<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 2, 1998
REGISTRATION NO. 333-63363
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------------------------
INNES STREET FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NORTH CAROLINA 6036 56-2101799
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
401 WEST INNES STREET
SALISBURY, NORTH CAROLINA 28144
(704) 633-2341
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
______________________
RONALD E. BOSTIAN, PRESIDENT
Innes Street Financial Corporation
Post Office Box 1929
401 West Innes Street
Salisbury, North Carolina 28145-1929
(704) 633-2341
(Name and address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
EDWARD C. WINSLOW III
JEAN C. BROOKS
Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P.
2000 Renaissance Plaza
Post Office Box 26000
Greensboro, North Carolina 27420
____________________
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ X ]
_______________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BE REGISTERED PER SHARE OFFERING PRICE FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value... 2,248,250/(1)/ $10.00 $22,482,500 $6,632.93
================================================================================================
</TABLE>
(1) The estimated maximum number of shares to be registered is based upon 15%
above the maximum of the valuation range of Citizens Bank, FSB and the
Registrant, as established by an independent appraisal, divided by the
proposed offering price per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
================================================================================
<PAGE>
INNES STREET FINANCIAL CORPORATION
CROSS-REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Item Caption or Location
Number in Prospectus
- ------ ------------------------------------------
1 Forepart of the Front Cover Page
Registration Statement and
Outside Front Cover Page
of Prospectus
2 Inside Front and Outside Inside Front Cover Page; Table of
Back Cover Pages of Contents; Outside Back Cover Page
Prospectus
3 Summary Information, Risk Summary; Selected Financial and Other Data
Factors and Ratio of of The Bank; Risk Factors
Earnings to Fixed Charges
4 Use of Proceeds Summary; Use of Proceeds
5 Determination of Offering Summary; The Conversion
Price
6 Dilution Not Applicable
7 Selling Security Holders Not Applicable
8 Plan of Distribution Summary; Use of Proceeds; The Conversion
9 Description of Securities Dividend Policy; Description of Capital
to be Registered Stock; Restriction on Acquisition of The
Company
10 Interests of Named Experts Not Applicable
and Counsel
11 Information with Respect Summary; Selected Financial and Other Data
to the Registrant of The Bank; Innes Street Financial
Corporation; Citizens Bank, FSB; Dividend
Policy; Market for Common Stock;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business of The Company;
Business of The Bank; Management of The
Bank; Financial Statements
12 Disclosure of Commission Not Applicable
Position on
Indemnification for
Securities Act Liabilities
<PAGE>
PROSPECTUS
UP TO 2,248,250 SHARES OF COMMON STOCK
INNES STREET FINANCIAL CORPORATION
(PROPOSED HOLDING COMPANY FOR CITIZENS BANK, FSB)
401 WEST INNES STREET
POST OFFICE BOX 1929
SALISBURY, NORTH CAROLINA 28145-1929
(704) 633-2341
================================================================================
Citizens Bank, FSB (the "Bank") is converting from a federally-chartered
mutual savings bank to a federally-chartered stock savings bank. As part of the
Conversion, the Bank will become a wholly owned subsidiary of Innes Street
Financial Corporation (the "Company"). The Company was incorporated on July 6,
1998 at the direction of the Bank, 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 a majority of the votes eligible to be cast by
members of the Bank and by the Office of Thrift Supervision. The Offering will
not go forward if the Bank does not receive these approvals and the Company does
not sell at least a minimum number of shares.
================================================================================
TERMS OF THE OFFERING
An independent appraiser has estimated the market value of the converted Bank to
be between $14,450,000 and $19,550,000, which establishes the number of shares
to be offered at a price of $10.00 per share. Subject to the approval of the
OTS, up to 2,248,250 shares, an additional 15% above the maximum number of
shares, may be offered. Based on these estimates, the Company is 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 1,445,000 1,700,000 1,955,000 2,248,250
Estimated Offering expenses $ 866,000 $ 920,000 $ 973,000 $ 1,034,000
Estimated Net Proceeds $13,584,000 $16,080,000 $18,577,000 $21,448,500
Estimated Net Proceeds per share $ 9.40 $ 9.46 $ 9.50 $ 9.54
</TABLE>
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 15 OF THIS DOCUMENT.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, 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 OFFICE OF THRIFT
SUPERVISION, 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.
TRIDENT SECURITIES, INC. WILL USE ITS BEST EFFORTS TO ASSIST THE COMPANY IN
SELLING AT LEAST THE MINIMUM NUMBER OF SHARES BUT DOES NOT GUARANTEE THAT THIS
NUMBER WILL BE SOLD. ALL FUNDS RECEIVED FROM SUBSCRIBERS WILL BE HELD IN AN
INTEREST BEARING SAVINGS ACCOUNT AT THE BANK UNTIL THE COMPLETION OR TERMINATION
OF THE CONVERSION.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT (704)
638-5816.
TRIDENT SECURITIES, INC.
The date of this Prospectus is November 12, 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.......................................... 11
Recent Developments.................................................................... 13
Risk Factors........................................................................... 15
Innes Street Financial Corporation..................................................... 21
Citizens Bank, FSB..................................................................... 22
Use of Proceeds........................................................................ 22
Dividend Policy........................................................................ 24
Market for Common Stock................................................................ 24
Capitalization......................................................................... 25
Pro Forma Data......................................................................... 27
Historical and Pro Forma Capital Compliance............................................ 32
Stock Purchases by Directors and Executive Officers.................................... 33
Management's Discussion and Analysis of Financial Condition and Results of Operations.. 34
Business of the Company................................................................ 45
Business of the Bank................................................................... 45
Taxation............................................................................... 66
Supervision and Regulation............................................................. 68
Management of the Company.............................................................. 74
Management of the Bank................................................................. 75
Description of Capital Stock........................................................... 85
Restrictions on Acquisition of the Company............................................. 87
Certain Provisions of the Articles of Incorporation and Bylaws of the Company.......... 90
The Conversion......................................................................... 91
Legal Opinions......................................................................... 107
Experts................................................................................ 107
Registration Requirements.............................................................. 107
Additional Information................................................................. 107
Glossary............................................................................... A-1
Financial Statements................................................................... F-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 15 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>
CITIZENS BANK, FSB
SALISBURY, NORTH CAROLINA
3
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q. WHAT IS A MUTUAL TO STOCK CONVERSION?
A. The Conversion is a legal change in the Bank's form of organization.
Currently, the Bank operates as a federally-chartered mutual savings bank
with no stockholders. As a result of the Conversion, it will become a
federally-chartered stock savings bank. As part of the Conversion, a
holding company called Innes Street Financial Corporation 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 strategies
and improve its future access to 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 elects 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 1,445,000 and 1,955,000 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 2,248,250 shares without further notice to you, subject to
receipt of approval of the OTS, 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, December 8, 1998. See pages 101 to 103.
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 60,000 shares (or
$600,000) (subject to certain exceptions). In certain instances, your
purchase might be grouped together with purchases by persons with other
accounts with whom you are affiliated or related, or with whom you are
acting in concert, and in that event the aggregate purchases may not exceed
60,000 shares (or $600,000) (subject to certain exceptions).
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 60,000
shares (or $600,000) (subject to certain exceptions). 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 60,000 shares (or $600,000) (subject to certain
exceptions). See pages 104 to 106.
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
the Offering is oversubscribed, shares of the Common Stock will be
allocated based upon a formula set forth in the Plan of Conversion and in
accordance with OTS regulations. See pages 96 to 99.
Q. WHO WILL RECEIVE SUBSCRIPTION RIGHTS?
A. The Common Stock will be offered on a priority basis to the following
persons:
. ELIGIBLE ACCOUNT HOLDERS - Persons who had a savings account (including
all types of demand deposit accounts) with a balance of at least $50.00
with the Bank on December 31, 1996. (The Bank's employee stock
ownership plan ("ESOP") will have priority over Eligible Account
Holders if more than 1,955,000 shares are sold, to the extent of any
shares sold over 1,955,000 and up to the number of shares subscribed
for by the ESOP). Any remaining shares will be offered to:
. ESOP - The Bank's employee stock ownership plan. Any remaining shares
will be offered to:
. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS - Persons who had a savings
account (including all types of demand deposit accounts) with a balance
of at least $50.00 with the Bank on September 30, 1998. Any remaining
shares will be offered to:
. OTHER MEMBERS - Other depositors of the Bank and certain borrowers of
the Bank, as of October 30, 1998.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to employees, officers and directors 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 Rowan and Iredell Counties, North Carolina.
See pages 96 to 99.
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"
beginning on page 15.
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 92 to 95.
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, a representative from Trident Securities
will be available to assist you at the following location:
STOCK INFORMATION CENTER
INNES STREET FINANCIAL CORPORATION
401 WEST INNES STREET
POST OFFICE BOX 1829
SALISBURY, NORTH CAROLINA 28145-1829
(704) 638-5816
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.
INNES STREET FINANCIAL CORPORATION
Innes Street Financial Corporation was incorporated on July 6, 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. The Company's office is located
at 401 West Innes Street, Post Office Box 1929, Salisbury, North Carolina 28145-
1929. See page 22.
CITIZENS BANK, FSB
The Bank, which has been in operation since 1907, converted from a North
Carolina-chartered mutual savings bank to a federally-chartered mutual savings
bank effective September 2, 1998. The Bank offers a variety of financial
services to meet the needs of the communities it serves from its three full
service offices located in Salisbury, Statesville and Rockwell, North Carolina.
The Bank is a member of the FHLB system and its deposits are federally insured
by the FDIC under the SAIF to the maximum amount permitted by law. The Bank
emphasizes residential mortgage lending, primarily originating one-to-four-
family mortgage loans in its primary market area, consisting of communities
within a 10-mile radius of its offices and includes portions of Rowan and
Iredell Counties, North Carolina. The Bank also makes home equity loans,
nonresidential loans, multi-family residential loans, construction and
development loans, commercial loans and consumer loans. The Bank sells a
portion of its loan production into the secondary market to reduce its interest
rate risk exposure. At June 30, 1998, the Bank had total assets of $192.7
million, deposits of $159.8 million, and equity of $15.6 million. See pages 45
to 66.
THE STOCK OFFERING
The Company is offering between 1,445,000 and 1,955,000 shares of Common
Stock at $10.00 per share. Subject to approval by the OTS, the number of shares
to be sold may be increased to 2,248,250 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, the Bank's ESOP,
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 96 to 99.
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 becomes aware of the
transfer of subscription rights. The Bank will reject orders that are
determined to involve the transfer of such rights. See page 106.
6
<PAGE>
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 the appraisal 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 October 16, 1998, such value ranged between $14,450,000 and
$19,550,000 (with a midpoint of $17,000,000) (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 the Bank's
Board of Directors. 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 $14,450,000 or above $22,482,500, the Company will notify you and
you will have the opportunity to modify or cancel your order. See pages 99 to
101.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at 12:00 noon, Eastern Time, on
December 8, 1998. The Community Offering, if any, may terminate at any time
without notice but no later than January 25, 1999, without approval by the OTS.
The Subscription Offering and the Community Offering may not be extended beyond
December 10, 2000. See pages 96 to 99.
BENEFITS TO MANAGEMENT FROM THE OFFERING
Employment Agreement. As a part of the Conversion, the Bank will enter
into an employment agreement with Ronald E. Bostian, President and Chief
Executive Officer of the Bank. The agreement will provide for an initial annual
base salary of $147,528 and for an initial term of employment of three years.
The employment agreement provides that in the event of a change in control of
the Bank or the Company, the acquiror will be bound by the terms of the
employment agreement for a period of three years beginning on the date of the
change in control and during such time the nature of Mr. Bostian's compensation,
duties or benefits cannot be diminished except as set forth in the agreement.
See page 79.
Severance Plan. Also, in connection with the Conversion, the Bank will
adopt a Severance Plan for the benefit of all of its employees. The Severance
Plan provides for severance pay for the Bank's employees in the event of an
employee's termination under certain circumstances following a change in control
of the Bank or the Company. Any officer of the Bank who at the time of a change
in control is a party to an employment agreement is not covered by the Severance
Plan. See page 80.
ESOP. The Bank's full-time employees will participate in an ESOP, which is
a form of retirement plan that will purchase up to 8% of the Common Stock issued
in the Conversion. The Company intends to use up to 8% of the proceeds of the
Offerings to make a loan to the ESOP to enable the ESOP to purchase up to 8% of
the shares of Common Stock to be issued in the Conversion, estimated to be
between 115,600 and 156,400 shares assuming the issuance of between 1,445,000
and 1,955,000 shares. The amount loaned to the ESOP to enable such purchases is
estimated to range from $1,156,000 (if 1,445,000 shares are issued) to
$1,564,000 (if 1,955,000 shares are issued). Shares purchased by the ESOP and
pledged as security for the loan will be held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the ESOP
and shares released from the suspense account in an amount proportional to the
repayment of the ESOP loan will be allocated among ESOP participants on the
basis of relative compensation in the year of allocation. Employees
participating in the ESOP will be entitled to instruct the ESOP trustees as to
the voting of all shares allocated to their respective accounts and held in the
ESOP. The unallocated shares held in the suspense account, and all allocated
shares for which voting instructions are not received will be voted by the
trustees in their discretion, subject to the provisions of the ERISA. See page
80.
7
<PAGE>
MRP. Following the Conversion, subject to approval by the Company's
stockholders, the Bank intends to implement a management recognition plan (the
"MRP"). 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 to enable the MRP Trust to purchase a number of shares equal to
4% of the number of 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. If shares are acquired in
the open market, the funds for such purchase may be provided from the proceeds
of the Offerings. 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.
Under the MRP, directors and executive officers of the Bank will be
entitled to receive awards of restricted stock at no cost to them, except for
any federal and state taxes due on such award. Assuming the issuance of
1,955,000 shares in the Conversion and receipt of stockholder approval, 78,200
shares would be issued pursuant to the MRP and the estimated aggregate value of
such MRP shares would be $782,000 based on the $10.00 Purchase Price. The MRP
provides that each recipient will be entitled to all voting and other
stockholder rights with respect to shares which have been awarded under the MRP.
The Boards of Directors of the Bank and the Company have decided to adopt the
MRP no sooner than 12 months after the Conversion at which time such plan will
be presented to the stockholders of the Company for their approval. See pages
81 to 82.
Option Plan. Subject to approval by the Company's stockholders, the
Company anticipates implementing a stock option plan (the "Option Plan"), which
will benefit the Bank's directors and certain employees. The Company will
reserve for the Option Plan a number of shares equal to 10% of the number of
shares issued in the Conversion. 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. The exercise price of the options
granted under the Option Plan will be equal to the market price of the Common
Stock on the date of the grant. Assuming the issuance of 1,955,000 shares in
the Conversion and receipt of shareholder approval, 195,500 shares would be
reserved for issuance under the Option Plan. Of those shares, the Company
anticipates that 58% (113,390 shares) would be issued to directors and executive
officers and 42% (82,110 shares) would be issued to other employees of the
Company and the Bank.
The Option Plan will provide that the Company's Board of Directors will
have the discretionary authority to authorize cash payments to the holders of
unexercised options, both vested and unvested, equal to the amount of dividends
which would have been paid on shares subject to options if the options had been
exercised. No such payment may be made in connection with dividends or other
distributions which result in a reduction in the option exercise price. If an
optionee receives such a cash payment with respect to any unvested option, and
if such option is later forfeited, the optionee must repay any cash payment made
with respect to the forfeited option. The Boards of Directors of the Bank and
the Company have decided to adopt the Option Plan no sooner than 12 months after
the Conversion at which time such plan will be presented to the stockholders of
the Company for their approval. See pages 82 to 85.
8
<PAGE>
The following table summarizes the benefits executive officers, directors
and other employees of the Company and the Bank may receive in connection with
the Conversion. The table assumes (i) the issuance of 1,955,000 shares (the
maximum of the Estimated Valuation Range) in the Conversion; (ii) that the ESOP
purchases 156,400 shares (8% of the shares offered at the maximum of the
Estimated Valuation Range) at $10.00 per share; (iii) that the MRP is approved
by the stockholders of the Company no sooner than 12 months following the
Conversion, the MRP Trust purchases 78,200 shares (4% of the number of shares
offered at the maximum of the Estimated Valuation Range), and the market value
of the MRP shares on the date of award is $10.00 per share; and (iv) that the
Option Plan is approved by the stockholders of the Company no sooner than 12
months following the Conversion and that 195,500 options are awarded under the
Option Plan, which is 10% of the number of shares offered at the maximum of the
Estimated Valuation Range.
