<PAGE>
FILED PURSUANT TO
RULE 424(b)(3)
FILE NO. 333-47963
PROSPECTUS
UP TO 872,850 SHARES OF COMMON STOCK
ANSON BANCORP, INC.
211 SOUTH GREENE STREET
WADESBORO, NORTH CAROLINA 28170
(704) 694-2122
================================================================================
Anson Savings Bank, SSB (the "Bank") is converting from a North Carolina
chartered mutual savings bank to a North Carolina chartered stock savings bank.
As part of the Conversion, the Bank will become a wholly owned subsidiary of
Anson Bancorp, Inc. (the "Company"). The Company was formed in March 2, 1998
and upon completion of the Conversion will own all of the shares of the Bank.
The Common Stock of the Company is being offered to the public in accordance
with a Plan of Conversion. The Plan of Conversion must be approved by the
Administrator of the Savings Institutions Division of the North Carolina
Department of Commerce (the "Administrator") and the Federal Deposit Insurance
Corporation (the "FDIC") and by a majority of the votes eligible to be cast by
members of the Bank. The offering will not go forward if the Bank does not
receive these approvals and the Company does not sell at least the minimum
number of shares.
The shares of Common Stock are first being offered pursuant to
nontransferable subscription rights in a Subscription Offering. Depositor and
borrower members as of certain eligibility dates will receive subscription
rights. Shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale in a Community Offering with preference given to certain
residents of Anson County, North Carolina.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted Bank to
be between $5,610,000 and $7,590,000, which establishes the number of shares to
be offered at a price of $10.00 per share. Subject to the approval of the
Administrator, up to 872,850 shares, an additional 15% above the maximum number
of shares, may be offered. Based on these estimates, we are making the
following offering of shares of Common Stock:
<TABLE>
<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Price per share $ 10.00 $ 10.00 $ 10.00 $ 10.00
Number of shares 561,000 660,000 759,000 872,850
Offering expenses $ 488,000 $ 513,000 $ 537,000 $ 566,000
Net Proceeds $5,122,000 $6,087,000 $7,053,000 $8,163,000
Net Proceeds per share $ 9.13 $ 9.22 $ 9.29 $ 9.35
</TABLE>
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 1 OF THIS DOCUMENT.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FDIC, ANY OTHER GOVERNMENT AGENCY, THE COMPANY OR THE BANK. AN
INVESTMENT IN THE COMMON STOCK MAY LOSE VALUE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE ADMINISTRATOR, THE FDIC, NOR
ANY STATE SECURITIES REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT (704)
694-6481.
TRIDENT SECURITIES, INC.
The date of this Prospectus is May 15, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Questions and Answers About the Stock Offering......................................... 4
Summary................................................................................ 6
Selected Financial and Other Data of the Bank.......................................... 9
Recent Developments.................................................................... 10
Risk Factors........................................................................... 12
Anson Bancorp, Inc..................................................................... 18
Anson Savings Bank, SSB................................................................ 19
Use of Proceeds........................................................................ 19
Dividend Policy........................................................................ 21
Market for Common Stock................................................................ 22
Capitalization......................................................................... 23
Pro Forma Data......................................................................... 26
Historical and Pro Forma Capital Compliance............................................ 31
Stock Purchases by Directors and Executive Officers.................................... 33
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 35
Business of the Company................................................................ 47
Business of the Bank................................................................... 47
Taxation............................................................................... 66
Supervision and Regulation............................................................. 68
Management of the Company.............................................................. 79
Management of the Bank................................................................. 80
Description of Capital Stock........................................................... 88
Anti-Takeover Provisions Affecting the Company and the Bank............................ 90
Certain Provisions of the Charters and Bylaws of the Company and the Bank.............. 95
The Conversion......................................................................... 96
Legal Opinions......................................................................... 113
Experts................................................................................ 113
Registration Requirements.............................................................. 113
Additional Information................................................................. 113
Glossary............................................................................... A-1
</TABLE>
This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" beginning on page 1 of this document.
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
2
<PAGE>
ANSON SAVINGS BANK, SSB
WADESBORO, NORTH CAROLINA
[INSERT MAP FROM TRIDENT]
3
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q. WHAT IS A MUTUAL TO STOCK CONVERSION?
A. The Conversion is a change in the Bank's form of organization.
Currently, the Bank operates as a North Carolina chartered mutual
savings bank with no stockholders. As a result of the Conversion, it
will become a North Carolina chartered stock savings bank. As part of
the Conversion, a holding company called Anson Bancorp, Inc. will be
organized under the laws of the State of North Carolina to acquire all
the Bank's stock issued in the Conversion. The Company will offer for
sale shares of its Common Stock and will use a portion of the proceeds
from the offering to purchase the Bank's stock.
Q. WHAT IS THE PURPOSE OF THE CONVERSION AND THE OFFERING?
A. As a stock savings bank operating through a holding company structure,
the Bank will have the ability to plan and develop long-term growth and
improve its future access to the capital markets. The stock offering
will increase the Bank's capital and the amount of funds available for
lending and investment activities. This provides greater flexibility to
diversify operations and expand into other geographic markets if the
Bank chooses to do so. If the Company's earnings are sufficient in the
future, stockholders might also receive dividends and benefit from the
possible long-term appreciation of the Company's stock price.
Q. HOW MANY SHARES OF STOCK WILL BE SOLD?
A. Between 561,000 and 759,000 shares of Common Stock will be sold, all at
a price of $10.00 per share. The number of shares to be sold may be
increased to 872,850 shares without further notice to you, subject to
receipt of approval of the Administrator, if market or financial
conditions change prior to completion of the Conversion.
Q. HOW DO I PURCHASE THE STOCK?
A. You must complete and return the original Order Form to the Company and
the Bank together with your payment or your authorization for withdrawal
of the payment amount from an account you have with the Bank, on or
before 12:00 noon, Eastern Time, June 9, 1998. See pages 99 to 106.
Q. HOW MUCH STOCK MAY I PURCHASE?
A. The minimum purchase is 50 shares (or $500). The maximum purchase per
eligible depositor in the Subscription Offering is 10,000 shares (or
$100,000). In certain instances, your purchase might be grouped
together with purchases by persons with other accounts with whom you are
affiliated or related and in that event the aggregate purchases may not
exceed 15,000 shares (or $150,000). The Bank may decrease or increase
the maximum purchase limitation without notifying you.
If shares are sold in a Community Offering, the maximum number of shares
that may be purchased by any party in the Community Offering is 10,000
shares (or $100,000). As with the Subscription Offering, in certain
circumstances your purchase may be combined with the number of shares
purchased by other parties with whom such party is affiliated or related
and in that event the aggregate purchases may not exceed 15,000 shares
(or $150,000). See pages 109-110.
4
<PAGE>
Q. WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A. You might not receive any or all of the shares you want to purchase. If
there is an over subscription, the Common Stock will be offered on a
priority basis to the following persons:
. ELIGIBLE ACCOUNTS HOLDERS - Persons who had a deposit account with a
balance of at least $50.00 with the Bank on September 30, 1996. Any
remaining shares will be offered to:
. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS - Persons who had a deposit
account with a balance of at least $50.00 with the Bank on March 31,
1998. Any remaining shares will be offered to:
. OTHER MEMBERS - Other depositors and certain borrowers of the Bank,
as of April 30, 1998.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to directors, officers and employees of the Bank who
are not Eligible Account Holders, Supplemental Eligible Account Holders or
Other Members and to certain members of the general public with preference
given to people who live in Anson County, North Carolina. In the event
there is an oversubscription in any category, the shares will be allocated
among all subscribers in that category in accordance with a formula set out
in the Plan and described in "THE CONVERSION". See pages 100-101.
Q. WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT TO
BUY THE STOCK?
A. In order to make an informed investment decision, you should read this
entire Prospectus, particularly the section entitled "Risk Factors."
Q. AS A DEPOSITOR OR BORROWER MEMBER OF THE BANK, WHAT WILL HAPPEN IF I DO
NOT PURCHASE ANY STOCK?
A. You presently have voting rights while the Bank is in the mutual form;
however, once the Bank converts to the stock form you will lose your voting
rights unless you purchase stock. You are not required to purchase stock.
Your deposit account, certificate accounts and any loans you may have with
the Bank will not be affected. See pages 97-99.
Q. WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK
OFFERING?
A. In order to make an informed investment decision, you should read this
entire document. In addition, you should contact:
STOCK INFORMATION CENTER
ANSON BANCORP, INC.
211 SOUTH GREENE STREET
WADESBORO, NORTH CAROLINA 28170
(704) 694-6481
5
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read carefully this entire document, including the
financial statements and the notes to the financial statements of the Bank.
ANSON BANCORP, INC.
Anson Bancorp, Inc. was formed on March 2, 1998 as a North Carolina
corporation to be the holding company for the Bank. The Company is not an
operating company and has not engaged in any significant business to date. The
holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. See page 18.
ANSON SAVINGS BANK, SSB
The Bank is a community and customer oriented North Carolina chartered
mutual savings bank that has been in operation since December 4, 1889 with one
office located in Wadesboro, North Carolina. The Bank has been a member of the
Federal Home Loan Bank ("FHLB") system since 1939 and its deposits have been
federally insured since 1959. The Bank emphasizes residential mortgage lending,
primarily originating one-to-four-family mortgage loans in its primary market
area, Anson County, North Carolina. To a lesser extent, the Bank also makes
nonresidential real estate loans, construction loans and loans secured by
deposit accounts. The Bank is a portfolio lender, meaning that it does not
originate loans for sale in the secondary market. At December 31, 1997, the
Bank had total assets of $20.7 million, deposits of $16.7 million, and equity of
$3.9 million. See page 19.
THE STOCK OFFERING
The Company is offering between 561,000 and 759,000 shares of Common Stock
at $10.00 per share. Subject to approval by the Administrator, the number of
shares to be sold may be increased to 872,850 shares without future notice if
market or financial conditions change prior to completion of the Conversion.
STOCK PURCHASES
The Company is first offering its shares of Common Stock in a Subscription
Offering. Depositor and borrower members as of certain eligibility dates will
receive subscription rights. The shares of Common Stock will be offered on a
priority basis as follows: Eligible Account Holders, Supplemental Eligible
Account Holders, Other Members and directors, officers and employees of the Bank
who do not qualify in the above-listed categories. Any remaining shares may be
offered in a Community Offering or in a Syndicated Community Offering. See
pages 99-108.
SUBSCRIPTION RIGHTS
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. All persons exercising their
subscription rights will be required to certify that they are purchasing shares
solely for their own account and that they have no agreement or understanding
regarding the sale or transfer of shares. The Bank intends to pursue any and
all legal and equitable remedies in the event the Bank
6
<PAGE>
becomes aware of the transfer of subscription rights. The Bank will reject
orders that are determined to involve the transfer of such rights.
THE OFFERING RANGE AND DETERMINATION OF THE PRICE PER SHARE
The offering range is based on an independent appraisal of the pro forma
market value of the Common Stock by Ferguson & Company ("Ferguson"), an
appraisal firm experienced in appraisals of savings institutions. The pro forma
market value of the shares is the Bank's market value after giving effect to the
sale of shares in this offering. Ferguson has estimated that in its opinion as
of February 27, 1998, such value ranged between $5,610,000 and $7,590,000 (with
a midpoint of $6,600,000) (the "Estimated Valuation Range"). The appraisal was
based in part upon the Bank's financial condition and operations and the effect
of the additional capital raised by the sale of Common Stock in this offering.
The $10.00 price per share was determined by our board of directors and is the
price most commonly used in stock offerings involving conversions of mutual
savings institutions. The appraisal will be updated prior to the consummation of
the Conversion. If the updated pro forma market value of the Common Stock is
either below $5,610,000 or above $8,728,500, the Company will notify you and you
will have the opportunity to modify or cancel your order. See pages 103-106.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at 12:00 noon, Eastern Time, on
June 9, 1998. The Community Offering, if any, may terminate at any time without
notice but no later than July 24, 1998, without approval by the Administrator.
The Subscription Offering and the Community Offering may not be extended beyond
June 15, 2000. See pages 99-100.
BENEFITS TO MANAGEMENT FROM THE OFFERING
As a part of the Conversion, the Bank will enter a three-year employment
agreement with Eugene M. Ward, President and Chief Executive Officer of the
Bank. Also, the Bank will adopt a Severance Plan for the benefit of all of its
employees. Following the Conversion, the Bank intends to implement a management
recognition plan ("MRP") under which directors and employees of the Bank will be
entitled to receive awards of restricted stock at no cost to them and a stock
option and incentive plan (the "Option Plan"), which will benefit the Bank's
employees and directors. However, the MRP and Option Plan may not be adopted
until at least six months after the Conversion and are subject to stockholder
approval and compliance with FDIC regulations if adopted within the first year
following the Bank's Conversion. See pages 84-88.
STOCK OWNERSHIP BY MANAGEMENT
The directors and executive officers of the Company and of the Bank and
their associates currently anticipate subscribing for Common Stock in the
aggregate amount of $537,000, or 53,700 shares. As a result, such persons
anticipate subscribing for 9.57% to 7.08% of the shares of Common Stock issued
in the Conversion based upon the minimum and maximum of the Estimated Valuation
Range, respectively. It is expected that directors and certain employees of the
Company and the Bank will also receive restricted stock grants under the MRP for
a number of shares of Common Stock equal to 4% of the number of shares issued in
the Conversion and will receive options under the Option Plan to purchase a
number of shares of Common Stock equal to 10% of the number of shares issued in
the Conversion, if such plans are approved by the stockholders of the Company at
a meeting of stockholders to be held no sooner than six months following
7
<PAGE>
the Conversion. When the shares of Common Stock that the directors and executive
officers and their associates are expected to purchase are aggregated with the
shares of Common Stock the directors and executive officers expect to acquire
through the Option Plan and the MRP, the directors and executive officers of the
Company and the Bank could have voting control over as much as 23.6% or 21.1%,
at the minimum and maximum of the Estimated Valuation Range, respectively, of
the Common Stock issued and outstanding (assuming Option Plan shares and MRP
shares are purchased in the open market). See pages 15-16 and 33-34.
USE OF THE PROCEEDS FROM THE SALE OF COMMON STOCK
The Company will retain up to 50% of the net proceeds from the offering and
will use the balance to purchase all the capital stock to be issued by the Bank
in the Conversion. The amount retained by the Company will serve as a possible
source of funds for the payment of dividends to stockholders or to repurchase
shares of Common Stock in the future and for general corporate purposes. Net
proceeds paid to the Bank will become part of the Bank's general funds and will
be initially invested in mortgage and other loans and investments consistent
with the Bank's investment policy. See pages 19-21.
DIVIDENDS
After the Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Company expects to pay annual dividends on the
Common Stock at a rate of $0.30 per share. In addition, the Board of Directors
may determine from time to time to pay special, nonrecurring cash dividends. No
assurances can be given that any dividends will in fact be paid on the Common
Stock. See pages 21-22.
MARKET FOR THE COMMON STOCK
The Company, as a newly organized company, has never issued capital stock;
consequently, there is no market for its Common Stock at this time. The Bank
and the Company have engaged Trident Securities, Inc. ("Trident Securities") as
a financial advisor and to assist in the marketing of the shares of Common
Stock, on a best efforts basis, in the stock offering. The Company intends to
list the Common Stock over-the-counter through the OTC "Electronic Bulletin
Board". Since the size of the offering is small, it is unlikely that an active
and liquid trading market for the shares will develop and be maintained.
Investors should have a long-term investment intent. Purchasers may not be able
to sell their shares when they desire or to sell the shares at a price equal to
or above $10.00. See page 22.
IMPORTANT RISKS IN OWNING THE COMPANY'S COMMON STOCK
Before you decide to purchase stock in the offering, you should read
carefully the "Risk Factors" section beginning on page 12 of this document.
8
<PAGE>
SELECTED FINANCIAL
AND OTHER DATA OF THE BANK
Set forth below are summaries of historical financial and other data of the
Bank. This information is derived in part from, and should be read in
conjunction with, the Financial Statements and Notes to Financial Statements of
the Bank presented elsewhere herein and with the section of this Prospectus
entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS." The selected financial and other data of the Bank at
and for the six months ended December 31, 1997 and 1996 were derived from
unaudited financial statements and reflect, in the opinion of management, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of such periods. The results at and for the
six-month period ended December 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1998.
<TABLE>
<CAPTION>
At or for the Six Months
Ended December 31, At or for the Year Ended June 30,
------------------------ ----------------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------- ------- ------- -------
(Dollars in Thousands)
FINANCIAL CONDITION DATA:
Total assets $20,723 $20,695 $20,720 $21,456
Investments/(1)/ 8,794 8,346 8,700 9,122
Loans receivable, net 11,323 11,730 11,423 11,572
Deposits 16,656 16,889 16,791 17,623
Equity/(2)/ 3,859 3,624 3,756 3,621
OPERATING DATA:
Interest income 718 743 1,442 1,559
Interest expense 412 419 819 894
------- ------- ------- -------
Net interest income 306 324 623 665
-------
Provision for loan losses - 1 5 7
Net interest income after ------- ------- ------- -------
provision for loan losses 306 323 618 658
Noninterest income 4 1 6 2
Noninterest expense/(3)/ 232 348 555 481
------- ------- ------- -------
Income (loss) before income taxes 78 (24) 69 179
Income tax expense (benefit) 17 (4) 19 52
------- ------- ------- -------
Net income (loss) $ 62 $ (20) $ 50 $ 127
======= ======= ======= =======
SELECTED OTHER DATA:
Number of outstanding loans 383 404 397 408
Number of deposit accounts 1,702 1,811 1,754 1,876
Number of full-service offices open 1 1 1 1
Return on average assets/(3)/ .60% (.14)% .24% .58%
Return on average equity/(3)/ 3.24% (.82)% 1.34% 3.57%
Average equity to average assets 18.50% 17.16% 17.81% 16.37%
Interest rate spread 2.25% 2.37% 2.29% 2.39%
Net yield on average interest-
earning assets 3.09% 3.15% 3.15% 3.16%
Average interest-earning assets
to average interest-bearing liabilities 120% 119% 119% 118%
Ratio of noninterest expense to
average total assets/ (3)/ 2.24% 3.29% 2.65% 2.23%
Nonperforming assets to total assets 1.51% 1.29% 1.16% .92%
Loan loss reserves to nonperforming
loans at period end 32.05% 35.63% 41.67% 47.98%
Retained earnings to total assets 17.44% 16.76% 17.14% 16.32%
</TABLE>
9
<PAGE>
_______________________________________
(1) Includes interest-earning deposits, federal funds sold, FHLB stock and
investment securities.
(2) Includes unrealized gains on investments amounting to $244,000, $155,000,
$204,000 and $119,000 at December 31, 1997 and 1996, and June 30, 1997 and
1996, respectively.
(3) Includes a non-recurring expense of $114,000 for the six months ended
December 31, 1996 and the year ended June 30, 1997 for a one-time premium
to recapitalize the SAIF.
(4) Annualized for the six months ended December 31, 1997 and 1996.
RECENT DEVELOPMENTS
The following table sets forth certain selected financial data of the Bank
at and for the period indicated. This information is derived in part from, and
should be read in conjunction with, the Financial Statements and Notes to
Financial Statements of the Bank presented elsewhere herein and with the section
of this Prospectus entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION." The selected financial and other data of
the Bank at March 31, 1998, and for the three months ended March 31, 1998 and
1997, are unaudited. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation have
been included. The results of operations and other data for the three months
ended March 31, 1998 are not necessarily indicative of the results of operations
for the fiscal year ending June 30, 1998.
<TABLE>
<CAPTION>
At At
March 31, June 30,
1998 1997
------------ ------------
(Dollars in Thousands)
<S> <C> <C>
FINANCIAL CONDITION DATA:
Total assets $21,241 $20,720
Investments/(1)/ 9,261 8,700
Loans receivable, net 11,186 11,423
Deposits 17,055 16,791
Equity /(2)/ 3,922 3,756
</TABLE>
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------------
1998 1997
----------- ------------
(Dollars in Thousands)
<S> <C> <C>
OPERATING DATA:
Interest income $ 360 $ 356
Interest expense 204 198
------- -------
Net interest income 156 158
Provision for loan losses 1 2
------- -------
Net interest income after provision for loan losses 155 156
Non-interest income -- --
Non-interest expense 119 114
------- -------
Income (loss) before income taxes (credits) 36 42
Income tax expense 7 8
------- -------
Net income (loss) $ 29 $ 34
======= =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
1998 1997
----------- ----------
<S> <C> <C>
OTHER SELECTED DATA:
Number of outstanding loans 372 402
Number of deposit accounts 1,688 1,782
Number of full-service offices open 1 1
Return on average assets/(3)/ .55% .66%
Return on average equity/(3)/ 2.98% 3.72%
Average equity to average assets 18.54% 17.74%
Interest rate spread 2.25% 2.42%
Net yield on average interest-earning assets 3.07% 3.18%
Average interest-earning assets to average
interest-bearing liabilities 121.00% 119.00%
Ratio of non-interest expense to average total assets/(3)/ 2.27% 2.21%
Non-performing assets to total assets 1.25% 1.28%
Loan loss reserves to nonperforming loans at period end 37.27% 37.89%
Retained earnings to total assets 17.16% 17.08%
</TABLE>
_______________________________________
(1) Includes interest-earning deposits, federal funds sold, FHLB stock, and
investment securities.
(2) Includes unrealized gains on investments amounting to $278,000 and
$204,000 at March 31, 1998 and June 30, 1997, respectively.
(3) Annualized for the three months ended March 31, 1997 and 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
Total assets of the Bank have increased 2.5% since June 30, 1997 and
totaled $21.24 million at March 31, 1998. Net loans receivable decreased by
$230,000 to $11.19 million at March 31, 1998 from $11.42 million at June 30,
1997. Deposits increased by $270,000 to $17.06 million at March 31, 1998 from
$16.79 million at June 30, 1997. Total investments increased by $560,000 to
$9.26 million at March 31, 1998 from $8.70 million at June 30, 1997. Equity
increased by $166,000 to $3.92 million at March 31, 1998, which is attributable
to the Bank's earnings of $91,000 and unrealized gains on securities available
for sale, net of tax, of $75,000 during the nine month period ended March 31,
1998.
At March 31, 1998, the Bank's capital, including the equity component of
unrealized gain on available for sale securities, net of tax, totaled $3.92
million. The Bank's capital as a percentage of assets was 17.16% at March 31,
1998, and was in excess of the regulatory capital requirements at such date.
The Bank had $271,000 of nonperforming loans at March 31, 1998, compared to
$240,000 at June 30, 1997. A loan loss provision amounting to $1,000 was charged
to expense for the three months ended Mach 31, 1998. The allowance for loan
losses totalled $101,000 at March 31, 1998.
11
<PAGE>
Net income for the three months ended March 31, 1998 was $29,000, compared
to $34,000 during the same period of 1997. Net interest income totalled $156,000
for the three months ended March 31, 1998, as compared to $158,000 for the same
period in 1997. There were no significant variations in net interest income or
non-interest income between the three months ended March 31, 1998 and 1997.
Non-interest expense increased $5,000 to $119,000 for the three months
ended March 31, 1998, compared to $114,000 for the same period ended March 31,
1997. There were no significant variations in the non-interest expense
categories between the three months ended March 31, 1998 and 1997.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS,
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING
WHETHER TO INVEST IN THE COMMON STOCK.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES
The results of operations of the Bank, as with savings institutions
generally, are dependent to a large degree on its net interest income, which is
generally the difference between interest income from loans and investments and
interest expense on deposits and borrowings. Approximately 99.5% of the Bank's
mortgage loans have rates of interest which are fixed for the term of the loan
and are originated generally with terms of up to 15 years, while deposit
accounts have significantly shorter terms to maturity. Because the Bank's
interest-earning assets generally have fixed rates of interest and have longer
effective maturities than the Bank's interest-bearing liabilities, the yield on
the Bank's interest earning assets generally will adjust more slowly to changes
in interest rates than the cost of the Bank's interest-bearing liabilities. The
slower adjustment of interest earning assets as compared to interest-bearing
liabilities results in the Bank having a "negative gap." At December 31, 1997,
the Bank's cumulative one year interest rate gap as a percentage of total
interest-earning assets was negative 41.01% and its cumulative three year
interest rate gap as a percentage of total interest-earning assets was a
negative 39.00%. As a result, the Bank's net interest income will be adversely
affected by material and prolonged increases in interest rates. In addition,
rising interest rates may adversely affect the Bank's earnings because there
might be a lack of customer demand for loans. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Asset/Liability
Management".
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. The relatively lower interest rates in recent
periods have resulted in increased prepayments of loans and mortgage-backed
securities, as borrowers refinanced their mortgages in order to reduce their
borrowing cost. Under these circumstances, the Bank is subject to reinvestment
risk to the extent that it is not able to reinvest such prepayments at rates
which are comparable to the rates on the prepaid loans or securities. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset/Liability Management."
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RISK ASSOCIATED WITH NONCONFORMING LOANS
The Bank does not originate its one-to-four-family loans with the intention
that they will be sold in the secondary market. It generally originates loans
satisfying its underwriting requirements which are tailored for its local
community but which may not satisfy various requirements imposed by FHLMC or
FNMA. For example, the Bank may not require title insurance and may not obtain
all of the loan documentation normally required by FHLMC and FNMA. As a result,
to the extent such loans are sold in the secondary market, they may not be sold
on terms as favorable as those originated in conformity with secondary market
requirements. In addition, loans which are not originated in conformity with the
purchase requirements of FHLMC and FNMA, or nonconforming loans, are generally
thought to have greater risks of default and nonperformance; however, the Bank
has not experienced a greater level of nonperformance with its nonconforming
loans. See "BUSINESS OF THE BANK -- Origination and Sale of Loans." These loans
satisfy a need in the Bank's local community and generally produce a higher
yield than would be produced by conforming loans. At December 31, 1997, all of
the loans in the Bank's portfolio were nonconforming.
ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION
The Bank's return on equity was below industry standards for the six months
ended December 31, 1997. At December 31, 1997, the Bank's ratio of average
equity to average assets was 18.50%. On a pro forma basis at December 31, 1997,
assuming the sale of 759,000 shares of Common Stock in the Conversion, the
Bank's ratio of equity to assets would have been 38.24%. With its higher capital
position as a result of the Conversion, it is doubtful that the Bank will be
able to quickly deploy the capital raised in the Conversion in loans and other
assets in a manner consistent with its underwriting standards and operating
philosophies and in a manner which will generate earnings to support its high
capital position. The cost of the implementation of the MRP following the
Conversion is also expected to reduce the Company's return on equity. As a
result, it is expected that the Company's return on equity initially will be
below industry norms. Also, the Company's return on equity initially could be
below the Bank's historical return on equity. Consequently, investors expecting
a return on equity which will meet or exceed industry norms for the foreseeable
future should carefully evaluate and consider the risk that such returns will
not be achieved.
Following the Conversion, the Company may consider plans to reduce capital
if the opportunities to deploy it prudently are not found. Such plans may
include payment of cash dividends and repurchasing shares. Any such steps would
be taken based on conditions as they exist following the Conversion and in
compliance with applicable regulations which limit the Company's ability to pay
dividends and repurchase its stock. See "USE OF PROCEEDS," "DIVIDEND POLICY" and
"SUPERVISION AND REGULATION -- Regulation of the Company -- General" and "--
Dividend Limitations" and "SUPERVISION AND REGULATION -- Regulation of the
Bank--Restrictions on Dividends and Other Capital Distributions."
LIMITED MARKET FOR THE COMMON STOCK
The Company, as a newly organized company, has never issued capital stock,
and consequently, there is no established market for the Common Stock at this
time. Following the completion of the offering, it is anticipated that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board. Trident Securities is
expected to make a market in the Common Stock, by developing and maintaining
historical stock trading records, soliciting potential buyers and sellers of
shares and attempting to match buy and sell orders. In connection with its
market
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making activities, Trident may buy or sell shares from time to time for its own
account. However, Trident Securities will not be subject to any obligation with
respect to such efforts.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's offering (660,000 shares at the midpoint of the
Estimated Valuation Range), it is unlikely that a stockholder base large enough
to create an active trading market will develop and be maintained. Further, even
if a market develops, there can be no assurance that the shares of Common Stock
offered in the Conversion can be resold at or above the purchase price after
completion of the Conversion. Purchasers should consider the potentially
illiquid and long-term nature of their investment in the shares of the Common
Stock. The aggregate price of the Common Stock is based upon an independent
appraisal of the pro forma market value of the Common Stock. However, there can
be no assurance that an investor will be able to sell the Common Stock purchased
in the Conversion at or above the $10.00 purchase price.
RISKS ASSOCIATED WITH ANSON'S PRIMARY MARKET AREA; LIMITED LENDING
OPPORTUNITIES; COMPETITION
The Bank's office is located in Anson County, North Carolina, where the
Bank originates a substantial majority of its loans. Anson County is rural with
an approximate population of 24,309. Population growth and per capital income
levels for Anson County are lower than comparable levels for North Carolina and
the nation, while unemployment rates are higher. Management regards the Anson
County market as a low growth area in which there is significant competition
among financial services providers for market share. See "BUSINESS OF THE BANK--
Competition". The lower income levels and lower rates of growth in Anson County
has limited residential mortgage lending opportunities in its primary market
area, and management does not anticipate that residential mortgage lending
opportunities will increase in the future because of the lack of growth in the
local economy. Primarily as a result of these market conditions, loans
receivable, the principal category of earning assets of the Bank decreased from
$11.57 million at the year ended June 30, 1996 to $11.42 million at the year
ended June 30, 1997 and to $11.32 million for six-months ended December 31,
1997. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Comparison of Financial Condition". In addition, lower
income levels and low rates of growth in Anson County could result in an
increase in the number of delinquent or nonperforming loans and reduce the value
of the collateral securing such loans, adversely affecting the Bank's financial
condition and results of operations. See "BUSINESS OF THE BANK -- Market Area."
COST AND POSSIBLE DILUTIVE EFFECT OF THE MRP AND OPTION PLAN
It is expected that the stockholders of the Company will be asked to
approve the Option Plan and the MRP at a meeting of stockholders after the
Conversion. Under the MRP, directors and employees of the Bank are expected to
be awarded an aggregate amount of Common Stock equal to 4% of the shares issued
in the Conversion. Under the Option Plan, directors and employees of the Bank
are expected to be granted options to purchase an aggregate amount of Common
Stock equal to 10% of the shares issued in the Conversion at exercise prices
equal to the market price of the Common Stock on the date of grants. Shares
issued to directors and certain employees under the MRP and the Option Plan may
be from authorized but unissued shares of Common Stock or they may be purchased
in the open market. In the event the shares issued under the MRP and the Option
Plan consist of newly issued shares of Common Stock, the interests of existing
stockholders would be diluted. If 759,000 shares (872,850 shares at the maximum,
as adjusted)
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of the Common Stock are issued in the Conversion, it is expected that options to
acquire 75,900 shares (87,285 shares at the maximum, as adjusted) of the Common
Stock could be granted under the Option Plan, and awards of an additional 30,360
(34,914 shares at the maximum, as adjusted) shares could be made under the MRP.
At the maximum of the Estimated Valuation Range, if all shares under the MRP and
the Option Plan were newly issued, the exercise price was $10.00 for the shares
issued pursuant to the options, and all of the options were exercised, the
number of outstanding shares of Common Stock would increase from 759,000 to
865,260 (872,850 to 995,049 shares at the maximum, as adjusted) , the pro forma
book value per share of the outstanding Common Stock at December 31, 1997 would
have been $13.49 ($12.96 at the maximum, as adjusted) compared with $13.98
($13.37 at the maximum, as adjusted) if such plans did not exist, and the
unannualized pro forma net income per share of the outstanding Common Stock for
the six months ended December 31, 1997 would have been $0.21 ($0.21 at the
maximum, as adjusted) compared with $0.22 ($0.21 at the maximum, as adjusted) if
such plans did not exist. The cost of the shares acquired by the MRP will be
expensed over any vesting period set forth in the MRP. If 759,000 (872,850
shares at the maximum, as adjusted) shares of Common Stock are issued in the
Conversion and the MRP acquired 30,360 (34,914 shares at the maximum, as
adjusted) shares at a cost of $10.00 per share, the total annual pre-tax expense
of the MRP would be $60,720 ($69,828 at the maximum, as adjusted) per year
assuming a straight line amortization method over a five-year life. See "PRO
FORMA DATA" and "MANAGEMENT OF THE BANK --Proposed Management Recognition Plan"
and "--Proposed Option Plan."
ANTI-TAKEOVER CONSIDERATIONS
PROVISIONS IN THE ARTICLES OF INCORPORATION AND BYLAWS. The Company's
Articles of Incorporation and Bylaws contain certain provisions that may
discourage attempts to acquire control of the Company that are not negotiated
with the Company's Board of Directors. These provisions may result in the
Company being less attractive to a potential acquiror and may result in
stockholders receiving less for their shares than otherwise might be available
in the event of a takeover attempt. In addition, these provisions may have the
effect of discouraging takeover attempts that some stockholders might deem to be
in their best interests, including takeover proposals in which stockholders
might receive a premium for their shares over the then-current market price, as
well as making it more difficult for individual stockholders or a group of
stockholders to elect directors or to remove incumbent management. The Company's
Board of Directors believes, however, that these provisions are in the best
interests of the Company and its stockholders because such provisions encourage
potential acquirors to negotiate directly with the Board of Directors, which the
Board of Directors believes is in the best position to act on behalf of all
stockholders.
These provisions include, among other things, (1) supermajority voting
requirements on certain matters, (2) a staggered board of directors, (3) non-
cumulative voting for any purpose, (4) limits on the calling of special
meetings, (5) the ability of the Board of Directors to issue preferred stock
without stockholder action, (6) the removal of directors before the end of their
term only for cause and (7) the ability of the Board of Directors to change the
number of directors within a range without stockholder action.
The amended Certificate of Incorporation and Bylaws of the Bank upon its
Conversion to stock form also contain certain provisions that might discourage
potential takeover attempts of the Bank. See "ANTI-TAKEOVER PROVISIONS AFFECTING
THE COMPANY AND THE BANK."
POSSIBLE VOTING CONTROL OF DIRECTORS, OFFICERS AND EMPLOYEES. The directors
and executive officers of the Company and of the Bank and their associates
currently anticipate subscribing for Common Stock in the aggregate amount of
$537,000, or 53,700 shares. As a result, such persons anticipate
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<PAGE>
subscribing for 9.57% to 7.08% of the shares of Common Stock issued in the
Conversion based upon the minimum and maximum of the Estimated Valuation Range,
respectively. See "ANTICIPATED STOCK PURCHASES BY MANAGEMENT." It is expected
that directors and certain employees of the Company and the Bank will also
receive restricted stock grants under the MRP for a number of shares of Common
Stock equal to 4% of the number of shares issued in the Conversion and will
receive options under the Option Plan to purchase a number of shares of Common
Stock equal to 10% of the number of shares issued in the Conversion, if such
plans are approved by the stockholders of the Company at a meeting of
stockholders to be held no sooner than six months following the Conversion. See
"MANAGEMENT OF THE BANK --Proposed Management Recognition Plan" and "--Proposed
Option Plan." When the shares of Common Stock that the directors and executive
officers and their associates are expected to purchase are aggregated with the
shares of Common Stock the directors and executive officers expect to acquire
through the Option Plan and the MRP, the directors and executive officers of the
Company and the Bank could have voting control over as much as 23.6% or 21.1%,
at the minimum and maximum of the Estimated Valuation Range, respectively, of
the Common Stock issued and outstanding (assuming Option Plan shares and MRP
shares are purchased in the open market). Because the Company's Articles of
Incorporation require the affirmative vote of 75% of the outstanding shares
entitled to vote in order to approve certain mergers, consolidations or other
business combinations, the directors, officers and employees, as a group, could
potentially block such transactions. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE
COMPANY AND THE BANK --The Company -- Supermajority Voting Provisions."
REGULATORY PROVISIONS. Regulations of the Administrator contain provisions
that, for a period of three years after the Conversion, prohibit any person from
directly or indirectly acquiring or offering to acquire beneficial ownership of
more than 10% of any class of equity security of the Company or the Bank, with
certain exceptions, without the prior approval of the Administrator. If any
person should acquire beneficial ownership of more than 10% of any class of
equity security without prior approval, any shares beneficially owned in excess
of 10% would not be counted as shares entitled to vote and would not be voted in
connection with any matter submitted to the stockholders for a vote. See "ANTI-
TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK."
The Change in Bank Control Act, together with North Carolina regulations,
require that the consent of the Administrator and Federal Reserve be obtained
prior to any person or company acquiring "control" of a savings bank or a bank
holding company. Restrictions applicable to the operations of bank holding
companies and conditions imposed by the Federal Reserve in connection with its
approval of such acquisitions may deter potential acquirors from seeking to
obtain control of the Company. See "SUPERVISION AND REGULATION -- Regulation of
the Company."
AGREEMENTS WITH EMPLOYEES. In connection with the Conversion, the Bank will
enter into an employment agreement with Eugene M. Ward, President and Chief
Executive Officer. See "MANAGEMENT OF THE BANK --Employment Agreement." In
addition, the Bank intends to adopt a Severance Plan which would benefit its
employees in the event there is a change in control of the Company or the Bank.
See "MANAGEMENT OF THE BANK -- Severance Plan." Pursuant to the terms of the
proposed employment agreement and Severance Plan a total of $439,934.45 would
have been paid to the Bank's employees, as of December 31, 1997, if a change of
control had occurred and all the employees, including Mr. Ward were terminated.
The existence of the employment agreement and severance plan may tend to
discourage mergers, consolidations, acquisitions or other transactions that
would result in a change in control of the Company or the Bank. See "ANTI-
TAKEOVER PROVISIONS AFFECTING THE
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COMPANY AND THE BANK --The Company -- Anti-Takeover Effect of Employment
Agreement and Benefit Plans."
