top Heavy Status............31
(c) Super Top Heavy Status.......................32
(d) Aggregate Account............................32
(e) Aggregation Group............................33
(f) Determination Date...........................34
(g) Present Value of Accrued Benefit.............34
(h) Top Heavy Group..............................34
ARTICLE V - FUNDING AND INVESTMENT POLICY...............................35
5.1 INVESTMENT POLICY.....................................35
(a) Primary Investment...........................35
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(b) Other Investments............................35
(c) Insurance....................................35
(d) Purchase Contingencies.......................35
(e) Put Options..................................35
(f) Fair Market Value............................35
5.2 EMPLOYER SECURITIES AND REAL PROPERTY.................36
5.3 APPLICATIONS OF CASH..................................36
5.4 TRANSACTIONS INVOLVING COMPANY STOCK..................36
(a) Limitations upon Nonrecognition of Gain......36
(b) Special Rule for Lineal Descendant...........36
(c) Period of Limitation.........................37
(d) Nonallocation Period.........................37
5.5 LOANS TO THE TRUST....................................37
(a) Use of Loan Proceeds.........................37
(b) Disqualified Pension Transaction.............37
(c) Definition...................................38
ARTICLE VI - VALUATIONS 39
6.1 VALUATION OF THE TRUST FUND...........................39
6.2 METHOD OF VALUATION...................................39
ARTICLE VII - DETERMINATION AND DISTRIBUTION OF BENEFITS................39
7.1 DETERMINATION OF BENEFITS UPON RETIREMENT.............39
7.2 DETERMINATION OF BENEFITS UPON DEATH..................40
(a) Death of Participant.........................40
(b) Death of Former Participant..................40
(c) Proof of Death...............................40
(d) Spouse as Primary Beneficiary................40
(e) Disclaimer by Beneficiary....................41
(f) Waiver of Beneficiary........................41
7.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY......41
7.4 DETERMINATION OF BENEFITS UPON TERMINATION............41
(a) Time and Manner of Distribution..............41
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(b) Investment of Funds of Former Participants...42
(c) Vesting Schedule.............................43
(d) Discontinuance of Contribution or
Termination of Plan..........................44
(e) Effect of Amendment; Election of
Prior Vesting Schedule.......................44
(f) Reemployment of Participant;
Determination of Vesting.....................45
7.5 DISTRIBUTION OF BENEFITS..............................46
(a) Form of Distribution.........................46
(b) Large Account Balance........................46
(c) Distributions Prior to Normal
Retirement Date..............................47
(d) Cash Dividends...............................47
(e) Retained Benefits............................47
(f) Limitations on Distributions.................48
(g) Commencement of Death Benefits...............48
(h) Election by Designated Beneficiary to
Delay Commencement of Benefits...............49
(i) Election to Redetermine Life Expectancy and
Recalculate Distribution Limitation..........49
(j) Time of Segregation or Distribution..........49
(k) Separate Accounting Due to Distributions.....50
7.6 HOW PLAN BENEFIT WILL BE DISTRIBUTED..................50
(a) Rights to Demand Distribution
in Company Stock.............................50
(b) Satisfaction of Demand for Distribution......50
(c) Directions From Administrator................50
(d) Distribution of Company Stock Restricted
by Charter or By-Laws........................51
(e) Application of Restrictions..................51
(f) Separate Classes of Stock....................51
7.7 DISTRIBUTION FOR MINOR BENEFICIARY....................51
7.8 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN........51
7.9 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS.............52
7.10 RIGHT OF FIRST REFUSALS...............................52
(a) Notice of Proposed Sale......................52
(b) Limitation on Sale...........................52
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(c) Closing of Sale..............................52
(d) Company Stock Acquired with Proceeds of
Exempt Loan..................................53
7.11 STOCK CERTIFICATE LEGEND..............................53
7.12 PUT OPTION............................................53
(a) Acquired Other than by Exempt Loan...........53
(b) Acquired By Exempt Loan......................53
(c) Exercise of Rights...........................54
(d) No Other Put Options.........................55
7.13 NONTERMINABLE PROTECTIONS AND RIGHTS..................55
7.14 DIRECT ROLLOVER.......................................55
ARTICLE VIII - TRUSTEE 56
8.1 BASIC RESPONSIBILITIES OF THE TRUSTEE.................56
(a) Investment Assets............................56
(b) Payment of Benefits..........................56
(c) Records of Receipts and Disbursements........56
(d) Manner of Actions............................57
8.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE...........57
(a) Investment of Trust Fund.....................57
(b) Bank or Trust Company........................57
(c) Collective Trust Fund........................57
(d) Guaranteed Investment Contracts..............57
(e) Life Insurance Contracts.....................58
8.3 OTHER POWERS OF THE TRUSTEE...........................58
(a) Purchase of Securities.......................59
(b) Sale of Securities...........................59
(c) Voting Rights................................59
(d) Registration of Securities...................59
(e) Borrowing....................................59
(f) Cash Investments.............................59
(g) Retention of Prior Investment................59
(h) Execution of Transfer Documents..............59
(i) Settlement of Claims.........................60
(j) Employment of Agents.........................60
(k) Brokerages...................................60
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(l) Bank Deposits................................60
(m) U.S. Obligations.............................60
(n) Stock Options................................60
(o) Savings and Loan Deposits....................60
(p) Pooling Funds................................61
(q) Miscellaneous................................61
(r) Statutory Powers.............................61
8.4 VOTING COMPANY STOCK..................................61
8.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS..............62
8.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES.........62
8.7 ANNUAL REPORT OF THE TRUSTEE..........................62
(a) Statement of Account.........................62
(b) Approval of Statement of Account.............62
8.8 AUDIT 63
(a) When Audit Required..........................63
(b) Reliance Upon Certain Certifications.........63
8.9 RESIGNATION, REMOVAL, AND SUCCESSION OF TRUSTEE.......63
(a) Resignation of Trustee.......................63
(b) Removal of Trustee by Employer...............63
(c) Appointment of Successor Trustee.............64
(d) Appointment of Successor Trustee in Advance..64
(e) Interim Account Requirements.................64
8.10 TRANSFER OF INTEREST..................................64
ARTICLE IX - AMENDMENT, TERMINATION AND MERGERS.........................65
9.1 AMENDMENT.............................................65
(a) Rights of Employer to Amend Plan.............65
(b) Exclusive Benefit Rule.......................65
(c) Protected Benefit............................65
9.2 TERMINATION...........................................65
(a) Rights of Employer to Terminate Plan.........65
(b) Distribution to Participants Upon
Termination..................................66
9.3 MERGER OR CONSOLIDATION...............................66
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ARTICLE X - MISCELLANEOUS 66
10.1 PARTICIPANT'S RIGHTS..................................66
10.2 ALIENATION............................................66
(a) Prohibition Against Alienation...............66
(b) Qualified Domestic Relations Orders..........67
10.3 CONSTRUCTION OF PLAN..................................67
10.4 GENDER AND NUMBER.....................................67
10.5 LEGAL ACTIONS AND INDEMNIFICATION.....................67
10.6 PROHIBITION AGAINST DIVERSION OF FUNDS................67
(a) Exclusive Benefit Rule.......................67
(b) Return of Contributions Made Under
Mistake of Fact..............................68
10.7 BONDING 68
10.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE............68
10.9 INSURER'S PROTECTIVE CLAUSE...........................68
10.10 RECEIPT AND RELEASE FOR PAYMENTS......................69
10.11 ACTION BY THE EMPLOYER................................69
10.12 NAMED FIDUCIARIES AND ALLOCATION
OF RESPONSIBILITY.....................................69
10.13 HEADINGS 70
10.14 APPROVAL BY INTERNAL REVENUE SERVICE..................70
(a) Initial Qualification........................70
(b) Deductibility of Contributions...............70
10.15 UNIFORMITY............................................70
10.16 SECURITIES AND EXCHANGE COMMISSION APPROVAL...........70
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ARTICLE XI - PARTICIPATING EMPLOYERS....................................71
11.1 ADOPTION BY OTHER EMPLOYERS...........................71
11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS...............71
(a) Trustee......................................71
(b) Commingling of Assets........................71
(c) Transfers Between Employers..................71
(d) Forfeitures..................................71
(e) Expenses.....................................72
11.3 DESIGNATION OF AGENT..................................72
11.4 EMPLOYEE TRANSFERS....................................72
11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION.................72
11.6 AMENDMENT.............................................72
11.7 DISCONTINUANCE OF PARTICIPATION.......................73
11.8 ADMINISTRATOR'S AUTHORITY.............................73
11.9 PARTICIPATING EMPLOYER CONTRIBUTION
FOR AFFILIATE.........................................73
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BOC FINANCIAL CORP.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
EFFECTIVE JANUARY 1, 1998
THIS AGREEMENT, hereby made and entered into this ____ day of
_____________, 1996, by BOC FINANCIAL CORP. (herein referred to as the
"Employer") and STEPHEN R. TALBERT (herein referred to as the "Trustee").
W I T N E S S E T H:
WHEREAS, the Employer desires to establish an Employee Stock Ownership
Plan to enable its eligible employees to acquire a proprietary interest in
capital stock of the Employer, whereby contributions to the Plan will be made by
the Employer and such contributions made to the trust will be invested primarily
in the capital stock of the Employer; and
WHEREAS, the Employer desires to recognize the contribution made to its
successful operation by its employees and to reward such contribution by means
of an Employee Stock Ownership Plan for those employees who shall qualify as
Participants hereunder.
NOW, THEREFORE, effective January 1, 1998, (hereinafter called the
"Effective Date"), the Employer hereby establishes the BOC Financial Corp.
Employee Stock Ownership Plan and Trust (hereinafter referred to as the "Plan")
for the exclusive benefit of the Participants and their Beneficiaries, which is
intended to qualify as an "ESOP", according to the following terms:
ARTICLE I
DEFINITIONS
1.1 "ACT" means the Employee Retirement Income Security Act of 1974, as
it may be amended from time to time.
1.2 "ADMINISTRATOR" means the person designated by the Employer
pursuant to Section 2.2 to administer the Plan on behalf of the Employer.
1.3 "AFFILIATED EMPLOYER" means any corporation which is a member of a
controlled group of corporations (as defined in Code Section 414(b)) which
includes the Employer; any trade or business (whether or not incorporated) which
is under common control (as defined in Code Section 414(c)) with the Employer;
any organization (whether or not incorporated) which is a member of an
affiliated service group (as defined in Code Section 414(m)) which includes the
Employer; and any other entity required to be aggregated with the Employer
pursuant to Regulations under Code Section 414(o).
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<PAGE>
1.4 "AGGREGATE ACCOUNT" means, with respect to each Participant, the
value of all accounts maintained on behalf of a Participant, whether
attributable to Employer or Employee contributions, subject to the provisions of
Section 4.7.
1.5 "ANNIVERSARY DATE" means December 31.
1.6 "BENEFICIARY" means the person to whom the share of a deceased
Participant's total Account is payable, subject to the restrictions of Sections
7.2 and 7.5.
1.7 "CODE" means the Internal Revenue Code of 1986, as amended or
replaced from time to time.
1.8 "COMPANY STOCK" means common stock issued by the Employer (or by a
corporation which is a member of the controlled group of corporations of which
the Employer is a member) which is readily tradeable on an established
securities market. If there is no common stock which meets the foregoing
requirements, the term "Company Stock" means common stock issued by the Employer
(or by a corporation which is a member of the same controlled group) having a
combination of voting power and dividend rights equal to or in excess of: (A)
that class of common stock of the Employer (or of any other such corporation )
having the greatest voting power, and (B) that class of common stock of the
Employer (or of any other such corporation) having the greatest dividend rights.
Noncallable preferred stock shall be deemed to be "Company Stock" if such stock
is convertible at any time into stock which constitutes "Company Stock"
hereunder and if such conversion is at a conversion price which (as of the date
of the acquisition by the Trust) is reasonable. For purposes of the preceding
sentence, pursuant to Regulations, preferred stock shall be treated as
noncallable if after the call there will be a reasonable opportunity for a
conversion which meets the requirements of the preceding sentence.
1.9 "COMPANY STOCK ACCOUNT" means the account of a Participant which is
credited with the shares of Company Stock purchased and paid for by the Trust
Fund or contributed to the Trust Fund.
1.10 "COMPENSATION" with respect to any Participant means such
Participant's wages as defined in Code Section 3401(a) and all other payments of
compensation by the Employer (in the course of the Employer's trade or business)
for a Plan Year for which the Employer is required to furnish the Participant a
written statement under Code Sections 6041(d), 6051(a)(3), and 6052.
Compensation must be determined without regard to any rules under Code Section
3401(a) that limit the remuneration included in wages based on the nature or
location of the employment or the services performed (such as the exception for
agricultural labor in Code Section 3401(a)(2)).
For purposes of this Section, the determination of Compensation shall
be made by including amounts which are contributed by the Employer pursuant to a
salary reduction
- 2 -
<PAGE>
agreement and which are not includible in the gross income of
the Participant under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b), or
457, and Employee contributions described in Code Section 414(h)(2) that are
treated as Employer contributions.
For a Participant's initial year of participation, Compensation shall
be recognized as of an Employee's effective date of participation pursuant to
Section 3.2.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, the annual
Compensation of each Employee taken into account under the Plan shall not exceed
the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93") annual compensation
limit. The OBRA '93 annual compensation limit is $150,000, as adjusted by the
Internal Revenue Service for increases in the cost of living in accordance with
Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a
calendar year applies to any period, not exceeding 12 months, over which
Compensation is determined (determination period), beginning in such calendar
year. If a determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is 12.
Any reference in this Plan to the limitation under Code Section
401(a)(17) shall mean the OBRA '93 annual compensation limit set forth in this
provision.
If Compensation for any prior determination period is taken into
account in determining an Employee's benefits accruing in the current Plan Year,
the Compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period.
1.11 "CONTRACT" or "POLICY" means a life insurance policy or annuity
contract (group or individual) issued by the insurer as elected.
1.12 "CURRENT OBLIGATIONS" means Trust obligations arising from
extension of credit to the Trust and payable in cash within one (1) year from
the date an Employer contribution is due.
1.13 "DIRECTED INVESTMENT ACCOUNT" means the Account established for a
Participant who directs the Trustee as to the investment of all or a portion of
the interest in any one or more of his individual account balances as permitted
in Section 4.6.
1.14 "EARLY RETIREMENT DATE" means any date (prior to Normal Retirement
Date) coinciding with or next following the date on which a Participant or
Former Participant attains age 55. A Former Participant who terminates
employment and who thereafter reaches the age requirement contained herein shall
be entitled to receive his benefits under the Plan.
- 3 -
<PAGE>
1.15 "ELIGIBLE EMPLOYEE" means any Employee.
1.16 "EMPLOYEE" means any person who is employed by the Employer or
Affiliated Employer, but excludes any person who is an independent contractor.
Employee shall include Leased Employees within the meaning of Code Sections
414(n)(2) and 414(o)(2) unless such Leased Employees are covered by a Plan
described in Code Section 414(n)(5) and such Leased Employees do not constitute
more than 20% of the recipient's non-highly compensated work force.
1.17 "EMPLOYER" means BOC Financial Corp. and any Participating
Employer (as defined in Section 11.1) which shall adopt this Plan; any successor
which shall maintain this Plan; and any predecessor which has maintained this
Plan. The Employer is a corporation, with principal offices in the State of
North Carolina.
1.18 "ESOP" means an employee stock ownership plan that meets the
requirements of Code Section 4975(e)(7) and Regulation 54.4975-11.
1.19 "EXEMPT LOAN" means a loan made to the Plan by a disqualified
person or a loan to the Plan which is guaranteed by a disqualified person and
which satisfies the requirements of Section 2550.408b-3 of the Department of
Labor Regulations, Section 54.4975-7(b) of the Treasury Regulations and Section
5.5 hereof.
1.20 "FIDUCIARY" means any person who (a) exercises any discretionary
authority or discretionary control respecting management of the Plan or
exercises any authority or control respecting management or disposition of its
assets, (b) renders investment advice for a fee or other compensation, direct or
indirect, with respect to any monies or other property of the Plan or has any
authority or responsibility to do so, or (c) has any discretionary authority or
discretionary responsibility in the administration of the Plan, including, but
not limited to, the Trustee, the Employer and its representative body, and the
Administrator.
1.21 "FISCAL YEAR" means the Employer's accounting year of 12 months
commencing on January 1st of each year and ending the following December 31.
1.22 "FORFEITURE" means that portion of a Participant's Account that is
not Vested, and occurs on the earlier of:
(a) the distribution of the entire Vested portion of a
Participant's Account, or
(b) the last day of the Plan Year in which the Participant
incurs five (5) consecutive 1-Year Breaks in Service.
Furthermore, for purposes of paragraph (a) above, in the case of a
Terminated Participant whose Vested benefit is zero, such Terminated Participant
shall be deemed to have received a
- 4 -
<PAGE>
distribution of his Vested benefit upon his termination of employment.
Restoration of such amounts shall occur pursuant to Section 7.4(f). In addition,
the term Forfeiture shall also include amounts deemed to be Forfeitures pursuant
to any other provision of this Plan.
1.23 "FORMER PARTICIPANT" means a person who has been a Participant,
but who has ceased to be a Participant for any reason.
1.24 "415 COMPENSATION" with respect to any Participant means such
Participant's wages as defined in Code Section 3401(a) and all other payments of
compensation by the Employer (in the course of the Employer's trade or business)
for a Plan Year for which the Employer is required to furnish the Participant a
written statement under Code Sections 6041(d), 6051(a)(3), and 6052.
Compensation must be determined without regard to any rules under Code Section
3401(a) that limit the remuneration included in wages based on the nature or
location of the employment or the services performed (such as the exception for
agricultural labor in Code Section 3401(a)(2)).
For purposes of this Section, the determination of "415 Compensation"
shall be made by including amounts which are contributed by the Employer
pursuant to a salary reduction agreement and which are not includible in the
gross income of the Participant under Code Sections 125, 402(e)(3), 402(h),
403(b) or 457, and Employee contributions described in Code Section 414(h)(2)
that are treated as Employer contributions.
1.25 "414(S) COMPENSATION" with respect to any Participant means such
Participant's "415 Compensation" paid during a Plan Year. The amount of "414(s)
Compensation" with respect to any Participant shall include "414(s)
Compensation" for the entire twelve (12) month period ending on the last day of
such Plan Year, except that "414(s) Compensation" shall only be recognized for
that portion of the Plan Year during which an Employee was a Participant in the
Plan.
For purposes of this Section, the determination of "414(s)
Compensation" shall be made by including amounts which are contributed by the
Employer pursuant to a salary reduction agreement and which are not includible
in the gross income of the Participant under Code Sections 125, 402(e)(3),
402(h), 403(b) or 457, and Employee contributions described in Code Section
414(h)(2) that are treated as Employer contributions.
In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, the annual
Compensation of each Employee taken into account under the Plan shall not exceed
the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93") annual compensation
limit.
The OBRA '93 annual compensation limit is $150,000, as adjusted by the
Internal Revenue Service for increases in the cost of living in accordance with
Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a
calendar year applies to any period,
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not exceeding 12 months, over which
Compensation is determined (determination period), beginning in such calendar
year. If a determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the numerator of
which is the number of months in the determination period, and the denominator
of which is 12.
Any reference in this Plan to the limitation under Code Section
401(a)(17) shall mean the OBRA '93 annual compensation limit set forth in this
provision.
If Compensation for any prior determination period is taken into
account in determining an Employee's benefits accruing in the current Plan Year,
the Compensation for that prior determination period is subject to the OBRA '93
annual compensation limit in effect for that prior determination period.
1.26 "HIGHLY COMPENSATED EMPLOYEE" means an Employee, who
(a) at any time during the Plan Year or the preceding Plan
Year was a five-percent owner (as defined in Code Section 414(q)(2)) of
the Employer (applying the constructive ownership rules of Code Section
318 and the principles of Code Section 318 for an unincorporated
entity); or
(b) during the preceding Plan Year had compensation from the
Employer in excess of $80,000 (as adjusted by the Secretary pursuant to
Code Section 415(d), except that the base period shall be the calendar
quarter ending September 30, 1996), and
if the Employer elects, was part of the Top-Paid
Group of Employees (as defined in Code Section 414(q)(3)) for such
preceding Plan Year.
The determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of Employees in
the Top-Paid Group, will be made in accordance with Section 1.51, Code
Section 414(q) and the Regulations thereunder.
For purposes of this section, the term "compensation" means
compensation within the meaning of Code Section 415(c)(3).
1.27 "HIGHLY COMPENSATED FORMER EMPLOYEE" means a former Employee who
shall be treated as a Highly Compensated Employee if: (i) such Employee was a
Highly Compensated Employee when such Employee separated from service, or (ii)
such Employee was a Highly Compensated Employee at any time after attaining age
55.
1.28 "HIGHLY COMPENSATED PARTICIPANT" means any Highly Compensated
Employee who is eligible to participate in the Plan.
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1.29 "HOUR OF SERVICE" means (1) each hour for which an Employee is
directly or indirectly compensated or entitled to compensation by the Employer
for the performance of duties during the applicable computation period; (2) each
hour for which an Employee is directly or indirectly compensated or entitled to
compensation by the Employer (irrespective of whether the employment
relationship has terminated) for reasons other than performance of duties (such
as vacation, holidays, sickness, jury duty, disability, lay-off, military duty,
or leave of absence) during the applicable computation period; (3) each hour for
which back pay is awarded or agreed to by the Employer without regard to
mitigation of damages. These hours will be credited to the Employee for the
computation period or periods to which the award or agreement pertains rather
than the computation period in which the award, agreement or payment is made.
The same Hours of Service shall not be credited both under (1) or (2), as the
case may be, and under (3).
Notwithstanding the above, (i) no more than 501 Hours of Service are
required to be credited to an Employee on account of any single continuous
period during which the Employee performs no duties (whether or not such period
occurs in a single computation period); (ii) an hour for which an Employee is
directly or indirectly paid, or entitled to payment, on account of a period
during which no duties are performed is not required to be credited to the
Employee if such payment is made or due under a Plan maintained solely for the
purpose of complying with applicable worker's compensation, or unemployment
compensation or disability insurance laws; and (iii) Hours of Service are not
required to be credited for a payment which solely reimburses an Employee for
medical or medically related expenses incurred by the Employee.
For purposes of this Section, a payment shall be deemed to be made by
or due from the Employer regardless of whether such payment is made by or due
from the Employer directly, or indirectly through, among others, a trust fund,
or insurer, to which the Employer contributes or pays premiums and regardless of
whether contributions made or due to the trust fund, insurer, or other entity
are for the benefit of particular Employees or are on behalf of a group of
Employees in the aggregate.
An Hour of Service must be counted for the purpose of determining a
Year of Service, a year of participation for purposes of accrued benefits, a
1-Year Break in Service, and employment commencement date (or reemployment
commencement date). In addition, Hours of Service will be credited for
employment with other Affiliated Employers. Hours of Service will be credited
for any individual considered an Employee for purposes of this Plan under Code
Section 414(n) or 414(o) and the Regulations thereunder. The provisions of
Department of Labor regulations 2530.200b-2(b) and (c) are incorporated herein
by reference.
Notwithstanding any provision of this Plan to the contrary,
contributions, benefits and service credit with respect to qualified military
service will be provided in accordance with Code Section 414(u).
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1.30 "INVESTMENT MANAGER" means an entity that (a) has the power to
manage, acquire, or dispose of Plan assets and (b) acknowledges fiduciary
responsibility to the Plan in writing. Such entity must be a person, firm, or
corporation registered as an investment adviser under the Investment Advisers
Act of 1940, a bank, or an insurance company.
1.31 "KEY EMPLOYEE" means an Employee as defined in Code Section 416(i)
and the Regulations thereunder. Generally, any Employee or former Employee (as
well as each of his Beneficiaries) is considered a Key Employee if he, at any
time during the Plan Year that contains the "Determination Date" or any of the
preceding four (4) Plan Years, has been included in one of the following
categories:
(a) an officer of the Employer (as that term is defined within
the meaning of the Regulations under Code Section 416) having annual
"415 Compensation" greater than 50 percent of the amount in effect
under Code Section 415(b)(1)(A) for any such Plan Year.
(b) one of the ten (10) Employees having annual "415
Compensation" from the Employer for a Plan Year greater than the dollar
limitation in effect under Code Section 415(c)(1)(A) for the calendar
year in which such Plan Year ends and owning (or considered as owning
within the meaning of Code Section 318) both more than one-half percent
(0.5%) interest and the largest interests in the Employer.
(c) a "five percent (5%) owner" of the Employer. "Five percent
(5%) owner" means any person who owns (or is considered as owning
within the meaning of Code Section 318) more than five percent (5%) of
the outstanding stock of the Employer or stock possessing more than
five percent (5%) of the total combined voting power of all stock of
the Employer or, in the case of an unincorporated business, any person
who owns more than five percent (5%) of the capital or profits interest
in the Employer. In determining percentage ownership hereunder,
employers that would otherwise be aggregated under Code Sections
414(b), (c), (m), and (o) shall be treated as separate employers.
(d) a "one percent (1%) owner" of the Employer having an
annual "415 Compensation" from the Employer of more than $150,000. "One
percent (1%) owner" means any person who owns (or is considered as
owning within the meaning of Code Section 318) more than one percent
(1%) of the outstanding stock of the Employer or stock possessing more
than one percent (1%) of the total combined voting power of all stock
of the Employer or, in the case of an unincorporated business, any
person who owns more than one percent (1%) of the capital or profits
interest in the Employer. In determining percentage ownership
hereunder, employers that would otherwise be aggregated under Code
Sections 414(b), (c), (m), and (o) shall be treated as separate
employers. However, in determining whether an individual has "415
Compensation" of
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more than $150,000, "415 Compensation" from each employer required to
be aggregated under Code Sections 414(b), (c), (m), and (o) shall be
taken into account.
For purposes of this Section, the term "415 Compensation" means
compensation within the meaning of Code Section 415(c)(3).
1.32 "LATE RETIREMENT DATE" means the first day of the month coinciding
with or next following a Participant's actual Retirement Date after having
reached his Normal Retirement Date.
1.33 "LEASED EMPLOYEE" means any person (other than an Employee of the
recipient) who pursuant to an agreement between the recipient and any other
person ("leasing organization") has performed services for the recipient (or for
the recipient and related persons determined in accordance with Code Section
414(n)(6)) on a substantially full-time basis for a period of at least one (1)
year, and such services are performed under primary direction or control by the
recipient. Contributions or benefits provided a Leased Employee by the leasing
organization which are attributable to services performed for the recipient
employer shall be treated as provided by the recipient employer. A Leased
Employee shall not be considered an Employee of the recipient if:
(a) such employee is covered by a money purchase pension
Plan providing:
(1) a non-integrated employer contribution rate of at
least ten percent (10%) of compensation, as defined in Code
Section 415(c)(3), but including amounts contributed pursuant
to a salary reduction agreement which are excludable from the
employee's gross income under Code Sections 125, 402(a)(8),
402(h), or 403(b);
(2) immediate participation; and
(3) full and immediate vesting.
(b) Leased Employees do not constitute more than 20% of the
recipient's non-highly compensated work force.
1.34 "NON-HIGHLY COMPENSATED PARTICIPANT" means any Participant who is
not a Highly Compensated Employee.
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1.35 "NON-KEY EMPLOYEE" means any Employee or former Employee (and his
Beneficiaries) who is not a Key Employee.
1.36 "NORMAL RETIREMENT AGE" means the Participant's 65th birthday. A
Participant shall become fully Vested in his Participant's Account upon
attaining his Normal Retirement Age.
1.37 "NORMAL RETIREMENT DATE" means the January 1st nearest the
Participant's Normal Retirement Age.
1.38 "1-YEAR BREAK IN SERVICE" means the applicable computation period
during which an Employee has not completed more than 500 Hours of Service with
the Employer. Further, solely for the purpose of determining whether a
Participant has incurred a 1-Year Break in Service, Hours of Service shall be
recognized for "authorized leaves of absence" and "maternity and paternity
leaves of absence." Years of Service and 1-Year Breaks in Service shall be
measured on the same computation period.
"Authorized leave of absence" means an unpaid, temporary cessation from
active employment with the Employer pursuant to an established nondiscriminatory
policy, whether occasioned by illness, military service, or any other reason.
A "maternity or paternity leave of absence" means an absence from work
for any period by reason of the Employee's pregnancy, birth of the Employee's
child, placement of a child with the Employee in connection with the adoption of
such child, or any absence for the purpose of caring for such child for a period
immediately following such birth or placement. For this purpose, Hours of
Service shall be credited for the computation period in which the absence from
work begins, only if credit therefore is necessary to prevent the Employee from
incurring a 1-Year Break in Service, or, in any other case, in the immediately
following computation period. The Hours of Service credited for a "maternity or
paternity leave of absence" shall be those which would normally have been
credited but for such absence, or, in any case in which the Administrator is
unable to determine such hours normally credited, eight (8) Hours of Service per
day. The total Hours of Service required to be credited for a "maternity or
paternity leave of absence" shall not exceed 501.
1.39 "OTHER INVESTMENTS ACCOUNT" means the account of a Participant
which is credited with his share of the net gain (or loss) of the Plan,
Forfeitures, and Employer contributions in other than Company Stock and which is
debited with payments made to pay for Company Stock.
1.40 "PARTICIPANT" means any Eligible Employee who participates in the
Plan as provided in Section 3.2, and has not for any reason become ineligible to
participate further in the Plan.
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1.41 "PARTICIPANT'S ACCOUNT" means the account established and
maintained by the Administrator for each Participant with respect to his total
interest in the Plan and Trust resulting from the Employer's contributions to
the Plan.
1.42 "PLAN" means this instrument, including all amendments
thereto.
1.43 "PLAN YEAR" means the Plan's accounting year of twelve (12) months
commencing on January 1 of each year and ending the following December 31.
1.44 "REGULATION" means the Income Tax Regulations as promulgated by
the Secretary of the Treasury or his delegate, and as amended from time to time.
1.45 "RETIRED PARTICIPANT" means a person who has been a Participant,
but who has become entitled to retirement benefits under the Plan.
1.46 "RETIREMENT DATE" means the date as of which a Participant retires
for reasons other than Total and Permanent Disability, whether such retirement
occurs on a Participant's Early Retirement Date, Normal Retirement Date or Late
Retirement Date (see Section 7.1).
1.47 "SUPER TOP HEAVY PLAN" means a Plan described in Section 4.7.
1.48 "TERMINATED PARTICIPANT" means a person who has been a
Participant, but whose employment has been terminated other than by death, Total
and Permanent Disability, or retirement.
1.49 "TOP HEAVY PLAN" means a Plan described in Section 4.7.
1.50 "TOP HEAVY PLAN YEAR" means a Plan Year during which the Plan is a
Top Heavy Plan.
1.51 "TOP PAID GROUP" means the top 20 percent of Employees who
performed services for the Employer during the applicable year, ranked according
to the amount of "415 Compensation" (determined for this purpose in accordance
with Section 1.24) received from the Employer during such year. All Affiliated
Employers shall be taken into account as a single employer, and Leased Employees
within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered
Employees unless such Leased Employees are covered by a Plan described in Code
Section 414(n)(5) and are not covered in any qualified Plan maintained by the
Employer. Employees who are non-resident aliens and who received no earned
income (within the meaning of Code Section 911(d)(2)) from the Employer
constituting United States source income within the meaning of Code Section
861(a)(3) shall not be treated as Employees. Additionally, for the purpose of
determining the number of active Employees in any year, the following Employees
shall be excluded (however, such Employees shall still be considered for the
purpose of identifying the particular Employees in the Top Paid Group):
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(a) Employees with less than six (6) months of service;
(b) Employees who normally work less than 17-1/2 hours
per week;
(c) Employees who normally work less than six (6) months
during a year; and
(d) Employees who have not yet attained age 21.
In addition, if 90 percent or more of the Employees of the Employer are
covered under agreements the Secretary of Labor finds to be collective
bargaining agreements between Employee representatives and the Employer, and the
Plan covers only Employees who are not covered under such agreements, then
Employees covered by such agreements shall be excluded from both the total
number of active Employees as well as from the identification of particular
Employees in the Top Paid Group.
The foregoing exclusions set forth in this Section shall be applied on
a uniform and consistent basis for all purposes for which the Code Section
414(q) definition is applicable.
1.52 "TOTAL AND PERMANENT DISABILITY" means a physical or mental
condition of a Participant resulting from bodily injury, disease, or mental
disorder which renders him incapable of continuing his usual and customary
employment with the Employer. The disability of a Participant shall be
determined by a licensed physician chosen by the Administrator. The
determination shall be applied uniformly to all Participants.
1.53 "TRUSTEE" means the person or entity named as trustee in the
separate trust agreement forming a part of this Plan, and any successors.
1.54 "TRUST FUND" means the assets of the Plan held by the Trustee as
the same shall exist from time to time.
1.55 "UNALLOCATED COMPANY STOCK SUSPENSE ACCOUNT" means an account
containing Company Stock acquired with the proceeds of an Exempt Loan and which
has not been released from such account, and allocated to the Participants'
Company Stock Accounts.
1.56 "VESTED" means the nonforfeitable portion of any account
maintained on behalf of a Participant.
1.57 "YEAR OF SERVICE" means the computation period of twelve (12)
consecutive months, herein set forth, during which an Employee has at least 1000
Hours of Service.
For purposes of eligibility for participation, the initial computation
period shall begin with the date on which the Employee first performs an Hour of
Service. The participation
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computation period beginning after a 1-Year Break in Service shall be measured
from the date on which an Employee again performs an Hour of Service. The
participation computation period shall shift to the Plan Year which includes the
anniversary of the date on which the Employee first performed an Hour of
Service.
For vesting and all other purposes, the computation period shall be the
Plan Year, including periods prior to the Effective Date of the Plan. Years of
Service with any Affiliated Employer shall be recognized.
Notwithstanding the foregoing, for any short Plan Year, the
determination of whether an Employee has completed a Year of Service shall be
made in accordance with Department of Labor regulation 2530.203-2(c). However,
in determining whether an Employee has completed a Year of Service for purposes
of sharing in Employer contributions and Forfeitures, the number of the Hours of
Service required shall be proportionately reduced based on the number of full
months in the short Plan Year.
ARTICLE II
ADMINISTRATION
2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER
(a) Appointment and Removal of Trustee and Administrator. The
Employer shall be empowered to appoint and remove the Trustee and the
Administrator from time to time as it deems necessary for the proper
administration of the Plan to assure that the Plan is being operated
for the exclusive benefit of the Participants and their Beneficiaries
in accordance with the terms of the Plan, the Code, and the Act.
(b) Funding Policy and Method. The Employer shall establish a
"funding policy and method," i.e., it shall determine whether the Plan
has a short run need for liquidity (e.g., to pay benefits) or whether
liquidity is a long run goal and investment growth (and stability of
same) is a more current need, or shall appoint a qualified person to do
so. The Employer or its delegate shall communicate such needs and goals
to the Trustee, who shall coordinate such Plan needs with its
investment policy. The communication of such a "funding policy and
method" shall not, however, constitute a directive to the Trustee as to
investment of the Trust Funds. Such "funding policy and method" shall
be consistent with the objectives of this Plan and with the
requirements of Title I of the Act.
(c) Review of Performance of Fiduciaries. The Employer shall
periodically review the performance of any Fiduciary or other person to
whom duties have been delegated or allocated by it under the provisions
of this Plan or pursuant to procedures established hereunder. This
requirement may be satisfied by formal periodic review by
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the Employer or by a qualified person specifically designated by the
Employer, through day-to-day conduct and evaluation, or through other
appropriate ways.
2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY
The Employer shall appoint one or more persons to serve on a Plan
administration committee which committee shall be referred to herein as the
Administrator. Any person, including, but not limited to, the Employees of the
Employer, shall be eligible to serve as an Administrator. Any person so
appointed shall signify his acceptance by filing written acceptance with the
Employer. A committee member may resign by delivering his written resignation to
the Employer or be removed by the Employer by delivery of written notice of
removal, to take effect at a date specified therein, or upon delivery to the
Administrator if no date is specified. The Employer, upon the resignation or
removal of a committee member, shall promptly designate in writing a successor
to this position. If the Employer does not appoint an Administrator, the
Employer will function as the Administrator.
2.3 ALLOCATION AND DELEGATION OF RESPONSIBILITIES
If more than one person is appointed as Administrator, the
responsibilities of each Administrator may be specified by the Employer and
accepted in writing by each Administrator. In the event that no such delegation
is made by the Employer, the Administrators may allocate the responsibilities
among themselves, in which event the Administrators shall notify the Employer
and the Trustee in writing of such action and specify the responsibilities of
each Administrator. The Trustee thereafter shall accept and rely upon any
documents executed by the appropriate Administrator until such time as the
Employer or the Administrators file with the Trustee a written revocation of
such designation.
2.4 POWERS AND RESPONSIBILITIES OF THE ADMINISTRATOR
(a) Primary Responsibility of Administrator. The primary
responsibility of the Administrator is to administer the Plan for the
exclusive benefit of the Participants and their Beneficiaries, subject
to the specific terms of the Plan. The Administrator shall administer
the Plan in accordance with its terms and shall have the power, in its
sole and absolute discretion, to construe the terms of the Plan and to
determine all questions arising in connection with the administration,
interpretation, and application of the Plan. Any such determination by
the Administrator shall be conclusive and binding upon all persons. The
Administrator may establish procedures, correct any defect, supply any
information, or reconcile any inconsistency in such manner and to such
extent as shall be deemed necessary or advisable to carry out the
purpose of this Agreement; provided, however, that any procedure,
discretionary act, interpretation or construction shall be done in a
nondiscriminatory manner based upon uniform principles consistently
applied and shall be consistent with the intent that the Plan shall
continue to be deemed a qualified Plan under the terms of Code Section
401(a), and shall comply with the terms of
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the Act and all regulations issued pursuant thereto. The Administrator
shall have all powers necessary or appropriate to accomplish his duties
under this Plan.
(b) Powers and Duties of Administrator. The Administrator
shall be charged with the powers and duties of the general
administration of the Plan, including, but not limited to, the
following:
(1) to determine, in its sole and absolute
discretion, all questions relating to the eligibility of
Employees to participate or remain a Participant hereunder and
to receive benefits under the Plan;
(2) to compute, certify, and direct the Trustee with
respect to the amount and the kind of benefits to which any
Participant shall be entitled hereunder;
(3) to authorize and direct the Trustee with respect
to all nondiscretionary or otherwise directed disbursements
from the Trust;
(4) to maintain all necessary records for the
administration of the Plan;
(5) to interpret, in its sole and absolute
discretion, the provisions of the Plan and to make and publish
such rules for regulation of the Plan as are consistent with
the terms hereof;
(6) to determine the size and type of any Contract to
be purchased from any insurer, and to designate the insurer
from which such Contract shall be purchased;
(7) to compute and certify to the Employer and to the
Trustee from time to time the sums of money necessary or
desirable to be contributed to the Plan;
(8) to consult with the Employer and the Trustee
regarding the short and long-term liquidity needs of the Plan
in order that the Trustee can exercise any investment
discretion in a manner designed to accomplish specific
objectives; and
(9) to assist any Participant regarding his rights,
benefits, or elections available under the Plan.
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2.5 RECORDS AND REPORTS
The Administrator shall keep a record of all actions taken and shall
keep all other books of account, records, and other data that may be necessary
for proper administration of the Plan and shall be responsible for supplying all
information and reports to the Internal Revenue Service, Department of Labor,
Participants, Beneficiaries, and others as required by law.
2.6 APPOINTMENT OF ADVISERS
The Administrator, or the Trustee with the consent of the
Administrator, may appoint counsel, specialists, advisers, and other persons as
the Administrator or the Trustee deems necessary or desirable in connection with
the administration of this Plan.
2.7 INFORMATION FROM EMPLOYER
To enable the Administrator to perform his functions, the Employer
shall supply full and timely information to the Administrator on all matters
relating to the Compensation of all Participants, their Hours of Service, their
Years of Service, their retirement, death, disability, or termination of
employment, and such other pertinent facts as the Administrator may require; and
the Administrator shall advise the Trustee of such of the foregoing facts as may
be pertinent to the Trustee's duties under the Plan. The Administrator may rely
upon such information as is supplied by the Employer and shall have no duty or
responsibility to verify such information.
2.8 PAYMENT OF EXPENSES
All expenses of administration may be paid out of the Trust Fund unless
paid by the Employer. However, in the event that any expense of administration
is directly attributable to a specific Participant's Aggregate Account, the
expenses may be paid out of the assets allocated to that Participant's Aggregate
Account. Such expenses shall include any expenses incident to the functioning of
the Administrator, including, but not limited to, fees of accountants, counsel,
and other specialists and their agents, and other costs of administering the
Plan. Until paid, the expenses shall constitute a liability of the Trust Fund.
However, the Employer may reimburse the Trust Fund for any administration
expense incurred. Any administration expense paid to the Trust Fund as a
reimbursement shall not be considered an Employer contribution.
2.9 MAJORITY ACTIONS
Except where there has been an allocation and delegation of
administrative authority pursuant to Section 2.3, if there shall be more than
one Administrator, they shall act by a majority of their number, but may
authorize one or more of them to sign all papers on their behalf.
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2.10 QUALIFIED DOMESTIC RELATIONS ORDER PROCEDURES
In the case of any domestic relations order ("Order") received with
respect to the Plan, its status under the Code and Act shall be determined under
the following provisions:
(a) Notification of Receipt. Promptly upon receipt of an
Order, the Administrator will notify in writing each person named
therein, at the address specified in the Order (if applicable), of the
receipt by the Plan of the Order and forward to them notification of
the procedures set forth in this Section 2.10. In addition, with
respect to any amounts that are distributable, the Administrator shall
separately account under the Plan for all (i) payments required by the
Order, and (ii) portions of payments otherwise payable that would be
affected by the Order which come due after the Administrator's receipt
of the Order.
(b) Review of Order. The Administrator will ascertain, with
the assistance of legal counsel, as appropriate, whether:
(1) The copy of the Order is certified;
(2) The Order is a judgment, decree, or order
(including approval of a property settlement agreement),
issued by a court, relating to the provision of child support,
alimony payments, or marital property rights to a spouse,
former spouse, child, or other dependent of a Participant;
(3) The Order specifies the name and full mailing
address of the Participant and each alternate payee, or if
not, that the information is available from the records of the
Plan or Employer;
(4) The Order clearly identifies the Plan or plan(s)
affected;
(5) Payment pursuant to the Order would neither
increase the Participant's benefits nor change the terms of
the Plan;
(6) The Order clearly specifies the amount or
percentage of the Participant's Vested benefit to be paid to
each alternate payee or the manner in which such amount or
percentage is to be determined; and
(7) The Order clearly specifies the time when
payments to any alternate payee are to begin and, if
applicable, the period during which any such payments are to
continue and the time any such payments shall cease.
(c) Notification of Qualified Status. When the Administrator
is satisfied that the Order satisfies the requirements to be a
"qualified domestic relations order," the
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Administrator shall notify in writing all persons named in the Order
and any representatives designated in writing by such persons
("Interested Parties") that a tentative determination has been made
that the Order is a "qualified domestic relations order."
If no Interested Party disputes this determination within 60
days of receipt of such notice, then the Administrator shall proceed as
though a final determination has been made that the Order is a
"qualified domestic relations order." If any Interested Party disputes
this determination within 60 days of receipt of such notice, then the
Administrator will refer such dispute to legal counsel for further
advice concerning the resolution of the dispute.