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
ESTIMATED NUMBER NUMBER OF SHARES
NUMBER OF OF MRP PURCHASED BY THE
SHARES PERCENTAGE SHARES PERCENTAGE OF DOLLAR VALUE OF ESOP AND
SUBJECT OF OPTIONS TO BE TOTAL MRP MRP SHARES ON ALLOCATED TO
RECIPIENT TITLE TO OPTION ISSUED GRANTED/1/ SHARES ISSUED DATE OF GRANT/2/ PARTICIPANTS
<S> <C> <C> <C> <C> <C> <C> <C>
Malcolm B. Blankenship, Jr. Director 5,865 3.0% 7,820 10.0% $ 78,200 0
James W. Duke Director 5,865 3.0% 7,820 10.0% 78,200 0
Harold C. Earnhardt Vice 5,865 3.0% 7,820 10.0% 78,200 0
Chairman
K.V. Epting, Jr. Director 5,865 3.0% 7,820 10.0% 78,200 0
Gordon P. Hurley Director 5,865 3.0% 3,910 5.0% 39,100 0
Bobby A. Lomax Director 5,865 3.0% 7,820 10.0% 78,200 0
Ronald E. Bostian Chairman, 39,100 20.0% 15,640 20.0% 156,400 --
President,
and Chief
Executive
Officer
Jeffrey C. Chisholm Senior Vice 19,550 10.0% 9,775 12.5% 97,775 --
President
and Chief
Lending
Officer
Dianne E. Hawkins Vice 19,550 10.0% 9,775 12.5% 97,775 --
President,
Treasurer,
and
Controller
Other Employees 82,110 42.0% 0 0.0% 0
------- ----- ------ ----- -------- ----------
Total 195,500 100.0% 78,200 100.0% $782,000 156,400/2/
======= ===== ====== ===== ======== ==========
<CAPTION>
ESTIMATED
OF SHARES HELD
BY THE ESOP AND
ALLOCATED TO
RECIPIENT TITLE PARTICIPANTS
<S> <C> <C>
Malcolm B. Blankenship, Jr. Director 0
James W. Duke Director 0
Harold C. Earnhardt Vice 0
Chairman
K.V. Epting, Jr. Director 0
Gordon P. Hurley Director 0
Bobby A. Lomax Director 0
Ronald E. Bostian Chairman, --
President,
and Chief
Executive
Officer
Jeffrey C. Chisholm Senior Vic --
President
and Chief
Lending
Officer
Dianne E. Hawkins Vice --
President,
Treasurer,
and
Controller
Other Employees
-------------
Total $1,564,000/2/
=============
</TABLE>
_______________________________
(1) The recipients of MRP shares will be entitled to all voting and other
stockholder rights with respect to shares which have been awarded under the
MRP.
(2) The MRP shares will be awarded at no cost to the recipients, except for any
federal or state taxes due on such awards.
(3) The number and the value of shares allocated to the ESOP accounts of each
of the executive officers and other employees cannot be determined at this
time. Contributions to the ESOP and shares released from the suspense
account in an amount proportional to the repayment of the ESOP loan will be
allocated among ESOP participants on the basis of relative compensation in
the year of allocation.
9
<PAGE>
OFFICERS' AND DIRECTORS' COMMON STOCK PURCHASES AND BENEFICIAL OWNERSHIP
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 $3,270,000, or 327,000 shares. As a result, such persons
anticipate subscribing for 22.63% to 16.73% of the shares of Common Stock issued
in the Conversion based upon the 1,445,000 shares (minimum of the Estimated
Valuation Range) and 1,955,000 shares (maximum of the Estimated Valuation
Range), respectively. In addition, purchases by the ESOP, allocations under the
MRP, and the exercise of stock options issued under the Option Plan, will
increase the number of shares beneficially owned by directors, officers and
employees. Assuming (i) implementation of the MRP and the Option Plan, (ii) the
open market purchase of shares on behalf of the MRP, (iii) the purchase by the
ESOP of 8% of the Common Stock sold in the Offerings, and (iv) the exercise of
stock options equal to 10% of the number of shares of Common Stock issued in the
Conversion, directors, officers and employees of the Company and the Bank would
have voting control, on a fully diluted basis of 44.63% and 38.73% of the Common
Stock, based on the issuance of the 1,445,000 shares (minimum of the Estimated
Valuation Range) and 1,955,000 shares (maximum of the Estimated Valuation
Range), respectively. See pages 19 to 20 and 33 to 34.
USE OF THE PROCEEDS FROM THE SALE OF COMMON STOCK
The Company will use the proceeds from the Offerings as follows:
. 50% of the net proceeds will be used to purchase all the capital stock
of the Bank.
. 8% of the gross proceeds will be loaned to the ESOP to fund its purchase
of Common Stock.
. The balance will be retained as a possible source of funds for the
payment of dividends to shareholders, the repurchase of stock, and for
other general corporate purposes. The Company will initially invest
these proceeds primarily in interest-earning deposits, U.S. government,
federal agency and other marketable securities and mortgage-backed
securities.
The Company and the Bank have no present intention to file consolidated tax
returns which will preserve for the Company the ability to use a portion of the
proceeds to make a return of capital in the future. However, the Company has
not made any decision to pay such a return of capital. In accordance with OTS
policy, the Company and the Bank will take no actions in furtherance of the
payment of a return of capital, including filing a private letter ruling request
with the IRS regarding the tax free nature of a possible one time cash
distribution to the Company's stockholders, for a period of one year following
the Conversion.
In addition to general corporate purposes, net proceeds received by the
Bank will be available for continued expansion of the retail banking franchise
through new branch openings or deposit or branch acquisitions, continued growth
in the loan portfolio and investments consisting primarily of U.S. government
and federal agency obligations, interest-earning deposits and other marketable
securities. See pages 22 to 23.
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 currently anticipates paying quarterly
cash dividends on the Common Stock of $0.05 per share (or an annual rate of
$0.20 per share, which is equal to 2% of the Purchase Price for the Common Stock
in the Conversion). 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 page
24.
10
<PAGE>
MARKET FOR THE COMMON STOCK
The Company has never issued its Common Stock to the public. Consequently,
there is no established market for the Common Stock. An active and liquid
public trading market for the securities of any issuer, including the Common
Stock of the Company, depends upon the presence in the marketplace of both
willing buyers and willing sellers of the securities at any given time. The
Company expects the Common Stock to be quoted on the Nasdaq Small-Cap Market,
under the symbol "ISFC" subject to certain conditions which it believes will be
met, including a minimum market capitalization and minimum number of market
makers and stockholders of record. If the Common Stock does not qualify for
quotation on the Nasdaq Small-Cap Market, the Company expects it to be quoted on
the OTC Electronic Bulletin Board. Trident Securities is expected to make a
market in the Common Stock following consummation of the Conversion and will
assist the Company in seeking to encourage at least two additional market makers
to establish and maintain a market in the Common Stock. Making a market
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. Due to the amount of
Common Stock to be issued in the Conversion, the Company cannot assure investors
that the conditions for quotation on the Nasdaq Small-Cap Market or the OTC
Electronic Bulletin Board will be satisfied or that an active and liquid trading
market for the Common Stock will develop or be maintained. See "RISK FACTORS."
See pages 25 to 26.
IMPORTANT RISKS IN OWNING THE COMPANY'S COMMON STOCK
Before you decide to purchase Common Stock in the Offering, you should read
carefully the "Risk Factors" section beginning on page 15 of this document.
SELECTED FINANCIAL
AND OTHER DATA OF THE BANK
Set forth below are summaries of historical financial and other data of the
Bank. The selected financial and other data at and for the years ended
September 30, 1993 through September 30, 1997 have been derived from the audited
financial statements of the Bank. The selected financial and other data at and
for the nine months ended June 30, 1998 and 1997 were derived from unaudited
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of financial
condition and results of operations for the unaudited periods presented here
have been included. The results of operations and other data presented for the
nine months ended June 30, 1998 are not necessarily indicative of the results of
operations that may be expected for the fiscal year ending September 30, 1998.
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."
11
<PAGE>
<TABLE>
<CAPTION>
At or for the Nine Months
Ended June 30, At or for the Year Ended September 30,
------------------------------ ----------------------------------------------
1998 (7) 1997 (7) 1997 (7) 1996 (7) 1995 (7)
---------- ---------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Financial condition data:
Total assets $ 192,716 $ 200,781 $ 199,616 $ 190,233 $ 202,170
Investments /(1)/ 26,486 33,149 34,752 25,866 29,641
Loans receivable, net /(2)/ 159,710 161,601 159,458 159,491 168,396
Deposits 159,819 158,248 160,493 146,450 159,309
Equity 15,611 14,344 14,629 13,557 13,454
Operating data:
Interest income $ 10,455 $ 10,376 $ 13,902 $ 13,690 $ 14,324
Interest expense 6,962 7,380 9,872 9,983 9,956
------------- ------------ ---------- ----------
Net interest income 3,493 2,996 4,030 3,707 4,368
Provision for loan losses - - - - -
------------- ------------ ---------- ---------- -----------
Net interest income after
provision for loan losses 3,493 2,996 4,030 3,707 4,368
Non-interest income 285 334 416 388 434
Non-interest expense 2,238 2,194 2,959 3,982 (8) 2,910
------------- ------------ ---------- ---------- -----------
Income before income taxes 1,540 1,136 1,487 113 1,892
Income tax expense 572 431 520 11 743
------------- ------------ ---------- ---------- -----------
Income before cumulative effect of a
change in accounting principle 968 705 967 102 1,149
Cumulative effect on prior years of
changing to a different method of
accounting for income taxes - - - - -
============= ============ ========== ========= ===========
Net income $ 968 $ 705 $ 967 $ 102 $ 1,149
============= ============ ========== ========= ===========
Other selected data:
Number of outstanding loans 3,725 3,654 3,620 3,631 3,721
Number of deposit accounts 9,496 10,090 9,989 10,030 10,607
Number of full-service offices open 3 3 3 3 3
Return on average assets /(3)/ 0.67% 0.48% 0.49% 0.(8) 0.56%
Return on average equity /(3)/ 8.35% 6.59% 6.70% 0.(8) 8.64%
Average equity to average assets 7.97% 7.27% 7.30% 7.29% 6.48%
Interest rate spread /(4)/ 2.06% 1.70% 1.70% 1.54% 1.82%
Net yield on average interest-
earning assets /(5)/ 2.47% 2.09% 2.09% 1.94% 2.16%
Average interest-earning assets
to average interest-bearing liabilities 108.43% 107.45% 107.52% 107.70% 107.12%
Ratio of non-interest expense to
average total assets /(3)/ 1.54% 1.49% 1.50% 2.(8) 1.42%
Non-performing assets to total assets /(6)/ 0.07% 0.14% 0.17% 0.07% 0.02%
Non-performing loans to total gross loans /(6)/ 0.08% 0.13% 0.21% - -
Allowance for loan losses to total loans 0.77% 0.76% 0.77% 0.76% 0.72%
Allowance for loan losses to
non-performing loans /(6)/ 942% 449% 351% 935% 2,480%
Provision for loan losses to total
loans receivable, net /(3)/ - - - - -
Net charge-offs(recoveries) to average
loans outstanding - - - - (0.01)%
Equity to total assets 8.10% 7.14% 7.33% 7.13% 6.65%
<CAPTION>
At or for the Year Ended September 30,
--------------------------------------
1994 (7) 1993 (7)
---------- --------
(Dollars in Thousands)
<S> <C> <C>
Financial condition data:
Total assets $ 200,712 $ 172,384
Investments /(1)/ 39,742 21,871
Loans receivable, net /(2)/ 156,297 145,533
Deposits 159,480 155,412
Equity 12,305 9,954
Operating data:
Interest income $ 11,952 $ 11,772
Interest expense 6,786 6,837
---------------- ----------
Net interest income 5,166 4,935
Provision for loan losses - -
---------------- ----------
Net interest income after
provision for loan losses 5,166 4,935
Non-interest income 675 861
Non-interest expense 2,798 2,539
---------------- ----------
Income before income taxes 3,043 3,257
Income tax expense 1,206 1,210
---------------- ----------
Income before cumulative effect of a
change in accounting principle 1,837 2,047
Cumulative effect on prior years of
changing to a different method of
accounting for income taxes 514 -
================ ==========
Net income $ 2,351 $ 2,047
================ ==========
Other selected data:
Number of outstanding loans 3,588 3,498
Number of deposit accounts 10,667 11,206
Number of full-service offices open 3 3
Return on average assets /(3)/ 1.33% 1.30%
Return on average equity /(3)/ 20.66% 22.26%
Average equity to average assets 6.43% 5.83%
Interest rate spread /(4)/ 2.65% 2.77%
Net yield on average interest-
earning assets /(5)/ 3.01% 3.27%
Average interest-earning assets
to average interest-bearing liabilities 105.97% 104.79%
Ratio of non-interest expense to
average total assets /(3)/ 1.58% 1.61%
Non-performing assets to total assets /(6)/ 0.08% 0.10%
Non-performing loans to total gross loans /(6)/ 0.07% 0.01%
Allowance for loan losses to total loans 0.77% 0.83%
Allowance for loan losses to
non-performing loans /(6)/ 763% 736%
Provision for loan losses to total
loans receivable, net /(3)/ - -
Net charge-offs(recoveries) to average
loans outstanding 0.01% (0.05)%
Equity to total assets 6.13% 5.77%
</TABLE>
- --------------------------------------------------------------
(1) Includes interest-bearing bank deposits, overnight and term fed funds-sold,
certificates of deposit, FHLB stock and investment securities.
(2) "Loans receivable, net" represents gross loans less net deferred loan fees,
undisbursed loan funds and allowances for loan losses.
(3) Annualized for the nine months ended June 30, 1998 and 1997.
(4) The interest rate spread represents the difference between the weighted-
average yield on interest-earning assets and the weighted-average cost of
interest-bearing liabilities.
(5) The net yield on average interest-earning assets represents net interest
income as a percentage of average interest-earning assets.
(6) Non-performing assets include nonaccrual loans and accruing loans past due
90 days or more and foreclosed real estate.
(7) Ratios are derived from monthly balances except for ratios derived from
period-end balances and are annualized where appropriate. Management does
not believe the use of month-end balances has caused a material difference
in the information provided.
(8) Excluding the one-time SAIF special assessment of $1,074,702 the return on
average assets, the return on average equity, and the ratio of non-interest
expense to average total assets would be 0.39%, 5.30%, and 1.49%,
respectively.
12
<PAGE>
RECENT DEVELOPMENTS
The following summary of selected financial information and other data does
not purport to be complete and is qualified in its entirety by reference to the
detailed information and financial statements and accompanying notes appearing
elsewhere in this Prospectus. Selected financial information as of September
30, 1997 has been derived from the audited financial statements of the Bank.
Selected financial information as of September 30, 1998 and for the three months
ended September 30, 1998 and 1997 has been derived from unaudited financial
information. In the opinion of management, such information reflects all
adjustments (which consist only of normal, recurring accruals), necessary for a
fair presentation of the selected financial information and other data. The
results of operations for the three months ended September 30, 1998 are not
necessarily indicative of the results which may be expected for any other
period.
<TABLE>
<CAPTION>
At September 30,
----------------------------
1998 1997
----------------------------
(Dollars in Thousands)
<S> <C> <C>
FINANCIAL CONDITION DATA:
Total Assets $190,058 $199,616
Investments/(1)/ 24,254 34,752
Loans receivable, net 159,248 159,458
Deposits 161,549 160,493
Borrowings 10,000 22,000
Equity 15,972 14,629
</TABLE>
<TABLE>
<CAPTION> For the Three Months
Ended September 30,
----------------------------
1998 1997
----------------------------
(Dollars in Thousands)
<S> <C> <C>
OPERATING DATA:
Interest income $ 3,459 $ 3,526
Interest expense 2,225 2,492
Net interest income 1,234 1,034
Provision for loan losses - -
Net interest income after provision for loan losses 1,234 1,034
Non-interest income 136 82
Non-interest expense 818 765
Income before income taxes 552 351
Income tax expense 187 89
-------- --------
Net income $ 365 $ 262
======== ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
At or For the Three Months
---------------------------------
Ended September 30,
1998 1997
----------------------------------
(Dollars in Thousands)
<S> <C> <C>
ASSET QUALITY RATIOS:
Non-performing assets to total assets/(3)/ 0.11% 0.17%
Net chargeoffs (recoveries) to average loans outstanding - -
Allowance for loan losses to total loans 0.77% 0.77%
Allowance for loan losses to non-performing loans 613% 351%
KEY PERFORMANCE RATIOS:
Return on average assets/(4)/ 0.76% 0.52%
Return on average equity/(4)/ 8.91% 7.02%
Interest rate spread/(5)/ 2.28% 1.73%
Average equity to average assets 8.53% 7.40%
Non-interest expense to average assets/ (4)/ 1.70% 1.52%
OTHER DATA:
Number of outstanding loans 3,730 3,620
Number of deposit accounts 9,418 9,989
Number of full-service offices 3 3
</TABLE>
/(1)/ Includes interest-bearing bank deposits, overnight and term fed funds-
sold, certificates of deposits, FHLB stock and investment
securities.