DEPENDENCE ON MANAGEMENT
The success of the Bank's operations depends to a considerable degree on
its management and, in particular, its President and Chief Executive Officer,
Eugene M. Ward, and the loss of his services could adversely affect the Bank.
The Bank has attempted to provide for his continued employment by entering into
a three-year employment agreement with Mr. Ward. Mr. Ward could terminate his
employment at any time, however. See "MANAGEMENT OF THE BANK --Employment
Agreement."
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
The U.S. Congress is expected to consider legislation that may eliminate
the thrift industry as a separate industry. The Deposit Insurance Funds Act of
1996 ("DIF Act") provides that the Savings Association Insurance Fund ("SAIF")
will be merged with the Bank Insurance Fund ("BIF") on January 1, 1999, but only
if there are no thrift institutions in existence. The DIF Act requires the
Treasury Department to study the development of a common charter for banks and
thrifts and to submit a report of its finding to Congress, which the Treasury
Department has done. The Company cannot predict whether any legislation will
result from this process or what any such legislation may provide. If Congress
does not act to end the separate existence of the thrift industry, the merger of
the SAIF and BIF contemplated by the DIF Act will not occur, without some
amendment of the DIF Act. Although the SAIF currently meets its statutory
reserve ratios, there can be no assurance that it will continue to do so. The
financial burden of any future recapitalization of the SAIF, if imposed solely
on insured savings associations, would fall on a smaller assessment base than in
the past. This could increase the burden on individual institutions, including
the Bank. See SUPERVISION AND REGULATION."
Because the Bank is a North Carolina-chartered state savings bank, any
federal legislation providing for a common charter for banks and thrifts is not
expected to apply directly to the Bank. However, in addition to eliminating a
separate thrift industry, Congress is expected to consider legislation that will
restructure the banking and financial services industries generally. While such
legislation may not affect the Bank or the Company directly, it may restructure
the regulatory and competitive environments in which they operate. The Company
cannot predict the effects of such restructuring.
The Bank is subject to extensive regulation and supervision as a North
Carolina chartered savings bank. In addition, the Company, as a bank holding
company, is subject to extensive regulation and supervision. Any change in the
regulatory structure or the applicable statutes or regulations, whether by the
Administrator, the Federal Reserve, the FDIC, the North Carolina General
Assembly or the U.S. Congress, could have a material impact on the Company, the
Bank, or the Conversion.
POSSIBLE YEAR 2000 COMPUTER PROGRAM PROBLEMS; IMPACT OF TECHNOLOGICAL ADVANCES
As is the case with substantially all financial institutions, rapid and
accurate data processing is essential to the operation of the Bank. There is
concern that in the year 2000 many computers will "read" entries for the year
2000 as the year 1900 and compute payment, interest or delinquency based on the
wrong date or be unable to compute payment, interest or delinquency.
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All of the material data processing of the Bank that could be affected by
this problem is provided by a third party service bureau. The service bureau of
the Bank has advised the Bank that it expects to resolve this potential problem
before the year 2000. However, if the service bureau is unable to resolve this
potential problem in time, the Bank would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operations of the Bank.
In addition, the financial services industry frequently introduces new
technology-driven products and services which improve customer services and, if
used effectively, may enable financial institutions to reduce costs. The Bank's
future success will depend, in part, on its ability to address its customers
needs by using technology to provide products and services that will satisfy
customer demands for convenience, as well as increase the Bank's efficiencies in
its operations. There can be no assurances that the Bank will be able to
effectively implement new technology-driven products and services or be
successful in marketing such products and services in its market area.
BEST EFFORTS OFFERING
The Bank has engaged Trident Securities to consult with and advise the Bank
with respect to the Conversion and to assist, on a best-efforts basis, in
connection with the solicitation of subscriptions and purchase orders for shares
of Common Stock in the Offerings. Trident Securities is under no obligation to
purchase any shares of Common Stock in any of the Offerings. Trident Securities
has not prepared or delivered any opinion or recommendation with respect to the
appropriateness of the amount of Common Stock to be issued in the Conversion.
Trident Securities has not prepared any fairness opinion with respect to the
terms of the Offerings or any opinion with respect to the price at which shares
of Common Stock may trade.
ANSON BANCORP, INC.
The Company was incorporated under North Carolina law on March 2, 1998 at
the direction of the Bank for the purpose of acquiring and holding all of the
outstanding capital stock of the Bank to be issued in connection with the
Conversion. The Company has received conditional approval from the Federal
Reserve and the Administrator to become a bank holding company and as such will
be subject to regulation by the Federal Reserve and the Administrator. This
structure will give the Company greater flexibility than the Bank currently has
to expand and diversify its business activities, although there are no current
plans regarding expansion or diversification. See "SUPERVISION AND REGULATION --
Regulation of the Company."
Prior to completion of the Conversion, the Company will not own any
material assets or transact any material business. Upon completion of the
Conversion, on an unconsolidated basis, the Company will have no significant
assets other than the stock of the Bank acquired in the Conversion, and the
portion of the net proceeds from the sale of Common Stock in the Conversion
which are retained by it. The Company will have no significant liabilities upon
completion of the Conversion. The management of the Company is described in
"MANAGEMENT OF THE COMPANY." The executive office of the Company is located at
the headquarters office of the Bank at 211 South Greene Street, Wadesboro, North
Carolina, and its telephone number is (704) 694-2122.
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The existing management of the Company believes that it will be in the best
interests of the Company, the Bank and the Company's stockholders for the
Company to remain an independent company.
ANSON SAVINGS BANK, SSB
The Bank is a North Carolina-chartered mutual savings bank. The Bank was
organized in 1889 and has been a member of the FHLB system since 1939. The
deposits of the Bank are insured by the SAIF of the FDIC to the maximum amount
permitted by law.
The Bank is a member of the FHLB of Atlanta, which is one of the twelve
regional banks for federally insured savings institutions and other eligible
members comprising the FHLB system. As a North Carolina chartered savings bank,
the Bank is regulated by the Administrator. The Bank is also subject to
regulations of the FDIC with respect to certain other matters and, as a
subsidiary of the Company, will be indirectly subject to regulation by the
Federal Reserve. See "SUPERVISION AND REGULATION -- Regulation of the Company"
and "-- Regulation of the Bank."
The Bank conducts business through its one full service office in
Wadesboro, North Carolina. The Bank's primary market area is Anson County, North
Carolina. At December 31, 1997, the Bank had total assets of $20.7 million, net
loans of $11.3 million, deposits of $16.7 million and retained earnings of $3.6
million.
The Bank is a community-oriented financial institution which offers a
variety of financial services to meet the needs of the communities it serves.
The Bank is principally engaged in the business of attracting deposits from the
general public and using such deposits to make one-to-four-family residential
real estate loans, non-residential real estate loans, construction loans and
loans secured by deposit accounts.
Revenues of the Bank are derived primarily from interest on loans. The
Bank also receives interest income from its investments and interest-earning
deposit balances. The Bank also receives non-interest income from transaction
and service fees and other sources. The major expenses of the Bank are interest
on deposits and general and administrative expenses such as compensation and
employee benefits, federal deposit insurance premiums, data processing expenses
and occupancy and related expenses.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently estimated that
such net proceeds will be between $5.12 million and $7.05 million, based on the
current Estimated Valuation Range. If the gross proceeds of the shares sold are
increased to 15% above the maximum of the Estimated Valuation Range, it is
estimated that net proceeds will equal $8.16 million. See "PRO FORMA DATA" for
the assumptions used to arrive at these amounts. The actual net proceeds may
vary materially from the estimated amounts described herein. The Company expects
to retain 50% of the proceeds of the Offering and will use the balance to
purchase the capital stock of the Bank to be issued in the Conversion.
The Company expects to use the portion of the net proceeds it retains for
working capital and investment purposes. The Company does not expect to have
significant operating expenses and anticipates
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that initially it will invest the net proceeds it retains primarily in interest-
earning deposits, U.S. government, federal agency and other marketable
securities and mortgage-backed securities. The types and amounts of such
investments will vary from time to time based upon the interest rate
environment, asset/liability mix considerations and other factors.
Net proceeds paid to the Bank initially will become part of the Bank's
general funds and will be invested primarily in mortgage and other loans, and
investments consisting primarily of interest-earning deposit balances, U.S.
government and federal agency obligations and other marketable securities in
accordance with the Bank's lending and investment policies. The relative amounts
to be invested in each of these types of investments will depend upon loan
demand, rates of return and asset/liability matching considerations at the time
the investments are to be made. Management is not able to predict the yields
which will be produced by the investment of the proceeds of the Offering because
such yields will be significantly influenced by general economic conditions and
the interest rate environment existing at the time the investments are made.
Remaining net proceeds paid to the Bank will be used for general corporate
purposes.
The proceeds of the Offering will result in an increase in the Bank's net
worth and regulatory capital and may enhance the potential for growth through
increased lending and investment activities, branch expansion, ATMs or
otherwise. The net proceeds retained by the Company could be used to support the
future expansion of operations of the Company through the opening of a branch
office in or adjacent to the Bank's primary market area. The Company has no
current plans to open any additional office. Payments for shares of Common Stock
of the Company made through the withdrawal of existing deposit accounts at the
Bank will not result in the receipt of new funds for investment by the Bank.
Upon completion of the Conversion, the Board of Directors will have the
authority to adopt stock repurchase plans, subject to statutory and regulatory
requirements. Based upon facts and circumstances which may arise following the
Conversion, the Board of Directors may determine to repurchase stock in the
future. Such facts and circumstances may include but are not limited to (i)
market and economic factors such as the price at which the Common Stock is
trading, the volume of trading, the attractiveness of other investment
alternatives in terms of the rates of return and risks involved in the
investments, (ii) the ability to increase the book value and earnings per share
of the remaining outstanding shares, and improve the Company's return on equity;
(iii) the reduction of dilution to stockholders caused by having to issue
additional shares to cover the exercise of stock options or to fund employee
stock benefit plans; and (iv) any other circumstances in which repurchases would
be in the best interests of the Company and its stockholders.
Any stock repurchases will be subject to the determination of the Board of
Directors that both the Company and the Bank will be capitalized in excess of
applicable regulatory requirements after any such repurchases and that capital
will be adequate taking into account, among other things, the level of
nonperforming assets and other risks, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment and tax and other regulatory considerations. Federal regulations
require that, subject to certain exceptions, the Company must obtain approval of
the Federal Reserve prior to repurchasing Common Stock in excess of 10% of its
net worth during any twelve-month period. See "SUPERVISION AND REGULATION --
Regulation of the Company -- Dividend and Repurchase Limitations."
The Company and the Bank have entered into a tax allocation agreement which
contemplates the filing of consolidated tax returns at a yet undetermined future
time when most advantageous to the Company,
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the Bank and the Company's shareholders. However, the Company and the Bank have
no present intention to file consolidated tax returns, thus preserving for the
Company the ability to use a portion of the proceeds to make a return of capital
in the future. However, the Company has not made any decision to pay such a
return of capital. The Company and the Bank have agreed to notify the FDIC
before making a return of capital during the first three years following the
Conversion. See "DIVIDEND POLICY."
At any time following approval of the MRP by the Company's stockholders, it
is expected that the MRP may acquire a number of shares of Common Stock equal to
4% of the number of shares issued in the Conversion. See "MANAGEMENT OF THE
BANK -- Proposed Management Recognition Plan." Such shares may be acquired in
the open market or acquired through the Company's issuance of authorized but
unissued shares. In the event shares are acquired in the open market, the funds
for such purchase may be provided by the Bank from the proceeds of the
Conversion. It is estimated that between 22,440 and 30,360 shares (34,914 shares
at the maximum, as adjusted) may be acquired by the MRP, assuming the issuance
of between 561,000 and 759,000 shares (872,850 shares at the maximum, as
adjusted), respectively, in the Conversion. If the Common Stock is acquired with
the open market it will be purchased at a price equal to the fair market value
of the Common Stock at the time of purchase, which price may be greater or lower
than the offering price of $10.00 per share of Common Stock. If all such shares
were acquired by the MRP in the open market, and if such shares were acquired at
a price of $10.00 per share, the Bank would contribute between $224,400 and
$303,600 ($349,914 at the maximum, as adjusted), respectively, to the MRP for
this purpose.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare semiannual dividends on the Common Stock, subject to
statutory and regulatory requirements. The Company expects to pay annual
dividends on the Common Stock at a rate of $0.30 per share which is equal to 3%
of the offering price for the Common Stock in the Conversion. The payment of
dividends is expected to begin as soon as practicable after completion of the
Conversion. In addition, the Board of Directors may determine from time to time
that it is prudent to pay special nonrecurring cash dividends, which may or may
not constitute a return of capital. Special cash dividends, if paid, may be in
addition to, or in lieu of, regular cash dividends. The Company's Board of
Directors will periodically review its policy concerning dividends. Declarations
of dividends, if any, by the Board of Directors will depend upon a number of
factors, including investment opportunities available to the Company and the
Bank, capital requirements, regulatory limitations, the Company's and the Bank's
results of operations and financial condition, tax considerations and general
economic conditions. Upon review of such considerations, the Board of Directors
of the Company may authorize dividends to be paid in the future if it deems such
payment appropriate and in compliance with applicable law and regulation. No
assurances can be given that any dividends will in fact be paid on the Common
Stock or, if dividends are paid, that they will not be reduced or discontinued
in the future.
In connection with the Conversion, the Bank has agreed with the FDIC that,
within the first three years after completion of the Conversion, neither the
Company nor the Bank will pay any taxable dividend or make any taxable
distribution in excess of their current and retained earnings. The Company and
the Bank have agreed to notify the FDIC before making a return of capital during
the first three years following the Conversion.
21
<PAGE>
The sources of income to the Company initially will consist of earnings on
the capital retained by the Company and dividends paid by the Bank to the
Company, if any. Consequently, future declarations of cash dividends by the
Company may depend upon dividend payments by the Bank to the Company, which
payments are subject to various restrictions. Under current North Carolina
regulations, the Bank could not declare or pay a cash dividend if the effect
thereof would be to reduce its net worth to an amount which is less than the
minimum required by the FDIC and the Administrator. In addition, for a period of
five years after the consummation of the Conversion, the Bank will be required,
under existing regulations, to obtain the prior written approval of the
Administrator before it can declare and pay a cash dividend on its capital stock
in an amount in excess of one-half of the greater of (i) its net income for the
most recent fiscal year, or (ii) the average of its net income after dividends
for the most recent fiscal year and not more than two of the immediately
preceding fiscal years, if applicable. See "SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions." As a result of this limitation, if the Bank had been a stock
institution at the end of fiscal 1997 and for the two preceding fiscal years, it
could not have paid a dividend in excess of $61,244.33 without the approval of
the Administrator.
As a converted institution, the Bank also will be subject to the regulatory
restriction that it will not be permitted to declare or pay a dividend on or
repurchase any of its capital stock if the effect thereof would be to cause its
regulatory capital to be reduced below the amount required for the liquidation
account established in connection with the Conversion. See "THE CONVERSION --
Effects of Conversion -- Liquidation Rights." Also, see "TAXATION -- Federal
Income Taxation" for a discussion of federal income tax provisions that may
limit the ability of the Bank to pay dividends to the Company without incurring
a recapture tax.
MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock,
and consequently, there is no established market for the Common Stock at this
time. Following the completion of the Offering, it is anticipated that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board. Trident Securities is
expected to make a market in the Common Stock, by developing and maintaining
historical stock trading records, soliciting potential buyers and sellers of
shares and attempting to match buy and sell orders. In connection with its
market making activities, Trident may buy or sell shares from time to time for
its own account. However, Trident Securities will not be subject to any
obligation with respect to such efforts.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's offering (660,000 shares at the midpoint of the
Estimated Valuation Range), it is unlikely that a stockholder base large enough
to create an active trading market will develop and be maintained. Further,
even if a market develops, there can be no assurance that the shares of Common
Stock offered in the Conversion can be resold at or above the purchase price
after completion of the Conversion. Purchasers of Common Stock should consider
the potentially illiquid and long-term nature of their investment in the shares
being offered hereby. The aggregate price of the Common Stock is based upon an
independent appraisal of the pro forma market value of the Common Stock.
However, there can be no assurance that an investor will be able to sell the
Common Stock purchased in the Conversion at or above the $10.00 purchase price.
22
<PAGE>
CAPITALIZATION
The following tables present the historical capitalization of the Bank at
December 31, 1997 and the pro forma capitalization of the Company at such date
after giving effect to the sale of the Common Stock and application of the
assumptions set forth under "PRO FORMA DATA," assuming that 561,000, 660,000,
759,000 and 872,850 shares of Common Stock are sold at $10.00 per share (the
minimum, midpoint, maximum and 15% above the maximum of the current Estimated
Valuation Range). A change in the number of shares issued in the Conversion may
materially affect such pro forma capitalization. See "USE OF PROCEEDS" and
"THE CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered."
23
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO FORMA CAPITALIZATION AT DECEMBER 31, 1997
BASED UPON SALE OF
---------------------------------------------------------
561,000 660,000 759,000 872,850
SHARES AT A SHARES AT A SHARES AT A SHARES AT A
CAPITALIZATION PRICE OF PRICE OF PRICE OF PRICE OF
OF BANK AT $10.00 PER $10.00 PER $10.00 PER $10.00 PER SHARE/(1)/
---------- ---------- ---------- ---------------------
12/31/97 SHARE SHARE SHARE
-------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits/(2)/ $16,656 $ 16,656 $ 16,656 $ 16,656 $ 16,656
Borrowings -- -- -- -- --
------- -------- -------- -------- --------
Total deposits and borrowings $16,656 $ 16,656 $ 16,656 $ 16,656 $ 16,656
======= ======== ======== ======== ========
Capital Stock:
Preferred stock, no par value per share:
authorized - 5,000,000 shares; assumed
outstanding - none $ -- $ -- $ -- $ -- $ --
Common Stock, no par value per share;
authorized - 20,000,000 shares; shares to be
outstanding - as shown -- -- -- -- --
Paid-in capital -- 5,122 6,087 7,053 8,163
Less:
Common Stock acquired by MRP/(3)/ -- (224) (264) (304) (349)
Retained earnings -- substantially restricted 3,614 3,614 3,614 3,614 3,614
Unrealized gains on available-for-sale
securities, net of tax 244 245 245 245 245
------- -------- -------- -------- --------
Total stockholders' equity $ 3,859 $ 8,757 $ 9,682 $ 10,608 $ 11,672
======= ======== ======== ======== ========
</TABLE>
24
<PAGE>
_______________________________
(1) Represents the number of shares of Common Stock that would be issued in the
Conversion after giving effect to a 15% increase in maximum valuation in
the Estimated Valuation Range.
(2) Withdrawals from deposit accounts for the purchase of Common Stock are not
reflected. Any such withdrawals would reduce pro forma deposits by the
amount of such withdrawals.
(3) Additionally, assumes no stock option grants under the proposed Option
Plan, and assumes that, after the Conversion, a number of shares equal to
4% of the shares of Common Stock offered hereby will be purchased by the
MRP. The Common Stock acquired by the MRP is reflected as a reduction of
stockholders' equity. See "RISK FACTORS -- Cost and Possible Dilutive
Effect of the MRP and Option Plan, footnote 1 to the tables under "PRO
FORMA DATA" and "MANAGEMENT OF THE BANK --Proposed Management Recognition
Plan".
25
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $5.12 million and $8.16 million, based upon
the following assumptions: (i) 52,000 shares of the Common Stock sold in the
Conversion will be sold to the directors and executive officers and their
associates (and that Trident Securities will not receive certain compensation
with respect to such sales), and none of the shares of Common Stock will be sold
in any Syndicated Community Offering pursuant to selected dealer agreements;
(ii) fees will be payable to Trident Securities with respect to the Subscription
and Community Offering as described in "THE CONVERSION -- Marketing
Arrangements;" and (iii) Conversion expenses, excluding the fees and commissions
to Trident Securities, will be approximately $366,000. Actual net proceeds may
vary depending upon the number of shares sold to directors, executive officers
and their associates, the number of shares, if any, sold in the Syndicated
Community Offering pursuant to selected dealer arrangements and the actual
expenses of the Conversion. Payments for shares made through withdrawals from
the existing Bank deposit accounts will not result in the receipt of new funds
for investment by the Bank. However, capital will increase and interest-bearing
liabilities will decrease by the amount of such withdrawals. See "THE
CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered."
Under the Plan, the Common Stock must be sold at an aggregate price equal
to not less than the minimum nor more than the maximum of the Estimated
Valuation Range based upon an independent appraisal. The Estimated Valuation
Range as of February 27, 1998 is from a minimum of $5,610,000 to a maximum of
$7,590,000 with a midpoint of $6,600,000. However, with the consent of the
Administrator and the FDIC, the aggregate dollar amount of the Common Stock sold
may be increased to up to 15% above the maximum of the Estimated Valuation
Range, or to $8,728,500, without a resolicitation and without any right to
cancel, rescind or change subscription orders, to reflect changes in market and
financial conditions following commencement of the Subscription Offering. See
"THE CONVERSION -- Purchase Price of Common Stock and Number of Shares Offered."
Pro forma consolidated net earnings and book value of the Company at or for
the six months ended December 31, 1997 and the year ended June 30, 1997 have
been based upon the following assumptions: (i) the sale of shares of Common
Stock in connection with the Conversion occurred at the beginning of the
periods, and yielded net proceeds available for investment of approximately
$4.90 million, $5.82 million, $6.75 million and $7.81 million (based upon the
issuance of 561,000, 660,000, 759,000 and 872,850 shares, respectively, at
$10.00 per share) on such dates; (ii) such net proceeds were invested on a
consolidated basis at the beginning of the period at a yield of 5.55%, which
represents the average one-year treasury rate for the last week of December
1997; and (iii) the MRP is adopted by the Board of Directors and receives the
requisite shareholder approval. The Company did not use the arithmetic average
of the Bank's weighted-average yield on interest-earning assets and weighted-
average interest rate paid on deposits during the six months ended December 31,
1997 or the year ended June 30, 1997. Management believes that the one-year
Treasury rate is a more appropriate rate for purposes of preparing the pro forma
data because proceeds from the Conversion are expected to be initially invested
in instruments with similar yields and maturities. The effect of withdrawals
from deposit accounts for the purchase of Common Stock has not been reflected.
Such withdrawals have no effect on pro forma stockholders' equity, and
management does not believe that such withdrawals will have a material impact on
pro forma net earnings or pro forma net earnings per share. In calculating pro
forma net earnings for the six months ended December 31, 1997 and year ended
June 30, 1997, an effective combined federal and state income tax rate of 34.00%
has been assumed, resulting in a yield after taxes of 3.66%. Historical and pro
forma per share amounts have been calculated by dividing the Bank's historical
amounts and the Company's pro forma amounts by the indicated number of shares of
Common Stock, assuming that such number of shares had been outstanding during
the entire period.
26
<PAGE>
The following pro forma information is not intended to represent the market
value of the Common Stock, the value of net assets and liabilities or of future
results of operations. The assumption regarding investment yields should not be
considered indicative of actual yields for future periods. The following
information is not intended to be used as a basis for projection of results of
operations for future periods.
<TABLE>
<CAPTION>
At or for the Six Months Ended December 31, 1997
----------------------------------------------------------------------
561,000 660,000 759,000 872,850
shares at $10.00 shares at $10.00 shares at $10.00 shares at $10.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (Supermaximum)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 5,610 $ 6,600 $ 7,590 $ 8,729
Less offering expenses and commissions (488) (513) (537) (566)
-------- -------- -------- --------
Estimated net Conversion proceeds 5,122 6,087 7,053 8,163
Less Common Stock to be acquired by MRP/(1)/ (224) (264) (304) (349)
-------- -------- -------- --------
Estimated proceeds available for investment $ 4,898 $ 5,823 $ 6,749 $ 7,813
======== ======== ======== ========
Pro forma net income:
Historical net income $ 62 $ 62 $ 62 $ 62
Pro forma adjustments:
Pro forma income on net proceeds $ 90 107 124 143
Pro forma MRP adjustments/(1)/ $ (16) (17) (20) (23)
-------- -------- -------- --------
Pro forma net income $ 137 $ 151 $ 166 $ 182
======== ======== ======== ========
Pro forma net income per share
Historical net income per share $ 0.11 $ 0.09 $ 0.08 $ 0.08
Pro forma adjustments:
Pro forma income on net proceeds 0.16 0.16 0.16 0.16
Pro forma MRP adjustments/(1)/ (0.03) (0.03) (0.03) (0.03)
-------- -------- --------
Pro forma net income per share/(1) (2) (4)/ $ 0.24 $ 0.23 $ 0.22 $ 0.21
======== ======== ======== ========
Number of shares used in calculating income per share/(4)/ 561,000 660,000 759,000 872,850
======== ======== ======== ========
Stockholders' equity (book value)/(3)/
Historical retained earnings $ 3,859 $ 3,859 $ 3,859 $ 3,859
Estimated net conversion proceeds 5,122 6,087 7,053 8,163
Less common stock acquired by:
MRP/(1)/ (224) (264) (304) (349)
-------- -------- -------- --------
Pro forma stockholders' equity/(3)/ $ 8,757 $ 9,682 $ 10,608 $ 11,672
======== ======== ======== ========
Pro forma stockholders' equity per share
Historical retained earnings $ 6.88 $ 5.85 $ 5.09 $ 4.42
Estimated net conversion proceeds 9.13 9.22 9.29 9.35
Less common stock acquired by:
MRP/(1)/ (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share/(1) (2)/ $ 15.61 $ 14.67 $ 13.98 $ 13.37
======== ======== ======== ========
Pro forma price to book Value 64.1% 68.2% 71.5% 74.8%
======== ======== ======== ========
Pro forma price to earnings (P/E ratio)/(5)/ 20.8x 21.7x 22.7x 23.8x
======== ======== ======== ========
Number of shares used in calculating equity per share 561,000 660,000 759,000 872,850
======== ======== ======== ========
</TABLE>
27
<PAGE>
__________________________________
(1) It is assumed that the MRP will purchase a number of shares equal to 4% of
the shares of Common Stock issued in the Conversion for issuance to
directors, officers and employees, subject to approval by the Company's
stockholders. If the MRP is approved by the stockholders, the MRP intends
to acquire the Common Stock either through open market purchases or from
authorized but unissued shares of Common Stock of the Company. Funds used
by the MRP to purchase the shares will be contributed to the MRP by the
Bank. In calculating the pro forma effect of the MRP, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open market
purchases at the Conversion purchase price of $10.00 per share, and that
20% of the amount contributed was amortized to expense annually during the
period (the MRP will be amortized over a five-year period), net of income
tax at an assumed combined federal and state rate of 34%. The issuance of
authorized but unissued shares of the Company's Common Stock to the MRP
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.9%; pro forma net earnings per
share would be $0.24, $0.23, $0.22 and $0.21 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, for the six-month period ended December 31, 1997; pro forma
price to earnings ratio would be 20.8, 21.7, 22.7 and 23.8; and pro forma
stockholders' equity per share would be $15.39, $14.49, $13.82 and $13.24
at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, respectively, at December 31, 1997. There can be
no assurance that stockholder approval of the MRP will be obtained, or that
the actual purchase price of the shares will be equal to the Conversion
purchase price. See "MANAGEMENT OF THE BANK -- Proposed Management
Recognition Plan."
(2) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. See "MANAGEMENT OF THE BANK --Proposed
Option Plan." If the Option Plan is approved by the stockholders, an amount
equal to 10% of the Common Stock issued in the Conversion, or 56,100,
66,000, 75,900 and 87,285 shares at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, will be reserved for future
issuance upon the exercise of the options to be granted under the Option
Plan. The issuance of Common Stock pursuant to exercise of options under
the Option Plan will result in the dilution of existing stockholders'
interests. Assuming stockholder approval of the Option Plan and exercise of
all options at the beginning of the period at an exercise price of $10.00
per share, and the issuance of authorized but unissued shares upon exercise
of such options, the pro forma net earnings per share would be $0.24,
$0.22, $0.21 and $0.21, respectively, and pro forma stockholders' equity
per share would be $15.10, $14.25, $13.62, and $13.07, respectively, at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range.
(3) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."
(4) Earnings per share is calculated based on the number of shares outstanding
indicated in the previous tables which include shares to be acquired by the
MRP. The FASB has issued Statement #128, Earnings per Share (EPS), which
requires presentation of EPS for basic and diluted per-share amounts.
Diluted per-share amounts assume the Conversion, exercise or issuance of
all potential common stock instruments. Application is required for annual
and interim periods ending after December 15, 1997 with earlier application
not permitted.
(5) Pro forma net earnings per share have been annualized for purposes of this
ratio.
28
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1997
------------------------------------------------------------------------
561,000 660,000 759,000 872,850
shares at $10.00 shares at $10.00 shares at $10.00 shares at $10.00
per share per share per share per share
(Minimum) (Midpoint) (Maximum) (Supermaximum)
---------------- ---------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 5,610 $ 6,600 $ 7,590 $ 8,729
Less offering expenses and commissions (488) (513) (537) (566)
-------- -------- -------- --------
Estimated net Conversion proceeds 5,122 6,087 7,053 8,163
Less Common Stock to be acquired by MRP/(1)/ (224) (264) (304) (349)
-------- -------- -------- --------
Estimated proceeds Available for investment $ 4,898 $ 5,823 $ 6,749 $ 7,813
======== ======== ======== ========
Pro forma net income:
Historical net income $ 50 $ 50 $ 50 $ 50
Pro forma adjustments:
Pro forma income on net proceeds 179 213 247 286
Pro forma MRP adjustments/(1)/ (30) (35) (41) (46)
-------- -------- -------- --------
Pro forma net income $ 200 $ 228 $ 257 $ 290
======== ======== ======== ========
Pro forma net income per share
Historical net income per share $ 0.09 $ 0.08 $ 0.07 $ 0.06
Pro forma adjustments:
Pro forma income on net proceeds/(2)/ 0.32 0.32 0.33 0.33
Pro forma MRP Adjustments/(1)/ (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Pro forma net income per share/(1) (2) (4)/ $ 0.36 $ 0.35 $ 0.34 $ 0.33
======== ======== ======== ========
Number of shares used in calculating income per share/(4)/ 561,000 660,000 759,000 872,850
Stockholders' equity (book value)/(3)/
Historical retained earnings $ 3,756 $ 3,756 $ 3,756 $ 3,756
Estimated net conversion proceeds 5,122 6,087 7,053 8,163
Less common stock acquired by:
MRP/(1)/ (224) (264) (304) (349)
-------- -------- -------- --------
Pro forma stockholders' equity/(3)/ $ 8,654 $ 9,579 $ 10,505 $ 11,569
======== ======== ======== ========
Pro forma stockholders' equity per share
Historical retained earnings $ 6.71 $ 5.69 $ 4.96 $ 4.30
Estimated net conversion proceeds 9.13 9.22 9.29 9.35
Less common stock acquired by:
MRP/(1)/ (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders' equity per share/(1) (2)/ $ 15.43 $ 14.51 $ 13.84 $ 13.25
======== ======== ======== ========
Pro forma price to book value 64.8% 68.9% 72.2% 75.4%
Pro forma price to earnings (P/E ratio) 27.8x 28.6x 29.4x 30.3x
======== ======== ======== ========
Number of shares used in calculating equity per share 561,000 660,000 759,000 872,850
======== ======== ======== ========
</TABLE>
29
<PAGE>
__________________________________________
(1) It is assumed that the MRP will purchase a number of shares equal to 4% of
the shares of Common Stock issued in the Conversion for issuance to
directors, officers and employees, subject to approval by the Company's
stockholders. If the MRP is approved by the stockholders, the MRP intends
to acquire the Common Stock either through open market purchases or from
authorized but unissued shares of Common Stock of the Company. Funds used
by the MRP to purchase the shares will be contributed to the MRP by the
Bank. In calculating the pro forma effect of the MRP, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open market
purchases at the Conversion purchase price of $10.00 per share, and that
20% of the amount contributed was amortized to expense annually during the
period (the MRP will be amortized over a five-year period), net of income
tax at an assumed combined federal and state rate of 34%. The issuance of
authorized but unissued shares of the Company's Common Stock to the MRP
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.9%; pro forma net earnings per
share would be $0.36, $0.35, $0.34 and $0.33 and pro forma equity per share
would be $15.22, $14.34, $13.69 and $13.13 at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range,
respectively, for the year ended June 30, 1997; pro forma price to earnings
ratio would be 27.8, 28.6, 29.4 and 30.3 at the minimum, midpoint, maximum
and 15% above the maximum of Estimated Valuation Range, respectively, at
June 30, 1997. There can be no assurance that stockholder approval of the
MRP will be obtained, or that the actual purchase price of the shares will
be equal to the Conversion purchase price. See "MANAGEMENT OF THE BANK --
Proposed Management Recognition Plan."
(2) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. See "MANAGEMENT OF THE BANK --Proposed
Option Plan." If the Option Plan is approved by the stockholders, an amount
equal to 10% of the Common Stock issued in the Conversion, or 56,100,
66,000, 75,900 and 87,285 shares at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, will be reserved for future
issuance upon the exercise of the options to be granted under the Option
Plan. The issuance of Common Stock pursuant to exercise of options under
the Option Plan will result in the dilution of existing stockholders'
interests. Assuming stockholder approval of the Option Plan and exercise of
all options at the beginning of the period at an exercise price of $10.00
per share, and the issuance of authorized but unissued shares upon exercise
of such options, the pro forma net earnings per share would be $0.36,
$0.35, $0.34 and $0.34, respectively, at the minimum, midpoint, maximum and
15% above the maximum of Estimated Valuation Range, respectively, at June
30, 1997.
(3) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."
(4) Earnings per share is calculated based on the number of shares outstanding
indicated in the previous tables which include shares to be acquired by the
MRP. The FASB has issued Statement #128, Earnings per Share (EPS), which
requires presentation of EPS for basic and diluted per-share amounts.
Diluted per-share amounts assume the conversion, exercise or issuance of
all potential common stock instruments. Application is required for annual
and interim periods ending after December 15, 1997 with earlier application
not permitted.
30
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The Bank is subject to the North Carolina savings bank requirement that net
worth, computed in accordance with the requirements of the Administrator, equal
or exceed 5% of total assets. As of December 31, 1997, the Bank's net worth,
computed in accordance with such requirements, was 17.9% of total assets. In
addition, the Bank is subject to the capital requirements of the FDIC. The FDIC
requires that institutions which receive the highest rating during their
examination process and are not experiencing or anticipating significant growth
must maintain a leverage ratio of Tier I capital to total assets (as defined in
FDIC regulations) of at least 3%. All other institutions are required to
maintain a ratio of 1% or 2% above the 3% minimum with an absolute minimum
leverage ratio of not less than 4%. The FDIC also imposes requirements that (i)
the ratio of Tier I capital to risk-weighted assets equal at least 4% and (ii)
the ratio of total capital to risk-weighted assets equal at least 8%. As
demonstrated in the table below, the Bank exceeds the FDIC Tier I and risk-based
capital requirements and North Carolina capital requirements on a historical and
pro forma basis.
The following table presents (i) the Bank's historical regulatory capital
position on December 31, 1997 and June 30, 1997 and (ii) the Bank's pro forma
regulatory capital position on such dates after giving effect to the assumptions
set forth under "PRO FORMA DATA" and "CAPITALIZATION" and further assuming that
the Company will retain 50% of the net proceeds of the Common Stock sold in the
Conversion.
The Company, because it is expected to have consolidated assets of less
than $150 million, will not be subject to the Federal Reserve's capital adequacy
guidelines. Those guidelines, however, will be applied to the Bank. The Bank,
like bank holding companies, will be required to comply with the Federal
Reserve's risk-based capital guidelines. Under these regulations, the minimum
ratio of total capital to risk-weighted assets (including certain off-balance
sheet activities, such as standby letters of credit) is 8%. At least half of
the total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a
bank holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding company
which has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum. See "SUPERVISION AND REGULATION -- Regulation of the Company --
Capital Adequacy Guidelines for Holding Companies". These capital requirements
are in addition to those imposed by the FDIC and the Administrator discussed
above.