(d) Notification of Non-Qualified Status. If it appears the
Order is not a "qualified domestic relations order," the Administrator
shall notify in writing all Interested Parties that a tentative
determination has been made that the Order is not a "qualified domestic
relations order." Such notice shall state the reasons for such
determination.
(e) Final Determination Made. If, within 18 months of receipt
of an Order, a final determination is made that the Order (as modified,
if applicable) is a "qualified domestic relations order," the
Administrator shall follow the terms of such Order. The Administrator
shall authorize distribution of the amounts subject to the "qualified
domestic relations order" to the alternate payee.
(f) No Final Determination Made. If, within 18 months of
receipt of an Order, no final determination has been made that the
Order is a "qualified domestic relations order", the Administrator
shall notify all Interested Parties in writing of such fact and amounts
held in the Plan shall be held for the benefit of or distributed to the
person who would have been entitled to such amounts if there had been
no Order. If it is subsequently determined that the Order (as modified,
if applicable) is a "qualified domestic relations order," then the
"qualified domestic relations order" shall be applied prospectively
only.
2.11 CLAIMS PROCEDURE
Claims for benefits under the Plan may be filed with the Administrator
on forms supplied by the Employer. Written notice of the disposition of a claim
shall be furnished to the claimant within 90 days after the application is
filed. In the event the claim is denied, the reasons for the denial shall be
specifically set forth in the notice in language calculated to be understood by
the claimant, pertinent provisions of the Plan shall be cited, and, where
appropriate, an explanation as to how the claimant can perfect the claim will be
provided. In addition, the claimant shall be furnished with an explanation of
the Plan's claims review procedure.
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2.12 CLAIMS REVIEW PROCEDURE
Any Employee, former Employee, or Beneficiary of either, who has been
denied a benefit by a decision of the Administrator pursuant to Section 2.11
shall be entitled to request the Administrator to give further consideration to
his claim by filing with the Administrator (on a form which may be obtained from
the Administrator) a request for a hearing. Such request, together with a
written statement of the reasons why the claimant believes his claim should be
allowed, shall be filed with the Administrator no later than 60 days after
receipt of the written notification provided for in Section 2.11. The
Administrator shall then conduct a hearing within the next 60 days, at which the
claimant may be represented by an attorney or any other representative of his
choosing and at which the claimant shall have an opportunity to submit written
and oral evidence and arguments in support of his claim. At the hearing (or
prior thereto upon five (5) business days written notice to the Administrator)
the claimant or his representative shall have an opportunity to review all
documents in the possession of the Administrator which are pertinent to the
claim at issue and its disallowance. Either the claimant or the Administrator
may cause a court reporter to attend the hearing and record the proceedings. In
such event, a complete written transcript of the proceedings shall be furnished
to both parties by the court reporter. The full expense of any such court
reporter and such transcripts shall be borne by the party causing the court
reporter to attend the hearing. A final decision as to the allowance of the
claim shall be made by the Administrator within 60 days of receipt of the appeal
(unless there has been an extension of 60 days due to special circumstances,
provided the delay and the special circumstances occasioning it are communicated
to the claimant within the 60 day period). Such communication shall be written
in a manner calculated to be understood by the claimant and shall include
specific reasons for the decision and specific references to the pertinent Plan
provisions on which the decision is based.
<PAGE>
ARTICLE III
ELIGIBILITY
3.1 CONDITIONS OF ELIGIBILITY
Any Eligible Employee who has completed one (1) Year of Service and has
attained his 21st birthday shall be eligible to participate hereunder as of the
date he has satisfied such requirements. The Employer shall give each
prospective Eligible Employee written notice of his eligibility to participate
in the Plan prior to the close of the Plan Year in which he first becomes an
Eligible Employee.
3.2 EFFECTIVE DATE OF PARTICIPATION
An Eligible Employee shall become a Participant effective as of the
earlier of the first day of the Plan Year or the first day of the seventh month
of such Plan Year coinciding with or next following the date such Employee met
the eligibility requirements of Section 3.1, provided said Employee is still
employed as of such date (or if not employed on such date, as of the date of
rehire if five (5) consecutive 1-Year Breaks in Service have not occurred).
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3.3 DETERMINATION OF ELIGIBILITY
The Administrator shall determine the eligibility of each Employee for
participation in the Plan based upon information furnished by the Employer. Such
determination shall be conclusive and binding upon all persons, as long as the
same is made pursuant to the Plan and the Act. Such determination shall be
subject to review pursuant to Section 2.12.
3.4 TERMINATION OF ELIGIBILITY
(a) In the event a Participant shall go from a classification
of an Eligible Employee to an ineligible Employee, such Former
Participant shall continue to vest in his interest in the Plan for each
Year of Service completed while a noneligible Employee until such time
as his Participant's Account shall be forfeited or distributed pursuant
to the terms of the Plan. Additionally, his interest in the Plan shall
continue to share in the earnings of the Trust Fund.
(b) In the event a Participant is no longer a member of an
eligible class of Employees and becomes ineligible to participate but
has not incurred a 1-Year Break in Service, such Employee will
participate immediately upon returning to an eligible class of
Employees. If such Participant incurs a 1-Year Break in Service,
eligibility will be determined under the break in service rules of the
Plan.
(c) In the event an Employee who is not a member of an
eligible class of Employees becomes a member of an eligible class, such
Employee will participate immediately if such Employee would have
otherwise previously become a Participant.
3.5 OMISSION OF ELIGIBLE EMPLOYEE
If, in any Plan 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 his Employer for the year has been made,
the Employer shall make a subsequent contribution with respect to the omitted
Employee in the amount which the said 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 Code.
3.6 INCLUSION OF INELIGIBLE EMPLOYEE
If, in any Plan 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, the
Employer shall not be entitled to recover the contribution made with respect to
the ineligible person regardless of whether or not a deduction
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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.
ARTICLE IV
CONTRIBUTION AND ALLOCATION
4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION
(a) Discretionary Contribution. For each Plan Year, the
Employer shall contribute to the Plan a discretionary amount of not
less than the amount required to pay any Current Obligations of the
Trust Fund which shall be allocated in accordance with the provisions
of Section 4.3(b).
(b) Maximum Amount Allowable. Notwithstanding the foregoing,
however, the Employer's contribution for any Plan Year shall not exceed
the maximum amount allowable as a deduction to the Employer under the
provisions of Code Section 404. All contributions by the Employer shall
be made in cash or in such property as is acceptable to the Trustee.
(c) Top Heavy Contribution. Except, however, to the extent
necessary to provide the top heavy minimum allocations, the Employer
shall made a contribution even if it exceeds the amount which is
deductible under Code Section 404.
4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION
Employer contributions will be paid in cash, Company Stock or other
property as the Employer may from time to time determined. Company Stock and
other property will be valued at their then fair market value. The Employer
shall pay to the Trustee its contribution to the Plan for each Plan Year within
the time prescribed by law, including extensions of time, for the filing of the
Employer's federal income tax return for the Fiscal Year.
4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES, AND EARNINGS
(a) Establishment of Account. The Administrator shall
establish and maintain an account in the name of each Participant to
which the Administrator shall credit as of each Anniversary Date all
amounts allocated to each such Participant as set forth herein.
(b) Employer Contributions. The Employer shall provide the
Administrator with all information required by the Administrator to
make a proper allocation of the Employer's contribution for each
allocation period. Within a reasonable period of time after the date of
receipt by the Administrator of such information, the Administrator
shall
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allocate such contribution to each Participant's Account in the same
proportion that each such Participant's Compensation for the year bears
to the total Compensation of all Participants for such year.
Except, however, only Participants who have completed a Year
of Service during the Plan Year and are actively employed on the last
day of the Plan Year shall be eligible to share in the allocation of
the Employer's discretionary contribution for the Plan Year, unless
required pursuant to Section 4.3(h).
(c) Company Stock. The Company Stock Account of each
Participant shall be credited as of each Anniversary Date with
Forfeitures of Company Stock and his allocable share of Company Stock
(including fractional shares) purchased and paid for by the Plan or
contributed in kind by the Employer. Stock dividends on Company Stock
held in his Company Stock Account shall be credited to his Company
Stock Account when paid. Cash dividends on Company Stock held in his
Company Stock Account shall, in the sole discretion of the
Administrator, either be credited to his Other Investments Account when
paid or used to repay an Exempt Loan; provided, however, that when cash
dividends are used to repay an Exempt Loan, Company Stock shall be
released from the Unallocated Company Stock Suspense Account and
allocated to the Participant's Company Stock Account pursuant to
Section 4.3(f) and, provided further, that Company Stock allocated to
each Participant's Company Stock Account shall have a fair market value
not less than the amount of cash dividends which would have been
allocated to such Participant's Other Investments Accounts for the
year.
Company Stock acquired by the Plan with the proceeds of an
Exempt Loan shall only be allocated to each Participant's Company Stock
Account upon release from the Unallocated Company Stock Suspense
Account as provided in this Section 4.3(c) and Section 4.3(f) herein.
Company Stock acquired with the proceeds of an Exempt Loan shall be an
asset of the Trust Fund and maintained in the Unallocated Company Stock
Suspense Account.
(d) Earnings and Losses. As of each Anniversary Date or other
valuation Date, any earnings or losses (net appreciation or net
depreciation) of the Trust Fund (exclusive of Company Stock) shall be
allocated in the same proportion that each Participant's and Former
Participant's time weighted averaged (based on beginning year base)
nonsegregated accounts (other than each Participant's Company Stock
Account) bear to the total of all Participants' and Former
Participants' time weighted average (based on beginning year base)
nonsegregated accounts (other than Participants' Company Stock
Accounts) as of such date.
Earnings or losses do not include the interest paid under any
installment contract for the purchase of Company Stock by the Trust
Fund or on any loan used by the Trust Fund to purchase Company Stock,
nor does it include income received by the Trust Fund with respect to
Company Stock acquired with the proceeds of an Exempt Loan; all
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income received by the Trust Fund from Company Stock acquired with the
proceeds of an Exempt Loan may, at the discretion of the Administrator,
be used to repay such loan.
(e) Insurance. Participants' accounts shall be debited for any
insurance or annuity premiums paid, if any, and credited with any
dividends received on insurance contracts.
(f) Unallocated Company Stock Suspense Account. All Company
Stock acquired by the Plan with the proceeds of an Exempt Loan must be
added to and maintained in the Unallocated Company Stock Suspense
Account. Such Company Stock shall be released and withdrawn from that
account as if all Company Stock in that account were encumbered. For
each Plan Year during the duration of the loan, the number of shares of
Company Stock released shall equal the number of encumbered shares held
immediately before release for the current Plan Year multiplied by a
fraction, the numerator of which is the amount of principal paid for
the Plan Year and the denominator of which is the sum of the numerator
plus the principal to be paid for all future Plan Years. As of each
Anniversary Date, the Plan must consistently allocate to each
Participant's Account, in the same manner as Employer discretionary
contributions pursuant to Section 4.1(a) are allocated, non-monetary
units (shares and fractional shares of Company Stock) representing each
Participant's interest in Company Stock withdrawn from the Unallocated
Company Stock Suspense Account.
However, Company Stock released from the Unallocated Company
Stock Suspense Account with cash dividends pursuant to Section 4.3(c)
shall be allocated to each Participant's Company Stock Account in the
same proportion that each such Participant's number of shares of
Company Stock sharing in such cash dividends bears to the total number
of shares of all Participants' Company Stock sharing in such cash
dividends. Income earned with respect to Company Stock in the
Unallocated Company Stock Suspense Account shall be used, at the
discretion of the Administrator, to repay the Exempt Loan used to
purchase such Company Stock. Company Stock released from the
Unallocated Company Stock Suspense Account with such income, and any
income which is not so used, shall be allocated as of each Anniversary
Date or other valuation date in the same proportion that each
Participant's and Former Participant's nonsegregated accounts after the
allocation of any earnings or losses pursuant to Section 4.3(d) bear to
the total of all Participants' and Former Participants' nonsegregated
accounts after the allocation of any earnings or losses pursuant to
Section 4.3(d).
(g) Forfeitures. As of each Anniversary Date any amounts which
became Forfeitures since the last Anniversary Date shall first be made
available to reinstate previously forfeited account balances of Former
Participants, if any, in accordance with Section 7.4(f). The remaining
Forfeitures, if any, shall be allocated among the Participants'
Accounts in the same proportion that each such Participant's
Compensation for the year bears to the total Compensation of all
Participants for the year.
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<PAGE>
Provided, however, that in the event the allocation of
Forfeitures provided herein shall cause the "annual addition" (as
defined in Section 4.4) to any Participant's Account to exceed the
amount allowable by the Code, the excess shall be reallocated in
accordance with Section 4.5.
Except, however, only Participants who have completed a Year
of Service during any Plan Year and are actively employed on the last
day of the Plan Year shall be eligible to share in the allocation of
Forfeitures for that Plan Year, unless otherwise required pursuant to
Section 4.3(h).
(h) Minimum Allocations Required for Top Heavy Plan Years.
Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of
the Employer's contributions and Forfeitures allocated to the
Participant's Account of each Non-Key Employee shall be equal to at
least three percent (3%) of such Non-Key Employee's "415 Compensation".
However, if (i) the sum of the Employer's contributions and Forfeitures
allocated to the Participant's Account of each Key Employee for such
Top Heavy Plan Year is less than three percent (3%) of each Key
Employee's "415 Compensation" and (ii) this Plan is not required to be
included in an Aggregation Group to enable a defined benefit Plan to
meet the requirements of Code Section 401(a)(4) or 410, the sum of the
Employer's contributions and Forfeitures allocated to the Participant's
Account of each Non-Key Employee shall be equal to the largest
percentage allocated to the Participant's Account of any Key Employee.
However, no such minimum allocation shall be required in this
Plan for any Non-Key Employee who participates in another defined
contribution Plan subject to Code Section 412 providing such benefits
included with this Plan in a Required Aggregation Group. If any Non-Key
Employee participates in another defined contribution Plan not subject
to Code Section 412 providing such benefits included with this Plan in
a Required Aggregation Group, this Plan shall provide the minimum
allocation.
(i) Minimum Allocation for Key Employees. Notwithstanding
Section 4.1, for purposes of the minimum allocations set forth above,
the percentage allocated to the Participant's Account of any Key
Employee shall be equal to the ratio of the sum of the Employer's
contributions and Forfeitures allocated on behalf of such Key Employee
divided by the "415 Compensation" for such Key Employee. However if the
minimum allocation set forth above is less than three percent (3%) of
the Non-Key Employees' "415 Compensation," amounts contributed as a
result of a salary reduction agreement must be included in determining
the contributions allocated to the Key Employees.
(j) Employment Requirements for Minimum Allocations. For any
Top Heavy Plan Year, the minimum allocations set forth above shall be
allocated to the Participant's Account of all Non-Key Employees who are
Participants and who are employed by the Employer on the last day of
the Plan Year, including Non-Key Employees who (1) failed to complete a
Year of Service; (2) declined to make mandatory
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<PAGE>
contributions (if required) to the Plan; and (3) had been excluded from
participation because of their level of Compensation.
(k) Limitation on Compensation. In addition to other
applicable limitations set forth in the Plan, and notwithstanding any
other provision of the Plan to the contrary, the annual Compensation of
each Employee taken into account under the Plan shall not exceed the
Omnibus Budget Reconciliation Act of 1993 ("OBRA '93") annual
compensation limit. The OBRA '93 annual compensation limit is $150,000,
as adjusted by the Internal Revenue Service for increases in the cost
of living in accordance with Code Section 401(a)(17)(B). The
cost-of-living adjustment in effect for a calendar year applies to any
period, not exceeding 12 months, over which Compensation is determined
(determination period), beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93
annual compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the determination period,
and the denominator of which is 12.
Any reference in this Plan to the limitation under Code
Section 401(a)(17) shall mean the OBRA '93 annual compensation limit
set forth in this provision.
If Compensation for any prior determination period is taken
into account in determining an Employee's benefits accruing in the
current Plan Year, the Compensation for that prior determination period
is subject to the OBRA '93 annual compensation limit in effect for that
prior determination period.
(l) Allocations for Deceased Participants. Notwithstanding
anything herein to the contrary, Participants terminating for reasons
of death shall share in the allocations of contributions and
Forfeitures provided for in this Section regardless of whether they are
actively employed on the last day of the Plan Year or complete a Year
of Service during the Plan Year.
(m) Allocations for Disabled Participants. Notwithstanding
anything herein to the contrary, Participants terminating for reasons
of Total and Permanent Disability shall share in the allocations of
contributions and Forfeitures provided for in this Section regardless
of whether they are actively employed on the last day of the Plan year
or complete a Year of Service during the Plan Year.
(n) Allocations for Retired Participants. Notwithstanding
anything herein to the contrary, Participants terminating for reasons
of retirement shall share in the allocations of contributions and
Forfeitures provided for in this Section regardless of whether they are
actively employed on the last day of the Plan Year or complete a Year
of Service during the Plan Year.
(o) Allocations for Terminated Participants. Notwithstanding
anything herein to the contrary, Participants terminating for reasons
other than death, Total and
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<PAGE>
Permanent Disability, or Early or Normal Retirement, and who are not
actively employed on the last day of the Plan Year, shall not share in
the allocation of contributions and Forfeitures provided for in this
Section.
(p) Separate Accounts for Reemployed Participants. If a Former
Participant is reemployed after five (5) consecutive l-Year Breaks in
Service, then separate accounts shall be maintained as follows:
(1) one account for nonforfeitable benefits
attributable to pre-break service; and
(2) one account representing his status in the Plan
attributable to post-break service.
(q) Failsafe Contribution. Notwithstanding anything to the
contrary, if this is a Plan that would otherwise fail to meet the
requirements of Code Sections 410(b)(1) or 410(b)(2)(A)(i) and the
Regulations thereunder because Employer contributions have not been
allocated to a sufficient number or percentage of Participants for a
Plan Year, then the following rules shall apply:
(1) The group of Participants eligible to share in
the Employer's contribution and Forfeitures for the Plan Year
shall be expanded to include the minimum number of
Participants who would not otherwise be eligible as are
necessary to satisfy the applicable test specified above. The
specific Participants who shall become eligible under the
terms of this paragraph shall be those who are actively
employed on the last day of the Plan Year and, when compared
to similarly situated Participants, have completed the
greatest number of Hours of Service in the Plan Year.
(2) If after application of paragraph (1) above, the
applicable test is still not satisfied, then the group of
Participants eligible to share in the Employer's contribution
and Forfeitures for the Plan Year shall be further expanded to
include the minimum number of Participants who are not
actively employed on the last day of the Plan Year as are
necessary to satisfy the applicable test. The specific
Participants who shall become eligible to share shall be those
Participants, when compared to similarly situated
Participants, who have completed the greatest number of Hours
of Service in the Plan Year before terminating employment.
(3) Nothing in this Section shall permit the
reduction of a Participant's accrued benefit. Therefore any
amounts that have previously been allocated to Participants
may not be reallocated to satisfy these requirements. In such
event, the Employer shall make an additional contribution
equal to the amount such affected Participants would have
received had they been included in the
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<PAGE>
allocations, even if it exceeds the amount which would be
deductible under Code Section 404. Any adjustment to the
allocations pursuant to this paragraph shall be considered a
retroactive amendment, consistent with the provisions of the
Code and Regulations.
4.4 MAXIMUM ANNUAL ADDITIONS
(a) Limits on Annual Additions. Notwithstanding any other
provisions of the Plan, contributions and other additions with respect
to a Participant exceed the limitation of Code Section 415(c) if, when
expressed as an annual addition (within the meaning of Code Section
415(c)(2) to the Participant's Account, such annual addition is greater
than the lesser of:
(1) $30,000, or
(2) 25 percent of the Participant's compensation (as
defined in Code Section 415(c)(3).
For any short "limitation year," the dollar limitation in (1), above,
shall be reduced by a fraction, the numerator of which is the number of
full months in the short "limitation year" and the denominator of which
is twelve (12).
(b) Annual Additions. For purposes of applying the limitations
of Code Section 415, "annual additions" means the sum credited to a
Participant's accounts for any "limitation year" of (1) Employer
contributions, (2) Employee contributions for "limitation years"
beginning after December 31, 1986, (3) Forfeitures, (4) amounts
allocated, after March 31, 1984, to an individual medical account, as
defined in Code Section 415(l)(2) which is part of a pension or annuity
Plan maintained by the Employer, and (5) amounts derived from
contributions paid or accrued after December 31, 1985, in taxable years
ending after such date, which are attributable to post-retirement
medical benefits allocated to the separate account of a key employee
(as defined in Code Section 419A(d)(3)) under a welfare benefit Plan
(as defined in Code Section 419(e)) maintained by the Employer. Except,
however, the "415 Compensation" percentage limitation referred to in
paragraph (a)(2) above shall not apply to: (1) any contribution for
medical benefits (within the meaning of Code Section 419A(f)(2)) after
separation from service which is otherwise treated as an "annual
addition," or (2) any amount otherwise treated as an "annual addition"
under Code Section 415(l)(l).
(c) Exceptions to Annual Additions. For purposes of applying
the limitations of Code Section 415, the following are not "annual
additions": (1) the transfer of funds from one qualified Plan to
another and (2) provided no more than one-third of the Employer
contributions for the year are allocated to Highly Compensated
Participants, Forfeitures of Company Stock purchased with the proceeds
of an Exempt Loan and
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Employer contributions applied to the payment of interest on an Exempt
Loan. In addition, the following are not Employee contributions for the
purposes of Section 4.4(b)(2): (1) rollover contributions (as defined
in Code Sections 402(a)(5), 403(a)(4), 403(b)(8), and 408(d)(3)); (2)
repayments of loans made to a Participant from the Plan; (3) repayments
of distributions received by an Employee pursuant to Code Section
411(a)(7)(B) (i.e., cash-outs); (4) repayments of distributions
received by an Employee pursuant to Code Section 411(a)(3)(D) (i.e.,
mandatory contributions); and (5) Employee contributions to a
simplified employee pension excludable from gross income under Code
Section 408(k)(6).
(d) Limitation Year. For purposes of applying the limitations
of Code Section 415, the "limitation year" shall be the Plan Year.
(e) Annual Adjustments to Limitation. The dollar limitation
under Code Section 415(b)(1)(A) stated in paragraph (a)(1) above shall
be adjusted annually as provided in Code Section 415(d) pursuant to the
Regulations. The adjusted limitation is effective as of January 1 of
each calendar year and is applicable to "limitation years" ending with
or within that calendar year.
(f) Consolidation of Plans. For the purpose of this Section,
all qualified defined benefit plans (whether terminated or not) ever
maintained by the Employer shall be treated as one defined benefit
Plan, and all qualified defined contribution plans (whether terminated
or not) ever maintained by the Employer shall be treated as one defined
contribution Plan.
(g) Consolidation of Employers. For the purpose of this
Section, if the Employer is a member of a controlled group of
corporations, trades, or businesses under common control (as defined by
Code Section 1563(a) or Code Section 414(b) and (c), as modified by
Code Section 415(h)), is a member of an affiliated service group (as
defined by Code Section 414(m)), or is a member of a group of entities
required to be aggregated pursuant to Regulations under Code Section
414(o), all Employees of such Employers shall be considered to be
employed by a single Employer.
(h) Consolidation of Employers under Code Section 413. For the
purpose of this Section, if this Plan is a Code Section 413(c) Plan,
all Employers of a Participant who maintain this Plan will be
considered to be a single Employer.
(i) Special Rules Where Participants Are in More Than One
Defined Contribution Plan.
(1) If a Participant participates in more than one
defined contribution Plan maintained by the Employer which
have different Anniversary Dates, the maximum "annual
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<PAGE>
additions" under this Plan shall equal the maximum "annual
additions" for the "limitation year" minus any "annual
additions" previously credited to such Participant's accounts
during the "limitation year".
(2) If a Participant participates in both a defined
contribution Plan subject to Code Section 412 and a defined
contribution Plan not subject to Code Section 412 maintained
by the Employer which have the same Anniversary Date, "annual
additions" will be credited to the Participant's accounts
under the defined contribution Plan subject to Code Section
412 prior to crediting "annual additions" to the Participant's
accounts under the defined contribution Plan not subject to
Code Section 412.
(3) If a Participant participates in more than one
defined contribution Plan not subject to Code Section 412
maintained by the Employer which have the same Anniversary
Date, the maximum "annual additions" under this Plan shall
equal the product of (A) the maximum "annual additions" for
the "limitation year" minus any "annual additions" previously
credited under subparagraphs (l) or (2) above, multiplied by
(B) a fraction (i) the numerator of which is the "annual
additions" which would be credited to such Participant's
accounts under this Plan without regard to the limitations of
Code Section 415 and (ii) the denominator of which is such
"annual additions" for all plans described in this
subparagraph.
(j) Future Adjustment. Notwithstanding anything contained in
this Section to the contrary, the limitations, adjustments, and other
requirements prescribed in this Section shall at all times comply with
the provisions of Code Section 415 and the Regulations thereunder, the
terms of which are specifically incorporated herein by reference.
4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS
(a) Procedure for Adjustments For Excessive Annual Addition.
If, as a result of the allocation of Forfeitures, a reasonable error in
estimating a Participant's Compensation, a reasonable error in
determining the amount of elective deferrals (within the meaning of
Code Section 402(g)(3)), or other facts and circumstances to which
Regulation 1.415-6(b)(6) shall be applicable, the "annual additions"
under this Plan would cause the maximum "annual additions" to be
exceeded for any Participant, the Administrator shall treat the excess
in accordance with one of the following methods: (1) distribute any
elective deferrals or return any Employee contributions (whether
voluntary or mandatory), and distribute the gains attributable to those
elective deferrals and Employee contributions, to the extent that the
distribution or return would reduce the "excess amount" in the
Participant's accounts, (2) allocate and reallocate the "excess
amounts" to the other Participants' accounts to the extent that the
Section 415 limitations are not exceeded with respect to such
Participants, (3) hold any "excess amount" remaining after the return
of any voluntary Employee contributions in
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a "Section 415 suspense account" and use the "Section 415 suspense
account" in the next "limitation year" (and succeeding limitation years
if necessary) to reduce Employer contributions for that Participant if
that Participant is covered by the Plan as of the end of the
"limitation year," or if the Participant is not so covered, allocate
and reallocate the "Section 415 suspense account" in the next
"limitation year" (and succeeding limitation years if necessary) to all
Participants in the Plan before any Employer or Employee contributions
which would constitute "annual additions" are made to the Plan for such
"limitation year" or (4) reduce Employer contributions to the Plan for
such "limitation year" by the amount of the "Section 415 suspense
account" allocated and reallocated during such "limitation year."
(b) Determination of Excess Amounts. For purposes of this
Article, "excess amount" for any Participant for a "limitation year"
shall mean the excess, if any, of (l) the "annual additions" which
would be credited to his account under the terms of the Plan without
regard to the limitations of Code Section 415 over (2) the maximum
"annual additions" determined pursuant to Section 4.4.
(c) Section 415 Suspense Account. For purposes of this
Section, "Section 415 suspense account" shall mean an unallocated
account equal to the sum of "excess amounts" for all Participants in
the Plan during the "limitation year." The "Section 415 suspense
account" shall not share in any earnings or losses of the Trust Fund.
(d) Limitation on Distribution of Excess Amounts. The Plan may
not distribute "excess amounts," other than voluntary Employee
contributions, to Participants or Former Participants.
4.6 DIRECTED INVESTMENT ACCOUNT
(a) Diversification Requirements. Each "Qualified Participant"
may elect within ninety (90) days after the close of each Plan Year
during the "Qualified Election Period" to direct the Trustee in writing
as to the investment of 25 percent of the total number of shares of
Company Stock acquired by or contributed to the Plan that have ever
been allocated to such "Qualified Participant's" Company Stock Account
(reduced by the number of shares of Company Stock previously invested
pursuant to a prior election). In the case of the election year in
which the Participant can make his last election, the preceding
sentence shall be applied by substituting "50 percent" for "25
percent". If the "Qualified Participant" elects to direct the Trustee
as to the investment of his Company Stock Account, such direction shall
be effective no later than 180 days after the close of the Plan Year to
which such direction applies.
Notwithstanding the above, if the fair market value
(determined pursuant to Section 6.1 at the Plan valuation date
immediately preceding the first day on which a
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"Qualified participant" is eligible to make an election) of Company
Stock acquired or contributed to the Plan and allocated to a "Qualified
Participant's" Company Stock Account is $500 or less, then such Company
Stock shall not be subject to this paragraph. For purposes of
determining whether the fair market value exceeds $500, Company Stock
held in accounts of all employee stock ownership plans (as defined in
Code Section 4975(e)(7)) and tax credit employee stock ownership plans
(as defined in Code Section 409(a)) maintained by the Employer or any
Affiliated Employer shall be considered as held by the Plan.
For the purposes of this Section, the following definitions
shall apply:
(1) "Qualified Participant" means any Participant or
Former Participant who has completed ten (10) Years of Service
as a Participant and has attained age 55.
(2) "Qualified Election Period" means the six (6)
Plan Year period beginning with the later of (i) the first
Plan Year in which the Participant first became a "Qualified
Participant", or (ii) the first Plan Year beginning after
December 31, 1986.
(b) Accounting. A separate Directed Investment Account shall
be established for each Participant who has directed an investment.
Transfers between the Participant's regular account and his Directed
Investment Account shall be charged and credited as the case may be to
each account. The Directed Investment Account shall not share in Trust
Fund earnings, but it shall be charged or credited as appropriate with
the net earnings, gains, losses, and expenses as well as any
appreciation or depreciation in market value during each Plan Year
attributable to such account.
4.7 TOP HEAVY RULES
(a) Top Heavy Plan Requirements. For any Top Heavy Plan Year,
the Plan shall provide the special vesting requirements of Code Section
416(b) pursuant to Section 7.5 of the Plan and the special minimum
allocation requirements of Code Section 416(c) pursuant to Section 4.3
of the Plan.
(b) Determination of Top Heavy Status. This Plan shall be a
Top Heavy Plan for any Plan Year in which, as of the Determination
Date, (1) the Present Value of Accrued Benefits of Key Employees and
(2) the sum of the Aggregate Accounts of Key Employees under this Plan
and all plans of an Aggregation Group, exceeds sixty percent (60%) of
the Present Value of Accrued Benefits and the Aggregate Accounts of all
Key and Non-Key Employees under this Plan and all plans of an
Aggregation Group.
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If any Participant is a Non-Key Employee for any Plan Year,
but such Participant was a Key Employee for any prior Plan Year, such
Participant's Present Value of Accrued Benefit and/or Aggregate Account
balance shall not be taken into account for purposes of determining
whether this Plan is a Top Heavy or Super Top Heavy Plan (or whether
any Aggregation Group which includes this Plan is a Top Heavy Group).
In addition, if a Participant or Former Participant has not performed
any services for any Employer maintaining the Plan at any time during
the five year period ending on the Determination Date, any accrued
benefit for such Participant or Former Participant shall not be taken
into account for the purposes of determining whether this Plan is a Top
Heavy or Super Top Heavy Plan.
(c) Super Top Heavy Status. This Plan shall be a Super Top
Heavy Plan for any Plan Year in which, as of the Determination Date,
(1) the Present Value of Accrued Benefits of Key Employees and (2) the
sum of the Aggregate Accounts of Key Employees under this Plan and all
plans of an Aggregation Group, exceeds ninety percent (90%) of the
Present Value of Accrued Benefits and the Aggregate Accounts of all Key
and Non-Key Employees under this Plan and all plans of an Aggregation
Group.
(d) Aggregate Account. A Participant's Aggregate Account as of
the Determination Date is the sum of the following:
(1) his Participant's Account balance as of the most
recent valuation occurring within a 12 month period ending on
the Determination Date;
(2) an adjustment for any contributions due as of the
Determination Date. Such adjustment shall be the amount of any
contributions actually made after the valuation date but due
on or before the Determination Date, except for the first Plan
Year when such adjustment shall also reflect the amount of any
contributions made after the Determination Date that are
allocated as of a date in that first Plan Year;
(3) any Plan distributions made within the Plan Year
that includes the Determination Date or within the four (4)
preceding Plan Years. However, in the case of distribution
made after the valuation date and prior to the Determination
Date, such distributions are not included as distributions for
top heavy purposes to the extent that such distributions are
already included in the Participant's Aggregate Account
balance as of the Valuation Date. Notwithstanding anything
herein to the contrary, all distributions, including
distributions made prior to January 1, 1987, and distributions
under a terminated plan which if it had not been terminated
would have been required to be included in an Aggregation
Group, will be counted. Further, distributions from the Plan
(including the cash value of life insurance policies) of a
Participant's account balance because of death shall be
treated as a distribution for the purposes of this paragraph;
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(4) any Employee contributions, whether voluntary or
mandatory. However, amounts attributable to tax deductible
qualified deductible employee contributions shall not be
considered to be a part of the Participant's Aggregate Account
balance;
(5) with respect to unrelated rollovers and
plan-to-plan transfers (ones which are both initiated by the
Employee and made from a plan maintained by one employer to a
plan maintained by another employer), if this Plan provides
the rollovers or plan-to-plan transfers, it shall always
consider such rollovers or plan-to-plan transfers as a
distribution for the purposes of this Section. If this Plan is
the plan accepting such rollovers or plan-to-plan transfers,
it shall not consider such rollovers or plan-to-plan transfers
accepted after December 31, 1983 as part of the Participant's
Aggregate Account balance. However, rollovers or plan-to-plan
transfers accepted prior to January 1, 1984 shall be
considered as part of the Participant's Aggregate Account
Balance;
(6) with respect to related rollovers and
plan-to-plan transfers (ones either not initiated by the
Employee or made to a plan maintained by the same employer),
if this Plan provides the rollover or plan-to-plan transfer,
it shall not be counted as a distribution for purposes of this
Section. If this Plan is the plan accepting such rollover or
plan-to-plan transfer, it shall consider such rollover or
plan-to-plan transfer as part of the Participant's Aggregate
Account balance, irrespective of the date on which such
rollover or plan-to-plan transfer is accepted;
(7) for the purposes of determining whether two
employers are to be treated as the same employer in (5) and
(6) above, all employers aggregated under Code Section 414(b),
(c), (m), and (o) are treated as the same employer.
(e) Aggregation Group. Aggregation Group means either a
Required Aggregation Group or a Permissive Aggregation Group as
hereinafter determined.
(1) Required Aggregation Group: In determining a
Required Aggregation Group hereunder, each plan of the
Employer in which a Key Employee is a participant in the Plan
Year containing the Determination Date or any of the four
preceding Plan Years, and each other plan of the Employer
which enables any plan in which a Key Employee participates to
meet the requirements of Code Sections 401(a)(4) or 410, will
be required to be aggregated. Such group shall be known as a
Required Aggregation Group.
In the case of a Required Aggregation Group, each
plan in the group will be considered a Top Heavy Plan if the
Required Aggregation Group is a Top Heavy Group. No plan in
the Required Aggregation Group will be considered a Top Heavy
Plan if the Required Aggregation Group is not a Top Heavy
Group.
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(2) Permissive Aggregation Group: The Employer may
also include any other plan not required to be included in the
Required Aggregation Group, provided the resulting group,
taken as a whole, would continue to satisfy the provisions of
Code Sections 401(a)(4) and 410. Such group shall be known as
a Permissive Aggregation Group.
In the case of a Permissive Aggregation Group, only a
plan that is part of the Required Aggregation Group will be
considered a Top Heavy Plan if the Permissive Aggregation
Group is a Top Heavy Group. No plan in the Permissive
Aggregation Group will be considered a Top Heavy Plan if the
Permissive Aggregation Group is not a Top Heavy Group.
(3) Only those plans of the Employer in which the
Determination Dates fall within the same calendar year shall
be aggregated in order to determine whether such plans are Top
Heavy Plans.
(4) An Aggregation Group shall include any terminated
plan of the Employer if it was maintained within the last five
(5) years ending on the Determination Date.
(f) Determination Date. Determination Date means (a) the last
day of the preceding Plan Year, or (b) in the case of the first Plan
Year, the last day of such Plan Year.
(g) Present Value of Accrued Benefit. In the case of a defined
benefit plan, the Present Value of Accrued Benefit for a Participant
other than a Key Employee, shall be as determined using the single
accrual method used for all plans of the Employer and Affiliated
Employers, or if no such single method exists, using a method which
results in benefits accruing not more rapidly than the slowest accrual
rate permitted under Code Section 411(b)(1)(C). The determination of
the Present Value of Accrued Benefit shall be determined as of the most
recent valuation date that falls within or ends with the 12-month
period ending on the Determination Date except as provided in Code
Section 416 and the Regulations thereunder for the first and second
plan years of a defined benefit plan.
(h) Top Heavy Group. Top Heavy Group means an Aggregation
Group in which, as of the Determination Date, the sum of the following
exceed sixty percent (60%) of a similar sum determined for all
Participants.
(1) the Present Value of Accrued Benefits of Key
Employees under all defined benefit plans included in the
group; and
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(2) the Aggregate Accounts of Key Employees under all
defined contribution plans included in the group.
ARTICLE V
FUNDING AND INVESTMENT POLICY
5.1 INVESTMENT POLICY
(a) Primary Investment. The Plan is designed to invest
primarily in Company Stock.
(b) Other Investments. With due regard to subparagraph (a)
above, the Administrator may also direct the Trustee to invest funds
under the Plan in other property described in the Trust or in life
insurance policies to the extent permitted by subparagraph (c) below,
or the Trustee may hold such funds in cash or cash equivalents.
(c) Insurance. With due regard to subparagraph (a) above, the
Administrator may also direct the Trustee to invest funds under the
Plan in insurance policies on the life of any "keyman" Employee. The
proceeds of a "keyman" insurance policy may not be used for the
repayment of any indebtedness owed by the Plan which is secured by
Company Stock. In the event any "keyman" insurance is purchased by the
Trustee, the premiums paid thereon during any Plan Year, net of any
policy dividends and increases in cash surrender values, shall be
treated as the cost of Plan investment and any death benefit or cash
surrender value received shall be treated as proceeds from an
investment of the Plan.
(d) Purchase Contingencies. The Plan may not obligate itself
to acquire Company Stock from a particular holder thereof at an
indefinite time determined upon the happening of an event such as the
death of the holder.
(e) Put Options. The Plan may not obligate itself to acquire
Company Stock under a put option binding upon the Plan. However, at the
time a put option is exercised, the Plan may be given an option to
assume the rights and obligations of the Employer under a put option
binding upon the Employer.
(f) Fair Market Value. All purchases of Company Stock shall be
made at a price which, in the judgment of the Administrator, does not
exceed the fair market value thereof. All sales of Company Stock shall
be made at a price which, in the judgment of the Administrator, is not
less than the fair market value thereof. The valuation rules set forth
in Article VI shall be applicable.
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5.2 EMPLOYER SECURITIES AND REAL PROPERTY
The Plan is designed to invest in "qualifying Employer securities" and
"qualifying Employer real property," as those terms are defined the Act,
provided, however, that immediately after the acquisition of such qualifying
Employer securities and qualifying Employer real property, the fair market value
of all such securities and property in the Trust Fund shall not exceed 100% of
the fair market value of all the assets in the Trust Fund.
5.3 APPLICATIONS OF CASH
Employer contributions determined pursuant to Section 4.1(a) and other
cash received by the Trust Fund shall first be applied to pay any Current
Obligations of the Trust Fund.
5.4 TRANSACTIONS INVOLVING COMPANY STOCK
(a) Limitations upon Nonrecognition of Gain. No portion of the
Trust Fund attributable to (or allocable in lieu of) Company Stock
acquired by the Plan in a sale to which Code Section 1042 applies may
accrue or be allocated directly or indirectly under any plan maintained
by the Employer meeting the requirements of Code Section 401(a):
(1) during the "Nonallocation Period", for the
benefit of
(i) any taxpayer who makes an election under
Code Section 1042(a) with respect to Company Stock,
(ii) any individual who is related to the
taxpayer (within the meaning of Code Section 267(b)),
or
(2) for the benefit of any other person who owns
(after application of Code Section 318(a) applied without
regard to the employee trust exception in Code Section
318(a)(2)(B)(i)) more than 25 percent of
(i) any class of outstanding stock of the
Employer or Affiliated Employer which issued such
Company Stock, or
(ii) the total value of any class of
outstanding stock of the Employer or Affiliated
Employer.
(b) Special Rule for Lineal Descendant. Except, however,
subparagraph (a)(1)(ii) above shall not apply to lineal descendants of
the taxpayer, provided that the aggregate amount allocated to the
benefit of all such lineal descendants during the "Nonallocation
Period" does not exceed more than five (5) percent of the Company Stock
(or amounts allocated in lieu thereof) held by the Plan which are
attributable to a sale to
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the Plan by any person related to such descendants (within the meaning
of Code Section 267(c)(4)) in a transaction to which Code Section 1042
is applied.
(c) Period of Limitation. A person shall be treated as failing
to meet the stock ownership limitation under paragraph (a)(2) above if
such person fails such limitation:
(1) at any time during the one (1) year period ending
on the date of sale of Company Stock to the Plan or
(2) on the date as of which Company Stock is
allocated to Participants in the Plan.
(d) Nonallocation Period. For purposes of this Section,
"Nonallocation Period" means the period beginning on the date of the
sale of the Company Stock and ending on the later of:
(1) the date which is ten (10) years after the date
of sale, or
(2) the date of the Plan allocation attributable to
the final payment of the Exempt Loan incurred in connection
with such sale.
5.5 LOANS TO THE TRUST
(a) Use of Loan Proceeds. The Plan may borrow money for any
lawful purpose, provided the proceeds of an Exempt Loan are used within
a reasonable time after receipt only for any or all of the following
purposes:
(1) To acquire Company Stock.
(2) To repay such loan.
(3) To repay a prior Exempt Loan.
(b) Disqualified Pension Transaction. All loans to the Trust
which are made or guaranteed by a disqualified person must satisfy all
requirements applicable to Exempt Loans including but not limited to
the following:
(1) The loan must be at a reasonable rate of
interest;
(2) The amount of interest paid shall not exceed the
amount of each payment which would be treated as interest
under standard loan amortization tables;
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(3) Any collateral pledged to the creditor by the
Plan shall consist only of the Company Stock purchased with
the borrowed funds;
(4) Under the terms of the loan, any pledge of
Company Stock shall provide for the release of shares so
pledged on a pro-rata basis pursuant to Section 4.3(f);
(5) Under the terms of the loan, the creditor shall
have no recourse against the Plan except with respect to such
collateral, earnings attributable to such collateral, Employer
contributions (other than contributions of Company Stock) that
are made to meet current obligations and earnings attributable
to such contributions;
(6) 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;
(7) The term of the loan (including the sum of the
expired duration of the loan, any renewal period, any
extension period, and the duration of any new loan) shall not
exceed ten (10) years;
(8) The 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;
(9) In the event of default upon an Exempt Loan, the
value of the Trust Fund transferred in satisfaction of the
Exempt Loan shall not exceed the amount of default. If the
lender is a disqualified person, an Exempt Loan shall provide
for a transfer of Trust Funds upon default only upon and to
the extent of the failure of the Plan to meet the payment
schedule of the Exempt Loan;
(10) Exempt Loan payments during a Plan Year must not
exceed an amount equal to (A) the sum, over all Plan Years, of
all contributions and cash dividends paid by the Employer to
the Plan with respect to such Exempt Loan and earnings on such
Employer contributions and cash dividends, less (B) the sum of
the Exempt Loan payments in all preceding Plan Years. A
separate accounting shall be maintained for such Employer
contributions, cash dividends and earnings until the Exempt
Loan is repaid.