/(2)/ "Loans receivable, net" represents gross loans less net deferred loans
fees, undisbursed loan funds and allowances for loan losses.
/(3) /Non-performing assets include nonaccrual loans and accruing loans
past due 90 days or more and foreclosed real estate.
/(4) / Annualized for the three months ended September 30, 1998 and
1997.
/(5)/ The interest rate spread represents the difference between weighted-
average yield on interest-earning assets and the weighted-average cost
of interest-bearing liabilities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT DEVELOPMENTS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND 1997
Total assets of the Bank decreased by $9.6 million from September 30, 1997,
and totaled $190.1 million at September 30, 1998. Investments decreased $10.5
million to $24.3 million at September 30, 1998 from $34.8 million at September
30, 1997 primarily due to a decrease in borrowings. Deposits increased by $1.0
million to $161.5 million at September 30, 1998 from $160.5 million at
September 30, 1997. Borrowings decreased by $12.0 million from $22.0 million at
September 30, 1997 to $10.0 million at September 30, 1998. Equity increased by
$1.3 million to $16.0 million at September 30, 1998, which is primarily
attributable to the Bank's earnings during the twelve months ended September 30,
1998.
COMPARISON OF RESULTS OF OPERATION FOR THE THREE MONTHS SEPTEMBER 30, 1998 AND
1997
Net earnings totaled approximately $365,000 for the three months ended
September 30, 1998, as compared to $262,000 during the same quarter of 1997.
Return on average assets and return on average equity for the three months ended
September 30, 1998 were 0.76% and 8.93% on an annualized basis as compared to
0.52% and 7.02%, respectively, for the three-month period ended September 30,
1997.
14
<PAGE>
Net interest income increased 18.5% to $1.2 million during the three months
ended September 30, 1998 as compared to $1.0 million during the three months
ended September 30, 1997. This increase was a result of the $12.0 million
dollar decrease in borrowings along with an increase in interest rate
spread.
Non-interest income increased $54,000 from $82,000 during the three months
ended September 30, 1997 to $136,000 during the three months ended September 30,
1998 primarily due to an increase in gains on sale of loans. Non-interest
expense increased $53,000 from $765,000 during the three months ended September
30, 1997 to $818,000 during the three months ended September 30, 1998 primarily
due to increases in professional expenses and charitable contributions.
RISK FACTORS
THE FOLLOWING FACTORS, IN ADDITION TO THE INFORMATION PRESENTED ELSEWHERE
IN THIS PROSPECTUS, SHOULD BE CONSIDERED BY INVESTORS BEFORE DECIDING WHETHER TO
PURCHASE THE COMMON STOCK OFFERED HEREBY.
GEOGRAPHIC CONCENTRATION OF CREDIT RISK AND ORIGINATION POLICY OF THE BANK
The Bank has no significant concentration of credit risk other than that a
substantial portion of its loan portfolio (98.9%) is secured by real estate,
either as primary or secondary collateral, located in Rowan and Iredell
Counties, North Carolina, the Bank's primary market area. The economy of the
Bank's primary market area is generally stable and diverse, however, no
assurances can be given that such favorable economic conditions will continue.
Accordingly, this geographic concentration of credit risk could have a material
adverse effect on the Bank's financial condition and results of operations to
the extent there is a material deterioration in that area's economy and real
estate values. The lending strategy of the Bank has been directed toward the
reduction of credit, collateral, and interest rate risks. This strategy has
resulted in a high level of asset quality as evidenced by the low level of non-
performing assets. There have been no loan charge-offs during the forty-five
month period ended June 30, 1998 and non-performing loans as a percent of total
gross loans have been at 0.21% or less. Adjustable rate loans have been
emphasized as part of this strategy to reduce or minimize interest rate risk.
Adjustable rate loans comprise 67% of the loan portfolio, net of deferred loan
fees and undisbursed loan funds. This risk-averse lending strategy has resulted
in high asset quality, but a yield on loans below industry standards.
Strict underwriting standards and avoidance of mortgages on nonresidential
and multi-family properties along with commercial and consumer loans have been
an integral part of this strategy. Although this strategy has been the Board's
policy in the past, it is the intent of the Board to consider and evaluate the
possibilities of diversifying the loan portfolio to enhance yield. In order to
diversify its operations and generate higher yielding loans, the Bank may be
required to hire experienced personnel to originate additional loan products.
See " BUSINESS OF THE BANK - Market Area" and "BUSINESS OF THE BANK - Lending
Activities."
INTEREST RATE RISK
The Bank's financial condition and operations are influenced significantly
by general economic conditions, the related monetary and fiscal policies of the
federal government and government regulations. Deposit flows and the cost of
funds are influenced by interest rates of competing investments and general
market interest rates. Lending activities are affected by the demand for
mortgage financing and for consumer and other types of loans, which in turn is
affected by the interest rates at which such financing may be offered and by
other factors affecting the supply of housing and the availability of funds.
The Bank's profitability depends largely on its net interest income, which is
the difference between the interest income received from its interest-earning
assets and the interest expense incurred in connection with its interest-bearing
liabilities.
Changes in the level of interest rates also affect the volume of loans
originated or purchased by the Bank and, thus, the amount of loan and commitment
fees, as well as the market value of the Bank's investment securities and other
interest-earning assets. Changes in interest rates can also affect the average
life of loans. Decreases in interest rates may result in increased prepayments
of loans, as borrowers refinance to reduce borrowing costs.
15
<PAGE>
When this occurs, 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 maturing loans or securities. Moreover, volatility in interest rates
can also result in disintermediation, or flow of funds away from banks into
direct investments such as U.S. Government and corporate securities which,
because of the absence of federal insurance premiums and reserve requirements,
generally pay higher rates of return than banks.
The Bank has attempted to mitigate interest rate risk by originating
adjustable rate mortgage loans. At June 30, 1998, out of $160.9 million total
gross loans, net of deferred loan fees and undisbursed loan funds, in the Bank's
portfolio, $107.7 million, or 67%, were adjustable. Furthermore, the Bank's
adjustable loans contain periodic and lifetime interest rate adjustment limits
which, in a rising rate environment, may prevent such loans from repricing to
market interest rates. While management anticipates that adjustable rate
mortgage loans will better offset the adverse effects of an increase in interest
rates as compared to fixed-rate mortgages, the increased mortgage payments
required of adjustable rate mortgage borrowers in a rising interest rate
environment could potentially cause an increase in delinquencies and defaults.
The Bank has not historically had an increase in such delinquencies and defaults
on adjustable rate mortgage loans, but no assurance can be given that such
delinquencies or defaults would not occur in the future. The marketability of
the underlying property also may be adversely affected in a high interest rate
environment. Moreover, the Bank's ability to originate or purchase adjustable
rate mortgage loans is affected by changes in the level of interest rates and by
market acceptance of terms of such loans. When the yield curve is relatively
flat, as it currently is, borrowers generally tend to favor fixed rate loans
over adjustable rate loans to hedge against future increases in interest rates.
The Bank's results of operations would be adversely affected by a material
prolonged increase in market interest rates. At June 30, 1998, assuming, for
example, an instantaneous 200 basis point increase in market interest rates, the
Bank's net portfolio value ("NPV") (the present value of expected cash flows
from assets, liabilities, and off-balance sheet contracts) would decrease
approximately $2.41 million, or 13.01%. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Asset and Liability
Management."
COMPETITION
The Bank's market area is a highly competitive market, and the Bank faces
significant competition both in attracting deposits and in originating loans.
The Bank faces direct competition from a number of financial institutions, many
with a state-wide or regional presence, and, in some cases, a national presence.
Competition arises from other savings institutions, commercial banks, credit
unions and other providers of financial services, many of which are
significantly larger than the Bank and, therefore, have greater financial and
marketing resources than the Bank. Management estimates that, based upon 1997
comparative data, the Bank had approximately 11.7% of the deposits in Salisbury,
North Carolina and approximately 10.4% of the deposits in Rowan County. In
addition, the Bank had approximately 8.0% of the deposits in Statesville and
approximately 4.7% in Iredell County. See "BUSINESS OF THE BANK --
Competition."
TECHNOLOGY
The rapid rate of technological change applicable to the banking industry
poses significant challenges to the Bank. The ability to offer on-line banking
services and other services which the market may require in the future is a
major concern of the Bank's management.
ANTICIPATED LOW RETURN ON EQUITY FOLLOWING CONVERSION
At June 30, 1998, the Bank's ratio of equity to total assets was 8.10%. On
a pro forma basis at June 30, 1998, assuming the sale of 1,955,000 shares of
Common Stock in the Conversion, the Company's ratio of equity to assets would
have been 15.24%. With its higher capital position as a result of the
Conversion, it is doubtful that the Company will be able to deploy quickly the
capital raised in the Conversion in loans and other assets in a manner
consistent with its business plan and operating philosophies and in a manner
which will generate earnings to
16
<PAGE>
support its high capital position. The cost of the implementation of an ESOP,
MRP and Option Plan following the Conversion are 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 averages. Consequently,
investors expecting a return on equity which will meet or exceed industry
averages for the foreseeable future should carefully evaluate and consider the
risk that such returns will not be achieved.
Following the Conversion, the Company may consider plans to reduce capital
if the opportunities to deploy it are not found. Such plans may include payment
of cash dividends and repurchasing shares. Any such steps would be taken based
on conditions as they exist following the Conversion and in compliance with
applicable regulations which limit the Company's ability to pay dividends and
repurchase its stock. See "USE OF PROCEEDS," "DIVIDEND POLICY" and "SUPERVISION
AND REGULATION -- Regulation of the Company -- General" and "-- Dividend
Limitations" and "SUPERVISION AND REGULATION -- Regulation of the Bank --
Limitations 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. The Company expects the Common Stock to be quoted on the Nasdaq Small-Cap
Market under the symbol "ISFC". There can be no assurance that the Common Stock
will in fact be listed, or will trade, on the Nasdaq Small-Cap Market. 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. Based
on the midpoint of the Estimated Valuation Range, it is anticipated that,
following completion of the Conversion, the Company will have approximately
1,700,000 shares of Common Stock issued and outstanding. Of that amount,
136,000 of such shares will be held by the ESOP and an additional 327,000 shares
will be held by directors and executive officers of the Bank and the Company,
limiting the number of shares held by the public. Due to the relatively small
size of the Company's offering and the significant amount of stock expected to
be held by management and the ESOP, it is unlikely that a stockholder base large
enough to create an active trading market will develop and be maintained.
Further, even if a market develops, there can be no assurance that the shares of
Common Stock offered in the Conversion can be resold at or above the Purchase
Price after completion of the Conversion. Purchasers of Common Stock should
consider the potentially illiquid and long-term nature of their investment in
the shares being offered hereby. The aggregate price of the Common Stock is
based upon an independent appraisal of the pro forma market value of the Common
Stock. However, there can be no assurance that an investor will be able to sell
the Common Stock purchased in the Conversion at or above the purchase
price.
INCREASE IN OVERHEAD EXPENSES
After completion of the Conversion, the Company's noninterest expense is
likely to increase as a result of the financial accounting, legal and tax
expenses usually associated with operating as a public company. In addition, it
is currently anticipated that the Company will record additional expense based
on the proposed MRP. See "PRO FORMA DATA" and "MANAGEMENT OF THE BANK -
Proposed Recognition Plan." Further, the Company will also record additional
expense as a result of the adoption of the ESOP. See "MANAGEMENT OF THE BANK -
Employee Stock Ownership Plan."
In November 1993, the American Institute of Certified Public Accountants
approved Statement of Position ("SOP") 93-6, "Employers' Accounting for Employee
Stock Ownership Plans." SOP 93-6, among other things, changes the measure of
compensation recorded by employers from the cost of ESOP shares to the fair
value of ESOP shares. Since the fair value of the shares following the
Offerings cannot be predicted, the Company cannot reasonably estimate the
impact of SOP 93-6 on its financial statements. While an increase in such fair
value will cause an increase in ESOP-related expenses for accounting purposes,
an increase in the fair value of the shares should not increase the actual out-
of-pocket cost to the Company of the ESOP. Also, earnings per share may be
increased as a result of the implementation of SOP 93-6 because only shares
which have been committed to be released by the ESOP are included as outstanding
shares in the computation. See "PRO FORMA DATA."
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YEAR 2000 COMPLIANCE
As the year 2000 approaches, an important business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Some of the existing application software products
were designed to accommodate only two-digits. For example, "96" is stored on
the system and represents 1996. The Bank has been identifying potential
problems associated with the "Year 2000" issue and has implemented a plan
designed to ensure that all software used in connection with the Bank's business
will manage and manipulate data involving the transition with data from 1999 to
2000 without functional or data abnormality and without inaccurate results
related to such data. The Bank has prepared a critical issues schedule with a
time line and assigned responsibilities to address the Year 2000 problem. In
addition, the Bank recognizes that its ability to be Year 2000 compliant is
dependent upon the cooperation of its vendors. The Bank is requiring its
computer systems and software vendors to represent that the products provided
are or will be Year 2000 compliant and has planned a program of testing for
compliance. The Bank has received representations from its primary third party
vendors that they will have resolved any Year 2000 problems in their software by
December 31, 1998 and anticipates that all of its vendors also will have
resolved any Year 2000 problems in their software by that same date. All Year
2000 issues for the Bank, including testing, are expected to be addressed by
December 31, 1998 and any problems would be remedied by June 30, 1999. The Bank
also is preparing contingency plans in the event there are any system
interruptions. The Bank's contingency plan is designed to ensure continued
operation even in the event of a power failure. Telephone capability is being
analyzed in conjunction with vendors. The same analysis and monitoring is being
performed on the provider of security services. Additionally, the Bank intends
to increase its vault currency well above normal levels to preclude any problems
with delivery services. The Bank's vaults are mechanical and not subject to
time or calendar failure. The Bank believes that its costs related to Year 2000
will be immaterial. There can be no assurances, however, that the contingency
plan or the performance by the Bank's vendors will be effective to remedy all
potential problems. To the extent the Bank's systems are not fully Year 2000
compliant, there can be no assurance that potential systems interruptions or the
cost necessary to update software would not have a material adverse effect on
the Bank's business, financial condition, results of operations and business
prospects. The Bank's loan portfolio consists primarily of residential mortgage
loans to individuals. These individuals generally are not affected by Year 2000
failures. The limited number of the Bank's commercial borrowers are being
contacted to assure that timely payments will be made in January 2000. The Bank
intends to amend its underwriting policies to address loan payment problems
associated with a borrower as a result of a disruption in income or a
commercial borrower's inability to make a timely payment.
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 to be held no
sooner than 12 months after the Conversion. Under the MRP, directors and
certain employees of the Bank are expected to be awarded an aggregate amount of
Common Stock equal to 4% of the shares issued in the Conversion. Under the
Option Plan, directors and certain employees of the Bank are expected to be
granted options to purchase an aggregate amount of Common Stock equal to 10% of
the shares issued in the Conversion at exercise prices equal to the market price
of the Common Stock on the date of grants. Shares issued to directors and
certain employees under the MRP and the Option Plan may be from authorized but
unissued shares of Common Stock or they may be from shares 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 1,955,000 shares of the Common Stock are
issued in the Conversion, it is expected that options to acquire 195,500 shares
of the Common Stock could be granted under the Option Plan, and awards of an
additional 78,200 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 1,955,000 to 2,228,700, the pro forma
book value per share of the outstanding Common Stock at June 30, 1998 would have
been $15.52 compared with $16.29 if such plans did not exist, and the pro forma
net income per share of the outstanding Common Stock for the nine months
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ended June 30, 1998 would have been $0.62 compared with $0.68 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 1,955,000 shares of Common Stock are
issued in the Conversion and the MRP acquired 78,200 shares at a cost of $10.00
per share, the total annual pre-tax expense of the MRP would be $156,400 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 others, that (1) the Board of Directors has
the authority to change the number of directors within a range from five to 15;
(2) stockholders who intend to nominate a candidate for election to the Board of
Directors must give advance notice to the Secretary of the Company; (3) terms
for directors will be staggered at any time that the number of directors is
equal to or exceeds nine; (4) certain merger, consolidation, or other business
combinations (as defined in the Articles of Incorporation) must receive the
affirmative vote of at least 75% of the Continuing Directors (as defined in the
Articles of Incorporation); (5) special meetings of stockholders may be called
only by the Chairman of the Board, the Chief Executive Officer, the President or
by the Board of Directors and (6) directors may be removed from office prior to
the end of their term only for cause.