31
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA REGULATORY CAPITAL POSITION AT DECEMBER 31, 1997/(1)/
---------------------------------------------------------------------
HISTORICAL
AT MINIMUM OF 561,000 MIDPOINT OF 660,000
DECEMBER 31, 1997 SHARES AT SHARES AT
-----------------
$10.00 PER SHARE $10.00 PER SHARE
---------------- ----------------
PERCENT OF PERCENT OF PERCENT OF
REGULATORY REGULATORY REGULATORY
AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $3,859 18.6% $6,420 27.6% $6,903 29.0%
====== ===== ====== ===== ====== =====
Tier 1 (leverage) capital $3,615 17.4% $6,176 26.5% $6,659 28.0
Tier 1 (leverage) capital requirement/(3)/ 829 4.0% 931 4.0% 951 4.0%
------ ---- ------ ---- ------ ----
Excess $2,786 13.4% $5,245 22.5% $5,708 24.0%
====== ==== ====== ==== ====== ====
Tier 1 risk based capital $3,615 46.5% $6,176 74.6% $6,650 79.5%
Tier 1 risk based capital requirement 311 4.0% 331 4.0% 335 4.0%
------ ---- ------ ---- ------ ----
Excess $3,304 42.5% $5,845 70.6% $6,324 75.5%
====== ==== ====== ==== ====== ====
Total risk based capital $3,712 47.8% $6,273 75.8% $6,756 80.7%
Total risk based capital requirement 621 8.0% 662 8.0% 670 8.0%
------ ---- ------ ---- ------ ----
Excess $3,091 39.8% $5,611 67.8% $6,086 72.7%
====== ==== ====== ==== ====== ====
NC regulatory capital $3,712 17.9% $6,273 26.9% $6,756 28.4%
NC regulatory capital requirement 1,036 5.0% 1,164 5.0% 1,188 5.0%
------ ---- ------ ---- ------ ----
Excess $2,676 12.9% $5,109 21.9% $5,568 23.4%
====== ==== ====== ==== ====== ====
<CAPTION>
MAXIMUM, AS ADJUSTED
MAXIMUM, OF 759, 000 OF 872,850
SHARES AT SHARES AT
$10.00 PER SHARE $10.00 PER SHARE
---------------- ----------------
PERCENT OF PERCENT OF
REGULATORY REGULATORY
AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Capital under generally accepted
accounting principles $7,386 30.5% $8,440 33.4%
====== ==== ====== =====
Tier 1 (leverage) capital $7,142 29.5% $8,196 32.4%
Tier 1 (leverage) capital requirement/(3)/ 970 4.0% 1,012 4.0%
------ ---- ------ ----
Excess $6,172 25.5% $7,184 28.4%
====== ==== ====== ====
Tier 1 risk based capital $7,142 84.3% $8,196 94.4%
Tier 1 risk based capital requirement 339 4.0% 347 4.0%
------ ---- ------ ----
Excess $6,803 80.3% $7,849 90.4%
====== ==== ====== ====
Total risk based capital $7,239 85.4% $8,293 95.5%
Total risk based capital requirement 678 8.0% 695 8.0%
------ ---- ------ ----
Excess $6,561 77.4% $7,598 87.5%
====== ==== ====== ----
NC regulatory capital $7,239 29.9% $8,293 32.8%
NC regulatory capital requirement 1,213 5.0% 1,265 5.0%
------ ---- ------ ----
Excess $6,027 24.9% $7,028 27.8%
====== ==== ====== ====
</TABLE>
__________________________
/(1)/ Assumes a bank-only calculation for regulatory requirements.
/(2)/ For the Tier 1 (leverage) capital and North Carolina regulatory capital
calculations, percent is of total average assets. Average assets after
investment of net proceeds from the offering at the minimum, midpoint,
maximum and 15% above the maximum total $23.3 million, $23.8 million,
$24.3 million and $25.3 million, respectively. For the Tier 1 risk-base
capital and total risk-based capital calculations, percent is of total
risk-weighted assets. Net proceeds were assumed to be invested in short-
term treasury securities (0% risk-weight) and one-to-four-family
residential mortgage loans (50% risk-weight) with a weighted average
risk-weight of 20%. Total risk-weighted assets after investment of net
proceeds from the offering at the minimum, midpoint, maximum and 15%
above the maximum total $3.3 million, $8.4 million, and $8.7 million,
respectively.
/(3)/ As a North Carolina-chartered savings bank, the Bank is subject to the
capital requirements of the FDIC and the Administrator. The FDIC requires
state-chartered savings banks, including the Bank, to have a minimum
leverage ratio of Tier 1 capital to total assets of at least 3%;
provided, however, that all institutions, other than those (i) receiving
the highest rating during the examination process and (ii) not
anticipating any significant growth, are required to maintain a ratio of
1% to 2% above the stated minimum, with an absolute minimum leverage
ratio of at least 4%. For the purposes of this table, the Bank has
assumed that its leverage capital requirement is 4% of total average
assets.
32
<PAGE>
STOCK PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
Directors, officers and employees of the Bank will be entitled to subscribe
for shares of Common Stock in the Subscription Offering in their capacities as
such and to the extent they qualify as Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members. Shares purchased by such persons
will be purchased at the same price per share--$10.00--that will be paid by
other purchasers in the Offering. They may also purchase Common Stock in the
Community Offering or in the Syndicated Community Offering, if any, subject to
the maximum purchase limitations applicable to all purchasers of shares in the
Conversion.
The following table sets forth for the named executive officer and each of
the directors of the Bank who intends to purchase Common Stock, and for all
executive officers and directors as a group (including in each case, except as
otherwise noted, all associates of such persons) the aggregate dollar amount of
Common Stock for which such director or executive officer has informed the Bank
he intends to subscribe. The amounts reflected in the table are estimates only
and the actual shares of Common Stock actually subscribed for by the listed
individuals may differ from the amounts reflected in the table. The following
table assumes that sufficient shares will be available to satisfy the
subscriptions of the Bank's executive officers and directors.
<TABLE>
<CAPTION>
ANTICIPATED
ANTICIPATED NUMBER
AMOUNT OF SHARES AS A PERCENT
TO BE PAID TO BE OF SHARES
NAME FOR SHARES PURCHASED/(1)/ ISSUED/(2)/
- ---- ------------- -------------- -------------
<S> <C> <C> <C>
Preston A. Burns, Chairman $ 100,000 10,000 1.52%
John J. Crawford, Director 100,000 10,000 1.52%
W. Kenneth Huntley, Director 50,000 5,000 0.76%
Emmett S. Patterson, Director 10,000 1,000 0.15%
John R. Potter, Director 25,000 2,500 0.38%
H. Patrick Taylor, Jr., Director 150,000/(3)/ 15,000 2.27%
Eugene M. Ward, Director, President and Chief 100,000 10,000 1.52%
Executive Officer
Other Executive Officers /(2)/ 2,000 200 0.03%
All executive officers and directors as a group (9 $ 537,000 53,700 8.14%
persons) ------------- ------ ----
</TABLE>
33
<PAGE>
_____________________
(1) Grants under the proposed MRP and shares subject to option under the Option
Plan, if approved by the stockholders of the Company at a meeting of
stockholders following the Conversion, are not aggregated with shares of
Common Stock purchased by the executive officers and directors listed
above. Under the proposed MRP, if approved by the stockholders of the
Company, a number of shares equal to 4% of the shares issued in the
Conversion are expected to be issued to directors and certain employees of
the Bank. Such shares could be purchased in the open market at any time
following approval of the MRP by the Company's stockholders or could be
issued out of authorized but unissued shares. Recipients of shares under
the MRP will have voting control over such shares regardless of whether
such shares have vested. See "MANAGEMENT OF THE BANK -- Proposed Management
Recognition Plan."
(2) Based upon the issuance of 660,000 shares of Common Stock which is the
number of shares to be issued at the midpoint of the Estimated Valuation
Range. The same individuals would subscribe for 9.57% of the shares issued
based upon the issuance of 561,000 shares of Common Stock which is the
number of shares to be issued at the minimum of the Estimated Valuation
Range.
(3) This amount includes 50,000 shares which Mr. Taylor anticipates will be
purchased by his affiliate, as allowed under the Plan of Conversion. See
"PLAN OF CONVERSION -- Minimum and Maximum Purchase Limitations".
Without the prior written consent of the Administrator, shares of Common
Stock purchased by directors or executive officers of the Bank in the Conversion
cannot be sold during a period of one year following the Conversion, except upon
death of the director or executive officer. Such restriction also applies to
any shares issued to such person as a stock dividend, stock split or otherwise
with respect to any of such originally restricted stock.
In addition, the North Carolina conversion regulations provide that
directors and executive officers and their associates are prohibited from
purchasing outstanding shares of Common Stock for a period of three years
following the Conversion, except from or through a broker or dealer registered
with the SEC or Secretary of State of North Carolina, unless the prior written
approval of the Administrator is obtained. This provision does not apply to
negotiated transactions involving more than 1% of the Company's outstanding
Common Stock or to purchases of stock made by or held by one or more tax-
qualified or non-tax-qualified employee stock benefit plans of the Bank or the
Company which may be attributable to individual executive officers or directors.
Purchases and sales of Common Stock by officers and directors will also be
subject to the short-swing trading prohibitions contained in Section 16(b) of
the Exchange Act, and the short-swing trading and other rules promulgated
pursuant to the Exchange Act.
34
<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 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 contained in this
Prospectus.
The Company was incorporated under North Carolina law on March 2, 1998 at
the direction of the Bank for the purpose of acquiring and holding all of the
outstanding stock of the Bank to be issued in the Conversion. The Company's
principal business activities after the Conversion are expected to be conducted
solely through the Bank.
The Bank's results of operations depend primarily on net interest income,
which is the difference between interest income from interest-earning assets and
interest expense on interest-bearing liabilities. The Bank's principal
operating expenses, aside from interest expense, consist of compensation and
employee benefits, office occupancy costs, data processing expenses and federal
deposit insurance premiums.
CAPITAL RESOURCES AND LIQUIDITY
The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.
The Bank's primary sources of internally generated funds are principal and
interest payments on loans receivable, cash flows generated from operations, and
cash flows generated by investment, including mortgage-backed securities.
External sources of funds include increases in deposits and advances from the
Federal Home Loan Bank of Atlanta (FHLB). In recent years, advances from the
FHLB have not been a primary source of liquidity for the 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
regulation allows the inclusion of mortgage-backed securities and investments
with readily marketable value, including investments with maturities in excess
of five years. The Bank believes that it will have sufficient funds available
to meet its anticipated future loan commitments as well as other liquidity
needs.
Following the Conversion, the Company will initially conduct no business
other than holding the capital stock of the Bank. In order to provide
sufficient funds for its operations, the Company expects to retain at the
Company level and invest 50% of the net proceeds of the Conversion. In the
future, the Company's primary source of funds, other than income from its
investments is expected to be dividends from the Bank. As a North Carolina-
chartered stock savings bank, the Bank may not declare or pay a cash dividend on
or repurchase any of its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, for a period of five years after the Conversion, the Bank must obtain
35
<PAGE>
written approval from the State of North Carolina Administrator before declaring
or paying a cash dividend on its capital stock in an amount in excess of one-
half of the greater of (i) its net income for the most recent fiscal year end,
or (ii) the average of its net income after dividends for the most recent fiscal
year end and not more than two of the immediately preceding fiscal year ends.
As a result of this limitation, if the Bank had been a stock institution at the
end of fiscal 1997 and for the two preceding years, it could not have paid a
cash dividend in excess of $61,000 without approval of the Administrator. In
connection with the Conversion, the Company and the Bank have agreed with the
FDIC that, within the first year after completion of the Conversion, they will
not pay any dividend or make any distribution that represents, or is
characterized as, or is treated for tax purposes as a return of capital. In
addition, after the Conversion, the Bank will be subject to the restriction that
it will not be permitted to declare or pay a cash dividend on or repurchase any
of its capital stock if the effect thereof would be to cause its net worth to be
reduced below the amount required for the liquidation account to be established
in connection with the Conversion. (See "THE CONVERSION -- Effects of
Conversion" and " -- Liquidation Rights."
OPERATING STRATEGY
The primary goals of management are to increase the Bank's profitability,
monitor its capital position and enhance its banking franchise. The Bank's
results of operations are dependent primarily on net interest income, which is
the difference between the income earned on its interest-earning assets, such as
loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits. The Bank's operations are affected to a much lesser
degree by non-interest income, such as transaction and other service fee income,
and other sources of income. The Bank's net income is also affected by, among
other things, provisions for loan losses and operating expenses. The Bank's
principal operating expenses, aside from interest expense, consists of
compensation and employee benefits, office occupancy costs, data processing
expenses and federal deposit insurance premiums. The Bank's results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, government
legislation and policies concerning monetary and fiscal affairs, housing and
financial institutions and the attendant actions of regulatory authorities.
In guiding the operations of the Bank, management has implemented various
strategies designed to continue the institution's profitability while
maintaining its safety and soundness. These strategies include: (i)
emphasizing one-to-four family residential lending; (ii) maintaining asset
quality; (iii) controlling operating expenses; and (iv) monitoring interest-rate
risk. It is anticipated, subject to market conditions, that the strategies
presently in place will be continued following completion of the Conversion.
EMPHASIS ON ONE-TO-FOUR-FAMILY RESIDENTIAL HOUSING. The Bank has been
predominantly a one-to-four family residential lender. As of December 31, 1997,
approximately 92.1% of its loan portfolio, before net items, was composed of
permanent one-to-four-family residential loans. As of such date, an additional
4.1% of its loan portfolio, before net items, was composed of nonresidential
real estate loans and 3.1% of its loan portfolio, before net items, was composed
of construction loans. As a result, the Bank has developed expertise in
mortgage loan underwriting and origination. The Bank has established methods to
generate loan origination through contacts with realtors, homebuilders and past
and present customers. The institution also uses advertising and community
involvement to gain exposure within its community.
36
<PAGE>
MAINTENANCE OF ASSET QUALITY. At December 31, 1997, the Bank's ratio of
nonperforming assets to total assets was 1.51%. Since 1991, no net loan charge-
offs have been necessary. The Bank has attempted to maintain asset quality
through its underwriting and collection procedures.
CONTROL OF NONINTEREST EXPENSES. The Bank closely monitors its noninterest
expenses and seeks to control them while maintaining the necessary personnel to
properly serve its customers. Since June 30, 1996, the Bank's ratio of
noninterest expenses to average assets has averaged 2.4%. Exclusive of a one-
time charge for federal deposit insurance premiums amount of $114,000 in
September 1996, the Bank's ratio of noninterest expenses to average assets
averaged 2.18%.
INTEREST RATE RISK
The Bank's asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond the Bank's control, such as market interest rates and competition, may
also have an impact on the Bank's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Bank's earning assets generally will increase from existing levels when interest
rates rise over an extended period of time, and conversely interest income will
decrease when interest rates decrease. In general, interest expense will
increase when interest rates rise over an extended period of time, and
conversely interest expense will decrease when interest rates decrease.
Therefore, by controlling the increases and decreases in its interest income and
interest expense which are brought about by changes in market and interest
rates, the Bank can significantly influence its net interest income.
NET PORTFOLIO VALUE ANALYSIS. In addition to the interest rate gap
analysis as discussed below, management monitors the Bank's interest rate
sensitivity through the use of a model which estimates the change in net
portfolio value ("NPV") in response to a range of assumed changes in market
interest rates. NPV is the present value of expected cash flows from assets,
liabilities, and off-balance sheet items. The model estimates the effect on the
Bank's NPV of instantaneous and permanent 100 to 400 basis point increases and
decreases in market interest rates.
37
<PAGE>
The following table presents information regarding possible changes in the
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 NET PORTFOLIO VALUE
-------------------
RATES IN BASIS
POINTS
(RATE SHOCK) AMOUNT $CHANGE %CHANGE
---------- ------ ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Up 400 $2,479 $(1,139) (31%)
Up 300 2,780 (838) (23%)
Up 200 3,081 (537) (15%)
Up 100 3,349 (269) (7%)
Static 3,618 -- --
Down 100 3,750 132 4%
Down 200 3,881 263 7%
Down 300 3,991 373 10%
Down 400 4,101 483 13%
</TABLE>
The table set forth above indicates that, in the event of a 200 basis point
decrease in interest rates, the Bank could experience a 7.0% increase in NPV.
In the event of a 200 basis point increase in interest rates, the Bank could
experience a 15.0% decrease in NPV.
INTEREST RATE GAP ANALYSIS. As a part of the Bank's interest rate risk
management policy, the Bank calculates an interest rate "gap". Interest rate
"gap" analysis is a common, though imperfect, measure of interest rate risk,
which measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the different between the
amounts of such liabilities maturing or otherwise repricing within that period
which exceeds the amount of interest-earning assets maturity 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 decease 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 Bank's one year interest sensitivity gap as a percentage of total
interest-earning assets at December 31, 1997 was a negative 41.01%. At December
31, 1997 the Bank's three-year and five-year
38
<PAGE>
cumulative interest sensitivity gaps as a percentage of total interest-earning
assets were negative 39.00% and negative 32.49%, respectively.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997 which are
projected to reprice or mature in each of the future time periods shown. 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 liability. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Passbook
accounts, money market deposit accounts or other transaction accounts are
assumed to be subject to immediate repricing and depositor availability and have
been placed in the shortest period. In making the gap computations, none of the
assumptions sometimes made regarding prepayments 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 Bank's assets and liabilities illustrated in the
following table would vary substantially if different assumptions were used or
if actual experience differed from that indicated by such assumptions.
<TABLE>
<CAPTION>
Terms to Repricing at December 31, 1997
---------------------------------------------------------------------------
Six Six More Than More Than
Months Months to 1 Years to 3 Years to More than
or Less 1 Year 3 Years 5 Years 5 Years Total
------- ------- ---------- --------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable:
Adjustable rate residential 1-4 family $ 60 $ -- $ -- $ --- $ -- $ 60
Fixed rate residential 1-4 family 194 68 345 1,197 8,727 10,531
Other secured real estate - fixed -- 44 -- 78 633 755
Other loans 77 -- -- -- -- 77
Interest-bearing deposits 5,290 -- -- - -- 5,290
Investments 1,630 -- 1,000 41 692 3,363
FHLB common stock -- -- -- -- 143 143
------- -------- -------- -------- ------- -------
Total interest-earning assets $7,251 $ 112 $ 1,345 $ 1,316 $10,195 $20,219
======= ======== ======== ======== ======= =======
INTEREST-BEARING LIABILITIES:
Deposits:
Passbook and statement accounts 3,585 -- -- -- -- 3,585
Money market deposit accounts 101 -- -- -- -- 101
Certificates of deposit 5,833 6,135 940 -- -- 12,908
------- -------- -------- -------- ------- -------
Total interest-bearing liabilities $ 9,519 $ 6,135 $ 940 $ -- $ -- $16,594
======= ======== ======== ======== ======= =======
INTEREST SENSITIVITY GAP PER PERIOD (2,268) (6,023) 405 1,316 10,195 3,625
CUMULATIVE INTEREST SENSITIVITY GAP (2,268) (8,291) (7,886) (6,570) 3,625 3,625
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS (11.21)% (41.01)% (39.00)% (32.49)% 17.93% 17.93%
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF INTEREST-BEARING 76.17% 44.37% 52.48% 60.41% 121.85% 121.85%
LIABILITIES
</TABLE>
39
<PAGE>
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results. Further, the computations do not reflect any
actions management may undertake in response to changes in interest rates.
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. Further, in the event of a change in interest rates, prepayment
and early withdrawal levels would likely deviate significantly from those
assumed in the tables. Finally, the ability of many borrowers to service their
adjustable-rate debt may decrease in the event of a sustained interest rate
increase.
The Bank's net 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 Bank's
interest rate sensitivity position at December 31, 1997 to be unacceptable in
view of the Bank's historical results of operations and highly capitalized
position.
The Bank does not originate its 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 table sets forth information relating to
average balances of the Bank's assets and liabilities for the six months ended
December 31, 1997 and 1996 and for the years ended June 30, 1997 and 1996. For
the periods indicated, the table reflects the average yield on interest-earning
assets and the average cost of interest-bearing liabilities (derived by dividing
income or expense by the monthly average balance of interest-earning assets or
interest-bearing liabilities, respectively) as well as the net yield on
interest-earning assets (which reflects the impact of the net earning balance).
40
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended December 31,
-------------------------------------------------------------
At
December 31,
1997/(1)/ 1997 1996
---------- ------------------------------ -----------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/
Balance Rate Balance Interest Rate/(2)/ Balance Interest Rate/(2)/
------- ----- ------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-earning deposits $ 5,290 5.48% $ 5,335 $ 150 5.62% $ 5,032 $137 5.45%
Investments/(3)/ 3,504 6.19% 3,059 93 6.08% 3,686 111 6.02%
Loans/(4)/ 11,323 7.84% 11,558 475 8.24% 11,842 495 8.36%
-------- ------ ---- ------- ----
Total interest-earning assets 20,117 6.94% 19,952 718 7.21% 20,560 743 7.23%
---- ----
Other Assets 606 744 633
-------- ------ -------
Total Assets $ 20,723 $20,696 $21,193
======== ====== =======
Interest-bearing liabilities:
Deposits $ 16,655 4.92% $16,567 411 4.96% $17,243 419 4.86%
Other Liabilities 209 301 313
Retained Earnings 3,859 3,828 3,637
-------- ------ -------
Total liabilities and retained $ 20,723 $20,696 $21,193
======== ====== =======
Net interest income and interest
rate spread/(5)/ 2.02% $307 2.25% $324 2.37%
==== ====
Net yield on interest-earning
assets/(6)/ 3.09% 3.15%
Ratio of interest-earning assets
to interest-bearing liabilities
<CAPTION>
For the Six Months Ended June 31,
---------------------------------------------------------------------
1997 1996
---------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-earning deposits $ 4,783 $ 263 5.50% $ 4,218 $ 242 5.74%
Investments/(3)/ 3,635 215 5.91% 4,675 285 6.10%
Loans/(4)/ 11,771 963 8.18% 12,145 1,032 8.50%
------ ----- ------ ------
Total interest-earning assets 20,189 1,441 7.14% 21,038 1,559 7.41%
----- ------
Other Assets 731 539
--- ---
Total Assets $20,920 $21,577
======= =======
Interest-bearing liabilities:
Deposits $16,899 819 4.85% $17,796 894 5.02%
Other Liabilities 296 249
Retained Earnings 3,725 3,532
----- -----
Total liabilities and retained $20,920 $21,577
====== ======
Net interest income and interest
rate spread/(5)/ $622 2.29% $665 2.39%
Net yield on interest-earning
assets/(6)/ 3.15% 3.16%
Ratio of interest-earning assets
to interest-bearing liabilities 119.00% 118.00%
</TABLE>
___________________________________________________
(1) The weighted average rate represents the coupon associated with each asset
and liability, weighted by the principle balance associated with each asset
and liability.(2) Average yield/rate for the six months ended December 31,
1997 and 1996.
(3) Includes investment securities and FHLB of Atlanta common stock.
(4) Loans placed on nonperforming status have been included in the
computation of average balances.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net yield on interest-earning assets represents net interest income
divided by average interest-earning assets.
41
<PAGE>
RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), and (iii) net change (the sum of the previous columns).
The change attributable to both rate and volume (changes in rate multiplied by
changes in volume) has been allocated equally to both the changes attributable
to volume and the changes attributable to rate.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June
1997 vs. 1996 1997 vs. 19
------------------------ ----------------------
Increase (Decrease) Increase (Decrease)
------------------ ------------------
Attributable to Attributable to
--------------- ---------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest-earning balances 9 4 13 32 (10) 22
Investments (19) 1 (18) (62) (8) (70)
Loans (12) (7) (19) (32) (38) (70)
--- --- --- --- --- ----
Total interest income (22) (2) (24) (62) (56) (118)
Interest expense:
Deposits (16) 8 (8) (45) (30) (75)
--- --- --- --- --- ----
Net interest income (6) (10) (16) (17) (26) (43)
--- --- --- --- --- ----
</TABLE>
COMPARISON OF FINANCIAL CONDITION
Total assets of the Bank amounted to $20.72 million at December 31, 1997,
compared to $20.72 million at June 30, 1997 and $21.45 million at June 30, 1996.
The decline from June 30, 1996 to December 31, 1997 is primarily attributed to
the decrease in investments and loans receivable.
The principal category of earnings assets is loans receivable which amounted
to $11.32 million, $11.42 million and $11.57 million at December 31, 1997, June
30, 1997 and 1996, respectively. Loan originations for the six months ended
December 31, 1997 total $1.03 million and were funded by loan principal
repayments of $1.14 million as the loan portfolio decreased by $100,000. Loan
originations for the year ended June 30, 1997 totaled $1.90 million and
principal repayments for 1997 totaled $2.05 million. The Bank experienced a net
decrease in the loan portfolio of $149,000 over 1996. Management believes
competitive rates within its community contributed to the decreased loan demand
in 1997. The Bank
42
<PAGE>
maintains underwriting and credit standards designed to maintain the quality of
the loan portfolio. Nonperforming loans at December 31, 1997, June 30, 1997 and
1996 totaled $312,000, $240,000 and $198,000,respectively and were 2.76%, 2.10%
and 1.71% of total loans, respectively.
In addition to loans, the Bank invests in U.S. Treasury and Government agency
securities. Management does not engage in the practice of trading securities,
rather, Anson's investment portfolio consists primarily of investments
designated as held-to-maturity. Investment securities, including interest-
bearing deposits and FHLB stock, at December 31, 1997, June 30, 1997 and 1996
totaled $8.79 million, $8.70 million and $9.12 million, respectively. The
decline in investments and loans is primarily attributed to the decline in
deposits.
The Bank has experienced some decline in savings deposits. At December 31,
1997 and June 30, 1997, the Bank's deposits decreased $135,000 and $832,000 to
$16.66 million and $16.79 million, respectively. The Bank has priced its
deposits in a fashion to be at or near the top of the market because of its
dependence on the local market for funds availability.
The Bank's equity, which consists entirely of retained earnings and unrealized
gains on securities available for sale, net of tax, amounted to $3.86 million,
$3.76 million and $3.62 million at December 31, 1997, June 30, 1997 and 1996,
respectively. The Bank has classified a portion if its investments as available
for sale which requires reporting such investments at market with unrealized
gains or losses, net of tax, shown as a separate component of equity. The
equity component for net unrealized gains (losses) at December 31, 1997, June
30, 1997 and 1996 amounted to $244,000, $204,000 and $119,000, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
AND 1996
NET INCOME. The Bank's net income for the six months ended December 31, 1997
and 1996 was $62,000 and $(20,000) loss, respectively. Net income was
positively affected in 1997 by an overall sustained downward trend in interest
rates. Net income was negatively affected for the six months ended December 31,
1996 by a one-time charge of $114,000 related to a one-time assessment of
deposit insurance premiums by the United States Government. See "Insurance
Premium Surcharge". Exclusive of the one-time assessment for insurance
premiums, net income for the six months ended December 31, 1997 and 1996 would
have been approximately $62,000 and $71,000, respectively. Net interest income
has declined in conjunction with the decrease in interest earning assets and
liabilities.
NET INTEREST INCOME. Net interest income has decreased 5% to $306,000 for the
six months ended December 31, 1997 from $324,000 for the six months ended
December 31, 1996. This general decline in net interest income reflects the
decrease in both loans receivable and deposits and the downward trend in
interest rate spread.
PROVISIONS FOR LOAN LOSSES. The provision for loan losses was $0 and $500 for
the six months ended December 31, 1997 and 1996, respectively. The provisions
and the resulting loan loss allowances are amounts management believes will be
adequate to absorb possible losses on existing loans. At December 31, 1997 and
1996, the Bank's loan loss allowances totaled $100,000 and $95,500,
respectively, representing 32% and 36%, respectively, of nonperforming loans at
such dates. Loans are charged off against the allowance when management believes
collectibility is unlikely, although management continues to actively pursue
collection of loans which have been charged off. Management decisions regarding
the provisions and resulting allowance are based both on prior loan loss
experience and other factors, such as existing loan
43
<PAGE>
levels and types of loans outstanding, nonperforming loans, industry standards
and general economic conditions. The Bank experienced no loan charge-offs during
the six months ended December 31, 1997 and 1996.
NONINTEREST INCOME. Noninterest income consists primarily of fees related to
safe deposit boxes and other miscellaneous items and amounted to $4,000 and
$1,000 for the six months ended December 31, 1997 and 1996, respectively.
NONINTEREST EXPENSE. Noninterest expense consisted primarily of operating
expenses for compensation and employee benefits, occupancy, federal deposit
insurance premiums, data processing charges and other operating expenses.
Noninterest expense decreased to $232,000 from $349,000 for the six months ended
December 31, 1997 and 1996. Exclusive of the impact of a one-time insurance
premium surcharge in December, 1996, see "Insurance Premium Surcharge",
noninterest expense decreased from $235,000 to $232,000 for the six months ended
December 31, 1996 to the six months ended December 31, 1997. The Bank
anticipates that its noninterest expense may increase in the future because of
costs associated with funding the MRP with operating as a publicly held company
and with purchasing the computer equipment necessary for year 2000 compliance.
See "MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan" and "RISK
FACTORS -- Possible Year 2000 Computer Problems; Impact of Technological
Advances".
INCOME TAXES. Income tax expense (benefit) was $17,000 and $(4,000) for the
six month periods ended December 31, 1997 and 1996, respectively. The
fluctuations were primarily attributable to corresponding fluctuations in income
before income taxes.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
NET INCOME. The Bank's net income for the years ended June 30, 1997 and 1996
was $50,000 and $127,000, respectively. Net income was positively affected in
1997 by an overall sustained downward trend in interest rates. Net income was
negatively affected for the year ended June 30, 1997 by a one-time charge of
$114,000 related to a one-time assessment of deposit insurance premiums by the
United States Government, see "Insurance Premium Surcharge". Exclusive of the
one-time assessment for insurance premiums, net income for years ended June 30,
1997 and 1996 would have been approximately $127,000 and $128,000, respectively.
NET INTEREST INCOME. Net interest income for the fiscal year ended June 30,
1997 decreased 6% from the fiscal year ended June 30, 1996 from $665,000 to
$623,000. This general decline in net interest income reflects the decrease in
both loans receivable and deposits and the downward trend in interest rate
spread.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $5,000 and
$7,000 for the years ended June 30, 1997 and 1996, respectively. For the years
ended June 30, 1997 and 1996, the Bank's loan loss allowances totaled $100,000
and $95,000, respectively, representing 42% and 48%, respectively, of
nonperforming loans at such dates. The Bank experienced no loan charge-offs
during the years ended June 30, 1997 and 1996.
44
<PAGE>
NONINTEREST INCOME. Noninterest income consists primarily of fees related to
safe deposit boxes and other miscellaneous items and amounted to $6,000 and
$2,000 for the years ended June 30, 1997 and 1996, respectively.
NONINTEREST EXPENSE. Noninterest expense for the years ended June 30, 1997
and 1996 were $555,000 and $481,000, respectively. Exclusive of the impact of a
one-time insurance premium surcharge discussed above, general and administrative
expenses decreased from $481,000 to $441,000 for fiscal years ended June 30,
1997 and June 30, 1996, respectively. This reduction is largely due to a
reduction in payroll and the related tax and fringe benefits.
INCOME TAXES. Income tax expense decreased to $19,000 in the fiscal year
ended June 30, 1997 from $52,000 in the fiscal year ended June 30, 1996. The
fluctuations were primarily attributable to corresponding fluctuations in income
before income taxes.
INSURANCE PREMIUM SURCHARGE
A comprehensive continuing appropriations bill which was passed by the United
States Congress and signed by the President on September 30, 1996, provided for
a one-time assessment to recapitalized the Savings Association Insurance Fund
(SAIF). The assessment equaled 65.7 cents per each $100 of insured domestic
deposits and was payable in 1996. This assessment had the effect of reducing
the capital of the Bank by the amount of the assessment, net of the income tax
benefit. The assessment was $114,000 before income taxes and was accrued as an
expense during the quarter ended September 30, 1996. As a result of this
expense, the Bank experienced a net loss for that fiscal quarter and the six
months ended December 31, 1996. (See "SUPERVISION AND REGULATION -- Regulation
of the Bank -- Insurance Deposit.")
RECAPTURE OF BAD DEBTS
Recently enacted federal legislation has repealed the reserve method of
accounting for thrift loan debt reserves and would require thrifts to recapture
into income over a six-year period their post-1987 additions to their excess bad
debt tax reserves, thereby generating additional tax liability. At December 31,
1997, the Bank had no material post-1987 excess reserves.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been prepared
in accordance with generally accepting accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Bank's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Bank are monetary in nature. As a
result, interest rates have a greater impact on the Bank's performance than do
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
45
<PAGE>
YEAR 2000 COMPLIANCE
At this time, the Bank has not determined the cost of making any modifications
to correct any Year 2000 problems; however, equipment and software expenses are
not expected to materially differ from past results. The Bank routinely
upgrades and purchases technologically advanced software and hardware on a
continual basis and expects to specifically evaluate such purchases for Year
2000 compliance. All of the material data processing of the Bank that could be
affected by any Year 2000 problems is provided by a third party service bureau.
The Bank has been advised by its service bureau that it expects to resolve any
potential problems in this area before the year 2000. See "RISK FACTORS --
Possible Year 2000 Computer Program Problems; Impact of Technological Advances."
IMPACT OF NEW ACCOUNTING STANDARDS
The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation,
which the Bank has not been required to adopt as of December 31, 1997.
The Statement, which will be in effect for the Bank's fiscal year ending June
30, 1998, will require that an entity account for stock based compensation plans
using a fair value based method which measures compensation cost at the grant
date based upon the value of the award, which is then recognized over the
service period, usually the vesting period. The accounting requirements of the
Statement apply to grants of awards entered into in fiscal years that begin
after December 15, 1995. The Statement allows entities to continue to use APB
Opinion No. 25 to measure compensation cost, but requires that the pro forma
effects on net income and earnings per share be disclosed to reflect the
difference between the compensation cost, if any, from applying APB Opinion No.
25 and the related cost measured by the fair value method defined in the
Statement. The Statement is not expected to have a material effect on the
Bank's financial statements, should the Bank elect to adopt a restricted stock
plan subsequent to conversion to the stock form, because management is expected
to elect to continue to use the accounting and reporting permitted by APB
Opinion No. 25 and will disclose the differences, if any, in notes to the
financial statements as pro forma effects of not utilizing the fair value method
prescribed in SFAS No. 123.
In February, 1997 the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", which is effective for financial statements for
periods ending after December 31, 1997. This statement applies to both public
and nonpublic entities. The Bank anticipates that adoption of this statement
will not have a material effect on the Bank.
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set for general financial statements. Under this
statement, enterprises are required to classify items of "other comprehensive
income" by their nature in the financial statements and display the balance of
other comprehensive income separate in the equity section of a statement of
financial position. Statement 130 is effective for both interim and annual
periods beginning after December 15, 1997. Comparative financial statements
provided for earlier periods are required to be reclassified to reflect the
provisions of the statement. It is not anticipated the adoption of this
statement will materially effect the Bank's current method of financial
reporting.
Also in June, 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information". This statement establishes standards
for the way public enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. Statement 131 is effective for financial statements for
period beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated unless it is
impractical to do so. It is not
46
<PAGE>
anticipated that the adoption of this statement will materially effect the
Bank's current method of financial reporting.
BUSINESS OF THE COMPANY
Prior to the Conversion, the Company will not transact any material business.
Following the Conversion, in addition to directing, planning and coordinating
the business activities of the Bank, the Company will invest the proceeds of the
Conversion which are retained by it. See "USE OF PROCEEDS." Upon consummation
of the Conversion, the Company will have no significant assets other than the
shares of the Bank's capital stock acquired in the Conversion and that portion
of the net proceeds of the Conversion retained by it, and it will have no
significant liabilities. Cash flow to the Company will be dependent upon
investment earnings from the net proceeds retained by it and any dividends
received from the Bank. Initially, the Company will neither own nor lease any
property, but will instead use the premises, equipment and furniture of the
Bank. At the present time, the Company does not intend to employ any persons
other than its officers (who are not anticipated to be separately compensated by
the Company), but will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands its business in the future. In the future, the Company may consider
using some of the proceeds of the Conversion retained by it to expand its
operations in its existing primary market and other nearby areas by acquiring
other financial institutions or their branches. The Company has no current
plans with respect to any such acquisitions, however. Existing management of
the Company believes that it is in the best interest of the Company and its
shareholders for the Company to remain an independent company.
BUSINESS OF THE BANK
GENERAL
The Bank is engaged primarily in the business of attracting deposits from the
general public and using such deposits to make mortgage loans secured by real
estate. The Bank makes one-to-four-family residential real estate loans, loans
secured by nonresidential real property, and construction loans. The Bank also
makes loans which are not secured by real property, such as loans secured by
pledged deposit accounts. The Bank's primary source of revenue is interest
income from its lending activities. The Bank's other major sources of revenue
are interest and dividend income from investments, interest income from its
interest-earning deposit balances in other depository institutions, and
transaction and fee income from its lending and deposit activities. The major
expenses of the Bank are interest on deposits and general and administrative
expenses such as employee compensation and benefits, federal deposit insurance
premiums, data processing expenses and occupancy expenses.
As a North Carolina chartered savings bank, the Bank is subject to examination
and regulation by the FDIC and the Administrator. Upon consummation of the
Conversion, the Bank, as a subsidiary of the Company, will be subject to
indirect regulation by the Federal Reserve. The business and regulation of the
Bank are subject to legislative and regulatory changes from time to time. See
"SUPERVISION AND REGULATION --Regulation of the Bank."
MARKET AREA
The Bank's primary market area is Anson County, North Carolina. The Bank also
makes loans to residents of Union, Stanley and Mecklenburg counties in North
Carolina from time to time. Anson County
48
<PAGE>
is rural with a population of 24,309 located on the North Carolina/South
Carolina border and Wadesboro is located 50 miles east of Charlotte, North
Carolina.
Employment in the Bank's primary market area is diversified among
manufacturing, mining, agriculture, retail and wholesale trade, government and
service. Other non-manufacturing employers include the county government,
school systems and the county hospital.
In recent years unemployment rates in Anson County have been high, averaging
9.2% in 1995. But a steady increase in employment over the last year resulted
in an average yearly unemployment of 7.5% through September 1996. However, this
rate is still above that of North Carolina and national averages. Comparative
data indicates that income levels in Anson County are below the North Carolina
and the national average for 1997. From 1990-1994, population in Anson County
increased by 1.6% which was below the national and North Carolina averages.
Management regards Anson County as a low-growth area in which there is
significant competition among financial service providers for market shares.
Due primarily to the economic factors discussed above, the Bank has limited
residential mortgage lending opportunities in its local market area and does not
anticipate that residential mortgage lending opportunities will increase in the
future because of lack of growth in the local economy. See "BUSINESS OF THE
BANK -- Competition." Management believes that opportunities for future
earnings growth in the Bank's primary market area are limited in light of these
factors. In addition, lower income levels and low rates of growth in Anson
County could result in an increase in the number of delinquent or nonperforming
loans and reduce the value of the collateral securing such loans, adversely
affecting the Bank's financial condition and results of operations. See "RISK
FACTORS -- Risks Associated with Anson's Primary Market Area; Limited Lending
Opportunities; Competition".