(c) Definition. For purposes of this Section, the term
"disqualified person" means a person who is a Fiduciary, a person
providing services to the Plan, an Employer any of whose Employees are
covered by the Plan, an employee organization any of whose members are
covered by the Plan, an owner, direct or indirect, of 50% or more of
the total combined voting power of all classes of voting stock or of
the total value of all
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classes of the stock, or an officer, director, 10% or more shareholder,
or a highly compensated Employee.
ARTICLE VI
VALUATIONS
6.1 VALUATION OF THE TRUST FUND
The Administrator shall direct the Trustee, as of each Anniversary
Date, and at such other date or dates deemed necessary by the Administrator,
herein called "valuation date," to determined the net worth of the assets
comprising the Trust Fund as it exists on the "valuation date." 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" and shall deduct all expenses
for which the Trustee has not yet obtained reimbursement from the Employer or
the Trust Fund.
6.2 METHOD OF VALUATION
Valuations must be made in good faith and based on all relevant factors
for determining the fair market value of securities. In the case of a
transaction between a Plan and a disqualified person, value must be determined
as of the date of the transaction. For all other Plan purposes, value must be
determined as of the most recent valuation date under the Plan. An independent
appraisal will not in itself be deemed to be a good faith determination of value
with respect to a transaction between the Plan and a disqualified person.
However, in other cases, a determination of fair market value based on at least
an annual appraisal independently arrived at by a person who customarily makes
such appraisals and who is independent of any party to the transaction will be
deemed to be a good faith determination of value. Company Stock not readily
tradeable on an established securities market shall be valued by an independent
appraiser meeting requirements similar to the requirements of the Regulations
prescribed under Code Section 170(a)(1).
ARTICLE VII
DETERMINATION AND DISTRIBUTION OF BENEFITS
7.1 DETERMINATION OF BENEFITS UPON RETIREMENT
Every Participant may terminate his employment with the
Employer and retire for the purposes hereof on his Early Retirement
Date or Normal Retirement Date. However, a Participant may postpone the
termination of his employment with the Employer to a later date, in
which event the participation of such Participant in the Plan,
including the right to receive allocations pursuant to Section 4.3
shall continue until his Late Retirement Date. Upon a Participant's
Retirement Date, or as soon thereafter as is
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practicable, the Trustee shall distribute all amounts credited to such
Participant's Account in accordance with Section 7.5.
7.2 DETERMINATION OF BENEFITS UPON DEATH
(a) Death of Participant. Upon the death of a Participant
before his Retirement Date or other termination of his employment, all
amounts credited to such Participant's Account shall become fully
Vested. If elected, distribution of the Participant's Account shall
commence not later than one (1) year after the close of the Plan Year
in which such Participant's death occurs. The Administrator shall
direct the Trustee, in accordance with the provisions of Sections 7.5
and 7.6 to distribute the value of the deceased Participant's accounts
to the surviving Beneficiary designated by the Participant or, if none,
to the Participant's spouse, if living, or if there is no spouse
living, to the Participant's issue, per stirpes, or if neither the
Participant's spouse nor any of his issue are living, then to such
Participant's estate.
(b) Death of Former Participant. Upon the death of a Former
Participant, the Administrator shall direct the Trustee, in accordance
with the provisions of Sections 7.5 and 7.6, to distribute any
remaining amounts credited to the accounts of a deceased Former
Participant to any surviving Beneficiary designated by him or, if none,
to the Participant's spouse, if living, or if there is no spouse
living, to the Participant's issue, per stirpes, or if neither the
Participant's spouse nor any of his issue are living, then to such
Participant's estate.
(c) Proof of Death. The Administrator may require such proper
proof of death and such evidence of the right of any person to receive
payment of the value of the account of a deceased Participant or Former
Participant as the Administrator may deem desirable. The
Administrator's determination of death and of the right of any person
to receive payment shall be conclusive.
(d) Spouse as Primary Beneficiary. The Beneficiary of the
death benefit payable pursuant to this Section shall be the
Participant's spouse. Except, however, the Participant may designate a
Beneficiary other than his spouse if:
(1) the spouse has waived the right to be the
Participant's Beneficiary, or
(2) the Participant is legally separated or has been
abandoned (within the meaning of local law) and the
Participant has a court order to such effect (and there is no
"qualified domestic relations order" as defined in Code
Section 414(p) which provides otherwise), or
(3) the Participant has no spouse, or
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(4) the spouse cannot be located.
In such event, the designation of a Beneficiary shall be made
on a form satisfactory to the Administrator. A Participant may at any
time revoke his designation of a Beneficiary or change his Beneficiary
by filing written notice of such revocation or change with the
Administrator. However, the Participant's spouse must again consent in
writing to any change in Beneficiary unless the original consent
acknowledged that the spouse had the right to limit consent only to a
specific Beneficiary and that the spouse voluntarily elected to
relinquish such right. In the event no valid designation of Beneficiary
exists at the time of the Participant's death, the death benefit shall
be payable to his estate.
(e) Disclaimer by Beneficiary. In the event the designated, or
any successor, Beneficiary disclaims, in a manner qualifying under Code
Section 2518, all or any portion of the benefits payable to him
hereunder, the amount so disclaimed shall be payable in accordance with
the written directions of the Participant to the successor Beneficiary
designated by the Participant or provided under this Plan.
(f) Waiver of Beneficiary. Any consent by the Participant's
spouse to waive any rights to the death benefit must be in writing,
must acknowledge the effect of such waiver, and be witnessed by a Plan
representative or a notary public. Further, the spouse's consent must
be irrevocable and must acknowledge the specific non-spouse
Beneficiary. Any consent by a spouse shall be effective only with
respect to the spouse executing the consent.
7.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY
In the event of a Participant's Total and Permanent Disability prior to
his Retirement Date or other termination of his employment, all amounts credited
to such Participant's Account shall become fully Vested. In the event of a
Participant's Total and Permanent Disability, the Trustee, in accordance with
the provisions of Sections 7.5 and 7.6, shall distribute to such Participant all
amounts credited to such Participant's Account as though he had retired. If such
Participant elects, distribution shall commence not later than one (1) year
after the close of the Plan Year in which Total and Permanent Disability occurs.
7.4 DETERMINATION OF BENEFITS UPON TERMINATION
(a) Time and Manner of Distribution. If a Participant's
employment with the Employer is terminated for any reason other than
death, Total and Permanent Disability or retirement, such Participant
shall be entitled to such benefits as are provided hereinafter pursuant
to this Section 7.4.
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Distribution of the funds due to a Terminated Participant
shall be made on the occurrence of an event which would result in the
distribution had the Terminated Participant remained in the employ of
the Employer (upon the Participant's death, Total and Permanent
Disability, Early or Normal Retirement). However, at the election of
the Participant, the Administrator shall direct the Trustee to cause
the entire Vested portion of the Terminated Participant's Account to be
payable as soon as administratively feasible after the end of the Plan
Year during which such Terminated Participant incurs a 1-Year Break in
Service. In the event that the Terminated Participant does not elect to
commence the distribution pursuant to the preceding sentence, such
Terminated Participant may elect to commence such distribution
determined on the last day of each succeeding Plan Year and payable in
accordance with Section 7.5 as soon as administratively feasible
thereafter. Distribution to a Terminated Participant shall not include
any Company Stock acquired with the proceeds of an Exempt Loan until
the close of the Plan Year in which such loan is repaid in full. Any
distribution under this paragraph shall be made in a manner which is
consistent with and satisfies the provisions of Sections 7.5 and 7.6,
including, but not limited to, all notice and consent requirements of
Code Section 411(a)(11) and the Regulations thereunder.
If the value of a Terminated Participant's Vested benefit
derived from Employer and Employee contributions has never exceeded
$5,000, the Administrator shall direct the Trustee to cause the entire
Vested benefit to be paid to such Participant in a single lump sum as
soon as administratively feasible after the Anniversary Date following
his termination of employment.
For purposes of this Section 7.4, if the value of a Terminated
Participant's Vested benefit is zero, the Terminated Participant shall
be deemed to have received a distribution of such Vested benefit.
If a portion of a Participant's Account is forfeited, Company
Stock allocated to the Participant's Company Stock Account must be
forfeited only after the Participant's Other Investments Account has
been depleted. If interest in more than one class of Company Stock has
been allocated to a Participant's Account, the Participant must be
treated as forfeiting the same proportion of each such class.
(b) Investment of Funds of Former Participants. On or before
the valuation date coinciding with or subsequent to the termination of
a Participant's employment for any reason other than death, Total and
Permanent Disability, or retirement, the Administrator may direct the
Trustee to segregate the amount of the Vested portion of such
Terminated Participant's Account and invest the aggregate amount
thereof in a separate, federally insured savings account, certificate
of deposit, common or collective trust fund of a bank, or a deferred
annuity. In the event the Vested portion of a Participant's Account is
not segregated, the amount shall remain in a separate account for the
Terminated Participant and share in net gains or losses of the general
Trust Fund pursuant to Section 4.4(d) until such time as a distribution
is made to the Terminated Participant. The amount of the Terminated
Participant's Account which is not Vested
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may be credited to a separate account for the Terminated Participant
(which will continue to share in gains and losses of the Trust) and at
such time as the amount becomes a Forfeiture shall be applied pursuant
to Section 4.3.
In the event that the amount of the Vested portion of the
Terminated Participant's Account equals or exceeds the cash surrender
value of any insurance Contracts, the Trustee, when so directed by the
Administrator and agreed to by the Terminated Participant, shall
assign, transfer, and set over to such Terminated Participant all
Contracts on his life in such form or with such endorsements so that
the settlement options and forms of payment are consistent with the
options and forms of payment permitted under the provisions of Section
7.5. In the event that the Terminated Participant's Vested portion does
not at least equal the cash surrender value of the Contracts, if any,
the Terminated Participant may pay over to the Trustee the sum needed
to make the distribution equal to the value of the Contracts being
assigned or transferred, or the Trustee, pursuant to the Participant's
election, may borrow the cash surrender value of the Contracts from the
insurer and then assign the Contracts to the Terminated Participant.
(c) Vesting Schedule. The Vested portion of any Participant's
Account shall be a percentage of the total amount credited to his
Participant's Account determined on the basis of the Participant's
number of Years of Service according to the following vesting schedule:
Years of Service Percentage
-------------- ------------
Less than 3 0%
3 20%
4 40%
5 60%
6 80%
7 or more 100%
Notwithstanding the vesting provided for above, for any Top
Heavy Plan Year, the Vested Portion of the Participant's Account of any
Participant who has an Hour of Service after the Plan becomes top heavy
shall be a percentage of the total amount credited to his Participant's
Account determined on the basis of the Participant's number of Years of
Service according to the following vesting schedule:
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Years of Service Percentage
----------------- ------------
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
If in any subsequent Plan Year, the Plan ceases to be a Top
Heavy Plan, the Administrator shall revert to the vesting schedule in
effect before this Plan became a Top Heavy Plan. Any such reversion
shall be treated as a Plan amendment pursuant to Section 7.4(e) of the
Plan.
(d) Discontinuance of Contribution or Termination of Plan.
Notwithstanding the vesting schedule above, upon the complete
discontinuance of the Employer's contributions to the Plan or upon any
full or partial termination of the Plan, all amounts credited to the
account of any affected Participant shall become 100% Vested and shall
not thereafter be subject to Forfeiture.
(e) Effect of Amendment; Election of Prior Vesting Schedule.
The computation of a Participant's nonforfeitable percentage of his
interest in the Plan shall not be reduced as the result of any direct
or indirect amendment to this Plan. For this purpose, the Plan shall be
treated as having been amended if the Plan provides for an automatic
change in vesting due to a change in top heavy status. In the event
that the Plan is amended to change or modify any vesting schedule, a
Participant with at least three (3) Years of Service as of the
expiration date of the election period may elect to have his
nonforfeitable percentage computed under the Plan without regard to
such amendment. If a Participant fails to make such election, then such
Participant shall be subject to the new vesting schedule. The
Participant's election period shall commence on the adoption date of
the amendment and shall end 60 days after the latest of:
(1) the adoption date of the amendment,
(2) the effective date of the amendment, or
(3) the date the Participant receives written notice
of the amendment from the Employer or Administrator.
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(f) Reemployment of Participant; Determination of
Vesting.
(1) If any Former Participant shall be reemployed by
the Employer before a 1-Year Break in Service occurs, he shall
continue to participate in the Plan in the same manner as if
such termination had not occurred.
(2) If any Former Participant shall be reemployed by
the Employer before five (5) consecutive 1-Year Breaks in
Service, and such Former Participant had received (or was
deemed to have received) a distribution of his entire Vested
interest prior to his reemployment, his forfeited account
shall be reinstated only if he repays the full amount
distributed to him before the earlier of five (5) years after
the first date on which the Participant is subsequently
reemployed by the Employer or the close of the first period of
5 consecutive 1-Year Breaks in Service commencing after the
distribution or, in the event of a deemed distribution, upon
the reemployment of such Former Participant. In the event the
Former Participant does repay the full amount distributed to
him, or in the event of a deemed distribution, the
undistributed portion of the Participant's Account must be
restored in full, unadjusted by any gains or losses occurring
subsequent to the valuation date preceding his termination.
The source for such reinstatement shall first be any
Forfeitures occurring during the year. If such source is
insufficient, then the Employer shall contribute an amount
which is sufficient to restore any such forfeited Accounts
provided, however, that if a discretionary contribution is
made for such year, such contribution shall first be applied
to restore any such Accounts and the remainder shall be
allocated in accordance with Section 4.3.
(3) If any Former Participant is reemployed after a
1-Year Break in Service has occurred, Years of Service shall
include Years of Service prior to his 1-Year Break in Service
subject to the following rules:
(i) If a Former Participant has a l-Year
Break in Service, his pre-break and post-break
service shall be used for computing Years of Service
for eligibility and for vesting purposes only after
he has been employed for one (1) Year of Service
following the date of his reemployment with the
Employer;
(ii) Any Former Participant who under the
Plan does not have a nonforfeitable right to any
interest in the Plan resulting from Employer
contributions shall lose credits otherwise allowable
under (i) above if his consecutive l-Year Breaks in
Service equal or exceed the greater of (A) five (5),
or (B) the aggregate number of his pre-break Years of
Service;
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(iii) After five (5) consecutive l-Year
Breaks in Service, a Former Participant's Vested
Account balance attributable to pre-break service
shall not be increased as a result of post-break
service;
(iv) If a Former Participant who has not had
his Years of Service before a l-Year Break in Service
disregarded pursuant to (ii) above completes one (l)
Year of Service for eligibility purposes following
his reemployment with the Employer, he shall
participate in the Plan retroactively from his date
of reemployment;
(v) If a Former Participant who has not had
his Years of Service before a l-Year Break in Service
disregarded pursuant to (ii) above completes a Year
of Service (a l-Year Break in Service previously
occurred, but employment had not terminated), he
shall participate in the Plan retroactively from the
first day of the Plan Year during which he completes
one (1) Year of Service.
7.5 DISTRIBUTION OF BENEFITS
(a) Form of Distribution. The Administrator, pursuant to the
election of the Participant, shall direct the Trustee to distribute to
a Participant or his Beneficiary any amount to which he is entitled
under the Plan in one or more of the following methods:
(1) One lump-sum payment;
(2) Payments over a period certain in monthly,
quarterly, semiannual, or annual installments. The period over
which such payment is to be made shall not extend beyond the
earlier of the Participant's life expectancy (or the life
expectancy of the Participant and his designated Beneficiary)
or the limited distribution period provided for in Section
7.5(b).
(b) Large Account Balance. Unless the Participant elects in
writing a longer distribution period, distributions to a Participant or
his Beneficiary attributable to Company Stock shall be in substantially
equal monthly, quarterly, semiannual, or annual installments over a
period not longer than five (5) years. In the case of a Participant
with an account balance attributable to Company Stock in excess of
$500,000, the five (5) year period shall be extended one (1) additional
year (but not more than five (5) additional years) for each $100,000 or
fraction thereof by which such balance exceeds $500,000. The dollar
limits shall be adjusted at the same time and in the same manner as
provided in Code Section 415(d) and for 1998 the account balance
limitation has increased to $725,000, with each additional year at
$145,000.
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(c) Distributions Prior to Normal Retirement Date. Any
distribution to a Participant who has a benefit that does not exceed
$5,000, and has never exceeded $5,000 at the time of any prior
distribution, shall require such Participant's consent if such
distribution commences prior to the later of his Normal Retirement Age
or age 62. With regard to this required consent:
(1) The Participant must be informed of his right to
defer receipt of the distribution. If a Participant fails to
consent, it shall be deemed an election to defer the
commencement of payment of any benefit. However, any election
to defer the receipt of benefits shall not apply with respect
to distributions which are required under Section 7.5(e).
(2) Notice of the rights specified under this
paragraph shall be provided no less than 30 days and no more
than 90 days before the first day on which all events have
occurred which entitle the Participant to such benefit.
(3) Written consent of the Participant to the
distribution must not be made before the Participant receives
the notice and must not be made more than 90 days before the
first day on which all events have occurred which entitle the
Participant to such benefit.
(4) No consent shall be valid if a significant
detriment is imposed under the Plan on any Participant who
does not consent to the distribution.
If a distribution is one to which Code Sections 401(a)(11) and
417 do not apply, such distribution may commence less than 30 days
after the notice required under Regulation 1.411(a)-11(c) is given,
provided that: (1) the Administrator clearly informs the Participant
that the Participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution
option), and (2) the Participant, after receiving the notice,
affirmatively elects a distribution.
(d) Cash Dividends. Notwithstanding anything herein to the
contrary, the Administrator, in his sole discretion, may direct that
cash dividends on shares of Company Stock allocable to Participants' or
Former Participants' Company Stock Accounts be distributed to such
Participants or Former Participants within 90 days after the close of
the Plan Year in which the dividends are paid.
(e) Retained Benefits. Any part of a Participant's benefit
which is retained in the Plan after the Anniversary Date on which his
participation ends will continue to be treated as a Company Stock
Account or as an Other Investments Account (subject to Section 7.4(a))
as provided in Article IV. However, neither account will be credited
with any further Employer contributions or Forfeitures.
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(f) Limitations on Distributions. Notwithstanding any
provision in the Plan to the contrary, the distribution of a
Participant's benefits shall be made in accordance with the following
requirements and shall otherwise comply with Code Section 401(a)(9) and
the Regulations thereunder (including Regulation 1.401(a)(9)-2), the
provisions of which are incorporated herein by reference:
(1) A Participant's benefits shall be distributed to
him not later than April 1 of the calendar year following the
later of (i) the calendar year in which the Participant
attains age 70 1/2 or (ii) the calendar year in which the
Participant retires, provided, however, that this clause (ii)
shall not apply in the case of a Participant who is a "five
percent (5%) owner" at any time during the five (5) Plan Year
period ending in the calendar year in which he attains age 70
1/2 or, in the case of a Participant who becomes a "five
percent (5%) owner" during any subsequent Plan Year, clause
(ii) shall no longer apply and the required beginning date
shall be the April 1 of the calendar year following the
calendar year in which such subsequent Plan Year ends.
Alternatively, distributions to a Participant must
begin no later than the applicable April 1 as determined under
the preceding paragraph and must be made over a period certain
measured by the life expectancy of the Participant (or the
life expectancies of the Participant and his designated
Beneficiary) in accordance with Regulations.
(2) Distributions to a Participant and his
Beneficiaries shall only be made in accordance with the
incidental death benefit requirements of Code Section
401(a)(9)(G) and the Regulations thereunder.
(g) Commencement of Death Benefits. Notwithstanding
any provision in the Plan to the contrary, distributions upon the death
of a Participant shall be made in accordance with the following
requirements and shall otherwise comply with Code Section 401(a)(9) and
the Regulations thereunder. If it is determined pursuant to Regulations
that the distribution of a Participant's interest has begun and the
Participant dies before his entire interest has been distributed to
him, the remaining portion of such interest shall be distributed at
least as rapidly as under the method of distribution selected pursuant
to Section 7.5 as of his date of death. If a Participant dies before he
has begun to receive any distributions of his interest under the Plan
or before distributions are deemed to have begun pursuant to
Regulations, then his death benefit shall be distributed to his
Beneficiaries by December 31st of the calendar year in which the fifth
anniversary of his date of death occurs.
However, the five-year distribution requirement of the
preceding paragraph shall not apply to any portion of the deceased
Participant's interest which is payable to or for the benefit of a
designated Beneficiary. In such event, such portion may, at the
election of the Participant (or the Participant's designated
Beneficiary), be distributed over the life
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of such designated Beneficiary (or over a period not extending beyond
the life expectancy of such designated Beneficiary) provided such
distribution begins not later than December 31st of the calendar year
immediately following the calendar year in which the Participant died.
However, in the event the Participant's spouse (determined as of the
date of the Participant's death) is his Beneficiary, the requirement
that distributions commence within one year of a Participant's death
shall not apply. In lieu thereof, distributions must commence on or
before the later of: (l) December 31st of the calendar year immediately
following the calendar year in which the Participant died; or (2)
December 31st of the calendar year in which the Participant would have
attained age 70 1/2. If the surviving spouse dies before distributions
to such spouse begin, then the five-year distribution requirement of
this Section shall apply as if the spouse was the Participant.
(h) Election by Designated Beneficiary to Delay Commencement
of Benefits. For purposes of Section 7.5(f), the election by a
designated Beneficiary to be excepted from the five-year distribution
requirement must be made no later than December 31st of the calendar
year following the calendar year of the Participant's death. Except,
however, with respect to a designated Beneficiary who is the
Participant's surviving spouse, the election must be made by the
earlier of: December 31st of the calendar year immediately following
the calendar year in which the Participant died or, if later, the
calendar year in which the Participant would have attained age 70 1/2;
or (2) December 31st of the calendar year which contains the fifth
anniversary of the date of the Participant's death. An election by a
designated Beneficiary must be in writing and shall be irrevocable as
of the last day of the election period stated herein. In the absence of
an election by the Participant or a designated Beneficiary, the
five-year distribution requirement shall apply.
(i) Election to Redetermine Life Expectancy and Recalculate
Distribution Limitation. For purposes of this Section, the life
expectancy of a Participant and a Participant's spouse may, at the
election of the Participant or the Participant's spouse, be
redetermined in accordance with Regulations. The election, once made,
shall be irrevocable. If no election is made by the time distributions
must commence, then the life expectancy of the Participant and the
Participant's spouse shall not be subject to recalculation. Life
expectancy and joint and last survivor expectancy shall be computed
using the return multiples in Tables V and VI of Regulation 1.72-9.
(j) Time of Segregation or Distribution. Except as limited by
Sections 7.5 and 7.6, whenever the Trustee is to make a distribution or
to commence a series of payments on or as of an Anniversary Date, the
distribution or series of payments may be made or begun, on such date
or as soon thereafter as is practicable. However, unless a Former
Participant elects in writing to defer the receipt of benefits (such
election may not result in a death benefit that is more than
incidental), the payment of benefits shall begin not later than the
60th day after the close of the Plan Year in which the latest of the
following events occurs: (a) the date on which the Participant attains
the earlier of age 65 or the Normal Retirement Age specified herein;
(b) the tenth (10th) anniversary of the
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year in which the Participant commenced participation in the Plan; or
(c) the date the Participant terminates his service with the Employer.
(k) Separate Accounting Due to Distributions. If an in-service
distribution is made at a time when a Participant is not fully Vested
in his Participant's Account and the Participant may increase the
Vested percentage in such account:
(1) a separate account shall be established for the
Participant's interest in the Plan as of the time of the
distribution; and
(2) at any relevant time, the Participant's Vested
portion of the separate account shall be equal to an amount
("X") determined by the formula:
X equals P(AB plus (R x D)) - (R x D)
For purposes of applying the formula: P is the Vested
percentage at the relevant time, AB is the account balance at
the relevant time, D is the amount of distribution, and R is
the ratio of the account balance at the relevant time to the
account balance after distribution.
7.6 HOW PLAN BENEFIT WILL BE DISTRIBUTED
(a) Right to Demand Distribution in Company Stock.
Distribution of a Participant's benefit may be made in cash or Company
Stock or both, provided, however, that if a Participant or Beneficiary
so demands, such benefit shall be distributed only in the form of
Company Stock. 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
Company Stock.
(b) Satisfaction of Demand for Distribution. If a Participant
or Beneficiary demands that benefits be distributed solely in Company
Stock, distribution of a Participant's benefit will be made entirely in
whole shares or other units of Company Stock. Any balance in a
Participant's Other Investments Account will be applied to acquire for
distribution the maximum number of whole shares or other units of
Company Stock at the then fair market value. Any fractional unit value
unexpended will be distributed in cash. If Company Stock is not
available for purchase by the Trustee, then the Trustee shall hold such
balance until Company Stock is acquired and then make such
distribution, subject to Sections 7.5 and 7.6.
(c) Directions From Administrator. The Trustee will make
distribution from the Trust only on instructions from the
Administrator.
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(d) Distribution of Company Stock Restricted by Charter or
By-Laws. Notwithstanding anything contained herein to the contrary, if
the Employer's charter or by-laws restrict ownership of substantially
all shares of Company Stock to Employees and the Trust Fund, as
described in Code Section 409(h)(2), the Administrator shall distribute
a Participant's Account entirely in cash without granting the
Participant the right to demand distribution in shares of Company
Stock.
(e) Application of Restrictions. Except as otherwise provided
herein, Company Stock distributed by the Trustee may be restricted as
to sale or transfer by the by-laws or articles of incorporation of the
Employer, provided restrictions are applicable to all Company Stock of
the same class. If a Participant is required to offer the sale of his
Company Stock to the Employer before offering to sell his Company Stock
to a third party, in no event may the Employer pay a price less than
that offered to the distributee by another potential buyer making a
bona fide offer and in no event shall the Trustee pay a price less than
the fair market value of the Company Stock.
(f) Separate Classes of Stock. If Company Stock acquired with
the proceeds of an Exempt Loan (described in Section 5.5 hereof) is
available for distribution and consists of more than one class, a
Participant or his Beneficiary must receive substantially the same
proportion of each such class.
7.7 DISTRIBUTION FOR MINOR BENEFICIARY
In the event a distribution is to be made to a minor, then the
Administrator may direct that such distribution be paid to the legal guardian,
or if none, to a parent of such Beneficiary or a responsible adult with whom the
Beneficiary maintains his residence, or to the custodian for such Beneficiary
under the Uniform Gift to Minors Act or Transfer to Minors Act or similar
statute as permitted by the laws of the state in which said Beneficiary resides.
Such a payment to the legal guardian, custodian, or parent of a minor
Beneficiary shall fully discharge the Trustee, Employer, and Plan from further
liability on account thereof.
7.8 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN
In the event that all, or any portion, of the distribution payable to a
Participant or his Beneficiary hereunder shall, at the later of the
Participant's attainment of age 62 or his Normal Retirement Age, remain unpaid
solely by reason of the inability of the Administrator, after sending a
registered letter, return receipt requested, to the last known address, and
after further diligent effort, to ascertain the whereabouts of such Participant
or his Beneficiary, the amount so distributable shall be treated as a Forfeiture
pursuant to the Plan. In the event a Participant or Beneficiary is located
subsequent to his benefit being reallocated, such benefit shall be restored.
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7.9 LIMITATIONS ON BENEFITS AND DISTRIBUTIONS
All rights and benefits, including elections, provided to a Participant
in this Plan shall be subject to the rights afforded to any "alternate payee"
under a "qualified domestic relations order." Furthermore, a distribution to an
"alternate payee" shall be permitted if such distribution is authorized by a
"qualified domestic relations order," even if the affected Participant has not
reached the "earliest retirement age" under the Plan. For the purposes of this
Section, "alternate payee," "qualified domestic relations order" and "earliest
retirement age" shall have the meaning set forth under Code Section 414(p).
7.10 RIGHT OF FIRST REFUSALS
(a) Notice of Proposed Sale. If any Participant, his
Beneficiary or any other person to whom shares of Company Stock are
distributed from the Plan (the "Selling Participant") shall, at any
time, desire to sell some or all of such shares (the "Offered Shares")
to a third party (the "Third Party"), the Selling Participant shall
give written notice of such desire to the Employer and the
Administrator, which notice shall contain the number of shares offered
for sale, the proposed terms of the sale and the names and addresses of
both the Selling Participant and Third Party. Both the Trust Fund and
the Employer shall each have the right of first refusal for a period of
14 days from the date the Selling Participant gives such written notice
to the Employer and the Administrator (such 14 day period to run
concurrently against the Trust Fund and the Employer) to acquire the
Offered Shares. As between the Trust Fund and the Employer, the Trust
Fund shall have priority to acquire the shares pursuant to the right of
first refusal. The selling price and terms shall be the same as offered
by the Third Party.
(b) Limitations on Sale. If the Trust Fund and the Employer do
not exercise their right of first refusal within the required 14 day
period provided above, the Selling Participant shall have the right, at
any time following the expiration of such 14 day period to dispose of
the Offered Shares to the Third Party; provided, however, that (i) no
disposition shall be made to the Third Party on terms more favorable to
the Third Party than those set forth in the written notice delivered by
the Selling Participant above, and (ii) if such disposition shall not
be made to a Third Party on the terms offered to the Employer and the
Trust Fund, the Offered Shares shall again be subject to the right of
first refusal set forth above.
(c) Closing of Sale. The closing pursuant to the exercise of
the right of first refusal under Section 7.10(a) above shall take place
at such place agreed upon between the Administrator and the Selling
Participant, but not later than ten (10) days after the Employer or the
Trust Fund shall have notified the Selling Participant of the exercise
of the right of first refusal. At such closing, the Selling Participant
shall deliver certificates representing the Offered Shares duly
endorsed in blank for transfer, or with stock powers attached duly
executed in blank with all required transfer tax stamps attached or
provided
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for, and the Employer or the Trust Fund shall deliver the purchase
price, or an appropriate portion thereof, to the Selling Participant.
(d) Company Stock Acquired with Proceeds of Exempt Loan.
Except as provided in this paragraph (d), no Company Stock acquired
with the proceeds of an Exempt Loan complying with the requirements of
Section 5.5 hereof shall be subject to a right of first refusal.
Company Stock acquired with the proceeds of an Exempt Loan, which is
distributed to a Participant or Beneficiary, shall be subject to the
right of first refusal provided for in paragraph (a) of this Section
only so long as the Company Stock is not publicly traded. The term
"publicly traded" refers to a securities exchange registered under
Section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) or
that is quoted on a system sponsored by a national securities
association registered under Section 15A(b) of the Securities Exchange
Act (15 U.S.C. 780). In addition, in the case of Company Stock which
was acquired with the proceeds of a loan described in Section 5.5, the
selling price and other terms under the right must not be less
favorable to the seller than the greater of the value of the security
determined under Section 6.2, or the purchase price and other terms
offered by a buyer (other than the Employer or the Trust Fund), making
a good faith offer to purchase the security. The right of first refusal
must lapse no later than 14 days after the security holder gives notice
to the holder of the right that an offer by a third party to purchase
the security has been made. The right of first refusal shall comply
with the provisions of paragraphs (a), (b) and (c) of this Section,
except to the extent those provisions may conflict with the provisions
of this paragraph.
7.11 STOCK CERTIFICATE LEGEND
Certificates for shares distributed pursuant to the Plan shall contain
the following legend:
"The shares represented by this certificate are transferable
only upon compliance with the terms of the BOC Financial Corp. Employee
Stock Ownership Plan and Trust which grants to BOC Financial Corp. a
right of first refusal, a copy of said Plan being on file in the office
of the Company."
7.12 PUT OPTION
(a) Acquired Other than by Exempt Loan. If Company Stock which
was not acquired with the proceeds of an Exempt Loan is distributed to
a Participant and such Company Stock is not readily tradeable on an
established securities market, a Participant has a right to require the
Employer to repurchase the Company Stock distributed to such
Participant under a fair valuation formula. Such Company Stock shall be
subject to the provisions of Section 7.12(c).
(b) Acquired By Exempt Loan. Company Stock which is acquired
with the proceeds of an Exempt Loan and which is not publicly traded
when distributed, or if it is
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subject to a trading limitation when distributed, must be subject to a
put option. For purposes of this paragraph, a "trading limitation" on
Company Stock is a restriction under any Federal or State securities
law or any regulation thereunder, or an agreement (not prohibited by
Section 7.13) affecting the Company Stock which would make the Company
Stock not as freely tradeable as stock not subject to such restriction.
(c) Exercise of Rights. The put option must be exercisable
only by a Participant, by the Participant's donees, or by a person
(including an estate or its distributees) to whom the Company Stock
passes by reason of a Participant's death. (Under this paragraph
Participant or Former Participant means a Participant or Former
Participant and the beneficiaries of the Participant or Former
Participant under the Plan). The put option must permit a Participant
to put the Company Stock to the Employer. Under no circumstances may
the put option bind the Plan. However, it shall grant the Plan an
option to assume the rights and obligations of the Employer at the time
that the put option is exercised. If it is known at the time a loan is
made that Federal or State law will be violated by the Employer's
honoring such put option, the put option must permit the Company Stock
to be put, in a manner consistent with such law, to a third party
(e.g., an affiliate of the Employer or a shareholder other than the
Plan) that has substantial net worth at the time the loan is made and
whose net worth is reasonably expected to remain substantial.
The put option shall commence as of the day following the date
the Company Stock is distributed to the Former Participant and end 60
days thereafter and if not exercised within such 60-day period, an
additional 60-day option shall commence on the first day of the fifth
month of the Plan Year next following the date the stock was
distributed to the Former Participant (or such other 60-day period as
provided in regulations promulgated by the Secretary of the Treasury).
However, in the case of Company Stock that is publicly traded without
restrictions when distributed but ceases to be so traded within either
of the 60-day periods described herein after distribution, the Employer
must notify each holder of such Company Stock in writing on or before
the tenth day after the date the Company Stock ceases to be so traded
that for the remainder of the applicable 60-day period the Company
Stock is subject to the put option. The number of days between the
tenth day and the date on which notice is actually given, if later than
the tenth day, must be added to the duration of the put option. The
notice must inform distributees of the term of the put options that
they are to hold. The terms must satisfy the requirements of this
paragraph.
The put option is exercised by the holder notifying the
Employer in writing that the put option is being exercised; the notice
shall state the name and address of the holder and the number of shares
to be sold. The period during which a put option is exercisable does
not include any time when a distributee is unable to exercise it
because the party bound by the put option is prohibited from honoring
it by applicable Federal or State law. The price at which a put option
must be exercisable is the value of the Company Stock determined in
accordance with Section 6.2. Payment under the put option involving a
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"Total Distribution" shall be paid in substantially equal monthly,
quarterly, semiannual or annual installments over a period certain
beginning not later than 30 days after the exercise of the put option
and not extending beyond five (5) years. The deferral of payment is
reasonable if adequate security and a reasonable interest rate on the
unpaid amounts are provided. The amount to be paid under the put option
involving installment distributions must be paid not later than 30 days
after the exercise of the put option. Payment under a put option must
not be restricted by the provisions of a loan or any other arrangement,
including the terms of the Employer's articles of incorporation, unless
so required by applicable state law.
For purposes of this Section, "Total Distribution" means a
distribution to a Participant or his Beneficiary within one (1) taxable
year of the entire Vested Participant's Account.
(d) No Other Put Options. An arrangement involving the Plan
that creates a put option must not provide for the issuance of put
options other than as provided under this Section. The Plan (and the
Trust Fund) must not otherwise obligate itself to acquire Company Stock
from a particular holder thereof at an indefinite time determined upon
the happening of an event such as the death of the holder.
7.13 NONTERMINABLE PROTECTIONS AND RIGHTS
No Company Stock, except as provided in Section 4.3(f) and 7.12(b),
acquired with the proceeds of a loan described in Section 5.5 hereof may be
subject to a put, call, or other option, or buy-sell or similar arrangement when
held by and when distributed from the Trust Fund, whether or not the plan is
then an ESOP. The protections and rights granted in this Section are
nonterminable, and such protections and rights shall continue to exist under the
terms of this Plan so long as any Company Stock acquired with the proceeds of a
loan described in Section 5.5 hereof is held by the Trust Fund or by any
Participant or other person for whose benefit such protections and rights have
been created, and neither the repayment of such loan nor the failure of the Plan
to be an ESOP, nor an amendment of the Plan shall cause a termination of said
protections and rights.
7.14 DIRECT ROLLOVER
Notwithstanding any provision of the Plan to the contrary that would
otherwise limit a distributee's election under this Section, a distributee may
elect, at the time and in the manner prescribed by the 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."
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: any distribution that is one
of a series of substantially equal periodic payments (not less
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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 years or more; any distribution to the extent such distribution is
required under Code Section 401(a)(9); and the portion of any distribution that
is not includible in gross income (determined without regard to the exclusion
for net unrealized appreciation with respect to employer securities).
An "eligible retirement plan" is an individual retirement account
described in Code Section 408(a), an individual retirement annuity described in
Code Section 408(b), an annuity plan described in Code Section 403(a), or a
qualified trust described in Code Section 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.
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 Section 414(p), are
distributees with regard to the interest of the spouse or former spouse.
A "direct rollover" is a payment by the Plan to the "eligible
retirement plan" specified by the "distributee."
ARTICLE VIII
TRUSTEE
8.1 BASIC RESPONSIBILITIES OF THE TRUSTEE
The Trustee shall have the following categories of responsibilities:
(a) Investment Assets. Consistent with the "funding policy and
method" determined by the Employer, to invest, manage, and control the
Plan assets subject, however, to the direction of the Administrator of
an Investment Manager if the Trustee should appoint such manager as to
all or a portion of the assets of the Plan;
(b) Payment of Benefits. At the direction of the
Administrator, to pay benefits required under the Plan to be paid to
Participants, or, in the event of their death, to their Beneficiaries;
(c) Records of Receipts and Disbursements. To maintain records
of receipts and disbursements and furnish to the Employer and/or
Administrator for each Plan Year a written annual report per Section
8.7; and
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(d) Manner of Actions. If there shall be more than one
Trustee, they shall act by a majority of their number, but may
authorize one or more of them to sign papers on their behalf.
8.2 INVESTMENT POWERS AND DUTIES OF THE TRUSTEE
(a) Investment of Trust Fund. The Trustee shall invest and
reinvest the Trust Fund to keep the Trust Fund invested without
distinction between principal and income and in such securities or
property, real or personal, wherever situated, upon the written
instructions of the Administrator, or absent instructions, as the
Trustee shall deem advisable, including, but not limited to, stocks,
common or preferred, bonds and other evidences of indebtedness or
ownership, and real estate or any interest therein. The Trustee shall
at all times in making investments of the Trust Fund consider, among
other factors, the short and long-term financial needs of the Plan on
the basis of information furnished by the Employer. In making such
investments, the Trustee shall not be restricted to securities or other
property of the character expressly authorized by the applicable law
for trust investments; however, the Trustee shall give due regard to
any limitations imposed by the Code or the Act so that at all times
this Plan may qualify as an Employee Stock Ownership Plan and Trust.
(b) Bank or Trust Company. If the Trustee is not a bank or
trust company, the Trustee may employ a bank or trust company pursuant
to the terms of its usual and customary bank agency agreement, under
which the duties of such bank or trust company shall be of a custodial,
clerical, and recordkeeping nature.
(c) Collective Trust Fund. The Trustee may from time to time
with the consent of the Employer transfer to a common, collective, or
pooled trust fund maintained by any corporate Trustee hereunder, all or
such part of the Trust Fund as the Trustee may deem advisable, and such
part or all of the Trust Fund so transferred shall be subject to all
the terms and provisions of the common, collective, or pooled trust
fund which contemplate the commingling for investment purposes of such
trust assets with trust assets of other trusts. The Trustee may, from
time to time with the consent of the Employer, withdraw from such
common, collective, or pooled trust fund all or such part of the Trust
Fund as the Trustee may deem advisable.
(d) Guaranteed Investment Contracts. The Trustee may, at the
direction of the Administrator, (i) enter into one or more contracts
with a life insurance company or authorized financial institution, the
rate of return from which is fixed by the terms of such contracts, (ii)
transfer to any such insurance company or authorized financial
institution a portion of the Trust Fund in accordance with any such
contracts, and (iii) hold any such contracts as a part of the Trust
Fund until directed otherwise by the Administrator. The Administrator
may direct the Trustee to (i) request any information from any such
insurance company or authorized financial institution necessary or
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appropriate to make an investment decision, (ii) demand or accept
withdrawals or other distributions under any such contracts, (iii)
exercise or not to exercise any rights, powers, privileges, and options
under any such contracts and (iv) assign, amend, modify or terminate
any such contracts. The Trustee shall take no action with respect to
any such contracts except at the direction of the Administrator. The
Trustee shall incur no liability for complying with or failing to
comply with any direction of the Administrator unless the Trustee's
action is prima facie contrary to the Act or contrary to the Trustee's
duties and responsibilities under this Plan. Any insurance company or
authorized financial institution issuing any contracts as hereinabove
described may deal with the Trustee as the absolute owner of any such
contracts and need not inquire as to the authority of the Trustee to
act with regard to such contracts. Any such insurance company or
financial institution may accept and rely upon any communication from
the Trustee which is signed by an officer of the Trustee. For purposes
of this Agreement, any such insurance company or financial institution
shall be considered to be an Investment Manager with regard to the
assets of the Plan subject to its control. In no event shall the
underlying assets of such insurance company or financial institution in
which such contracts are invested be considered assets of the Plan or
part of the Trust Fund.
(e) Life Insurance Contracts. At the election of each
Participant, the Trustee, at the direction of the Administrator's hall
apply for, own, and pay premiums on Contracts on the lives of the
Participants [and their dependents]. If a life insurance Policy is to
be purchased for a Participant, the aggregate premium for ordinary life
insurance for each Participant must be less than 50% of the aggregate
of the contributions and Forfeitures to the credit of the Participant
at any particular time. If term insurance is purchased with such
contributions, the aggregate premium must be less than 25% of the
aggregate contributions and Forfeitures allocated to a Participant's
Account. If both term insurance and ordinary life insurance are
purchased with such contributions, the amount expended for term
insurance plus one-half (1/2) of the premium for ordinary life
insurance may not in the aggregate exceed 25% of the aggregate
contributions and Forfeitures allocated to a Participant's Account. The
Trustee must convert the entire value of the life insurance Contracts
at or before retirement into cash or provide for a periodic income so
that no portion of such value may be used to continue life insurance
protection beyond retirement, or distribute the Contracts to the
Participant. Such cash value shall be held in the Participant's Account
until distributed pursuant to the provisions of Section 7.5.