In addition, the Articles of Incorporation do not provide for cumulative
voting for any purpose. As a result, a majority of shareholders will be able to
approve matters presented to the shareholders for consideration, except such
matters as require more than a majority vote for approval. The Company's
Articles of Incorporation state that the Board of Directors, without the
approval of the stockholders, may authorize the issuance of shares of preferred
stock with such voting rights, designations, preferences, limitations and
relative rights as the Board of Directors shall determine. As a result, the
Board of Directors has the power, to the extent consistent with its fiduciary
duties, to issue preferred stock to persons friendly to management or otherwise
in order to impede attempts by third parties to acquire voting control of the
Company and to impede other transactions not favored by management. The amended
Charter 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 "RESTRICTIONS ON ACQUISITION OF THE COMPANY."
REGULATORY PROVISIONS. Regulations of the OTS contain provisions that, for
a period of three years after the Conversion is consummated, prohibit any person
from directly or indirectly acquiring or offering to acquire beneficial
ownership of more than 10% of any class of equity security of the Company or the
Bank without the prior approval of the OTS. Federal law also requires OTS
approval prior to the acquisition of "control" (as defined in OTS regulations)
of an insured institution, including a holding company thereof. See
"RESTRICTIONS ON ACQUISITION OF THE COMPANY."
VOTING CONTROL OF OFFICERS, DIRECTORS AND EMPLOYEES. Directors and
executive officers of the Bank and the Company and their associates expect to
purchase approximately 22.63% to 16.73% of the shares of Common
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Stock issued in the Conversion based upon the minimum and the maximum of the
Estimated Valuation Range, respectively. See "ANTICIPATED STOCK PURCHASES BY
MANAGEMENT."
In addition, it is expected that the ESOP will acquire a number of shares
equal to 8% of the shares issued in the Conversion. Employees will vote the
shares allocated to them under the ESOP. The ESOP trustees (directors of the
Bank) will vote unallocated shares, and allocated shares for which no voting
instructions have been received, in their discretion, subject to the provisions
of the Employee Retirement Income Security Act of 1974, as amended.
Under the proposed MRP, if approved by the stockholders of the Company, a
number of shares equal to 4% of the shares issued in the Conversion could be
issued to directors and certain employees of the Bank. Such shares could be
purchased in the open market or could be issued out of authorized but unissued
shares. Recipients of shares under the MRP will have voting control over such
shares regardless of whether such shares have vested. See "MANAGEMENT OF THE
BANK -- Proposed Management Recognition Plan." Under the proposed Option Plan,
if approved by the stockholders of the Company, directors and certain employees
of the Bank could receive options to purchase a number of shares equal to 10% of
the shares issued in the Conversion. Shares to fund such options could be
acquired in the open market or could be acquired through the issuance of
authorized but unissued shares. See "MANAGEMENT OF THE BANK -- Proposed Option
Plan."
If (i) the Option Plan is approved by the stockholders of the Company at a
meeting held no sooner than 12 months following the Conversion and all of the
stock options which could be granted to directors and executive officers under
the Option Plan are granted and all option shares are acquired in the open
market, (ii) the MRP is approved by the stockholders of the Company at a meeting
held no sooner than 12 months following the Conversion, all of the MRP shares
which could be granted to directors and executive officers are granted and
issued and all such shares are acquired in the open market, (iii) the ESOP
acquires 8% of the shares issued in the Conversion and none of such shares are
allocated, and (iv) the Company did not issue any additional shares of its
Common Stock, the shares held by directors and executive officers and their
associates as a group, including (a) shares purchased outright in the
Conversion, (b) shares purchased by the ESOP, (c) shares purchased pursuant to
the Option Plan and (d) shares granted under the MRP, would give such persons
effective control over as much as 44.63% or 38.73%, at the minimum and maximum
of the Estimated Valuation Range, respectively, of the Common Stock issued and
outstanding.
Because the Company's Articles of Incorporation requires the affirmative
vote of 75% of the outstanding shares entitled to vote in order to approve
certain mergers, consolidations or other business combinations, the directors,
officers and employees, as a group, could potentially block such transactions.
See "RESTRICTIONS ON ACQUISITION OF THE COMPANY -- Supermajority Voting
Provisions."
AGREEMENTS WITH EMPLOYEES. In connection with the Conversion, the Bank
will enter into an employment agreement with Ronald E. Bostian, 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." 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 "RESTRICTIONS ON ACQUISITION OF THE COMPANY --
Anti-Takeover Effect of Employment Agreement and Benefit Plans."
REGULATORY OVERSIGHT
The Bank is subject to extensive regulation, supervision and examination by
the OTS as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. The Bank is a member
of the FHLB of Atlanta and is subject to certain limited regulation by the Board
of Governors of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of the Bank, the Company will be subject to
regulation and oversight by the OTS. See "SUPERVISION AND REGULATION." Such
regulation and supervision governs the activities in which an institution can
engage and is intended primarily
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for the protection of the insurance fund and depositors. Regulatory authorities
have been granted extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking industry, including the imposition of restrictions on the
operation of an institution, the classification of assets by the institution and
the adequacy of an institution's allowance for loan losses. See "SUPERVISION AND
REGULATION -- Federal Regulation of the Bank". Any change in such regulation and
oversight, whether by the OTS, the Federal Reserve Board, the FDIC or Congress,
could have a material impact on the Company, the Bank and their respective
operations.
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 SAIF will be merged with the Bank Insurance
Fund ("BIF") on January 1, 1999, but only if there are no thrift institutions in
existence. The DIF Act requires the Treasury Department to study the
development of a common charter for banks and thrifts and to submit a report of
its finding to Congress, which the Treasury Department has done. The Company
cannot predict whether any legislation will result from this process or what any
such legislation may provide. If Congress does not act to end the separate
existence of the thrift industry, the merger of the SAIF and BIF contemplated by
the DIF Act will not occur, without some amendment of the DIF Act. Although the
SAIF currently meets its statutory reserve ratios, there can be no assurance
that it will continue to do so. The financial burden of any future
recapitalization of the SAIF, if imposed solely on insured savings associations,
would fall on a smaller assessment base than in the past. This could increase
the burden on individual institutions, including the Bank. See "REGULATION AND
SUPERVISION."
BEST EFFORTS OFFERING
The Bank and the Company have engaged Trident Securities to consult with
and advise the Bank and the Company 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.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
If the Subscription Rights granted to Eligible Account Holders,
Supplemental Eligible Account Holders and Other Members of the Bank are deemed
to have an ascertainable value, receipt of such rights may be a taxable event
(either as capital gain or ordinary income), to those Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members who receive and/or
exercise the Subscription Rights in an amount equal to such value.
Additionally, the Bank could be required to recognize a gain for tax purposes on
such distribution. Whether Subscription Rights are considered to have
ascertainable value is an inherently factual determination. The Bank has been
advised by Ferguson that such rights have no value; however, Ferguson's
conclusion is not binding on the Internal Revenue Service ("IRS"). See "THE
CONVERSION - Effects of Conversion - Income Tax Consequences."
INNES STREET FINANCIAL CORPORATION
The Company was incorporated under North Carolina law on July 6, 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 OTS to
become a savings and loan holding company and as such will be subject to
regulation by the OTS. The holding company structure will give the Company
greater flexibility than the Bank currently has to expand and diversify its
business activities, although there are no current plans regarding expansion or
diversification. See "SUPERVISION AND REGULATION --Regulation of the Company."
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Prior to completion of the Conversion, the Company will not own any
material assets or transact any material business. Upon completion of the
Conversion, on an unconsolidated basis, the Company will have no significant
assets other than the stock of the Bank acquired in the Conversion, the loan
receivable with respect to the loan made to the ESOP to enable the ESOP to
purchase shares of Common Stock in the Conversion, and the portion of the net
proceeds from the sale of Common Stock in the Conversion which are retained by
it. The Company will have no significant liabilities upon completion of the
Conversion. The management of the Company is set forth under "MANAGEMENT OF THE
COMPANY." The executive office of the Company is located at the headquarters
office of the Bank at 401 West Innes Street, Salisbury, North Carolina.
The existing management of the Company believes that it will be in the best
interests of the Company, the Bank and the Company's stockholders for the
Company to remain an independent company.
CITIZENS BANK, FSB
The Bank, organized in 1907, converted from a North Carolina chartered
mutual savings bank to a federally-chartered mutual savings bank, effective
September 2, 1998. 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 federally-chartered savings bank, the
Bank is regulated by the OTS. The Bank is also subject to regulations of the
FDIC with respect to certain other matters. See "SUPERVISION AND REGULATION --
Regulation of the Company" and "--Regulation of the Bank."
The Bank conducts business through its three full service offices in
Salisbury, Rockwell and Statesville, North Carolina. The Bank's primary market
area encompasses the communities within an approximately 10-mile radius of its
offices in Rowan and Iredell Counties, North Carolina. At June 30, 1998, the
Bank had total assets of $192.7 million, net loans of $159.7 million, deposits
of $159.8 million and equity of $15.6 million.
The Bank is a community-oriented financial institution that 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 primarily to make one-to-four family
residential real estate loans and, to a lesser extent, multi-family residential,
nonresidential loans, construction and development loans, home equity loans,
commercial and consumer loans and other investments.
Revenues of the Bank are derived primarily from interest on loans. The
Bank 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, office occupancy costs, data processing, advertising expenses
and federal deposit insurance premiums.
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 $13.6 million and $18.6 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 be $21.4 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 estimated amount of
net proceeds includes proceeds from the sale of the shares which are expected to
be purchased by the ESOP in the Subscription Offering at $10.00 per share with
funds borrowed from the Company. The amount loaned to the ESOP to enable such
purchases is estimated to range from $1,156,000 (if 1,445,000 shares are issued)
to $1,564,000 (if 1,955,000 shares are issued). See "MANAGEMENT OF THE BANK --
Employee Stock Ownership Plan."
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The Company has received conditional OTS approval to purchase all of the
capital stock of the Bank to be issued in the Conversion in exchange for 50% of
the net proceeds of the Offering. The Company expects to use the portion of the
net proceeds it retains to make a loan to the ESOP to fund its purchase of 8% of
the shares of Common Stock sold in the Conversion and to use the remainder of
the net proceeds for working capital and investment purposes. The Company does
not expect to have significant operating expenses and anticipates that it will
initially invest the net proceeds it retains primarily in interest-earning
deposits, U.S. government, federal agency and other marketable securities and
mortgage-backed securities. The types and amounts of such investments will vary
from time to time based upon the interest rate environment, asset/liability mix
considerations and other factors.
Net proceeds paid to the Bank will become part of the Bank's general funds
and will be invested primarily in mortgage, consumer and other loans, and
investments consisting primarily of interest-earning deposit balances, U.S.
government and federal agency obligations and other marketable securities in
accordance with the Bank's lending and investment policies. The relative
amounts to be invested in each of these types of investments will depend upon
loan demand, rates of return and asset/liability matching considerations at the
time the investments are to be made. Management is not able to predict the
yields which will be produced by the investment of the proceeds of the Offerings
because such yields will be significantly influenced by general economic
conditions and the interest rate environment existing at the time the
investments are made. Remaining net proceeds paid to the Bank will be used for
general corporate purposes.
The proceeds of the Offerings will result in an increase in the Bank's net
worth and regulatory capital and may enhance the potential for growth through
increased lending and investment activities, branch expansion, ATMs or
otherwise. The net proceeds retained by the Company could be used to support
the future expansion of operations of the Company through the opening of one or
more branch offices in or near the Bank's primary market area. The Bank has no
current plans to open any additional offices. 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.
The proceeds may also be utilized by the Company to repurchase (at prices
which may be above or below the initial offering price) shares of the Common
Stock through an open market repurchase program subject to limitations contained
in OTS regulations, although the Company currently has no specific plan to
repurchase any of its stock. In the future, the Board of Directors of the
Company will make decisions on the repurchase of the Common Stock based on its
view of the appropriateness of the price of the Common Stock as well as the
Company's and the Bank's investment opportunities and capital needs. Under
current OTS regulations, no repurchases may be made within the first year
following Conversion except with OTS approval under "exceptional circumstances."
During the second and third years following Conversion, OTS regulations permit,
subject to certain limitations, the repurchase of up to five percent of the
outstanding shares of stock during each twelve-month period with a greater
amount permitted with OTS approval. In general, the OTS regulations do not
restrict repurchases thereafter, other than limits on the Bank's ability to pay
dividends to the Company to fund the repurchase. For a description of the
restrictions on the Bank's ability to provide the Company with funds through
dividends or other distributions, see "DIVIDEND POLICY" and "SUPERVISION AND
REGULATION --Regulation of the Company -- Dividend and Repurchase Limitations."
The Company and the Bank have no present intention to file consolidated tax
returns which will preserve for the Company the ability to use a portion of the
proceeds to make a return of capital in the future. However, the Company has
not made any decision to pay such a return of capital. In accordance with OTS
policy, the Company and the Bank will take no actions in furtherance of the
payment of a return of capital, including filing a private letter ruling request
with the IRS regarding the tax-free nature of a possible one time cash
distribution to the Company's stockholders, for a period of one year 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
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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 57,800 and 78,200 shares may be
acquired by the MRP, assuming the issuance of between 1,445,000 and 1,955,000
shares, respectively, in the Conversion. If all such shares were acquired by the
MRP in the open market, and if such shares were acquired at a price of $10.00
per share, the Bank would contribute between $578,000 and $782,000,
respectively, to the MRP for this purpose.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company anticipates paying
quarterly dividends on the Common Stock, subject to statutory and regulatory
requirements, at an initial quarterly rate of $0.05 per share (or an annual rate
of $0.20 per share, which is equal to 2% of the Purchase Price for the Common
Stock in the Conversion). In addition, the Board of Directors may determine
from time to time that it is prudent to pay special nonrecurring cash dividends.
Special cash dividends, if paid, may be in addition to, or in lieu of, regular
cash dividends. The Company's Board of Directors will periodically review its
policy concerning dividends. Declarations of dividends, if any, by the Board of
Directors will depend upon a number of factors, including investment
opportunities available to the Company and the Bank, capital requirements,
regulatory limitations, the Company's and the Bank's results of operations and
financial condition, tax considerations and general economic conditions. Upon
review of such considerations, the Board of Directors of the Company may
authorize dividends to be paid in the future if it deems such payment
appropriate and in compliance with applicable law and regulation. No assurances
can be given that any dividends will in fact be paid on the Common Stock or, if
dividends are paid, that they will not be reduced or discontinued in the
future.
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. The Bank, like all savings banks
regulated by the OTS, is subject to certain restrictions on the payment of
dividends based on its net income, its capital in excess of the regulatory
capital requirements and the amount of regulatory capital required for the
liquidation account to be established in connection with the Conversion. See
"SUPERVISION AND REGULATION -- Regulation of the Bank --Limitations on Dividends
and Other Capital Distributions." 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 has never issued its Common Stock to the public. Consequently,
there is no established market for the Common Stock. The Company expects the
Common Stock to be quoted on the Nasdaq Small-Cap Market under the symbol "ISFC"
subject to certain conditions which it believes will be met, including a minimum
market capitalization and minimum number of market makers and stockholders of
record. If the Common Stock does not qualify for quotation on the Nasdaq Small-
Cap Market, the Company expects it to be quoted on the OTC Electronic Bulletin
Board. Trident Securities is expected to make a market in the Common Stock
following consummation of the Conversion and will assist the Company in seeking
to encourage at least two additional market makers to establish and maintain a
market in the Common Stock. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements. Due to the amount of Common Stock to be issued in the
Conversion, the Company cannot assure investors that the conditions for
quotation on the Nasdaq Small-Cap Market or the OTC Electronic Bulletin Board
will be satisfied.
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 (1,700,000 shares at the midpoint of
the Valuation Range),
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<PAGE>
it is unlikely that a stockholder base large enough to create an active trading
market will develop and be maintained. Further, even if a market develops, there
can be no assurance that the shares of Common Stock offered in the Conversion
can be resold at or above the purchase price after completion of the Conversion.