LENDING ACTIVITIES
GENERAL. The Bank's primary source of revenue is interest and fee income from
its lending activities, consisting primarily of mortgage loans for the purchase
or refinancing of one-to-four-family residential real property located in its
primary market area. The Bank also makes loans secured by multi-family and
nonresidential properties, construction loans, and loans secured by pledged
deposit accounts. Less than 1.0% of the Bank's loan portfolio, before net
items, is not secured by real estate. On December 31, 1997, the Bank's largest
single outstanding loan had a balance of approximately $265,000. In addition to
interest earned on loans, the Bank receives fees in connection with loan
originations, loan modifications, late payments, loan assumptions and other
miscellaneous services. The Bank generally does not sell its loans; loans are
originated with the intention that they will be held in the Bank's loan
portfolio. The Bank also originates mortgage loans with a call feature that
varies from five to 15 years, enabling the Bank to call the loan and increase
the interest rate from the original fixed contractual rate. Interest on such
loans is amortized over the contractual life of the loan. For purposes of the
discussion and in the tables that follow, such loans with call provisions are
shown as fixed rate loans maturing at the date of the call provisions.
LOAN PORTFOLIO COMPOSITION. The Bank's net loan portfolio totaled
approximately $11.3 million at December 31, 1997 representing 54.6% of the
Bank's total assets at such date. At December 31, 1997, 92.1% of the Bank's
loan portfolio, before net items, was composed of one-to-four-family residential
mortgage loans. Nonresidential real estate loans represented 4.1% of the Bank's
loan portfolio, before net items, on such date. Construction loans represented
3.1% of the Bank's loan portfolio, before net items, on such date. As of
December 31, 1997, less than 1%, before net items, of the loans in the Bank's
loan portfolio had adjustable interest rates.
The following table sets forth the composition of the Bank's loan portfolio by
type of loan at the dates indicated.
48
<PAGE>
<TABLE>
<CAPTION>
At December 31, At June 30,
-------------------------------------- -------------------------------------
1997 1996 1997 1996
--------------------- --------------- -------------------------------------
% of % of % of % of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four-family residential $10,857 95.88% $11,295 96.29% $10,888 95.32% $11,241 97.14%
Nonresidential 483 4.27 375 3.20 543 4.75 400 3.46
Construction 366 3.23 319 2.72 349 3.06 199 1.72
--- ---- --- ---- --- ---- --- ----
Total real estate loans 11,706 103.38 11,989 102.21 11,780 103.13 11,840 102.32
Other loans:
Loans secured by deposits 77 .68 45 .38 75 .66 46 .40
--- ---- --- ---- --- ---- --- ----
Total other loans 77 .68 45 .38 75 .66 46 .40
--- ---- --- ---- --- ---- --- ----
Total loans 11,783 104.06 12,034 102.59 11,855 103.79 11,886 102.72
Less:
Allowance for loan losses 100 .88 95 .81 100 .88 95 .82
Undisbursed portion of construction loans 319 2.82 164 1.40 288 2.52 174 1.50
Net deferred loan origination fees 41 .36 45 .38 44 .39 46 .40
--- ---- --- ---- --- ---- --- ----
Total reductions 460 4.06 304 2.59 432 3.79 315 2.72
--- ---- --- ---- --- ---- --- ----
Total loans receivable, net $11,323 100.00% $11,730 100.00% $11,423 100.00% $11,571 100.00%
======= ====== ======= ====== ======= ====== ======= =======
</TABLE>
49
<PAGE>
The following table sets forth the time to contractual maturity of the Bank's
loan portfolio at December 31, 1997. Loans which have adjustable rates are
shown as being due in the period during which rates are next subject to change,
while fixed rate and other loans are shown as due in the period of contractual
maturity. Demand loans, loans having no stated maturity and overdrafts are
reported as due in one year or less. The table does not include prepayments or
scheduled principal repayments. Amounts in the table are net of loans in
process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
------- --------- ---------- --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
TOTAL LOANS:
- -----------
Real estate loans:
Adjustable rate residential 1-4 family $ 60 $ -- $ -- $ -- $ 60
Fixed rate residential 1-4 family 262 345 1,197 8,727 10,531
Other real estate loans - fixed 44 -- 78 633 755
Other loans 77 -- -- -- 77
----- ---- ------ ------ -------
Total 443 345 1,275 9,360 11,423
Less:
Allowance for loan losses (100) -- -- -- (100)
----- ---- ------ ------ -------
Totals $ 343 $345 $1,275 $9,360 $11,323
===== ==== ====== ====== =======
</TABLE>
The following table sets forth the dollar amount at December 31, 1997 of all
loans maturing or repricing on or after December 31, 1998 which have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
----- ----------
(In Thousands)
<S> <C> <C>
Real estate loans $10,980 $ --
Other loans -- --
-------- ----------
$10,980 $ --
======== ==========
</TABLE>
ORIGINATION AND SALE OF LOANS. The Bank generally does not originate its one-
to-four-family residential mortgage or other loans with the intention that they
will be sold in the secondary market. Although the Bank believes that many of
its one-to-four-family residential loans could be sold to investors, some of
such loans could be sold only after the Bank incurred certain costs and/or
discounted the purchase price. As a result, with respect to potential private
sales of whole loans, the Bank's loan portfolio may be less valuable than would
be the case if it was composed entirely of loans originated in conformity with
secondary market requirements.
50
<PAGE>
The table below sets forth the Bank's loan origination, purchase and sale
activity and loan portfolio repayment experience during the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, YEAR ENDED JUNE 30,
----------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Loans receivable, net, beginning of period $11,423 $11,572 $11,572 $11,910
Loan originations:
Residential 1-4 family 839 776 1,365 1,619
Nonresidential real estate -- -- -- 67
Residential construction 171 264 486 253
Loans secured by deposits 22 8 53 69
------- ------- ------- -------
Total loan originations 1,032 1,048 1,904 2,008
Loans purchased -- -- -- --
Principal repayments (1,135) (892) (2,051) (2,342)
Other changes, net /(1)/ 3 2 (2) (4)
------- ------- ------- -------
Increase (decrease) in loans receivable (100) (149) (149) (338)
------- ------- ------- -------
Loans receivable, net, end of period $11,323 $11,730 $11,423 $11,572
======= ======= ======= =======
</TABLE>
-----------------------------
(1) Includes changes in deferred loan fees and the allowance for loan
losses.
ONE-TO-FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of fixed and adjustable rate first mortgage loans to enable borrowers to
purchase or refinance one-to-four-family residential real property. Consistent
with the Bank's emphasis on being a community-oriented financial institution, it
is and has been the Bank's strategy to focus its lending efforts in its primary
market area. On December 31, 1997, approximately 92.1% of the Bank's real
estate loan portfolio, before net items, consisted of one-to-four-family
residential real estate loans. These include both loans secured by detached
single-family residences and condominiums and loans secured by housing
containing not more than four separate dwelling units. Of such loan amounts,
less than one percent had adjustable interest rates.
The Bank does not originate its one-to-four-family loans with the intention
that they will be sold in the secondary market. The Bank generally originates
loans satisfying its underwriting requirements which are tailored for its local
community but which may not satisfy various requirements imposed by FHLMC or
FNMA. For example, the Bank may not require title insurance and may not obtain
all the loan documentation normally required by FHLMC and FNMA. As a result, to
the extent such loans are sold in the secondary market, they may not be sold on
terms as favorable as those originated in conformity with
secondary market requirements. In addition, loans which are not originated in
conformity with the purchase requirements of
51
<PAGE>
FHLMC and FNMA, or nonconforming loans, are generally thought to have greater
risks of default and nonperformance; however, the Bank has not experienced a
higher level of nonperformance with its nonconforming loans. These loans satisfy
a need in the Bank's local community and generally produce a higher yield than
would be produced by conforming loans. The Bank plans to continue its practice
of originating primarily nonconforming loans.
The Bank originates conventional mortgage loans secured by owner occupied
property in amounts of up to 95% of the value of the property. Private mortgage
insurance is generally required if the loan amount exceeds 80% of the value of
the property. The loans have both fixed and adjustable rates. The maximum term
for fixed and adjustable rate loans is 30 years. The interest rates on
adjustable rate loans are generally adjustable every year and are tied to the
one-year United States treasury bill rate. The loans have rate caps which limit
the amount of changes at the time of each adjustment and over the lives of the
loans. The Bank offers loans which require monthly payments.
Adjustable rate loans are generally considered to involve a greater degree of
credit risk than fixed rate loans because borrowers may have difficulty meeting
their payment obligations if interest rates and required payment amounts
increase substantially. Substantially all of the fixed-rate loans in the Bank's
mortgage loan portfolio have due on sale provisions allowing the Bank to declare
the unpaid balance due and payable in full upon the sale or transfer of an
interest in the property securing the loan.
While one-to-four-family residential loans are normally originated for between
15 to 25 year terms, such loans customarily remain outstanding for shorter
periods because borrowers often prepay their loans in full upon sale of the
property pledged as security or upon refinancing the original loan. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates,
and the interest rates payable on outstanding loans.
The Bank generally does not require title insurance for its one-to-four-family
residential loans but does require an attorney's opinion of title. The Bank
also generally requires that fire and extended coverage casualty insurance (and,
if appropriate, flood insurance) be maintained in an amount at least equal to
the loan amount or replacement cost of the improvements on the property securing
the loans, whichever is greater.
NONRESIDENTIAL REAL ESTATE LENDING. On December 31, 1997, the Bank had
$483,000 outstanding in loans secured by nonresidential properties, comprising
approximately 4.1% of its loan portfolio, before net items, as of that date.
These loans are secured by office, retail and church properties. These loans
generally do not exceed 80% of the appraised value of the real estate securing
the loans. Nonresidential real estate loans have terms of up to 15 years. See
"-- One-to-Four-Family Residential Real Estate Lending."
The Bank requires title insurance or an attorney's opinion in connection with
its nonresidential real estate loans. The Bank also requires that fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the loan amount or the replacement
cost of the improvements on the property securing the loans, whichever is
greater.
Loans secured by nonresidential real estate generally are larger than one-to-
four-family residential loans and involve greater concentration of assets and a
greater degree of risk. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Since commercial
lending is frequently secured by leased or operating commercial properties,
repayment frequently depends upon the results of operations of the tenant or
operating entity. Nonresidential loans also generally involve more
52
<PAGE>
specialized and complicated underwriting decisions than one-to-four-family
residential real estate lending. The Bank intends to continue to make
nonresidential real estate loans.
CONSTRUCTION LENDING. The Bank makes construction loans for the construction
of single-family dwellings, and for the construction of multi-family and
commercial buildings. The aggregate outstanding balance of such loans on
December 31, 1997 was approximately $366,000, representing approximately 3.1% of
the Bank's loan portfolio, before net items, and included construction loans in
process of approximately $319,000. Some of these loans were made to persons who
are constructing properties for the purpose of occupying them; others were made
to builders who were constructing properties for sale. Construction loans are
"construction-permanent" loans which generally provide for the payment of
interest only during a construction period, after which the loans convert to a
permanent loan at fixed or adjustable interest rates having terms similar to
one-to-four-family residential loans.
Construction loans for one-to-four-family real estate to be occupied by the
borrower may have a maximum loan-to-value ratio of 95% of the appraised value of
the property with private mortgage insurance. Other construction loans are made
at loan to value ratios of up to 80%. Title insurance or an attorney's opinion
is generally required for construction loans. In addition, the Bank generally
requires builders risk or casualty insurance (and, if appropriate, flood
insurance) on such loans.
LOANS SECURED BY DEPOSITS. The Bank also offers loans secured by deposit
accounts. At December 31, 1997, such loans totaled $77,000, representing 0.70%
of the Bank's loan portfolio, before net items. The interest rates on these
loans are variable and are generally 2% above the interest rate being paid on
the deposit account serving as collateral. The maximum amounts of these loans
is generally 90% of the related deposit account.
LOAN SOLICITATION, PROCESSING AND UNDERWRITING. Loan originations are derived
from a number of sources such as referrals from real estate brokers, present
depositors and borrowers, builders, attorneys, walk-in customers and in some
instances, other lenders.
During its loan approval process, the Bank assesses the applicant's ability to
make principal and interest payments on the loan and the value of the property
securing the loan. The Bank obtains detailed written loan applications to
determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations. Under current practice, the responsible officer or loan officer
of the Bank analyzes the loan application and the property involved, and an
appraiser inspects and appraises the property. The Bank generally requires
independent fee appraisals on all loans in excess originated primarily on the
basis of real estate collateral. The Bank also obtains information concerning
the income, financial condition, employment and the credit history of the
applicant.
All real estate loans must be approved by the Bank's loan committee which is
made up of any three members of the Bank's board of directors. Loans secured by
deposits are approved by any two employees of the Bank, at least one of which
must be an officer.
Normally, upon approval of a residential mortgage loan application, the Bank
gives a commitment to the applicant that it will make the approved loan at a
stipulated rate any time within a 15-day period. The loan is typically funded at
such rate of interest and on other terms which are based on market conditions
existing as of the date of the commitment. As of December 31, 1997, the Bank had
$132,000 in such unfunded mortgage loan commitments. In addition, on such date
the Bank had $319,000 in undisbursed construction loans.
53
<PAGE>
INTEREST RATES, TERMS, POINTS AND FEES. Interest rates and fees charged on
the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds. These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.
In addition to earning interest on loans, the Bank receives fees in connection
with originating loans. Fees for loan modifications, late payments, loan
assumptions and other miscellaneous services in connection with loans are also
charged by the Bank.
NONPERFORMING ASSETS AND ASSET CLASSIFICATION. When a borrower fails to make
a required payment on a loan and does not cure the delinquency promptly, the
loan is classified as delinquent. In this event, the normal procedure followed
by the Bank is to make contact with the borrower at prescribed intervals in an
effort to bring the loan to a current status, and late charges are assessed as
allowed by law. In most cases, delinquencies are cured. If a delinquency is
not cured, the Bank normally, subject to any required prior notice to the
borrower, commences foreclosure proceedings. If the loan is not reinstated
within the time permitted for reinstatement, or the property is not redeemed
prior to sale, the property may be sold at a foreclosure sale. In foreclosure
sales, the Bank may acquire title to the property through foreclosure, in which
case the property so acquired is offered for sale and may be financed by a loan
involving terms more favorable to the borrower than those normally offered. Any
property acquired as a result of foreclosure or by deed in lieu of foreclosure
is classified as real estate owned until such time as it is sold or otherwise
disposed of by the Bank in an effort to recover its investment. As of December
31, 1997, the Bank had no real estate acquired in settlement of loans. Real
estate acquired through, or in lieu of, loan foreclosure is initially recorded
at fair value at the date of foreclosure, establishing a new cost basis. After
foreclosure, valuations are periodically performed by management, and the real
estate is carried at the lower of cost or fair value minus costs to sell. Costs
relating to the development and improvement of the property are capitalized, and
costs relating to holding the property are charged to expenses.
Interest on loans is recorded as borrowers' monthly payments become due.
Accrual of interest on loans continues so long as (i) the collateral for such
loans remains sufficient, (ii) the borrower continues to make a good faith
effort to make payments to the Bank and (iii) the Board of Directors does not
otherwise decide to institute foreclosure procedures. If the Bank ultimately
institutes foreclosure procedures, the interest accrued since the last loan
payment is generally charged off.
The following table sets forth information with respect to nonperforming
assets identified by the Bank, including real estate owned at the date
indicated. At such dates, the Bank had no loans which were "troubled debt
restructurings", as defined in SFAS No. 15, Accounting by Debtors and Creditors
for Troubled Debt Restructurings.
<TABLE>
<CAPTION>
At December 31, At June 30,
----------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Accruing loans past due 90 days or more $ 312 $ 268 $ 240 $ 198
----- ----- ----- -----
Total non-performing loans 312 268 240 198
Foreclosed real estate -- -- -- --
----- ----- ----- -----
Total nonperforming assets $ 312 $ 268 $ 240 $ 198
===== ===== ===== =====
Non-performing assets to total assets 1.51% 1.29% 1.16% 0.92%
===== ===== ===== =====
</TABLE>
54
<PAGE>
Applicable regulations require the Bank to "classify" its own assets on a
regular basis. In addition, in connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
and, if appropriate, classify them. Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.
An asset is considered "substandard" if not adequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. "Substandard" assets include those characterized by well-defined
weakness with possible risk of loss if the deficiency is not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable." Assets classified "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a loss reserve is not warranted.
As of December 31, 1997, the Bank had approximately $312,000 of loans
internally classified as "substandard," no loans classified as "doubtful" and no
loans classified as "loss." Total classified loans as of June 30, 1997 and 1996
were approximately $240,000 and approximately $198,000, respectively.
When an insured institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. These allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities and the risks associated with particular problem assets.
When an insured institution classifies problem assets as "loss," it charges off,
or writes down the balance of, the asset. The Bank's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the FDIC and the Administrator which can order the
establishment of additional loss allowances.
The Bank also identifies assets which possess credit deficiencies or
potential weaknesses deserving close attention by management. These assets are
maintained on a "watch list" and do not yet warrant adverse classification. At
December 31, 1997, the Bank's watch list consisted of one loan with an aggregate
outstanding balance of approximately $43,000.
ALLOWANCE FOR LOAN LOSSES. In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of the security for the loan as well as general economic conditions. It
is management's policy to maintain an allowance for loan losses based on, among
other things, the Bank's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Specific allowances are provided for individual loans when ultimate collection
is considered questionable by management after reviewing the current status of
loans which are contractually past due and considering the net realizable value
of the security for the loans.
Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.
55
<PAGE>
The following table describes the activity related to the Bank's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Six Months Ended
December 31, Year Ended June 30,
------------------ ---------------------
1997 1996 1997 1996
---- ---- ---- ----
(Dollars InThousands)
<S> <C> <C> <C> <C>
Balance, beginning of period $100 $ 95 $ 95 $ 88
---- ---- ---- ----
Loans Charged off:
Real Estate -- -- -- --
Other -- -- -- --
---- ---- ---- ----
Total loans charged off -- -- -- --
Recoveries:
Real Estate -- -- -- --
Other -- -- -- --
---- ---- ---- ----
Net loans charged off (recovered) -- -- -- --
Provision for loan losses -- 1 5 7
---- ---- ---- ----
Balance at end of period $100 $96 $100 $95
==== === ==== ===
Ratio of net charge-offs (recoveries)
to average loans outstanding during 0% 0% 0% 0%
the period = = = =
</TABLE>
The following table sets forth the composition of the allowance for loan
losses by type of loan at the dates indicated. The allowance is allocated to
specific categories of loans for statistical purposes only, and may be applied
to loan losses incurred in any loan category.
56
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1997 1996
------------------------------------- --------------------------------------
PERCENT OF AMOUNT PERCENT OF AMOUNT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS
AMOUNT OF TO TOTAL TO GROSS AMOUNT OF TO TOTAL TO GROSS
ALLOWANCE ALLOWANCE LOANS ALLOWANCE ALLOWANCE LOANS
--------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $40 40% 92.1% $40 41.7% 93.8%
Nonresidential 20 20 4.1 16 16.7 3.1
Construction 20 20 3.1 20 20.8 2.7
-- -- --- -- ---- ---
Total real estate loans 80 80 99.3 76 79.2 99.6
Other loans:
Loans secured by deposits - - 0.7 - - 0.4
-- -- --- -- -- ---
Total other loans - - 0.7 - - 0.4
-- -- --- -- -- ---
Unallocated 20 20 - 20 20.8 -
-- ---- ---- --- ------ ------
Total allowance for loan losses $100 100% 100% $96 100.0% 100.0%
==== ==== ==== === ====== ======
<CAPTION>
AT JUNE 30,
----------------------------------------------------------------------
1997 1996
------------------------------------- --------------------------------------
PERCENT OF AMOUNT PERCENT AMOUNT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS
AMOUNT OF TO TOTAL TO GROSS AMOUNT OF TO TOTAL TO GROSS
ALLOWANCE ALLOWANCE LOANS ALLOWANCE ALLOWANCE LOANS
--------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $40 40% 91.8% $40 42.1% 94.5%
Nonresidential 20 20 4.6 15 15.7 3.4
Construction 20 20 2.9 20 21.1 1.7
-- -- --- -- ---- ---
Total real estate loans 80 80 99.3 75 78.9 99.6
Other loans:
Loans secured by deposits - - 0.7 - - 0.4
-- -- --- -- -- ---
Total other loans - - 0.7 - - 0.4
-- -- --- -- -- ---
Unallocated 20 20 - 20 21.1 -
---- ---- ------ --- ------ ------
Total allowance for loan losses $100 100% 100.0% $95 100.0% 100.0%
==== ==== ====== === ====== ======
</TABLE>
57
<PAGE>
INVESTMENT SECURITIES
Interest and dividend income from investment securities generally provides
the second largest source of income to the Bank after interest on loans. In
addition, the Bank receives interest income from deposits in other financial
institutions. At December 31, 1997, the Bank's investment portfolio totaled
approximately $8.79 million and consisted of U.S. government and agency
securities, interest-earning deposits in other financial institutions,
certificates of deposit and stock of the FHLB of Atlanta.
The FASB has issued SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" which addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. These investments are to be classified
in three categories and accounted for as follows: (1) debt securities that the
entity has the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; (2) debt and equity securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with net
unrealized gains and losses included in earnings; and (3) debt and equity
securities not classified as either held-to-maturity or trading securities are
classified as securities available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity. At December 31, 1997, the Bank had no trading securities.
The Bank adopted SFAS No. 115 as of July 1, 1994. The adoption affected only
the held-to-maturity and available-for-sale classifications. Net unrealized
securities gains on the securities available-for-sale of $244,000, net of
related deferred taxes of $127,000, are reported as a separate component of
equity in its financial statements at December 31, 1997. See Notes 2 and 6 of
"Notes to Financial Statements."
The amortized cost of securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest income from
investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other than temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method. Prior to the
adoption of SFAS No. 115, the Bank stated its debt securities at amortized cost
and its marketable equity securities at the lower of cost or market.
Accumulated changes in net unrealized losses on marketable equity securities
were included in retained earnings.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As
of December 31, 1997, the Bank's investment in stock of the FHLB of Atlanta was
$143,000.
North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets which may be invested in specified short-term securities. See
"SUPERVISION AND REGULATION -- Regulation of the Bank -- Liquidity." The Bank
is also permitted to make certain other securities investments.
The Bank's current investment policy provides that investment decisions
will be made by Eugene M. Ward, President and Chief Executive Officer, and
reviewed monthly by the Board of Directors. The investment policy provides that
the objectives of the investment portfolio are to: (i) provide and maintain
liquidity within regulatory guidelines, (ii) maintain a balance of high quality,
diversified investments, (iii) provide collateral for pledging requirements,
(iv) serve as a counter-cyclical balance to earnings, and (v) maximum returns
without sacrificing liquidity and safety.
58
<PAGE>
Permitted investments include U.S. Treasury obligations, FHLB daily and
time deposits, insured certificates of deposit, federal agency securities and
federal funds.
The following table sets forth the carrying value of the Bank's investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31, At June 30,
------------------------- -----------------------
1997 1996 1997 1996
---- ---- ---- ----
(in Thousands)
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agency securities $ 380 $ 250 $ 318 $ 194
------- ------ ------ ------
Securities held to maturity:
U.S. government and agency securities 1,500 1,992 2,496 1,994
Mortgage-backed securities 732 898 800 940
------- ------ ------ ------
Total securities held to maturity 2,232 2,890 3,296 2,934
------- ------ ------ ------
Total investment securities 2,612 3,140 3,614 3,128
------- ------ ------ ------
Interest-earning balances in other banks 6,039 5,067 4,944 5,851
------- ------ ------ ------
Federal Home Loan Bank stock 143 143 143 143
------- ------ ------ ------
6,182 5,210 5,087 5,994
------- ------ ------ ------
Total investments $ 8,794 $8,350 $8,701 $9,122
======= ====== ====== ======
</TABLE>
At December 31, 1997, the market value of the Bank's investment securities
available for sale and held to maturity were $380,000 and $2.23 million,
respectively.
59
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
investment portfolio as of December 31, 1997.
<TABLE>
<CAPTION>
More than Six Months More than One Year More than Five Years
Less Than Six Months to One Year to Five Years to Ten Years
---------------------- ----------------------- ------------------ ---------------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carring
Value Yield Value Yield Value Yield Value Yield Value
---------- ---------- -------- ---------- --------- ---------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Securities available for sale:
FHLMC Stock $ 380 _____% $____ -- % $ -- --% $ -- --% $ --
Securities held to maturity:
U.S. government and agency
securities -- -- 500 5.70 1,000 5.64 -- -- --
Mortgage-backed securities -- -- -- -- 43 7.76 259 7.00 430
Other:
Interest-earning balances
in other banks 6,039 5.48 -- -- -- -- -- -- --
Federal Home Loan Bank stock -- -- -- -- -- -- -- -- --
------ ------ ------- ------ ------- ------ ------ ------- -----
Total $6,419 5.16% $ 500 .95% $1,043 5.73% $ 259 7.00% $ 573
====== ======= ======= ====== ======= ======= ====== ======= =====
<CAPTION>
After Ten Years
---------------------
Weighted
Carrying Average Carrying
Value Yield Value
---------- ---------- --------
<S> <C> <C> <C>
Securities available for sale:
FHLMC Stock $ -- --% $ 380
Securities held to maturity:
U.S. government and agency
securities -- -- 1,500
Mortgage-backed securities 430 6.50 732
Other:
Interest-earning balances -- -- 6,039
in other banks
Federal Home Loan Bank stock 143 7.25 143
---- ----- ------
Total $573 6.69% $8,794
==== ===== ======
</TABLE>
60
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, interest
income and advances from the FHLB of Atlanta and otherwise from its operations.
Loan repayments are a relatively stable source of funds while deposit inflows
and outflows may be significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also
be used on a longer term basis for general business purposes.
DEPOSITS. The Bank attracts both short-term and long-term deposits from
the general public by offering a variety of accounts and rates. The Bank offers
passbook savings accounts, statement savings accounts, negotiable order of
withdrawal accounts, money market deposit accounts, non-interest-bearing
accounts, and fixed interest rate certificates with varying maturities. At
December 31, 1997, 77.8% of the Bank's deposits consisted of certificate
accounts, 21.6% consisted of passbook savings accounts and 0.61% consisted of
money market deposit accounts. Deposit flows are greatly influenced by economic
conditions, the general level of interest rates, competition, and other factors,
including the restructuring of the thrift industry. The Bank's savings deposits
traditionally have been obtained primarily from its primary market area. The
Bank utilizes traditional marketing methods to attract new customers and savings
deposits, including print, television and radio media advertising and direct
mailings. The Bank does not advertise for deposits outside of its local market
area or utilize the services of deposit brokers.
The following table sets forth certain other information regarding the
Bank's savings deposits at the dates indicated.
61
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997 At June 30, 1997 At June 30, 1996
----------------------------------- --------------------------------- --------------------
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits Amount
----------- ---------- ---------- --------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Passbook savings $ 3,585 3.25% 21.60% $ 3,673 3.25% 21.96% $ 4,149
Money market deposit accounts 101 3.05 0.61 105 3.10 0.63 181
------ ------ ------ ------- ------ ------- -------
3,686 3.24 22.21 3,778 3.24 22.59 4,330
Certificate of accounts with
original maturities of:
6 months 3,955 5.07 23.84 4,372 5.08 26.14 5,619
12 months 2,101 5.11 12.66 2,414 5.15 14.43 2,809
14, 18, 30 and 36 6,852 5.67 41.29 6,163 5.74 36.84 4,781
------ ------ ------ ------- ------ ------- -------
months 12,908 5.40 77.79 12,949 5.41 77.41 13,209
------ ------ ------ ------- ------ ------- -------
Total certificates
Total deposits $16,594 4.92% 100.00% $16,727 4.92% 100.00% $ 17,539
====== ====== ======= ======= ====== ======= =======
<CAPTION>
At June 30, 1996
---------------------
Weighted
Average % of
Rate Deposits
---------- ----------
<S> <C> <C>
Demand accounts:
Passbook savings 3.25% 23.66%
Money market deposit accounts 3.10 1.02
------- -------
Certificate of accounts with
original maturities of:
6 months 5.01 32.04
12 months 5.22 16.02
14, 18, 30 and 36 5.56 27.26
------- -------
months 5.26 75.32
------- -------
Total certificates
Total deposits 4.76% 100.00%
======= =======
</TABLE>
62
<PAGE>
The following table presents the maturities and weighted average rates paid on
all certificates of deposit as of December 31, 1997.
<TABLE>
<CAPTION>
Amount Due During the Year Ending December 31,
--------------------------------------------------------------------
1998 1999 2000 Thereafter Total
--------------- --------------- -------------- ---------------- ---------
Weighted Weighted Weighted Weighted
Amount Rate Amount Rate Amount Rate Amount Rate Amount
-------- ---------- ---------- ----------- --------- --------- ------ -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of
$100,000 or more $ 1,251 5.95% $ -- --% $ -- --% $ -- --% $ 1,251
Certificates of less than
$100,000 8,948 5.28% 2,196 5.51% 513 5.77% -- -- 11,657
------- ------ ------- ------- ------ ------ ------ ----- -------
Total $10,199 5.36% $2,196 5.51% $ 513 5.77% $ -- -- $12,908
======= ====== ======= ======= ====== ====== ====== ===== =======
</TABLE>
63
<PAGE>
As of December 31, 1997, the aggregate amount of time certificates of
deposit in amounts greater than or equal to $100,000 outstanding was
approximately $1.3 million. The following table presents the maturity of these
time certificates of deposit at such date.
<TABLE>
<CAPTION>
At
December 31, 1997
-----------------------
(In Thousands)
<S> <C>
6 Months or less $ 539
Over 6 months through 12 months 712
Over 12 months ---
--------
Total $1,251
========
</TABLE>
BORROWINGS. The Bank's principal available source of long-term borrowings
are advances from the FHLB of Atlanta. The FHLB system functions in a reserve
credit capacity for savings institutions. As a member, the Bank is required to
own capital stock in the FHLB of Atlanta and is authorized to apply for advances
from the FHLB of Atlanta on the security of that stock and a floating lien on
certain of its real estate secured loans and other assets. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness. The Bank has had no borrowings outstanding from
the FHLB of Atlanta since 1987 and has no immediate plans to seek any advances
from the FHLB of Atlanta.
SUBSIDIARIES
As a North Carolina-chartered savings bank, the Bank is able to invest up
to 10% of its total assets in subsidiary service corporations. The Bank has no
subsidiaries.
PROPERTIES
The Bank operates from one office located in Wadesboro, North Carolina.
Specific information related to this office as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Net Book Value
------------------
Furniture,
Land Building Fixtures and
------------------ ------------------
Equipment
---------------
<S> <C> <C> <C>
211 South Greene Street
Wadesboro, North Carolina $ 30,808 $180,392 $3,695
======== ======== ======
</TABLE>
The properties are considered by the Bank's management to be in good condition.
64
<PAGE>
LEGAL PROCEEDINGS
From time to time, the Bank is a party to legal proceedings which arise in
the ordinary course of its business. Most commonly, such proceedings are
commenced by the Bank to enforce obligations owed to it. From time to time,
claims are asserted against the Bank directly or as defenses and counterclaims
in actions filed by the Bank. At this time, the Bank is not a party to any
legal proceeding which is expected to have a material effect on its financial
condition or results of operations.
COMPETITION
The Bank is the only financial institution headquartered in Anson County
and has operated there for more than 100 years. It faces strong competition
both in attracting deposits and making real estate and other loans. Its most
direct competition for deposits has historically come from other savings
institutions, credit unions, brokerage firms and commercial banks located in its
primary market area, including large financial institutions which have greater
financial and marketing resources available to them. As of June 30, 1997, there
were four FDIC-insured depository institutions with nine offices in Anson
County, North Carolina. Based upon 1997 comparative data, the Bank had 10.9%
and 8.3% of the federally insured deposits in Wadesboro and Anson County,
respectively.
The Bank has also faced additional significant competition for investors'
funds from short-term money market securities and other corporate and government
securities. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. The
Bank competes for loans primarily through the interest rates and loan fees it
charges, the efficiency and quality of services it provides borrowers, and its
more flexible underwriting standards. Competition may increase as a result of
the continuing reduction of restrictions on the interstate operations of
financial institutions. See "RISK FACTORS -- Risks Associated with Anson's
Primary Market Area; Limited Lending Opportunities; Competition."
EMPLOYEES
As of December 31, 1997, the Bank had 5 full-time employees. The Bank
provides its employees with basic and major medical insurance, dental insurance,
disability insurance, life insurance, sick leave and vacation benefits. The
Bank also maintains a non-contributory defined benefit pension plan ("Pension
Plan") for its employees. All full-time employees of the Bank who have
completed one year of service and who are at least twenty-one (21) years of age
are covered under the Pension Plan. Participants are fully vested in amounts
contributed to the Pension Plan on their behalf after seven (7) years of
service, as follows: less than 3 years of service, 0%; 3 years, 20%; 4 years,
40%; 5 years, 60%; 6 years, 80%; 7 years, 100%. Benefits under the Pension Plan
are payable in the event of the participant's retirement, death, disability or
termination of employment.
The Boards of Directors of the Company and the Bank are expected to adopt,
and stockholders of the Company will be asked to approve, a MRP and a Option
Plan at a meeting of stockholders after the first anniversary following the
Conversion. See "MANAGEMENT OF THE BANK -- Proposed Option Plan" and "--
Proposed Management Recognition Plan."
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Employees are not represented by any union or collective bargaining group,
and the Bank considers its employee relations to be good.
TAXATION
FEDERAL INCOME TAXATION
Savings institutions such as the Bank are subject to the taxing provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), for corporations,
as modified by certain provisions specifically applicable for financial or
thrift institutions. Income is reported using the accrual method of accounting.
The maximum corporate federal income tax rate is 35%.
For fiscal years beginning prior to December 31, 1995, thrift institutions
which qualified under certain definitional tests and other conditions of the
Code were permitted certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally loans
secured by interests in real property improved or to be improved) under (i) a
method based on a percentage of the institution's taxable income, as adjusted
(the "percentage of taxable income method") or (ii) a method based on actual
loss experience (the "experience method"). The reserve for nonqualifying loans
was computed using the experience method.
The addition to the bad debt reserve under the percentage of taxable income
method was limited to 8% of taxable income. This method could not raise the
reserve to exceed 6% of qualifying real property loans at the end of the year.
Moreover, the current year addition for qualifying real property loans, when
added to the experience method deduction for nonqualifying loans, could not
exceed the amount by which 12% of total deposits or withdrawable accounts
exceeded the sum of surplus, undivided profits and reserves at the beginning of
the year. The experience method was the amount necessary to increase the
balance of the reserve at the close of the year to the greater of (i) the amount
which bore the same ratio to loans outstanding at the close of the year as the
total net bad debts sustained during the current and five preceding years bore
to the sum of the loans outstanding at the close of such six years or (ii) the
balance in the reserve account at the close of the last taxable year beginning
before 1988 (assuming that the loans outstanding have not declined since such
date).
In order to qualify for the percentage of taxable income method, an
institution had to have at least 60% of its assets as "qualifying assets," which
generally included, cash, obligations of the United States government or an
agency or instrumentality thereof or of a state or political subdivision,
residential real estate-related loans, or loans secured by savings accounts and
property used in the conduct of its business. In addition, it had to meet
certain other supervisory tests and operate principally for the purpose of
acquiring savings and investing in loans.
Institutions which became ineligible to use the percentage of taxable
income method had to change to either the reserve method or the specific charge-
off method that applied to banks. Large thrift institutions, those generally
exceeding $500 million in assets, had to convert to the specific charge-off
method. In computing its bad debt reserve for federal income taxes, the Bank
used the reserve method in fiscal years 1996 and 1997.
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Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt reserve") must be included in taxable income upon
certain distributions to shareholders. Distributions in redemption or
liquidation of stock or distributions with respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated as a distribution from the excess bad debt reserve. When such a
distribution takes place, the thrift is required to reduce its reserve by such
amount and simultaneously recognize the amount as an item of taxable income
increased by the amount of income tax imposed on the inclusion. Dividends not
in excess of earnings and profits accumulated since December 31, 1951 will not
require inclusion of part or all of the bad debt reserve in taxable income. The
Bank has accumulated earnings and profits since December 31, 1951 and has an
excess bad debt reserve. Distributions in excess of current and accumulated
earnings and profits will increase taxable income. Net retained earnings at
December 31, 1997 includes approximately $1.0 million for which no provision for
federal income tax has been made.
Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period. At December 31, 1997, the
Bank's post-1987 excess reserves subject to recapture were not significant.
The Bank may also be subject to the corporate alternative minimum tax
("AMT"). This tax is applicable only to the extent it exceeds the regular
corporate income tax. The AMT is imposed at the rate of 20% of the
corporation's alternative minimum taxable income ("AMTI") subject to applicable
statutory exemptions. AMTI is calculated by adding certain tax preference items
and making certain adjustments to the corporation's regular taxable income.
Preference items and adjustments generally applicable to financial institutions
include, but are not limited to, the following: (i) the excess of the bad debt
deduction over the amount that would have been allowable on the basis of actual
experience; (ii) interest on certain tax-exempt bonds issued after August 7,
1986; and (iii) 75% of the excess, if any, of a corporation's adjusted earnings
and profits over its AMTI (as otherwise determined with certain adjustments).
Net operating loss carryovers, subject to certain adjustments, may be utilized
to offset up to 90% of the AMTI. Credit for AMT paid may be available in future
years to reduce future regular federal income tax liability to the extent it
exceeds the year's AMT. The Bank has not been subject to the AMT in recent
years.
The Bank's federal income tax returns have not been audited in the last ten
tax years.