8.3 OTHER POWERS OF THE TRUSTEE
The Trustee, in addition to all powers and authorities under common
law, statutory authority, including the Act, and other provisions of this
Agreement, shall have the following powers and authorities, to be exercised in
the Trustee's sole discretion:
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(a) Purchase of Securities. To purchase, or subscribe for, any
securities or other property and to retain the same. In conjunction
with the purchase of securities, margin accounts may be opened and
maintained;
(b) Sale of Securities. To sell, exchange, convey, transfer,
grant options to purchase, or otherwise dispose of any securities or
other property held by the Trustee, by private contract or at public
auction. 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, with or
without advertisement;
(c) Voting Rights. To vote Company Stock as provided in
Section 8.4, to vote any other stocks, bonds, or other securities; to
give general or special proxies or powers of attorney with or without
power of substitution; to exercise any conversion privileges,
subscription rights or other options, and to make any payments
incidental thereto; to oppose, or to consent to, or otherwise
participate in, corporate reorganizations or other changes affecting
corporate securities, and to delegate discretionary powers, and to pay
any assessments or charges in connection therewith; and generally to
exercise any of the powers of an owner with respect to stocks, bonds,
securities, or other property;
(d) Registration of Securities. To cause any securities or
other property to be registered in the Trustee's own name or in the
name of one or more of the Trustee's nominees;
(e) Borrowing. To borrower or raise money for the purposes of
the Plan in such amount, and upon such terms and conditions, as the
Trustee shall deem advisable; and for any sum so borrowed, to issue a
promissory note as Trustee, and to secure the repayment thereof by
pledging all, or any part, of the Trust Fund; and no person lending
money to the Trustee shall be bound to see to the application of the
money lent or to inquire into the validity, expediency, or propriety of
any borrowing;
(f) Cash Investments. To keep such portion of the Trust Fund
in cash or cash balances as the Trustee may, from time to time, deem to
be in the best interests of the Plan, without liability for interest
thereon;
(g) Retention of Prior Investment. To accept and retain for
such time as the Trustee may deem advisable any securities or other
property received or acquired as Trustee hereunder, whether or not such
securities or other property would normally be purchased as investments
hereunder;
(h) Execution of Transfer Documents. To make, execute,
acknowledge, and deliver any and all documents of transfer and
conveyance and any and all other instruments that may be necessary or
appropriate to carry out the powers herein granted;
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(i) Settlement of Claims. To settle, compromise, or submit to
arbitration any claims, debts, or damages due or owing to or from the
Plan, to commence or defend suits or legal or administrative
proceedings, and to represent the Plan in all suits and legal and
administrative proceedings;
(j) Employment of Agents. To employ suitable agents and
counsel and to pay their reasonable expenses and compensation, and such
agent or counsel may or may not be agent or counsel for the Employer;
(k) Brokerages. To apply for and procure from responsible
insurance companies to be selected by the Administrator, as an
investment of the Trust Fund such annuity, or other Contracts (on the
life of any Participant) as the Administrator shall deem proper; to
exercise, at any time or from time to time, whatever rights and
privileges may be granted under such annuity, or other Contracts; to
collect, receive, and settle for the proceeds of all such annuity or
other Contracts as and when entitled to do so under the provisions
thereof;
(l) Bank Deposits. To invest funds of the Trust in time
deposits or savings accounts bearing a reasonable rate of interest in
the Trustee's bank;
(m) U.S. Obligations. To invest in Treasury Bills and other
forms of United States government obligations;
(n) Stock Options. Except as hereinafter expressly authorized,
the Trustee is prohibited from selling or purchasing stock options. The
Trustee is expressly authorized to write and sell call options under
which the holder of the option has the right to purchase shares of
stock held by the Trustee as a part of the assets of this Trust, if
such options are traded on and sold through a national securities
exchange registered under the Securities Exchange Act of 1934, as
amended, which exchange has been authorized to provide a market for
option contracts pursuant to Rule 9B-1 promulgated under such Act, and
so long as the Trustee at all times up to and including the time of
exercise or expiration of any such option holds sufficient stock in the
assets of this Trust to meet the obligations under such option if
exercised. In addition, the Trustee is expressly authorized to purchase
and acquire call options for the purchase of shares of stock covered by
such options if the options are traded on and purchased through a
national securities exchange as described in the immediately preceding
sentence, and so long as any such option is purchased solely in a
closing purchase transaction, meaning the purchase of an exchange
traded call option the effect of which is to reduce or eliminate the
obligations of the Trustee with respect to a stock option contract or
contracts which it has previously written and sold in a transaction
authorized under the immediately preceding sentence;
(o) Savings and Loan Deposits. To deposit monies in federally
insured savings accounts or certificates of deposit in banks or savings
and loan associations;
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(p) Pooling Funds. To pool all or any of the Trust Fund, from
time to time, with assets belonging to any other qualified employee
pension benefit trust created by the Employer or an affiliated company
of the Employer, and to commingle such assets and make joint or common
investments and carry joint accounts on behalf of this Plan and such
other trust or trusts, allocating undivided shares or interests in such
investments or accounts or any pooled assets of the two or more trusts
in accordance with their respective interests;
(q) Miscellaneous. To do all such acts and exercise all such
rights and privileges, although not specifically mentioned herein, as
the Trustee may deem necessary to carry out the purposes of the Plan;
(r) Statutory Powers. Without in any way limiting or modifying
the foregoing, and in addition thereto, the Trustee shall have all of
the powers set forth in North Carolina General Statutes Section 32-26
and such powers are specifically incorporated herein by reference.
8.4 VOTING COMPANY STOCK
The Trustee shall vote all Company Stock held by it as part of the Plan
assets. Provided, however, that if any agreement entered into by the Trust
provides for voting of any shares of Company Stock pledged as security for any
obligation of the Plan, then such shares of Company Stock shall be voted in
accordance with such agreement. The Trustee shall not vote Company Stock which a
Participant or Beneficiary, pursuant to this Section, fails to exercise.
Notwithstanding the foregoing, 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 Company Stock which is entitled to
vote and which is allocated to the Company Stock Account of such Participant or
Beneficiary is to be voted. 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 Company Stock which are allocated to the Company Stock 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 prescribed in
Regulations. For purposes of this Section the term "registration-type class of
securities" means: (A) a class of securities required to be registered under
Section 12 of the Securities Exchange Act of 1934; and (B) 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.
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
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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.
8.5 DUTIES OF THE TRUSTEE REGARDING PAYMENTS
At the direction of the Administrator, the Trustee shall, from time to
time, in accordance with the terms of the Plan, make payments out of the Trust
Fund. The Trustee shall not be responsible in any way for the application of
such payments.
8.6 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES
The Trustee shall be paid such reasonable compensation as shall from
time to time be agreed upon in writing by the Employer and the Trustee. An
individual serving as Trustee who already receives full-time pay from the
Employer shall not receive compensation from the Plan. In addition, the Trustee
shall be reimbursed for any reasonable expenses, including reasonable counsel
fees incurred by it as Trustee. Such compensation and expenses shall be paid
from the Trust Fund unless paid or advanced by the Employer. All taxes of any
kind and all kinds whatsoever that may be levied or assessed under existing or
future laws upon, or in respect of, the Trust Fund or the income thereof, shall
be paid from the Trust Fund.
8.7 ANNUAL REPORT OF THE TRUSTEE
(a) Statement of Account. Within a reasonable period of time
after the later of the Anniversary Date or receipt of the Employer's
contribution for each Plan Year, the Trustee shall furnish to the
Employer and Administrator a written statement of account with respect
to the Plan Year for which such contribution was made setting forth:
(1) the net income, or loss, of the Trust Fund;
(2) the gains, or losses, realized by the Trust Fund
upon sales or other disposition of the assets;
(3) the increase, or decrease, in the value of the
Trust Fund;
(4) all payments and distributions made from the
Trust Fund; and
(5) such further information as the Trustee and/or
Administrator deems appropriate.
(b) Approval of Statement of Account. The Employer, upon its
receipt of the statement of account, shall acknowledge receipt thereof
in writing and advise the Trustee and/or Administrator of its approval
or disapproval thereof. Failure by the Employer to
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disapprove any such statement of account within thirty (30) days after
its receipt thereof shall be deemed an approval thereof. The approval
by the Employer of any statement of account shall be binding as to all
matters embraced therein as between the Employer and the Trustee to the
same extent as if the account of the Trustee had been settled by
judgment or decree in an action for a judicial settlement of its
account in a court of competent jurisdiction in which the Trustee, the
Employer and all persons having or claiming an interest in the Plan
were parties; provided, however, that nothing herein contained shall
deprive the Trustee of its right to have its accounts judicially
settled if the Trustee so desires.
8.8 AUDIT
(a) When Audit Required. If an audit of the Plan's records
shall be required by the Act and the regulations thereunder for any
Plan Year, the Administrator shall direct the Trustee to engage on
behalf of all Participants an independent qualified public accountant
for that purpose. Such accountant shall, after an audit of the books
and records of the Plan in accordance with generally accepted auditing
standards, within a reasonable period after the close of the Plan Year,
furnish to the Administrator and the Trustee a report of his audit
setting forth his opinion as to whether each of the following
statements, schedules or lists, or any others that are required by
Section 103 of the Act or the Secretary of Labor to be filed with the
Plan's annual report, are presented fairly in conformity with generally
accepted accounting principles applied consistently. All auditing and
accounting fees shall be an expense of and may, at the election of the
Administrator, be paid from the Trust Fund.
(b) Reliance Upon Certain Certifications. If some or all of
the information necessary to enable the Administrator to comply with
Section 103 of the Act is maintained by a bank, insurance company, or
similar institution, regulated and supervised and subject to periodic
examination by a state or federal agency, it shall transmit and certify
the accuracy of that information to the Administrator as provided in
Section 103(b) of the Code within 120 days after the end of the Plan
Year or by such other date as may be prescribed under regulations of
the Secretary of Labor.
8.9 RESIGNATION, REMOVAL, AND SUCCESSION OF TRUSTEE
(a) Resignation of Trustee. The Trustee may resign at any time
by delivering to the Employer, at least 30 days before its effective
date, a written notice of his resignation.
(b) Removal of Trustee by Employer. The Employer may remove
the Trustee by mailing by registered or certified mail, addressed to
such Trustee at his last known address, at least 30 days before its
effective date, a written notice of his removal.
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(c) Appointment of Successor Trustee. Upon the death,
resignation, incapacity, or removal of any Trustee, a successor may be
appointed by the Employer; and such successor, upon accepting such
appointment in writing and delivering same to the Employer, shall,
without further act, become vested with all the estate, rights, powers,
discretions, and duties of his predecessor with like respect as if he
were originally named as a Trustee herein. Until such a successor is
appointed, the remaining Trustee or Trustees shall have full authority
to act under the terms of the Plan.
(d) Appointment of Successor Trustee in Advance. The Employer
may designate one or more successors prior to the death, resignation,
incapacity removal of a Trustee. In the event a successor is so
designated by the Employer and accepts such designation, the successor
shall, without further act, become vested with all the estate, rights,
powers, discretions, and duties of his predecessor with the like effect
as if he were originally named as Trustee herein immediately upon the
death, resignation, incapacity, or removal of his predecessor.
(e) Interim Account Requirements. Whenever any Trustee
hereunder ceases to serve as such, he shall furnish to the Employer and
Administrator a written statement of account with respect to the
portion of the Plan Year during which he served as Trustee. This
statement shall be either (i) included as part of the annual statement
of account for the Plan Year required under Section 8.7 or (ii) set
forth in a special statement. Any such special statement of account
should be rendered to the Employer no later than the due date of the
annual statement of account for the Plan Year. The procedures set forth
in Section 8.7 for the approval by the Employer of annual statements of
account shall apply to any special statement of account rendered
hereunder and approval by the Employer of any such special statement in
the manner provided in Section 8.7 shall have the same effect upon the
statement as the Employer's approval of an annual statement of account.
No successor to the Trustee shall have any duty or responsibility to
investigate the acts or transactions of any predecessor who has
rendered all statements of account required by Section 8.7 and this
subparagraph.
8.10 TRANSFER OF INTEREST
Notwithstanding any other provision contained in this Plan, the Trustee
at the direction of the Administrator shall transfer the Vested interest, if
any, of such Participant in his account to another trust forming part of a
pension, profit sharing, or stock bonus plan maintained by such Participant's
new employer and represented by said employer in writing as meeting the
requirements of Code Section 401(a), provided that the trust to which such
transfers are made permits the transfer to be made.
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ARTICLE IX
AMENDMENT, TERMINATION AND MERGERS
9.1 AMENDMENT
(a) Rights of Employer to Amend Plan. The Employer shall have
the right at any time to amend the Plan, subject to the limitations of
this Section. However, any amendment which affects the rights, duties,
or responsibilities of the Trustee may only be made with the Trustee's
written consent. Any such amendment shall become effective as provided
therein upon its execution. The Trustee shall not be required to
execute any such amendment unless the Trust provisions contained herein
are a part of the Plan and the amendment affects the duties of the
Trustee hereunder.
(b) Exclusive Benefit Rule. No amendment to the Plan shall be
effective if it authorizes or permits any part of the Trust Fund (other
than such part as is required to pay taxes and administration expenses)
to be used for or diverted to any purpose other than for the exclusive
benefit of the Participants or their Beneficiaries or estates; or cause
any reduction in the amount credited to the account of any Participant;
or cause or permit any portion of the Trust Fund to revert to or become
property of the Employer.
(c) Protected Benefit. Except as permitted by Regulations, no
Plan amendment or transaction having the effect of a Plan amendment
(such as a merger, plan transfer or similar transaction) shall be
effective to the extent that it eliminates or reduces any "Section
411(d)(6) protected benefit" or adds or modifies conditions relating to
"Section 411(d)(6) protected benefits" the result of which is a further
restriction on such benefit unless such protected benefits are
preserved with respect to benefits accrued as of the later of the
adoption date or effective date of the amendment. "Section 411(d)(6)
protected benefits" are benefits described in Code Section
411(d)(6)(A), early retirement benefits and retirement-type subsidies,
and optional forms of benefits.
In addition, no such amendment shall have the effect of
terminating the protections and rights set forth in Section 7.13,
unless such termination shall then be permitted under the applicable
provisions of the Code and Regulations; such a termination is currently
expressly prohibited by Regulation 54.4975-11(a)(3)(ii).
9.2 TERMINATION
(a) Rights of Employer to Terminate Plan. The Employer shall
have the right at any time to terminate the Plan by delivering to the
Trustee and Administrator written notice of such termination. Upon any
full termination or partial termination, all amounts credited to the
affected Participants' Accounts shall become 100% Vested as provided in
Section 7.5 and shall not thereafter be subject to forfeiture, and all
unallocated amounts
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shall be allocated to the accounts of all Participants in accordance
with the provisions hereof.
(b) Distribution to Participants Upon Termination. Upon the
full termination of the Plan, the Employer shall direct the
distribution of the assets of the Trust Fund to Participants in a
manner which is consistent with and satisfies the provisions of Section
7.5. Distributions to a Participant shall be made in cash or in
property, or through the purchase of irrevocable nontransferable
deferred commitments from an insurer. Except as permitted by
Regulations, the termination of the Plan shall not result in the
reduction of "Section 411(d)(6) protected benefits" in accordance with
Section 9.1(c).
9.3 MERGER OR CONSOLIDATION
This Plan and Trust may be merged or consolidated with, or its assets
and/or liabilities may be transferred to any other Plan and trust only if the
benefits which would be received by a Participant of this Plan, in the event of
a termination of the Plan immediately after such transfer, merger, or
consolidation, are at least equal to the benefits the Participant would have
received if the Plan had terminated immediately before the transfer, merger, or
consolidation, and such transfer, merger, or consolidation does not otherwise
result in the elimination or reduction of any "Section 411(d)(6) protected
benefits" in accordance with Section 9.1(c).
ARTICLE X
MISCELLANEOUS
10.1 PARTICIPANT'S RIGHTS
This Plan shall not be deemed to constitute a contract between the
Employer and any Participant or to be a consideration or an inducement for the
employment of any Participant or Employee. Nothing contained in this Plan shall
be deemed to give any Participant or Employee the right to be retained in the
service of the Employer or to interfere with the right of the Employer to
discharge any Participant or Employee at any time regardless of the effect which
such discharge shall have upon him as a Participant of this Plan.
10.2 ALIENATION
(a) Prohibition Against Alienation. Subject to the exceptions
provided below, no benefit which shall be payable out of the Trust Fund
to any person (including a Participant or his Beneficiary) shall be
subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge, and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber, or
charge the same shall be void; and no such benefit shall in any manner
be liable for, or subject to, the debts, contracts, liabilities,
engagements, or torts of any such person, nor shall it be subject to
attachment
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or legal process for or against such person, and the same shall not be
recognized by the Trustee, except to such extent as may be required by
law.
(b) Qualified Domestic Relations Orders. This provision shall
not apply to a "qualified domestic relations order" defined in Code
Section 414(p), including those other domestic relations orders
permitted to be so treated by the Administrator under the provisions of
the Retirement Equity Act of 1984 to the extent that the Administrator
determines the qualified status of such domestic relations orders in
accordance with the procedure specified in Section 2.10 and administers
distributions hereunder.
10.3 CONSTRUCTION OF PLAN
This Plan and Trust shall be construed and enforced according to the
Act and the laws of the State of North Carolina, other than its laws respecting
choice of law, to the extent not preempted by the Act.
10.4 GENDER AND NUMBER
Wherever any words are used herein in the masculine, feminine, or
neuter gender, they shall be construed as though they were also used in another
gender in all cases where they would so apply, and whenever any words are used
herein in the singular or plural form, they shall be construed as though they
were also used in the other form in all cases where they would so apply.
10.5 LEGAL ACTIONS AND INDEMNIFICATION
The Employer and the Trust Fund shall indemnify any Fiduciary of the
Plan against any and all claims, losses, damages, expenses, and liabilities,
including reasonable attorneys fees, arising from any action or failure to act,
except when the same is judicially determined to be due to gross negligence or
willful misconduct of the Fiduciary.
10.6 PROHIBITION AGAINST DIVERSION OF FUNDS
(a) Exclusive Benefit Rule. Except as provided below and
otherwise specifically permitted by law, it shall be impossible by
operation of the Plan or of the Trust, by termination of either, by
power of revocation or amendment, by the happening of any contingency,
by collateral arrangement or by any other means, for any part of the
corpus or income of any trust fund maintained pursuant to the Plan or
any funds contributed thereto to be used for, or diverted to, purposes
other than the exclusive benefit of Participants, Retired Participants,
or their Beneficiaries.
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(b) Return of Contributions Made Under Mistake of Fact. In the
event the Employer shall make an excessive contribution under a mistake
of fact pursuant to Section 403(c)(2)(A) of the Act, the Employer may
demand repayment of such excessive contribution at any time within one
(l) year following the time of payment and the Trustees shall return
such amount to the Employer within the one (l) year period. Earnings of
the Plan attributable to the excess contributions may not be returned
to the Employer but any losses attributable thereto must reduce the
amount so returned.
10.7 BONDING
Every Fiduciary, except a bank or an insurance company, unless exempted
by the Act and regulations thereunder, shall be bonded in an amount not less
than ten percent (10%) of the amount of the funds such Fiduciary handles;
provided, however, that the minimum bond shall be $1,000 and the maximum bond,
$500,000. The amount of funds handled shall be determined at the beginning of
each Plan Year by the amount of funds handled by such person, group, or class to
be covered and their predecessors, if any, during the preceding Plan Year, or if
there is no preceding Plan Year, then by the amount of the funds to be handled
during the then current year. The bond shall provide protection to the Plan
against any loss by reason of acts of fraud or dishonesty by the Fiduciary alone
or in connivance with others. The surety shall be a corporate surety company (as
such term is used in Section 412(a)(2) of the Act), and the bond shall be in a
form approved by the Secretary of Labor. Notwithstanding anything in the Plan to
the contrary, the cost of such bonds shall be an expense of and may, at the
election of the Administrator, be paid from the Trust Fund or by the Employer.
10.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE
Neither the Employer nor the Trustee, nor their successors, shall be
responsible for the validity of any Contract issued hereunder or for the failure
on the part of the insurer to make payments provided by any such Contract, or
for the action of any person which may delay payment or render a Contract null
and void or unenforceable in whole or in part.
10.9 INSURER'S PROTECTIVE CLAUSE
Any insurer who shall issue Contracts hereunder shall not have any
responsibility for the validity of this Plan or for the tax or legal aspects of
this Plan. The insurer shall be protected and held harmless in acting in
accordance with any written direction of the Trustee, and shall have no duty to
see to the application of any funds paid to the Trustee, nor be required to
question any actions directed by the Trustee. Regardless of any provision of
this Plan, the insurer shall not be required to take or permit any action or
allow any benefit or privilege contrary to the terms of any Contract which it
issues hereunder, or the rules of the insurer.
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10.10 RECEIPT AND RELEASE FOR PAYMENTS
Any payment to any Participant, his legal representative, Beneficiary,
or to any guardian or committee appointed for such Participant 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 Trustee and the Employer,
either of whom may require such Participant, legal representative, Beneficiary,
guardian, or committee, as a condition precedent to such payment, to execute a
receipt and release thereof in such form as shall be determined by the Trustee
or Employer.
10.11 ACTION BY THE EMPLOYER
Whenever the Employer under the terms of the Plan is permitted or
required to do or perform any act or matter or thing, it shall be done and
performed by a person duly authorized by its legally constituted authority.
10.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY
The "named Fiduciaries" of this Plan are (l) the Employer, (2) the
Administrator, and (3) the Trustee. The named Fiduciaries shall have only those
specific powers, duties, responsibilities, and obligations as are specifically
given them under the Plan. In general, the Employer shall have the sole
responsibility for making the contributions provided for under Section 4.1; and
shall have the sole authority to appoint and remove the Trustee and the
Administrator; to formulate the Plan's "funding policy and method;" and to amend
or terminate, in whole or in part, the Plan. The Administrator shall have the
sole responsibility for the administration of the Plan, which responsibility is
specifically described in the Plan. The Trustee shall have the sole
responsibility of management of the assets held under the Trust, except those
assets, the management of which have been reserved by the Administrator or
assigned to an Investment Manager. In the event of such reservation or
assignment of responsibility of management of the assets held under the Trust,
the Employer, Administrator or Investment Manager shall be solely responsible
for the management of the assets assigned to it, all as specifically provided in
the Plan. Each named Fiduciary warrants that any directions given, information
furnished, or action taken by it shall be in accordance with the provisions of
the Plan, authorizing or providing for such direction, information, or action.
Furthermore, each named Fiduciary may rely upon any such direction, information
or action of another named Fiduciary as being proper under the Plan, and is not
required under the Plan to inquire into the propriety of any such direction,
information or action. It is intended under the Plan that each named Fiduciary
shall be responsible for the proper exercise of its own powers, duties,
responsibilities, and obligations under the Plan. No named Fiduciary shall
guarantee the Trust Fund in any manner against investment loss or depreciation
in asset value. Any person or group may serve in more than one Fiduciary
capacity. In the furtherance of their responsibilities hereunder, the "named
Fiduciaries" shall be empowered to interpret the Plan and Trust and to resolve
ambiguities, inconsistencies and omissions, which findings shall be binding,
final and conclusive.
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10.13 HEADINGS
The headings and subheadings of this Plan have been inserted for
convenience of reference and are to be ignored in any construction of the
provisions hereof.
10.14 APPROVAL BY INTERNAL REVENUE SERVICE
(a) Initial Qualification. Notwithstanding anything herein to
the contrary, contributions to this Plan are conditioned upon the
initial qualification of the Plan under Code Section 401. If the Plan
receives an adverse determination with respect to its initial
qualification, then the Plan may return such contributions to the
Employer within one (1) year after such determination, provided the
application for the determination is made by the time prescribed by law
for filing the Employer's return for the taxable year in which the Plan
was adopted, or such later date as the Secretary of the Treasury may
prescribe.
(b) Deductibility of Contributions. Notwithstanding any
provisions to the contrary, except Sections 3.5, 3.6, and 4.1(c), any
contribution by the Employer to the Trust Fund is conditioned upon the
deductibility of the contribution by the Employer under the Code and,
to the extent any such deduction is disallowed, the Employer may,
within one (1) year following the disallowance of the deduction, demand
repayment of such disallowed contribution and the Trustee shall return
such contribution within one (l) year following the disallowance.
Earnings of the Plan attributable to the excess contribution may not be
returned to the Employer, but any losses attributable thereto must
reduce the amount so returned.
10.15 UNIFORMITY
All provisions of this Plan shall be interpreted and applied in a
uniform, nondiscriminatory manner. In the event of any conflict between the
terms of this Plan and any Contract purchased hereunder, the Plan provisions
shall control.
10.16 SECURITIES AND EXCHANGE COMMISSION APPROVAL
The Employer may request an interpretative letter from the Securities
and Exchange Commission stating that the transfers of Company Stock contemplated
hereunder do not involve transactions requiring a registration of such Company
Stock under the Securities Act of 1933. In the event that a favorable
interpretative letter is not obtained, the Employer reserves the right to amend
the Plan and Trust retroactively to their Effective Dates in order to obtain a
favorable interpretative letter or to terminate the Plan.
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<PAGE>
ARTICLE XI
PARTICIPATING EMPLOYERS
11.1 ADOPTION BY OTHER EMPLOYERS
Notwithstanding anything herein to the contrary, with the consent of
the Employer and Trustee, any other corporation or entity, whether an affiliate
or subsidiary or not, may adopt this Plan and all of the provisions hereof, and
participate herein and be known as a Participating Employer, by a properly
executed document evidencing said intent and will of such Participating
Employer.
11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS
(a) Trustee. Each such Participating Employer shall be
required to use the same Trustee as provided in this Plan.
(b) Commingling of Assets. The Trustee may, but shall not be
required to, commingle, hold, and invest as one Trust Fund all
contributions made by Participating Employers, as well as all
increments thereof. However, the assets of the Plan shall, on an
ongoing basis, be available to pay benefits to all Participants and
Beneficiaries under the Plan without regard to the Employer or
Participating Employer who contributed such assets.
(c) Transfers Between Employers. The transfer of any
Participant from or to an Employer participating in this Plan, whether
he be an Employee of the Employer or a Participating Employer, shall
not affect such Participant's rights under the Plan, and all amounts
credited to such Participant's Account as well as his accumulated
service time with the transferor or predecessor, and his length of
participation in the Plan, shall continue to his credit.
(d) Forfeitures. All rights and values forfeited by
termination of employment shall inure only to the benefit of the
Participants of the Employer or Participating Employer by which the
forfeiting Participant was employed, except if the Forfeiture is for an
Employee whose Employer is an Affiliated Employer, then said Forfeiture
shall be allocated to the Participants employed by the Employer or
Participating Employers who are Affiliated Employers. Should an
Employee of one ("First") Employer be transferred to an associated
("Second") Employer which is an Affiliated Employer, such transfer
shall not cause his account balance (generated while an Employee of
"First" Employer) in any manner, or by any amount to be forfeited. Such
Employee's Participant Account balance for all purposes of the Plan,
including length of service, shall be considered as though he had
always been employed by the "Second" Employer and as such had received
contributions, forfeitures, earnings or losses, and appreciation or
depreciation in value of assets totaling amount so transferred.
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<PAGE>
(e) Expenses. Any expenses of the Plan which are to be paid by
the Employer or borne by the Trust Fund shall be paid by each
Participating Employer in the same proportion that the total amount
standing to the credit of all Participants employed by such Employer
bears to the total standing to the credit of all Participants.
11.3 DESIGNATION OF AGENT
Each Participating Employer shall be deemed to be a part of this Plan;
provided, however, that with respect to all of its relations with the Trustee
and Administrator for the purpose of this Plan, each Participating Employer
shall be deemed to have designated irrevocably the Employer as its agent. Unless
the context of the Plan clearly indicates the contrary, the word "Employer"
shall be deemed to include each Participating Employer as related to its
adoption of the Plan.
11.4 EMPLOYEE TRANSFERS
It is anticipated that an Employee may be transferred between
Participating Employers, and in the event of any such transfer, the Employee
involved shall carry with him his accumulated service and eligibility. No such
transfer shall effect a termination of employment hereunder, and the
Participating Employer to which the Employee is transferred shall thereupon
become obligated hereunder with respect to such Employee in the same manner as
was the Participating Employer from whom the Employee was transferred.
11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION
Any contribution subject to allocation during each Plan Year shall be
allocated among all Participants of all Participating Employers who are
Affiliated Employers in accordance with the provisions of this Plan. On the
basis of the information furnished by the Administrator, the Trustee shall keep
separate books and records concerning the affairs of each Participating Employer
hereunder and as to the accounts and credits of the Employees of each
Participating Employer. The Trustee may, but need not, register Contracts so as
to evidence that a particular Participating Employer is the interested Employer
hereunder, but in the event of an Employee transfer from on Participating
Employer to another, the employing Employer shall immediately notify the Trustee
thereof.
11.6 AMENDMENT
Amendment to this Plan by the Employer at any time when there shall be
a Participating Employer hereunder shall not be by the written action of each
and every Participating Employer and with the consent of the Trustee where such
consent is necessary in accordance with the terms of this Plan.
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<PAGE>
11.7 DISCONTINUANCE OF PARTICIPATION
Any Participating Employer shall be permitted to discontinue or revoke
its participation in the Plan. At the time of any such discontinuance or
revocation, satisfactory evidence thereof and of any applicable conditions
imposed shall be delivered to the Trustee. The Trustee shall thereafter
transfer, deliver, and assign Contracts and other Trust Fund assets allocable to
the Participants of such Participating Employer to such new trustee as shall
have been designated by such Participating Employer, in the event that it has
established a separate pension Plan for its Employees provided, however, that no
such transfer shall be made if the result is the elimination or reduction of any
"Section 411(d)(6) protected benefits" in accordance with Section 9.1(c). If no
successor is designated, the Trustee shall retain such assets for the Employees
of said Participating Employer pursuant to the provisions of Article VIII
hereof. In no such event shall any part of the corpus or income of the Trust as
it relates to such Participating Employer be used for or diverted for purposes
other than for the exclusive benefit of the Employees of such Participating
Employer.
11.8 ADMINISTRATOR'S AUTHORITY
The Administrator shall have authority to make any and all necessary
rules or regulations, binding upon all Participating Employers and all
Participants, to effectuate the purpose of this Article.
11.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE
If any Participating Employer is prevented in whole or in part from
making a contribution to the Trust Fund which it would otherwise have made under
the Plan by reason of having no current or accumulated earnings or profits, or
because such earnings or profits are less than the contribution which it would
otherwise have made, then, pursuant to Code Section 404(a)(3)(B), so much of the
contribution which such Participating Employer was so prevented from making may
be made, for the benefit of the participating Employees of such Participating
Employer, by the other Participating Employers who are members of the same
affiliated group within the meaning of Code Section 1504 to the extent of their
current or accumulated earnings or profits, except that such contribution by
each such other Participating Employer shall be limited to the proportion of its
total current and accumulated earnings and profits remaining after adjustment
for its contribution to the Plan made without regard to this paragraph which the
total prevented contribution bears to the total current and accumulated earnings
and profits of all Participating Employers remaining after adjustment for all
contributions made to the Plan without regard to this paragraph.
A Participating Employer on behalf of whose Employees a contribution is
made under this paragraph shall not be required to reimburse the contributing
Participating Employers.
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IN WITNESS WHEREOF, this Plan has been executed the day and year first
above written.
BOC FINANCIAL CORP.
By_____________________
ATTEST:
- -----------------------
Secretary
(CORPORATE SEAL)
--------------------------
Stephen R. Talbert, Trustee
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<PAGE>
BOC FINANCIAL CORP.
1998 MANAGEMENT RECOGNITION PLAN
BOC Financial Corp., a North Carolina corporation (the "Corporation"), does
herein set forth the terms of the BOC Financial Corp. 1998 Management
Recognition Plan, (this "Plan") which was adopted by the Board of Directors (the
"Board") of the Corporation on ________, 1998 and approved by the shareholders
of the Corporation on __________, 1998 (the "Effective Date").
1. Purpose of this Plan
The purpose of this Plan is to provide to certain directors, officers and
employees of the Corporation and its subsidiaries (collectively "Participants"
or singularly, "Participant") an ownership interest in the Corporation, in
consideration of their contributions to the growth and profitability of the
Corporation by making awards (collectively "Awards" or singularly, "Award") of
shares of common stock of the Corporation (the "Common Stock"). The Board
believes that participation in the ownership of the Corporation will induce
Participants to continue to serve the Corporation as directors, officers and
employees and encourage them to contribute to the future growth and
profitability of the Corporation.
2. Administration of this Plan
(a) This Plan shall be administered by the Board. The Board shall have full
power and authority to construe, interpret, and administer this Plan. All
actions, decisions, determinations, or interpretations of the Board shall be
final, conclusive, and binding upon all parties.
(b) The Board shall decide to whom Awards shall be made under this Plan,
the number of shares of Common Stock subject to each Award, the number of
additional shares, if any, to be purchased or allocated for the purposes of this
Plan, and such additional terms and conditions for Awards as the Board shall
deem appropriate, including, without limitation, any determinations as to the
restrictions or conditions on transfer of shares of Common Stock that are
necessary or appropriate to satisfy all applicable securities laws, rules,
regulations, and listing requirements.
(c) The Board may designate any officers or employees of the Corporation to
assist in the administration of this Plan. The Board may authorize such
individuals to execute documents on its behalf and may delegate to them such
other ministerial and limited discretionary duties as the Board may see fit.
(d) Any shares of Common Stock held under this Plan shall be held by
________ and ________ (hereinafter referred to as the "Trustees") and any
successor or successors who from time to time may be appointed by the Board.
<PAGE>
3. Shares of Common Stock Available Under the Plan
(a) The Corporation shall provide funding to the Plan to purchase
_____________________ (______) shares of the Common Stock of the Corporation
(the "Initial Plan Shares"). Such shares shall be held or delivered by the
Trustees pursuant to the terms of this Plan.
(b) Upon purchase of the Initial Plan Shares as provided in subparagraph
(a) above, ___________________________ (______) of such shares (the "Allocated
Initial Plan Shares") shall be allocated as provided in paragraph 5 hereof. If
shares once allocated to a Participant are forfeited as provided in paragraph 6
hereof, then such forfeited shares shall be retained by the Trustees and they
shall again be available for making additional Awards to Participants as
provided in paragraph 2 hereof.
(c) At any time, and from time to time, the Corporation may purchase
additional shares of Common Stock for making Awards under this Plan. Such shares
shall be held by the Trustees pursuant to the terms of this Plan and shall be
available for making additional Awards to Participants as provided in paragraph
2 hereof.
(d) The shares referred to in (i) the last sentence of subparagraph (b)
above, (ii) subparagraph (c) above and (iii) the last sentence of this
subparagraph (d) shall be treated collectively as a pool of shares available
(the "Available Shares") for making additional Awards to Participants as
provided in paragraph 2 hereof. With respect to the Available Shares, if any
such shares once allocated to a Participant are forfeited as provided in
paragraph 6 hereof, then such forfeited shares shall be retained by the Trustees
and they shall be available again for grants to Participants as provided in
paragraph 2 hereof.
4. Eligibility. The Participants in this Plan to whom Awards may be made
shall be the following: such directors, officers and employees of the
Corporation and its subsidiaries as may be designated by the Board.
5. Award of Allocated Initial Plan Shares; Additional Awards
(a) Subject to the provisions of paragraph 7 hereof, all of the Allocated
Initial Plan Shares shall be awarded to certain directors, officers and
employees of the Corporation and its subsidiaries (the "Initial Participants")
in the number indicated in a resolution or resolutions duly adopted by the
Board.
(b) The Available Shares shall be held by the Trustees under this Plan and
shall be available for the making of additional Awards to Participants during
the remaining term of this Plan, upon such terms and conditions as may be
determined by the Board.
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6. Vesting of Shares
(a) Shares granted under this Plan shall vest and the right of a
Participant to the shares shall be nonforfeitable in accordance with the
following schedules:
(i) With respect to the Allocated Initial Plan Shares awarded as of
the Effective Date:
Date When Such Shares Percentage of Such
Become Vested Shares Vested
------------- -------------
Effective Date of Plan 0%
First Anniversary of Effective Date 20%
Second Anniversary of Effective Date 20%
Third Anniversary of Effective Date 20%
Fourth Anniversary of Effective Date 20%
Fifth Anniversary of Effective Date 20%
(ii) With respect to the Available Shares which may be made subject to
an Award after the Effective Date:
Date When Such Shares Percentage of Such
Become Vested Shares Vested
------------- -------------
Date of Award 0%
First Anniversary of the date of Award 20%
Second Anniversary of the date of Award 20%
Third Anniversary of the date of Award 20%
Fourth Anniversary of the date of Award 20%
Fifth Anniversary of the date of Award 20%
(b) In determining the number of shares vested under the above vesting
schedules, a Participant shall not receive fractional shares. If the product
resulting from multiplying the vested percentage times the allocated shares
results in a fractional share, then a Participant's vested right shall be to the
whole number of shares disregarding any fractional share.
(c) In the event any Participant to whom shares are awarded under this Plan
terminates employment or service as a director, officer or employee with the
Corporation for any reason, other than as provided in subparagraph 6(d) below,
and such Participant does not have a 100% vested interest in the Participant's
shares under this Plan, then any shares which are not vested, based upon the
applicable schedule in subparagraph (a) above, shall be forfeited and shall be
available again for Awards to Participants as may be determined by the Board.
(d) In the event that the employment or service as a director, officer or
employee of a Participant with the Corporation should terminate because of such
Participant's
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<PAGE>
disability, death or as a result of a "change in control" of the Corporation (as
such term is defined below) prior to the date when all shares allocated to the
Participant would be 100% vested in accordance with the applicable schedule in
subparagraph 6(a) above, then, notwithstanding the foregoing schedules in
subparagraph 6(a) above, all shares allocated to such Participant shall
immediately become fully vested and nonforfeitable. For purposes of this Plan,
the term disability shall be defined in the same manner as such term is defined
in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended. When used
herein, the phrase "change in control" refers to (i) the acquisition by any
person, group of persons or entity of the beneficial ownership or power to vote
more than twenty-five (25%) percent of the Corporation's outstanding stock, (ii)
during any period of two (2) consecutive years, a change in the majority of the
Board unless the election of each new director was approved by at least
two-thirds of the directors then still in office who were directors at the
beginning of such two (2) year period, or (iii) a reorganization, merger, or
consolidation of the Corporation with one or more other corporations in which
the Corporation is not the surviving corporation, or the transfer of all or
substantially all of the assets or shares of the Corporation to another person
or entity.
7. Action Required of Participants
(a) Each Participant receiving an Award of shares under this Plan shall
represent to and agree with the Corporation and the Trustees that the
Participant (i) is acquiring such shares on the Participant's behalf as an
investment and not with a present intention of distribution or re-sale and (ii)
agrees to have placed upon the certificates representing such shares a legend
setting forth these representations and agreements or a reference thereto. Such
shares shall be transferable thereafter only if the proposed transfer shall be
permissible under this Plan and if, in the opinion of counsel for the
Corporation, such transfer shall at such time be in compliance with all
applicable federal and state securities laws and regulations.
(b) Each Participant receiving an Award of shares under this Plan shall
deliver to the Corporation a Restricted Stock Agreement, substantially in the
form attached hereto as Exhibit A, which shall be signed by such Participant.
8. Restriction
(a) Shares subject to an Award made under this Plan shall forthwith, after
the making of the representations required by paragraph 7 hereof, be issued and
a certificate or certificates for such shares shall be prepared in the name of
such Participant. Such Participant shall thereupon be a shareholder with respect
to all the shares represented by such certificate or certificates and shall have
all the rights of a shareholder with respect to all such shares, including the
right to vote such shares and to receive all dividends and other distributions
(subject to the provisions of subparagraph 8(b) below) paid with respect to such
shares; provided, however, that such shares shall be subject to the restrictions
hereinafter described and to possible forfeiture as previously described in
paragraph 6 hereof. Certificates of stock representing shares subject to an
Award made under this Plan shall be imprinted with a legend to the effect that
the shares represented are subject to restrictions on transfer and potential
forfeiture in accordance with the terms of the Restricted Stock Agreement, and
the transfer agent for Common Stock shall be
4
<PAGE>
instructed to that effect with respect to such shares. In aid of such
restrictions, the Participant shall, immediately upon receipt of the certificate
or certificates, deposit such certificate or certificates together with a stock
power or other instrument of transfer, appropriately endorsed in blank, with the
Trustees or with such other escrow agent as may be designated by the Trustees,
with the expenses of any such escrow arrangement to be borne by the Corporation.
(b) In the event that, as the result of a stock split or stock dividend or
combination of shares or any other change or exchange for other securities by
reclassification, reorganization, merger, consolidation, recapitalization, or
otherwise, a Participant shall, as the owner of the shares subject to an Award
made under this Plan and subject to the restrictions hereunder, be entitled to
new or additional or different shares of Common Stock or other securities, the
certificate or certificates for, or other evidence of, such new or additional or
different shares or other securities, together with a stock power or other
instrument of transfer appropriately endorsed, shall also be imprinted with a
legend as provided in subparagraph 8(a) above and deposited by such Participant
with the Trustees, and all provisions of this Plan relating to vesting,
restrictions, and lapse of restrictions herein set forth shall thereupon be
applicable to such new or additional or different shares or other securities to
the extent applicable to the shares with respect to which they were distributed;
provided, however, that if a Participant should receive rights, warrants, or
fractional interests in respect of any of such shares then being held under the
terms of this Plan, such rights or warrants may be held, exercised, sold, or
otherwise disposed of, and such fractional interests may be settled, by such
Participant free and clear of the restrictions herein set forth.
(c) The restriction to which shares subject to an Award made under this
Plan shall be subject is that if the directorship or employment of a Participant
should be terminated for any reason during the "restricted period" (as defined
in subparagraph 12(b) hereof), except as otherwise specifically provided in
paragraph 6 hereof, the Participant's interest in the shares issued under this
Plan shall be forfeited as provided in the applicable schedule in subparagraph
6(a) hereof.
(d) The restrictions imposed on shares issued under this Plan may at any
time be modified, reduced, relaxed, or eliminated altogether as the Board shall
from time to time determine, if, in its discretion, the Board considers such
action to be in furtherance of the purposes of this Plan. Notice of any change
in restrictions shall be given to Participants, the Trustees and the
Corporation's transfer agent.
9. Effect of Award on Status of Participant. The fact that an Award is made
to a Participant under this Plan shall not confer on such Participant any right
to continued employment with the Corporation or any subsidiary of the
Corporation or service on its Board of Directors; nor shall it limit the right
of the Corporation to terminate the Participant's employment with the
Corporation or service on the Board of Directors at any time.
10. Voting Rights; Dividends; Other Distributions. A Participant shall have
the full power to vote all of the shares held by the Trustees in the
Participant's name from time to time and shall be entitled to receive all cash
dividends declared upon any such shares held by the
5
<PAGE>
Trustees in the Participant's name from time to time. All shares of Common Stock
or other securities, including but not limited to stock dividends, issued in
respect of such shares or in substitution thereof, whether by the Corporation or
by another issuer, shall be held by the Trustees and shall be subject to all
terms and conditions of this Plan and shall be redelivered to a Participant or
delivered as instructed by the Board under the same circumstances as the shares
with respect to, or in substitution for, which they were issued; provided,
however, that if a Participant should receive rights, warrants, or fractional
interests in respect of any of the shares held by the Trustees in the
Participant's name, such rights or warrants may be held, exercised, sold, or
otherwise disposed of, and such fractional interests may be settled, by such
Participant free and clear of the restrictions herein set forth. The Trustees
shall have the full power to vote all Available Shares, subject to the direction
of the Board. Cash dividends declared upon Available Shares shall be deposited
in an interest bearing account established for this Plan and shall be available
to fund future Awards, tax payments made pursuant to paragraph 13 or any other
purpose determined by the Board to be appropriate.