Purchasers of Common Stock should consider the potentially illiquid and long-
term nature of their investment in the shares being offered hereby. The
aggregate price of the Common Stock is based upon an independent appraisal of
the pro forma market value of the Common Stock. However, there can be no
assurance that an investor will be able to sell the Common Stock purchased in
the Conversion at or above the purchase price. See "RISK FACTORS".
CAPITALIZATION
The following tables present the historical capitalization of the Bank at
June 30, 1998 and the pro forma capitalization of the Company at such dates
after giving effect to the sale of the Common Stock and application of the
assumptions set forth under "PRO FORMA DATA," assuming that 1,445,000,
1,700,000, 1,955,000 and 2,248,250 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."
25
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO FORMA CAPITALIZATION AT JUNE 30, 1998
BASED UPON SALE OF
----------------------------------------------------------------------
CAPITALIZATION 1,445,000 1,700,000 1,955,000 1,955,000
OF BANK SHARES AT SHARES AT SHARES AT SHARES AT
AT 6-30-98 $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
---------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits $159,819 $159,819 $159,819 $159,819 $159,819
Borrowings 13,000 13,000 13,000 13,000 13,000
-------- -------- -------- -------- --------
Total Deposits and Borrowings/(2)/ $172,819 $172,819 $172,819 $172,819 $172,819
======== ======== ======== ======== ========
Stockholders' equity
Common stock, no par value:
Authorized shares: 20,000,000
Assumed outstanding shares as
shown in column headings $ -- $ -- $ -- $ -- $ --
Preferred stock:
Authorized shares: 5,000,000
No shares outstanding -- -- -- -- --
Additional paid-in capital 13,584 16,080 18,577 21,449
Less: Common stock to be acquired
by the ESOP/(3)/ (1,156) (1,360) (1,564) (1,799)
Less: Common stock to be acquired
by the MRP/(3)/ -- (578) (680) (782) (899)
Retained earnings - substantially
restricted 15,491 15,491 15,491 15,491 15,491
Net unrealized gains on available
for sale securities 120 120 120 120 120
-------- -------- -------- -------- --------
Total equity $ 15,611 $ 27,461 $ 29,651 $ 31,842 $ 34,362
======== ======== ======== ======== ========
</TABLE>
____________________
(1) Represents the number of shares of Common Stock that would be issued in the
Conversion after giving effect to a 15% increase in maximum valuation in
the 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) Assumes that 8% of the shares of Common Stock offered hereby will be
purchased by the ESOP in the Conversion. The funds used to acquire the ESOP
shares will be borrowed from the Company. Additionally, assumes that, after
the Conversion, a number of shares equal to 4% of the shares of Common
Stock offered hereby will be purchased by the MRP with funds contributed by
the Bank. The Common Stock acquired by both the ESOP and the MRP is
reflected as a reduction of stockholders' equity. See "MANAGEMENT OF THE
BANK -- Employee Stock Ownership Plan" and "-- Proposed Management
Recognition Plan."
26
<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 $13.6 million and $21.4 million (including net
proceeds from shares expected to be purchased by the ESOP with funds borrowed
from the Company), based upon the following assumptions: (i) 30.6%, 27.2%,
24.7% and 22.5% of the Common Stock sold in the Conversion at the minimum,
midpoint, maximum and 15% above the maximum, respectively, of the Estimated
Valuation Range will be sold to the ESOP, directors and executive officers and
their associates (and that Trident Securities will not receive certain
compensation with respect to such sales), and none of the shares of Common Stock
will be sold in any Syndicated Offering pursuant to selected dealer agreements;
(ii) fees will be payable to Trident Securities with respect to the Subscription
and Offerings as described in "THE CONVERSION -- Marketing Arrangements;" and
(iii) Conversion expenses, excluding the fees and commissions to Trident
Securities, will be approximately $626,000. Actual net proceeds may vary
depending upon the number of shares sold to the ESOP and to directors, executive
officers and their associates, the number of shares, if any, sold in the
Syndicated 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 October 16, 1998 is from a minimum of $14,450,000 to a maximum of
$19,550,000 with a midpoint of $17,000,000. However, with the consent of the
OTS, the aggregate price of the Common Stock sold may be increased to up to 15%
above the maximum of the Estimated Valuation Range, or to $22,482,500, 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 income and book value of the Company at or for
the nine months ended June 30, 1998 and the year ended September 30, 1997 have
been based upon the following assumptions: (i) the sale of shares of Common
Stock in connection with the Conversion occurred at October 1, 1997 for the nine
months ended June 30, 1998, and at October 1, 1996 for the year ended September
30, 1997, and yielded net proceeds available for investment of approximately
$13.6 million, $16.1 million, $18.6 million and $21.4 million(based upon the
issuance of 1,445,000, 1,700,000, 1,955,000 and 2,248,250 shares, respectively,
at $10.00 per share) on such dates; and (ii) such net proceeds were invested on
a consolidated basis at the beginning of the period at a yield of 5.40% and
5.45%, which represents the average one-year treasury rate for the last week of
June 1998 and September 1997, respectively. 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 nine
months ended June 30, 1998 or the year ended September 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 income or pro forma net
income per share. In calculating pro forma net income for the nine months ended
June 30, 1998 and year ended September 30, 1997, an effective combined federal
and state income tax rate of 38% has been assumed, resulting in a yield after
taxes of 3.35% and 3.38%, respectively. 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.
27
<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 Nine Months Ended June 30, 1998
1,445,000 1,700,000 1,955,000 2,248,250
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) (Adj. Maximum)
---------------- --------------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 14,450 $ 17,000 $ 19,550 $ 22,483
Less Offering expenses and commissions (866) (920) (973) (1,034)
---------- -------------- ---------- ----------
Estimated net Conversion proceeds 13,584 16,080 18,577 21,449
Less shares to be acquired by ESOP/(1)/ (1,156) (1,360) (1,564) (1,799)
Less shares to be acquired by MRP/(2)/ (578) (680) (782) ( 899)
---------- -------------- ---------- ----------
Adjusted estimated net Conversion proceeds $ 11,850 $ 14,040 $ 16,231 $ 18,751
========== ============== ========== ==========
Pro forma net income:
Historical net income $ 968 $ 968 $ 968 $ 968
Pro Forma adjustments:
Pro forma income on net proceeds 298 353 408 471
Pro forma ESOP adjustments/(1)/ (54) (63) (73) (84)
Pro forma MRP adjustments/(2)/ (54) (63) (73) (84)
---------- -------------- ---------- ----------
Pro forma net income $ 1,158 $ 1,194 $ 1,230 $ 1,272
========== ============== ========== ==========
Pro forma net income per share/(4)/:
Historical net income per share $ 0.72 $ 0.61 $ 0.53 $ 0.46
Pro forma adjustments:
Pro forma income on net proceeds 0.22 0.22 0.22 0.23
Pro forma ESOP adjustments/(1)/ (0.04) (0.04) (0.04) (0.04)
Pro forma MRP adjustments/(2)/ (0.04) (0.04) (0.04) (0.04)
---------- -------------- ---------- ----------
Pro forma net income per share(1) (2) (3) (5) $ 0.86 $ 0.76 $ 0.68 $ 0.61
========== ============== ========== ==========
Number of shares used in calculating income per
share /(5)/ 1,340,960 1,577,600 1,814,240 2,086,376
========== ============== ========== ==========
Pro forma stockholders' equity (book value)/(4)/:
Historical retained earnings $ 15,611 $ 15,611 $ 15,611 $ 15,611
Estimated net Conversion proceeds 13,584 16,080 18,577 21,449
Less shares to be acquired by:
ESOP/(1)/ (1,156) (1,360) (1,564) (1,799)
MRP/(2)/ (578) (680) (782) (899)
---------- -------------- ---------- ----------
Pro forma stockholders' equity/(4)/ $ 27,461 $ 29,651 $ 31,842 $ 34,362
========== ============== ========== ==========
Pro forma stockholders' equity per share/(5)/:
Historical retained earnings $ 10.80 $ 9.18 $ 7.99 $ 6.94
Estimated net Conversion proceeds 9.40 9.46 9.50 9.54
Less shares to be acquired by:
ESOP/(1)/ (0.80) (0.80) (0.80) (0.80)
MRP/(2)/ (0.40) (0.40) (0.40) (0.40)
---------- -------------- ---------- ----------
Pro forma stockholders' equity per share/(5)/ $ 19.00 $ 17.44 $ 16.29 $ 15.28
========== ============== ========== ==========
Pro forma price to book value 52.6% 57.3% 61.4% 65.4%
Pro forma price to earnings (P/E ratio) /(6)/ 8.7x 9.9x 11.0x 12.3x
Number of shares used to calculate stockholders'
equity per share/(4)/ 1,445,000 1,700,000 1,955,000 2,248,250
========== ============== ========== ==========
</TABLE>
28
<PAGE>
_________________________________________
(1) It is assumed that 8% of the shares of Common Stock in the Conversion will
be purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been loaned to the ESOP by the
Company. The amount loaned is reflected as a reduction of stockholders'
equity. The Bank intends to make annual contributions to the ESOP over a
ten-year period in an amount at least equal to the principal and interest
requirements of the loan. The Bank's total annual payment of the ESOP loan
is based upon ten equal annual installments of principal. The pro forma
net income assumes: (i) that the Bank's contribution to the ESOP for the
principal portion of the debt service requirement for the nine months ended
June 30, 1998 was made at the end of the period, (ii) that 11,560, 13,600,
15,640 and 17,986 shares at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, were committed to be released
during the nine months ended June 30, 1998 at an average fair value of
$10.00 per share and were accounted for as a charge to expense in
accordance with Statement of Position ("SOP") No. 93-6 (prorated over the
September 30, 1998 year), net of income tax at an assumed combined federal
and state rate of 38%. See "MANAGEMENT OF THE BANK -- Employee Stock
Ownership Plan."
(2) It is assumed that the MRP will purchase a number of shares equal to 4% of
the shares of Common Stock issued in the Conversion for issuance to
directors, officers and employees, subject to approval by the Company's
stockholders. If the MRP is approved by the stockholders, the MRP intends
to acquire the Common Stock either through open market purchases or from
authorized but unissued shares of Common Stock of the Company. Funds used
by the MRP to purchase the shares will be contributed to the MRP by the
Bank. In calculating the pro forma effect of the MRP, it is assumed that
the required stockholder approval has been received, that the shares were
acquired by the MRP at the beginning of the period presented in open market
purchases at the Conversion purchase price of $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 38%. 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 4.0%; pro forma net income per share
would be $0.84, $0.74, $0.66 and $0.59 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, for the nine-month
period ended June 30, 1998; pro forma price to earnings ratio would be
8.9x, 10.1x, 11.4x and 12.7x; and pro forma stockholders' equity per share
would be $18.66, $17.16, $16.05 and $15.08 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, at June 30,
1998. There can be no assurance that stockholder approval of the MRP will
be obtained, or that the actual purchase price of the shares will be equal
to the Conversion purchase price. See "MANAGEMENT OF THE BANK -- Proposed
Management Recognition Plan."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. See "MANAGEMENT OF THE BANK -- Proposed
Option Plans." If the Option Plan is approved by the stockholders, an
amount equal to 10% of the Common Stock issued in the Conversion, or
144,500, 170,000, 195,500, and 224,825 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 income per share
would be $0.80, $0.71, $0.64 and $0.57, respectively, and pro forma
stockholders' equity per share would be $18.19, $16.77, $15.72, and $14.80,
respectively, at the minimum, midpoint, maximum and 15% above the maximum
of the range.
(4) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND REGULATION --
Regulation of the Bank -- Limitations on Dividends and Other Capital
Distributions." Pursuant to SOP 93-6, stockholders' equity per share is
calculated based on all ESOP shares issuable.
(5) Earnings per share is calculated based on the number of shares outstanding
indicated in the previous tables which include shares to be acquired by the
ESOP and the MRP. Pursuant to SOP 93-6, earnings per share is calculated
based on the ESOP shares released for the period according to scheduled
contributions and does not include ESOP shares that have not yet been
committed for release.
(6) Pro forma net income per share have been annualized for purposes of this
ratio.
29
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30, 1997
----------------------------------------------------------------------------
1,445,000 1,700,000 1,955,000 2,248,250
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) (Adj. maximum)
----------------- ---------------- ---------------- ----------------
(Dollars in Thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds $ 14,450 $ 17,000 $ 19,550 $ 22,483
Less Offering expenses and commissions - (920) (973) (1,034)
Estimated net Conversion proceeds (866) 16,080 18,577 21,449
Less shares to be acquired by ESOP/(1)/ 13,584 (1,360) (1,564) (1,799)
Less shares to be acquired by MRP/(2)/ (1,156) (680) (782) (899)
Adjusted estimated net Conversion proceeds (578) $ 14,040 $ 16,231 $ 18,751
$ 11,850
Pro forma net income:
Historical net income $ 967 $ 967 $ 967 $ 967
Pro Forma adjustments:
Pro forma income on net proceeds 400 474 548 634
Pro forma ESOP adjustments/(1)/ (72) (84) (97) (112)
Pro forma MRP adjustments/(2)/ (72) (84) (97) (112)
----------------- ---------------- ---------------- ----------------
Pro forma net income $ 1,224 $ 1,273 $ 1,322 $ 1,378
================= ================ ================ ================
Pro forma net income per share/(4)/:
Historical net income per share $ 0.72 $ 0.61 $ 0.53 $ 0.46
Pro forma adjustments:
Pro forma income on net proceeds 0.30 0.30 0.30 0.30
Pro forma ESOP adjustments/(1)/ (0.05) (0.05) (0.05) (0.05)
Pro forma MRP adjustments/(2)/ (0.05) (0.05) (0.05) (0.05)
Pro forma net income per share(1) (2) (3) (5) $ 0.91 $ 0.81 $ 0.73 $ 0.66
Number of shares used in calculating income per
share /(5)/ 1,340,960 1,577,600 1,814,240 2,086,376
Pro forma stockholders' equity (book value)/(4)/:
Historical retained earnings $ 14,629 $ 14,629 $ 14,629 $ 14,629
Estimated net Conversion proceeds 13,584 16,080 18,577 21,449
Less shares to be acquired by:
ESOP/(1)/ (1,156) (1,360) (1,564) (1,799)
MRP/(2)/ (578) (680) (782) (899)
Pro forma stockholders' equity/(4)/ $ 26,479 $ 28,669 $ 30,860 $ 33,380
Pro forma stockholders' equity per share/(5)/:
Historical retained earnings $ 10.12 $ 8.61 $ 7.48 $ 6.51
Estimated net Conversion proceeds 9.40 9.46 9.50 9.54
Less shares to be acquired by:
ESOP/(1)/ (0.80) (0.80) (0.80) (0.80)
MRP/(2)/ (0.40) (0.40) (0.40) (0.40)
Pro forma stockholders' equity per share/(5)/ $ 18.32 $ 16.86 $ 15.79 $ 14.85
Pro forma price to book value 54.6% 59.3% 63.4% 67.4%
Pro forma price to earnings (P/E ratio) /(5)/ 11.0x 12.3x 13.7x 15.2x
Number of shares used to calculate stockholders'
equity per share/(4)/ 1,445,000 1,700,000 1,955,000 2,248,250
================= ================ ================ ================
</TABLE>
30
<PAGE>
__________________________________________
(1) It is assumed that 8% of the shares of Common Stock in the Conversion will
be purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been loaned to the ESOP by the
Company. The amount loaned is reflected as a reduction of stockholders'
equity. The Bank intends to make annual contributions to the ESOP over a
ten-year period in an amount at least equal to the principal and interest
requirements of the loan. The Bank's total annual payment of the ESOP loan
is based upon ten equal annual installments of principal. The pro forma
net earnings assumes: (i) that the Bank's contribution to the ESOP for the
principal portion of the debt service requirement for the year ended
September 30, 1997 was made at the end of the period, (ii) that 11,560,
13,600, 15,640 and 17,986 shares at the minimum, midpoint, maximum and 15%
above the maximum of the range, respectively, were committed to be released
during the nine months ended June 30, 1998 and the year ended September 30,
1997, respectively, at an average fair value of $10.00 per share and were
accounted for as a charge to expense in accordance with Statement of
Position ("SOP") No. 93-6, net of income tax at an assumed combined federal
and state rate of 38%. See "MANAGEMENT OF THE BANK -- Employee Stock
Ownership Plan."