STATE AND LOCAL TAXATION
Under North Carolina law, the corporate income tax is 7.5% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition, for tax years beginning in 1991, 1992, 1993 and 1994,
corporate taxpayers were required to pay a surtax equal to 4%, 3%, 2% and 1%,
respectively, of the state income tax otherwise, payable by it. An annual state
franchise tax is imposed at a rate of 0.15% applied to the greatest of the
institutions (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) appraised valuation of property
in North Carolina.
The North Carolina corporate tax rate will drop to 7.25% in 1998, 7% in
1999, and 6.9% thereafter.
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SUPERVISION AND REGULATION
REGULATION OF THE COMPANY
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
GENERAL. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards as of the time the
institution fails to comply with such capital restoration plan. Under a policy
of the Federal Reserve with respect to bank holding company operations, a bank
holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
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Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period.
As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.
CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a
bank holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding company
which has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum.
DIVIDEND AND REPURCHASE LIMITATIONS. In connection with the Conversion,
the Bank has agreed with the FDIC that, during the first three years after
consummation of the Conversion, neither the Company nor the Bank will pay any
taxable dividend or make any other taxable distribution to its stockholders in
excess of their current or retained earnings. Also, the Company and the Bank
have agreed to notify the FDIC before making a return of capital during the
first three years following the Conversion. The Company must obtain Federal
Reserve approval prior to repurchasing Common Stock for in excess of 10% of its
net worth during
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any twelve-month period unless the Company (i) both before and after the
redemption satisfies capital requirements for "well capitalized" state member
banks; (ii) received a one or two rating in its last examination; and (iii) is
not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to the requirements and limitations of North Carolina corporate law,
except as set forth in this paragraph, neither the Administrator nor the FDIC
have promulgated any regulations specifically limiting the right of the Company
to pay dividends and repurchase shares. However, the ability of the Company to
pay dividends or repurchase shares may be dependent upon the Company's receipt
of dividends from the Bank. The Bank's ability to pay dividends is limited.
See " -- Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."
CAPITAL MAINTENANCE AGREEMENT. In connection with the Administrator's
approval of the Company's application to acquire control of the Bank, the
Company was required to execute a Capital Maintenance Agreement whereby it has
agreed to maintain the Bank's capital in an amount sufficient to enable the Bank
to satisfy all regulatory capital requirements.
FEDERAL SECURITIES LAW. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Exchange Act and will not deregister
the Common Stock for a period of three years following the completion of the
Conversion. As a result of such registration, the proxy and tender offer rules,
insider trading reporting requirements, annual and periodic reporting and other
requirements of the Exchange Act are applicable to the Company.
The registration under the Securities Act of the Offering of the Common
Stock does not cover the resale of such shares. Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company are subject to
the resale provisions of Rule 144 under the Securities Act. So long as the
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) will be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
REGULATION OF THE BANK
GENERAL. Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services. In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
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including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are insured by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as
owners of real property, financial institutions, including the Bank, may be
subject to potential liability under various statutes and regulations applicable
to property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
TRANSACTIONS WITH AFFILIATES. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
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Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company. Any "interested" director may not participate in the voting. The
Federal Reserve has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of unimpaired
capital and unimpaired surplus (up to $500,000). Further, pursuant to Section
22(h) the Federal Reserve requires that loans to directors, executive officers,
and principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons and not involve more than the normal
risk of repayment or present other unfavorable features. Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.
DEPOSIT INSURANCE. The Bank's deposit accounts are insured by the FDIC
under the SAIF to the maximum extent permitted by law. The Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
discussed below. The matrix so created results in nine assessment risk
classifications, with rates that, until September 30, 1996, ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk to the SAIF unless effective corrective action is taken.
Pursuant to the DIF Act, which was enacted on September 30, 1996, the FDIC
imposed a special assessment on each depository institution with SAIF-assessable
deposits which resulted in the SAIF achieving its designated reserve ratio. In
connection therewith, the FDIC reduced the assessment schedule for SAIF members,
effective January 1, 1997, to a range of 0% to 0.27%, with most institutions
paying 0%. This assessment schedule is the same as that for the BIF, which
reached its designated reserve ratio in 1995. In addition, since January 1,
1997, SAIF members are charged an assessment of 0.065% of SAIF-assessable
deposits for the purpose of paying interest on the obligations issued by the
Financing Corporation ("FICO") in the 1980s to help fund the thrift industry
cleanup. BIF-assessable deposits will be charged an assessment to help pay
interest on the FICO bonds at a rate of approximately .013% until the earlier of
December 31, 1999 or the date upon which the last savings association ceases to
exist, after which time the assessment will be the same for all insured
deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
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The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
COMMUNITY REINVESTMENT ACT. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. A savings bank is evaluated and rated under three categories: a
lending test, an investment test and a service test. For each of these three
tests, the savings bank is given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial non-
compliance." A set of criteria for each rating is included in the regulation.
If an institution disagrees with a particular rating, the institution has the
burden of rebutting the presumption by clearly establishing that the
quantitative measures do not accurately present its actual performance, or that
demographics, competitive conditions or economic or legal limitations peculiar
to the service area should be considered. The ratings received under the three
tests are used to determine the overall composite CRA rating or "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."
During the Bank's last compliance examination, which was performed by the
FDIC under the old CRA regulations in July 1996, the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by the Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and could result in the denial of such applications.
CAPITAL REQUIREMENTS APPLICABLE TO THE BANK. The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder ("Tier
II capital") may consist of a limited amount of subordinated debt, certain
hybrid capital instruments, other debt securities, certain types of preferred
stock and a limited amount of loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At December 31, 1997,
the Bank had a leverage ratio of 17.4%.
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The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At December 31, 1997, the Bank complied with each of the capital
requirements of the FDIC and the Administrator. For a description of the Bank's
required and actual capital levels on December 31, 1997, see "HISTORICAL AND PRO
FORMA CAPITAL COMPLIANCE."
Each federal banking agency was required by law to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multi-family mortgages. On August 2, 1995, the federal banking agencies
issued a joint notice of adoption of final risk-based capital rules to take
account of interest rate risk. The final regulation required an assessment of
the need for additional capital on a case-by-case basis, considering both the
level of measured exposure and qualitative risk factors. The final rule also
stated an intent to, in the future, establish an explicit minimum capital charge
for interest rate risk based on the level of a bank's measured interest rate
risk exposure. The final regulation has not had a material impact on the Bank's
capital requirements.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies" election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement is not expected to have a material impact
on the Bank's management of interest rate risk.
In December 1994, the FDIC adopted a final rule changing its risk-based
capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives - interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterparty, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. The Bank does not anticipate
that this rule will have a material effect upon its financial condition or
results of operations.
LOANS-TO-ONE-BORROWER. The Bank is subject to the Administrator's loans-
to-one-borrower limits. Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize
savings banks to make loans-to-one-borrower, for any purpose, in an amount not
to exceed $500,000. A savings bank also is authorized to make loans-to-one-
borrower to develop domestic residential housing units, not to exceed the lesser
of $30 million or 30% of the savings bank's net worth, provided that the
purchase price of each single-family dwelling in the development does not exceed
$500,000 and the aggregate amount of loans made under this authority does not
exceed 150% of net worth. These limits also authorize a savings bank to make
loans-to-one-borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
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<PAGE>
As of December 31, 1997, the largest aggregate amount of loans which the
Bank had to any one borrower was $265,000. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 1997, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $143,000.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
FEDERAL RESERVE SYSTEM. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1997, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
RESTRICTIONS ON ACQUISITIONS. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired by, among other things, the acquisition of more than 25% of any class
of voting stock. In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions of control by such person.
For three years following completion of the Conversion, North Carolina
conversion regulations require the prior written approval of the Administrator
before any person may directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Bank. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is not
required for (i) any offer with a view toward public resale made exclusively to
the Bank or its underwriters or the selling group acting on its behalf or (ii)
any offer to acquire or acquisition of beneficial ownership of more than 10% of
the common stock of the Bank by a corporation whose ownership is or will be
substantially the same as the ownership of the Bank, provided that
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<PAGE>
the offer or acquisition is made more than one year following the consummation
of the Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Company and
the Bank or the Boards of Directors of the Company and the Bank support the
acquisition and (iii) the acquiror is of good character and integrity and
possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to the Company and the Bank and the public interests will not
be adversely affected.
LIQUIDITY. The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years. On December 31, 1997, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 41%. At December
31, 1997, the Bank had stable, core-like time deposits of $100,000 or more of
approximately $1.3 million.
ADDITIONAL LIMITATIONS ON ACTIVITIES. FDIC law and regulations generally
provide that the Bank may not engage as principal in any type of activity, or in
any activity in an amount, not permitted for national banks, or directly acquire
or retain any equity investment of a type or in an amount not permitted for
national banks. National banks are generally not permitted to hold equity
investments other than shares of service corporations and certain federal agency
securities. Moreover, the activities in which service corporations are
permitted to engage are limited to those of service corporations for national
banks. The FDIC has authority to grant exceptions from these prohibitions
(other than with respect to non-service corporation equity investments) if it
determines no significant risk to the insurance fund is posed by the amount of
the investment or the activity to be engaged in and if the Bank is and continues
to be in compliance with fully phased-in capital standards.
PROMPT CORRECTIVE REGULATORY ACTION. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
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INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina
adopted nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elects to do so by June 1, 1997.
States may choose to allow interstate branching prior to June 1, 1997 by opting-
in to a group of states that permits these transactions. These states generally
allow interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. A North
Carolina chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its Conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, no stock repurchases may be made
by the savings bank during the first year following a Conversion from mutual to
stock, except that stock repurchases of no greater than 5% of the bank's
outstanding shares may be repurchased during the first year where compelling and
valid business reasons are established to the satisfaction of the FDIC.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
Conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's Conversion from mutual to
stock ownership.
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In connection with the Conversion, the Bank has agreed with the FDIC that,
during the first three years after the Conversion, neither the Company nor the
Bank will pay any taxable dividend or make any other taxable distribution in
excess of their current and retained earnings. The Bank has also agreed to
notify the FDIC before making a return of capital during the first three years
following the Conversion.
RESTRICTIONS ON BENEFIT PLANS. FDIC regulations provide that for a period
of one year from the date of the Conversion, the Bank may not implement or adopt
a stock option plan or restricted stock plan, other than a tax-qualified plan or
an employee stock ownership plan, unless: (1) the plans are fully disclosed in
the Conversion proxy soliciting and stock offering material, (2) all such plans
are approved by a majority of the Company's stockholders prior to implementation
and no earlier than six months following the Conversion, (3) for stock option
plans, the exercise price must be at least equal to the market price of the
stock at the time of grant, and (4) for restricted stock plans, no stock issued
in connection with the Conversion may be used to fund the plan.
The FDIC regulations provide that, in reviewing plans submitted to the
stockholders within one year after the consummation of the Conversion, the FDIC
will presume that excessive compensation will result if stock based benefit
plans fail to satisfy percentage limitations on management stock-based benefit
plans set forth in the regulations of the Office of Thrift Supervision ("OTS").
Those regulations provide that (1) for stock option plans, the total number of
shares for which options may be granted may not exceed 10% of the shares
issued in the Conversion, (2) for restricted stock plans, the shares issued may
not exceed 3% of the shares issued in the Conversion (4% for institutions with
tangible capital of 10% or greater after the Conversion), (3) the aggregate
amount of stock purchased by an employee stock ownership plan shall not exceed
10% (8% for well-capitalized institutions utilizing a 4% restricted stock
plan), (4) no individual employee may receive more than 25% of the available
awards under any plan, and (5) directors who are not employees may not receive
more than 5% individually or 30% in the aggregate of the awards under any plan.
The awards and grants to be made under the MRP and Option Plan will conform to
these requirements if such plans are submitted for stockholder approval within
one year after the Conversion is consummated.
OTHER NORTH CAROLINA REGULATIONS. As a North Carolina chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person
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or institution is engaging in, or has engaged in, any unsafe or unsound practice
or unfair and discriminatory practice in the conduct of its business or in
violation of any other law, rule or regulation.
A North Carolina chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
FUTURE REQUIREMENTS. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company currently consists of seven
directors: Preston A. Burns, John J. Crawford, W. Kenneth Huntley, Emmett S.
Patterson, John R. Potter, H. Patrick Taylor, Jr. and Eugene M. Ward. Each of
these persons is also a director of the Bank, and biographical information with
respect to each is set forth under "MANAGEMENT OF THE BANK -- Directors" and
" -- Executive Officers." Each director is elected for a one-year term. However,
at such time, if any, as the number of directors is at least nine, the Articles
of Incorporation and Bylaws of the Company provide for staggered elections so
that approximately one-third of the directors will each be initially elected to
one, two and three-year terms, respectively, and thereafter, all directors will
be elected to terms of three years each.
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The executive officers of the Company, each of whom is also currently an
executive officer of the Bank, and each of whom serves at the discretion of the
Board of Directors of the Company, are as follows:
<TABLE>
<CAPTION>
AGE AT POSITION HELD
NAME DECEMBER 31, 1997 WITH THE COMPANY
---- ----------------- ----------------
<S> <C> <C>
Eugene M. Ward 63 President and Chief Executive
Officer
Nancy H. Allen 52 Treasurer and Assistant
Secretary
Veda H. Edwards 57 Secretary
</TABLE>
Biographical information with respect to each of these officers is set
forth below under "MANAGEMENT OF THE BANK -- Executive Officers." There are no
other employees of the Company. No officer, director or employee of the Company
has received remuneration from the Company to date, and it is currently expected
that no compensation will be paid by the Company after the Conversion.
Information concerning the principal occupations and employment of, and
compensation paid by the Bank to, the directors and executive officers of the
Company is set forth under "MANAGEMENT OF THE BANK." See "MANAGEMENT OF THE
BANK -- Employment Agreement" for a description of the employment agreement
expected to be entered into with the Chief Executive Officer of the Company and
the Bank.
MANAGEMENT OF THE BANK
DIRECTORS
The direction and control of the Bank, as a mutual North Carolina chartered
savings bank, has been vested in its seven-member Board of Directors elected by
the depositor and borrower members of the Bank. Upon Conversion of the Bank to
capital stock form, each director of the Bank immediately prior to the
Conversion will continue to serve as a director of the Bank as a stock
institution. All directors currently serve for one-year terms. The Bank's
proposed Bylaws, which would become effective after the Conversion, provide for
staggered elections of its directors, if and when the number of directors equals
at least nine, so that approximately one-third of the directors would be elected
each year for three-year terms. Upon consummation of the Conversion, the
Company will own all of the issued and outstanding shares of capital stock of
the Bank, and the Company will elect the directors of the Bank. The Company now
plans to nominate and re-elect all members of the Bank's existing board of
directors when their existing terms expire. The following table sets forth
certain information with respect to the persons who currently serve as members
of the Board of Directors of the Bank.
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<TABLE>
<CAPTION>
AGE ON
DECEMBER 31, PRINCIPAL OCCUPATION DIRECTOR
NAME 1997 DURING LAST FIVE YEARS SINCE
- ---- ------------ ---------------------- --------
<S> <C> <C> <C>
Preston A. Burns, Chairman 83 Retired, former President of Wadesboro Auto 1958
Supply
John J. Crawford 77 Retired, former owner of Crawford Motor 1960
Company
W. Kenneth Huntley 48 President, Huntley Oil and Gas Company, Inc. 1989
Emmett S. Patterson 59 General Manager and Executive Vice President, 1988
PeeDee Electric Membership Corporation
John R. Potter 79 Retired, former Anson County Agricultural 1962
Extension Agent
H. Patrick Taylor, Jr. 73 Attorney 1961
Eugene M. Ward 63 President, Anson Savings Bank, SSB 1962
</TABLE>
BOARD MEETINGS AND COMMITTEES
The Bank's Board of Directors has regular monthly meetings, and held 12
regular and special meetings in the fiscal year ended June 30, 1997. The Board
has also established three committees to whom certain responsibilities have been
delegated - an Executive Committee, a Nominating/Compensation Committee and a
Proxy Committee. In addition, all of the directors serve on the Loan Committee
and the Audit Committee; however, only 3 directors are asked to attend any one
meeting of the Loan Committee. No director attended fewer than 75% of the total
number of Board meetings and meetings of Board committees (other than the Loan
Committee) on which he served during the year ended June 30, 1997. In addition,
no director attended fewer than 75% of the total number of Loan Committee
meetings he was requested to attend during the year ended June 30, 1997.
The Executive Committee is composed of directors Preston Burns, Eugene
Ward, John Potter and John Crawford. The Executive Committee makes
recommendations to the full Board and acts on policies adopted by the full Board
in the absence of a meeting of the entire Board. The Executive Committee meets
on an as needed basis and did not meet during the year ended June 30, 1997.
The Nominating/Compensation Committee is composed of directors John
Crawford, John Potter and Emmett Patterson. This committee recommends
individuals to be elected to serve as directors of the Bank and recommends to
the Board of Directors the compensation to be paid to the Bank's officers. The
Nominating/Compensation Committee generally meets on an annual basis and met one
time during the year ended June 30, 1997.
The Proxy Committee is composed of directors John Potter, Kenneth Huntley,
and John Crawford. The Proxy Committee meets on an as needed basis and met one
time during the year ended June 30, 1997.
The full Board of Directors serves as a Loan Committee with any three
directors constituting a quorum for purposes of approving loans. The Loan
Committee meets on an as needed basis and met 35 times during the year ended
June 30, 1997.
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The full Board of Directors also serves the function of an Audit Committee.
The Board meets with and retains independent auditors, oversees the adequacy of
internal controls, insuring compliance with the Bank's policies and procedures
and with generally accepted accounting principles.
DIRECTORS' FEES
For their service on the Bank's Board of Directors, all members of the
Bank's Board of Directors, including Mr. Ward, receive an annual retainer of
$600.00 and an additional $200.00 per meeting attended. Board fees are subject
to adjustment annually. The Executive Committee members, including Mr. Ward,
receive $50.00 per meeting attended; all of the directors, excluding Mr. Ward,
receive $50.00 per month for their services on the Loan Committee.
EXECUTIVE OFFICERS
The Bank has three executive officers. The following table sets forth
certain information with respect such executive officers:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL AGE ON POSITIONS AND OCCUPATIONS EMPLOYED BY
POSITION DECEMBER 31, 1997 DURING LAST FIVE YEARS THE BANK SINCE
- ------------------ ----------------- ------------------------- --------------
<S> <C> <C> <C>
Eugene M. Ward 63 President and Chief Executive 1962
Officer
Nancy H. Allen 52 Treasurer and Assistant 1964
Secretary
Veda H. Edwards 57 Secretary 1959
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended June 30, 1997
certain information regarding compensation received by (i) the chief executive
officer of the Bank and (ii) all other executive officers whose cash
compensation exceeded $100,000 (there were none).
<TABLE>
OTHER ANNUAL
COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS ($) /2/ COMPENSATION
- --------------------------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C>
Eugene M. Ward, President, Chief $64,000/1/ $7,320 --- $395/3/
Executive Officer and Director
</TABLE>
____________________
/1/ Includes directors' fees of $3,000 received by Mr. Ward.
/2/ Under the "Other Annual Compensation" category, perquisites for the fiscal
year ended June 30, 1997 did not exceed the lesser of $50,000 or 10% of
salary and bonus as reported for Mr. Ward.
/3/ Represents the amount of the insurance premium paid by the Bank for term
life insurance for the benefit of Mr. Ward.
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<PAGE>
The Bank's Nominating/Compensation Committee determines the compensation of
the executive officers. The salaries of each of the executive officers is
determined based upon the executive officer's contributions to the Bank's
overall profitability, maintenance of regulatory compliance standards,
professional leadership, and management effectiveness in meeting the needs of
day to day operations. The Board of Directors also compares the compensation of
the Bank's executive officers with compensation paid to executives of comparable
financial institutions in North Carolina and executives of other businesses in
the Bank's market area. Mr. Ward participates in the deliberations of the Board
of Directors regarding compensation of executive officers other than himself. He
does not participate in the discussion or decisions regarding his own
compensation.
BONUS COMPENSATION
The Board of Directors of the Bank has established a plan for awarding an
annual bonus to all employees of the Bank including Mr. Ward. Under the terms of
the annual bonus plan, if the profits of the Bank exceed a certain target
amount, which target amount is determined annually by the Bank's Board of
Directors, an aggregate amount equal to 10% of the profits of the Bank is
divided pro rata among the full-time employees based on each employee's base
salary. However, the annual bonus paid to each of the Bank's employees may not
exceed 20% of each such employee's annual base salary. However, as is the case
with the Bank's compensation arrangements in general, the Bank's bonus
compensation is subject to regulatory oversight and, therefore, could be changed
in the future in response to regulatory requirements or otherwise.
OTHER BENEFITS
The Bank maintains a Pension Plan for its employees. All full-time
employees of the Bank who have completed one year of service and who are at
least twenty-one (21) years of age are covered under the Pension Plan.
Participants are fully vested in amounts contributed to the Pension Plan on
their behalf after six (6) years of service, as follows: less than 2 years of
service, 0%; 2 years, 20%; 3 years, 40%; 4 years, 60%; 5 years, 80%; 6 years,
100%. Benefits under the Pension Plan are payable in the event of the
participant's retirement, death, disability or termination of employment.
Normal retirement age under the Pension Plan is the later of (a) age sixty-
five (65), or (b) the fifth anniversary of the participant's joining the plan
("Normal Retirement Age"). Subject to certain restrictions on maximum benefits
required by federal law, upon reaching Normal Retirement Age, each participant
will receive a retirement benefit in the form of a straight life annuity,
determined pursuant to a formula which takes into consideration a participant's
"average monthly compensation" and up to seven (7) years of service. For
purposes of the Pension Plan, a participant's "average monthly compensation" is
defined as a participant's compensation converted to a monthly amount and then
averaged over the five (5) consecutive plan years of the last ten (10) calendar
years immediately preceding his retirement.
As of June 30, 1997, Mr. Ward's expected benefit under the Pension Plan at
Normal Retirement Age was $33,444 per year.
The Bank also provides its employees with group medical, dental, life and
disability insurance benefits and provides vacation leave.
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EMPLOYMENT AGREEMENT
In connection with the Conversion, the Bank will enter into an employment
agreement with Eugene M. Ward, President and Chief Executive Officer, in order
to establish his duties and compensation and to provide for his continued
employment with the Bank. The agreement will provide for an initial annual base
salary of $69,000 and an initial term of employment of three years. Commencing
on the first anniversary date and continuing on each anniversary date
thereafter, following a performance evaluation of the employee, each agreement
may be extended for an additional year so that the remaining term shall be three
years, unless written notice of non-renewal is given by the Board of Directors.
The agreements also provide that the base salary shall be reviewed by the Board
of Directors not less often than annually. In addition, the employment agreement
provides for possible profitability and discretionary bonuses, as described in
"Bonus Compensation" and participation in all other pension, profit-sharing or
retirement plans maintained by the Bank or the Company for employees of the
Bank, as well as fringe benefits normally associated with Mr. Ward's office. The
employment agreement provides that it may be terminated by the Bank for cause,
as defined in the agreement, and that they may otherwise be terminated by the
Bank (subject to vested rights) or by Mr. Ward. In the event of a "change in
control" (as defined below) in lieu of continuing to be entitled to receive a
profitability bonus, Mr. Ward's base salary shall be adjusted to include an
amount equal to the average of the two previous years' annual profitability
bonus and such adjusted base salary shall be increased by a minimum of 6%
annually. In addition, the agreement will automatically be extended so that it
will have a three-year term after the change in control.
The employment agreement provides that the nature of Mr. Ward's
compensation, duties or benefits cannot be diminished following a change in
control of the Bank or the Company. For purposes of the employment agreement, a
change in control generally will occur if (i) after the effective date of the
employment agreement, any "person" (as such term is defined in Sections 3(a)(9)
and 13(d)(3) of the Exchange Act) directly or indirectly, acquires beneficial
ownership of voting stock, or acquires irrevocable proxies or any combination of
voting stock and irrevocable proxies, representing 25% or more of any class of
voting securities of either the Company or the Bank, or acquires in any manner
control of the election of a majority of the directors of either the Company or
the Bank, (ii) either the Company or the Bank consolidates or merges with or
into another corporation, association or entity, or is otherwise reorganized,
where neither the Company nor the Bank is the surviving corporation in such
transaction, or (iii) all or substantially all of the assets of either the
Company or the Bank are sold or otherwise transferred to, or are acquired by,
any other entity or group. The agreement also provides that, in the event of the
employee's death following a change in control, the remaining payments to be
made under the agreements will be made to the employee's beneficiary or the
beneficiary's estate.
The employment agreement could have the effect of making it less likely
that the Bank or the Company will be acquired by another entity. See "ANTI-
TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK -- The Company -- Anti-
Takeover Effect of Employment Agreement and Benefit Plans."
SEVERANCE PLAN
In connection with the Conversion, the Bank's Board of Directors plans to
adopt a Severance Plan for the benefit of its employees who are not employed by
the Bank pursuant to an employment agreement at the time of a "change in
control" (as defined in the Severance Plan). The Severance Plan provides that in
the event there is a change in control of the Bank or the Company and (i) the
Bank or any successor of the Bank terminates the employment of any full time
employee of the Bank in connection with, or within 24 months after
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the change in control, other than for "cause" (as defined in the Severance
Plan), or (ii) an employee terminates his or her employment with the Bank or any
successor following a decrease in the level of such employee's annual base
salary rate or a transfer of such employee to a location more than 40 miles
distant from the employee's primary work station within 24 months after a change
in control, the employee shall be entitled to a severance benefit equal to the
following: (a) if the employee has been an employee for less than twenty (20)
years, the employee shall be entitled to a benefit equal to the greater of (1)
an amount equal to two weeks' salary at the employee's existing salary rate
multiplied times the employee's number of complete years of service as a Bank
employee or (2) the amount of one month's salary at the employee's salary rate
at the time of termination; or (b) if the employee has been an employee for
twenty (20) or more years, the employee shall be entitled to a benefit equal to
the greater of (1) an amount equal to two weeks' salary of the employee's
existing salary rate multiplied times the employee's number of complete years of
service as a Bank employee or (2) an amount equal to two years of the employee's
annual salary at the employee's existing salary rate.
PROPOSED MANAGEMENT RECOGNITION PLAN
The Boards of Directors of the Company and the Bank intend to adopt the
MRP, subject to approval of the stockholders of the Company at a meeting to be
held no sooner than six months following the Conversion. The MRP will serve as a
means of providing the directors and employees of the Bank with an ownership
interest in the Company in a manner designed to encourage such persons to
continue their service to the Bank. All directors and certain employees of the
Bank would receive benefits under the MRP.
The Company's directors are expected to act by majority as trustees of the
trust associated with the MRP (the "MRP Trust"). The trustees of the MRP Trust
(the "MRP Trustees") will have the responsibility to hold and invest all funds
contributed to the MRP Trust.
At any time following approval of the MRP by the Company's stockholders,
the Company and the Bank expect to contribute sufficient funds to the MRP Trust
so that the MRP Trust could purchase a number of shares of Common Stock equal to
4% of the shares issued in the Conversion. Such shares would be provided by the
issuance of authorized but unissued shares of Common Stock or shares purchased
by the MRP Trust in the open market. Whether such shares will be purchased in
the open market or newly issued by the Company, and the timing of such
purchases, will depend on market and other conditions and the alternative uses
of capital available to the Company. Shares issued to recipients under the MRP
will be restricted and subject to forfeiture as described below.
Recipients would not be required to pay for shares issued to them under the
MRP. To the extent that the MRP acquires authorized but unissued shares of
Common Stock after the Conversion, the interests of existing shareholders will
be diluted. Assuming the issuance of 759,000 shares (872,850 shares at the
maximum, as adjusted) in the Conversion and receipt of stockholder approval,
30,360 shares (34,914 shares at the maximum, as adjusted), would be issued
pursuant to the MRP. Under applicable regulations, if the proposed MRP is
submitted to and approved by the stockholders of the Company within one year
after consummation of the Conversion, (i) no employee of the Bank (including Mr.
Ward) could receive more than 25% of the shares issued under the MRP, or 7,590
shares (8,728 shares at the maximum, as adjusted), assuming the issuance of
759,000 shares (872,850 shares at the maximum, as adjusted) in the Conversion,
(ii) the six non-employee directors of the Bank could receive restricted stock
grants for an aggregate of not more than 30% of the shares issued under the MRP,
or 9,108 shares (10,474 shares at the maximum, as adjusted), assuming the
issuance of
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759,000 shares (872,850 shares at the maximum, as adjusted) in the Conversion
and (iii) none of the six non-employee directors of the Bank could receive
individually more than 5% of the shares issued under the MRP, or 1,518 shares
(1,745 shares at the maximum, as adjusted), assuming the issuance of 759,000
shares (872,850 shares at the maximum, as adjusted) in the Conversion. If the
MRP is submitted to and approved by the Company's stockholders more than one
year after consummation of the Conversion, the regulatory percentage limitations
set forth above would not apply.
After the grant of shares of Common Stock under the MRP, recipients will be
entitled to vote all vested and unvested shares and receive all dividends and
other distributions with respect thereto. If the MRP is submitted for
stockholder approval within twelve months after consummation of the Conversion,
the MRP will provide that 20% of the shares granted will vest and become
nonforfeitable on the first anniversary of the date of the grant under the MRP,
and 20% will vest and become nonforfeitable on each subsequent anniversary date,
so that the shares would be completely vested at the end of five years after the
date of grant. Grants of Common Stock under the MRP will immediately vest upon
the disability or death of a recipient.
If the MRP is submitted to the Company's stockholders and approved by them
more than one year after the consummation of the Conversion, the MRP may provide
for a different or no vesting schedule and may provide that grants of Common
Stock under the MRP will become automatically vested upon retirement or upon a
change in control of the Company or the Bank. In such event, it is expected that
a "change in control" would have the same meaning as is set forth in the
employment agreement with Mr. Ward. See "-- Employment Agreement."
Until shares become vested, the right to direct the voting of such shares
and the right to receive dividends thereon may not be sold, assigned,
transferred, exchanged, pledged or otherwise encumbered. If the recipient of
shares under the MRP terminates his service to the Bank prior to the time shares
become vested (and such shares are not automatically vested under the terms of
the MRP), unvested shares would be forfeited to the MRP and would be subject to
future allocations to others. In addition, the recipient would be required to
repay all dividends received with respect to shares that did not become vested.
It is expected that the MRP will provide that it cannot be terminated upon a
change in control of the Company or the Bank unless the acquiror provides for an
equivalent benefit.
If the MRP is approved by the stockholders, the Bank expects to recognize a
compensation expense for the MRP awards in the amount of the fair market value
of the Common Stock granted. The expense would be recognized pro rata over the
years during which shares vest. The recipients of stock grants would be required
to recognize ordinary income equal to the fair market value of the stock.
PROPOSED OPTION PLAN
The Boards of Directors of the Company and the Bank intend to adopt the
Option Plan, subject to approval of the stockholders of the Company at a meeting
to be held no sooner than six months following the Conversion. As soon as
practicable following stockholder approval of the Option Plan, Common Stock in
the aggregate amount equal to 10% of the shares issued in the Conversion would
be reserved for future issuance by the Company upon the exercise of the stock
options granted under the Option Plan. Assuming the issuance of between 561,000
and 759,000 shares in the Conversion (872,850 shares at the maximum, as
adjusted), an aggregate of between 56,100 and 75,900 shares of Common Stock
would be reserved for issuance (87,285 shares at the maximum, as adjusted).
However, some or all of the shares issued upon the exercise of options granted
under the Option Plan may be purchased in the open market at the time of
exercise.
Assuming the Option Plan is approved by the stockholders of the Company,
the Option Plan would be administered by a committee of the Company's Board of
Directors. Options granted under the Option Plan will have an option exercise
price of not less than the fair market value of the Common Stock on the date the
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options are granted. Options granted under the Option Plan will have a term of
ten years, will not be transferable except upon death and will continue to be
exercisable upon retirement, death or disability. If the Option Plan is
submitted for stockholder approval within twelve months after consummation of
the Conversion, options granted under the Option Plan will have a vesting
schedule which will provide that 20% of the options granted would vest and
become nonforfeitable on the first anniversary of the date of the option grant
and 20% will vest and become nonforfeitable on each subsequent anniversary date,
so that the options would be completely vested at the end of five years after
the date of the option grant. Options would become 100% vested upon death or
disability.
If the Option Plan is submitted to and approved by the Company's
stockholders more than one year after consummation of the Conversion, the Option
Plan may provide for a different or no vesting schedule and may provide that
options will become automatically vested upon retirement or upon a change in
control of the Company or the Bank. In such event, it is expected that a "change
in control" would have the same meaning as is set forth in the employment
agreement with Mr. Ward. See "-- Employment Agreement." The Option Plan is
expected to provide that the Plan cannot be terminated upon a change in control
of the Company or the Bank unless the acquiror provides for an equivalent
benefit to holders of unvested options.
Under applicable regulations, if the proposed Option Plan is submitted to
and approved by the stockholders of the Company within one year after
consummation of the Conversion, (i) no employee of the Bank (including Mr. Ward)
could receive more than 25% of the options issued under the Option Plan, or
options to purchase 18,975 shares (21,821 shares at the maximum, as adjusted),
assuming the issuance of 759,000 shares (872,850 shares at the maximum, as
adjusted) in the Conversion, (ii) the six non-employee directors of the Bank
could receive not more than 30% of the options issued under the Option Plan, or
options to purchase not more than 22,770 shares (26,186 shares at the maximum,
as adjusted), assuming the issuance of 759,000 shares (872,850 shares at the
maximum, as adjusted) in the Conversion, and (iii) none of the six non-employee
directors of the Bank could receive individually more than 5% of the options
issued under the Option Plan, or options to purchase not more than 3,795 shares
(4,364 shares at the maximum, as adjusted), assuming the issuance of 759,000
shares (872,850 shares at the maximum, as adjusted) in the Conversion. If the
Option Plan is submitted to and approved by the Company's stockholders more than
one year after consummation of the Conversion, the regulatory percentage
limitations set forth above would not apply.
Options granted to employees under the Option Plan may be "incentive
stock options" which are designed to result in beneficial tax treatment to the
employee but no tax deduction to the Company or the Bank. The holder of an
incentive stock option generally is not taxed for federal income tax purposes on
either the grant or the exercise of the option. However, the optionee must
include in his or her federal alternative minimum tax income any excess (the
"Bargain Element") of the acquired common stock's fair market value at the time
of exercise over the exercise price paid by the optionee. Furthermore, if the
optionee sells, exchanges, gives or otherwise disposes of such common stock
(other than in certain types of transactions) either within two years after the
option was granted or within one year after the option was exercised (an "Early
Disposition"), the optionee generally must recognize the Bargain Element as
compensation income for regular federal income tax purposes. Any gain realized
on the disposition in excess of the Bargain Element is subject to recognition
under the usual rules applying to dispositions of property. If a taxable sale
or exchange is made after such holding periods are satisfied, the difference
between the exercise price and the amount realized upon the disposition of the
common stock generally will constitute a capital gain or loss for tax purposes.
If an optionee exercises an incentive stock option and delivers shares of common
stock as payment for part or all of the exercise price of the stock purchased
("Payment Stock"), no gain or loss generally will be recognized with respect to
the Payment Stock; provided, however, if the Payment Stock was acquired pursuant
to the exercise of an incentive stock option, the optionee will be subject to
recognizing as compensation income the
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Bargain Element on the Payment Stock as an Early Disposition if the exchange for
the new shares occurs prior to the expiration of the holding periods for the
Payment Stock. The Company generally would not recognize gain or loss or be
entitled to a deduction upon either the grant of an incentive stock option or
the optionee's exercise of an incentive stock option. However, if there is an
Early Disposition, the Company generally would be entitled to deduct the Bargain
Element as compensation paid the optionee.
Options granted to directors under the Option Plan would be "non-qualified
stock options." In general, the holder of a non-qualified stock option will
recognize compensation income equal to the amount by which the fair market value
of the common stock received on the date of exercise exceeds the sum of the
exercise price and any amount paid for the non-qualified stock option. If the
optionee elects to pay the exercise price in whole or in part with common stock,
the optionee generally will not recognize any gain or loss on the common stock
surrendered in payment of the exercise price. The Company would not recognize
any income or be entitled to claim any deduction upon the grant of a non-
qualified stock option. At the time the optionee is required to recognize
compensation income upon the exercise of the non-qualified stock option, the
Company would recognize a compensation expense and be entitled to claim a
deduction in the amount equal to such compensation income.
If the Option Plan is approved by the stockholders of the Company, the
options granted to employees and directors pursuant to the Option Plan would be
issued in recognition of the recipients' past service to the Bank and as an
incentive for their continued performance. No cash consideration will be paid
for the options.
CERTAIN INDEBTEDNESS AND TRANSACTIONS OF MANAGEMENT
The Bank makes loans to executive officers and directors of the Bank in the
ordinary course of its business. These loans are made on the same terms,
including interest rates and collateral, as those then prevailing for comparable
transactions with nonaffiliated persons, and do not involve more than the normal
risk of collectibility or present any other unfavorable features. The Bank does
not make loans to executive officers and directors of the Bank on terms more
favorable than could be obtained by persons not affiliated with the Bank. There
were no loans outstanding at December 31, 1997 which were made to directors and
officers and their affiliates.
DESCRIPTION OF CAPITAL STOCK
THE COMPANY
The Company is authorized to issue 20,000,000 shares of Common Stock and
5,000,000 shares of preferred stock. Neither the authorized Common Stock nor the
authorized preferred stock has any par value.
COMMON STOCK. General. THE COMPANY'S COMMON STOCK WILL REPRESENT
NONWITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL
NOT BE INSURED BY THE FDIC, ANY OTHER GOVERNMENTAL ENTITY, THE COMPANY OR THE
BANK. Upon payment of the purchase price for the Common Stock, all such stock
will be duly authorized, validly issued, fully paid, and nonassessable.