11. Adjustment Upon Changes in Capitalization; Dissolution; or Liquidation
(a) In the event of a change in the number of shares of Common Stock
outstanding by reason of a reclassification, recapitalization, reorganization,
merger, or consolidation, or other similar capital adjustment, merger or
consolidation of the Corporation, or the sale by the Corporation of all or a
substantial portion of its assets, or the occurrence of any other event which
could affect the implementation of this Plan and the realization of its
objectives, the Board may make such adjustments in the terms, conditions, or
restrictions of this Plan and in any Restricted Stock Agreement then in effect,
as the Board shall deem equitable and just.
(b) The making of an Award under this Plan shall not affect in any way the
right or power of the Corporation or its shareholders to make or authorize any
adjustment, recapitalization, reorganization, or other change in the
Corporation's capital structure or its business, or any merger or consolidation
of the Corporation, or to issue bonds, debentures, preferred or other preference
stock ahead of or affecting Common Stock or the rights thereof, or the
dissolution or liquidation of the Corporation, or any sale or transfer of all or
any part of the Corporation's assets or business.
12. Non-Transferability
(a) Any shares subject to an Award made under this Plan shall not be sold,
exchanged, transferred, pledged, hypothecated or otherwise disposed of during
the "restricted period." Nothing herein shall preclude a Participant from making
a gift of any such shares to a spouse, child, stepchild, grandchild, parent, or
sibling, or legal dependent of such Participant, or to a trust of which the
beneficiary or beneficiaries of the trust shall be either a person designated
herein or such Participant; provided, however, that any such shares so given by
a Participant shall remain subject to the restrictions, obligations, and
conditions set forth in this Plan. In addition, such shares may be tendered in
response to a tender offer for or a request or invitation to tenders of greater
than fifty (50%) percent of the outstanding Common Stock and may be surrendered
in a merger, consolidation, or share exchange involving the Corporation;
provided, however, in each
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<PAGE>
case, that except as otherwise provided herein, the securities or other
consideration received in exchange therefor shall thereafter be subject to the
restrictions and conditions set forth in this Plan.
(b) The term "restricted period" with respect to shares subject to an Award
made under this Plan shall be the period commencing on the date of making such
Award of such shares to a Participant and ending on the date on which such
shares are no longer subject to forfeiture as provided in paragraph 6(a) hereof.
The date of making an Award with respect to the Initial Plan Shares shall be the
Effective Date. The date of making an Award with respect to Available Shares
shall be the date of execution by a Participant of a Restricted Stock Agreement
in the form referred to in subparagraph 7(b) hereof.
13. Tax Withholding. The Corporation shall have the right to deduct or
otherwise effect a withholding of any amount required by federal or state laws
to be withheld with respect to the making of an Award or the sale of shares
acquired under this Plan in order for the Corporation to obtain a tax deduction
otherwise available as a consequence of such Award or sale, as the case may be.
14. Exculpation and Indemnification. In connection with this Plan, no
member of the Board shall be personally liable for any act or omission to act in
such person's capacity as a member of the Board, nor for any mistake in judgment
made in good faith, unless arising out of, or resulting from, such person's own
bad faith, gross negligence, willful misconduct, or criminal acts. To the extent
permitted by applicable law and regulation, the Corporation shall indemnify and
hold harmless the members of the Board and each other officer or employee of the
Corporation to whom any duty or power relating to the administration or
interpretation of this Plan may be assigned or delegated, from and against any
and all liabilities (including any amount paid in settlement of a claim with the
approval of the Board) and any costs or expenses (including counsel fees)
incurred by such persons arising out of or as a result of, any act or omission
to act in connection with the performance of such person's duties,
responsibilities, and obligations under this Plan, other than such liabilities,
costs, and expenses as may arise out of, or result from, the bad faith, gross
negligence, willful misconduct, or criminal acts of such persons.
15. Amendment and Modification of this Plan. The Board may at any time, and
from time to time, amend or modify this Plan (including the form of Restricted
Stock Agreement) in any respect; provided, however, that no amendment or
modification shall be made that increases the total number of Allocated Initial
Plan Shares covered by this Plan, changes the list of Initial Participants or
the number of Allocated Initial Plan Shares allocated to each, or effects any
change in the category of persons who may receive Awards of shares under this
Plan. Any amendment or modification of this Plan shall not in any manner affect
any Award of shares theretofore made to a Participant under this Plan without
the consent of such Participant or the transferee in the event of the death of
such Participant.
16. Termination and Expiration of this Plan. This Plan may be abandoned,
suspended, or terminated, in whole or in part, at any time by the Board;
provided, however, that abandonment, suspension, or termination of this Plan
shall not affect any Awards theretofore
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<PAGE>
made under this Plan. Unless sooner terminated, this Plan shall terminate at the
close of business on the day that is the tenth (10th) anniversary of the
Effective Date, or the next business day thereafter; and no Award of shares may
be made under this Plan thereafter but such termination shall not effect any
Award of shares theretofore made. In the event that the Board terminates this
Plan in whole, any Available Shares that had not been allocated to eligible
Participants together with any other trust assets, shall revert to the
Corporation.
17. Effective Date. This Plan has been adopted by the Board to be effective
as of the first business day following approval by the shareholders of the
Corporation at an annual or special meeting (the "Effective Date").
18. Captions and Headings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Plan. As used herein, the
masculine gender shall include the feminine and neuter, the singular number, the
plural, and vice versa, whenever such meanings are appropriate.
19. Expenses of Administration of Plan. All costs and expenses incurred in
the operation and administration of this Plan shall be borne by the Corporation.
The Corporation shall also indemnify, defend, and hold the Trustees harmless
against all claims, expenses, and liabilities arising out of or related to the
exercise of the Trustees' powers and the discharge of the Trustees' duties
hereunder.
20. Governing Law. Without regard to the principles of conflicts of laws,
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
21. Inspection of Plan. A copy of this Plan, and any amendments thereto,
shall be maintained by the Secretary of the Corporation and shall be shown to
any proper person making inquiry about it.
8
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STATE OF NORTH CAROLINA EXHIBIT A
COUNTY OF ROWAN
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (hereinafter referred to as this
"Agreement") is made and entered into as of this _______ day of _______________,
1998 (hereinafter referred to as the "Effective Date"), by and among BOC
FINANCIAL CORP. (hereinafter referred to as the "Corporation"), a North Carolina
corporation, (hereinafter referred to as the "Trustees") and _________________,
a resident of ____________ County, North Carolina (hereinafter referred to as
the "Participant").
WHEREAS, the BOC Financial Corp. 1998 Management Recognition Plan
(hereinafter referred to as the "Plan") was adopted by the Board of Directors of
the Corporation (hereinafter referred to as the "Corporate Board"); and
WHEREAS, the Corporate Board has determined that it is desirable and in the
best interest of the Corporation to make an award (the "Award") of certain
shares of common stock, par value $1.00 per share of the Corporation ("Common
Stock"), under the Plan, to the Participant, subject to certain restrictions as
specified below, in recognition of his or her outstanding service to the
Corporation or of one or more of its subsidiaries; and
WHEREAS, in order to enforce the aforesaid restrictions, Participant is
required under the terms of the Award to immediately deposit the certificate(s)
for the shares of Common Stock subject to the Award, together with stock powers
appropriately endorsed in blank, with the Trustees in accordance with the
requirements of this Agreement.
NOW, THEREFORE, the Corporation, the Trustees, and the Participant agree as
follows:
1. Date of Award. The date of making the Award under this Agreement is the
______ day of _____________, 1998.
2. Receipt by Participant. The Participant acknowledges receipt from the
Corporation of (_______) shares of Common Stock (the "Restricted Stock") and
agrees to the execution of stock powers or such other transfer authorizations as
the Corporation shall request, in blank, covering the Restricted Stock to be
held by the Trustees prior to the distribution of the Restricted Stock to the
Participant as hereinafter provided.
3. Investment Representation and Transfer Restrictions
(a) Investment Representation. Participant represents to the
Corporation that the Participant is taking the Restricted Stock for
investment and without any present intention to sell, transfer or otherwise
dispose of the Restricted Stock.
<PAGE>
(b) Securities Law Restrictions. The Participant agrees with the
Corporation that the Restricted Stock shall be subject to such
stop-transfer orders and other restrictions as the Corporate Board may deem
advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which Common
Stock is then listed and any other applicable federal or state securities
laws, rules or regulations, and the Corporate Board may cause a legend or
legends to be placed on any certificate representing any of the shares of
Restricted Stock to make appropriate reference to such restrictions.
(c) Other Transfer Restrictions. The Participant agrees with the
Corporation that at each certificate representing any of the shares of
Restricted Stock may bear a legend, substantially in the form attached as
Exhibit I hereto, to the effect that the shares of Restricted Stock
represented thereby are subject to potential forfeiture and may not be
sold, exchanged, transferred, pledged, hypothecated or otherwise disposed
of except in accordance with the terms of this Agreement, and shall be
subject to such stop-transfer orders and other restrictions as the
Corporate Board shall deem advisable to insure compliance with the terms of
this Agreement.
4. Receipt by the Trustees. The Trustees acknowledge receipt from the
Participant of the Restricted Stock, registered in the name of the Participant,
and acknowledge receipt of stock powers executed in blank by the Participant
covering all of the Restricted Stock. The Restricted Stock shall be held by the
Trustees and distributed or transferred as directed by the Corporate Board.
5. Vesting and Delivery of Restricted Stock by the Trustees
(a) Periodic Vesting. Subject to subparagraphs 5(b), 5(c), 5(d), 5(e)
below, the Restricted Stock shall vest and become nonforfeitable in
accordance with the following schedules, as applicable:
(i) With respect to any shares of Restricted Stock which are
Allocated Initial Plan Shares as defined in the Plan:
On the Date of Award: 0% vested
On or after the first anniversary
of the date of Award: 20% vested
On or after the second anniversary
of the date of Award: 40% vested
On or after the third anniversary of
the date of Award: 60% vested
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<PAGE>
On or after the fourth anniversary of
the date of Award: 80% vested
On or after the fifth anniversary of the
date of Award 100% vested
(ii) With respect to any shares of Restricted Stock which were
Available Shares as defined in the Plan:
On the Date of Award: 0% vested
On or after the first
anniversary of the date of Award: 20% vested
On or after the second
anniversary of the date of Award: 40% vested
On or after the third anniversary
of the date of Award: 60% vested
On or after the fourth
anniversary of the date of Award: 80% vested
On or after the fifth anniversary of the
date of Award 100% vested
(b) Accelerated Vesting. Notwithstanding paragraph (a) above, all
Restricted Stock previously not vested and subject to forfeiture shall vest
and the right of the Participant to such shares of the Restricted Stock
shall become nonforfeitable upon the occurrence of any of the following:
(i) Disability or Death of Participant. The termination of the
Participant's membership on the Corporate Board or of his or her
employment by the Corporation by reason of disability or death. For
purposes of this Plan, the term "disability" shall (i) with respect to
any Participant who is an employee of the Corporation or of any of its
subsidiaries, be defined in the same manner as such term is defined,
in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended,
and (ii) if the Participant is not such an employee, as may be defined
by the Corporate Board from time to time, or as may be determined by
the Corporate Board at any time with respect to the Participant. A
Participant who is both a member of the Corporate Board and an
employee of the Corporation shall be treated solely as an employee for
purposes of this subparagraph (b)(ii).
(ii) Change in Control. Notice of a "change in control" of the
Corporation being given by the Corporate Board. For the purpose of
this
3
<PAGE>
Agreement, a "change in control" of the Corporation means (i) the
acquisition by any person, group of persons or entity of the
beneficial ownership or power to vote more than twenty-five (25%)
percent of the outstanding Common Stock or (ii) during any period of
two (2) consecutive years, a change in the majority of the Corporate
Board, unless the election of each new director was approved by at
least two-thirds (2/3) of the directors then still in office who were
directors at the beginning of the two (2) year period.
(c) Delivery of Restricted Stock to the Participant. Within thirty
(30) days after (i) a date on which shares of Restricted Stock have become
vested as provided in subparagraphs (a) and (b) above, all of such shares
that have become nonforfeitable in accordance with this paragraph 5 shall
be delivered to the Participant or Participant's designee, (ii) receipt of
written notification of Participant's retirement, disability, or death
together with such other documentation as the Corporation shall reasonably
require, or (iii) receipt of written notification by the Corporate Board of
a change in control of the Corporation, the Corporate Board shall instruct
the Trustees to deliver to the Participant, the Participant's designee, or
such other person as shall have been designated as Participant's
beneficiary in accordance with this Agreement, as applicable, certificates
representing the shares of Restricted Stock which have become vested and
nonforfeitable, as the Corporate Board shall determine, free from any
restrictions imposed by this Agreement other than such restrictions and
conditions as may be deemed necessary by the Corporate Board to assure
compliance with all applicable securities laws, rules, regulations and
listing requirements as set forth in subparagraph 3(b) above.
(d) Delivery of Forfeited Restricted Stock. If the Participant's
members on the Corporate Board or on the Board of Directors of any
subsidiary of the Corporation, or employment with the Corporation or any of
its subsidiaries, terminates for any reason other than one of those
provided in subparagraph 5(b) above, before all of the shares of Restricted
Stock are vested in accordance with subparagraphs 5(a) and 5(b) above, all
such shares then subject to forfeiture shall be deemed forfeited by the
Participant and the Corporate Board shall instruct the Trustees concerning
the disposition of such forfeited shares. Thereafter such forfeited shares
shall cease to be subject to this Agreement.
6. Voting Rights; Dividends; Other Distributions. The Participant shall
have the full power to vote all of the Restricted Stock held by the Trustees in
his or her name from time to time and shall be entitled to receive all cash
dividends declared upon any of the Restricted Stock held by the Trustees in his
or her name from time to time. All shares of Common Stock or other securities,
including but not limited to stock dividends, issued in respect of the
Restricted Stock or in substitution thereof, whether by the Corporation or by
another issuer, shall be held by the Trustees and shall be subject to all terms
and conditions of this Agreement and shall be redelivered to the Participant or
delivered as instructed by the Corporate Board under the same circumstances as
the Restricted Stock with respect to, or in substitution for, which they were
issued; provided, however, that if the Participant should receive rights,
warrants or fractional interests in respect of any of the Restricted Stock held
by the Trustees in his or her name, such
4
<PAGE>
rights or warrants may be held, exercised, sold or otherwise disposed of, and
such fractional interests may be settled, by the Participant free and clear of
the restrictions herein set forth.
7. Designation of Beneficiary, The Participant may file with the Corporate
Board a written designation of one or more persons as the beneficiary who shall
be entitled to receive the Restricted Stock, if any, distributable to the
Participant upon his or her death. The Participant may, from time to time,
revoke or change his or her beneficiary designation without the consent of any
prior beneficiary, if any, by filing a new designation with the Corporate Board.
The last such designation received by the Corporate Board shall be controlling;
provided, however, that no designation, or change of revocation thereof, shall
be effective unless received by the Corporate Board prior to the Participant's
death, and in no event shall it be effective as of a date prior to such receipt.
If no such beneficiary designation is in effect at the time of the
Participant's death, or if no designated beneficiary survives the Participant,
or if such designation conflicts with law, the Participant's estate shall be
deemed to have been designated his or her beneficiary and shall be deemed to
have been designated his or her beneficiary and shall receive the Restricted
Stock, if any, distributable to the Participant upon the Participant's death. If
the Corporate Board is in doubt as to the right of any person to receive such
distribution, the Corporate Board may direct the Trustees to retain the
Restricted Stock, without liability for any interest in respect thereof, until
the rights thereto are determined, or the Corporate Board may direct the
transfer of such Restricted Stock into any court of appropriate jurisdiction and
such transfer shall be deemed a complete discharge of the obligations of the
Corporation hereunder.
8. Effect of Award on Status of Participant. The fact that an Award has
been made to the Participant under this Plan shall not confer on the Participant
any right to continued service on the Corporate Board or on the Board of
Directors of any subsidiary of the Corporation, nor to continued employment with
the Corporation or any of its subsidiaries; nor shall it limit the right of the
Corporation or of any of its subsidiaries to remove the Participant from their
respective boards, or to terminate his or her employment at any time.
9. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation
(a) In the event of a change in the number of shares of Common Stock
outstanding by reason of a reclassification, recapitalization,
reorganization, merger, or consolidation, or other similar capital
adjustment, merger or consolidation of the Corporation, or the sale by the
Corporation of all or a substantial portion of its assets, or the
occurrence of any other event which could affect the implementation of this
Plan and the realization of its objectives, the Corporate Board may make
such adjustments in the terms, conditions, or restrictions of this
Agreement as the Corporate Board shall deem equitable and just.
(b) The making of the Award under this Agreement does not affect in
any way the right or power of the Corporation or its shareholders to make
or authorize any adjustment, recapitalization, reorganization, or other
change in the Corporation's capital
5
<PAGE>
structure or its business, or any merger or consolidation of the
Corporation, or to issue bonds, debentures, preferred or other preference
stock ahead of or affecting Common Stock or the rights thereof, or the
dissolution or liquidation of the Corporation, or any sale or transfer of
all or any part of the Corporation's assets or business.
10. Non-Transferability. The Restricted Stock may not be sold, exchanged,
transferred, pledged, hypothecated, or otherwise disposed of by the Participant
until transferred to the Participant by the Trustees in accordance with the
terms of this Agreement. Nothing herein shall preclude the Participant from
making a gift of any Restricted Stock to a spouse, child, stepchild, grandchild,
parent, sibling, or legal dependent of the Participant, or to a trust of which
the beneficiary or beneficiaries of the trust shall be either a person
designated herein or the Participant, provided, however, that any Restricted
Stock so given shall remain subject to the restrictions, obligations and
conditions set forth in this Agreement. In addition, the Restricted Stock may be
tendered in response to a tender offer for or a request or invitation to tenders
of greater than fifty percent (50%) of the common stock of the Corporation and
may be surrendered in a merger, consolidation or share exchange involving the
Corporation; provided, however, in each case, that except as otherwise provided
in paragraph 6 above, the security or other consideration received in exchange
therefor shall thereafter be subject to the restrictions and conditions set
forth in this Agreement.
11. Tax. All Restricted Stock distributed pursuant to this Agreement, and
any amounts distributed with respect thereto prior to distribution of such
Restricted Stock by the Trustees, shall be subject to applicable federal, state
and local withholding for taxes. The Participant expressly acknowledges and
agrees to such withholding without regard to whether the Restricted Stock may
then be sold or otherwise transferred by the Participant.
12. Notices. Any notices or other communications required or permitted to
be given under this Agreement shall be in writing and shall be deemed to have
been sufficiently given if delivered personally or when deposited in the United
States mail as Certified Mail, return receipt requested, properly addressed and
postage prepaid, if to the Corporation at its principal office at 107 South
Central Avenue, Landis, North Carolina 28088; and, if to the Participant, at his
or her last address appearing on the books of the Corporation or of any of its
last subsidiaries. The Corporation or any of its subsidiaries and the
Participant may change their address or addresses by giving written notice of
such change as provided herein. Any notice or other communication hereunder
shall be deemed to have been given on the date actually delivered or as of the
third (3rd) business day following the date mailed, as the case may be.
13. Construction Controlled by Plan. This Agreement shall be construed so
as to be consistent with the Plan; and the provisions of the Plan shall be
deemed to be controlling in the event that any provision hereof should appear to
be inconsistent therewith. The Participant hereby acknowledges receipt of a copy
of the Plan from the Corporation.
14. Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such a manner as to be valid and enforceable under applicable
law, but if any provision of this Agreement is determined to be unenforceable,
invalid or illegal, the validity of
6
<PAGE>
any other provision or part thereof, shall not be affected thereby and this
Agreement shall continue to be binding on the parties hereto as if such
unenforceable, invalid or illegal provision or part thereof had not been
included herein.
15. Modification of Agreement; Waiver. This Agreement may be modified,
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto. No waiver hereunder shall constitute a waiver with respect to any
subsequent occurrence or other transaction hereunder or of any other provision
hereof.
16. Captions and Headings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Agreement. As used herein,
the masculine gender shall include the feminine and neuter, the singular number
the plural, and vice versa, whenever such meanings are appropriate.
17. Governing Law: Venue and Jurisdiction. Without regard to the principles
of conflicts of laws, the laws of the State of North Carolina shall govern and
control the validity, interpretation, performance, and enforcement of this
Agreement. The parties hereto agree that any suit or action relating to this
Agreement shall be instituted and prosecuted in the courts of the County of
Rowan, State of North Carolina, and each party hereby does waive any right or
defense relating to such jurisdiction and venue.
18. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the Corporation, and its successors and assigns, and shall be
binding upon and inure to the benefit of the Trustees and the Participant, and
their respective heirs, legatees, personal representatives, executors and
administrators.
19. Entire Agreement. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto and, except as otherwise
provided hereunder, there are no other agreements or understandings, written or
oral, in effect between the parties hereto relating to the matters addressed
herein.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed in its corporate name by its President, its Chairman of the Board of
Directors, or one of its Vice Presidents, and attested by its Secretary or any
of its Assistant Secretaries, and its corporate seal to be hereto affixed, all
by authority of its Board of Directors first duly given; and the individual
parties hereto have hereunto set his or her hand and adopted as his or her seal
the typewritten word "SEAL" appearing beside his or her name, all done this the
day and year first above written.
BOC FINANCIAL CORP.
By: ___________________________
_______________________________
ATTEST:
___________________________
______________ Secretary
[Corporate Seal]
________________________ (SEAL)
__________________, Trustee
________________________ (SEAL)
__________________, Trustee
8
<PAGE>
EXHIBIT I
Form of Legend
The shares represented by this certificate are subject to restrictions on
transfer and potential forfeiture under the terms of a Restricted Stock
Agreement dated ______________, 1998, a copy of which agreement may be obtained
from the issuer by writing to:
BOC Financial Corp.
107 South Central Avenue
Landis, North Carolina 28088
Attention: Corporate Secretary
9
BOC FINANCIAL CORP.
1998 NONSTATUTORY STOCK OPTION PLAN
BOC Financial Corp., a North Carolina corporation (hereinafter referred to
as the "Corporation"), does herein set forth the terms of the BOC Financial
Corp. 1998 Nonstatutory Stock Option Plan (hereinafter referred to as this
"Plan"), which was adopted by the Board of Directors (hereinafter referred to as
the "Board") of the Corporation subject to approval by the Corporation's
shareholders as provided in paragraph 20 hereof.
1. Purpose of this Plan. The purpose of this Plan is to provide for the
grant of Nonstatutory Stock Options (hereinafter referred to as "Options" or
singularly, "Option") to Eligible Directors (as hereinafter defined) of the
Corporation who wish to invest in the Corporation's common stock (hereinafter
referred to as "Common Stock"). The Board believes that participation in the
ownership of the Corporation by the Eligible Directors will be to the mutual
benefit of the Corporation and the Eligible Directors. In addition, the
existence of this Plan will make it possible for the Corporation to attract
capable individuals to serve on the Board. As used herein, the term "Eligible
Directors" or singularly, "Eligible Director," shall mean those members of the
Board who are not employed by the Corporation and are ineligible to participate
in the BOC Financial Corp. 1998 Incentive Stock Option Plan.
2. Administration of this Plan
(a) This Plan shall be administered by the Board. The Board shall have full
power and authority to construe, interpret and administer this Plan. All
actions, decisions, determinations, or interpretations of the Board shall be
final, conclusive, and binding upon all parties.
(b) The Board may designate any officers or employees of the Corporation or
of any of its subsidiaries to assist in the administration of this Plan. The
Board may authorize such individuals to execute documents on its behalf and may
delegate to them such other ministerial and limited discretionary duties as the
Board may see fit.
3. Shares of Common Stock Subject to this Plan. The maximum number of
shares of Common Stock that shall be offered under this Plan is
_____________________ (______) shares, subject to adjustment as provided in
paragraph 14. Shares subject to Options which expire or terminate prior to the
issuance of the shares of Common Stock shall lapse and the shares of Common
Stock originally subject to such Options shall again be available for future
grants of Options under this Plan.
4. Eligibility; Grant of Options. Each Eligible Director serving on the
Board shall receive an Option to purchase shares of Common Stock in the amount
set forth below:
<PAGE>
Name Number of Shares
---- ----------------
-------------- ------
-------------- ------
-------------- ------
-------------- ------
-------------- ------
-------------- ------
-------------- ------
Total ------
5. Vesting of Options
(a) Options granted under this Plan shall vest and the right of an Optionee
to exercise an Option shall be nonforfeitable in accordance with the following
schedules:
(i) With respect to the Options which are granted as of the Effective
Date (as hereinafter defined):
Date When Such Options Percentage of Such
Become Vested Options Vested
---------------------- -------------------
Effective Date of Plan 0%
First Anniversary of Effective Date 20%
Second Anniversary of Effective Date 20%
Third Anniversary of Effective Date 20%
Fourth Anniversary of Effective Date 20%
Fifth Anniversary of Effective Date 20%
(ii) With respect to the any Options which may be granted after the
Effective Date:
Date When Such Options Percentage of Such
Become Vested Options Vested
---------------------- -------------------
Date of grant 0%
First Anniversary of the date of grant 20%
Second Anniversary of the date of grant 20%
Third Anniversary of the date of grant 20%
Fourth Anniversary of the date of grant 20%
Fifth Anniversary of the date of grant 20%
(b) In determining the number of shares of Common Stock under each Option
vested under the above vesting schedules, an Optionee shall not be entitled to
exercise an Option
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to purchase a fractional number of shares of the Common Stock. If the product
resulting from multiplying the vested percentage times the Options results in a
fractional number of shares of Common Stock, then an Optionee's vested right
shall be to the whole number of shares of Common Stock, disregarding any
fractional shares of Common Stock.
(c) In the event any Optionee to whom Options are granted under this Plan
terminates service as a Director with the Corporation for any reason, other than
as provided in subparagraph 5(d) below, and such Optionee does not have a 100%
vested interest in the Optionee's Options under this Plan, then any Options
which are not vested, based upon the applicable schedule in subparagraph (a)
above, shall be forfeited and shall be available again for grants to Eligible
Directors as may be determined by the Board.
(d) In the event that the service of an Optionee as a director with the
Corporation should terminate because of such Optionee's disability, death or
change in control of the Corporation (as such term is defined below) prior to
the date when all Options allocated to the Optionee would be 100% vested in
accordance with the applicable schedule in subparagraph 5(a) above, then,
notwithstanding the foregoing schedules in subparagraph 5(a) above, all Options
allocated to such Optionee shall immediately become fully vested and
nonforfeitable. For purposes of this Plan, the term "disability" shall be
defined as may be determined by the Board, from time to time, or as determined
at any time with respect to any individual nominee. When used herein, the phrase
"change in control" refers to (i) the acquisition by any person, group of
persons or entity of the beneficial ownership or power to vote more than
twenty-five (25%) percent of the Corporation's outstanding stock, (ii) during
any period of two (2) consecutive years, a change in the majority of the Board
unless the election of each new Director was approved by at least two-thirds of
the Directors then still in office who were Directors at the beginning of such
two (2) year period, or (iii) a reorganization, merger, or consolidation of the
Corporation with one or more other corporations in which the Corporation is not
the surviving corporation, or the transfer of all or substantially all of the
assets or shares of the Corporation to another person or entity.
6. Option Price
(a) The price per share of each Option granted under this Plan (hereinafter
called the "Option Price") shall be determined by the Board as of the effective
date of grant of such Option, but in no event shall such Option Price be less
than 100% of the fair market value of Common Stock on the date of grant. An
Option shall be considered as granted on the later of (i) the date that the
Board acts to grant such Option, or (ii) such later date as the Board shall
specify in an Option Agreement (as hereinafter defined).
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(b) The fair market value of a share of Common Stock shall be determined as
follows: (i) if on the date as of which such determination is being made, Common
Stock being valued is admitted to trading on a securities exchange or exchanges
for which actual sale prices are regularly reported, or actual sale prices are
otherwise regularly published, the fair market value of a share of Common Stock
shall be deemed to be equal to the mean of the closing sale price as reported
for each of the five (5) trading days immediately preceding the date as of which
such determination is made; provided, however, that, if a closing sale price is
not reported for each of the five (5) trading days immediately preceding the
date as of which such determination is made, then the fair market value shall be
equal to the mean of the closing sale prices on those trading days for which
such price is available, or (ii) if on the date as of which such determination
is made, no such closing sale prices are reported, but quotations for Common
Stock being valued are regularly listed on the National Association of
Securities Dealers Automated Quotation System or another comparable system, the
fair market value of a share of Common Stock shall be deemed to be equal to the
mean of the average of the closing bid and asked prices for such Common Stock
quoted on such system on each of the five (5) trading days preceding the date as
of which such determination is made, but if a closing bid and asked price is not
available for each of the five (5) trading days, then the fair market value
shall be equal to the mean of the average of the closing bid and asked prices on
those trading days during the five-day period for which such prices are
available, or (iii) if no such quotations are available, the fair market value
of a share of Common Stock shall be deemed to be the average of the closing bid
and asked prices furnished by a professional securities dealer making a market
in such shares, as selected by the Board, for the trading date first preceding
the date as of which such determination is made. If the Board determines that
the price as determined above does not represent the fair market value of a
share of Common Stock, the Board may then consider such other factors as it
deems appropriate and then fix the fair market value for the purposes of this
Plan.
7. Payment of Option Price. Payment for shares subject to an Option may be
made either in cash, or with the approval of the Board, in other stock of the
Corporation owned by an Eligible Director or such other person as may be
entitled to exercise such Option. Any shares of the Corporation's stock that are
delivered in payment of the aggregate Option Price shall be valued at their fair
market value, as determined by the Board, on the date of the exercise of such
Option.
8. Terms and Conditions of Grant of Options. Each Option granted pursuant
to this Plan shall be evidenced by a written Nonstatutory Stock Option Agreement
(hereinafter referred to as "Option Agreement") with each Eligible Director
(hereinafter referred to as "Optionee") to whom an Option is granted; such
agreement shall be substantially in the form attached hereto as "Exhibit A,"
unless the Board shall adopt a different form and, in each case, may contain
such other, different, or additional terms and conditions as the Board may
determine.
9. Option Period. Each Option Agreement shall set forth a period during
which such Option may be exercised (hereinafter referred to as the "Option
Period"); provided, however, that the Option Period shall not exceed ten (10)
years after the date of grant of such Option as specified in an Option
Agreement.
4
<PAGE>
10. Exercise of Options. An Option shall be exercised by written notice to
the Board signed by an Optionee or by such other person as may be entitled to
exercise such Option. In the case of the exercise of an Option, the aggregate
Option Price for the shares being purchased may be paid either in cash or, with
the approval of the Board, in shares of the Corporation's stock (valued as
determined by the Board as of the date of exercise) or any combination thereof
and the notice of exercise shall specify how payment will be made. The written
notice shall state the number of shares with respect to which an Option is being
exercised and shall either be accompanied by the payment of the aggregate Option
Price for such shares or shall fix a date (not more than ten (10) business days
after the date of such notice) by which the payment of the aggregate Option
Price will be made. An Optionee shall not exercise an Option to purchase less
than 100 shares, unless the Board otherwise approves or unless the partial
exercise is for the remaining shares available under such Option. A certificate
or certificates for the shares of Common Stock purchased by the exercise of an
Option shall be issued in the regular course of business subsequent to the
exercise of such Option and the payment therefor. During the Option Period, no
person entitled to exercise any Option granted under this Plan shall have any of
the rights or privileges of a shareholder with respect to any shares of Common
Stock issuable upon exercise of such Option, until certificates representing
such shares shall have been issued and delivered and the individual's name
entered as a shareholder of record on the books of the Corporation for such
shares.
11. Effect of Leaving the Board or Death
(a) In the event that an Optionee leaves the Board for any reason other
than retirement, disability, or death, any Option granted to the Optionee under
this Plan, to the extent not previously exercised by the Optionee or expired,
shall immediately terminate.
(b) In the event that an Optionee should leave the Board as a result of
such Optionee's retirement, such Optionee shall have the right to exercise an
Option granted under this Plan, to the extent that it has not previously been
exercised by the Optionee or expired, for such period of time as may be
determined by the Board and specified in an Option Agreement, but in no event
may any Option be exercised later than the end of the Option Period provided in
the Option Agreement in accordance with paragraph 8 hereof. For purposes of this
Plan, the term "retirement" shall mean termination of an Eligible Director's
membership on the Board (i) at any time after attaining age 65 with the approval
of the Board; or (ii) at the election of the Eligible Director, at any time
after not less than five (5) years service as a member of the Board, such
service shall be computed cumulatively for purposes of this clause (ii).
(c) In the event that an Optionee should leave the Board by reason of such
Optionee's disability, such Optionee shall have the right to exercise an Option
granted under this Plan, to the extent that it has not previously been exercised
or expired, for such period of time as may be determined by the Board and
specified in an Option Agreement, but in no event may any Option be exercised
later than the end of the Option Period provided in the Option Agreement in
accordance with paragraph 8 hereof. Notwithstanding any other provision
contained herein, or in any Option Agreement, upon leaving by reason of
disability, any Option then held by an Optionee shall be exercisable immediately
in full. For purposes of this Plan, the term "disability" shall be
5
<PAGE>
defined as may be determined by the Board, from time to time, or as determined
at any time with respect to any individual Optionee.
(d) In the event that an Optionee should die while serving on the Board or
after leaving by reason of disability during the Option Period provided in an
Option Agreement in accordance with paragraph 8 hereof, an Option granted under
this Plan, to the extent that it has not previously been exercised or expired,
shall vest and shall be exercisable, in accordance with its terms, by the
personal representative of such Optionee, the executor or administrator of such
Optionee's estate, or by any person or persons who acquired such Option by
bequest or inheritance from such Optionee, notwithstanding any limitations
placed on the exercise of such Option by this Plan or an Option Agreement, at
any time within twelve (12) months after the date of death of such Optionee, but
in no event may an Option be exercised later than the end of the Option Period
provided in an Option Agreement in accordance with paragraph 8 hereof. Any
references herein to an Optionee shall be deemed to include any person entitled
to exercise an Option after the death of such Optionee under the terms of this
Plan.
12. Effect of Plan on Status as Member of a Board. The fact that an
Eligible Director has been granted an Option under this Plan shall not confer on
such Eligible Director any right to continued service on the Board, nor shall it
limit the right of the Corporation to remove such Eligible Director from the
Board at any time.
13. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation
(a) In the event of a change in the number of shares of Common Stock
outstanding by reason of a stock dividend, stock split, recapitalization,
reorganization, merger, exchange of shares, or other similar capital adjustment
prior to the termination of an Optionee's rights under this Plan, equitable
proportionate adjustments shall be made by the Board in (i) the number and kind
of shares which remain available under this Plan, and (ii) the number, kind, and
the Option Price of shares subject to the unexercised portion of an Option under
this Plan. The adjustments to be made shall be determined by the Board and shall
be consistent with such change or changes in the Corporation's total number of
outstanding shares; provided, however, that no adjustment shall change the
aggregate Option Price for the exercise of Options granted under this Plan.
(b) The grant of Options under this Plan shall not affect in any way the
right or power of the Corporation or its shareholders to make or authorize any
adjustment, recapitalization, reorganization, or other change in the
Corporation's capital structure or its business, or any merger or consolidation
of the Corporation, or to issue bonds, debentures, preferred or other preference
stock ahead of or affecting Common Stock or the rights thereof, or the
dissolution or liquidation of the Corporation, or any sale or transfer of all or
any part of the Corporation's assets or business.
(c) Except upon a change in control as set forth in paragraph 10 hereof,
upon the effective date of the dissolution or liquidation of the Corporation,
this Plan and any Options granted hereunder, shall terminate.
6
<PAGE>
14. Non-Transferability. An Option granted under this Plan shall not be
assignable or transferable except, in the event of the death of an Optionee, by
will or by the laws of descent and distribution. In the event of the death of an
Optionee, his personal representative, the executor or the administrator of such
Optionee's estate, or the person or persons who acquired by bequest or
inheritance the rights to exercise such Options, may exercise any Option or
portion thereof to the extent not previously exercisable or surrendered by an
Optionee or expired, in accordance with its terms, prior to the expiration of
the exercise period as specified in subparagraph 11(d) hereof.
15. Tax Withholding. The Corporation or any of its subsidiaries shall have
the right to deduct or otherwise effect a withholding of any amount required by
federal or state laws to be withheld with respect to the grant, exercise or the
sale of stock acquired upon the exercise of an Option in order for the
Corporation or any of its subsidiaries to obtain a tax deduction otherwise
available as a consequence of such grant, exercise or sale, as the case may be.
16. Listing and Registration of Option Shares. Any Option granted under
this Plan shall be subject to the requirement that if at any time the Board
shall determine, in its discretion, that the listing, registration, or
qualification of the shares covered thereby upon any securities exchange or
under any state or federal law or the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in connection
with, the granting of such Option or the issuance or purchase of shares
thereunder, such Option may not be exercised in whole or in part unless and
until such listing, registration, qualification, consent, or approval shall have
been effected or obtained free of any conditions not acceptable to the Board.
17. Exculpation and Indemnification. In connection with this Plan, no
member of the Board shall be personally liable for any act or omission to act in
such person's capacity as a member of the Board, nor for any mistake in judgment
made in good faith, unless arising out of, or resulting from, such person's own
bad faith, gross negligence, willful misconduct, or criminal acts. To the extent
permitted by applicable law and regulation, the Corporation shall indemnify and
hold harmless the members of the Board, and each other officer or employee of
the Corporation or of any of its subsidiaries to whom any duty or power relating
to the administration or interpretation of this Plan may be assigned or
delegated, from and against any and all liabilities (including any amount paid
in settlement of a claim with the approval of the Board) and any costs or
expenses (including counsel fees) incurred by such persons arising out of or as
a result of, any act or omission to act in connection with the performance of
such person's duties, responsibilities, and obligations under this Plan, other
than such liabilities, costs, and expenses as may arise out of, or result from,
the bad faith, gross negligence, willful misconduct, or criminal acts of such
persons.
18. Amendment and Modification of this Plan. The Board may at any time, and
from time to time, amend or modify this Plan (including the form of Option
Agreement) in any respect; provided, however, that no amendment or modification
shall be made that increases the total number of shares covered by this Plan or
effects any change in the category of persons who may receive Options under this
Plan or materially increases the benefits accruing to Optionees
7
<PAGE>
under this Plan unless such change is approved by the holders of a majority of
the outstanding shares of Common Stock present or represented at a shareholders'
meeting at which a quorum is present. Any amendment or modification of this Plan
shall not materially reduce the benefits under any Option therefore granted to
an Optionee under this Plan without the consent of such Optionee or the
transferee in the event of the death of such Optionee.
19. Termination and Expiration of this Plan. This Plan may be abandoned,
suspended, or terminated at any time by the Board; provided, however, that
abandonment, suspension, or termination of this Plan shall not affect any
Options then outstanding under this Plan. No Option shall be granted pursuant to
this Plan after ten (10) years from the effective date of this Plan as provided
in paragraph 20 hereof.
20. Effective Date; Shareholder Approval. This Plan shall not be effective
until approved by the holders of a majority of the outstanding shares of Common
Stock present or represented at an annual or special shareholders' meeting at
which a quorum is present (the "Effective Date"); which shareholder vote shall
be taken at a meeting of the shareholders of the Corporation to occur on a date
not sooner than six months after the effective date of the conversion from
mutual to stock form of Landis Savings Bank, SSB pursuant to the Plan of
Conversion dated September 29, 1997.
21. Captions and Headings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Plan. As used herein, the
masculine gender shall include the feminine and neuter, the singular number, the
plural, and vice versa, whenever such meanings are appropriate.
22. Expenses of Administration of Plan. All costs and expenses incurred in
the operation and administration of this Plan shall be borne by the Corporation
or by one of its subsidiaries.
23. Governing Law. Without regard to the principles of conflicts of laws,
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
24. Inspection of Plan. A copy of this Plan, and any amendments thereto or
modifications thereof, shall be maintained by the Secretary of the Corporation
and shall be shown to any proper person making inquiry about it.
8
<PAGE>
STATE OF NORTH CAROLINA EXHIBIT A
COUNTY OF ROWAN
NONSTATUTORY STOCK OPTION AGREEMENT
THIS NONSTATUTORY STOCK OPTION AGREEMENT (hereinafter referred to as this
"Agreement") is made and entered into as of this ____ day of _______, 199_,
between BOC FINANCIAL CORP., a North Carolina corporation (hereinafter referred
to as the "Corporation"), and _________________________________, a resident of
_______________ County, North Carolina (hereinafter referred to as the
"Optionee").
WHEREAS, the Board of Directors of the Corporation (hereinafter referred to
as the "Board") has adopted the BOC Financial Corp. 1998 Nonstatutory Stock
Option Plan (hereinafter referred to as the "Plan") subject to approval by the
Corporation's shareholders as provided in the Plan; and
WHEREAS, the shareholders of the Corporation at the [annual] [special]
meeting duly called and held on ________, 199__, approved the Plan (the
"Effective Date"); and
WHEREAS, the Plan provides that the Board will make available to the
Directors (as defined in the Plan) of the Corporation, the right to purchase
shares of the Corporation's common stock (hereinafter referred to as "Common
Stock"); and
WHEREAS, the Board has determined that the Optionee is entitled to purchase
shares of Common Stock under the Plan;
NOW, THEREFORE, the Corporation and the Optionee agree as follows:
1. Date of Grant of Option. The date of grant of the option granted under
this Agreement is the ______ day of _______, 199_.
2. Grant of Option. Pursuant to the Plan, the Corporation grants to the
Optionee the right (hereinafter referred to as the "Option") to purchase from
the Corporation all or a portion of an aggregate number of __________________
(______) shares of Common Stock (hereinafter referred to as the "Option Shares")
which shall be authorized but unissued shares.
3. Vesting and Delivery of Restricted Stock by the Trustees
(a) Periodic Vesting. Subject to subparagraphs 3(b) and 3(c) below, the
Option shall vest and become nonforfeitable in accordance with the following
schedules, as applicable:
<PAGE>
(i) With respect to any Options which are granted under the Plan as of
the Effective Date:
============================================================ ===================
Effective Date of the Plan: 0% vested
- ------------------------------------------------------------ -------------------
First anniversary of the Effective Date of the Plan:
20% vested
- ------------------------------------------------------------ -------------------
Second anniversary of the Effective Date of the Plan:
40% vested
- ------------------------------------------------------------ -------------------
Third anniversary of the Effective Date of the Plan:
60% vested
- ------------------------------------------------------------ -------------------
Fourth anniversary of the Effective Date of the Plan:
80% vested
- ------------------------------------------------------------ -------------------
Fifth anniversary of the Effective Date of the Plan:
100% vested
============================================================ ===================
(ii) With respect to any Options which may be granted after the
Effective Date:
============================================================ ===================
Date of grant: 0% vested
============================================================ ===================
First anniversary of the date of grant: 20% vested
- ------------------------------------------------------------ -------------------
Second anniversary of the date of grant: 40% vested
- ------------------------------------------------------------ -------------------
Third anniversary of the date of grant: 60% vested
- ------------------------------------------------------------ -------------------
Fourth anniversary of the date of grant: 80% vested
- ------------------------------------------------------------ -------------------
Fifth anniversary of the date of grant: 100% vested
============================================================ ===================
(b) Fractional Option Shares. In determining the number of Option Shares
vested under the above vesting schedule, an Optionee shall not be entitled to
exercise an Option for a fractional number of Option Shares. If the product
resulting from multiplying the vested percentage times the allocated Option
results in a fractional number of Option Shares, then the Optionee's vested
right shall be to the whole number of Option Shares, disregarding any fractional
number.