(2) It is assumed that the MRP will purchase a number of shares equal to 4% of
the number of 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 38%. 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 4%; pro forma net earnings per share
would be $0.89, $0.79, $0.71 and $0.65 at the minimum, midpoint, maximum
and 15% above the maximum of the range, respectively, for the year ended
September 30, 1997; pro forma price to earnings ratio would be 11.2 x, 12.7
x, 14.1 x and 15.4 x; and pro forma stockholders' equity per share would be
$18.00, $16.60, $15.56, and $14.66 at the minimum, midpoint, maximum and
15% above the maximum of the range, respectively, at September 30, 1997.
There can be no assurance that stockholder approval of the MRP will be
obtained, or that the actual purchase price of the shares will be equal to
the Conversion purchase price. See "MANAGEMENT OF THE BANK --Proposed
Management Recognition Plan."
(3) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Option Plan. See "MANAGEMENT OF THE BANK -- Proposed
Stock Option Plans." If the Option Plan is approved by the stockholders,
an amount equal to 10% of the Common Stock issued in the Conversion, or
144,500, 170,000, 195,500, and 224,825 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 $0.86, $0.76, $0.69 and $0.63, respectively, at the minimum,
midpoint, maximum and 15% above the maximum of the range.
(4) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "DIVIDEND POLICY," "SUPERVISION AND REGULATION --
Regulation of the Bank -- Limitations on Dividends and Other Capital
Distributions." Pursuant to SOP 93-6, stockholders' equity per share is
calculated based on all ESOP shares issuable.
(5) Earnings per share is calculated based on the number of shares outstanding
indicated in the previous tables which include shares to be acquired by the
ESOP and the MRP. Pursuant to SOP 93-6, earnings per share is calculated
based on the ESOP shares released for the period according to scheduled
contributions and does not include ESOP shares that have not yet been
committed for release.
31
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
As of June 30, 1998, the Bank would have exceeded each of the OTS
capital requirements on both a current and a fully phased-in basis had it been
subject to such requirements on such date. Set forth below is a summary of the
Bank's pro forma compliance with the OTS capital standards as of June 30, 1998
assuming that it had been subject to such standards on such date and based on
historical capital. The table also assumes that the indicated number of shares
were sold as of such date using the assumptions contained under the caption "Pro
Forma Data."
<TABLE>
<CAPTION>
Pro Forma at June 30, 1998
----------------------------------------------------------------------
Historical at Minimum of 1,445,000 Midpoint of 1,700,000 Maximum of1,955,000
June 30, 1998 at $10 Per Share at $10 Per Share at $10 Per Share
----------------- -------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital/(2)/ $15,611 8.1% $20,669 10.4% $21,611 10.8% $22,554 11.2%
======= ==== ======= ==== ======= ==== ======= ====
Tangible Capital/(3)/
Capital level $15,472 8.0% $20,530 10.3% $21,472 10.7% $22,415 11.1%
Tangible capital requirement $ 2,889 1.5% $ 2,982 1.5% $ 2,999 1.5% $ 3,016 1.5%
------- ---- ------- ---- ------- ---- ------- ----
Excess $12,583 6.5% $17,548 8.8% $18,473 9.2% $19,399 9.6%
======= ==== ======= ==== ======= ==== ======= ====
Core Capital/(3)/
Capital level $15,472 8.0% $20,530 10.3% $21,472 10.7% $22,415 11.1%
Core capital requirement/(4)/ $ 5,777 3.0% $ 5,964 3.0% $ 5,998 3.0% $ 6,033 3.0%
------- ---- ------- ---- ------- ---- ------- ----
Excess $ 9,695 5.0% $14,566 7.3% $15,474 7.7% $16,382 8.1%
======= ==== ======= ==== ======= ==== ======= ====
Risk Based Capital/(3)/
Capital level/(5)/ $16,696 16.4% $21,754 21.1% $22,696 21.9% $23,639 22.8%
Risk-based capital requirement/(1)/ $ 8,157 8.0% $ 8,256 8.0% $ 8,275 8.0% $ 8,293 8.0%
------- ---- ------- ---- ------- ---- ------- ----
Excess $ 8,539 8.4% $13,498 13.1% $14,421 13.9% $15,346 14.8%
======= ==== ======= ==== ======= ==== ======= ====
<CAPTION>
Maximum, as Adjusted,
of 2,248,250
at $10 Per Share
--------------------
Amount Percent
<S> <C> <C>
GAAP Capital/(2)/ $23,638 11.7%
======= ====
Tangible Capital/(3)/
Capital level $23,499 11.6%
Tangible capital requirement $ 3,036 1.5%
------- ----
Excess $20,463 10.1%
======= ====
Core Capital/(3)/
Capital level $23,499 11.6%
Core capital requirement/(4)/ $ 6,072 3.0%
------- ----
Excess $17,427 8.6%
======= ====
Risk Based Capital/(3)/
Capital level/(5)/ $24,723 23.8%
Risk-based capital requirement/(1)/ $ 8,314 8.0%
------- ----
Excess $16,409 15.8%
======= ====
</TABLE>
______________________
/(1)/ Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weight.
/(2)/ Total equity as calculated under generally accepted accounting principles
("GAAP"). Assumes that the Bank receives 50% of the net proceeds offset
in part, by the aggregate purchase price of Common Stock acquired at a
price of $10.00 per share by the ESOP in the Conversion and the MRP
(assuming stockholder ratification of such plan following completion of
the Conversion).
/(3)/ Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets. Unrealized gains and losses on debt
securities available for sale are excluded from tangible, core and risk-
based capital. Adjusted total assets at the minimum, midpoint, maximum,
and 15% above the maximum were, $198.8 million, $200.0 million, $201.1
million and $202.4 million, respectively. Risk weighted assets at the
minimum, midpoint, maximum and 15% above the maximum $103.2 million,
$103.4 million, $103.7 million and $103.9 million, respectively.
/(4)/ The OTS has proposed a core capital requirement for savings associations
comparable to the requirement for national banks. This proposed core
capital ratio is 3% of total adjusted assets for thrifts that receive the
highest supervisory rating for safety and soundness ("CAMEL" rating), with
a 3% to 4% core capital requirement for all other thrifts. See
"SUPERVISION AND REGULATION -- Federal Regulation of the Bank --Capital
Requirements."
/(5)/ Includes $1,224,000 of the allowance for loan losses which qualifies as
supplementary capital. See "SUPERVISION AND REGULATION - Federal
Regulation of the Bank - Capital Requirements."
32
<PAGE>
STOCK PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as to the approximate
purchase of Common Stock by each director and executive officer of the Bank,
including their associates, as defined by applicable regulations. No individual
has entered into a binding agreement with respect to such intended purchases,
and, therefore, actual purchases could be more or less than indicated below.
Directors and officers of the Bank and their associates may not purchase in
excess of 32% of the shares sold in the Conversion. For purposes of the
following table, it has been assumed that sufficient shares will be available to
satisfy subscriptions in all categories. Directors, officers and employees will
pay the same price -- $10.00 -- for the shares for which they subscribe as the
price that will be paid by all other subscribers.
<TABLE>
<CAPTION>
ANTICIPATED
ANTICIPATED NUMBER PERCENT OF SHARES PERCENT OF SHARES
AMOUNT OF SHARES AT MINIMUM OF AT MAXIMUM OF
TO BE PAID TO BE ESTIMATED ESTIMATED
NAME FOR SHARES/(1)/ PURCHASED VALUATION RANGE VALUATION RANGE
- ---- ------------ --------- --------------- ---------------
<S> <C> <C> <C> <C>
Ronald E. Bostian $ 600,000 60,000 4.15% 3.07%
Chairman, CEO, and President
Harold C. Earnhardt 420,000 42,000 2.91% 2.15%
Vice Chairman
Malcolm B. Blankenship, Jr. 390,000 39,000 2.70% 1.99%
Director
James W. Duke 270,000 27,000 1.87% 1.38%
Director
K.V. Epting, Jr. 105,000 10,500 0.73% 0.54%
Director
Gordon P. Hurley 600,000 60,000 4.15% 3.07%
Director
Bobby A. Lomax 180,000 18,000 1.24% 0.92%
Director
Jeffrey C. Chisholm 600,000 60,000 4.15% 3.07%
Senior Vice President/
Chief Lending Officer
Dianne E. Hawkins 105,000 10,500 0.73% 0.54%
Vice President, Treasurer and Controller ---------- ------- ----- -----
Total $3,270,000 327,000 22.63% 16.73%
========== ======= ===== =====
</TABLE>
_______________
(1) Subscriptions by the ESOP are not aggregated with shares of Common Stock
purchased by the executive officers and directors listed above. It is
expected that the ESOP will acquire 8% of the shares issued in the
Conversion. Recipients of shares under the ESOP will have voting control
over the shares allocated to them, and trustees of the ESOP (directors of
the Bank) will have voting control over unallocated shares. See "MANAGEMENT
OF THE BANK -- Employee Stock Ownership Plan." Also, 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."
33
<PAGE>
Without the prior written consent of the OTS, 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 (i) upon death of
the director or executive officer or (ii) by reason of an exchange of securities
in connection with a merger or acquisition approved by the applicable regulatory
authorities. 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 OTS 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
unless the prior written approval of the OTS is obtained. This provision does
not apply to negotiated transactions involving more than 1% of the Company's
outstanding Common Stock or to purchases of stock made by or held by one or more
tax-qualified or non-tax-qualified employee stock benefit plans of the Bank or
the Company which may be attributable to individual executive officers or
directors. Purchases and sales of Common Stock by officers and directors will
also be subject to the short-swing trading prohibitions contained in Section
16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and the
short-swing trading and other rules promulgated pursuant to the Exchange Act.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
changes therein and results of operations of the Bank. The discussion contains
certain forward-looking statements consisting of estimates with respect to the
financial condition, results of operations and other business of the Bank that
are subject to various factors which could cause actual results to differ
materially from those estimates. Factors which could influence the estimates
include changes in the national, regional and local market conditions,
legislative and regulatory conditions, and an adverse interest rate environment.
The information contained in this section should be read in conjunction with the
Financial Statements, the accompanying Notes to Financial Statements, and the
other information contained in this Prospectus.
The Company was incorporated under North Carolina law on July 6, 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, and, accordingly,
has no results of operations. The Company's principal business activities after
the Conversion are expected to be conducted solely through the Bank.
The Bank's results of operations depend primarily on net interest income,
which is the difference between interest income from interest-earning assets and
interest expense on interest-bearing liabilities. The Bank's operations are
affected to a much lesser degree by non-interest income, such as transaction and
other service fee income, and other sources of income. The Bank's principal
operating expenses, aside from interest expense, consist of compensation and
employee benefits, office occupancy costs, data processing, advertising expenses
and federal deposit insurance premiums.
CAPITAL RESOURCES AND LIQUIDITY
The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.
The Bank's primary sources of internally generated funds are principal and
interest payments on loans receivable, cash flows generated from operations, and
cash flows generated by investment maturities. External sources of funds
include increases in deposits and advances from the FHLB of Atlanta. Advances
from the FHLB of Atlanta have not historically been a primary source of
liquidity for the Bank.
34
<PAGE>
Federal regulations require the Bank to maintain minimum levels of liquid
assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 4% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and corporate
securities and other obligations generally having remaining maturities of less
than five years. The Bank has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At June 30, 1998,
the Bank's liquidity ratio for regulatory purposes was 20.16%.
Following the Conversion, the Company will initially conduct no business
other than holding the capital stock of the Bank and the loan it will make to
the ESOP. In order to provide sufficient funds for its operations, the Company
expects to retain at the Company level 50% of the net proceeds of the Conversion
(less the amount of the loan to the ESOP). In the future, the Company's primary
source of funds, other than income from its investments and principal and
interest payments received from the ESOP with respect to the ESOP loan, is
expected to be dividends from the Bank. As a federally-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
regulatory capital of the institution to an amount which is less than the
minimum amount required by applicable federal regulations. At June 30, 1998,
the Bank was in compliance with all applicable capital requirements.
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 regulatory capital
to be reduced below the amount required for the liquidation account to be
established in connection with the Conversion. See "THE CONVERSION -- Effects
of Conversion -- Liquidation Rights -- Liquidation Rights After the Conversion".
OPERATING STRATEGY
The primary goals of management are to increase the Bank's profitability,
monitor its capital position and enhance its banking franchise. The Bank's
results of operations are dependent primarily on net interest income, which is
the difference between the income earned on its interest-earning assets, such as
loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits and advances from the FHLB. The Bank's operations are
affected to a much lesser degree by non-interest income, such as transaction and
other service fee income, and other sources of income. The Bank's net income is
also affected by, among other things, provisions for loan losses and operating
expenses. The Bank's principal operating expenses, aside from interest expense,
consist of compensation and employee benefits, office occupancy costs, data
processing, advertising 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 Bank's profitability while maintaining its
safety and soundness. Historically, these strategies have included: (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.
However, the Board of Directors may consider diversification of the loan
portfolio to increase yield on loans.
EMPHASIS ON ONE-TO-FOUR FAMILY RESIDENTIAL HOUSING. Historically, the Bank
has been predominantly a one-to-four family residential lender. As of June 30,
1998, approximately 84.9% of its loan portfolio, before net items, was composed
of permanent one-to-four residential loans. As of such date, an additional
12.2% of its loan portfolio, before net items, was comprised of construction
loans and home equity loans. As a result, the Bank has developed expertise in
mortgage loan underwriting and origination. The Bank has established methods to
expand its loan originations through contacts with realtors, homebuilders and
past and present customers. The Bank also uses advertising and community
involvement to gain exposure within the communities in which it operates. As of
June
35
<PAGE>
30, 1998, approximately 67% of the Bank's loan portfolio, net of deferred loan
fees and undisbursed loan funds, was composed of adjustable rate loans.
MAINTENANCE OF ASSET QUALITY. At June 30, 1998, the Bank's ratio of non-
performing assets to total assets was 0.07%. For the five-year period ended
September 30, 1997, loan recoveries exceeded loan charge-offs and no provisions
for loan losses were made during this five-year period.
The Bank has attempted to maintain asset quality through its underwriting
and collection procedures.
MONITORING OF INTEREST-RATE RISK. See "-- Asset Liability Management and
Market Risk."
CONTROL OF GENERAL AND ADMINISTRATIVE EXPENSES. The Bank closely monitors
its general and administrative expenses and seeks to control them while
maintaining the necessary personnel to properly serve its customers.
For the five-year period ended September 30, 1997, the Bank's ratio of
general and administrative expenses to average assets has averaged 1.63%, which
includes the one-time SAIF special assessment in September 1996.
ASSET LIABILITY MANAGEMENT AND MARKET 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, 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.
The Board of Directors has established goals to be achieved which have the
effect of reducing interest rate risk exposure. These goals are quantitative
measurements in the areas of the ratio of rate-sensitive assets to rate-
sensitive liabilities repricing within one year, the ratio of interest earning
assets-to-interest bearing liabilities, assets repricing or maturing past five
years, and the ratio of net interest income to net overhead (noninterest income
less noninterest expense) given a 200 basis point instantaneous spike in
interest rates.
As a part of the Bank's interest rate risk management policy, management
calculates an interest rate "gap." Interest rate "gap" analysis is a common,
though imperfect, measure of interest rate risk, which measures the relative
dollar amounts of interest-earning assets and interest-bearing liabilities which
reprice within a specific time period, either through maturity or rate
adjustment. The "gap" is the difference between the amounts of such assets and
liabilities that are subject to repricing. A "negative" gap for a given period
means that the amount of interest-bearing liabilities maturing or otherwise
repricing within that period exceeds the amount of interest-earning assets
maturing or otherwise repricing within the same period. Accordingly, in a
declining interest rate environment, an institution with a negative gap would
generally be expected, absent the effects of other factors, to experience a
lower decrease in the yield of its assets relative to the cost of its
liabilities and its income should be positively affected. Conversely, the cost
of funds for an institution with a negative gap would generally be expected to
increase more quickly 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."
Management uses a dynamic model with historically-derived prepayment speeds
and decay rates to measure the level of interest-rate risk exposure. The output
of this model has been reviewed monthly by the Asset/Liability Committee of the
Board.
36
<PAGE>
As of June 30, 1998, the gap was a negative 3.11% in the one year time
frame, a cumulative negative 3.56% in three years and a cumulative positive
4.77% in five years.
In addition to the interest rate gap analysis discussed above, 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.