Dividends. The holders of the Company's Common Stock will be entitled to
receive and share ratably in such dividends on Common Stock as may be declared
by the Board of Directors of the Company out of funds legally available
therefor, subject to applicable statutory and regulatory restrictions. See
"SUPERVISION AND REGULATION -- Regulation of the Company -- Restrictions on
Dividends." The
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ability of the Company to pay dividends may be dependent on the receipt of
dividends from the Bank. See "DIVIDEND POLICY," "SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions," and "TAXATION."
Stock Repurchases. The shares of Common Stock do not have any redemption
provisions. Stock repurchases are subject to Federal Reserve rules and
regulations and North Carolina corporate laws regarding capital distributions.
Voting Rights. Upon Conversion, the holders of Common Stock, as the only
class of capital stock of the Company then outstanding, will possess exclusive
voting rights with respect to the Company. Such holders will have the right to
elect the Company's Board of Directors and to act on such other matters as are
required to be presented to stockholders under North Carolina law or as are
otherwise presented to them. Each holder of Common Stock will be entitled to one
vote per share. The holders of Common Stock will have no right to vote their
shares cumulatively in the election of directors. As a result, the holders of a
majority of the shares of Common Stock will have the ability to elect all of the
directors on the Company's Board of Directors.
Liquidation Rights. In the event of a liquidation, dissolution or winding
up of the Company, the holders of Common Stock of the Company would be entitled
to ratably receive, after payment of or making of adequate provisions for, all
debts and liabilities of the Company and after the rights, if any, of preferred
stockholders of the Company, all remaining assets of the Company available for
distribution.
Preemptive Rights. Holders of the Common Stock of the Company will not be
entitled to preemptive rights with respect to any shares which may be issued by
the Company.
Shares Owned by Directors and Executive Officers. All shares of Common
Stock issued in the Conversion to directors and executive officers of the
Company and the Bank will contain a restriction providing that such shares may
not be sold without the written permission of the Administrator for a period of
one year following the date of purchase, except in the event of death of the
director or the executive officer.
PREFERRED STOCK. None of the 5,000,000 shares of the Company's authorized
preferred stock have been issued and none will be issued in the Conversion. Such
stock may be issued in one or more series with such rights, preferences and
designations as the Board of Directors of the Company may from time to time
determine subject to applicable law and regulations. If and when such shares are
issued, holders of such shares may have certain preferences, powers and rights
(including voting rights) senior to the rights of the holders of the Common
Stock. The Board of Directors can (without stockholder approval) issue preferred
stock with voting and conversion rights which could, among other things,
adversely affect the voting power of the holders of the Common Stock and assist
management in impeding an unfriendly takeover or attempted change in control of
the Company that some stockholders may consider to be in their best interests
but to which management is opposed. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE
COMPANY AND THE BANK --The Company -- Restrictions in Articles of Incorporation
and Bylaws." The Company has no current plans to issue preferred stock.
RESTRICTIONS ON ACQUISITION. Acquisitions of the Company and acquisitions
of the capital stock of the Company are restricted by provisions in the Articles
of Incorporation and Bylaws of the Company and by various federal and state laws
and regulations. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE
BANK -- The Company -- Restrictions in Articles of Incorporation and Bylaws" and
"-- Regulatory Restrictions."
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THE BANK
COMMON STOCK. After consummation of the Conversion, the Bank will be
authorized to issue 100,000 shares of common stock, no par value ("the Bank
Common Stock"). The Bank Common Stock will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the FDIC
or any other governmental entity.
DIVIDENDS. The payment of dividends by the Bank is subject to limitations
which are imposed by North Carolina law and regulations. See "DIVIDEND POLICY"
and "SUPERVISION AND REGULATION -- Regulation of the Bank --Restrictions on
Dividends and Other Capital Distributions." In addition, federal income tax law
considerations may affect the ability of the Bank to pay dividends and make
other capital distributions. See "TAXATION." The holders of the Bank Common
Stock will be entitled to receive and share ratably in such dividends on the
Bank Common Stock as may be declared by the Board of Directors of the Bank out
of funds legally available therefor, subject to applicable statutory and
regulatory restrictions.
VOTING RIGHTS. As a mutual North Carolina chartered savings bank, the Bank
currently has no stockholders, and voting rights in the Bank are currently held
by the Bank's members (depositors and borrowers). Members elect the Bank's Board
of Directors and vote on such other matters as are required to be presented to
them under North Carolina law.
Upon Conversion, the Company, as sole stockholder of the Bank, will possess
the exclusive voting rights with respect to the Bank Common Stock, will elect
the Bank's Board of Directors and will act on such other matters as are required
to be presented to stockholders under North Carolina law or as are otherwise
presented to stockholders by the Bank's Board of Directors. The holders of the
Bank Common Stock will have no right to vote their shares cumulatively in the
election of directors of the Bank.
LIQUIDATION RIGHTS. After the Conversion, in the event of any liquidation,
dissolution or winding up of the Bank, the Company, as holder of all of the
Bank's outstanding capital stock, would be entitled to receive all remaining
assets of the Bank available for distribution, after payment of or making of
adequate provisions for, all debts and liabilities of the Bank (including all
deposit accounts and accrued interest thereon) and after distribution of the
balance in the liquidation account established in connection with the Conversion
to Eligible Account Holders and Supplemental Eligible Account Holders. See "THE
CONVERSION -- Effects of Conversion -- Liquidation Rights."
PREEMPTIVE RIGHTS. Holders of the Bank Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued by the Bank.
RESTRICTIONS ON ACQUISITION. Acquisitions of the Bank and acquisitions of
its capital stock are restricted by various federal and state laws and
regulations. See "ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK --
The Bank."
ANTI-TAKEOVER PROVISIONS AFFECTING THE COMPANY AND THE BANK
THE COMPANY
RESTRICTIONS IN ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and Bylaws of the Company contain certain provisions that are
intended to encourage a potential acquiror to negotiate any
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proposed acquisition of the Company directly with the Company's Board of
Directors. An unsolicited non-negotiated takeover proposal can seriously disrupt
the business and management of a corporation and cause it great expense.
Accordingly, the Board of Directors believes it is in the best interests of the
Company and its stockholders to encourage potential acquirors to negotiate
directly with management. The Board of Directors believes that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It is
also the Board of Directors' view that these provisions should not discourage
persons from proposing a merger or transaction at prices reflective of the true
value of the Company and that otherwise is in the best interests of all
stockholders. However, these provisions may have the effect of discouraging
offers to purchase the Company or its securities which are not approved by the
Board of Directors but which certain of the Company's stockholders may deem to
be in their best interests or pursuant to which stockholders would receive a
substantial premium for their shares over the current market prices. Therefore,
the existence of such anti-takeover provisions in fact may not always be in the
best interests of all shareholders. Stockholders who might desire to participate
in such a takeover not supported by management may not have an opportunity to do
so. Such provisions will also render the removal of the current Board of
Directors and management more difficult. Nevertheless, the Boards of Directors
of the Bank and the Company believe these provisions are in the best interests
of the stockholders because they will assist the Company's Board of Directors in
managing the affairs of the Company in the manner they believe to be in the best
interests of stockholders generally and because a company's board of directors
is often best able in terms of knowledge regarding the company's business and
prospects, as well as resources, to negotiate the best transaction for its
stockholders as a whole.
The following description of certain of the provisions of the Articles of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each instance to such Articles of Incorporation and Bylaws.
See "ADDITIONAL INFORMATION" regarding how to obtain a copy of these documents.
Board of Directors. The Bylaws of the Company provide that the number of
directors shall not be less than five nor more than 15. The initial number of
directors is seven, but such number may be changed by resolution of the Board of
Directors. These provisions have the effect of enabling the Board of Directors
to elect directors friendly to management in the event of a non-negotiated
takeover attempt and may make it more difficult for a person seeking to acquire
control of the Company to gain majority representation on the Board of Directors
in a relatively short period of time. The Company believes these provisions to
be important to continuity in the composition and policies of the Board of
Directors.
The Articles of Incorporation provide that, if and when the number of
directors is at least nine, there will be staggered elections of directors so
that the directors will each be initially elected to one, two or three-year
terms, and thereafter (so long as the number of directors is nine or more) all
directors will be elected to terms of three years each. This provision also has
the effect of making it more difficult for a person seeking to acquire control
of the Company to gain majority representation on the Board of Directors.
The Articles of Incorporation and Bylaws of the Company provide that
directors may be removed prior to the end of their term only for cause.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of the Company's shares cannot be assured representation on the Board
of Directors, the
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absence of cumulative voting may discourage accumulations of the Company's
shares or proxy contests that would result in changes in the Company's
management. The Board of Directors believes that (i) elimination of cumulative
voting will help to assure continuity and stability of management and policies;
(ii) directors should be elected by a majority of the stockholders to represent
the interests of the stockholders as a whole rather than be the special
representatives of particular minority interests; and (iii) efforts to elect
directors representing specific minority interests are potentially divisive and
could impair the operations of the Company.
Special Meetings. The Bylaws of the Company provide that special meetings
of stockholders of the Company may be called by the Chairman of the Board, the
Chief Executive Officer, the President, or by the Board of Directors. If a
special meeting is not called by such persons or entities, stockholder proposals
cannot be presented to the stockholders for action until the next annual
meeting.
Capital Stock. The Articles of Incorporation of the Company authorize the
issuance of 20,000,000 shares of common stock and 5,000,000 shares of preferred
stock. The shares of common stock and preferred stock authorized in addition to
the number of shares of Common Stock to be issued pursuant to the Conversion
were authorized to provide the Company's Board of Directors with flexibility to
issue additional shares, without further stockholder approval, for proper
corporate purposes, including financing, acquisitions, stock dividends, stock
splits, director and employee stock options, grants of restricted stock to
directors and certain employees and other appropriate purposes. However,
issuance of additional authorized shares may also have the effect of impeding or
deterring future attempts to gain control of the Company.
The Board of Directors also has sole authority to determine the terms of
any one or more series of preferred stock, including voting rights, conversion
rates, dividend rights, and liquidation preferences, which could adversely
affect the voting power of the holders of the Common Stock and discourage an
attempt to acquire control of the Company. The Board of Directors does not
intend to issue any preferred stock, except on terms which it deems to be in the
best interests of the Company and its stockholders. However, the Board of
Directors has the power, to the extent consistent with its fiduciary duties, to
issue preferred stock to persons friendly to management or otherwise in order to
impede attempts by third parties to acquire voting control of the Company and to
impede other transactions not favored by management. The Board of Directors
currently has no plans for the issuance of additional shares of Common Stock
(except for such shares as may be necessary to fund a MRP and a Option Plan) or
of shares of preferred stock.
Director Nominations. The Bylaws of the Company require a stockholder who
intends to nominate a candidate for election to the Board of Directors at a
stockholders' meeting to give written notice to the Secretary of the Company at
least 50 days (but not more than 90 days) in advance of the date of the meeting
at which such nominations will be made. The nomination notice is also required
to include specified information concerning the nominee and the proposing
stockholder. The Board of Directors of the Company believes that it is in the
best interests of the Company and its stockholders to provide sufficient time
for the Board of Directors to study all nominations and to determine whether to
recommend to the stockholders that such nominees be considered.
SUPERMAJORITY VOTING PROVISIONS. The Company's Articles of Incorporation
require the affirmative vote of 75% of the outstanding shares entitled to vote
to approve a merger, consolidation, or other business combination, unless the
transaction is approved, prior to consummation, by the vote of at least 75% of
the number of the Continuing Directors (as defined in the Articles of
Incorporation) on the Company's Board of Directors. "Continuing Directors"
generally includes all members of the Board of Directors who are not affiliated
with any individual, partnership, trust or other person or entity (or the
affiliates and associates of such
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person or entity) which is a beneficial owner of 10% or more of the voting
shares of the Company. This provision could tend to make the acquisition of the
Company more difficult to accomplish without the cooperation or favorable
recommendation of the Company's Board of Directors.
ANTI-TAKEOVER EFFECT OF EMPLOYMENT AGREEMENTS AND BENEFIT PLANS. If
approved by the stockholders of the Company at a meeting of stockholders
following the Conversion, the MRP and the Option Plan will provide for the
ownership of additional shares of Common Stock by the employees and the
directors of the Bank and for voting control by directors and certain employees
over shares held by the MRP and Option Plan which are attributable to grants
made to them under such plans even though the grants are not yet vested. See
"MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan" and "--Proposed
Option Plan."
If (i) the Option Plan is approved by the stockholders of the Company
within one year after the Conversion and all of the stock options which could be
granted to directors and executive officers under the Option Plan are granted
and exercised or the shares for such options are acquired by the Option Plan and
all option shares are acquired in the open market, (ii) the MRP is approved by
the stockholders of the Company within one year after the Conversion, all of the
MRP shares which could be granted to directors and executive officers are
granted and issued and all such shares are acquired in the open market, (iii)
the Company did not issue any additional shares of its Common Stock, the shares
held by directors and executive officers and their associates as a group,
including (a) shares purchased outright in the Conversion, (b) shares purchased
pursuant to the Option Plan and (c) shares granted under the MRP, would give
such persons effective control over as much as 23.6% or 21.1%, at the minimum
and maximum of the Estimated Valuation Range, respectively, of the Common Stock
issued and outstanding.
The existence of the employment agreements with employees could make a
business combination with the Bank more costly and could discourage such
transactions. See "MANAGEMENT OF THE BANK -- Employment Agreements."
REGULATORY RESTRICTIONS. Applicable North Carolina regulations provide that
for a period of three years following the Conversion, the prior written approval
of the Administrator will be required before any person may, directly or
indirectly, acquire beneficial ownership of or make any offer to acquire any
stock or other equity security of the Company if, after the acquisition or
consummation of such offer, such person would be the beneficial owner of more
than 10% of such class of stock or other class of equity security of the
Company. If any person were to so acquire the beneficial ownership of more than
10% of any class of any equity security without prior written approval, the
securities beneficially owned in excess of 10% would not be counted as shares
entitled to vote and would not be voted or counted as voting shares in
connection with any matter submitted to stockholders for a vote. Approval is not
required for (i) any offer with a view toward public resale made exclusively to
the Company or its underwriters or the selling group acting on its behalf or
(ii) any offer to acquire or acquisition of beneficial ownership of more than
10% of the common stock of the Company by a corporation whose ownership is or
will be substantially the same as the ownership of the Company, provided that
the offer or acquisition is made more than one year following the consummation
of the Conversion. The regulation provides that within one year following the
Conversion, the Administrator would approve the acquisition of more than 10% of
beneficial ownership only to protect the safety and soundness of the
institution. During the second and third years after the Conversion, the
Administrator may approve such an acquisition upon a finding that (i) the
acquisition is necessary to protect the safety and soundness of the Company and
the Bank or the Board of Directors of the Company and the Bank support the
acquisition and (ii) the acquiror is of good character and integrity and
possesses satisfactory managerial skills,
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the acquiror will be a source of financial strength to the Company and the Bank
and the public interests will not be adversely affected.
The Change in Bank Control Act, together with North Carolina regulations,
require that the consent of the Administrator, and Federal Reserve, be obtained
prior to any person or company acquiring "control" of a North Carolina-chartered
savings bank or a North Carolina-chartered savings bank holding company. In
addition, except in limited circumstances, FDIC approval is required for a
change in control of a state savings bank. Upon acquiring control, such acquiror
will be deemed to be a bank Company. Control is conclusively presumed to exist
if, among other things, an individual or company acquires the power, directly or
indirectly, to direct the management or policies of the Company or the Bank or
to vote 25% or more of any class of voting stock. Control is rebuttably presumed
to exist under the Change in Bank Control Act if, among other things, a person
acquires more than 10% of any class of voting stock, and the issuer's securities
are registered under Section 12 of the Exchange Act or the person would be the
single largest stockholder. Restrictions applicable to the operations of bank
holding companies and conditions imposed by the Federal Reserve in connection
with its approval of such acquisitions may deter potential acquirors from
seeking to obtain control of the Company. See "SUPERVISION AND REGULATION --
Regulation of the Company."
THE BANK
Upon consummation of the Conversion, the Bank will become a wholly-owned
subsidiary of the Company, and, consequently, restrictions on the acquisition of
the Bank would have a more limited effect than if the Bank's common stock were
held directly by the stockholders purchasing in the Conversion. However,
restrictions on the acquisition of the Bank may discourage takeover attempts of
the Company in order to gain immediate control of the Bank.
REGULATORY RESTRICTIONS. The Administrator and the Federal Reserve have
conditionally approved the Company's acquisition of all of the stock of the Bank
issued in the Conversion. For three years following completion of a conversion,
North Carolina conversion regulations require the prior written approval of the
Administrator before any person may directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of an equity
security of a converting state savings bank such as the Bank. If any person were
to so acquire the beneficial ownership of more than 10% of any class of any
equity security without prior written approval, the securities beneficially
owned in excess of 10% would not be counted as shares entitled to vote and would
not be voted or counted as voting shares in connection with any matter submitted
to stockholders for a vote. Approval is not required for (i) any offer with view
toward public resale made exclusively to the Bank or its underwriters or the
selling group acting on its behalf or (ii) any offer to acquire or acquisition
of beneficial ownership of more than 10% of the common stock of the Bank by a
corporation whose ownership is or will be substantially the same as the
ownership of the Bank, provided that the offer or acquisition is made more than
one year following the consummation of the Conversion. Similarly, Federal
Reserve approval is required before any person or entity may acquire "control"
of the Bank. See "-- The Company-- Regulatory Restrictions."
BOARD OF DIRECTORS. The amended Articles of Incorporation of the Bank
upon consummation of the Conversion will provide that the number of directors
may be no less than five. The initial number of directors will be seven, but
such number may be changed by resolution of the Board of Directors. This
provision has the effect of enabling the Board of Directors to elect directors
friendly to management in the event of a non-negotiated takeover attempt. The
Bank's Bylaws also provide for staggered elections of directors if and when the
total number of directors is at least nine. These provisions are designed to
make it more difficult for a person seeking to acquire control of the Bank to
gain majority representation on the Board of Directors in a
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relatively short period of time. The Bank believes these provisions to be
important to continuity in the composition and policies of its Board of
Directors.
CERTAIN PROVISIONS OF THE CHARTERS AND BYLAWS OF
THE COMPANY AND THE BANK
LIMITATIONS OF LIABILITY
The Charters of both the Company and the Bank provide that the directors of
each shall not be personally liable to the corporation they serve or its
stockholders for money damages for breach of any duty as a director to the
fullest extent permitted by North Carolina law. The North Carolina Business
Corporation Act authorizes such provisions, but provides that they shall not be
effective with respect to (i) acts or omissions of directors that the director
knew or believed at the time were clearly in conflict with the best interests of
the corporation, (ii) transactions from which the director derived an improper
personal benefit, (iii) liability for certain unlawful distributions of
corporation assets, and (iv) with respect to acts or omissions that occurred
prior to the effectiveness of the provisions. The Bank's mutual charter contains
a similar provision.
INDEMNIFICATION
The Bylaws of both the Company and the Bank provide that any person who
serves as a director, officer, employee or agent of the corporation shall have a
right to be indemnified by the corporation they serve to the full extent allowed
by applicable law for liability or litigation expense arising out of activities
in such capacities. Both the Bylaws and the North Carolina Business Corporation
Act provide that there shall be no indemnification for liability or expense
arising out of activities which were known or believed by such persons at the
time of such activities to be clearly in conflict with the best interests of the
corporation. The Bank's mutual bylaws contain a similar provision.
DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
and the Bank pursuant to the foregoing provisions, or otherwise, the Company and
the Bank have been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act, and is therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company and the Bank of expenses
incurred or paid by a director, officer or controlling person of the Company and
the Bank in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Company and the Bank will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED AND THE ADMINISTRATOR HAS
APPROVED COMPLETION OF THE TRANSACTIONS DESCRIBED IN THE PLAN SUBJECT TO
APPROVAL BY THE MEMBERS OF THE BANK AND TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. APPROVAL BY THE ADMINISTRATOR DOES NOT CONSTITUTE A RECOMMENDATION
OR ENDORSEMENT OF THE PLAN BY THE ADMINISTRATOR.
GENERAL
The Bank was organized and has operated as a traditional savings and loan
association. It recognizes that the banking and financial services industries
are in the process of fundamental changes, reflecting changes in the local,
national and international economies, technological changes and changes in state
and federal laws. As a result, for several years the Bank has been studying the
environment in which it operates and its strategic options.
As a result of its study of its strategic options, the Bank adopted the
Plan. The Bank believes that converting the bank from the mutual to stock form
and organizing the Company will provide increased flexibility for the Bank and
the Company to react to changes in their operating environment, regardless of
the strategies ultimately chosen.
The existing management of the Bank and the Company believes that at this
time it is in the best interests of the Bank, the Company and the stockholders
of the Company for the Company to remain an independent financial institution.
Assuming the consummation of the Conversion, the Company and the Bank intend to
pursue the business strategy described in this Prospectus with the goal of
enhancing shareholder value over the long term. Neither the Company nor the Bank
has any existing plan to consider any business combination, and neither company
has any agreement or understanding with respect to any possible business
combination.
The Board of Director's adoption of the Plan is subject to approval by the
members of the Bank and receipt of required regulatory approvals. Pursuant to
the Plan, the Bank will be converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank and will become a
wholly-owned subsidiary of the Company. The Company will issue the Common Stock
to be sold in the Conversion and will use that portion of the net proceeds
thereof which it does not retain to purchase the capital stock of the Bank. By
letter dated May 11, 1998, the Administrator approved the Plan, subject to
approval by the members of the Bank and satisfaction of certain other
conditions. The Special Meeting will be held on June 15, 1998 for the purpose of
considering approval of the Plan.
Consummation of the Conversion is contingent also upon receipt of the
approvals of the Federal Reserve and the Administrator for the Company to
acquire the Bank. Those approvals have been received. The Conversion cannot be
consummated until the expiration of the Bank Merger Act of 1956 waiting period
which began to run upon approval by the Federal Reserve of the Company's
application and expires May 27, 1998. Finally, consummation of the Conversion is
contingent upon receipt from the FDIC of a final non-objection letter with
respect to the transaction. The FDIC has issued a conditional notification that
it does not intend to object to the Conversion.
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The following is a summary of all material provisions of the Plan. It
is qualified in its entirety by the provisions of the Plan, which contains a
more detailed description of the terms of the Conversion. The Plan is attached
as Attachment I to the Bank's Proxy Statement for the Special Meeting which has
been delivered to all members of the Bank. The Plan can also be obtained by
written request from the Bank. See "ADDITIONAL INFORMATION."
PURPOSES OF CONVERSION
The Bank, as a mutual savings bank, now has no stockholders and no
authority to issue capital stock. By converting to the stock form of
organization, the Bank will be structured in the form used by most commercial
banks, other business entities and a substantial number of savings institutions.
Conversion to a North Carolina-chartered capital stock savings bank and the
formation of a Company offers a number of advantages which may be important to
the future and performance of the Bank, including (i) a larger capital base for
the Bank's operations, (ii) an enhanced future access to capital markets and
(iii) an opportunity for depositors of the Bank to become stockholders of the
Company.
After completion of the Conversion, the unissued common and preferred stock
authorized by the Company's Articles of Incorporation will permit the Company,
subject to market conditions, to raise additional equity capital through further
sales of securities. Following the Conversion, the Company will also be able to
use stock-related incentive programs to attract, retain and provide incentives
for qualified directors and executive and other personnel of the Company and the
Bank. See "MANAGEMENT OF THE BANK -- Stock Based Benefits."
Formation of the Company will provide greater flexibility than the Bank
would otherwise have to expand and diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
with, both mutual and stock institutions, as well as other companies. However,
there are no current plans, arrangements, understandings or agreements regarding
any such business combinations.
EFFECTS OF CONVERSION
GENERAL. Each person with a deposit account in the Bank has pro rata
rights, based upon the balance in his or her account, in the net worth of the
Bank upon liquidation. However, this right is tied to the depositor's account
and has no tangible market value separate from such deposit account. Further,
the Bank's depositors can realize value with respect to their interests only in
the unlikely event that the Bank is liquidated and has a positive net worth. In
such an event, the depositors of record at that time, as owners, would share pro
rata in any residual surplus after other claims, including those with respect to
the deposit accounts of depositors, are paid.
Upon the Bank's Conversion to stock form, its Certificate of Incorporation
will be amended to authorize the issuance of permanent nonwithdrawable capital
stock to represent the ownership of the Bank, including its net worth. THE
CAPITAL STOCK WILL BE SEPARATE AND APART FROM DEPOSIT ACCOUNTS AND WILL NOT BE
INSURED BY THE FDIC, ANY OTHER GOVERNMENTAL ENTITY, THE COMPANY OR THE BANK.
Certificates will be issued to evidence ownership of the capital stock. All of
the outstanding capital stock of the Bank will be acquired by the Company, which
in turn will issue its Common Stock to purchasers in the Conversion. The stock
certificates issued by the Company will be transferable and, therefore, subject
to applicable law, the stock could be sold or traded if a purchaser is available
with no effect on any deposit account the seller may hold at the Bank.
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If all conditions for consummation of the Conversion are not satisfied, no
Common Stock will be issued, the Bank will continue to operate as a North
Carolina-chartered mutual savings bank, all subscription funds will be promptly
returned with interest at the Bank's passbook savings rate, and all deposit
withdrawal authorizations (and holds placed on such accounts) will be canceled.
In such an event, the Company would not acquire control of the Bank.
VOTING RIGHTS. Under the Bank's current Certificate of Incorporation and
Bylaws, deposit account holders and borrowers have voting rights with respect to
certain matters relating to the Bank, including the election of directors. After
the Conversion, (i) neither deposit account holders nor borrowers will have
voting rights with respect to the Bank and will therefore not be able to elect
directors of the Bank or control its affairs; (ii) voting rights with respect to
the Bank will be vested in the Company as the sole stockholder of the Bank; and
(iii) voting rights with respect to the Company will be vested in the Company's
stockholders. Each purchaser of Common Stock will be entitled to vote on any
matters to be considered by the Company's stockholders. For a description of the
voting rights of the holders of Common Stock, see "DESCRIPTION OF CAPITAL
STOCK."
DEPOSIT ACCOUNTS AND LOANS. The account balances, interest rates and other
terms of deposit accounts at the Bank and the existing deposit insurance
coverage of such accounts will not be affected by the Conversion (except to the
extent that a depositor directs the Bank to withdraw funds to pay for his or her
Common Stock). Furthermore, the Conversion will not affect any loan account, the
balances, interest rates, maturities or other terms of these accounts, or the
obligations of borrowers under their individual contractual arrangements with
the Bank.
CONTINUITY. The Bank will continue without interruption, during and after
completion of the Conversion, to provide its services to depositors and
borrowers pursuant to existing policies and will maintain its office operated by
the existing management and employees of the Bank.
LIQUIDATION RIGHTS. In the unlikely event of a complete liquidation of the
Bank, either before or after Conversion, account holders would have claims for
the amount of their deposit accounts, including accrued interest, and would
receive the protection of deposit insurance up to applicable limits. In addition
to deposit insurance coverage, depositor liquidation rights before and after
Conversion would be as follows:
Liquidation Rights Prior to the Conversion. Prior to the Conversion, in the
event of a complete liquidation of the Bank, each holder of a deposit account in
the Bank would receive such holder's pro rata share of any assets of the Bank
remaining after payment of claims of all creditors (including the claims of all
depositors to the withdrawal value of their accounts, including accrued
interest). Such holder's pro rata share of such remaining assets, if any, would
be in the same proportion of such assets as the value of such holder's deposit
account was to the total value of all deposit accounts in the Bank at the time
of liquidation.
Liquidation Rights After the Conversion. As required by North Carolina
conversion regulations, the Plan provides that, upon completion of the
Conversion, a memorandum account called a "Liquidation Account" will be
established for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. The amount of the Liquidation Account will be equal to
the net worth of the Bank as of the date of its latest statement of financial
condition contained in the final prospectus relating to the sale of shares of
Common Stock in the Conversion. Under applicable regulations, the Bank will not
be permitted to pay dividends on, or repurchase any of, its capital stock if its
net worth would thereby be reduced below the aggregate amount then required for
the Liquidation Account. See "DIVIDEND POLICY" and SUPERVISION AND REGULATION --
Regulation of the Bank -- Restrictions on Dividends and Other
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Capital Distributions." After the Conversion, Eligible Account Holders and
Supplemental Eligible Account Holders will be entitled, in the event of a
complete liquidation of the Bank, to receive liquidating distributions of any
assets remaining after payment of all creditors' claims (including the claims of
all depositors to the withdrawal values of their deposit accounts, including
accrued interest), before any distributions are made on the Bank's capital
stock, equal to their proportionate interests at that time in the Liquidation
Account.
Each Eligible Account Holder and Supplemental Eligible Account Holder will
have an initial interest ("subaccount balance") in the Liquidation Account for
each deposit account held as of September 30, 1996 (the Eligibility Record Date)
or as of March 31, 1998 (the Supplemental Eligibility Record Date),
respectively. Each initial subaccount balance will be the amount determined by
multiplying the total opening balance in the Liquidation Account by the
Qualifying Deposit (a deposit of at least $50 as of the Eligibility Record Date
or Supplemental Eligibility Record Date, as applicable) of such deposit account
divided by the total of all Qualifying Deposits on that date. If the amount in
the deposit account on any subsequent annual closing date of the Bank is less
than the balance in such deposit account on any other annual closing date or the
balance in such an account on the Eligibility Record Date or Supplemental
Eligibility Record Date, as the case may be, this interest in the Liquidation
Account will be reduced by an amount proportionate to any such reduction, and
will not thereafter be increased despite any subsequent increase in the related
deposit account. An Eligible Account Holder's or Supplemental Eligible Account
Holder's interest in the Liquidation Account will cease to exist if the deposit
account is closed. The Liquidation Account will never increase and will be
correspondingly reduced as the interests in the Liquidation Account are reduced
or cease to exist. In the event of a liquidation, any assets remaining after the
above liquidation rights of Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to the Company, as sole
stockholder of the Bank.
A merger, consolidation, sale of bulk assets or similar combination or
transaction with another FDIC-insured depository institution, whether or not the
Bank is the surviving institution, would not be viewed as a complete liquidation
for purposes of distribution of the Liquidation Account. In any such
transaction, the Liquidation Account would be assumed by the surviving
institution to the full extent authorized by regulations of the Administrator as
then in effect.
OFFERING OF COMMON STOCK
As part of the Conversion, the Company is making the Subscription Offering
of Common Stock in the priorities and to the persons described below under "--
Subscription Offering." In addition, any shares which remain unsubscribed for in
the Subscription Offering will be offered in the Community Offering to members
of the general public, with priority being given to natural persons and trusts
of natural persons residing or located in the Local Community, including IRAs,
Keogh accounts and similar retirement accounts established for the benefit of
natural persons who are residents of the Local Community. See "-- Community
Offering." If necessary, all shares of Common Stock not purchased in the
Subscription Offering and Community Offering, if any, may be offered for sale to
the general public through a syndicate of registered broker-dealers as selected
dealers to be managed by Trident Securities. See "--Syndicated Community
Offering." The Plan requires that the aggregate dollar amount of the Common
Stock sold equal not less than the minimum nor more than the maximum of the
Estimated Valuation Range which is established in connection with the
Conversion; provided, however, with the consent of the Administrator and the
FDIC the aggregate dollar amount of the Common Stock sold may be increased to as
much as 15% above the maximum of the Estimated Valuation Range, without a
resolicitation of subscribers or any right to cancel subscriptions, in order to
reflect changes in market and financial conditions following commencement of the
Subscription Offering. See "-- Purchase Price of Common Stock and Number of
Shares Offered." If the Syndicated
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Community Offering is not feasible or successful and Common Stock having an
aggregate value of at least the minimum of the Estimated Valuation Range is not
subscribed for in the Subscription and Community Offering, the Company will
consult with the Administrator to determine an appropriate alternative method of
selling all shares of Common Stock offered in the Conversion and not subscribed
for in the Offering. The same per share price ($10.00) will be paid by
purchasers in the Subscription, Community and Syndicated Community Offering.
The Subscription Offering will expire at the Expiration Time, which is
12:00 noon, Eastern Time, on June 9, 1998, unless, with the approval of the
Administrator, the offering period is extended by the Company and the Bank. The
Community Offering, if any, may begin at any time after the Subscription
Offering begins and will terminate at the Expiration Time or at any time
thereafter, but not later than July 24, 1998, unless extended with the approval
of the Administrator. The Syndicated Community Offering, if any, or other sale
of all shares not subscribed for in the Subscription and Community Offering,
will be made as soon as practicable following the Expiration Time. The sale of
the Common Stock must, under the North Carolina conversion regulations, be
completed within 45 days after the Expiration Time unless such period is
extended with the approval of the Administrator. In the event such an extension
is approved, subscribers would be resolicited and would be given the opportunity
to increase (subject to maximum purchase limitations), decrease (subject to
minimum purchase limitations) or rescind their subscriptions. If a subscriber
fails to respond to the resolicitation by the end of the resolicitation period,
the subscription of such subscriber will be canceled, funds submitted with the
subscription will be refunded promptly with interest at the Bank's passbook
savings rate, and holds on accounts from which withdrawals were designated will
be released. Any such solicitation will be by means of an amended prospectus
filed with the SEC. In such event, substantial additional printing, legal and
accounting expenses may be incurred in completing the Conversion. The Offering
may not be extended beyond June 15, 2000.
The commencement and completion of any required Community or Syndicated
Community Offering will be subject to market conditions and other factors beyond
the Company's control. Accordingly, no assurance can be given that any required
Community or Syndicated Community Offering or other sale of Common Stock will be
commenced at any particular time or as to the length of time that will be
required to complete the sale of all shares of Common Stock offered, and
significant changes may occur in the estimated pro forma market value of the
Common Stock, together with corresponding changes in the offering price, the
number of shares being offered, and the net proceeds realized from the sale of
the Common Stock. The Plan requires that the Conversion be completed within 24
months after the date of approval of the Plan by the Bank's members.
SUBSCRIPTION OFFERING
In accordance with North Carolina conversion regulations, non-transferable
Subscription Rights have been granted under the Plan to the following persons in
the following order of priority: (i) the Bank's Eligible Account Holders, who
are depositors as of September 30, 1996 who had aggregate deposits at the close
of business on such date of at least $50.00 ("Qualifying Deposits"); (ii) the
Bank's Supplemental Eligible Account Holders, who are depositors as of March 31,
1998 who had Qualifying Deposits on such date; (iii) the Bank's Other Members,
who are depositor and borrower members as of April 30, 1998, the voting record
date for the Special Meeting, who are not Eligible Account Holders or
Supplemental Eligible Account Holders; and (iv) directors, officers and
employees of the Bank who are not Eligible Account Holders, Supplemental
Eligible Account Holders or Other Members, in the priorities and subject to the
limitations described herein. All subscriptions received will be subject to the
availability of Common Stock after satisfaction of subscriptions of all persons
having prior rights in the Subscription Offering, and to the maximum purchase
limitations and other terms and conditions set forth in the Plan and described
below.
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IN ORDER TO ENSURE PROPER IDENTIFICATION OF SUBSCRIPTION RIGHTS, IT IS THE
RESPONSIBILITY OF SUBSCRIBERS IN THE SUBSCRIPTION OFFERING TO PROVIDE CORRECT
ACCOUNT VERIFICATION INFORMATION ON THE ORDER FORMS.
ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder has been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the maximum purchase limitation described in "--Minimum and
Maximum Purchase Limitations." If Eligible Account Holders subscribe for more
shares of Common Stock than are available for purchase, the shares offered will
first be allocated among the subscribing Eligible Account Holders so as to
enable each subscribing Eligible Account Holder to the extent possible, to
purchase the number of shares necessary to make his or her total allocation of
Common Stock equal to the lesser of 100 shares of Common Stock or the number of
shares subscribed for by such Eligible Account Holder. Any shares remaining
after such allocation will be allocated among the subscribing Eligible Account
Holders whose subscriptions remain unsatisfied in the proportion that each such
Eligible Account Holder's Qualifying Deposits bears to the total of the
Qualifying Deposits of all such Eligible Account Holders.
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, each Supplemental Eligible Account Holder has been granted, without
payment therefor, non-transferable Subscription Rights to purchase Common Stock
up to the maximum purchase limitation described in "-- Minimum and Maximum
Purchase Limitations." If Supplemental Eligible Account Holders subscribe for
more shares of Common Stock than are available for purchase, the shares offered
will first be allocated among the subscribing Supplemental Eligible Account
Holders so as to enable each subscribing Supplemental Eligible Account Holder to
the extent possible, to purchase the number of shares necessary to make his or
her total allocation of Common Stock equal to the lesser of 100 shares of Common
Stock or the number of shares subscribed for by such Supplemental Eligible
Account Holder. Any shares remaining after such allocation will be allocated
among the subscribing Supplemental Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that each such Supplemental Eligible
Account Holder's Qualifying Deposits bears to the total of the Qualifying
Deposits of all such Supplemental Eligible Account Holders.
OTHER MEMBERS. To the extent that shares remain available for purchase
after satisfaction of subscriptions of Eligible Account Holders and Supplemental
Eligible Account Holders, members of the Bank as of April 30, 1998 (the voting
record date for the Special Meeting), other than Eligible Account Holders and
Supplemental Eligible Account Holders (Other Members) have each been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the maximum purchase limitation described in "--Minimum and
Maximum Purchase Limitations." If Other Members subscribe for more shares of
Common Stock than remain available for purchase by Other Members, shares will be
allocated among the subscribing Other Members in the proportion that the number
of votes eligible to be cast by each Other Member bears to the total number of
votes eligible to be cast at the Special Meeting by all Other Members whose
subscriptions remain unsatisfied.