(c) Accelerated Vesting. Notwithstanding paragraph (a) above, all Options
previously not vested and subject to forfeiture shall vest and the right of the
Optionee to exercise such Options shall become nonforfeitable upon the
occurrence of any of the following:
(i) Disability, Death of Optionee and Change in Control of
Corporation. In the event that an Optionee's service as a Director shall
terminate because of such Optionee's death, disability or a result of the
change in control of the Corporation prior to the date when all Options
allocated to the Optionee
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<PAGE>
would be 100% vested in accordance with the applicable schedule in
subparagraph 3(a) above, then, notwithstanding the foregoing schedules in
subparagraph 3(a) above, all Options allocated to such Optionee shall
immediately become fully vested and exercisable. For purposes of this Plan,
the term "disability" shall be defined as may be determined by the Board,
from time to time, or as determined at any time with respect to any
individual Optionee.
(d) Other Terminations of Employment. In the event an Optionee's service as
a Director of the Corporation terminates for any other reason, other than as
provided in subparagraph 3(b) above, and such Optionee does not have 100% vested
interest in the Option, then any Options that are not vested, based upon the
applicable schedule in subparagraph 3(a) above, shall be forfeited and shall be
available again for grant to other Directors as may be determined by the Board.
4. Option Price. The price to be paid for the Option Shares shall be
_______________ Dollars ($_____) per share (hereinafter referred to as the
"Option Price") which is the fair market value of the Option Shares as
determined by the Board as of the date of grant of this Option.
5. Period within which Option may be Exercised. Subject to any further
restrictions in this Agreement, the Optionee shall have the right to exercise
the Option to purchase the Option Shares at any time after the date of grant of
this Option; and the Optionee, in his or her discretion, may exercise all or any
portion of the Option, subject to paragraphs 3 and 7 hereof. The Option shall
terminate as provided in paragraph 8 hereof.
6. Change in Control. When used herein, the phrase "change in control"
refers to (i) the acquisition by any person, group of persons or entity of the
beneficial ownership or power to vote more than twenty-five (25%) percent of the
Corporation's outstanding stock, (ii) during any period of two (2) consecutive
years, a change in the majority of the Board unless the election of each new
Director was approved by at least two-thirds of the Directors then still in
office who were Directors at the beginning of such two (2) year period, or (iii)
a reorganization, merger, or consolidation of the Corporation with one or more
other corporations in which the Corporation is not the surviving corporation, or
the transfer of all or substantially all of the assets or shares of the
Corporation to another person or entity.
7. Method of Exercise. The Option shall be exercised by written notice to
the Board signed by the Optionee or by such other person as may be entitled to
exercise the Option. In the exercise of the Option, the aggregate Option Price
for the shares being purchased may be paid either in cash or, with the approval
of the Board, in shares of the Corporation's stock (valued as determined by the
Board as of the date of exercise) or any combination thereof and the notice of
exercise shall specify how payment will be made. The written notice shall state
the number of shares with respect to which the Option is being exercised and,
shall either be accompanied by the payment of the aggregate Option Price for
such shares or shall fix a date (not more than ten (10) business days after the
date of such notice) by which the payment of the aggregate Option Price will be
made. The Optionee shall not exercise the Option to purchase less
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<PAGE>
than 100 shares, unless the Board otherwise approves or unless the partial
exercise is for the remaining shares available under the Option. A certificate
or certificates for the shares of Common Stock purchased by the exercise of the
Option shall be issued in the regular course of business subsequent to the
exercise of the Option and the payment therefor. Neither the Optionee, nor any
other person who may be entitled to exercise the Option, shall have any of the
rights or privileges of a shareholder with respect to any shares of Common Stock
issuable upon exercise of the Option, until certificates representing such
shares shall have been issued and delivered and the individual's name entered as
a shareholder of record on the books of the Corporation for such shares.
8. Termination of Option. The Option shall terminate on the earlier of:
(a) Except as provided in subparagraphs (b), (c) and (d) below, the
Option, to the extent that it has not been exercised or expired, shall
terminate on the earlier of (i) the date the Optionee leaves the Board for
any reason other than retirement, disability or death or (ii) the date
which is ten (10) years after the date of grant of the Option as set forth
in paragraph 1 hereof.
(b) In the event the Optionee retires prior to the date which is ten
(10) years after the date of grant of the Option as set forth in paragraph
1 hereof, the Optionee shall have the right to exercise the Option, to the
extent that it has not been exercised or expired, for the remainder of such
ten (10) year period. For purposes of the plan, the term "retirement" shall
mean any termination of an Optionee's membership on the Board (i) at any
time after attaining age 65 with the approval of the Board, or (ii) at the
election of the Optionee, at any time after not less than five years
service as a member of the Board, computed on a cumulative basis.
(c) In the event the Optionee leaves the Board by reason of such
Optionee's disability prior to the date which is ten (10) years after the
date of grant of the Option as set forth in paragraph 1 hereof, the
Optionee shall have the right to exercise the Option, to the extent that it
has not been exercised by him or expired, for the remainder of such ten
(10) year period. For purposes of the Plan, the term "disability" shall be
defined as may be determined by the Board, from time to time, or as
determined at any time with respect to any individual Optionee.
(d) In the event the Optionee dies while serving on the Board or after
his or her retirement or after his or her leaving by reason of disability,
and prior to the date which is ten (10) years after the date of grant of
the Option as set forth in paragraph 1 hereof, the Option, to the extent
that it has not been exercised by the Optionee or expired, shall be
exercisable, according to its terms, by the personal representative, the
executor or the administrator of the Optionee's estate, or the person or
persons who acquired the Option by bequest or inheritance from the
Optionee, at any time within twelve (12) months after the date of death of
the Optionee, but in no event may the Option be exercised later than ten
(10) years after the date of grant of the Option as set forth in paragraph
1 hereof.
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<PAGE>
9. Effect of Agreement on Status of Optionee. The fact that the Optionee
has been granted the Option under the Plan shall not confer on the Optionee any
right to continued service on the Board, nor shall it limit the right of the
Corporation to remove the Optionee from the Board at any time.
10. Listing and Registration of Option Shares. The Corporation's obligation
to issue shares of Common Stock upon exercise of the Option is expressly
conditioned upon the completion by the Corporation of any registration or other
qualification of such shares under any state or federal law or regulations or
rulings of any governmental regulatory body or the making of such investment
representations or other representations and agreements by the Optionee or any
person entitled to exercise the Option in order to comply with the requirements
of any exemption from any such registration or other qualification of the Option
Shares which the Board shall, in its discretion, deem necessary or advisable.
Notwithstanding the foregoing, the Corporation shall be under no obligation to
register or qualify the Option Shares under any state or federal law. The
required representations and agreements referenced above may include
representations and agreements that the Optionee, or any other person entitled
to exercise the Option, (i) is purchasing such shares on his or her own behalf
as an investment and not with a present intention of distribution or re-sale and
(ii) agrees to have placed upon any certificates representing the Option Shares
a legend setting forth any representations and agreements which have been given
to the Board or a reference thereto and stating that such shares may not be
transferred except in accordance with all applicable state and federal
securities laws and regulations, and further representing that, prior to making
any sale or other disposition of the Option Shares, the Optionee, or any other
person entitled to exercise the Option, will give the Corporation notice of the
intention to sell or dispose of such shares not less than five (5) days prior to
such sale or disposition.
11. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation
(a) In the event of a change in the number of shares of Common Stock
outstanding by reason of a stock dividend, stock split, recapitalization,
reorganization, merger, exchange of shares, or other similar capital adjustment,
prior to the termination of the Optionee's rights under this Agreement,
equitable proportionate adjustments shall be made by the Board in the number,
kind, and the Option Price of shares subject to the unexercised portion of the
Option. The adjustments to be made shall be determined by the Board and shall be
consistent with such changes or changes in the Corporation's total number of
outstanding shares; provided, however, that no adjustment shall change the
aggregate Option Price for the exercise of the Option granted.
(b) The grant of the Option under this Agreement shall not affect in any
way the right or power of the Corporation or its shareholders to make or
authorize any adjustment, recapitalization, reorganization, or other change in
the Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or to issue bonds, debentures, preferred or
other preference stock ahead of or affecting Common Stock or the rights thereof,
or the dissolution or liquidation of the Corporation, or any sale or transfer of
all or any part of the Corporation's assets or business.
-5-
<PAGE>
(c) Except upon a change in control as set forth in paragraph 6 hereof,
upon the effective date of the dissolution or liquidation of the Corporation,
the Option granted under this Agreement shall terminate.
12. Non-Transferability. The Option granted under this Agreement shall not
be assignable or transferable except, in the event of the death of the Optionee,
by will or by the laws of descent and distribution. In the event of the death of
the Optionee, the personal representative, the executor or the administrator of
the Optionee's estate, or the person or persons who acquired by bequest or
inheritance the right to exercise the Option may exercise the unexercised Option
or portion thereof, in accordance with the terms hereof, prior to the date which
is ten (10) years after the date of grant of the Option as set forth in
paragraph 1 hereof.
13. Tax Withholding. The grant of the Option and Option Shares delivered
pursuant to this Agreement, and any amounts distributed with respect thereto,
may be subject to applicable federal, state and local withholding for taxes. The
Optionee expressly acknowledges and agrees to such withholding, where
applicable, without regard to whether the Option Shares may then be sold or
otherwise transferred by the Optionee.
14. Notices. Any notices or other communications required or permitted to
be given under this Agreement shall be in writing and shall be deemed to have
been sufficiently given if delivered personally or when deposited in the United
States mail as Certified Mail, return receipt requested, properly addressed and
postage prepaid, if to the Corporation, at its principal office at 107 South
Central Avenue, Landis, North Carolina 28088; and, if to the Optionee, at his or
her last address appearing on the books of the Corporation. The Corporation and
the Optionee may change their address or addresses by giving written notice of
such change as provided herein. Any notice or other communication hereunder
shall be deemed to have been given on the date actually delivered or as of the
third (3rd) business day following the date mailed, as the case may be.
15. Construction Controlled by Plan. This Agreement shall be construed so
as to be consistent with the Plan; and the provisions of the Plan shall be
deemed to be controlling in the event that any provision hereof should appear to
be inconsistent therewith. The Optionee hereby acknowledges receipt of a copy of
the Plan from the Corporation.
16. Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be valid and enforceable under applicable
law, but if any provision of this Agreement is determined to be unenforceable,
invalid or illegal, the validity of any other provision or part thereof, shall
not be affected thereby and this Agreement shall continue to be binding on the
parties hereto as if such unenforceable, invalid or illegal provision or part
thereof had not been included herein.
17. Modification of Agreement; Waiver. This Agreement may be modified,
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto. No waiver hereunder shall
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<PAGE>
constitute a waiver with respect to any subsequent occurrence or other
transaction hereunder or of any other provision hereof.
18. Captions and Hearings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Agreement. As used herein,
the masculine gender shall include the feminine and neuter, the singular number,
the plural, and vice versa, whenever such meanings are appropriate.
19. Governing Law; Venue and Jurisdiction. Without regard to the principles
of conflicts of laws, the laws of the State of North Carolina shall govern and
control the validity, interpretation, performance, and enforcement of this
Agreement. The parties hereto agree that any suit or action relating to this
Agreement shall be instituted and prosecuted in the courts of the County of
Rowan, State of North Carolina, and each party hereby does waive any right or
defense relating to such jurisdiction and venue.
20. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the Corporation, its successors and assigns, and shall be binding
upon and inure to the benefit of the Optionee, his heirs, legatees, personal
representatives, executors, and administrators.
21. Entire Agreement. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto and, except as otherwise
provided hereunder, there are no other agreements or understandings, written or
oral, in effect between the parties hereto relating to the matters addressed
herein.
22. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute but one and the same
instrument.
-7-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed in its corporate name by its President, or one of its Vice Presidents,
and attested by its Secretary or one of its Assistant Secretaries, and its
corporate seal to be hereto affixed, all by authority of its Board of Directors
first duly given, and the Optionee has hereunto set his or her hand and adopted
as his or her seal the typewritten word "SEAL" appearing beside his or her name,
all done this the day and year first above written.
BOC FINANCIAL CORP.
By: ________________________________
Stephen R. Talbert, President
Attest:
_____________________________________
________________, Corporate Secretary
[CORPORATE SEAL]
________________________________
______________________, Optionee
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE OF
NONSTATUTORY STOCK OPTION
To: The Board of Directors of BOC Financial Corp.
The undersigned hereby elects to purchase ________ whole shares of Common
Stock of BOC Financial Corp. (the "Corporation") pursuant to the Nonstatutory
Stock Option granted to the undersigned in that certain Nonstatutory Stock
Option Agreement between the Corporation and the undersigned dated the ____ day
of _________, 199_. The aggregate purchase price for such shares is
$_______________, which amount is (i) being tendered herewith, (ii) will be
tendered on or before _______________, 199__, (cross out provision which does
not apply) in cash and/or stock of the Corporation owned by me, and I request
that a value as of the date of exercise of the Option be placed on any stock
being tendered in payment of the purchase price. The effective date of this
election shall be ____________________, 199___, or the date of receipt of this
Notice by the Corporation if later.
Executed this ___ day of ___________________, 199__, at __________________.
___________________________________
___________________________________
___________________________________
(Social Security Number)
BOC FINANCIAL CORP.
1998 INCENTIVE STOCK OPTION PLAN
BOC Financial Corp., a North Carolina corporation (hereinafter referred to
as the "Corporation"), does herein set forth the terms of the BOC Financial
Corp., 1998 Incentive Stock Option Plan (hereinafter referred to as this "Plan")
which was adopted by the Corporation's Board of Directors (hereinafter referred
to as the "Board") subject to approval by the Corporation's shareholders as
provided in Paragraph 22 hereof.
. Purpose of the Plan. The purpose of this Plan is to provide for the grant
of Incentive Stock Options (hereinafter referred to as "Option" or "Options")
qualifying for the tax treatment afforded by Section 422 of the Internal Revenue
Code of 1986, as amended, to eligible officers and employees of the Corporation
and its subsidiaries (hereinafter referred to as "Eligible Employees") who wish
to invest in the Corporation's common stock (hereinafter referred to as "Common
Stock"). The Corporation believes that participation in the ownership of the
Corporation by Eligible Employees will be to the mutual benefit of the
Corporation and Eligible Employees. The existence of this Plan will enhance the
Corporation's ability to attract capable individuals to employment in key
employee positions.
2. Administration of the Plan.
(a) This Plan shall be administered by the Compensation Committee of the
Board (hereinafter referred to as the "Committee"). The Committee shall consist
of three (3) members of the Board all of whom shall qualify as disinterested
persons as provided in Section 16(b) and the rules and regulations thereunder of
the Securities Exchange Act of 1934, as amended. The members of the Committee
shall be appointed by the Board and shall serve at the pleasure of the Board,
which may remove members from, add members to, or fill vacancies in the
Committee.
(b) The Committee shall decide to whom Options shall be granted under this
Plan, the number of shares as to which Options shall be granted, the Option
Price (as hereinafter defined) for such shares and such additional terms and
conditions for such Options as the Committee deems appropriate.
(c) A majority of the Committee shall constitute a quorum and the acts of a
majority of the members present at any meeting at which a quorum is present, or
acts approved unanimously in writing by the Committee, shall be considered as
valid actions by the Committee.
(d) The Board may designate any officers or employees of the Corporation to
assist in the administration of this Plan. The Board may authorize such
individuals to execute documents on its behalf and may delegate to them such
other ministerial and limited discretionary duties as the Board may deem fit.
<PAGE>
3. Shares of Common Stock Subject to the Plan. The number of shares of
Common Stock that shall be available initially for Options under this Plan is
__________________ (______) shares, subject to adjustment as provided in
Paragraph 16 hereof. Shares subject to Options which expire or terminate prior
to the issuance of the shares of Common Stock shall again be available for
future grants of Options under this Plan.
4. Eligibility. Options under this Plan may be granted to any Eligible
Employee as determined by the Committee. An individual may hold more than one
Option under this or other plans adopted by the Corporation.
5. Grant of Options
(a) The Committee has authorized that Options for ______________ (______)
shares of Common Stock shall be granted to certain Eligible Employees of the
Corporation which Options shall be granted based upon the past service and the
continued participation of those individuals in the management of the
Corporation. The allocation of said Options shall be as follows:
Name Number of Shares
_________________________ ____________
_________________________ ____________
_________________________ ____________
_________________________ ____________
_________________________
Total ____________
(b) Upon the forfeiture of an Option for whatever reason prior to the
expiration of the Option Period (as defined in Paragraph 10 hereof) the shares
of Common Stock covered by a forfeited Option shall be available for the
granting of additional Options to Eligible Employees during the remaining term
of this Plan upon such terms and conditions as may be determined by the
Committee. The number of additional Options to be granted to specific Eligible
Employees during the term of this Plan shall be determined by the Committee as
provided in Subparagraph 2(b) hereof.
6. Vesting of Options
(a) Options granted under this Plan shall vest and the right of an Optionee
to exercise an Option shall be nonforfeitable in accordance with the following
schedules:
2
<PAGE>
(i) With respect to the Options which are granted as of the Effective
Date (as hereinafter defined):
Date When Such Options Percentage of Such
Become Vested Options Vested
------------- --------------
Effective Date of Plan 0%
First Anniversary of Effective Date 20%
Second Anniversary of Effective Date 20%
Third Anniversary of Effective Date 20%
Fourth Anniversary of Effective Date 20%
Fifth Anniversary of Effective Date 20%
(ii) With respect to any Options which may be granted after the
Effective Date:
Date When Such Options Percentage of Such
Become Vested Options Vested
------------- --------------
Date of grant 0%
First Anniversary of the date of grant 20%
Second Anniversary of the date of grant 20%
Third Anniversary of the date of grant 20%
Fourth Anniversary of the date of grant 20%
Fifth Anniversary of the date of grant 20%
(b) In determining the number of shares of Common Stock under each Option
vested under the above vesting schedules, an Optionee shall not be entitled to
exercise an Option to purchase a fractional number of shares of the Common
Stock. If the product resulting from multiplying the vested percentage times the
Option results in a fractional number of shares of Common Stock, then an
Optionee's vested right shall be to the whole number of shares of Common Stock
disregarding any fractional shares of Common Stock.
(c) In the event any Optionee to whom Options are granted under this Plan
terminates employment with the Corporation for any reason, other than as
provided in subparagraph 6(d) below, and such Optionee does not have a 100%
vested interest in the Optionee's Options under this Plan, then any Options
which are not vested, based upon the applicable schedule in subparagraph (a)
above, shall be forfeited and shall be available again for grant to Eligible
Employees as may be determined by the Committee.
(d) In the event that the employment of an Optionee with the Corporation
should terminate because of such Optionee's disability, death or as a result of
a "change in control" of the Corporation (as such term is defined below) prior
to the date when all Options allocated to the Optionee would be 100% vested in
accordance with the applicable schedule in subparagraph 6(a) above, then,
notwithstanding the foregoing schedules in subparagraph 6(a) above, all Options
allocated to such Optionee shall immediately become fully vested and
3
<PAGE>
nonforfeitable. For purposes of this Plan, the term disability shall be defined
in the same manner as such term is defined in Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended. When used herein, the phrase "change in
control" refers to (i) the acquisition by any person, group of persons or entity
of the beneficial ownership or power to vote more than twenty-five (25%) percent
of the Corporation's outstanding stock, (ii) during any period of two (2)
consecutive years, a change in the majority of the Board unless the election of
each new Director was approved by at least two-thirds of the Directors then
still in office who were Directors at the beginning of such two (2) year period,
or (iii) a reorganization, merger, or consolidation of the Corporation with one
or more other corporations in which the Corporation is not the surviving
corporation, or the transfer of all or substantially all of the assets or shares
of the Corporation to another person or entity.
7. Option Price
(a) The price per share of each Option granted under this Plan (hereinafter
called the "Option Price") shall be determined by the Committee as of the
effective date of grant of such Option, but in no event shall the Option Price
be less than 100% of the fair market value of Common Stock on the date of grant.
If an Optionee (as hereinafter defined) at the time that an Option is granted
owns stock possessing more than ten (10%) percent of the total combined voting
power of all classes of stock of the Corporation, then the Option Price per
share of each Option granted under this Plan shall be no less than 110% of the
fair market value of Common Stock on the date of grant and such Option shall not
be exercisable more than five (5) years from the date of grant. An Option shall
be considered as granted on the date that the Committee acts to grant such
Option or such later date as the Committee shall specify in an Option Agreement
(as hereinafter defined).
(b) The fair market value of a share of Common Stock shall be determined as
follows: (i) if on the date as of which such determination is being made, Common
Stock being valued is admitted to trading on a securities exchange or exchanges
for which actual sale prices are regularly reported, or actual sale prices are
otherwise regularly published, the fair market value of a share of Common Stock
shall be deemed to be equal to the mean of the closing sale price as reported on
each of the five (5) trading days immediately preceding the date as of which
such determination is made; provided, however, that, if a closing sale price is
not reported for each of the five (5) trading days immediately preceding the
date as of which such determination is made, then the fair market value shall be
equal to the mean of the closing sale prices on those trading days for which
such price is available, or (ii) if on the date as of which such determination
is made, no such closing sale prices are reported, but quotations for Common
Stock being valued are regularly listed on the National Association of
Securities Dealers Automated Quotation System or another comparable system, the
fair market value of a share of Common Stock shall be deemed to be equal to the
mean of the average of the closing bid and asked prices for such Common Stock
quoted on such system on each of the five (5) trading days preceding the date as
of which such determination is made, but if a closing bid and asked price is not
available for each of the five (5) trading days, then the fair market value
shall be equal to the mean of the average of the closing bid and asked prices on
those trading days during the five-day period for which such prices are
available, or (iii) if no such quotations are available, the fair
4
<PAGE>
market value of a share of Common Stock shall be deemed to be the average of the
closing bid and asked prices furnished by a professional securities dealer
making a market in such shares, as selected by the Committee, for the trading
date first preceding the date as of which such determination is made. If the
Committee determines that the price as determined above does not represent the
fair market value of a share of Common Stock, the Committee may then consider
such other factors as it deems appropriate and then fix the fair market value
for the purposes of this Plan.
8. Payment of Option Price. Payment for shares subject to an Option may be
made either in cash or, with the approval of the Committee, in other stock of
the Corporation owned by the person to whom such Option was granted or such
other person as may be entitled to exercise such Option. Any shares of the
Corporation's stock that are delivered in payment of the aggregate Option Price
shall be valued at their fair market value, as determined by the Committee, on
the date of the exercise of such Option.
9. Terms and Conditions of Grant of Options. Each Option granted pursuant
to this Plan shall be evidenced by a written Incentive Stock Option Agreement
(hereinafter referred to as "Option Agreement") with each Eligible Employee
(hereinafter referred to as "Optionee") to whom an Option is granted; such
agreement shall be substantially in the form attached hereto as "Exhibit A,"
unless the Committee shall adopt a different form and, in each case, may contain
such other, different, or additional terms and conditions as the Committee may
determine.
10. Option Period. Each Option Agreement shall set forth a period during
which such Option may be exercised (hereinafter referred to as the "Option
Period"); provided, however, that the Option Period shall not exceed ten (10)
years after the date of grant of such Option as specified in an Option
Agreement.
11. Limitation on Grant of Incentive Stock Options. Notwithstanding any
other provision of this Plan, no person shall be granted an Option under this
Plan which would cause such person's "annual vesting amount" to exceed
$100,000.00. With respect to any calendar year, a person's "annual vesting
amount" is the aggregate fair market value of stock subject to incentive stock
options with respect to which such options are first exercisable during such
calendar year. For purposes of the foregoing, the aggregate fair market value of
stock with respect to which incentive stock options are first exercisable during
any calendar year shall be determined by taking into account all such options
granted to such person under all incentive stock option plans of the Corporation
or of any of its parent or subsidiary corporations.
12. Exercise of Incentive Stock Options. An Option shall be exercised by
written notice to the Committee signed by an Optionee or by such other person as
may be entitled to exercise such Option. In the exercise of an Option, the
aggregate Option Price for the shares being purchased may be paid either in cash
or, with the approval of the Committee, in shares of the Corporation's stock
(valued as determined by the Committee as of the date of exercise) or any
combination thereof and the notice of exercise shall specify how payment will be
made. The written notice shall state the number of shares with respect to which
an Option is being exercised
5
<PAGE>
and, shall either be accompanied by the payment of the aggregate Option Price
for such shares or shall fix a date (not more than ten (10) business days from
the date of such notice) by which the payment of the aggregate Option Price will
be made. An Optionee shall not exercise an Option to purchase less than 100
shares, unless the Committee otherwise approves or unless the partial exercise
is for the remaining shares available under such Option. A certificate or
certificates for the shares of Common Stock purchased by the exercise of an
Option shall be issued in the regular course of business subsequent to the
exercise of such Option and the payment therefor. During the Option Period, no
person entitled to exercise any Option granted under this Plan shall have any of
the rights or privileges of a shareholder with respect to any shares of Common
Stock issuable upon exercise of such Option, until certificates representing
such shares shall have been issued and delivered and the individual's name
entered as a shareholder of record on the books of the Corporation for such
shares.
13. Effect of Termination of Employment, Retirement, Disability or Death
(a) In the event of the termination of employment of an Optionee either by
reason of (i) being discharged for cause or (ii) voluntary separation on the
part of such Optionee for a reason other than retirement or disability, any
Option or Options granted to the Optionee under this Plan, to the extent not
previously exercised or expired, shall immediately terminate. The phrase
"discharged for cause" shall include termination at the sole discretion of the
Board because of such Optionee'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 or
regulation (other than traffic violations or similar offenses), a final cease
and desist order, or material breach of any provision of any employment
agreement that such Optionee may have with the Corporation.
(b) In the event of the termination of employment of an Optionee as a
result of such Optionee's retirement, such Optionee shall have the right to
exercise any Option or Options granted to the Optionee under this Plan, to the
extent that they have not previously been exercised or expired, for a period of
three (3) months after the date of retirement, but in no event may any Option be
exercised later than the end of the Option Period provided in such Option
Agreement in accordance with Paragraph 10 hereof. For purposes of this Plan, the
term "retirement" shall mean (i) termination of an Optionee's employment under
conditions which would constitute retirement under any tax qualified retirement
plan maintained by the Corporation or any of its subsidiaries or (ii) attaining
age 65.
(c) In the event of the termination of employment of an Optionee by reason
of such Optionee's disability, such Optionee shall have the right to exercise
any Option or Options held by the Optionee, to the extent that they previously
have not been exercised or expired, notwithstanding any limitations placed on
the exercise of such Options by this Plan or an Option Agreement, immediately in
full and at any time within twelve (12) months after the last date on which such
Optionee provides services as an officer or an employee of the Corporation
before being disabled, but in no event may any Option be exercised later than
the end of the Option Period provided in such Option Agreement in accordance
with Paragraph 10 hereof. For
6
<PAGE>
purposes of this Plan, the term "disability" shall be defined in the same manner
as such term is defined in Section 22(e)(3) of the Internal Revenue Code of
1986, as amended.
(d) In the event that an Optionee should die while employed by the
Corporation or any of its subsidiaries, or within three (3) months after
retirement, any Option or Options granted to the Optionee under this Plan and
not previously exercised or expired shall vest and shall be exercisable,
according to their respective terms, by the personal representative of such
Optionee or by any person or persons who acquired such Options by bequest or
inheritance from such Optionee, notwithstanding any limitations placed on the
exercise of such Options by this Plan or an Option Agreement, immediately in
full and at any time within twelve (12) months after the date of death of such
Optionee, but in no event may any Option be exercised later than the end of the
Option Period provided in such Option Agreement in accordance with Paragraph 10
hereof. Any references herein to an Optionee shall be deemed to include any
person entitled to exercise an Option under the terms of this Plan after the
death of such Optionee under the terms of this Plan.
14. Effect of Plan on Employment Status. The fact that the Committee has
granted an Option to an Optionee under this Plan shall not confer on such
Optionee any right to employment with the Corporation or to a position as an
officer or an employee of the Corporation, nor shall it limit the right of the
Corporation to remove such Optionee from any position held by the Optionee or to
terminate the Optionee's employment at any time.
15. Adjustment Upon Changes in Capitalization; Dissolution or Liquidation
(a) In the event of a change in the number of shares of Common Stock
outstanding by reason of a stock dividend, stock split, recapitalization,
reorganization, merger, exchange of shares, or other similar capital adjustment,
prior to the termination of an Optionee's rights under this Plan, equitable
proportionate adjustments shall be made by the Committee in (i) the number and
kind of shares which remain available under this Plan and (ii) the number, kind,
and the Option Price of shares subject to unexercised Options under this Plan.
The adjustments to be made shall be determined by the Committee and shall be
consistent with such change or changes in the Corporation's total number of
outstanding shares; provided, however, that no adjustment shall change the
aggregate Option Price for the exercise of Options granted under this Plan.
(b) The grant of Options under this Plan shall not affect in any way the
right or power of the Corporation or its shareholders to make or authorize any
adjustment, recapitalization, reorganization, or other change in the
Corporation's capital structure or its business, or any merger or consolidation
of the Corporation, or to issue bonds, debentures, preferred or other preference
stock ahead of or affecting Common Stock or the rights thereof, or the
dissolution or liquidation of the Corporation, or any sale or transfer of all or
any part of the Corporation's assets or business.
7
<PAGE>
(c) Except upon a change in control as defined in paragraph 6 hereof, upon
the effective date of the dissolution or liquidation of the Corporation, this
Plan and any Options granted hereunder, shall terminate.
16. Non-Transferability. Any Option granted under this Plan shall not be
assignable or transferable except, in the case of the death of an Optionee, by
will or by the laws of descent and distribution. In the event of the death of an
Optionee, the personal representative, the executor or the administrator of such
Optionee's estate, or the person or persons who acquired by bequest or
inheritance the rights to exercise such Option, may exercise any Option or
portion thereof to the extent not previously exercised by an Optionee or
expired, in accordance with its terms, prior to the expiration of the exercise
period as specified in Subparagraph 13(d) hereof.
17. Tax Withholding. The employer of a person granted an Option under this
Plan shall have the right to deduct or otherwise effect a withholding of any
amount required by federal or state laws to be withheld with respect to the
grant, exercise or the sale of stock acquired upon the exercise of an Option in
order for the employer to obtain a tax deduction otherwise available as a
consequence of such grant, exercise or sale, as the case may be.
18. Listing and Registration of Option Shares. Any Option granted under the
Plan shall be subject to the requirement that if at any time the Committee shall
determine, in its discretion, that the listing, registration, or qualification
of the shares covered thereby upon any securities exchange or under any state or
federal law or the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with, the granting of
such Option or the issuance or purchase of shares thereunder, such Option may
not be exercised in whole or in part unless and until such listing,
registration, qualification, consent, or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
19. Exculpation and Indemnification. In connection with this Plan, no
member of the Committee shall be personally liable for any act or omission to
act in such person's capacity as a member of the Committee, nor for any mistake
in judgment made in good faith, unless arising out of, or resulting from, such
person's own bad faith, gross negligence, willful misconduct, or criminal acts.
To the extent permitted by applicable law and regulation, the Corporation shall
indemnify and hold harmless the members of the Committee, and each other officer
or employee of the Corporation or of any subsidiary thereof to whom any duty or
power relating to the administration or interpretation of this Plan may be
assigned or delegated, from and against any and all liabilities (including any
amount paid in settlement of a claim with the approval of the Board) and any
costs or expenses (including counsel fees) incurred by such persons arising out
of, or as a result of, any act or omission to act in connection with the
performance of such person's duties, responsibilities, and obligations under
this Plan, other than such liabilities, costs, and expenses as may arise out of,
or result from, the bad faith, gross negligence, willful misconduct, or criminal
acts of such persons.
20. Amendment and Modification of the Plan. The Board may at any time and
from time to time amend or modify this Plan (including the form of Option
Agreement) in any
8
<PAGE>
respect; provided, however, that no amendment or modification shall be made that
increases the total number of shares of Common Stock covered by this Plan or
effects any change in the categories of persons who may receive Options under
this Plan or materially increases the benefits accruing to Optionees under this
Plan unless such change is approved by the holders of a majority of shares of
Common Stock present or represented at a shareholders' meeting at which a quorum
is present. Any amendment or modification of this Plan shall not materially
reduce the benefits under any Option theretofore granted to an Optionee under
this Plan without the consent of such Optionee or the transferee thereof in the
event of the death of such Optionee.
21. Termination and Expiration of the Plan. This Plan may be abandoned,
suspended, or terminated at any time by the Board; provided, however, that
abandonment, suspension, or termination of this Plan shall not affect any
Options then outstanding under this Plan. No Option shall be granted pursuant to
this Plan after ten (10) years from the effective date of this Plan as provided
in Paragraph 22 hereof.
22. Effective Date; Shareholder Approval. This Plan shall not be effective
until approved by the holders of a majority of shares of Common Stock present or
represented at an annual or special shareholders' meeting at which a quorum is
present (the "Effective Date"); such shareholder vote shall be taken at a
meeting of the shareholders of the Corporation to occur not sooner than six
months after the effective date of the conversion from mutual to stock form
pursuant to the Plan of Conversion of Landis Savings Bank, SSB dated September
29, 1997.
23. Captions and Headings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Plan. As used herein, the
masculine gender shall include the feminine and neuter, the singular number the
plural, and vice versa, whenever such meanings are appropriate.
24. Expenses of Administration of Plan. All costs and expenses incurred in
the operation and administration of this Plan shall be borne by the Corporation
or one or more of its subsidiaries.
25. Governing Law. Without regard to the principles of conflicts of laws,
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
26. Inspection of Plan. A copy of this Plan, and any amendments thereto or
modification thereof, shall be maintained by the Secretary of the Corporation
and shall be shown to any proper person making inquiry about it.
9
<PAGE>
STATE OF NORTH CAROLINA EXHIBIT A
COUNTY OF ROWAN
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (hereinafter referred to as this
"Agreement") is made and entered into as of this ___ day of __________, 199__,
between BOC FINANCIAL CORP., a North Carolina corporation (hereinafter referred
to as the "Corporation"), and _____________ a resident of __________ County,
North Carolina (hereinafter referred to as the "Optionee").
WHEREAS, the Board of Directors of the Corporation (hereinafter referred to
as the "Board") has adopted the BOC Financial Corp., 1998 Incentive Stock Option
Plan (hereinafter referred to as the "Plan") subject to approval by the
Corporation's shareholders; and
WHEREAS, the shareholders of the Corporation at a [special] [annual]
meeting duly called and held on ________, 199__, approved the Plan (the
"Effective Date"); and
WHEREAS, the Plan provides that the Compensation Committee (hereinafter
referred to as the "Committee") of the Board will make available to certain
officers and employees of the Corporation and its subsidiaries (the "Employer")
the right to purchase shares of the Corporation's common stock (hereinafter
referred to as "Common Stock"); and
WHEREAS, the Committee has determined that the Optionee should be granted
an option to purchase shares of Common Stock under the Plan;
NOW, THEREFORE, the Corporation and the Optionee agree as follows:
1. Date of Grant of Option. The date of grant of the option granted under
this Agreement is the ____ day of September, 199__.
2. Grant of Option. Pursuant to the Plan, the Corporation grants to the
Optionee the right (hereinafter referred to as the "Option") to purchase from
the Corporation all or any part of an aggregate of ___________________________
(______) shares of Common Stock (hereinafter referred to as the "Option Shares")
which shall be authorized but unissued shares.
3. Vesting of Options.
(a) Periodic Vesting. Subject to subparagraphs 3(b) and 3(c) below,
the Option shall vest and become exercisable in accordance with the
following schedules as applicable:
<PAGE>
(i) With respect to any Options which are granted under the Plan
as of Effective Date:
Effective Date of the Plan: 0% vested
First anniversary of the Effective Date of the Plan:
20% vested
Second anniversary of the Effective Date of the Plan:
40% vested
Third anniversary of the Effective Date of the Plan:
60% vested
Fourth anniversary of the Effective Date of the Plan:
80% vested
Fifth anniversary of the Effective Date of the Plan:
100% vested
(ii) With respect to any Options which may be granted after the
Effective Date:
Date of grant: 0% vested
First anniversary of the date of grant: 20% vested
Second anniversary of the date of grant: 40% vested
Third anniversary of the date of grant: 60% vested
Fourth anniversary of the date of the grant: 80% vested
Fifth anniversary of the date of grant: 100% vested
(b) Fractional Option Shares. In determining the number of Option
Shares vested under the above vesting schedule, an Optionee shall not be
entitled to exercise an Option for a fractional number of Option Shares. If
the product resulting from multiplying the vested percentage times the
allocated Option results in a fractional number of Option Shares, then the
Optionee's vested right shall be to the whole number of Option Shares,
disregarding any fractional number.
(c) Accelerated Vesting. Notwithstanding paragraph (a) above, all
Options previously not vested and subject to forfeiture shall vest and the
right of the Optionee to exercise such Options shall become nonforfeitable
upon the occurrence of any of the following:
(i) Disability, Death of Optionee or Change in Control. In the
event that the employment of an Optionee shall terminate because of
such Optionee's death, disability or within 24 months following a
change in control of its Corporation, prior to the date when all
Options allocated to the Optionee would be
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<PAGE>
100% vested in accordance with the applicable schedule in subparagraph
3(a) above, then, notwithstanding the foregoing schedules in
subparagraph 3(a) above, all Options allocated to such Optionee shall
immediately become fully vested and exercisable. For purposes of this
Plan, the term "disability" shall be defined in the same manner as
such term is defined in Section 22(e)(3) of the Internal Revenue Code
of 1986, as amended (the "Code").
(d) Other Terminations of Employment. In the event any Optionee's
employment with the Corporation terminates for any reason, other than as
provided in subparagraph 3(b)(i) above, and such Optionee does not have
100% vested interest in the Option, then any Options that are not vested,
based upon the applicable schedule in subparagraph 3(a) above, shall be
forfeited and shall be available again for grant to other officers and
employees as may be determined by the Committee.
4. Option Price. The price to be paid for the Option Shares shall be
_______ and __/100 Dollars ($_____) per share (hereinafter referred to as the
"Option Price") which is the fair market value of the Option Shares as
determined by the Committee as of the date of grant of this Option.
5. When and Extent to which Options may be Exercised. Subject to any
further restrictions in this Agreement, the right of the Optionee to exercise
the Option to purchase the Option Shares, either in whole or in part, shall be
conditioned upon the completion by the Optionee of one (1) full year of service
in the employment of the Employer following the date of grant of the Option set
forth in paragraph 1 hereof. At such time as the Option shall become exercisable
in accordance with this Agreement, the Optionee, in his discretion, may exercise
all or any portion of the Option, subject to paragraphs 3 and 7 hereof. The
Option shall terminate as provided in paragraph 8 hereof.
6. Change in Control. When used herein, the phrase "change in control"
refers to (i) the acquisition by any person, group of persons or entity of the
beneficial ownership or power to vote more than twenty-five (25%) percent of the
Corporation's outstanding stock, (ii) during any period of two (2) consecutive
years, a change in the majority of the Board unless the election of each new
Director was approved by at least two-thirds of the Directors then still in
office who were Directors at the beginning of such two (2) year period or (iii)
a reorganization, merger, or consolidation of the Corporation with one or more
other corporation in which the Corporation is not the surviving corporation, or
the transfer of all or substantially all of the assets or shares of the
Corporation to another person or entity.
7. Method of Exercise. The Option shall be exercised by written notice to
the Committee signed by the Optionee or by such other person as may be entitled
to exercise the Option. In the exercise of the Option, the aggregate Option
Price for the shares being purchased may be paid either in cash or, with the
approval of the Committee, in shares of the Corporation's stock (valued as
determined by the Committee as of the date of exercise) or any combination
thereof and the notice of exercise shall specify how payment will be made. The
written notice shall state the number of shares with respect to which the Option
is being exercised and, shall
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<PAGE>
either be accompanied by the payment of the aggregate Option Price for such
shares or shall fix a date (not more than ten (10) business days from the date
of such notice) by which the payment of the aggregate Option Price will be made.
The Optionee shall not exercise the Option to purchase less than one hundred
(100) shares, unless the Committee otherwise approves or unless the partial
exercise is for the remaining shares available under the Option. A certificate
or certificates for the shares of Common Stock purchased by the exercise of the
Option shall be issued in the regular course of business subsequent to the
exercise of the Option and the payment therefor. During the Option Period, no
person entitled to exercise the Option granted under this Agreement shall have
any of the rights or privileges of a shareholder with respect to any shares of
Common Stock issuable upon exercise of the Option, until certificates
representing such shares shall have been issued and delivered and the
individual's name entered as a shareholder of record on the books of the
Corporation for such shares.
8. Termination of Option. The Option shall terminate as follows:
(a) Except as provided in subparagraphs (b), (c) and (d) below, the Option
granted under this Agreement, to the extent that it has not been exercised or
expired, shall terminate on the earlier of (i) the date that the Optionee is
discharged for cause, (ii) the date the Optionee gives notice that the Optionee
terminates his or her employment with the Employer for a reason other than
retirement or disability or (iii) the date which is ten (10) years from the date
of grant of the Option set forth in paragraph 1 hereof. The phrase "discharged
for cause" shall include termination at the sole discretion of the Board of
Directors of the Employer of the Optionee because of the Optionee'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 or regulation (other than traffic violations or similar
offenses) or a final cease and desist order, or material breach of any provision
of any employment agreement that the Optionee may have with the Employer.
(b) In the event the Optionee retires prior to the date which is ten (10)
years after the date of grant of the Option, the Optionee shall have the right
to exercise the Option, to the extent that it is vested and has not been
exercised by the Optionee or expired, at any time within three (3) months after
the date of retirement, but in no event may the Option be exercised later than
ten (10) years after the date of grant of the Option set forth in paragraph 1
hereof. For purposes of this Agreement, the term "retirement" shall mean (i)
termination of the Optionee's employment under conditions which would constitute
retirement under any tax qualified retirement plan maintained by the Employer or
(ii) attaining age 65.
(c) In the event the Optionee becomes disabled prior to the date which is
ten (10) years after the date of grant of the Option, the Optionee shall have
the right to exercise the Option, to the extent that it has not been exercised
by the Optionee or expired, notwithstanding any limitation placed on the
exercise of the Option by the Plan or by this Agreement, immediately in full and
at any time within twelve (12) months after the last date on which the Optionee
provided services as an officer or an employee of the Employer before being
disabled, but in no event may the Option be exercised later than ten (10) years
after the date of grant of the Option set forth in paragraph 1 hereof. For
purposes of this Agreement, the term
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<PAGE>
"disability" shall be defined in the same manner as such term is defined in
Section 22(e)(3) of the Code.
(d) In the event the Optionee should die while employed by the Employer or
within three (3) months after retirement but prior to the date which is ten (10)
years after the date of grant of the Option, the Option, to the extent it has
not been exercised by the Optionee or expired, shall be exercisable, according
to its terms, by the personal representative, the executor or administrator of
the Optionee's estate, or any person or persons who acquired the Option by
bequest or inheritance from the Optionee, notwithstanding any limitation placed
on the exercise of the Option by the Plan or by this Agreement, immediately in
full and at any time within twelve (12) months after the date of death of the
Optionee, but in no event may the Option be exercised later than ten (10) years
from the date of grant of the Option as set forth in paragraph 1 hereof.