The following table is provided to the Bank by the FHLB Atlanta and
illustrates the percent change in NPV as of June 30, 1998, based on FHLB Atlanta
assumptions. The table below illustrates, for example, that an instantaneous
200 basis point increase in market interest rates at June 30, 1998 would reduce
the Bank's NPV by approximately $2.4 million, or 13.01% at that date. No effect
has been given to any steps that the Bank may take to counteract the effect of
the interest rate movements presented in the table.
<TABLE>
<CAPTION>
Basis Point Estimated Change in
Change in Rates Net Portfolio Value
---------------- -------------------
(Dollars in thousands)
<S> <C>
+400 $(7,186) (38.75)%
+300 (4,800) (25.88)
+200 (2,413) (13.01)
+100 (1,207) ( 6.51)
0 0 0
(100) 450 2.43
(200) 900 4.85
(300) 1,000 5.39
(400) 1,099 5.93
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, 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.
Furthermore, in the event of a change in interest rates, expected rates of
prepayments on loans and early withdrawals from certificates likely could
deviate significantly from those assumed in calculating the table. Therefore,
the data presented in the table should not be relied upon as necessarily
indicative of actual results.
YEAR 2000
At the turn of the century computer-based information systems will be faced
with problems potentially affecting hardware, software, networks, processing
platforms, as well as customer and vendor interdependencies. The Bank has
assessed the effect of Year 2000 on the Bank's operating plans and systems and
has prepared a critical issues schedule with a time line and assigned
responsibilities to address problems related to the Year 2000. The Bank is
requiring its computer systems software vendors to represent that the products
provided are or will be Year 2000 compliant and has planned a program of testing
for compliance. All Year 2000 issues for the Bank, including testing, are
expected to be addressed by December 31, 1998 and any problems would be
remediated by June 30, 1999. The Bank also is preparing a contingency plan in
the event there are any system interruptions. The Bank's contingency plan is
designed to ensure continued operation even in the event of a power failure.
Telephone capability is being analyzed in conjunction with vendors. The same
analysis and monitoring is being performed on the provider of security services.
Additionally, the Bank intends to increase its vault currency well above normal
levels to preclude any problems with delivery services. The Bank's vaults are
mechanical and are not subject to time or calendar failure. The Bank believes
that its costs related to the Year 2000 will be immaterial. There can be no
assurances,
37
<PAGE>
however, that the Bank's contingency plan or the performance of the Bank's
vendors will be effective to remedy all potential problems.
The Bank's loan portfolio consists primarily of residential mortgage loans
to individuals. These individuals generally are not affected by Year 2000
failures. The limited number of the Bank's commercial borrowers are being
contacted to insure that timely payments will be made in January 2000. The Bank
intends to amend its underwriting policies to address loan payment problems
associated with a borrower as a result of a disruption in income or a commercial
borrower's inability to make a timely payment. See "RISK FACTORS".
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 nine months ended
June 30, 1998 and 1997 and for the years ended September 30, 1997, 1996 and
1995. For the periods indicated, the table reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
(derived by dividing income or expense by the monthly average balance of
interest-earning assets or interest-bearing liabilities, respectively) as well
as the net yield on interest-earning assets (which reflects the impact of the
net earning balance).
38
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended June 30,
----------------------------------------------------------------------------
At
June 30,
1998 1998 1997
-------- ------------------------------------ -----------------------------------
Average Average
Average Average Yield/ Average Yield/
Rate(6) Balance Interest Rate(4) Balance Interest Rate(4)
------- ------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-bearing deposits 6.14% $ 11,046 $ 495 5.99% $ 7,890 $ 352 5.96%
Investments (1) 6.53% 20,356 953 6.26% 23,505 1,095 6.23%
Loans receivable, net (5) 7.59% 157,809 9,007 7.63% 160,646 8,929 7.43%
--------- -------- --------- --------
Total interest-earning assets 7.42% 189,211 $ 10,455 7.39% 192,041 $ 10,376 7.22%
-------- --------
Non-interest-earning assets
5,346 4,884
-------- --------
Total $ 194,557 $ 196,925
========= =========
Interest-bearing Liabilities
NOW and Money
market accounts 1.78% $ 8,524 $ 113 1.77% $ 8,042 $ 120 2.00%
Passbook accounts 4.52% 34,211 1,172 4.58% 28,753 967 4.50%
Certificates of deposit 5.51% 114,730 4,799 5.59% 115,260 4,920 5.71%
--------- -------- --------- --------
Total deposits 5.07% 157,465 6,084 5.17% 152,055 6,007 5.28%
FHLB advances 6.89% 17,029 878 6.89% 26,670 1,373 6.88%
--------- -------- --------- --------
Total intesres-bearing
liabilities 5.21% 174,494 $ 6,962 5.33% 178,725 $ 7,380 5.52%
-------- --------
Non-interest-bearing liabilities 4,564 3,889
Equity 15,499 14,311
--------- ---------
Total $ 194,557 $ 196,925
========= =========
Net interest income and interest
rate spread (2) $ 3,493 2.06% $ 2,996 1.70%
======= =======
Net yield on interest-earning asssets (5) 2.47% 2.09%
Ratio of interest-earning assets to
interest-bearing liabilities 108.43% 107.45%
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Year Ended September 30,
-----------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------- -------------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Interest-bearing deposits $ 9,152 $ 537 5.87% $ 8,960 $ 530 5.92% $ 10,244 $ 573 5.59%
Investments (1) 23,014 1,438 6.25% 21,907 1,394 6.36% 22,379 1,454 6.50%
Loans receivable, net (5) 160,597 11,927 7.43% 160,392 11,766 7.34% 169,262 12,297 7.27%
-------- ------- -------- -------- -------- -------
Total interest-earning
assets 192,763 $ 13,902 7.21% 191,259 $ 13,690 7.16% 201,885 $14,324 7.10%
-------- -------- -------
Non-interest-earning
assets 4,934 4,310 3,438
-------- -------- --------
Total $197,697 $195,569 $205,323
======== ======== ========
Interest-bearing
Liabilities
NOW and Money
market accounts $ 8,125 $ 157 1.93% $ 8,091 $ 174 2.15% $ 9,705 $ 238 2.45%
Passbook accounts 29,254 1,319 4.51% 23,537 1,014 4.31% 13,484 533 3.95%
Certificates of
deposit 116,148 6,623 5.70% 118,964 6,933 5.83% 138,273 7,359 5.32%
------- ------- ------- -------- -------- -------
Total deposits 153,527 8,099 5.28% 150,592 8,121 5.39% 161,462 8,130 5.04%
FHLB advances 25,751 1,773 6.89% 27,000 1,862 6.90% 27,000 1,826 6.76%
------- ------- ------- -------- -------- -------
Total intesres-bearing
liabilities 179,278 $ 9,872 5.51% 177,592 $ 9,983 5.62% 188,462 $ 9,956 5.28%
------- -------- -------
Non-interest-bearing
liabilities 3,986 3,722 3,557
Equity 14,433 14,255 13,304
-------- -------- --------
Total $197,697 $195,569 $205,323
======== ======== ========
Net interest income
and interest
rate spread (2) $ 4,030 1.70% $ 3,707 1.54% $ 4,368 1.82%
======= ======= =======
Net-yield on
interest-earning
asssets (5) 2.09% 1.94% 2.16%
Ratio of
interest-earning
assets to
interest-bearing
liabilities 107.52% 107.70% 107.12%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes investment securities, term fed funds and FHLB of Atlanta stock.
(2) Interest rate spread represents the difference between the average yield on
interest-earning assets and the cost of interest-bearing liabilities.
(3) Net yield on interest-earning assets represents net interest income divided
by average interest-earning assets.
(4) Average yield/rate for the nine months ended June 30, 1998 and 1997, have
been annualized.
(5) Loans placed on nonperforming status have been included in the computation
of average balances.
(6) The weighted average rate represents the coupon associated with each asset
and liability, weighted by the principal balance associated with each asset
and liability.
39
<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 rate (changes in rate multiplied by the prior period's volume),
(ii) changes attributable to volume (changes in volume multiplied by the prior
period's rate), 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.
40
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended September 30,
1998 vs. 1997 1997 vs. 1996
---------------------------------------- --------------------------------------
Increase(Decrease) Attributable to Increase(Decrease) Attributable to
---------------------------------------- --------------------------------------
Rate Volume Net Rate Volume Net
------------ ----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Interest-bearing deposits $ 2 $ 141 $ 143 $ (4) $ 11 $ 7
Investments 5 (147) (142) (26) 70 44
Loans receivable, net 237 (159) 78 146 15 161
------------ -----------
Total interest income on
interest-earning assets 79 212
------------ -----------
Interest expense
NOW and Money market accounts (14) 7 (7) (18) 1 (17)
Passbook accounts 18 187 205 49 256 305
Certificates of deposit (98) (23) (121) (150) (160) (310)
FHLB advances 2 (497) (495) (3) (86) (89)
------------ -----------
Total interest expense on
interest-bearing liabilities (418) (111)
------------ -----------
Increase(decrease) in net interest income $ 497 $ 323
============ ===========
<CAPTION>
Year Ended September 30,
1996 vs. 1995
---------------------------------------
Increase(Decrease) Attributable to
---------------------------------------
Rate Volume Net
------------ ------------ -----------
<S> <C> <C> <C>
Interest income
Interest-bearing deposits $ 32 $ (75) $ (43)
Investments (30) (30) (60)
Loans receivable, net 119 (650) (531)
---------
Total interest income on
interest-earning assets (634)
---------
Interest expense
NOW and Money market accounts (27) (37) (64)
Passbook accounts 52 429 481
Certificates of deposit 663 (1,089) (426)
FHLB advances 36 - 36
---------
Total interest expense on
interest-bearing liabilities 27
---------
Increase(decrease) in net interest income $ (661)
=========
</TABLE>
41
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998, SEPTEMBER 30, 1997 AND 1996
Total assets were $192.7 million, $199.6 million and $190.2 million at June
30, 1998, September 30, 1997, and September 30, 1996, respectively.
Loans receivable, net, amounted to $159.7 million, $159.5 million, and
$159.5 million at June 30, 1998, September 30, 1997, and September 30, 1996,
respectively. Although the size of the loan portfolio has remained stable
throughout the aforementioned period, home equity loans have increased from
4.74% of total loans outstanding, before net items, to 9.84%.
Cash and cash equivalents amounted to $12.6 million, $16.1 million and
$10.2 million at June 30, 1998, September 30, 1997 and September 30, 1996,
respectively.
Investment securities classified as held-to-maturity were $1.87 million at
June 30, 1998, $2.3 million at September 30, 1997, and $2.5 million at September
30, 1996. In December 1995, the Bank adopted the implementation guidance
allowed by the Financial Accounting Standards Board ("FASB") under its Special
Report "A Guide to Implementation of Standard 115 on Accounting for Certain
Investments in Debt and Equity Securities," and reclassified investment
securities classified as held-to-maturity to available-for-sale without tainting
the remainder of the held-to-maturity investment securities portfolio. See Note
2 of Notes to Consolidated Financial Statements.
Investments classified as available-for-sale and Federal funds sold-term
were $11.8 million, $16.4 million, and $13.4 million at June 30, 1998, September
30, 1997, and September 30, 1996, respectively.
Office properties and equipment, net were $1.2 million, $1.3 million and
$1.3 million at June 30, 1998, September 30, 1997, and September 30, 1996,
respectively.
Deposit accounts totaled $159.8 million, $160.5 million, and $146.4 million
at June 30, 1998, September 30, 1997, and September 30, 1996, respectively. The
increase from September 30, 1996 to September 30, 1997 was the result of
aggressive marketing. Borrowings from the FHLB-Atlanta decreased from $27.0
million at September 30, 1996 to $22.0 million at September 30, 1997, and to
$13.0 million at June 30, 1998.
Total equity was $15.6 million, $14.6 million, and $13.6 million at June
30, 1998, September 30, 1997, and September 30, 1996, respectively. These
increases were primarily the result of retained earnings.
RESULTS OF OPERATIONS
The earnings of the Bank depend primarily on its level of net interest
income which is the difference between interest earned on the Bank's interest-
earning assets and the interest paid on interest-bearing liabilities. Net
interest income is a function of the Bank's interest rate spread, which is the
difference between the yield earned on interest-earning assets and the rate paid
on interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to the average balance of interest-bearing
liabilities.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
NET INCOME. Net income was $968,445 for the nine months ended June 30,
1998 compared to $705,210 for the nine months ended June 30, 1997, an increase
of 37.3%. This increase was primarily the result of an increase in net interest
income.
NET INTEREST INCOME. Net interest income increased 16.6% from $3.0 million
for the nine months ended June 30, 1997 to $3.5 million for the nine months
ended June 30, 1998 primarily as a result of the decrease in interest
42
<PAGE>
expense from $7.4 million for the nine months ended June 30, 1997 to $7.0
million for the nine months ended June 30, 1998 as both the average outstanding
balance of interest-bearing liabilities and the rate paid on these liabilities
declined. Although the average balance of interest-earning assets declined from
$192.0 million for the nine months ended June 30, 1997 to $189.2 million for the
nine months ended June 30, 1998, the yield increased from 7.22% to 7.39%
resulting in an increase in interest income from $10.38 million for the nine
months ended June 30, 1997 to $10.46 million for the nine months ended June 30,
1998. The average outstanding balance of interest-bearing liabilities declined
from $178.7 million for the nine months ended June 30, 1997 to $174.5 million
for the nine months ended June 30, 1998. The rate paid on these interest-bearing
liabilities decreased from 5.52% to 5.33% for those periods primarily due to a
$9.6 million reduction in average outstanding balances of FHLB-Atlanta advances.
PROVISION FOR LOAN LOSSES. Provisions for loan losses are charges to
earnings to bring the total allowance for loan losses to a level considered by
management as adequate to provide for estimated loan losses based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. The Bank gives
greater weight to the level of classified assets than to the level of
nonperforming assets (nonaccrual loans and real estate acquired in settlement of
loans) because classified assets include not only nonperforming assets but also
performing assets that otherwise exhibit, in management's judgment, potential
credit weaknesses.
No provision for loan losses was made for either the nine months ended June
30, 1998 or the nine months ended June 30, 1997.
OTHER INCOME. Other income decreased from $334,344 for the nine months
ended June 30, 1997 to $285,030 for the nine months ended June 30, 1998
primarily due to a decline in loan servicing fees and a decline in gain on loans
sold.
OPERATING EXPENSES. Operating expenses increased from $2.19 million for
the nine months ended June 30, 1997 to $2.24 million for the nine months ended
June 30, 1998, an increase of 2.3%.
INCOME TAXES. The provision for income taxes for the nine months ended
June 30, 1998 was $571,823 compared to $430,674 for the nine months ended June
30, 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
NET INCOME. Net income was $967,232 for the year ended September 30, 1997
compared to $101,734 a year earlier. Both net interest income and other income
increased and operating expenses declined from $3.98 million to $2.96 million
primarily due to the $1.1 million one-time SAIF special assessment incurred in
fiscal 1996 which was not incurred in fiscal 1997.
NET INTEREST INCOME. Net interest income was $4.03 million for the year
ended September 30, 1997 compared to $3.71 million for the year ended September
30, 1996, an increase of 8.6%. Interest income on loans increased from $11.77
million for the year ended September 30, 1996 to $11.93 million for the year
ended September 30, 1997, an increase of 1.4%. Interest income on mortgage-
backed securities and other investments increased from $1.92 million for the
year ended September 30, 1996 to $1.97 million for the year ended 1997, an
increase of 2.6%. Interest expense decreased from $9.98 million for the year
ended September 30, 1996 to $9.87 million for the year ended September 30, 1997,
a decrease of 1.1%.
PROVISION FOR LOSSES. No provision for loan losses was made in either the
year ended September 30, 1997 or the year ended September 30, 1996.
OTHER INCOME. Other income increased from $388,177 for the year ended
September 30, 1996 to $415,561 for the year ended September 30, 1997, primarily
due to an increase in gains on sales of loans.
43
<PAGE>
OPERATING EXPENSES. Operating expenses declined from $3.98 million for the
year ended September 30, 1996 to $2.96 million for the year ended September 30,
1997. This decrease was primarily due to the absence of the one-time SAIF
special assessment in the year ended September 30, 1997 as well as a reduction
in SAIF premiums. The premium payments to the SAIF decreased from $1,473,015
for the year ended September 30, 1996 to $116,258 for the year ended September
30, 1997.