EMPLOYEES, OFFICERS AND DIRECTORS. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members, the Bank's
employees, officers and directors who are not Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members have each been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the maximum purchase limitation described in "-- Minimum and
Maximum Purchase Limitations", so long as the aggregate of such purchases does
not exceed 25% of the shares of Common Stock issued in the Conversion. If more
shares are subscribed for by
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such employees, officers and directors than are available for purchase by them,
the available shares will be allocated among subscribing employees, officers and
directors pro rata on the basis of the amount of their respective subscriptions.
COMMUNITY OFFERING
Any shares of Common Stock which remain unsubscribed for in the
Subscription Offering may be offered by the Company to members of the general
public in the Community Offering, which may commence at any time after
commencement of the Subscription Offering, with priority given to natural
persons and trusts of natural persons residing or located in Anson County in
North Carolina (the Local Community), including IRA accounts, Keogh accounts and
similar retirement accounts established for the benefit of natural persons who
are residents of, the Local Community. The Community Offering may terminate at
the Expiration Time or at any time thereafter, but no later than July 24, 1998,
unless further extended with the consent of the Administrator. The Offering may
not be extended beyond June 15, 2000. THE OPPORTUNITY TO SUBSCRIBE FOR SHARES OF
COMMON STOCK IN THE COMMUNITY OFFERING IS SUBJECT TO THE RIGHT OF THE BANK AND
THE COMPANY, IN THEIR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS, IN
WHOLE OR IN PART, EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS
PRACTICABLE FOLLOWING THE TERMINATION OF THE COMMUNITY OFFERING. In the event
the Bank and the Company reject any such orders after receipt, subscribers will
be promptly notified and all funds submitted with subscriptions will be returned
with interest at the Bank's passbook savings rate.
In the event that subscriptions by subscribers in the Community Offering
whose orders would otherwise be accepted exceed the shares available for
purchase in the Community Offering, then subscriptions of natural persons and
trusts of natural persons residing in the Local Community, including IRAs, Keogh
accounts and similar retirement accounts established for the benefit of natural
persons who are residents of the Local Community ("First Priority Community
Subscribers") will be filled in full up to applicable purchase limitations (to
the extent such subscriptions are not rejected by the Bank and the Company)
prior to any allocation to other subscribers in the Community Offering.
In the event of an oversubscription by First Priority Community Subscribers
whose orders would otherwise be accepted, shares of Common Stock will be
allocated first to each First Priority Community Subscriber whose order is
accepted in full or in part by the Bank and the Company in the entire amount of
such order up to a number of shares no greater than 7,500 shares, which number
shall be determined by the Board of Directors of the Bank prior to the time the
Conversion is consummated with the intent to provide for a wide distribution of
shares among such subscribers. Any shares remaining after such allocation will
be allocated to each First Priority Community Subscriber whose order is accepted
in full or in part on an equal number of shares basis until all orders are
filled. Such allocation shall also be applied to subscriptions by other
subscribers in the Community Offering, in the event shares are available for
such subscribers but there is an oversubscription by them.
IN ORDER TO ENSURE PROPER ALLOCATION OF SHARES IN THE EVENT OF AN
OVERSUBSCRIPTION, IT IS THE RESPONSIBILITY OF SUBSCRIBERS IN THE COMMUNITY
OFFERING TO PROVIDE CORRECT ADDRESSES OF RESIDENCE ON THE ORDER FORMS.
SYNDICATED COMMUNITY OFFERING
The Plan provides that, if necessary, all shares of Common Stock not
purchased in the Subscription and Community Offering, if any, may be offered for
sale to the general public in a Syndicated Community Offering through a
syndicate of registered broker-dealers as selected dealers ("Selected Dealers")
to be formed
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and managed by Trident Securities acting as agent of the Company in the sale of
the Common Stock. THE COMPANY AND THE BANK HAVE THE RIGHT TO REJECT ORDERS, IN
WHOLE OR IN PART, IN THEIR SOLE DISCRETION IN THE SYNDICATED COMMUNITY OFFERING.
Neither Trident Securities nor any registered broker-dealer shall have any
obligation to take or purchase any shares of the Common Stock in the Syndicated
Community Offering; however, Trident Securities has agreed to use its best
efforts in the sale of shares in the Syndicated Community Offering. Common Stock
sold in the Syndicated Community Offering will be sold at the purchase price of
$10.00 per share which is the same price as all other shares being offered in
the Conversion.
It is estimated that the Selected Dealers will receive a negotiated
commission based on the amount of Common Stock sold by the Selected Dealer,
payable by the Company. During the Syndicated Community Offering, Selected
Dealers may only solicit indications of interest from their customers to place
orders with the Company as of a certain date (the "Order Date") for the purchase
of shares of Common Stock. When and if Trident Securities and the Company
believe that enough indications and orders have been received in the Offering to
consummate the Conversion, Trident Securities will request, as of the Order
Date, Selected Dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected Dealers will
send confirmations of the orders to such customers on the next business day
after the Order Date. Selected Dealers will debit the accounts of their
customers on a date which will be three business days from the Order Date
("Debit Date"). Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Debit Date. On the next business day following the Debit
Date, Selected Dealers will remit funds to the account that the Company
established for each Selected Dealer. After payment has been received by the
Company from Selected Dealers, funds will earn interest at the Bank's passbook
savings rate until the consummation of the Conversion. In the event the
Conversion is not consummated as described above, funds with interest will be
returned promptly to the Selected Dealers, who, in turn, will promptly credit
their customers' brokerage accounts.
The Syndicated Community Offering may close at any time after the
Expiration Time at the discretion of the Bank and the Company, but in no case
later than July 24, 1998, unless further extended with the consent of the
Administrator. The Offering may not be extended beyond June 15, 2000.
PROSPECTUS DELIVERY
To ensure that each purchaser receives a Prospectus at least 48 hours prior
to the Expiration Date, in accordance with Rule 15c2-8 under the Exchange Act,
no Prospectus will be mailed later than five days or hand delivered any later
than two days prior to the Expiration Time. Execution of the Order Form will
confirm receipt or delivery of a Prospectus in accordance with Rule 15c2-8.
Order Forms will be distributed only with a Prospectus. Neither the Company, the
Bank, nor Trident Securities is obligated to deliver a Prospectus and an Order
Form by any means other than the U.S. Postal Service.
FRACTIONAL SHARES
In making allocations in the event of oversubscriptions, all computations
will be rounded down to the nearest whole share; no fractional shares will be
issued. Excess and other amounts sent by subscribers which are not used to
satisfy subscriptions will be refunded with interest at the Bank's passbook
savings rate, and amounts designated for withdrawal from deposit accounts will
be released.
PURCHASE PRICE OF COMMON STOCK AND NUMBER OF SHARES OFFERED
The purchase price of shares of Common Stock sold in the Offering will be
$10.00 per share. The purchase price was determined by the Boards of Directors
of the Company and the Bank in consultation with
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the Bank's financial advisor and sales agent, Trident Securities. The North
Carolina regulations governing conversions of North Carolina-chartered mutual
savings banks to stock form require that the aggregate purchase price of the
shares of Common Stock of the Company sold in connection with the Conversion be
equal to not less than the minimum, nor more than the maximum, of the Estimated
Valuation Range which is established by an independent appraisal in the
Conversion and is described below; provided, however, that with the consent of
the Administrator and the FDIC the aggregate purchase price of the Common Stock
sold may be increased to up to 15% above the maximum of the Estimated Valuation
Range, without a resolicitation of subscribers or any right to cancel, rescind
or change subscription orders, to reflect changes in market and financial
conditions following commencement of the Subscription Offering.
FDIC rules with respect to appraisals require that the independent
appraisal must include a complete and detailed description of the elements of
the appraisal report, justification for the methodology employed and sufficient
support for the conclusions reached. The appraisal report must include a full
discussion of each peer group member and documented analytical evidence
supporting variances from peer group statistics. The appraisal report must also
include a complete analysis of the converting institution's pro forma earnings,
which should include the institution's full potential once it fully deploys the
capital from the Conversion pursuant to its business plan.
The Bank has retained Ferguson, an independent appraisal firm experienced
in the valuation and appraisal of savings institutions and their holding
companies, to prepare an appraisal of the pro forma market value of the Bank and
the Company and to assist the Bank in preparing a business plan. For its
services in determining such valuation and assisting with the business plan,
Ferguson will receive an aggregate fee of $25,000 and will be reimbursed for its
out-of-pocket expenses.
Ferguson has informed the Bank that its appraisal has been made in reliance
upon the information contained in this Prospectus, including the financial
statements of the Bank. Ferguson has further informed the Bank that it also
considered the following factors, among others, in making the appraisal: (i) the
present and projected operating results and financial condition of the Company
and the Bank; (ii) the economic and demographic conditions in the Bank's
existing market area; (iii) certain historical, financial and other information
relating to the Bank; (iv) the proposed dividend policy of the Company; (v) a
comparative evaluation of the operating and financial statistics of the Bank
with those of other savings institutions; (vi) the aggregate size of the
offering of the Common Stock; and (vii) the trading market for the securities of
institutions Ferguson believes to be comparable in relevant respects to the
Company and the Bank and general conditions in the markets for such securities.
In addition, Ferguson has advised the Bank that it has considered the effect of
the Conversion on the net worth and earnings potential of the Company and the
Bank.
On the basis of its consideration of the above factors, Ferguson has
advised the Bank that, in its opinion, at February 27, 1998, the Estimated
Valuation Range of the Bank and the Company was from a minimum of $5,610,000 to
a maximum of $7,590,000, with a midpoint of $6,600,000. Based upon such
valuation and a purchase price for shares offered in the Conversion of $10.00
per share, the number of shares to be offered ranges from a minimum of 561,000
shares to a maximum of 759,000 shares, with a midpoint of 660,000 shares.
The Board of Directors of the Bank has reviewed the methodology and
assumptions used by Ferguson in preparing the appraisal and has determined that
the Estimated Valuation Range, as well as the methodology and assumptions used,
were reasonable and appropriate.
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Upon completion of the Offering, Ferguson will confirm or update its
valuation of the estimated aggregate pro forma market value of the Bank and the
Company. Based on the confirmed or updated appraisal, a determination will be
made of the total number of shares of Common Stock which shall be offered and
sold in the Conversion.
With the consent of the Administrator and the FDIC, the aggregate price of
the shares sold in the Conversion may be increased by up to 15% above the
maximum of the Estimated Valuation Range, or to $8,728,500 (872,850 shares),
without a resolicitation of subscribers and without any right to cancel, rescind
or change subscription orders, to reflect changes in market and financial
conditions following commencement of the Subscription Offering.
No sale of shares of Common Stock may be consummated unless, after the
expiration of the offering period, Ferguson confirms to the Bank, the Company,
the Administrator and the FDIC, that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause Ferguson to conclude that the aggregate purchase price of the Common
Stock sold in the Conversion is incompatible with its estimate of the aggregate
pro forma market value of the Bank and the Company as of February 27, 1998 (the
date of Ferguson's initial valuation) and at the conclusion of the Offering. If
the aggregate pro forma market value of the Bank and the Company as of such date
is within the Estimated Valuation Range (or, with the consent of the
Administrator and FDIC, not more than 15% above the maximum of the Estimated
Valuation Range), then such pro forma market value will determine the number of
shares of Common Stock to be sold in the Conversion. If there has occurred a
change in the aggregate pro forma market value of the Bank and the Company so
that the aggregate pro forma market value is below the minimum of the Estimated
Valuation Range or more than 15% above the maximum of the Estimated Valuation
Range, a resolicitation of subscribers may be made based upon a new Estimated
Valuation Range, the Plan may be terminated or such other actions as the
Administrator and the FDIC may permit may be taken.
In the event of a resolicitation, subscribers would be given a specified
time period within which to respond to the resolicitation. If a subscriber fails
to respond to the resolicitation by the end of such period, the subscription of
such subscriber will be canceled, funds submitted with the subscription will be
refunded promptly with interest at the Bank's passbook savings rate, and holds
on accounts from which withdrawals were designated will be released. Any such
resolicitation will be by means of an amended prospectus filed with the SEC. A
resolicitation may delay completion of the Conversion. If the Plan is
terminated, all funds will be returned promptly with interest at the Bank's
passbook savings rate from the date payment was deemed received, and holds on
funds authorized for withdrawal from deposit accounts will be released. See "--
Exercise of Subscription Rights and Purchases in the Community Offering."
THE VALUATION BY FERGUSON IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING COMMON STOCK.
FERGUSON DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY THE BANK, NOR DID FERGUSON VALUE INDEPENDENTLY THE
ASSETS OR LIABILITIES OF THE BANK. THE VALUATION CONSIDERS THE BANK AS A GOING
CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE
OF THE BANK OR THE COMPANY. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY
BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE
SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS
PURCHASING SUCH SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SHARES
AT PRICES IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE
THEREOF.
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A copy of the complete appraisal by Ferguson is on file and available for
inspection at the office of the Savings Institutions Division of the North
Carolina Department of Commerce, Tower Building, Suite 301, 1110 Navaho Drive,
Raleigh, North Carolina 27609. A copy is also available for inspection at the
Stock Information Center, 211 South Greene Street, Wadesboro, North Carolina
28170. A copy of the appraisal has also been filed as an exhibit to the
Registration Statement filed with the SEC with respect to the Common Stock
offered hereby. See "ADDITIONAL INFORMATION."
EXERCISE OF SUBSCRIPTION RIGHTS AND PURCHASES IN COMMUNITY OFFERING
In order for Subscription Rights to be effectively exercised in the
Subscription Offering and in order to purchase in the Subscription Offering, the
original signed Order Forms (including an original signed form of certification)
and the required payment for the aggregate dollar amount of Common Stock desired
or appropriate instructions authorizing withdrawal from one or more the Bank
deposit accounts (other than negotiable order of withdrawal accounts or other
demand deposit accounts), must be received by the Bank by the Expiration Time,
which is 12:00 noon, Eastern Time, on June 9, 1998. Subscription Rights (i) for
which the Bank does not receive original signed Order Forms by the Expiration
Time (unless such time is extended), or (ii) for which Order Forms are executed
defectively or are not accompanied by full payment (or appropriate withdrawal
instructions) for subscribed shares, will expire whether or not the Bank has
been able to locate the persons entitled to such rights. In order to purchase in
the Community Offering, the Order Forms, accompanied by the required payment for
the aggregate dollar amount of Common Stock desired or appropriate instructions
authorizing withdrawal from one or more of the Bank's deposit accounts (other
than negotiable order of withdrawal accounts or other demand deposit accounts),
must be received by the Bank prior to the time the Community Offering
terminates, which could be at any time at or subsequent to the Expiration Time.
No orders will be accepted from persons who do not have Subscription Rights in
the Subscription Offering unless a Community Offering is commenced.
In the event that an Order Form is not delivered and is returned to the
Bank by the United States Postal Service (or the Bank is unable to locate the
addressee), is not received or is received after the Expiration Time, is
defectively completed or executed, or is not accompanied by full 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 for the person to
whom such rights have been granted will lapse as though that person failed to
return the completed Order Form within the time period specified. The Bank may,
but will not be required to, waive any irregularity on any Order Form or require
the submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Bank specify. The waiver of an
irregularity on an order form in no way obligates the Bank to waive any other
irregularity on that, or any irregularity on any other Order Form. Waivers will
be considered on a case-by-case basis. Photocopies of Order Forms, including
copies sent by facsimile, payments from private third parties, payments made by
wire transfer or electronic transfers of funds will not be accepted. The Bank's
interpretation of the terms and conditions of the Plan and of the acceptability
of the Order Forms will be final. The Bank has the right to investigate any
irregularity on any Order Form.
EXECUTED ORDER FORMS ONCE RECEIVED BY THE BANK, MAY NOT BE MODIFIED,
AMENDED OR RESCINDED WITHOUT THE CONSENT OF THE BANK. The Bank has the right to
extend the subscription period subject to applicable regulations, unless
otherwise ordered by the Administrator, or to waive or permit correction of
incomplete or improperly executed Order Forms, but does not represent that it
will do so.
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The amount to be remitted with the Order Forms shall be the aggregate
dollar amount that a subscriber or purchaser desires to invest in the
Subscription and Community Offering. Complete payment must accompany all
completed Order Forms submitted in the Subscription and Community Offering in
order for subscriptions to be valid. See "-- Purchase Price of Common Stock and
Number of Shares Offered."
Payment for shares will be permitted to be made by any of the following
means: (i) in cash, if delivered in person to either office of the Bank; (ii) by
check, bank draft, negotiable order of withdrawal or money order, provided that
the foregoing will only be accepted subject to collection and payment; or (iii)
by appropriate authorization of withdrawal from any deposit account in the Bank
(other than a negotiable order of withdrawal account or other demand deposit
account). Order Forms directing that payment for shares be made by authorization
of withdrawal will be accepted only if, at the time the Order Forms are
received, there exists sufficient funds in the account from which withdrawal is
authorized to pay the full purchase price for the number of shares ordered. IN
ORDER TO ENSURE PROPER IDENTIFICATION OF SUBSCRIPTION RIGHTS AND PROPER
ALLOCATIONS IN THE EVENT OF AN OVERSUBSCRIPTION, IT IS THE RESPONSIBILITY OF
SUBSCRIBERS TO PROVIDE CORRECT ACCOUNT VERIFICATION INFORMATION ON THE ORDER
FORMS. ORDER FORMS SUBMITTED BY UNAUTHORIZED PURCHASERS OR IN AMOUNTS EXCEEDING
PURCHASE LIMITATIONS WILL NOT BE HONORED.
For purposes of determining the withdrawal balance of deposit accounts from
which withdrawals have been authorized, such withdrawals will be deemed to have
been made upon receipt of appropriate authorization therefor, but interest will
be paid by the Bank on the amount deemed to have been withdrawn at the
contractual rate of interest paid on such accounts until the date on which the
Conversion is completed or terminated.
Interest will be paid by the Bank on payments for Common Stock made in cash
or by check, bank draft, negotiable order of withdrawal or money order at the
Bank's passbook savings rate. Such interest shall be paid from the date the
order is accepted for processing and payment in good funds is received by the
Bank until consummation or termination of the Conversion. The Bank shall be
entitled to invest all amounts paid on subscriptions for Common Stock for its
own account until completion or termination of the Conversion. The Bank may not
knowingly lend funds or otherwise extend credit to any person to purchase Common
Stock. After amounts submitted for payment are applied to the purchase price for
shares sold, they will no longer earn interest, and they will not be insured by
the FDIC or any other government agency or other entity.
The Order Forms contain appropriate means by which authorization of
withdrawals from deposit accounts may be made to pay for subscribed shares. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be withdrawn (except by the Bank as payment for Common Stock) until the
Conversion is completed or terminated. Savings accounts will be permitted to be
established for the purpose of making payment for subscribed shares of Common
Stock. Funds authorized for withdrawal will continue to earn interest at the
applicable contract interest rate until completion or termination of the
Conversion or, in the case of an order submitted in the Community Offering,
until it is determined that such order cannot or will not be accepted.
Notwithstanding any regulatory provision regarding penalties for early
withdrawal from certificate accounts, payment for subscribed shares of Common
Stock will be permitted through authorization of withdrawals from such accounts
without the assessment of such penalties. However, if after such withdrawal the
applicable minimum balance requirement ceases to be satisfied, such certificate
account will be canceled and the remaining balance thereof will earn interest at
the Bank's passbook savings rate.
Upon completion or termination of the Conversion, the Bank will return to
subscribers all amounts paid with subscriptions which are not applied to the
purchase price for shares, plus interest at its passbook savings rate from the
date good funds are received until the consummation or termination of the
Conversion,
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and the Bank will release deposit account withdrawal orders given in connection
with the subscriptions to the extent funds are not withdrawn and applied toward
the purchase of shares.
DELIVERY OF STOCK CERTIFICATES
Certificates representing Common Stock issued in the Conversion will be
mailed by the Company's transfer agent to persons entitled thereto at the
address of such persons appearing on the Order Forms as soon as practicable
following consummation of the Conversion. Any certificates returned as
undeliverable will be held by the Company until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of Common Stock for which they
have subscribed, even though trading of the Common Stock may have commenced.
Shares sold prior to receipt of a stock certificate are the responsibility of
the purchaser. Allocations of Common Stock will be deemed final only upon
stockholder receipt of the certificate representing the Common Stock.
PERSONS IN NON-QUALIFIED OR FOREIGN JURISDICTIONS
The Company will make reasonable efforts to comply with the securities laws
of all states of the United States in which Eligible Account Holders,
Supplemental Eligible Account Holders, or Other Members entitled to subscribe
for shares of Common Stock reside. However, no shares of Common Stock or
Subscription Rights under the Plan will be offered or sold in a foreign country,
or in a state in the United States (i) where a small number of persons otherwise
eligible to subscribe for shares under the Plan reside or (ii) if the Company
determines that compliance with the securities laws of such state would be
impracticable for reasons of cost or otherwise, including, but not limited to, a
requirement that the Company, the Bank or any employee or representative thereof
register as a broker, dealer, agent or salesperson or register or otherwise
qualify the Subscription Rights or Common Stock for sale in such state. No
payments will be made in lieu of the granting of Subscription Rights to persons
residing in such jurisdictions.
MARKETING ARRANGEMENTS
The Bank has retained Trident Securities to consult with and advise the
Bank and the Company and to assist the Company, on a best-efforts basis, in the
marketing of shares in the Offering. Trident Securities is a broker-dealer
registered with the SEC and a member of the NASD. Trident Securities is
headquartered in Raleigh, North Carolina, and its telephone number is (919) 781-
8900. Trident Securities will assist the Bank and the Company in the Conversion
as follows: (i) it will act as marketing advisor with respect to the
Subscription Offering and will assist the Company on a best-efforts basis in the
marketing of the Common Stock in the Community Offering and Syndicated Community
Offering; (ii) members of its staff will conduct training sessions to educate
directors, officers and employees of the Bank regarding the Conversion process;
and (iii) it will provide assistance in the establishment and supervision of the
Stock Information Center, including training staff to record and tabulate orders
for the purchase of Common Stock and to respond to customer inquiries.
For rendering its services, the Bank has agreed to pay Trident Securities a
commission equal to 2.5% of the aggregate dollar amount of Common Stock sold in
the Subscription and Community Offering, excluding shares purchased by
directors, executive officers and their "associates" (as defined in the Plan).
The Bank has also agreed to pay to Selected Dealers, if any, negotiated
commissions.
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The Bank has agreed to reimburse Trident Securities for its reasonable out-
of-pocket expenses, including but not limited to travel, communications, legal
fees and postage, and to indemnify Trident Securities against certain claims or
liabilities, including certain liabilities under the Securities Act. Trident has
agreed that the Bank is not required to pay its legal fees to the extent they
exceed $27,500 or its other out of pocket expenses to the extent they exceed
$10,000. Total fees and commissions to Trident Securities are expected to be
between $126,855 and $204,788 at the minimum and 15% above the maximum,
respectively, of the Estimated Valuation Range. See "PRO FORMA DATA" for the
assumptions used to determine these estimates.
Sales of Common Stock will be made primarily through registered
representatives affiliated with Trident Securities or by the broker-dealers
managed by Trident Securities. In addition, subject to applicable law, executive
officers of the Company and the Bank may participate in the solicitation of
offers to purchase Common Stock. Other employees of the Bank may participate in
the Offering in clerical capacities, providing administrative support in
effecting sales transactions and answering questions of a mechanical nature
relating to the proper execution of the Order Forms. Other questions of
prospective purchasers, including questions as to the advisability or nature of
the investment, will be directed to registered representatives. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. A Stock Information
Center will be established in the Bank's office, in an area separate from the
Bank's banking operations. Employees will inform prospective purchasers that
their questions should be directed to the Stock Information Center and will
provide such persons with the telephone number of the Stock Information Center.
Stock orders will be accepted at the Bank's office and will be promptly
forwarded to the Stock Information Center for processing. Sales of Common Stock
by registered representatives will be made from the Stock Information Center. In
addition, the Bank may hire one or more temporary clerical persons to assist in
typing, opening mail, answering the phone, and with other clerical duties. An
employee of the Bank will also be present at the Stock Information Center to
process funds and answer questions regarding payment for stock, including
verification of account numbers in the case of payment by withdrawal
authorization and similar matters. Subject to applicable state law, the Company
will rely on Rule 3a4-1 under the Exchange Act, and sales of Common Stock will
be conducted within the requirements of Rule 3a4-1, so as to permit officers and
current full and part-time the Bank employees to participate in the sale of
Common Stock. No officer, director or employee of the Company or the Bank will
be compensated in connection with his or her participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
The engagement of Trident Securities and the work performed by Trident
Securities pursuant to its engagement should not be construed by purchasers of
Common Stock as constituting an endorsement or recommendation relating to such
investment or a verification of the accuracy or completeness of information
contained in this Prospectus.
MINIMUM AND MAXIMUM PURCHASE LIMITATIONS
Each person subscribing for Common Stock in the Conversion must subscribe
for at least fifty shares of the Common Stock to be offered in the Conversion.
In addition, the maximum number of shares of Common Stock which may be purchased
in the Conversion by (i) any person or entity, (ii) persons or entities
exercising Subscription Rights through a single account or (iii) group of
persons or entities otherwise acting in concert, is 10,000 shares. In addition,
no person or entity, or group of persons or entities acting in concert, together
with any associate (as defined in the Plan), may subscribe for more than 15,000
shares of Common Stock sold in the Conversion. The Board of Directors of the
Bank may in its absolute discretion (i) reduce the above-described 10,000 and
15,000 share maximum purchase limitations to an amount not less than 1% of the
109
<PAGE>
number of shares offered and sold in the Conversion or (ii) increase such 10,000
and 15,000 share maximum purchase limitations to an amount of up to 5% of the
shares of Common Stock offered and sold. Any reduction or increase in the
maximum purchase limitation by the Bank's Board of Directors may occur at any
time prior to consummation of the Conversion, either before or after the Special
Meeting on June 15, 1998. In the event the 10,000 or 15,000 share maximum
purchase limitation is increased, any subscriber or group of subscribers in the
Subscription, Community or Syndicated Community Offering who has subscribed for
the maximum amount which is increased, and certain other large subscribers in
the discretion of the Company, shall be given the opportunity to increase their
subscriptions up to the then applicable maximum purchase limitation.
The Plan further provides that for purposes of the foregoing limitations
the term "associate" is used to indicate any of the following relationships with
a person:
(i) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or
officer of the Bank, the Company or any subsidiary of the Bank or of
the Company;
(ii) any corporation or organization (other than the Bank, the Company or
a majority-owned subsidiary of the Bank or the Company) of which the
person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity security; and
(iii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as a trustee or
in a similar fiduciary capacity, except for any tax-qualified
employee stock benefit plan or any charitable trust which is exempt
from federal taxation pursuant to Section 501(c)(3) of the Code.
For purposes of the foregoing limitations, persons will be deemed to be
"acting in concert" if they are (i) knowingly participating in a joint activity
or interdependent conscious parallel action towards a common goal (whether or
not pursuant to an express agreement), with respect to the purchase, ownership,
voting or sale of Common Stock or (ii) engaged in a combination or pooling of
voting or other interests in the securities of the Company for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise. The Company and the Bank will presume
that certain persons are acting in concert based upon, among other things, joint
account relationships, accounts with the same address registration and the fact
that such persons have filed joint Schedules 13D with the SEC with respect to
other companies.
For purposes of the foregoing limitations, directors and officers of the
Bank or the Company shall not be deemed to be associates or a group of persons
acting in concert solely as a result of their serving in such capacities.
However, FDIC rules prohibit the directors and officers of the Bank and their
associates from purchasing, in the aggregate, 35% or more of the Common Stock to
be sold in the Conversion.
APPROVAL, INTERPRETATION, AMENDMENT AND TERMINATION
Under the Plan, the Administrator's approval thereof, and applicable North
Carolina conversion regulations, consummation of the Conversion is subject to
satisfaction of certain conditions, including the following: (i) approval of the
Plan by the affirmative vote of a majority of the votes eligible to be cast by
members of the Bank at the Special Meeting; (ii) sale of shares of Common Stock
for an aggregate purchase price equal to not less than the minimum or more than
the maximum of the Estimated Valuation Range unless the aggregate purchase price
is increased to as much as 15% above the maximum with the consent of the
110
<PAGE>
Administrator and FDIC, and (iii) receipt by the Company and the Bank of
favorable opinions of counsel or other tax advisor as to the federal and state
tax consequences of the Conversion. See "-- Income Tax Consequences."
Consummation of the Conversion is also subject to receipt by the Bank from the
FDIC of a letter of non-objection.
If all conditions for consummation of the Conversion are not satisfied, no
Common Stock will be issued, the Bank will continue to operate as a North
Carolina-chartered mutual savings bank, all subscription funds will be promptly
returned with interest at the Bank's passbook savings rate, and all deposit
withdrawal authorizations (and holds placed on such accounts) will be canceled.
In such an event, the Company would not acquire control of the Bank.
All interpretations by the Bank and the Company of the Plan and of the
Order Forms and related materials for the Subscription and Community Offering
will be final, subject to the authority of the FDIC and the Administrator. The
Bank and the Company may reject Order Forms that are not properly completed.
However, the Company and the Bank retain the right, but will not be required, to
waive irregularities in submitted Order Forms or to require the submission of
corrected Order Forms or the remittance of full payment for all shares
subscribed for by such dates as they may specify. In addition, the Plan may be
substantively amended by a two-thirds vote of the Bank's Board of Directors at
any time prior to the Special Meeting, and at any time thereafter by a two-
thirds vote of the Bank's Board of Directors with the concurrence of the
Administrator and the FDIC. If the Bank determines upon the advice of counsel
and after consultation with the Administrator that any such amendment is
material, subscribers would be given the opportunity to increase, decrease or
cancel their subscriptions. Also, as required by the regulations of the
Administrator, the Plan provides that the transactions contemplated thereby may
be terminated by a two-thirds vote of the Bank's Board of Directors at any time
prior to the Special Meeting and may be terminated by a two-thirds vote of the
Bank's Board of Directors at any time thereafter but prior to the completion of
the Conversion with the concurrence of the Administrator, notwithstanding
approval of the Plan by the Members at the Special Meeting.
CERTAIN RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS; FALSE OR MISLEADING
ORDER FORMS
THE SUBSCRIPTION RIGHTS GRANTED UNDER THE PLAN ARE NON-TRANSFERABLE.
SUBSCRIPTION RIGHTS MAY BE EXERCISED ONLY BY THE PERSON TO WHOM THEY ARE ISSUED
AND ONLY FOR HIS OR HER OWN ACCOUNT. Persons exercising Subscription Rights are
required to certify that they are purchasing shares for their own accounts
within the purchase limitations set forth in the Plan and that they have no
agreement or understanding for the sale or transfer of such shares.
The Bank reserves the right to make an independent investigation of any
facts or circumstances brought to its attention that indicate or tend to
indicate that one or more persons acting independently or as a group acting in
concert may be attempting to violate or circumvent the regulatory prohibition on
transferability of Subscription Rights. The nature and extent of such
investigation will be at the Bank's sole discretion and the Bank may require a
holder of Subscription Rights to provide certified affidavits and other
documentation to satisfy the Bank that its Plan and North Carolina and federal
conversion regulations regarding nontransferability are not being subverted by
actions of holders of Subscription Rights. In extreme cases the Bank reserves
the right to seek legal advice from the General Counsel for the Administrator as
to compliance with all regulations governing the Conversion, including the
nontransferability of Subscription Rights.
111
<PAGE>
The Plan provides that, if the Bank's Board of Directors determines that a
subscriber (i) has submitted a false or misleading information on his or her
Order Forms or otherwise in connection with the attempted purchase of shares,
(ii) has attempted to purchase shares of Common Stock in violation of provisions
of the Plan or (iii) fails to cooperate with attempts by the Bank or the Company
or their employees or agents to verify information with respect to purchase
rights, the Board of Directors may reject the order of such subscriber.
INCOME TAX CONSEQUENCES
The Bank has received an opinion from its special counsel, Brooks, Pierce,
McLendon, Humphrey & Leonard, L.L.P., of Greensboro, North Carolina, to the
effect that for federal income tax purposes: (i) the Conversion will constitute
a tax free reorganization with respect to the Bank and no gain or loss will be
recognized by the Bank either in its mutual or stock form; (ii) no gain or loss
will be recognized by the Bank upon the purchase of the Bank's stock by the
Company or upon the sale by the Company of its Common Stock; (iii) no gain or
loss will be recognized by the Bank's depositors with respect to their deposit
accounts at the Bank as a consequence of the Conversion; (iv) the tax basis of
depositors' deposit accounts at the Bank will not be changed as a result of the
Conversion; (v) assuming the Subscription Rights have no value, no gain or loss
will be recognized by Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members, or directors, officers and employees of the Bank upon
either the issuance to them of the Subscription Rights or the exercise or lapse
thereof; (vi) no gain or loss will be recognized by Eligible Account Holders or
Supplemental Eligible Account Holders upon the distribution to them of interests
in the Liquidation Account; (vii) assuming the Subscription Rights have no
value, the tax basis for Common Stock purchased in the Conversion will be the
amount paid therefor; and (viii) the tax basis of interests in the Liquidation
Account will be zero. The Bank has been further advised by its special counsel,
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., that the tax effects of
the Conversion under North Carolina tax laws will be consistent with the federal
income tax consequences.
Several of the foregoing legal opinions are premised on the assumption that
the Subscription Rights will have no value. The Bank has been advised by
Ferguson that, in its opinion, the Subscription Rights will not have any
ascertainable value, based on the fact that such rights are acquired by the
recipients without cost, are non-transferable, are of short duration and afford
the recipients the right only to purchase Common Stock at a price equal to its
estimated fair market value as of the date such rights are issued, which will be
the same price paid by all purchasers in the Conversion. The opinion of Ferguson
is not binding on the IRS and if the Subscription Rights were ultimately
determined to have ascertainable value, recipients of Subscription Rights would
have to include in gross income an amount equal to the value of the Subscription
Rights received by them. The basis of the Common Stock purchased pursuant to
Subscription Rights would be increased by the amount of income realized with
respect to the receipt or exercise of the Subscription Rights. Moreover,
recipients of Subscription Rights could then have to report the transaction to
the IRS. Each Eligible Account Holder, Supplemental Eligible Account Holder,
Other Member or other recipient of Subscription Rights is encouraged to consult
with his, her or its own tax advisor as to the tax consequences in the event the
Subscription Rights are deemed to have ascertainable value.
No legal opinion has been or will be received with respect to any tax
consequences of the Conversion not specifically described above, including the
tax consequences to Eligible Account Holders, Supplemental Eligible Account
Holders, Other Members, other recipients of Subscription Rights or purchasers of
Common Stock under the laws of any other state, local or foreign taxing
jurisdiction to which they may be subject. Special counsel expresses no opinion
regarding the value of the Subscription Rights.
112
<PAGE>
LEGAL OPINIONS
The validity of the issuance of the Common Stock in the Conversion has been
passed upon for the Company by its special counsel, Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P., Greensboro, North Carolina, which firm has also
rendered its opinion to the Bank concerning certain federal and North Carolina
income tax aspects of the Conversion as described herein under "THE CONVERSION
- -- Income Tax Consequences." Certain legal matters will be passed upon for
Trident Securities by Thacher Proffitt & Wood, Washington, D.C.
EXPERTS
The Financial Statements of the Bank as of June 30, 1997 and 1996 and for
each of the years in the two-year period ended June 30, 1997 have been included
herein in reliance upon the report of Faulkner and Thompson, P.A., independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
Ferguson has consented to being named as an expert herein and to the
summary herein of its appraisal report as to the estimated pro forma market
value of the Bank and the Company and its opinion with respect to Subscription
Rights.
REGISTRATION REQUIREMENTS
The Company will register its Common Stock with the SEC pursuant to Section
12 of the Exchange Act in connection with the Conversion and will not deregister
the Common Stock for a period of three years following the completion of the
Conversion. Upon such registration, the proxy and tender offer rules, insider
trading reporting requirements and restrictions, annual and periodic reporting
and other requirements of the Exchange Act will be applicable to the Company.
ADDITIONAL INFORMATION
The Company has filed a registration statement with the SEC on Form SB-2
under the Securities Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all of the information set forth in the registration statement. Such
information can be examined and copied at the public reference facilities of the
SEC located at Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and
at the regional offices of the SEC at 75 Park Place, Fourteenth Floor, New York,
New York 10007 and Room 3190, John C. Kluczynski Building, 230 South Dearborn
Street, Chicago, Illinois 60604. Copies of such material can be obtained by mail
from the SEC at prescribed rates from the Public Reference Section of the SEC at
450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC maintains
a World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC, including the Company; the address is (http://www.sec.gov.). The statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions of each material feature thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
The Bank has filed an Application to Convert a Mutual Savings Bank to a
Stock Owned Savings Bank with the Administrator. Pursuant to the North Carolina
conversion regulations, this Prospectus omits certain information contained in
such Application. The Application, which contains a copy of Ferguson's
appraisal,
113
<PAGE>
may be inspected at the office of the Administrator, Savings Institutions
Division, North Carolina Department of Commerce, Tower Building, Suite 301, 1110
Navaho Drive, Raleigh, North Carolina 27609. Copies of the Plan, which includes
a copy of the Bank's proposed Amended Certificate of Incorporation and Stock
Bylaws, and copies of the Company's Articles of Incorporation and Bylaws are
available for inspection at each office of the Bank and may be obtained by
writing to the Bank at 211 South Greene Street, Wadesboro, North Carolina 28170,
Attention: Eugene M. Ward, President, or by telephoning the Bank at (704) 694-
2122. A copy of Ferguson's independent appraisal is also available for
inspection at the Stock Information Center, 211 South Greene Street, Wadesboro,
North Carolina 28170.