9. Effect of Agreement on Employment Status of Optionee. The fact that the
Committee has granted the Option to the Optionee under this Agreement shall not
confer on the Optionee any right to employment with the Employer or to a
position as an officer or an employee of the Employer, nor shall it limit the
right of the Employer to remove the Optionee from any position held by the
Optionee or to terminate his or her employment at any time.
10. Listing and Registration of Option Shares
(a) The Corporation's obligation to issue shares of Common Stock upon
exercise of the Option is expressly conditioned upon (i) the completion by the
Corporation of any registration or other qualification of such shares under any
state or federal law or regulations or rulings of any government regulatory body
or (ii) the making of such investment representations or other representations
and agreements by the Optionee or any person entitled to exercise the Option in
order to comply with the requirements of any exemption from any such
registration or other qualification of the Option Shares which the Committee
shall, in its sole discretion, deem necessary or advisable. Notwithstanding the
foregoing, the Corporation shall be under no obligation to register or qualify
the Option Shares under any state or federal law. The required representations
and agreements referenced above may include representations and agreements that
the Optionee, or any other person entitled to exercise the Option, (i) is
purchasing such shares on his or her own behalf as an investment and not with a
present intention of distribution or re-sale and (ii) agrees to have placed upon
any certificates representing the Option Shares a legend setting forth any
representations and agreements which have been given to the Committee or a
reference thereto and stating that such shares may not be transferred except in
accordance with all applicable state and federal securities laws and
regulations, and further representing that, prior to making any sale or other
disposition of the Option Shares, the Optionee, or any other person entitled to
exercise the Option, will give the Corporation notice of the intention to sell
or dispose of such shares not less than five (5) days prior to such sale or
disposition.
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<PAGE>
11. Adjustment Upon Change in Capitalization; Dissolution or Liquidation
(a) In the event of a change in the number of shares of Common Stock
outstanding by reason of a stock dividend, stock split, recapitalization,
reorganization, merger, exchange of shares, or other similar capital adjustment,
prior to the termination of the Optionee's rights under this Agreement,
equitable proportionate adjustments shall be made by the Committee in the
number, kind, and the Option Price of shares subject to the unexercised portion
of the Option granted under this Agreement. The adjustments to be made shall be
determined by the Committee and shall be consistent with such change or changes
in the Corporation's total number of outstanding shares; provided, however, that
no adjustment shall change the aggregate Option Price for the exercise of the
Option granted under this Agreement.
(b) The grant of the Option under this Agreement shall not affect in any
way the right or power of the Corporation or its shareholders to make or
authorize any adjustment, recapitalization, reorganization, or other change in
the Corporation's capital structure or its business, or any merger or
consolidation of the Corporation, or to issue bonds, debentures, preferred or
other preference stock ahead of or affecting Common Stock or the rights thereof,
or the dissolution or liquidation of the Corporation, or any sale or transfer of
all or any part of the Corporation's assets or business.
(c) Except upon a change in control as set forth in paragraph 6 hereof,
upon the effective date of the dissolution or liquidation of the Corporation,
the Option granted under this Agreement shall terminate.
12. Nontransferability. The Option granted under this Agreement shall not
be assignable or transferable except, in the event of the death of the Optionee,
by will or by the laws of descent and distribution. In the event of the death of
the Optionee, the personal representative, the executor or the administrator of
the Optionee's estate, or the person or persons who acquired by bequest or
inheritance the right to exercise the Option may exercise the unexercised Option
or a portion thereof, in accordance with the terms hereof, prior to the date
which is ten (10) years after the date of grant of Option as set forth in
paragraph 1 hereof.
13. Notices. Any notice or other communications required or permitted to be
given under this Agreement shall be in writing and shall be deemed to have been
sufficiently given when delivered personally or when deposited in the United
States mail as Certified Mail, return receipt requested, properly addressed with
postage prepaid, if to the Corporation at its principal office at 107 South
Central Avenue, Landis, North Carolina 28088; and, if to the Optionee to his or
her last address appearing on the books of the Employer. The Employer and the
Optionee may change their address or addresses by giving written notice of such
change as provided herein. Any notice or other communication hereunder shall be
deemed to have been given on the date actually delivered or as of the third
(3rd) business day following the date mailed, as the case may be.
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<PAGE>
14. Construction Controlled by Plan. This Agreement shall be construed so
as to be consistent with the Plan; and the provisions of the Plan shall be
deemed to be controlling in the event that any provision hereof should appear to
be inconsistent therewith. The Optionee hereby acknowledges receipt of a copy of
the Plan from the Corporation.
15. Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such a manner as to be valid and enforceable under applicable
law, but if any provision of this Agreement is determined to be unenforceable,
invalid or illegal, the validity of any other provisions or part thereof, shall
not be affected thereby and this Agreement shall continue to be binding on the
parties hereto as if such unenforceable, invalid or illegal provision or part
thereof had not been included herein.
16. Modification of Agreement; Waiver. This Agreement may be modified,
amended, suspended, or terminated, and any terms, representations or conditions
may be waived, but only by written instrument signed by each of the parties
hereto. No waiver hereunder shall constitute a waiver with respect to any
subsequent occurrence or other transaction hereunder or of any other provision
hereof.
17. Captions and Headings; Gender and Number. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Agreement. As used herein,
the masculine gender shall include the feminine and neuter, the singular number
the plural, and vice versa, whenever such meanings are appropriate.
18. Governing Law; Venue and Jurisdiction. Without regard to the principles
of conflicts of laws, the laws of the State of North Carolina shall govern and
control the validity, interpretation, performance, and enforcement of this
Agreement. The parties hereto agree that any suit or action relating to this
Agreement shall be instituted and prosecuted in the courts of the County of
Rowan, State of North Carolina, and each party hereby does waive any right or
defense relating to such jurisdiction and venue.
19. Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the Corporation, its successors and assigns, and shall be binding
upon and inure to the benefit of the Optionee, his heirs, legatees, personal
representatives, executors, and administrators.
20. Entire Agreement. This Agreement constitutes and embodies the entire
understanding and agreement of the parties hereto and, except as otherwise
provided hereunder, there are no other agreements or understandings, written or
oral, in effect between the parties hereto relating to the matters addressed
herein.
21. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
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<PAGE>
IN WITNESS WHEREOF, the Corporation, has caused this instrument to be
executed in its corporate name by its Chairman and attested by its Secretary or
one of its Assistant Secretaries, and its corporate seal to be hereto affixed,
all by authority of its Board of Directors first duly given, and the Optionee
has hereunto set his or her hand and adopted as his or her seal the typewritten
word "SEAL" appearing beside his or her name, all done this the day and year
first above written.
BOC FINANCIAL CORP.
By: ____________________________________
____________, Chairman
ATTEST:
__________________________________
____________, Corporate Secretary
[CORPORATE SEAL]
____________________________________________
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<PAGE>
EXHIBIT A
NOTICE OF EXERCISE OF
INCENTIVE STOCK OPTION
To: The Compensation Committee of the Board of Directors of
BOC Financial Corp.
The undersigned hereby elects to purchase ________ whole shares of Common
Stock of BOC Financial Corp. (the "Corporation") pursuant to the Incentive Stock
Option granted to the undersigned in that certain Incentive Stock Option
Agreement between the Corporation and the undersigned dated the ____ day of
_______, 199_. The aggregate purchase price for such Shares is $____________,
which amount is (i) being tendered herewith, (ii) will be tendered on or before
_________________, 199__ (cross out provision which does not apply) in cash
and/or stock of the Corporation owned by me, and I request that a value as of
the date of exercise of this Option be placed on any stock being tendered in
payment of the purchase price. The effective date of this election shall be
____________________, 199__, or the date of receipt of this Notice by the
Corporation if later.
Executed this _____ day of _______________, 199__, at
________________________________________________.
____________________________________
____________________________________
____________________________________
(Social Security Number)
STATE OF NORTH CAROLINA
COUNTY OF ROWAN
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of ________________, 1998, by and between
BANK OF THE CAROLINAS (hereinafter referred to as the "Bank") and STEPHEN R.
TALBERT (hereinafter referred to as "Talbert").
W I T N E S S E T H:
WHEREAS, the Bank desires to retain Talbert's services as an officer of the
Bank for the period specified herein, and Talbert is willing to serve as an
officer of the Bank for such period; and, the parties desire to enter into this
Agreement to set forth the terms and conditions of Talbert's employment with the
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 Bank and Talbert hereby agree as follows:
1. Employment. The Bank hereby agrees to employ Talbert, and Talbert hereby
agrees to serve as an officer of the Bank, all upon the terms and conditions
stated herein. As an officer of the Bank, Talbert will (i) serve as President
and Chief Executive Officer of the Bank, and (ii) have such other duties and
responsibilities, and render to the Bank such other management services, as are
customary for persons in Talbert, position with the Bank or as shall otherwise
be reasonably assigned to him from time to time by the Board of Directors of the
Bank. Talbert shall faithfully and diligently discharge his duties and
responsibilities under this Agreement and shall use his best efforts to
implement the policies established by the Bank.
<PAGE>
Talbert hereby agrees to devote such number of hours of his working time and
endeavors to the employment granted hereunder as Talbert and the Bank shall deem
to be necessary to discharge his duties hereunder, and, for so long as
employment hereunder shall exist, Talbert shall not engage in any other
occupation which requires a significant amount of Talbert's personal attention
during the Bank's regular business hours or which otherwise interferes with
Talbert, attention to or performance of his duties and responsibilities as an
officer of the Bank hereunder except with the prior written consent of the Bank.
However, nothing herein contained shall restrict or prevent Talbert from
personally, and for Talbert' own account, trading in stocks, bonds, securities,
real estate or other forms of investment for Talbert's own benefit so long as
said activities do not interfere with Talbert's attention to or performance of
his duties and responsibilities as an officer of the Bank hereunder.
2. Compensation. For all services rendered by Talbert to the Bank under
this Agreement, the Bank shall pay Talbert a base salary at a rate of
Eighty-eight Thousand Two Hundred dollars ($88,200.00) per annum; provided that
the rate of such salary shall be reviewed by the Board of directors not less
often than annually. Salary paid under this Agreement shall be payable in cash
not less frequently than monthly. All compensation hereunder shall be subject to
customary withholding taxes and such other employment taxes as are required by
law. In the event of a Change in Control (as defined in Paragraph 8), Talbert's
base salary shall be increased not less than six percent (6%.) annually during
the term of this Agreement.
3. Participation in Retirement and Employee Benefit Plans; Fringe Benefits.
Subject to the terms and conditions of this Agreement, Talbert shall be entitled
to
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<PAGE>
participate in any and all employee benefit programs and compensation plans
from time to time maintained by the Bank and available to all employees of the
Bank, all in accordance with the terms and conditions (including eligibility
requirements) of such programs and plans of the Bank, resolutions of the Bank's
Board of Directors establishing such programs and plans, and the Bank's normal
practices and established policies regarding such programs and plans. Talbert
shall be entitled to paid vacation leave in accordance with the policy of the
Bank for similarly positioned employees now or hereafter in effect.
In addition to the other compensation and benefits described in this
Agreement, the Bank shall promptly reimburse Talbert for all reasonable expenses
incurred by him in the performance of his duties under this Agreement and
documented to the reasonable satisfaction of the Bank or appropriate officers of
the Bank pursuant to established procedures. The Bank shall assume payment of
Talbert, civic club and country club dues provided that Talbert shall be
responsible for all personal expenses for use of such clubs.
4. Term. Unless sooner terminated as provided in this Agreement and subject
to the right of either Talbert or the Bank to terminate Talbert's employment at
any time as provided herein, the initial term of this Agreement and Talbert's
employment with the Bank
3
<PAGE>
hereunder shall be for a period commencing on the date hereof and continuing for
a period of three (3) years. On each anniversary of the date of this Agreement,
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 Bank or Talbert is received 90 days prior to the anniversary date notifying
the other party that this Agreement shall not be further extended; provided
further that the Board of Directors shall review annually Talbert, performance
and shall make a specific determination pursuant to such review to renew this
Agreement prior to the 90 days notice period.
5. Confidentiality. Talbert hereby acknowledges and agrees that (i) in the
course of his service as an officer of the Bank, he will gain substantial
knowledge of and familiarity with the Bank's customers and its dealings with
them, and other information concerning the Bank's business, all of which
constitutes valuable assets and privileged information that is particularly
sensitive due to the fiduciary responsibilities inherent in the banking
business; and, ii) in order to protect the Bank's interest in and to assure it
the benefit of its business, it is reasonable and necessary to place certain
restrictions on Talbert's ability to compete against the Bank and on his
disclosure of information about the Bank's business and customers. For that
purpose, and in consideration of the Bank's agreements contained herein, Talbert
covenants and agrees as provided below.
For the purposes of this Paragraph 5, the following terms shall have the
meanings set forth below:
4
<PAGE>
Customer. The term "Customer" means any Person with whom, as of the
effective date of termination of this Agreement or Talbert's employment with the
Bank for any reason, the Bank has or has had a depository, loan and/or other
banking relationship.
Financial Institution. The term "Financial Institution" means any federal
or state chartered bank, savings bank, savings and loan association or credit
union, or any holding company for or corporation that owns or controls any such
entity, or any other Person engaged in the business of making loans of any type
or receiving deposits, other than the Bank.
Person. The term "Person" means any natural person or any corporation,
partnership, proprietorship, joint venture, limited liability company, trust,
estate, governmental agency or instrumentality, fiduciary, unincorporated
association or other entity.
(a) Confidentiality Covenant. Talbert covenants and agrees that any and all
data, figures, projections, estimates, lists, files, records, documents, manuals
or other such materials or information (financial or otherwise) relating to the
Bank and its banking business, regulatory examinations, financial results and
condition, lending and deposit operations, customers (including lists of the
Bank's customers and information regarding their accounts and business dealings
with the Bank), policies and procedures, computer systems and software,
shareholders, employees, officers and directors (herein referred to as
"Confidential Information") are proprietary to the Bank and are valuable,
special and unique assets of the Bank's business to which Talbert will have
access during his employment with the Bank. Talbert agrees that (i) all such
Confidential Information shall be considered and kept as the confidential,
private and privileged records and information of the Bank, and (ii) at all
times during the term of his employment with the Bank and following the
termination of this Agreement or his employment
5
<PAGE>
for any reason, and except as shall be required in the course of the performance
by Talbert of his duties on behalf of the Bank or otherwise pursuant to the
direct, written authorization of the Bank, Talbert will not: divulge any such
Confidential Information to any other Person or Financial Institution; remove
any such Confidential Information in written or other recorded form from the
Bank's premises; or make any use of any Confidential Information for his own
purposes or for the benefit of any Person or Financial Institution other than
the Bank. However, following the termination of Talbert's employment with the
Bank, this subparagraph (b) shall not apply to any Confidential Information
which then is in the public domain (provided that Talbert was not responsible,
directly or indirectly, for permitting such Confidential Information to enter
the public domain without the Bank's consent), or which is obtained by Talbert
from a third party which or who is not obligated under an agreement of
confidentiality with respect to such information.
(b) Remedies for Breach. Talbert understands and agrees that a breach or
violation by him of the covenants contained in Paragraph 5(a) of this Agreement
will be deemed a material breach of this Agreement and will cause irreparable
injury to the Bank, and that it would be difficult to ascertain the amount of
monetary damages that would result from any such violation. In the event of
Talbert's actual or threatened breach or violation of the covenants contained in
Paragraph 5 (a) , the Bank shall be entitled to bring a civil action seeking an
injunction restraining Talbert from violating or continuing to violate those
covenants or from any threatened violation thereof, or for any other legal or
equitable relief relating to the breach or violation of such covenant. Talbert
agrees that, if the Bank institutes any action or proceeding against Talbert
seeking to enforce any of such covenants or to recover other relief relating to
an
6
<PAGE>
actual or threatened breach or violation of any of such covenants, Talbert shall
be deemed to have waived the claim or defense that the Bank has an adequate
remedy at law and shall not urge in any such action or proceeding the claim or
defense that such a remedy at law exists. However, the exercise by the Bank of
any such right, remedy, power or privilege shall not preclude the Bank or its
successors or assigns from pursuing any other remedy or exercising any other
right, power or privilege available to it for any such breach or violation,
whether at law or in equity, including the recovery of damages, all of which
shall be cumulative and in addition to all other rights, remedies, powers or
privileges of the Bank.
Notwithstanding anything contained herein to the contrary, Talbert agrees
that the provisions of Paragraph 5(a) above and the remedies provided in this
Paragraph 5(b) for a breach by Talbert shall be in addition to, and shall not be
deemed to supersede or to otherwise restrict, limit or impair the rights of the
Bank under the Trade Secrets Protection Act contained in Article 24, Chapter 66
of the North Carolina General Statutes, or any other state or federal law or
regulation dealing with or providing a remedy for the wrongful disclosure,
misuse or misappropriation of trade secrets or other proprietary or confidential
information.
(c) Survival of Covenants. Talbert, covenants and agreements and the Bank's
rights and remedies provided for in this Paragraph 5 shall survive any
termination of this Agreement or Talbert's employment with the Bank.
6. Termination and Termination Pay.
(a) Talbert, employment under this Agreement may be terminated at any time
by Talbert upon sixty (60) days, written notice to the, Bank. Upon such
termination, Talbert shall be entitled to receive compensation through the
effective date of such termination;
7
<PAGE>
provided, however, that the Bank, in its sole discretion, may elect for Talbert
not to serve out part or all of said notice period.
(b) Talbert's employment under this Agreement shall be terminated upon the
death of Talbert during the term of this Agreement. Upon any such termination,
Talbert, estate shall be entitled to receive any compensation due to Talbert
computed through the last day of the calendar month in which his death shall
have occurred but which remains unpaid.
(c) In the event Talbert becomes disabled during the term of his employment
hereunder and it is determined by the Bank that Talbert is permanently unable to
perform his duties under this Agreement, the Bank shall continue to compensate
Talbert at the level of compensation described in Paragraph 2 above, and shall
continue to provide Talbert each of the other benefits set forth or described in
this Agreement, for the remaining term of this Agreement, less any other
payments provided under any disability income plan of the Bank which is
applicable to Talbert. In the event of any disagreement between Talbert and the
Bank as to whether Talbert is physically or mentally incapacitated such as will
result in the termination of Talbert's employment pursuant to this Paragraph
6(c), the question of such incapacity shall be submitted to an impartial and
reputable physician for determination, selected by mutual agreement of Talbert
and the Bank or, failing such agreement, by two (2) physicians (one (1) of whom
shall be selected by the Bank and the other by Talbert), and such determination
of the question of such incapacity by such physician or physicians shall be
final and binding on Talbert and the Bank. The Bank shall pay the reasonable
fees and expenses of such physician or physicians in making any determination
required under this Paragraph 6 (c).
8
<PAGE>
(d) The Bank may terminate Talbert's employment at any time for any reason
with or without "Cause" (as defined below), but any termination by the Bank
other than termination for "Cause," (as defined below) shall not prejudice
Talbert's right to compensation or other benefits under this Agreement for its
remaining term. Following any termination of Talbert's employment by the Bank
for "Cause", Talbert shall have no further rights under this Agreement
(including any right to receive compensation or other benefits for any period
after such termination).
For purposes of this Paragraph 6 (d) , the Bank shall have "Cause" to
terminate Talbert, employment upon:
(i) A determination by the Bank, in good faith, that Talbert (A) has
breached in any material respect any of the terms or conditions of this
Agreement, or (B) is engaging or has engaged in willful misconduct or
conduct which is detrimental to the business prospects of the Bank or which
has had or likely will have a material adverse effect on the Bank's
business or reputation. Prior to any termination by the Bank of Talbert,
employment for a breach, failure to perform or conduct described in this
subparagraph (i), the Bank shall give Talbert written notice which
describes such breach, failure to perform or conduct and if during a period
of five (5) days following such notice Talbert cures or corrects the same
to the reasonable satisfaction of the Bank, then this Agreement shall
remain in full force and effect. However, notwithstanding the above, if the
Bank has given written notice to Talbert on a previous occasion of the same
or a substantially similar breach, failure to perform or conduct, or of a
breach, failure to perform or conduct which the Bank determines in good
faith to be of substantially similar import, or if the Bank determines in
good faith that the then current breach, failure to perform or
9
<PAGE>
conduct is not reasonably curable, then termination under this subparagraph
(i) shall be effective immediately and Talbert shall have no right to cure
such breach, failure to perform or conduct.
(ii) The violation by Talbert of any applicable federal or state law,
or any applicable rule, regulation, order or statement of policy
promulgated by any governmental agency or authority having jurisdiction
over the Bank or any of its affiliates or subsidiaries (a "Regulatory
Authority", including without limitation the Federal Deposit Insurance
Corporation, the North Carolina Commissioner of Banks, the Federal Reserve
Board or any other banking regulator), which results from Talbert, gross
negligence, willful misconduct or intentional disregard of such law, rule,
regulation, order or policy statement and results in any substantial
damage, monetary or otherwise, to the Bank or any of its affiliates or
subsidiaries or to the Bank's reputation;
(iii) The commission in the course of Talbert's employment with the
Bank of an act of fraud, embezzlement, theft or proven personal dishonesty
(whether or not resulting in criminal prosecution or conviction);
(iv) The conviction of Talbert of any felony or any criminal offense
involving dishonesty or breach of trust, or the occurrence of any event
described in Section 19 of the Federal Deposit Insurance Act or any other
event or circumstance which disqualifies Talbert from serving as an
employee or executive officer of, or a party affiliated with, the Bank or
its bank holding company;
(v) Talbert becomes unacceptable to, or is removed, suspended or
prohibited from participating in the conduct of the Bank's affairs (or if
proceedings for that purpose are commenced) by, any Regulatory Authority;
and,
10
<PAGE>
(vi) The occurrence of any event believed by the Bank, in good faith,
to have resulted in Talbert being excluded from coverage, or having
coverage limited as to Talbert as compared to other covered officers or
employees, under the Bank's then current "blanket bond" or other fidelity
bond or insurance policy covering its directors, officers or employees.
8. Additional Regulatory Requirements. Notwithstanding anything contained
in this Agreement to the contrary, it is understood and agreed that the Bank (or
its successors in interest) shall not be required to make any payment or take
any action under this Agreement if (a) the Bank is declared by any Regulatory
Authority to be insolvent, in default or operating in an unsafe or unsound
manner, or if (b) in the opinion of counsel to the Bank such payment or action
(i) would be prohibited by or would violate any provision of state or federal
law applicable to the Bank, including without limitation the! Federal Deposit
Insurance Act and Chapter 53 of the North Carolina General Statutes as now in
effect or hereafter amended, (ii) would be prohibited by or would violate any
applicable rules, regulations, orders or statements of policy, whether now
existing or hereafter promulgated, of any Regulatory Authority, or (iii)
otherwise would be prohibited by any Regulatory Authority.
9. Change in Control
(a) In the event of a termination of Talbert's employment in connection
with, or within twenty-four (24) months after, a "Change in Control" (as defined
in Subparagraph (d) below) of the Bank, for reasons other than for "cause,, (as
defined in Paragraph 6 (d) hereof) , Talbert shall be entitled to receive the
sum set forth in Subparagraph (c) below. Said sum shall be payable as provided
in Subparagraph (e) below.
11
<PAGE>
(b) Talbert shall have the right to terminate this Agreement upon the
occurrence of any of the following events (the "Termination Events") within
twenty-four (24) months following a Change in Control of the Bank:
(i) Talbert is assigned 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 titles
with the Bank in effect at such time;
(ii) Talbert, annual base salary is reduced below the amount
in effect as of the effective date of a Change in Control or
as the same shall have been increased from time to time
following such effective date;
(iii) Talbert, life insurance, medical or hospitalization
insurance, disability insurance, stock option plans, stock
purchase plans, deferred compensation plans, management
retention plans, retirement plans, or similar plans or
benefits being provided by the Bank to Talbert as of the
effective date of the Change in Control are reduced in their
level, scope, or coverage, or any such insurance, plans, or
benefits are eliminated, unless such reduction or
elimination applies proportionately to all salaried
employees of the Bank who participated in such benefits
prior to such Change in Control; or
(iv) Talbert is transferred to a location outside of Rowan
County, North Carolina, without the Talbert's express
written consent.
A Termination Event shall be deemed to have occurred on the date such
action or event is implemented or takes effect.
(c) In the event that Talbert terminates this Agreement or the Bank
terminates this Agreement pursuant to this Paragraph 8, the Bank will be
obligated to pay or cause to be paid to Talbert an amount equal to two hundred
ninety-nine percent (299%.) of
12
<PAGE>
Talbert, "base amount" as defined in Section 28OG(b) (3) (A) of the Internal
Revenue Code of 1986, as amended (the "Code[)) .
(d) For the purposes of this Agreement, the term Change in Control shall
mean any of the following events:
(i) After the effective date of this Agreement, any "person"
(as such term is defined in Section 7 (j) (8) (A) of the
Change in Bank Control Act of 1978) , directly or
indirectly, acquires beneficial ownership of voting stock,
or acquires irrevocable proxies or any combination of voting
stock and irrevocable proxies, representing twenty-five
percent (25%) or more of any class of voting securities of
the Bank, or acquires control of in any manner the election
of a majority of the directors of the Bank;
(ii) The Bank consolidates or merges with or into another
corporation, association, or entity, or is otherwise
reorganized, where the Bank is the surviving corporation in
such transaction; or
(iii) All or substantially all of the assets of the Bank are
sold or otherwise transferred to or are acquired by any
other corporation, association, or other person, entity, or
group.
Notwithstanding the other provisions of this Paragraph 8, a transaction or
event shall not be considered a Change in Control if, prior to the consummation
or occurrence of such transaction or event, Talbert and the Bank agree in
writing that the same shall not be treated as a Change in Control for purposes
of this Agreement.
(e) Amounts payable pursuant to this Paragraph 8 shall be paid, at the
option of Talbert, either in one lump sum or in equal monthly payments over the
remaining term of this Agreement.
13
<PAGE>
(f) Following a Termination Event which gives rise to Talbert's rights
hereunder, Talbert shall have twelve (12) months from the date of occurrence of
the Termination Event to terminate this Agreement pursuant to this Paragraph 8.
Any such termination shall be deemed to have occurred only upon delivery to the
Bank or any successor thereto, of written notice of termination which describes
the Change in Control and Termination Event. if Talbert does not so terminate
this Agreement within such twelvemonth period, Talbert shall thereafter have no
further rights hereunder with respect to that Termination Event, but shall
retain rights, if any, hereunder with respect to any other Termination Event as
to which such period has not expired.
(g) It is the intent of the parties hereto that all payments made pursuant
to this Agreement be deductible by the Bank for federal income tax purposes and
not result in the imposition of an excise tax on Talbert. Notwithstanding
anything contained in this Agreement to the contrary, any payments to be made to
or for the benefit of Talbert which are deemed to be "parachute payments" as
that term is defined in Section 28OG(b) (2) of the Code, shall be modified or
reduced to the extent deemed to be necessary by the Bank's Board of Directors to
avoid the imposition of an excise tax on Talbert under Section 4999 of the Code
or the disallowance of a deduction to the Bank under Section 28OG(a) of the
Code.
(h) In the event any dispute shall arise between Talbert and the Bank as to
the terms or interpretation of this Agreement, including this Paragraph 8,
whether instituted by formal legal proceedings or otherwise, including any
action taken by Talbert to enforce the terms of this Paragraph 8 or in defending
against any action taken by the Bank, the Bank shall
14
<PAGE>
reimburse Talbert for all costs and expenses, proceedings or actions, in the
event Talbert prevails in any such action.
9. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and he binding upon any
corporate or other successor of the Bank which shall acquire, directly or
indirectly, by conversion, merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Bank.
(b) The Bank is contracting for the unique and personal skills of Talbert.
Therefore, Talbert shall be precluded from assigning or delegating his rights or
duties hereunder without first obtaining the written consent of the Bank.
10. 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 and signed by the parties hereto. 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.
11. 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.
15
<PAGE>
12. 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.
13. Entire Agreement. This Agreement contains the entire agreement of the
parties with respect to the transactions described herein and supersedes any and
all other oral or written agreements heretofore made, and there are no
representations or inducements by or to, or and agreements between, any of the
parties hereto other than those contained herein in writing.
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal and
in such form as to be binding as of the day and year first hereinabove written.
BANK OF THE CAROLINAS
By: ______________________________
Chairman
ATTEST:
__________________________________
Stephen R. Talbert
17
Landex Inc.
Smith Tower, Suite 420
5555 Highway 29
Harrisburg, N.C. 28075
Exhibit 10.8
(KINGS GRANT logo
appears here.)
December 2, 1997
VIA FACSIMILE TO: WALTER M. SAFRIT, II, ESQ.
----------------------------------------------------
LETTER OF INTENT
Outparcel 14 at Kings Grant
Cabarrus, County North Carolina
-----------------------------------------------------
This letter represents the intent of Interstate Combined
Ventures, a North Carolina joint venture partnership of which Landex,
Inc. is the managing general partner (hereinafter the "Seller"), to
sell the land referenced herein to Landis Savings Bank, SSB
(hereinafter the "Buyer"). Although this letter fairly represents our
position, it should not be considered a Contract to Purchase nor a
Contract to sell by either party.
Outlined below are the basic terms and conditions under which
title to the Property would be transferred from Seller to Buyer.
I. Description: All that real property which consists of
approximately one (1) acre referred to as Outparcel 14 of Kings
Grant, Cabarrus County, North Carolina as shown on EXHIBIT A
attached hereto.
II. Purchased Price: The Purchase Price shall be $557,377.00.
III. Conditions of Purchase & Sale:
1.) Buyer and Seller will execute a Purchase Agreement within
Thirty (30) days of the Buyer's execution hereof. The
Purchase Agreement will be consistent with the terms and
conditions outlined herein. Failure to execute a Purchase
Agreement within this time will void this Letter of
Intent.
<PAGE>
(KINGS GRANT logo
appears here.)
2.) Buyer shall deposit a $20,000 earnest money binder with
Walter M. Safrit, II, as escrow agent upon execution of
the Purchase Agreement. Buyer shall then have sixty (60)
days to inspect the property. If during this Inspection
Period Buyer determines that the Property is not suitable
for its purposes, the Purchase Agreement will be
terminated and the earnest money binder will be returned
to Buyer.
3.) If the Property is deemed suitable by the Buyer, and the
Seller is able to meet the contingencies set forth below
in Sub-Paragraph 4, the purchase and sale of the Property
shall close on the earlier of i.) thirty (30) days after
the end of the Inspection period; or ii.) thirty (30) days
after the Buyer has completed the items set forth below in
Sub-Paragraph 4.
4.) The Purchase Agreement shall provide that the obligations
of Buyer and Seller thereunder are contingent upon the
Seller's completion of the following items within 120 days
of the execution thereof:
i.) Acquiring the approval of the G.L Wilson Building
Company which holds record title to the Property as
security for certain financing provided to Interstate
Combined Ventures as per a certain Agreement dated the 1st
day of November, 1994 and of record in the Register of
Deeds Office for Cabarrus County, North Carolina in Book
1887 at Page 257.
ii.) Completion and filing of record of a final
subdivision plat showing Outparcel 14 as a lot in said
subdivision.
iii.) Completion of the rough grading on Outparcel 14 as
per that certain Agreement by and between the City of
Concord and Interstate Combined Ventures dated the 25th
day of March, 1997 and filed of record in the Register of
Deeds Office for Cabarrus County, North Carolina in Book
1867 at Page 182.
iv.) Providing access to the Property by public road
located along the northerly boundary of the Property as
shown on Exhibit A.
v.) Provided public utility service, including water and
sewer, to the boundary line of the Property.
<PAGE>
(KINGS GRANT logo
appears here.)
If the above terms meet with your approval, please
execute as provided below and return one (1) copy to me. This
proposal will expire if nor accepted on or before December 31,
1997.
Sincerely,
INTERSTATE COMBINED VENTURES
By: Landex, Inc.
/s/ William W. Merow
--------------------
William W. Merow
Vice President
AGREED TO AND ACCEPTED BY:
LANDIS BANK, SSB
By: Date:
------------------ ---------------
<PAGE>
Exhibit A
[Survey map of subject property appears here]
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors
Landis Savings Bank, SSB
Landis, North Carolina
We consent to the use in (i) the Registration Statement of BOC Financial Corp.
on Form SB-2, (ii) the Application to Convert filed by Landis Savings Bank, SSB
(the "Bank") with the Administrator, Savings Institutions Division under the
relevant provisions of Chapter 54C of the North Carolina General Statutes, and
(iii) the Notice of Intent to Convert to Stock Form, filed by the Bank with the
Federal Deposit Insurance Corporation, of our report dated October 23, 1997 on
the financial statements of Landis Savings Bank, SSB as of and for the years
ended December 31, 1996 and 1995, and to the reference to our firm under the
heading "Experts" in the Registration Statement.
Dixon Odom PLLC
Southern Pines, North Carolina
December 10, 1997
Exhibit 23.2
CONSENT OF INDEPEDENT APPRAISER
We hereby consent to the use of our firm's name in the applications for
conversion of Landis Savings Bank, SSB (the "Savings Bank"), Landis, North
Carolina, and any amendments thereto, filed with the Administrator of the
Division of Savings Institutions, North Carolina Department of Commerce (the
"Administrator"), and the Federal Deposit Insurance Corporation, and the
Registration Statement on Form SB-2 filed with the Securities and Exchange
Commission, the Acquisition Application filed with the Administrator, and the
holding company application filed with the Board of Governors of the Federal
Reserve System by BOC Financial Corp. We also hereby consent to the inclusion of
summaries of and references to our appraisal report, including updates, and our
opinion concerning subscription rights in such filings and the Proxy Statement
of the Savings Bank.
THE MERITAS GROUP, INC.
Chapel Hill, North Carolina
December 10, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 91 307
<INT-BEARING-DEPOSITS> 26 33
<FED-FUNDS-SOLD> 2,325 675
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 2,559 2,148
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 18,644 18,918
<ALLOWANCE> 30 7
<TOTAL-ASSETS> 24,234 22,661
<DEPOSITS> 19,701 18,322
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 138 27
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 4,395 4,312
<TOTAL-LIABILITIES-AND-EQUITY> 24,234 22,661
<INTEREST-LOAN> 1,127 1,445
<INTEREST-INVEST> 136 137
<INTEREST-OTHER> 49 28
<INTEREST-TOTAL> 1,312 1,610
<INTEREST-DEPOSIT> 732 841
<INTEREST-EXPENSE> 732 841
<INTEREST-INCOME-NET> 580 769
<LOAN-LOSSES> 22 5
<SECURITIES-GAINS> 2 4
<EXPENSE-OTHER> 453 610
<INCOME-PRETAX> 109 162
<INCOME-PRE-EXTRAORDINARY> 78 112
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 78 112
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 3.37 3.71
<LOANS-NON> 0 0
<LOANS-PAST> 47 5
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 8 3
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 30 8
<ALLOWANCE-DOMESTIC> 30 8
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
EXHIBIT 99.2
BOC FINANCIAL CORP.
Proposed Holding Company for Landis Bank, SSB
(to become Bank of the Carolinas)
Stock Information Center
107 South Central Avenue
Landis, North Carolina 28088
(704) 857-7277
STOCK ORDER FORM
- ------------------------------------------------------------------------------
DEADLINE The Subscription Offering ends at 5:00 p.m., Eastern Time, on
_________________, 1998. Your original Stock Order Form, properly executed and
with the correct payment, must be received at the address on the top of this
form by this deadline, or it will be considered void.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(1) NUMBER OF SHARES PRICE PER SHARE (2) TOTAL AMOUNT DUE
<S> <C> <C>
------------------------------ ------------------------------
$
x $10.00 =
------------------------------ ------------------------------
</TABLE>
The minimum number of shares that may be subscribed for is 25. Subject to the
limitations set forth in the Plan of Conversion (including the limitations on
the purchase of shares imposed by the receipt of any Exchange Shares), the
maximum individual subscription is 25,000 shares.
<PAGE>
METHOD OF PAYMENT
(3) |_| Enclosed is a check, bank draft or money order payable to BOC
Financial Corp. for $__________________ (cash if presented in
person).
(4) |_| I authorize Landis Savings Bank, SSB ("Landis Savings") to make
withdrawals from my Landis Savings certificate or savings account(s)
shown below, and understand that the amounts will not otherwise be
available for withdrawal:
Account Number(s) Amount(s)
------------------------------------- ------------------------
------------------------------------- ------------------------
------------------------------------- ------------------------
------------------------------------- ------------------------
------------------------------------- ------------------------
------------------------------------- ------------------------
------------------------------------- ------------------------
Total Withdrawal
------------------------
(5) |_| Check here if you are a DIRECTOR, OFFICER, or EMPLOYEE of Landis
Savings or a member of such person's immediate family.
(6) |_| ASSOCIATE - ACTING IN CONCERT
Check here, and complete the reverse side of this form, if you or any
associates (as defined on the reverse side of this form) or persons
acting in concert with you have submitted other orders for shares in
the Subscription Offering and/or Community Offering.
(7) Purchaser Information (additional space on back of form)
a. |_| ELIGIBLE ACCOUNT HOLDER - Check here if you were a depositor with
$50 or more on deposit with Landis Savings as of August 30, 1996. Enter
information below for all deposit accounts that you had at Landis
Savings on August 30, 1996.
b. |_| SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER - Check here if you were
depositor with $50 or more on deposit with Landis Savings as of
December 31, 1997, but are not an Eligible Account Holder. Enter
information below for all deposit accounts that you had at Landis
Savings on December 31, 1997.
c. |_| OTHER MEMBER - Check here if you were a depositor of Landis Savings
as of _______________, 1998 or a borrowers of Landis Savings with a
loan outstanding as of ______________, 1998, but are not an Eligible
Account Holder or a Supplemental Eligible Account Holder. Enter
information below for all deposit accounts or loans that you had at
Landis Savings on _______________, 1998.
d. |_| LOCAL COMMUNITY - Check here if you are permanent resident of Cabarrus,
Iredell, or Rowan county, North Carolina.
Account Title (Names on Accounts) Account Number
------------------------------------- ------------------------
------------------------------------- ------------------------
------------------------------------- ------------------------
------------------------------------- ------------------------
- -------------------------------------------------------------------------------
(8) STOCK REGISTRATION
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
|_| Individual |_| Uniform Transfer to Minors |_| Partnership
|_| Joint Tenants |_| Uniform Gift to Minors |_| Individual Retirement Account
|_| Tenants in Common |_| Corporation |_| Fiduciary/Trust (Under Agreement
Dated ------------------------------- )
</TABLE>
---------------------------------------------------------------------------
<TABLE>
<S> <C>
Name Social Security or Tax ID
-------------------------------------------------------------------------- -----------------------------------------------
Name Social Security or Tax ID
-------------------------------------------------------------------------- -----------------------------------------------
Street Address Daytime Telephone
-------------------------------------------------------------------------- -----------------------------------------------
City State Zip Code
--------------------------------------------------------------------------- ---------------------------------------------
</TABLE>
|_| NASD AFFILIATION (This section only applies to those individuals who meet
the delineated criteria)
Check here if you are a member of the National Association of
Securities Dealers, Inc. ("NASD"), a person associated with an NASD member, a
member of the immediate family of any such person to whose support such person
contributes, directly or indirectly, or the holder of an account in which an
NASD member or a person associated with an NASD member has a beneficial
interest. To comply with conditions under which an exemption from the NASD's
Interpretation With Respect to Free-Riding and Withholding is available, you
agree, if you have checked the NASD affiliation box: (1) not to sell, transfer
or hypothecate the stock for a period of three months following the issuance and
(2) to report this subscription in writing to the applicable NASD member within
one day of the payment therefor.
- -------------------------------------------------------------------------------
ACKNOWLEDGMENT By signing below I acknowledge receipt of the Prospectus dated
____________________, 1998 and understand I may not change or revoke my order
once it is received by BOC Financial Corp. I also certify that this stock order
is for my account and there is no agreement or understanding regarding any
further sale or transfer of these shares. North Carolina regulations prohibit
any persons from transferring, or entering into any agreement directly or
indirectly to transfer, the legal or beneficial ownership of conversion
subscription rights or the underlying securities to the account of another
person. Landis Savings will pursue any and all legal and equitable remedies in
the event it becomes aware of the transfer of subscription rights and will not
honor orders known by it to involve such transfer. Under penalties of perjury, I
further certify that: (1) the social security number or taxpayer identification
number given above is correct; and (2) I am not subject to backup withholding.
You must cross out item (2) above if you have been notified by the Internal
Revenue Service that you are subject to backup withholding because of
under-reporting interest or dividends on your tax return. By signing below, I
also acknowledge that I have not waived any rights under the Securities Act of
1933 and the Securities Exchange Act of 1934.
SIGNATURE THIS FORM MUST BE SIGNED AND DATED. THIS ORDER IS NOT VALID IF NOT
SIGNED. YOUR ORDER WILL BE FILLED IN ACCORDANCE WITH THE PROVISIONS OF THE
PROSPECTUS. When purchasing as a custodian, corporate officer, etc., include
your full title. An additional signature is required only if payment is by
withdrawal from an account that requires more than one signature to withdraw
funds. THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND
ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
- ------------------------------ ------------------------- ------------
Signature Title (if applicable) Date
- ------------------------------ ------------------------- ------------
Signature Title (if applicable) Date
- ------------------------------ ------------------------- ------------
- ------------------------ ---------------------- --------------------
FOR OFFICE USE Date Rec'd ----------- Order # --------------
Check # -------------- Category -------------
Batch # ------------- Amount $ ------------- Deposit $ -------------
- ------------------------------------------------------------------------
<PAGE>
ITEM (6) CONTINUED; ASSOCIATE - ACTING IN CONCERT
ASSOCIATES LISTED ON NUMBER OF
OTHER STOCK ORDERS SHARES ORDERED
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
ITEM (7) CONTINUED; PURCHASER INFORMATION
ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
- --------------------------------------- -----------------------
DEFINITION OF ASSOCIATE
The term "associate" of a person is defined to mean (i) any corporation or other
organization (other than BOC Financial Corp. ("Holding Company"), Landis Savings
Bank, SSB ("Landis Savings"), or a majority owned subsidiary of any of them) of
which such person is a director, officer, or partner or is directly or
indirectly the beneficial owner of 10% or more of any class of equity
securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, provided, however, that such term shall not
include any tax-qualified employee stock benefit plan of the Holding Company or
Landis Savings in which such person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity; and (iii) any relative
or spouse of such person, or any relative of such person, who either has the
same home as such person or who is a director or officer of the Holding Company
or Landis Savings, or any of their subsidiaries.
LANDIS SAVING BANK, SSB
107 South Central Avenue
Landis, North Carolina 28088
(704) 857-7277
------------------------------------
NOTICE OF SPECIAL MEETING OF MEMBERS
TO BE HELD , 1998
------------------------------------
NOTICE IS HEREBY GIVEN, that a special meeting (the "Special Meeting")
of the members of Landis Savings Bank, SSB (the "Savings Bank") will be held at
____________ on________ _________, 1998 at__________ Eastern Time, to consider
and vote upon:
1. A Plan of Conversion pursuant to which, among other things, the Savings
Bank will (i) convert from a North Carolina-chartered mutual savings bank
to a North Carolina- chartered stock savings bank (the "Stock Conversion"),
amend its Certificate of Incorporation and Bylaws as required to effect the
Stock Conversion, issue all of its capital stock to BOC Financial Corp.