114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS.......................... F-2
FINANCIAL STATEMENTS
Statements of Financial Condition..................... F-3
Statements of Operations.............................. F-4
Statements of Equity.................................. F-5
Statements of Cash Flows.............................. F-6
Notes to Financial Statements......................... F-8
</TABLE>
All schedules are omitted because of the absence of the conditions under which
they are required or because the required information is included in the
financial statements of Anson Savings Bank, S.S.B. or related notes. No
financial statements are provided for the Holding Company since it was not in
operation for any of the periods presented.
F-1
<PAGE>
[LETTERHEAD OF FAULKNER AND THOMPSON, P.A. APPEARS HERE]
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors
Anson Savings Bank, S.S.B.
Wadesboro, North Carolina
We have audited the accompanying statements of financial condition of Anson
Savings Bank, S.S.B. (the Bank) as of June 30, 1997 and 1996, and the related
statements of operations, equity 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 audits 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 Anson Savings Bank, S.S.B.
as of June 30, 1997 and 1996 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ Faulkner and Thompson, P.A.
August 26, 1997
Charlotte, North Carolina
F-2
<PAGE>
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, June 30,
------------ ------------------------
1997 1997 1996
------------ --------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents
Non-interest bearing
deposits and cash $ 171,850 $ 197,056 $ 252,484
Interest earning deposits 3,289,475 3,843,554 3,050,877
Federal funds sold 750,000 600,000 300,000
----------- ----------- -----------
4,211,325 4,640,610 3,603,361
Investment securities
Held to maturity (fair value
at December 31,
1997, June 30, 1997 and
1996 of $4,386,630,
$3,933,344 and $5,559,174,
respectively) 4,374,212 3,938,524 5,577,031
Available for sale 380,459 317,521 193,914
Loans receivable, net 11,323,178 11,422,892 11,571,502
Premises and equipment, net 214,895 222,125 233,083
Interest receivable 52,493 59,976 85,909
Other assets 109,457 61,719 133,714
Deferred income taxes 57,000 57,000 57,000
----------- ----------- -----------
$20,723,019 $20,720,367 $21,455,514
=========== =========== ===========
LIABILITIES AND EQUITY
LIABILITIES
Savings deposits, plus
accrued interest
thereon $16,655,697 $16,791,101 $17,623,069
Accounts payable and accrued
expenses 49,747 36,624 50,965
Accrued pension obligation - - 62,589
Deferred income taxes 158,701 136,200 98,000
----------- ----------- -----------
16,864,145 16,963,925 17,834,623
COMMITMENTS - Notes 4, 12 and 14
EQUITY
Retained earnings -
substantially restricted 3,614,437 3,552,442 3,502,297
Unrealized gains on
securities
available for sale, net of
tax 244,437 204,000 118,594
----------- ----------- -----------
3,858,874 3,756,442 3,620,891
----------- ----------- -----------
$20,723,019 $20,720,367 $21,455,514
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the six months ended For the years ended
December 31, June 30,
------------------------- -------------------
1997 1996 1997 1996
----------- ------------ -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $475,383 $ 493,791 $ 963,385 $1,032,084
Interest on investments and
deposits in other banks 242,747 249,482 478,076 526,444
-------- --------- ---------- ----------
Total interest income 718,130 743,273 1,441,461 1,558,528
INTEREST EXPENSE
Interest on savings deposits 411,866 419,310 818,740 893,945
-------- --------- ---------- ----------
Net interest income 306,264 323,963 622,721 664,583
PROVISION FOR LOAN LOSSES - 500 5,000 7,000
-------- --------- ---------- ----------
Net interest income after
provision for loan losses 306,264 323,463 617,721 657,583
NON-INTEREST INCOME 4,269 1,289 5,963 1,678
NON-INTEREST EXPENSE
Salaries and employee benefits 134,185 132,028 246,347 244,703
Federal insurance premiums 5,228 125,034 130,552 40,628
Data processing 15,846 15,643 31,946 31,139
Examinations and audit 16,640 12,360 26,268 34,581
Occupancy including depreciation 10,480 14,146 22,598 25,050
Other 49,175 49,523 97,128 104,860
-------- --------- ---------- ----------
Total non-interest expense 231,554 348,734 554,739 480,961
-------- --------- ---------- ----------
Income (loss) before income
taxes 78,979 (23,982) 68,945 178,300
INCOME TAXES
Current expense 16,984 8,800 18,800 54,000
Deferred expense (benefit) - (12,400) - (2,000)
-------- --------- ---------- ----------
16,984 (3,600) 18,800 52,000
-------- --------- ---------- ----------
Net income (loss) $ 61,995 ($20,382) $ 50,145 $ 126,300
======== ========= ========== ==========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Unrealized gains
Retained Earnings on securities
substantially available Total
restricted for sale Equity
----------------- ---------------- ----------
<S> <C> <C> <C>
BALANCE AT JUNE 30, 1995 $3,375,997 $ 94,605 $3,470,602
Net income 126,300 - 126,300
Changes in unrealized gain on
securities available
for sale, net of tax - 23,989 23,989
---------- -------- ----------
BALANCE AT JUNE 30, 1996 3,502,297 118,594 3,620,891
Net income 50,145 - 50,145
Changes in unrealized gain on
securities available
for sale, net of tax - 85,406 85,406
---------- -------- ----------
BALANCE AT JUNE 30, 1997 3,552,442 204,000 3,756,442
Net income (unaudited) 61,995 - 61,995
Changes in unrealized gain on
securities available for
sale, net of tax (unaudited) - 40,437 40,437
---------- -------- ----------
BALANCE AT DECEMBER 31, 1997
(Unaudited) $3,614,437 $244,437 $3,858,874
========== ======== ==========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended For the years ended
December 31, June 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ------------ ----------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 61,995 $(20,382) $ 50,145 $ 126,300
Adjustments to reconcile net
income (loss) to net cash provided
by (used for) operating activities
Provision for loan losses - 500 5,000 7,000
Provision for depreciation 7,230 12,600 14,419 17,212
Deferred income taxes - (12,400) - (2,000)
(Increase) decrease in assets
Interest receivable 7,483 (16,288) 25,933 (3,268)
Other assets (47,738) 6,426 71,995 28,507
Increase (decrease) in
liabilities
Accounts payable and
accrued expenses 13,123 (50,433) (76,931) (34,068)
----------- ----------- ------------ ----------
Net cash provided by
(used for) operating
activities 42,093 (79,977) 90,561 139,683
----------- ----------- ------------ ----------
INVESTING ACTIVITIES
Decrease (increase) in loans
receivable 99,714 (158,844) 143,610 336,853
Purchases of securities
held to maturity (2,499,922) (2,498,203) (2,501,384) (4,997,148)
Proceeds from maturities of
securities held to maturity 2,064,234 3,545,040 4,139,891 5,658,620
Purchases of premises and
equipment - (1,432) (3,461) (18,626)
----------- ----------- ------------ ----------
Net cash provided by
(used for) investing
activities (335,974) 886,561 1,778,656 979,699
----------- ----------- ------------ ----------
</TABLE>
(Continued)
F-6
<PAGE>
ANSON SAVINGS BANK, S.S.B.
STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
For the six months ended For the years ended
December 31, June 30,
-------------------------- -------------------------
1997 1996 1997 1996
------------- ----------- ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net decrease in savings deposits $ (135,404) $ (733,877) $ (831,968) $ (131,711)
---------- ---------- ---------- ----------
Increase (decrease) in cash
and cash equivalents $ (429,285) $ 72,707 $1,037,249 $ 987,671
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD $4,640,610 $3,603,361 $3,603,361 $2,615,690
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $4,211,325 $3,676,068 $4,640,610 $3,603,361
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE:
Total increase in unrealized
gain on securities available
for sale, net of tax $ 40,437 $ 36,248 $ 85,406 $ 23,989
========== ========== ========== ==========
Cash paid during the period
for interest $ 415,331 $ 431,623 $ 840,875 $ 888,560
========== ========== ========== ==========
Cash paid during the period
for income taxes $ 6,294 $ 25,382 $ 25,382 $ 35,525
========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
ANSON SAVINGS BANK, S.S.B.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Anson Savings, S.S.B. (the Bank)
conform to generally accepted accounting principles and to general practice
within the savings bank industry. The following is a description of the more
significant accounting and reporting policies that the Bank follows in
preparing its financial statements.
ORGANIZATION AND OPERATIONS
Anson Savings Bank, S.S.B. (the Bank) is a state chartered savings bank
primarily engaged in the business of obtaining savings deposits and
providing loans to the general public in Anson County, North Carolina. The
Bank qualifies as a savings and loan for tax purposes.
UNAUDITED FINANCIAL STATEMENTS
The unaudited financial statements furnished reflect all adjustments,
consisting of normal recurring accruals which are, in the opinion of
management, necessary for a fair presentation of the financial position as
of December 31, 1997 and the results of operations, changes in equity and
cash flows for the six months ended December 31, 1997 and 1996. The results
for the six month periods are not necessarily indicative of the operating
results of the Bank for the entire year.
USE OF ESTIMATES
The preparation of the 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 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.
INVESTMENT SECURITIES
The Bank accounts for investment securities in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115, debt
securities are classified upon purchase as available for sale, held to
maturity or trading. Such assets classified as available for sale are
carried at market value. Unrealized holding gains or losses are reported as
a component of equity net of deferred income taxes. Securities classified
as held to maturity are carried at cost, adjusted for the amortization of
premiums and the accretion of discounts. In order to qualify as held to
maturity the Bank must have the intent and ability to hold the securities to
maturity. Trading securities are carried at market value. Gains or losses
on disposition of securities are based on the difference between the net
proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method. The Bank held no trading securities at
December 31, 1997, June 30, 1997 or 1996.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LOANS
The Bank's loan portfolio consists principally of long-term conventional
mortgage loans secured by first deeds of trust. Loans are stated at the
principal balance outstanding and origination fees and certain direct
originating costs are capitalized and recognized as an adjustment of the
yield of the related loan. Interest income on loans is accrued and taken
into income based upon the interest method. The recognition of interest
income is discontinued when, in management's judgment, the interest is not
collectible in the normal course of business.
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This standard requires
that all creditors value loans at the loan's fair value if it is probable
that the creditor will be unable to collect all amounts due according to the
terms of the loan agreement. Fair value may be determined based upon the
present value of expected cash flows, market prices of the loan, if
available, or value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate. SFAS No.
114 was amended by SFAS No. 118 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan and by requiring
additional disclosures about how a creditor recognizes interest income on an
impaired loan. When the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied under
the contractual terms of the loan agreement first to principal then to
interest income. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to interest income, to the extent
that any interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring. For these accruing impaired loans, cash receipts are
typically applied to principal and interest receivable in accordance with
the terms of the restructured loan agreement. Interest income is recognized
on these loans using the accrual method of accounting. As of December 31,
1997 and 1996 and June 30, 1997 and 1996, the Bank had no impaired loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's ongoing evaluation of
the loan portfolio and reflects an amount that, in management's opinion, is
adequate to absorb losses in the existing portfolio. In evaluating the
portfolio, management takes into consideration numerous factors, including
current economic conditions, prior loan loss experience, adequacy of
collateral, the composition of the loan portfolio, and management's estimate
of anticipated
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
credit losses. Loans are charged against the allowance at such time as
they are determined to be losses. Subsequent recoveries are credited to the
allowance. Management considers the year-end allowance appropriate and
adequate to cover possible losses in the loan portfolio; however,
management's judgment is based upon a number of assumptions about future
events, which are believed to be reasonable, but which may or may not prove
valid. Thus, there can be no assurance that charge-offs in future periods
will not exceed the allowance for loan losses or that additional increases
in the allowance for loan losses will not be required.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. For financial reporting purposes, depreciation is computed by
use of the straight-line method over the estimated useful lives of the
various classes of assets.
INCOME TAXES
Deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse. The significant components of deferred
tax assets and liabilities arise principally from temporary differences
related to unrealized gains on investments, depreciation expense, loan loss
reserves, deferred loan fee income and prepaid pension.
CASH EQUIVALENTS
The Bank considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
RECLASSIFICATIONS
Certain 1996 balance sheet and income statement accounts have been
reclassified to conform to the 1997 presentation. This reclassification had
no effect on income or equity for any period.
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
Investment securities are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
(Unaudited)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury and other U.S.
Government Agency bonds:
Due within one year $ 499,922 $ 2,375 $ - $ 502,297
Due after one year through five years 1,000,000 7,657 - 1,007,656
---------- -------- ---------- ----------
1,499,922 10,032 - 1,509,954
---------- -------- ---------- ----------
Government National Mortgage
Association Securities:
Due after one year through five years 41,431 1,608 - 43,039
Due after five years through ten years 259,236 6,130 - 265,366
Due after ten years 431,023 - 5,352 425,671
---------- -------- ---------- ----------
731,690 7,738 5,352 734,076
---------- -------- ---------- ----------
Federal Home Loan Bank stock 142,600 - - 142,600
---------- -------- ---------- ----------
Fixed-rate, fixed-term deposits 2,000,000 - - 2,000,000
---------- -------- ---------- ----------
Total $4,374,212 $ 17,770 $5,352 $4,386,630
========== ======== ========== ==========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 8,883 $371,576 $ - $ 380,459
========== ======== ========== ==========
</TABLE>
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES, CONTINUED
<TABLE>
<CAPTION>
June 30, 1997
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury and other U.S.
Government Agency bonds:
Due within one year $1,496,406 $ 3,594 $ - $1,500,000
Due after one year through five years 1,000,000 - - 1,000,000
---------- ---------- ---------- ----------
2,496,406 3,594 - 2,500,000
---------- ---------- ---------- ----------
Government National Mortgage
Association Securities:
Due after one year through five years 47,016 2,362 - 49,378
Due after five years through ten years 281,481 2,625 - 284,106
Due after ten years 471,021 - 13,761 457,260
---------- ---------- ---------- ----------
799,518 4,987 13,761 790,744
---------- ---------- ---------- ----------
Federal Home Loan Bank stock 142,600 - - 142,600
---------- ---------- ---------- ----------
Fixed-rate, fixed-term deposits 500,000 - - 500,000
---------- ---------- ---------- ----------
Total $3,938,524 $ 8,581 $13,761 $3,933,344
========== ========== ========== ==========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 8,883 $308,638 $ - $ 317,521
========== ========== ========== ==========
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES, CONTINUED
<TABLE>
<CAPTION>
June 30, 1996
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury and other U.S.
Government Agency bonds:
Due within one year $1,494,709 $ 4,119 $ 351 $1,498,477
Due after one year through five years 499,258 - 3,984 495,274
---------- -------- ------- ----------
1,993,967 4,119 4,335 1,993,751
---------- -------- ------- ----------
Government National Mortgage
Association Securities:
Due after one year through five years $ 82,323 $ 3,536 $ - $ 85,859
Due after five years through ten years 33,195 3,340 - 36,535
Due after ten years 824,896 - 24,517 800,379
---------- -------- ------- ----------
940,414 6,876 24,517 922,773
---------- -------- ------- ----------
Federal Home Loan Bank stock 142,600 - - 142,600
---------- -------- ------- ----------
Fixed-rate, fixed-term deposits 2,500,000 - - 2,500,000
---------- -------- ------- ----------
Total $5,577,031 $ 10,995 $28,852 $5,559,174
========== ======== ======= ==========
Securities available for sale:
Federal Home Loan Mortgage
Corporation stock $ 8,883 $185,031 $ - $ 193,914
========== ======== ======= ==========
</TABLE>
NOTE 3 - FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank (FHLB) stock is a required deposit with the FHLB that
is classified as a restricted investment security, carried at cost and
evaluated for impairment. These shares can only be sold at their par value of
$100 per share and only to the FHLB or to another member institution.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------- -------------------------
1997 1997 1996
-------------------------- ----------- -----------
Principal Balances: (Unaudited)
<S> <C> <C> <C>
Real estate loans
One-to-four family
residential $10,857,928 $10,887,058 $11,242,399
Nonresidential 482,713 543,015 400,040
Secured by deposits 76,599 75,131 45,787
Construction loans 365,858 349,794 198,942
----------- ----------- -----------
11,783,098 11,854,998 11,887,168
----------- ----------- -----------
Allowance for loan losses (100,000) (100,000) $ (95,000)
Undisbursed portion of construction
loans (318,714) (288,281) (174,194)
Net deferred loan origination fees (41,198) (43,825) (46,472)
----------- ----------- -----------
(459,912) (432,106) (315,666)
----------- ----------- -----------
$11,323,178 $11,422,892 $11,571,502
=========== =========== ===========
</TABLE>
Loan commitments outstanding were $132,000 at December 31, 1997 and $169,400
and $239,500 at June 30, 1997 and 1996, respectively. At December 31, 1997,
June 30, 1997 and 1996, there were no loans that were in a nonaccrual status.
Set forth below is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, June 30,
----------------- -----------------
1997 1996 1997 1996
-------- ------- -------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Balance, beginning of period $100,000 $95,000 $ 95,000 $88,000
Loans charged-off - - - -
Recoveries of loans charged-off - - - -
Provision for loan losses - 500 5,000 7,000
-------- ------- -------- -------
Balance, end of period $100,000 $95,500 $100,000 $95,000
======== ======= ======== =======
</TABLE>
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31, June 30,
------------- ------------------
1997 1997 1996
------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Land $ 30,808 $ 30,808 $ 30,808
Land improvements 2,774 2,774 2,774
Building 562,545 562,545 559,277
Furniture and equipment 227,590 227,590 227,397
-------- -------- --------
823,717 823,717 820,256
Less allowances for depreciation 608,822 601,592 587,173
-------- -------- --------
$214,895 $222,125 $233,083
======== ======== ========
</TABLE>
NOTE 6 - INTEREST RECEIVABLE
Accrued interest receivable consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
------------- ----------------
1997 1997 1996
------------- -------- ------
(Unaudited)
<S> <C> <C> <C>
Accrued interest on interest bearing
deposits and investments $44,207 $42,497 $79,509
Accrued interest on loans receivable 8,286 7,479 6,400
------- ------- -------
$52,493 $59,976 $85,909
======= ======= =======
</TABLE>
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 7 - COMPOSITION OF SAVINGS DEPOSITS
The composition of savings deposits by interest rate is as follows:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997
--------------------- ---------------------------
Amount % Amount %
------------ ------- ------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
3.25 % passbook $ 3,645,425 21.88% $ 3,441,163 20.49%
Term certificates, 3.25% 31,002 .19 41,521 .25
Term certificates, 4.4% - 5.5% 8,613,564 51.71 8,872,711 52.84
Term certificates, 5.6% - 7.0% 3,460,166 20.78 3,345,034 19.92
Money market, 3.1% 100,895 .61 104,710 .62
Deposits greater than $100,000,
3.25% - 7.0% 743,138 4.46 920,991 5.49
----------- ------ ------------ -----------
16,594,190 16,726,130
Accrued interest payable on
deposits 61,507 .37 64,971 .39
----------- ------ ------------ -----------
$16,655,697 100.00% $ 16,791,101 100.00%
=========== ====== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996
-------------------
Amount %
---------- ------
<S> <C> <C>
3.25 % passbook $ 4,145,598 23.52%
Term certificates, 3.25% - 3.92% 50,935 .29
Term certificates, 4.1% - 5.5% 9,559,472 54.24
Term certificates, 5.6% - 7.0% 2,967,162 16.84
Money market, 3.3% 181,405 1.03
Deposits greater than $100,000,
3.25% - 7.0% 634,390 3.60
----------- ------
17,538,962
Accrued interest payable on
deposits 84,107 .48
----------- ------
$17,623,069 100.00%
=========== ======
</TABLE>
F-16
<PAGE>
NOTES TO FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 7 - COMPOSITION OF SAVINGS DEPOSITS, CONTINUED
Scheduled maturities of certificate accounts are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
(Unaudited)
<S> <C>
1998 $10,198,756
1999 2,195,991
2000 512,993
-----------
$12,907,740
===========
</TABLE>
Interest expense on savings deposits consists of the following components for
the six months ended December 31 and the years ended June 30:
<TABLE>
<CAPTION>
December 31, June 30,
------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Passbook accounts $ 61,750 $ 65,196 $ 128,355 $ 134,829
Money market accounts 1,580 2,369 3,994 4,942
Certificate accounts 348,536 351,745 686,391 754,174
--------- --------- --------- ---------
$ 411,866 $ 419,310 $ 818,740 $ 893,945
========= ========= ========= =========
</TABLE>
NOTE 8 - INCOME TAXES
The differences between income taxes at the U.S. statutory rate and the
effective income taxes as reflected in the financial statements are as
follows:
<TABLE>
<CAPTION>
Six months ended Year ended
December 31, June 30,
----------------------- --------------------
1997 1996 1997 1996
---------- ----------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Income tax expense at federal
statutory rate of 34% $ 27,000 $ (8,200) $ 23,400 $ 61,000
Effect of graduated income
tax rates ( 15,000) (4,600) (4,600) (8,000)
Other 4,984 - - (1,000)
-------- -------- -------- --------
$ 16,984 $ (3,600) $ 18,800 $ 52,000
======== ======== ======== ========
</TABLE>
F-17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
_______________________________________________________________________________
NOTE 8 - INCOME TAXES, CONTINUED
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Bank's deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
------------- ------------------
1997 1997 1996
------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Deferred revenue $ 18,000 $ 18,000 $18,000
Loan loss reserve 39,000 39,000 37,000
Other - - 2,000
-------- -------- -------
Total deferred income
tax assets $ 57,000 $ 57,000 $57,000
======== ======== =======
Deferred tax liabilities:
Unrealized gain on investments $127,000 $103,200 $66,000
Book basis versus tax basis
for premises and equipment 8,000 8,000 8,000
Prepaid pension 22,000 21,000 18,000
Other 1,701 4,000 6,000
-------- -------- -------
Total deferred income tax
liabilities $158,701 $136,200 $98,000
======== ======== =======
</TABLE>
Legislation has been passed which repeals the "reserve" method of accounting
for thrift bad debt reserves for the first tax year beginning after December
31, 1995 (the fiscal year ending June 30, 1996 for the Bank). This
legislation requires all thrifts (including the Bank) to account for bad debts
using either the specific charge-off method (available to all thrifts) or the
experience method (available only to thrifts that qualify as "small banks",
i.e. under $500 million in assets). The Bank currently uses the experience
method of accounting for its tax bad debt reserves. The legislation also
suspends recapture of bad debt reserves taken through 1987 (i.e., the base
year reserve), but requires thrifts to recapture or repay bad debt deductions
taken after 1987 over six years. As of December 31, 1997, bad debt reserves
subject to recapture were not significant. As permitted under SFAS 109, no
deferred tax liability is provided for approximately $1,000,000 ($340,000
approximate tax effect) of such tax bad debt reserves that arose prior to
October 1, 1988.
F-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 9 - PENSION PLAN
The Bank established a noncontributory defined benefit plan in 1990 which
covers substantially all employees. The plan benefits as of June 30, 1994
were frozen and the current plan benefits are based on plan years of service
and the employee's compensation during the last ten years of service. The
Bank's policy is to fund pension costs accrued. Pension expense for the six
months ended December 31, 1997 and 1996 and the years ended June 30, 1997 and
1996, was approximately $25,000, $19,000, $38,000 and $38,000, respectively.
The components of pension expense are as follows:
<TABLE>
<CAPTION>
Six months ended Year ended
December 31, June 30,
---------------- ------------------
1997 1996 1997 1996
------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Service costs $22,000 $17,000 $34,000 $ 31,000
Interest cost on projected
benefit obligation 14,000 11,000 22,000 18,000
Expected return on plan
assets (9,000) (7,000) (14,000) (15,000)
Amortization (2,000) (2,000) (4,000) 4,000
------- ------- ------- --------
Net period pension cost $25,000 $19,000 $38,000 $ 38,000
======= ======= ======= ========
</TABLE>
A summary of the Plan's funded status and the pension liability recognized
in the Bank's financial statements at December 31, 1997, June 30, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
Six months ended For the years ended
December 31, June 30,
--------------------- -----------------------
1997 1997 1996
--------------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Accumulated benefit obligation $317,000 $ 294,700 $ 249,400
======== ========= =========
Plan assets at fair value $318,000 $ 295,500 $ 237,700
-------- --------- ---------
Projected benefit obligation
for service rendered to date:
Vested (254,000) (236,000) (249,400)
Additional benefits based on
estimated future salary levels (107,000) (99,500) (24,900)
-------- --------- ---------
(361,000) (335,500) (274,300)
-------- --------- ---------
</TABLE>
(continued)
F-19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - PENSION PLAN, CONTINUED
<TABLE>
<CAPTION>
Six months ended For the years ended
December 31, June 30,
---------------- --------------------
1997 1997 1996
---------------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Projected benefit obligation in
excess of plan assets $ (43,000) $ (40,000) $ (36,600)
Unrecognized net transition liability 57,000 53,000 56,600
Unrecognized net prior service cost gain (72,000) (67,600) (72,200)
Unrecognized net loss 113,000 105,100 103,200
Minimum liability - - (62,500)
--------- --------- -------
(Accrued) prepaid pension cost $ 55,000 $ 50,500 ($11,500)
========== ========= =======
</TABLE>
Assumptions used in the actuarial calculation at December 31, 1997, June 30,
1997 and 1996 were 8% for the weighted-average discount rate and expected
long-term rate of return on assets and 4% for the rate of increase in
compensation levels. At December 31, 1997, June 30, 1997 and 1996, 92% of the
plan assets were invested in a certificate of deposit at the Bank.
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of fair value information, whether or not recognized in the
statement of financial position, when it is practical to estimate the fair
value. SFAS 107 defines a financial instrument as cash, evidence of an
ownership interest in an entity or contractual obligations which require the
exchange of cash or other financial instruments. Certain items are
specifically excluded from the disclosure requirements, including the Bank's
common stock, premises and equipment and other assets and liabilities.
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 AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For cash and cash equivalents and short-term investments, the carrying
amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES
Fair values for securities, excluding restricted equity securities, are
based on quoted market prices and dealer quotes. The carrying values of
restricted equity securities approximate fair values.
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
LOANS RECEIVABLE
Fair values of real estate loans and savings deposit loans are estimated
using discounted cash flow analyses, with interest rates currently being
offered for loans with similar terms to borrowers of similar credit quality.
ACCRUED INTEREST
The carrying amounts of accrued interest approximate fair values.
SAVINGS DEPOSITS
The fair value of savings accounts and certain money market deposits is the
amount payable on demand at the reporting date. The fair value of
certificates of deposit is based upon the discounted value of the
contractual cash flows. The discount rates used in these calculations
approximates the current rates offered for deposits of similar remaining
maturities.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed
rates.
The estimated fair value of the Bank 's financial instruments were as
follows at:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------
Carrying Fair
Amount Value
----------------- -----------
Financial Assets: (Unaudited)
<S> <C> <C>
Cash, interest bearing deposits,
and federal funds sold $ 4,211,325 $ 4,211,325
Investments
Securities available for sale 380,459 380,459
Securities held to maturity 4,374,212 4,386,630
Loans receivable 11,323,178 11,454,531
Interest receivable 52,493 52,493
Financial Liabilities:
Savings deposits 16,655,697 16,685,382
Unrecognized Financial Instruments:
Commitments to extend credit 132,000 132,000
</TABLE>
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - RELATED PARTIES
The Bank has entered into transactions with its officers and directors. The
aggregate amount of loans to such related parties at December 31, 1997, June
30, 1997 and 1996, were $0, $890 and $2,621, respectively. During the six
months ended December 31, 1997 and the years ended June 30, 1997 and 1996, new
loans to such related parties amounted to $0, $0 and $2,621, and repayments
amounted to $890, $1,731 and $27,254, respectively. Such loans were made
substantially on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other borrowers
and do not involve more than the normal risks of collectibility. The Bank
also had related party deposits of $649,677, $531,244 and $518,834 at December
31, 1997, June 30, 1997 and 1996, respectively.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit, which are
not reflected in the accompanying financial statements. Although these
commitments do expose the Bank to certain types of risk, management does not
expect losses to result from these transactions.
Commitments to extend credit are legally binding agreements to lend to a
customer. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee.
Existing credit and commitments are reviewed continually to ensure there is no
deterioration in the credit worthiness of the borrower. Outstanding
commitments at December 31, 1997 are $132,000. Collateral held is obtained
based on management's credit evaluation of the customer and generally includes
either real property or savings deposits.
NOTE 13 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Deposit Insurance Corporation
(FDIC) and the State of North Carolina. Failure to meet the minimum
regulatory capital requirements can initiate certain mandatory, and possible
additional discretionary actions by regulators, that if undertaken, could have
a direct material effect on the Bank and the financial statements. Under the
regulatory capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines involving
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification under the prompt corrective action
guidelines are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS, CONTINUED
The FDIC requires the Bank to have a minimum leverage ratio of Tier I Capital
(principally consisting of retained earnings and any future common
stockholders' equity, less any intangible assets) to total assets of at least
3%, provided the FDIC determines that the Bank is not anticipating or
experiencing significant growth and has well-diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity,
good earnings and in general is considered a strong banking organization,
rated composite 1 under the Uniform Financial Institutions Rating System (the
CAMEL rating system) established by the Federal Financial Institutions
Examination Council. All other institutions which do not meet the
aforementioned standards are required to maintain a Tier I capital ratio of 3%
plus an additional cushion of at least 100 to 200 basis points and therefore
shall consist of a ratio of Tier 1 capital to total assets of not less than
4%. The FDIC also requires the Bank to have a ratio of total capital to risk-
weighted assets of 8%, of which at least 4% must be in the form of Tier I
capital. The state regulations require a net worth equal to at least 5% of
total assets.
As shown below, at December 31, 1997 the Bank complied with all the capital
requirements described above and also all of the requirements to be classified
as well-capitalized.
<TABLE>
<CAPTION>
Leverage Tier I N.C.
Ratio of Risk- Savings
GAAP Tier I Adjusted Risk-Based Bank
Equity Capital Capital Capital Capital
------- --------- --------- ----------- --------
(Dollars in Thousands)
(Unaudited)
<S> <C> <C> <C> <C> <C>
GAAP Equity $3,860 $ 3,860 $ 3,860 $3,860 $3,860
======
Unrealized gains on
securities available for sale (245) (245) (245) (245)
General loan loss allowance - - 97 97
------ ------- ------- ------
Regulatory capital 3,615 3,615 3,712 3,712
Minimum capital requirement 829 311 621 1,036
------ ------- ------- ------
Excess regulatory capital $ 2,786 $ 3,304 $ 3,091 $ 2,676
====== ======= ======= =======
Total assets at December 31, 1997 $20,723 $20,723
======= =======
Risk-weighted assets at December 31,
1997 $ 7,767 $ 7,767
======= =======
Capital as a percentage of assets:
Actual 17.4% 46.5% 47.8% 17.9%
Required 4.0 4.0 8.0 5.0
------ ------- ------- ------
Excess 13.4% 42.5% 39.8% 12.9%
====== ======= ====== =======
</TABLE>
F-23
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NOTES TO FINANCIAL STATEMENTS
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NOTE 14 - SUBSEQUENT EVENTS - PLAN OF CONVERSION (UNAUDITED)
On December 11, 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-chartered mutual savings bank to a North Carolina-chartered stock
savings bank and will become a wholly-owned subsidiary of a holding company
formed in connection with the conversion. The holding company will issue
common stock to be sold in the conversion and will use that portion of the net
proceeds thereof which it does not retain to purchase the capital stock of the
Bank. The Plan is subject to approval by regulatory authorities and the
members of the Bank at a special meeting.
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 would 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.
Conversion costs of approximately $17,500 have been incurred and are included
in prepaid expenses and other assets of December 31, 1997. 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.
NOTE 15 - RECENTLY ISSUED ACCOUNTING STANDARDS
In February, 1997 the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", which is effective for financial statements for
periods ending after December 31, 1997. This statement applies to both public
and nonpublic entities. The Bank anticipates that adoption of this standard
will not have a material effect on the Bank.
F-24
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NOTES TO FINANCIAL STATEMENTS
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NOTE 15 - RECENTLY ISSUED ACCOUNTING STANDARDS, CONTINUED
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Under this statement, enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statements and display
the balance of other comprehensive income separate in the equity section of a
statement of financial position. Statement 130 is effective for both interim
and annual periods beginning after December 15, 1997. Comparative financial
statements provided for earlier periods are required to be reclassified to
reflect the provisions of the statement. It is not anticipated that the
adoption of these statement will materially affect the Bank's current method
of financial reporting.
Also in June, 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information". This statement establishes standards
for the way public enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. Statement 131 is effective for financial
statements for periods beginning after December 15, 1997. In the initial year
of application, comparative information for earlier years is to be restated
unless it is impractical to do so. It is not anticipated that the adoption of
this statement will materially affect the Bank's current method of financial
reporting.
NOTE 16 - YEAR 2000
The Bank recognizes that there is a business risk in computerized systems as
the calendar rolls over into the next century. The Federal Financial
Institutions Examination Council (FFIEC) issued an interagency statement on
May 5, 1997 outlining five phases for institutions to effectively manage the
Year 2000 challenge. The phases were: Awareness; Assessment; Renovation;
Validation; and, Implementation. The FFIEC encouraged institutions to have
all critical applications identified and priorities set by September 30, 1997
and to have renovation work largely completed and testing well underway by
December 31, 1998. The Bank has an ongoing program designed to ensure that
its operational and financial systems will not be adversely affected by year
2000 software failures, due to processing errors arising from calculations
using the year 2000 date. The Board of Directors and management of the Bank
have established year 2000 compliance as a strategic initiative. While the
Bank believes that it has available resources to assure year 2000 compliance,
it is to some extent dependent on vendor cooperation. At the present time,
the Bank expects its most critical application software vendor to have all of
its system in compliance by December 31, 1998. The Bank expects to install
the necessary software releases in 1998 and have testing of such systems
substantially completed by December 31, 1998.
At this time, the Bank has not determined the cost of making any modifications
to correct any year 2000 problems; however, equipment and software expenses
are not expected to materially differ from past results. The Bank routinely
upgrades and purchases technologically advanced software and hardware on a
continual basis and expects to specifically evaluate and test such purchases
for year 2000 compliance.
F-25
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GLOSSARY
Administrator The Administrator of the Savings Institutions
Division of the North Carolina Department of
Commerce
Bank Anson Savings Bank, SSB
BIF Bank Insurance Fund of the FDIC
Common Stock The Common Stock, no par value per share, of Anson
Bancorp, Inc.
Community Offering Offering for sale to certain members of the
general public of any shares of Common Stock not
subscribed for in the Subscription Offering,
including the possible offering of Common Stock in
a Syndicated Community Offering
Company Anson Bancorp, Inc.
Conversion Simultaneous conversion of the Bank to stock form,
the issuance of the Bank's outstanding capital
stock to the Company and the Company's offer and
sale of Common Stock
Eligible Account Holders Savings account holders of Anson Savings Bank, SSB
with account balances of at least $50.00 as of the
close of business on September 30, 1996
ERISA Employee Retirement Income Security of 1974, as
amended
Estimated
Valuation Range Estimated pro forma market value of the common
stock ranging from $5,610,000 to $7,590,000. The
maximum of the Estimated Valuation Range may be
increased to $8,728,500 without a resolicitation
of subscribers.
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Time 12:00 noon, local time, on June 9, 1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Federal Reserve System The Board of Governors of the Federal Reserve
System
Ferguson Ferguson & Company
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
IRS Internal Revenue Service
A-1
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MRP Management Recognition Plan to be adopted no
earlier than six months after the Conversion
NASD National Association of Securities Dealers, Inc.
NPV Net Portfolio Value
Offering Subscription Offering, Community Offering and
Syndicated Community Offering, collectively
Option Plan Stock option plan to be adopted no earlier than
six months after the Conversion
Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Other Members Savings account holders (other than Eligible
Account Holders and Supplemental Eligible Account
Holders) and certain borrowers (borrowers whose
loans were outstanding on April 30 and continue to
be outstanding) who are entitled to vote at the
Special Meeting due to the existence of a savings
account or a borrowing relationship, respectively,
on the Voting Record Date for the Special Meeting
OTC Bulletin Board An electronic stock data system operated by Nasdaq
Plan of Conversion Plan of the Bank to convert from a North Carolina
chartered mutual savings bank to a North Carolina
chartered stock savings bank and the issuance of
all of the Bank's outstanding capital stock to the
Company and the issuance of the Company's stock to
the public
Purchase Price $10.00 per share price of the Common Stock
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards
adopted by FASB
Special Meeting Special Meeting of members of the Bank called for
the purpose of approving the Plan
Subscription Offering Offering of non-transferable rights to subscribe
for the Common Stock, in order of priority, to
Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members
Supplemental Eligible
Account Holders Depositors, who are not Eligible Account Holders
of the Bank, with account balances of at least
$50.00 on March 31, 1998
A-2
<PAGE>
Syndicated Community
Offering Offering of shares of Common Stock remaining after
the Subscription Offering and undertaken prior to
the end and as part of the Community Offering, and
which may, at the Company's and the Bank's
discretion be made to the general public on a best
efforts basis by a selling group of broker-
dealers.
Trident Securities Trident Securities, Inc.
Voting Record Date The close of business on April 30, 1998, the date
for determining members entitled to vote at the
Special Meeting.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPEC-
TUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RE-
LIED UPON AS HAVING BEEN AUTHORIZED BY ANSON BANCORP, INC. OR ANSON SAVINGS
BANK, SSB. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICI-
TATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLIC-
ITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICI-
TATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED
OR GUARANTEED
---------------
UNTIL AUGUST 13, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
ANSON BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR ANSON SAVINGS BANK, INC.)
UP TO 872,850 SHARES
COMMON STOCK
($10.00 PAR VALUE PER SHARE)
---------------
PROSPECTUS
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TRIDENT SECURITIES, INC.
MAY 15, 1998
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