(the "Company"), a North Carolina business corporation formed at the
direction of the Board of Directors of the Savings Bank to serve as the
holding company for the Savings Bank upon its conversion to stock form; and
cause the Company to offer and sell shares of common stock in subscription
and community offerings and, if necessary, in a public offering; and (ii)
immediately after the Stock Conversion, convert to a North
Carolina-chartered commercial bank (the "Bank Conversion") to be known as
"Bank of the Carolinas" and amend its Certificate of Incorporation and
Bylaws as required to effect the Savings Bank Conversion; and
2. Such other matters that fall within the purposes set forth in this Notice
of Special Meeting of Members or any adjournment thereof. Management is not
aware of any such other business.
The Board of Directors has fixed the close of business on December 31,
1997 as the record date for the determination of members entitled to notice of
and to vote at the Special Meeting and at any adjournment thereof. Members of
the Savings Bank of record as of the close of business on that date who cease to
be depositors or borrowers prior to the date of the Special Meeting are no
longer members and will not be entitled to vote at the Special Meeting. If there
are insufficient votes for approval of the Plan of Conversion at the time of the
Special Meeting, the Special Meeting may be adjourned to permit further
solicitation of proxies.
By Order of the Board of Directors
Henry H. Land
Secretary
Landis, North Carolina
____________, 1998
THE BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY
MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL
MEETING, TO FILL IN, DATE, SIGN, AND RETURN THE ENCLOSED APPOINTMENT OF PROXY AS
SOON AS POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT
PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY
REVOKE YOUR APPOINTMENT OF PROXY BY WRITTEN INSTRUMENT DELIVERED TO THE
SECRETARY OF THE SAVINGS BANK AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR
BY ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON. THE SAVINGS BANK WILL
PROVIDE A COPY OF THE PLAN OF CONVERSION WITHOUT CHARGE TO ANY MEMBER UPON
WRITTEN OR ORAL REQUEST DIRECTED TO THE SECRETARY OF THE SAVINGS BANK, 107 SOUTH
CENTRAL AVENUE, LANDIS, NORTH CAROLINA 28088, (704) 857-7277.
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LANDIS SAVING BANK, SSB
107 South Central Avenue
Landis, North Carolina 28088
(704) 857-7277
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PROXY STATEMENT
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INTRODUCTION
Your Appointment of Proxy, in the form enclosed, is solicited by the
Board of Directors of Landis Savings Bank, SSB (the "Savings Bank") for use at a
Special Meeting of its members to be held on ____________, 1997, and any
adjournment of that meeting, for the purposes set forth in the foregoing notice
of Special Meeting. The information contained in the accompanying prospectus of
BOC Financial Corp., dated ________, 1998 (the "Prospectus"), including a more
detailed description of the Plan, is intended to help you evaluate the
Conversion and is incorporated herein by reference. All persons eligible to vote
at the Special Meeting should review both this Proxy Statement and the
accompanying Prospectus.
YOUR BOARD OF DIRECTORS URGES YOU TO CONSIDER CAREFULLY THIS PROXY
MATERIAL AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE SPECIAL
MEETING, TO FILL IN, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) AS SOON AS
POSSIBLE TO ASSURE THAT YOUR VOTES WILL BE COUNTED. THIS WILL NOT PREVENT YOU
FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY REVOKE YOUR
PROXY BY WRITTEN INSTRUMENT DELIVERED TO THE SECRETARY OF THE BANK AT ANY TIME
PRIOR TO OR AT THE SPECIAL MEETING OR BY ATTENDING THE SPECIAL MEETING AND
VOTING IN PERSON. THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE COMMON STOCK. THE OFFER IS MADE ONLY BY THE
PROSPECTUS.
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements in related notes appearing
elsewhere herein or in the Prospectus.
The Savings Bank Landis Saving Bank, SSB is a North
Carolina-chartered mutual savings bank.
The Company BOC Financial Corp. (the "Company"), the proposed
holding company for the Commercial Bank.
The Converted Savings Bank Immediately following the conversion of the
and the Commercial Bank Savings Bank into a North Carolina-chartered stock
savings bank (the "Stock Conversion"), the
resulting stock savings bank (the "Converted
Savings Bank") will convert to a North Carolina
commercial bank (the "Commercial Bank") to be
known as "Bank of the Carolinas" (the "Bank
Conversion," and together with the Stock
Conversion, the "Conversion").
Plan of Conversion Pursuant to the Plan of Conversion adopted by the
Board of Directors of the Savings Bank on
September 29, 1997 (the "Plan"), the Savings Bank
will convert to a North Carolina-chartered stock
savings bank as a subsidiary of the Company and
immediately thereafter convert to the Commercial
Bank.
The Offerings The Company is offering a minimum of ____ shares
and a maximum of ______ shares of its common stock
(the "Common Stock") in a subscription offering to
certain depositors (the "Subscription Offering"),
a community offering to residents of Cabarrus,
Iredell, and Rowan Counties, North Carolina (the
"Community Offering") and, if necessary, in an
underwritten public offering (the "Public
Offering," and collectively, the "Offerings"). The
maximum
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number of shares sold in the offerings may
be increased up to _____ shares without a
resolution of subscribers.
Purchase Price The shares of Common Stock are being offered at a
Purchase Price of $10.00 per share.
Plan of Distribution Subject to the limitations and restrictions
described herein, shares of Common Stock are being
offered in the Subscription Offering in descending
order of priority to (i) certain depositors of the
Savings Bank as of August 30, 1996, (ii) the
Company's Employee Stock Ownership Plan (the
"ESOP"), (iii) certain depositors of the Savings
Bank as of December 31, 1997, (iv) other members,
and (v) officers, directors and employees of the
Savings Bank. The Company also may offer shares of
Common Stock not subscribed for in the
Subscription Offering, if any, for sale in the
Community Offering and, if necessary, in the
Public Offering.
Purchase Limitations The Plan sets forth various purchase limitations.
Generally, except for the ESOP, which may purchase
up to eight percent of the total shares of the
Common Stock to be issued in the Stock Conversion,
no person may purchase more than 25,000 shares, or
$250,000 of Common Stock in the Offerings. The
minimum purchase is 25 shares. See "The Conversion
-- Subscription Rights," "-- Community Offering"
and "-- Limitations on Purchases of Shares" in the
Prospectus.
Independent Valuation The shares of the Common Stock to be issued in the
Offering will be issued at an aggregate purchase
price which is determined in accordance with an
independent appraisal prepared by The Meritas
Group, Inc. ("Meritas"). See "The Conversion --
Stock Pricing and the Number of Shares to be
Issued" in the Prospectus.
Use of Proceeds The Company will purchase capital stock of the
Converted Savings Bank in exchange for
approximately 50% of the net proceeds realized by
the Company from the sale of the Common Stock
under the Plan. Funds received by the Converted
Savings Bank from the Company's purchase of its
capital stock will become part of its general
corporate funds to be used for its business
activities. See "Use of Proceeds" in the
Prospectus.
Market for the Common Stock The Company will register the Common Stock with
the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Exchange
Act of 1934, as amended, and shall undertake not
to deregister the Common Stock for a period of
three years thereafter. Management anticipates
that the Common Stock will be quoted in the OTC
Bulletin Board System operated by the National
Association of Securities Dealers, Inc. See
"Market for the Common Stock" in the Prospectus.
Benefits of Conversion The Company's directors and executive officers
to Management will receive certain additional benefits as a
result of the Stock Conversion. See "Management of
the Savings Bank -- Certain Plans and Agreements"
in the Prospectus.
Board of Directors The Board of Directors unanimously recommends that
Recommendation depositors entitled to vote on the Plan vote "for"
the Plan. The Board of Directors makes no
recommendations regarding the suitability of
investment in the Common Stock.
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PURPOSE OF MEETING
The Special Meeting will be held at the office of the Savings Bank
located at 107 South Central Avenue, Landis, North Carolina on
_________________, 1998, at ______________, Eastern Time, for the purpose of
considering and voting on the Plan, which was unanimously adopted by the Savings
Bank's Board of Directors and which, if approved by a majority of the total
votes eligible to be cast by the members, will permit the Savings Bank to
convert from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank as a wholly-owned subsidiary of the
Company, a North Carolina corporation formed by the Savings Bank for the purpose
of becoming the holding company for the Converted Savings Bank. Immediately
thereafter, the Converted Savings Bank will convert from a North
Carolina-chartered stock savings bank to a North Carolina-chartered commercial
bank under the name "Bank of the Carolinas." The Conversion is contingent upon
the members' approval of the Plan at the Special Meeting.
The Plan provides in part that, after receiving final authorization from
the Administrator of the Savings Institution Division of the North Carolina
Department of Commerce (the "Administrator"), the Company will offer for sale
shares of its Common Stock, first to depositors to as of August 30, 1996 with
$50 or more on deposit in the Savings Bank on that date ("Eligible Account
Holders") and who live within the following North Carolina counties: Cabarrus,
Iredell, and Rowan (the "Local Community"), second to Eligible Account Holders
who live outside the Local Community, third to the ESOP, fourth to depositors
with $50 or more on deposit in the Savings Bank on December 31, 1997
("Supplemental Eligible Account Holders"), fifth to other members of the Savings
Bank entitled to vote at the Special Meeting, ("Other Members"), and sixth to
directors, officers and employees of the Company. Subscription rights received
in any of the foregoing categories will be subordinated to the subscription
rights of those in a prior category. The Company may offer any shares remaining
after the Subscription Offering to residents of the Local Community in the
Community Offering. Any shares of Common Stock not purchased in the Subscription
or Community Offerings may be sold to the general public in an offering
underwritten by a registered broker-dealer on a "best efforts" basis in the
Public Offering. The aggregate price of the Common Stock to be issued by the
Company under the Plan is currently estimated to be between ________ and
__________, subject to adjustment, as determined by an independent appraisal of
the Company's estimated pro forma market value subsequent to the conversion. See
"The Conversion -- Stock Pricing and Number of Shares to be Issued" in the
Prospectus.
Adoption of the proposed Amended and Restated Certificate of
Incorporation and Bylaws of the Converted Savings Bank and the proposed
Certificate of Incorporation and Bylaws of the Commercial Bank are integral
parts of the Plan. Copies of the Plan and the proposed Amended and Restated
Certificate of Incorporation and Bylaws for the Converted Savings Bank, the
proposed Certificate of Incorporation and Bylaws of the Commercial Bank, and the
proposed Articles of Incorporation and Bylaws of the Company are attached as
Exhibits to the Plan. The Plan and the appraisal report prepared by Meritas are
available for inspection at the Savings Bank and copies may be obtained without
charge upon request. These documents provide, among other things, for the
termination of voting rights of members and their rights to receive any surplus
remaining in the event of a liquidation of the Converted Savings Bank. For
further information, see "Effect of Conversion to Stock Form on Depositors and
Borrowers of the Savings Bank."
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU VOTE "FOR"
APPROVAL OF THE PLAN OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF CONVERSION
WILL NOT OBLIGATE ANY PERSON TO PURCHASE COMMON STOCK.
The Conversion will be accomplished through adoption of an Amended and
Restated Certificate of Incorporation and Bylaws to authorize the issuance of
capital stock by the Converted Savings Bank to the Company. Immediately
following consummation of the Stock Conversion, the Company, as sole shareholder
of the Converted Savings Bank, shall approve the Bank Conversion, and the
Converted Savings Bank shall take such actions as may be necessary to consummate
the Bank Conversion. Under the Plan, ______ shares of the Common Stock, subject
to adjustment, are being offered for sale by the Company. Upon completion of the
Stock Conversion, the Converted Savings Bank will issue all its newly issued of
capital stock to the Company in exchange for at least 50% of the net proceeds of
the Stock Conversion. None of the Savings Bank's assets will be distributed in
order to effect the Conversion other than to pay expenses and then send it
thereto.
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The net proceeds from the sale of Common Stock in the Stock Conversion
will substantially increase the capital of the Savings Bank, which will increase
the amounts of funds available for lending an investment, and support current
operations and the continued growth of the intitution's business. The holding
company structure will provide greater flexibility than the Commercial Bank
alone would have for diversification of business activities and expansion.
Management believes that this increased capital and operating flexibility will
enable the Commercial Bank to compete more effectively with other types of
financial service organizations. Management also believes that the Conversion
will enhance the future access of the Company to the capital markets and will
afford depositors and others the opportunity to become shareholders of the
Company and thereby participate in its future growth.
The Bank Conversion shall be deemed to occur and shall be effective upon
completion of all actions necessary or appropriate under applicable North
Carolina statute and the policies and regulations of the North Carolina Banking
Commission to complete the Conversion of the Savings Bank into a North Carolina
commercial bank, including without limitation the approval of the Bank
Conversion by the Company, as sole shareholder of the Converted Savings Bank.
Upon completion of such actions, Commercial Bank will be and become the
Commercial Bank. The Bank Conversion shall be consummated immediately following
the consummation of this Stock Conversion.
BOC FINANCIAL CORP.
The Company was incorporated under the laws of the State of North
Carolina in December 1997 at the direction of the Board of Directors of the
Savings Bank for the purpose of serving as the holding company of the Converted
Savings Bank upon its conversion from mutual to stock form, and of the
Commercial Bank following the Bank Conversion. The Company has received approval
from the Administrator, and has applied for approval from the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") to acquire control
of the Converted Savings Bank and the Commercial Bank subject to satisfaction of
certain conditions. Prior to the Conversion, the Company has not engaged and
will not engage in any material operations. Upon consummation of the Stock
Conversion, the Company will have no significant assets other than the
outstanding capital stock of the Converted Savings Bank (or, following the Bank
Conversion, the Commercial Bank), a portion of the net proceeds of the Stock
Conversion, and a note receivable from the ESOP. Upon consummation of the
Conversion, the Company's principal business will be overseeing and directing
the business of the Commercial Bank and investing the net Stock Conversion
proceeds retained by it.
LANDIS SAVINGS BANK, SSB
The Savings Bank is a North Carolina-chartered mutual savings bank
headquartered in Landis, North Carolina and serving Cabarrus, Iredell, and Rowan
Counties in North Carolina. The Savings Bank was chartered by the State of North
Carolina in 1913 and operated as a state savings and loan association until
1986. The Savings Bank received federal insurance of its deposit accounts in
1986 , when it converted to a federal savings and loan association under the
name "Landis Federal Home Savings and Loan Association." In 1993, the Savings
Bank converted to a North Carolina-chartered savings bank, at which time it
adopted its present name of "Landis Savings Bank, SSB." At September 30, 1997,
the Savings Bank had total assets of $_____ million, total deposits of $_____
million and retained income, substantially restricted, of $____ million.
Historically, the Savings Bank has operated as a traditional savings
institution, emphasizing the origination of loans secured by one- to four-family
("single-family") residences. In connection with its decision to pursue the
Conversion, the Board of Directors determined that the Savings Bank's market
area is not adequately served by existing financial institutions and that there
is an underserved demand for commercial and consumer loan products offered by a
truly community-oriented financial institution. As a result, the Board of
Directors has determined to refocus the Savings Bank's strategy. Pursuant to
this strategy, while continuing to pursue its existing business of originating
single-family residential mortgage loans, the Savings Bank will seek to take
advantage of the business opportunities identified by the Board of Directors by
gradually expanding into commercial and consumer lending. The Bank Conversion is
an integral part of this strategy.
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The Savings Bank is subject to examination and comprehensive regulation
by the FDIC and the Administrator, and the Savings Bank's deposits are insured
up to applicable limits by the SAIF, which is administered by the FDIC. The
Savings Bank is a member of and owns capital stock in the Federal Home Loan Bank
("FHLB") of Atlanta, which is one of 12 regional banks in the FHLB System. The
Savings Bank is further subject to regulations of the Federal Reserve Board
governing reserves to be maintained and certain other matters. Federal and state
regulations significantly affect the operations of the Savings Bank. See
"Regulation-Depository Institution Regulation" in the Prospectus.
BANK OF THE CAROLINAS
Upon consummation of the Bank Conversion, the Commercial Bank will
succeed to all of the assets and liabilities of the Converted Savings Bank
(which, pursuant to the Stock Conversion, will have succeeded to all of the
assets and liabilities of the Savings Bank). Following the Conversion,
management intends to continue to follow the Savings Bank's current strategy of
seeking growth opportunities through increasing its portfolio of commercial and
consumer loans while continuing to pursue single-family residential mortgage
loan origination.
The deposits of the Commercial Bank will continue to be insured by the
SAIF of the FDIC, and, as such, the Commercial Bank will continue to be subject
to regulation and supervision by the FDIC. The Commercial Bank will not be
subject to regulation and supervision by the Administrator. Rather, the primary
regulator of the Commercial Bank will be the State Banking Commission of North
Carolina (the "Commission;" as used herein, the Commission refers to the State
Banking Commission of North Carolina as well as the North Carolina Commissioner
of Banks, whose powers are exercised under the supervision of the Commission.)
In addition, the Commercial Bank will remain a member of the FHLB of Atlanta.
For information regarding regulations applicable to the Converted Savings Bank
and the Commercial Bank, see "Regulation" in the Prospectus.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Savings Bank has fixed the close of
business on ___________ 1998 as the record date (the "Voting Record Date") for
the determination of members entitled to notice of and to vote at the Special
Meeting. All holders of the Savings Bank's deposit or other authorized accounts
and borrowers are members of the Savings Bank under its current Certificate of
Incorporation and Bylaws. All members of record as of the close of business on
the Voting Record Date who continue as such until the date of the Special
Meeting will be entitled to vote at the Special Meeting or any adjournment
thereof.
Each depositor member will be entitled at the Special Meeting to cast
one vote for each $_________, or fraction thereof, of the aggregate withdrawal
value of all the saving accounts in the Savings Bank as of the Voting Record
Date. Borrower members will be entitled to one vote at the Special Meeting in
addition to any votes such Borrower member may have as a result of being a
depositor in the Savings Bank. No member may cast more than ______ votes.
Approval of the Plan will require the affirmative vote of at least a
majority of the total outstanding votes of the Savings Bank's members eligible
to be cast a Special Meeting. As of the voting record date of the Special
Meeting, there were approximately ____ votes eligible to be cast, of which _____
votes constitute a majority.
Members may vote at the Special Meeting or any adjournment thereof in
person or by proxy. All properly executed appointments of proxy received by the
Savings Bank will be voted in accordance with the instructions indicated
thereon. If no contrary instructions are given, such proxies will be voted in
favor of the Plan. If any other matters are properly presented before the
Special Meeting and may properly be voted upon, the proxy solicited hereby will
be voted on such matters by the proxy holder's name therein as directed by the
Board of Directors. Valid, previously executed general proxies, which typically
are obtained from members when they open their accounts at the Savings Bank will
not be used to vote for approval of the Plan, even if the respective members do
not execute another proxy or attend a Special Meeting and vote in person. Any
member given a proxy will have the right to provoke his or her proxy at any time
before it is voted by delivering written notice or a duly executed proxy bearing
a later date to the Secretary of the Savings Bank, provided that such written
notice is received by the Secretary prior to the Special Meeting or any
adjournment thereof, or by attending the Special Meeting and voting in person.
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FAILURE TO RETURN AN EXECUTED PROXY FOR THE SPECIAL MEETING OR TO ATTEND
THE SPECIAL MEETING AND VOTE IN PERSON WOULD HAVE THE SAME EFFECT AS VOTING
AGAINST THE CONVERSION.
Proxies may be solicited by officers, directors, or other employees of
the Savings Bank, in person, by telephone or through other forms of
communication. Such persons will be reimbursed by the Savings Bank only for
their expenses incurred in connection with such solicitation. The Proxies
solicited hereby will be used only at the Special Meeting and any adjournment
thereof; they will not be used at any other meeting.
DESCRIPTION OF PLAN OF CONVERSION
General
On September 29, 1997, the Board of Directors of the Savings Bank
unanimously adopted, subject to approval by the Administrator and the members of
the Savings Bank, and to the nonobjection by the FDIC, the Plan, pursuant to
which the Savings Bank will convert from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank, become a
wholly-owned subsidiary of the Company, and immediately thereafter convert to a
North Carolina commercial bank under the name "Bank of the Carolinas." The
Administrator has approved the Plan subject to, among other things, approval of
the Plan by the members of the Savings Bank. In addition, the FDIC has issued
its conditional non-objection to the Plan and the Stock Conversion. Such
approval and notice do not constitute recommendations or endorsements of the
Plan.
The Stock Conversion will be accomplished through the amendment of the
Savings Bank's existing North Carolina mutual certificate of incorporation and
bylaws to read in the form of North Carolina stock certificate of incorporation
and bylaws to authorize the issuance of capital stock by the Converted Savings
Bank, the issuance of all the Converted Savings Bank's capital stock to be
outstanding upon consummation of the Stock Conversion to the Company, and the
offer and sale of the Common Stock of the Company. Upon issuance of the
Converted Savings Bank's capital stock to the Company, the Converted Savings
Bank will be a wholly-owned subsidiary of the Company. Immediately following
consummation of the Stock Conversion, the Board of Directors of the Savings Bank
intends to effectuate the Bank Conversion by converting the Converted Savings
Bank to the Commercial Bank. The Bank Conversion will be accomplished through
the amendment of the Converted Savings Bank's certificate of incorporation to
the form appropriate for a North Carolina commercial bank. Upon completion of
the Bank Conversion, the Commercial Bank will be a wholly-owned subsidiary of
the Company.
The Company has applied to the Federal Reserve Board for approval to
become the holding company of the Converted Savings Bank subject to the
satisfaction of certain conditions and to acquire all of the capital stock of
the Converted Savings Bank to be issued in the Stock Conversion in exchange for
at least 50% of the net proceeds from the sale of Common Stock in the Stock
Conversion after deducting the principal amount of the ESOP Plan. The Stock
Conversion will be effected only upon completion of the sale of all of the
shares of Common Stock to be issued by the Company pursuant to the Plan. The
Savings Bank has received approval from the Administrator and the Commission,
subject to certain conditions, of the conversion of the Converted Savings Bank
to a North Carolina commercial bank, and the Company has applied to the Federal
Reserve Board for approval of the Company's continued ownership of 100% of the
stock of the Commercial Bank following the Bank Conversion.
The aggregate purchase price of the Common Stock to be issued in the
Stock Conversion will be within the Estimated Valuation Range of $_____________
to $_____________, which may be increased to $__________, based upon an
independent appraisal of the estimated pro forma market value of the Common
Stock prepared by Meritas. All shares of the Common Stock to be issued and sold
in the Stock Conversion will be sold at the same price. The independent
appraisal will be updated, if necessary, and the final aggregate price of the
shares of the Common Stock will be determined at the completion of the
Offerings. Meritas is experienced in the valuation and appraisal of financial
institutions. For additional information, see "-Stock Pricing and Number of
Shares to be Issued" in the Prospectus.
EFFECT OF CONVERSION TO STOCK FORM
ON DEPOSITORS AND BORROWERS OF THE SAVINGS BANK
General
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Each depositor in a mutual savings institution such as the Savings Bank
has both a deposit account and a pro rata ownership interest in the retained
earnings of that institution based upon the balance in his or her deposit
account. However, this ownership interest is tied to the depositor's account and
has no tangible market value separate from such deposit account. Any other
depositor who opens a deposit account obtains a pro rata interest in the
retained earnings of the institution without any additional payment beyond the
amount of the deposit. A depositor who reduces or closes his or her account
receives a portion or all of the balance in the account but nothing for his or
her ownership interest, which is lost to the extent that the balance in the
account is reduced.
Consequently, depositors normally do not have a way to realize the value
of their ownership, which has realizable value only in the unlikely event that
the mutual institution is liquidated. In such event, the depositors of record at
that time, as owners, would share pro rata in any residual retained earnings
after other claims are paid.
Upon consummation of the Stock Conversion, permanent nonwithdrawable
capital stock will be created to represent the ownership of the institution. The
stock is separate and apart from deposit accounts and is not and cannot be
insured by the FDIC. Transferable certificates will be issued to evidence
ownership of the stock, which will enable the stock to be sold or traded, if a
purchaser is available, with no effect on any account held in the Savings Bank.
Under the Plan, all of the capital stock of the Converted Savings Bank will be
acquired by the Company in exchange for a portion of the net proceeds from the
sale of the Common Stock in the Stock Conversion. The Common Stock will
represent an ownership interest in the Company and will be issued upon
consummation of the Stock Conversion to persons who elect to participate in the
Stock Conversion by purchasing the shares being offered.
Continuity
During the Conversion process, the normal business of the Savings Bank
of accepting deposits and making loans will continue without interruption. The
Converted Savings Bank will continue to be subject to regulation by the
Administrator and the FDIC, and the Commercial Bank will be subject to
regulation by the Commission and the FDIC, and FDIC insurance of accounts will
continue without interruption. After the Bank Conversion, the Commercial Bank
will continue to provide services for depositors and borrowers under current
policies and by its present management and staff.
The Board of Directors serving the Savings Bank at the time of the
Conversion will serve as the Board of Directors of the Converted Savings Bank,
and then the Commercial Bank after the Savings Bank Conversion. The Board of
Directors of the Company also will consist of the individuals currently serving
on the Board of Directors of the Savings Bank. All officers of the Savings Bank
at the time of the Conversion will retain their positions with the Converted
Savings Bank after the Stock Conversion, and then the Commercial Bank after the
Bank Conversion.
Voting Rights
Upon the completion of the Conversion, depositor and borrower members as
such will have no voting rights in the Commercial Bank or the Company and,
therefore, will not be able to elect directors of the Commercial Bank or the
Company or to control their affairs. Currently these rights are accorded to
depositors of the Savings Bank. Subsequent to the Stock Conversion, voting
rights will be vested exclusively in the shareholders of the Company which, in
turn, will own all of the stock of the Converted Savings Bank and, following the
Bank Conversion, the Commercial Bank. Each holder of Common Stock shall be
entitled to vote on any matter to be considered by the stockholders of the
Company, subject to the provisions of the Company's Articles of Incorporation.
Deposit Accounts and Loans
The Savings Bank's deposit accounts, the balances of individual accounts
and existing federal deposit insurance coverage will not be affected by the
Conversion. Furthermore, the Conversion will not affect the loan accounts, the
balances of these accounts and the obligations of the borrowers under their
individual contractual arrangements with the Savings Bank.
Tax Effects
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The Savings Bank has received an opinion from its special counsel Moore
& Van Allen, PLLC, as to the material federal income tax consequences of the
Conversion to the Savings Bank and the Commercial Bank, and as to the generally
applicable material federal income tax consequences of the Conversion to the
Savings Bank's account holders and to persons who purchase Common Stock in the
Stock Conversion. The opinion provides that the Conversion will constitute one
or more reorganizations for federal income tax purposes under Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended ("Internal Revenue
Code"). Among other things, the opinion also provides that: (i) no gain or loss
will be recognized by the Savings Bank in its mutual or stock form by reason of
the Stock Conversion; (ii) no gain or loss will be recognized by its account
holders upon the issuance to them of accounts in the Converted Savings Bank in
stock form immediately after the Stock Conversion, in the same dollar amounts
and on the same terms and conditions as their accounts at the Savings Bank
immediately prior to the Stock Conversion; (iii) the tax basis of each account
holder's interest in the liquidation account will be equal to the value, if any,
of that interest; (iv) the tax basis of the Common Stock purchased in the Stock
Conversion will be equal to the amount paid therefor increased, in the case of
Common Stock acquired pursuant to the exercise of Subscription Rights, by the
fair market value, if any, of the Subscription Rights exercised; (v) the holding
period for the Common Stock purchased in the Stock Conversion will commence upon
the exercise of such holder's Subscription Rights and otherwise on the day
following the date of such purchase; (vi) gain or loss will be recognized to
account holders upon the receipt of liquidation rights or the receipt or
exercise of Subscription Rights in the Stock Conversion, to the extent such
liquidation rights and Subscription Rights are deemed to have value, as
discussed below; and (vii) as a result of the adoption of Public Law 104-188,
the Savings Bank and its successors (including the Converted Savings Bank and
the Commercial Bank) will be required to recapture the applicable excess
reserves into gross income ratably over a six taxable year period. The
applicable excess reserves are the excess, if any, of (1) the balance of its
reserves as of the close of its last taxable year beginning before January 1,
1996, over (2) the greater of the balance of (a) its pre-1988 reserves, or (b)
what the Commercial Bank's reserves would have been at the close of its last
taxable year beginning before January 1, 1996, had the Savings Bank always used
the experience method (the six-year average method).
The opinion of Moore & Van Allen, PLLC is based in part upon, and
subject to the continuing validity in all material respects through the date of
the Conversion of, various representations of the Savings Bank and upon certain
assumptions and qualifications, including that the Conversion is consummated in
the manner and according to the terms provided in the Plan. Such opinion is also
based upon the Internal Revenue Code, regulations now in effect or proposed
thereunder, current administrative rulings and practice and judicial authority,
all of which are subject to change and such change may be made with retroactive
effect. Unlike private letter rulings received from the Internal Revenue Service
("IRS"), an opinion is not binding upon the IRS and there can be no assurance
that the IRS will not take a position contrary to the positions reflected in
such opinion, or that such opinion will be upheld by the courts if challenged by
the IRS.
Moore & Van Allen, PLLC has advised the Savings Bank that an interest in
a liquidation account has been treated by the IRS, in a series of private letter
rulings which do not constitute formal precedent, as having nominal, if any,
fair market value and therefore it is likely that the interests in the
liquidation account established by the Savings Bank as part of the Stock
Conversion will similarly be treated as having nominal, if any, fair market
value. Accordingly, it is likely that such depositors of the Savings Bank who
receive an interest in such liquidation account established by the Savings Bank
pursuant to the Stock Conversion will not recognize any gain or loss upon such
receipt.
Moore & Van Allen, PLLC has further advised the Savings Bank that the
federal income tax treatment of the receipt of Subscription Rights pursuant to
the Stock Conversion is uncertain, and recent private letter rulings issued by
the IRS have been in conflict. For instance, the IRS adopted the position in one
private ruling that Subscription Rights will be deemed to have been received to
the extent of the minimum pro rata distribution of such rights, together with
the rights actually exercised in excess of such pro rata distribution, and with
gain recognized to the extent of the combined fair market value of the pro rata
distribution of Subscription Rights plus the Subscription Rights actually
exercised. Persons who do not exercise their Subscription Rights under this
analysis would recognize gain upon receipt of rights equal to the fair market
value of such rights, regardless of exercise, and would recognize a
corresponding loss upon the expiration of unexercised rights that may be
available to offset the previously recognized gain. Under another IRS private
ruling, Subscription Rights were deemed to have been received only to the extent
actually exercised. This private ruling required that gain be recognized only if
the holder of such rights exercised such rights, and that no loss be recognized
if such rights were allowed to expire
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unexercised. There is no authority that clearly resolves this conflict among
these private rulings, which may not be relied upon for precedential effect.
However, based upon express provisions of the Internal Revenue Code and in the
absence of contrary authoritative guidance, Moore & Van Allen, PLLC has provided
in its opinion that gain will be recognized upon the receipt rather than the
exercise of Subscription Rights. Further, also based upon a published IRS ruling
and consistent with recognition of gain upon receipt rather than exercise of the
Subscription Rights, Moore & Van Allen, PLLC has provided in its opinion that
the subsequent exercise of the Subscription Rights will not give rise to gain or
loss. Regardless of the position eventually adopted by the IRS, the tax
consequences of the receipt of the Subscription Rights will depend, in part,
upon their valuation for federal income tax purposes.
If the Subscription Rights are deemed to have a fair market value, the
receipt of such rights will be taxable to Eligible Account Holders who are
Residents of the Local Community, Eligible Account Holders who are not Residents
of the Local Community, Supplemental Eligible Account Holders and Other Members
who exercise their Subscription Rights, even though such persons would have
received no cash from which to pay taxes on such taxable income. The Bank could
also recognize a gain on the distribution of such Subscription Rights in an
amount equal to their aggregate value. In the opinion of Meritas, whose opinion
is not binding upon the IRS, the Subscription Rights do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are non-transferable and of short duration and afford the recipients the right
only to purchase shares of the Common Stock at a price equal to its estimated
fair market value, which will be the same price as the price paid by purchasers
in the Community Offering for unsubscribed shares of Common Stock. Eligible
Account Holders who are Residents of the Local Community, Eligible Account
Holders who are not Residents of the Local Community, Supplemental Eligible
Account Holders and Other Members are encouraged to consult with their own tax
advisors as to the tax consequences in the event that the Subscription Rights
are deemed to have a fair market value. Because the fair market value, if any,
of the Subscription Rights issued in the Stock Conversion depends primarily upon
the existence of certain facts rather than the resolution of legal issues, Moore
& Van Allen, PLLC has neither adopted the opinion of Meritas as its own nor
incorporated such opinion of Meritas in its opinion issued in connection with
Conversion.
The Savings Bank has also obtained an opinion from Moore & Van Allen,
PLLC to the effect that the tax effects of the Conversion under North Carolina
tax laws will be substantially the same as described above with respect to
federal income tax laws.
THE FEDERAL AND STATE INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
PURPORT TO CONSIDER ALL ASPECTS OF FEDERAL AND STATE INCOME TAXATION WHICH MAY
BE RELEVANT TO EACH ELIGIBLE ACCOUNT HOLDER, SUPPLEMENTAL ACCOUNT HOLDER AND
OTHER MEMBER ENTITLED TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE, SUCH
AS TRUSTS, INDIVIDUAL RETIREMENT ACCOUNTS, OTHER EMPLOYEE BENEFIT PLANS,
INSURANCE COMPANIES AND ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL ELIGIBLE ACCOUNT
HOLDERS AND OTHER MEMBERS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES. DUE TO THE INDIVIDUAL NATURE OF TAX CONSEQUENCES, EACH OF ELIGIBLE
ACCOUNT HOLDER, SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER AND OTHER MEMBER IS URGED
TO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISOR AS TO THE EFFECT OF SUCH
FEDERAL AND STATE INCOME TAX CONSEQUENCES ON HIS OR HER OWN PARTICULAR FACTS AND
CIRCUMSTANCES, INCLUDING THE RECEIPT AND EXERCISE OF SUBSCRIPTION RIGHTS, AND
ALSO AS TO ANY OTHER TAX CONSEQUENCES ARISING OUT OF THE CONVERSION.
Liquidation Account
In the unlikely event of a complete liquidation of the Savings Bank in
its present mutual form, each holder of a deposit account in the Savings Bank
would receive his pro rata share of any assets of the Savings Bank remaining
after payment of claims of all creditors (including the claims of all depositors
to the withdrawal value of their accounts). His pro rata share of such remaining
assets would be the same proportion of such assets as the value of his deposit
account was to the total of the value of all deposit accounts in the Savings
Bank at the time of liquidation.
After the Stock Conversion, each deposit account holder on a complete
liquidation would have a claim of the same general priority as the claims of all
other general creditors of the Savings Bank. Therefore, except as
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described below, his claim would be solely in the amount of the balance in his
deposit account plus accrued interest. He would have no interest in the value of
the Savings Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Stock Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the net worth of the Savings Bank as of the date of its latest statement of
financial condition contained in the final Prospectus. Each Eligible Account
Holder and Supplemental Eligible Account Holder would be entitled, on a complete
liquidation of the Converted Savings Bank (or the Commercial Bank) after
completion of the Stock Conversion, to an interest in the liquidation account.
Each Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account held in the Savings Bank on August 30, 1996 and
each Supplemental Eligible Account Holder would have an initial interest in such
liquidation account each qualifying deposit held in the Savings Bank on December
31, 1997. The interest as to each qualifying deposit account would be in the
same proportion of the total liquidation account as the balance of such
qualifying deposit account was to the balance in all deposit accounts of
Eligible Account Holders and Supplemental Eligible Account Holders on such
dates. However, if the amount in the qualifying deposit account on any annual
closing date of the Savings Bank subsequent to the relevant eligibility date is
less than the amount in such account on the relevant eligibility date, or any
subsequent closing date, then the Eligible Account Holder's or Supplemental
Eligible Account Holder's interest in the liquidation account would be reduced
from time to time by an amount proportionate to any such reductions, and such
interest would cease to exist if he ceases to maintain an account at the
Converted Savings Bank or Commercial Bank that has the same Social Security
number as appeared on his account(s) at the relevant eligibility date. The
interest in the liquidation account would never be increased, notwithstanding
any increase in the related deposit account after the Stock Conversion.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were satisfied would
be distributed to the entity or persons holding the Savings Bank's capital stock
at that time.
The Bank Conversion shall not be deemed to be a complete liquidation of
the Converted Savings Bank for purposes of the distribution of the liquidation
account. Upon consummation of the Bank Conversion, the liquidation account, and
all rights and obligations of the Converted Savings Bank in connection
therewith, shall be assumed by the Commercial Bank.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with an FDIC-insured institution in which the Savings Bank is not
the surviving insured institution would not be considered to be a "liquidation"
under which distribution of the liquidation account could be made. In such a
transaction, the liquidation account would be assumed by the surviving
institution.
The creation and maintenance of the liquidation account will not
restrict the use or application of any of the capital accounts of the Savings
Bank, except that the Savings Bank may not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect of such dividend or
repurchase would be to cause its retained earnings to be reduced below the
aggregate amount then required for the liquidation account.
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan by the
Savings Bank will be final. The Plan provides that the Savings Bank's Board of
Directors shall have the sole discretion to interpret and apply the provisions
of the Plan to particular facts and circumstances and to make all determinations
necessary or desirable to implement such provisions, including but not limited
to matters with respect to giving preference in the Community Offering to
natural persons and trusts of natural persons who are permanent residents of the
Local Community, and any and all interpretations, applications and
determinations made by the Board of Directors in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Savings Bank and its members
and subscribers in the Subscription and Community Offerings, subject to the
authority of the FDIC and the Administrator.
The Plan provides that, if deemed necessary or desirable by the Board of
Directors, the Plan may be substantively amended by a two-thirds vote of the
Board of Directors at any time prior to submission of the Plan and proxy
materials to the Savings Bank's members. After submission of the Plan and proxy
materials to the members,
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the Plan may be amended by a two-thirds vote of the Board of Directors at any
time prior to the Special Meeting and at any time following the Special Meeting
with the concurrence of the FDIC and the Administrator. In its discretion, the
Board of Directors may modify or terminate the Plan upon the order of the
regulatory authorities without a resolicitation of proxies or another Special
Meeting. However, any modification of the Plan resulting in a material change in
the terms of the Conversion would require a resolicitation of proxies and
another meeting of stockholders.
The Plan further provides that in the event that mandatory new
regulations pertaining to conversions are adopted by the FDIC or the
Administrator or any successor agency prior to completion of the Conversion, the
Plan will be amended to conform to such regulations without a resolicitation of
proxies or another Special Meeting. In the event that such new conversion
regulations contain optional provisions, the Plan may be amended to utilize such
optional provisions at the discretion of the Board of Directors without a
resolicitation of proxies or another Special Meeting. By adoption of the Plan,
the Savings Bank's members will be deemed to have authorized amendment of the
Plan under the circumstances described above.
CONDITIONS AND TERMINATION
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total outstanding votes of
the members of the Savings Bank and the sale of all shares of the Common Stock
within 12 months following approval of the Plan by the members, which time
period may be extended an additional 12 months by an amendment to the Plan. If
these conditions are not satisfied, the Plan will be terminated, and the Savings
Bank will continue its business in the mutual form of organization. The Plan may
be terminated by the Board of Directors at any time prior to the Special Meeting
and, with the approval of the FDIC and the Administrator, by the Board of
Directors at any time thereafter.
OTHER
All statements made in this Proxy Statement are hereby qualified by the
contents of the Plan. In addition, attention is directed to the section entitled
"The Conversion" in the accompanying Prospectus for a more detailed discussion
of various aspects of the Plan. Adoption of the Plan by the Savings Bank's
members shall be deemed approval of the authority of the Board of Directors to
amend or terminate the Plan in accordance with its terms.
HOW TO ORDER STOCK
The accompanying Prospectus contains information about the business and
financial condition of the Savings Bank and additional information about the
Conversion and the Subscription and Community Offerings. You are not obligated
to subscribe for stock, and voting to approve the Conversion will not obligate
you to subscribe for stock.
All Subscription Rights are nontransferable and will expire if not
exercised by returning the accompanying Stock Order Form with full payment (or
appropriate instructions authorizing withdrawal from a savings or certificate
account at the Savings Bank) for all shares for which subscription is made to
the Company by __:00, Eastern Time, on ___________, 1998, unless extended by the
Savings Bank. A postage-paid reply envelope is provided for this purpose.
Provided that not all of the shares are subscribed for in the Subscription
Offering by members of the Savings Bank, the remaining shares may be offered to
certain members of the Local Community in the Community Offering with preference
given to natural persons and trusts of natural persons who reside in the Local
Community. Any shares of Common Stock not purchased in the Subscription and
Community Offerings may be offered, at the discretion of the Company, to certain
members of the general public in the Public Offering. The information contained
in this Proxy Statement is limited in its scope to use in the solicitation of
proxies for the Special Meeting to vote on the Plan. It is not intended for use
in the offering of the Common Stock. Such offering is made only by the
Prospectus.
By Order of the Board of Directors
Henry H. Land
Secretary
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REVOCABLE APPOINTMENT OF PROXY
LANDIS SAVINGS BANK, SSB
For a Special Meeting of Members to be Held on __________, 1998
This Appointment of Proxy is solicited on behalf of the Board of
Directors of Landis Savings Bank, SSB ("Landis"), Landis, North Carolina.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Members (the "Notice") and the Proxy Statement describing the matters
set forth below, and hereby appoints the Board of Directors ("Board") of Landis
as a whole, or a committee designated by a majority of the Board, as the proxy
of the undersigned, each with full power of substitution, to cast all votes
which the undersigned is entitled to vote at the Special Meeting of Members to
be held at the __________________________, Landis, North Carolina at _____
__.M., Eastern Time on __________, 1998 and at any adjournment thereof (the
"Special Meeting"), on the matters referred to below in the manner specified on
the reverse side hereof.
For Against Abstain
1. A Plan of Conversion (the "Plan of Conversion") pursuant to which, among
other things, (i) Landis will convert from a North Carolina-chartered
savings bank organized in mutual form to a North Carolina-chartered savings
bank organized in stock form, (ii) convert from a North Carolina-chartered
savings bank to a North Carolina commercial bank; (iii) amend its
Certificate of Incorporation and Bylaws as set forth as exhibits to the
Plan of Conversion; and (iv) be acquired by BOC Financial Corp., the
proposed holding company for Landis which will offer and sell shares of its
common stock in subscription and community offerings and, if necessary, in
a public offering.
2. Such other matters that fall within the purposes set forth in the Notice or
any adjournment thereof.
IMPORTANT: PLEASE DATE AND SIGN THE PROXY ON REVERSE SIDE. FAILURE TO
VOTE IS THE EQUIVALENT OF A VOTE AGAINST THE PLAN OF CONVERSION.
...............................................................................
This Appointment of Proxy will be voted as directed. Unless otherwise
marked, this Appointment of Proxy will be voted FOR approval of the Plan of
Conversion. If any other business that falls within the purposes set forth in
the Notice is presented at the Special Meeting, this Appointment of Proxy shall
be voted in accordance with the recommendation of the Board of Directors.
-----------------------------------
Date
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Signature
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Signature
Important: Please sign your name exactly as it appears
hereon. Please add your full title to your signature.
NOTE: If you receive more than one proxy card,
please date and sign each card and return all
proxy cards in the enclosed envelope.