INCOME TAXES. The provision for income taxes increased from $11,541 for
the year ended September 30, 1996 to $519,711 for the year ended September 30,
1997 as a result of the higher income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995
NET INCOME. Net income declined from $1.15 million for the year ended
September 30, 1995 to $101,734 for the year ended September 30, 1996. This
decline was primarily due to a decrease in net interest income of $660,903
coupled with an increase in operating expenses of $1.07 million as a result of
the one-time SAIF special assessment of $1.075 million during the year ended
September 30, 1996.
NET INTEREST INCOME. Net interest income decreased from $4.37 million in
the year ended September 30, 1995 to $3.71 million for the year ended September
30, 1996. This decrease was primarily attributable to a $530,560 decline in
interest income on loans as average loans outstanding decreased from $169.3
million for the year ended September 30, 1995 to $160.4 million for the year
ended September 30, 1996.
PROVISION FOR LOAN LOSSES. No provision for loan losses was made in either
the year ended September 30, 1996 or the year ended September 30, 1995.
OTHER INCOME. Other income decreased from $434,034 for the year ended
September 30, 1995 to $388,177 for the year ended September 30, 1996 primarily
due to a decline in loan servicing fees.
OPERATING EXPENSES. Operating expenses increased from $2.91 million for
the year ended September 30, 1995 to $3.98 million for the year ended September
30, 1996, primarily due to the one-time SAIF special assessment of $1.075
million.
INCOME TAXES. The provision for income taxes decreased from $743,129 for
the year ended September 30, 1995 to $11,541 for the year ended September 30,
1996 because of lower income subject to taxes.
IMPACT OF INFLATION AND CHANGING PRICES
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
IMPACT OF NEW REPORTING AND ACCOUNTING STANDARDS
Reporting Comprehensive Income. In June 1997, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
was issued and establishes standards for reporting and displaying comprehensive
income and its components. SFAS 130 requires comprehensive income and its
components, as recognized under accounting standards, to be displayed in a
financial statement with the same prominence as other financial statements. The
Bank plans to adopt the standard, as required in fiscal 1998.
44
<PAGE>
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, Statements of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," was issued and
establishes new standards for public companies to report information about
operating segments in annual and interim financial statements. The standard
also requires descriptive information about the way the operating segments are
determined, the products and services provided by the segments and the nature of
differences between reportable segment measurements and those used for the
consolidated enterprise. The Company, if the Offering is successful, would
adopt the standard, as required in fiscal 1998.
Employers' Disclosures about Pensions and Other Postretirement Benefits.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS
No. 132) which revises employers' disclosures about pension and other
postretirement benefit plans was issued. The standard does not change the
measurement or recognition of those plans. SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer viewed as useful
to the reader. The Bank plans to adopt the standard, as required, in fiscal
1998.
BUSINESS OF THE COMPANY
Prior to the Conversion, the Company will not transact any material
business. Following the Conversion, in addition to directing, planning and
coordinating the business activities of the Bank, the Company will invest the
proceeds of the Conversion which are retained by it. See "USE OF PROCEEDS."
Upon consummation of the Conversion, the Company will have no significant assets
other than the shares of the Bank's capital stock acquired in the Conversion,
the loan receivable held with respect to its loan to the ESOP and that portion
of the net proceeds of the Conversion retained by it. The Company will have no
significant liabilities. Cash flow to the Company will be dependent upon
investment earnings from the net proceeds retained by it, payments on the ESOP
loan and any dividends received from the Bank. Initially, the Company will
neither own nor lease any property, but will instead use the premises, equipment
and furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than its officers (who are not anticipated to be
separately compensated by the Company), but will utilize the support staff of
the Bank from time to time. Additional employees will be hired as appropriate
to the extent the Company expands its business in the future. In the future,
the Company may consider using some of the proceeds of the Conversion retained
by it to expand its operations in its existing primary market and other nearby
areas by acquiring other financial institutions or their branches. The Company
has no current plans with respect to any such acquisitions, however. 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
and, to a lesser extent, multi-family residential loans, nonresidential loans,
construction and development loans, home equity loans, commercial and consumer
loans. The Bank's primary source of revenue is interest income from its lending
activities. The Bank's other major sources of revenue are interest and dividend
income from investments, interest income from its interest-earning deposit
balances in other depository institutions, and transaction and fee income from
its lending and deposit activities. The major expenses of the Bank are interest
on deposits and general and administrative expenses such as employee
compensation and benefits, federal deposit insurance premiums, data processing,
advertising expenses and occupancy expenses.
As a federally-chartered savings bank, the Bank is subject to examination
and regulation by the OTS. The
45
<PAGE>
business and regulation of the Bank are subject to legislative and regulatory
changes from time to time. See "SUPERVISION AND REGULATION -- Regulation of the
Bank."
MARKET AREA
The Bank's primary market area consists of the communities in an
approximately a 10-mile radius around its offices in Salisbury, Rockwell, and
Statesville, North Carolina. These areas are located within Rowan and Iredell
Counties. All three offices are in proximity of Charlotte, North Carolina and
the market area has been and will continue to be affected by this major
metropolitan area.
The U.S. Census' records indicate that the population of Rowan County
increased from 99,186 in 1980 to 110,605 in 1990. The State of North Carolina
Office of Planning estimated the population of Rowan County at 121,003 in 1996
and is currently projecting the population to reach 126,858 in the year 2000 and
139,313 in the year 2010. The same agencies' data show that the population of
Iredell County increased from 82,538 in 1980 to 92,935 in 1990, was estimated at
106,233 in 1996 and is currently projected to reach 112,715 in the year 2000 and
127,714 in the year 2010.
Employment in the Bank's primary market area is highly diversified among
manufacturing, retail and wholesale trade, government, and services. The
largest employers in the Bank's market area are Food Lion (supermarkets),
Trevira (synthetic fibers), Freightliner (heavy truck manufacturer), the
Veterans Administration (hospital), General Electric (lighting panels), ASMO,
N.C., Inc. (electric motors), J. C. Penney (distribution center), and Kewaunee
Scientific (laboratory furniture). Because of the diversification outlined
above, the Bank's primary market area experiences a stable employment pattern.
As of June 30, 1998, there were 64,280 persons in the Rowan County labor force
and the unemployment rate was 3.0%. On the same date, there were 58,820 persons
in the Iredell County labor force and the unemployment rate was 2.3%. The labor
force of the State of North Carolina on June 30, 1998 was 3.84 million with an
unemployment rate of 3.4%. In general, the unemployment rate for the Bank's
market area is below the rate of North Carolina which is usually below the
national rate.
Based on 1997 FDIC comparative data, the Bank had approximately 11.7% of
the deposits in Salisbury and approximately 10.4% of the deposits in Rowan
County. The Bank had approximately 8% of the deposits in Statesville and
approximately 4.7% in Iredell County at the same date.
LENDING ACTIVITIES
GENERAL. The Bank's primary source of revenue is interest income from its
lending activities, consisting primarily of mortgage loans for the purchase or
refinance of one-to-four family residential real property located in its primary
market area. The Bank also makes home equity loans, multi-family residential
loans, nonresidential loans, construction and development loans, commercial and
consumer loans. Over 98.9% of the Bank's loan portfolio, before net items, is
secured by real estate. In addition to interest earned on loans, the Bank
receives fees in connection with loan originations, loan servicing, loan
modifications, late payments, loan assumptions and other miscellaneous services.
Adjustable rate loans are generally originated with the intention that they
will be held in the Bank's loan portfolio. Fixed rate one-to-four family
residential loans are generally originated in conformity with secondary market
purchase requirements and sold in the secondary market. During fiscal 1997,
1996, and 1995, the Bank sold $5.5 million, $4.3 million, and $6.7 million,
respectively, of fixed rate loans in order to better manage its interest rate
risk.
46
<PAGE>
LOAN PORTFOLIO COMPOSITION. The Bank's net loan portfolio totaled
approximately $159.7 million on June 30, 1998 which represented 82.9% of the
Bank's total assets. One-to-four family residential mortgage loans comprised
84.9% of the Bank's loan portfolio, before net items. Home equity loans
represented 9.8% of the loan portfolio, before net items, and loans secured by
construction and development property, multi-family residential property,
nonresidential property, secured commercial loans, and personal loans comprised
the remaining 5.3%.
As of June 30, 1998, 67% 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 date indicated.
47
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------
At June 30, 1998 1997 1996
------------------------------- -------------------------------- ----------------
Amount % of Total Amount % of Total Amount
--------------- ------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Type of loan:
Real estate loans:
1-4 family $ 138,295 86.59% $ 140,797 88.30% $ 145,342
Home equity 16,035 10.04% 11,063 6.94% 7,746
Construction and development 3,865 2.42% 5,639 3.54% 3,707
Nonresidential 1,633 1.02% 2,220 1.39% 2,633
Multi-family 1,365 0.85% 1,592 1.00% 1,879
--------------- ------------ --------------- -------------- ---------------
Total real estate loans 161,193 100.92% 161,311 101.16% 161,307
--------------- ------------ --------------- -------------- ---------------
Other loans:
Commercial 1,480 0.93% 1,629 1.02% 1,840
Consumer 271 0.17% 349 0.22% 309
--------------- ------------ --------------- -------------- ---------------
Total other loans 1,751 1.10% 1,978 1.24% 2,149
--------------- ------------ --------------- -------------- ---------------
Total gross loans 162,944 102.02% 163,289 102.40% 163,456
--------------- ------------ --------------- -------------- ---------------
Less:
Construction loans in process 1,844 1.15% 2,447 1.53% 2,619
Deferred loan origination fees 63 0.04% 57 0.04% 26
Unearned income 103 0.06% 104 0.07% 105
Allowance for loan losses 1,224 0.77% 1,223 0.77% 1,215
--------------- ------------ --------------- -------------- ---------------
Total reductions 3,234 2.02% 3,831 2.40% 3,965
--------------- ------------ --------------- -------------- ---------------
Total loans receivable, net $ 159,710 100.00% $ 159,458 100.00% $ 159,491
=============== ============ =============== ============== ===============
<CAPTION>
At September 30,
-----------------------------------------------
1995
------------- ---------------------------------
% of Total Amount % of Total
------------- ---------------- ---------------
<S> <C> <C> <C>
Type of loan:
Real estate loans:
1-4 family 91.13% $ 155,998 92.64%
Home equity 4.86% 4,507 2.68%
Construction and development 2.32% 4,962 2.95%
Nonresidential 1.65% 2,897 1.72%
Multi-family 1.18% 2,302 1.37%
------------- ---------------- ---------------
Total real estate loans 101.14% 170,666 101.35%
------------- ---------------- ---------------
Other loans:
Commercial 1.15% 45 0.03%
Consumer 0.19% 340 0.20%
------------- ---------------- ---------------
Total other loans 1.35% 385 0.23%
------------- ---------------- ---------------
Total gross loans 102.49% 171,051 101.58%
------------- ---------------- ---------------
Less:
Construction loans in process 1.64% 1,248 0.74%
Deferred loan origination fees 0.02% 86 0.05%
Unearned income 0.07% 106 0.06%
Allowance for loan losses 0.76% 1,215 0.72%
------------- ---------------- ---------------
Total reductions 2.49% 2,655 1.58%
------------- ---------------- ---------------
Total loans receivable, net 100.00% $ 168,396 100.00%
============= ================ ===============
</TABLE>
48
<PAGE>
The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at June 30, 1998. 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. Overdrafts on checking accounts are reported as due in one year or
less. The table does not include prepayments or scheduled principal repayments.
Amounts in the table are net of loans in process and are net of unamortized loan
fees.
<TABLE>
<CAPTION>
At June 30, 1998
-----------------------------------------
More Than
1 Year 1 Year to More Than
or Less 5 Years 5 Years Total
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
(In Thousands)
TOTAL LOANS:
- ------------
Real estate loans: $ 983 $ 516 $45,482 $ 46,981
1-4 family - fixed 48,296 41,922 697 90,915
1-4 family - adjustable -- 131 1,195 1,326
Home Equity - fixed 15,000 -- -- 15,000
Home Equity - adjustable 1,093 638 241 1,972
Construction and Development - fixed 36 11 -- 47
Construction and Development - adjustable 7 65 1,086 1,158
Nonresidential - fixed 401 18 -- 419
Nonresidential - adjustable -- 15 -- 15
Residential multi-family - fixed 703 632 15 1,350
Residential multi-family - adjustable
Commercial loans -- 31 1,449 1,480
Consumer loans 251 -- 20 271
Less:
Allowance for loan losses (1,224) -- -- (1,224)
------- ------- ------- --------
Totals $65,546 $43,979 $50,185 $159,710
======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount at June 30, 1998 of all
loans maturing or repricing on or after June 30, 1999 which have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
------- ----------
(In Thousands)
<S> <C> <C>
Real estate loans $49,369 $43,295
Commercial loans 1,480 --
Other loans 20 --
------- -------
Totals $50,869 $43,295
======= =======
</TABLE>
49
<PAGE>
Scheduled contractual principal repayments of loans do not reflect the
actual life of such assets. The average life of a loan is substantially less
than its contractual terms because of prepayments. In addition, due-on-sale
clauses on loans generally give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of mortgage loans tends to increase, however, when current mortgage loan
market rates are substantially higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are substantially
higher than current mortgage loan market rates. Furthermore, management
believes that a significant number of the Bank's residential mortgage loans are
outstanding for a period less than their contractual terms because of the
transitory nature of many of the borrowers who reside in its primary market
area.
ORIGINATION, PURCHASE, AND SALE OF LOANS. The Bank generally has
originated loans in Rowan and Iredell Counties. Some loans have been originated
in Cabarrus and Mecklenburg Counties which are contiguous with the Bank's
primary market area of Rowan and Iredell Counties.
The Bank purchased $10.9 million in single family first mortgage loans in
fiscal 1995 from a Greensboro financial firm. These loans are secured by
properties in Greensboro and Charlotte, North Carolina. These loans contribute
to the Bank's low asset yield because the mortgages have not repriced to current
market rates and were originated at yields below current levels. No loans have
been purchased since fiscal 1995. However, the Board of Directors may resume
the purchase of loans to increase the size of the loan portfolio.
The Bank originates fixed rate conventional, conforming single-family loans
with the intent of selling those loans in the secondary market to reduce
interest rate risk exposure.
The table below sets forth the Bank's loan origination, purchase and sale
activity and loan portfolio repayment experience during the periods indicated.
50
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
June 30, Year Ended September 30,
----------------------- ------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans receivable, net, beginning of period $ 159,458 $ 159,491 $ 159,491 $ 168,396 $ 156,297
---------- ---------- ---------- ---------- ----------
Loan originations:
1-4 family 27,990 16,192 21,554 16,204 15,491
Home equity 4,972 2,848 3,317 3,239 1,710
Construction and development 3,930 5,507 6,692 2,327 10,105
Nonresidential - - - - -
Multi-family - - - - -
Commercial - - - 1,800 -
Consumer 172 148 343 123 24
---------- ---------- ---------- ---------- ----------
Total loan originations 37,064 24,695 31,906 23,693 27,330
---------- ---------- ---------- ---------- ----------
Loans purchased - - - - 10,854
Loan sales (3,087) (5,246) (5,508) (4,319) (6,690)
Principal repayments (33,717) (17,318) (26,392) (28,339) (19,481)
Other changes, net (1) (8) (21) (39) 60 86
---------- ---------- ---------- ---------- ----------
Loans receivable, net, end of period $ 159,710 $ 161,601 $ 159,458 $ 159,491 $ 168,396
========== ========== ========== ========== ==========
</TABLE>
51
<PAGE>
ONE-TO-FOUR FAMILY RESIDENTIAL REAL ESTATE LENDING. The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of fixed and adjustable rate first mortgage loans to enable borrowers to
purchase or refinance one-to-four family residential real property. Consistent
with the Bank's emphasis on being a community-oriented financial institution, it
is and has been the Bank's strategy to focus its lending efforts in its primary
market. On June 30, 1998, approximately 85.8% 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, 67% had adjustable
interest rates.
The Bank originates conventional mortgage loans secured by owner-occupied
property having terms of up to 30 years in amounts of up to 95% of the value of
the property. Bank policy requires private mortgage insurance on the amount of
the loan which exceeds 80% of the value of the property. The loans have both
fixed and adjustable rates. The fixed rate loans are generally originated for
sale. Some of such loans are sold "servicing retained" and others are sold
"servicing released." The interest rates on adjustable rate loans are generally
adjustable every year after a period of one, three, or five years and are tied
to the average weekly yield on the United States Treasury securities adjusted to
a constant maturity or the 11th District Cost of Funds. The loans have rate
caps which limit the amount of change at the time of each adjustment and over
the life of each loan.
The Bank generally requires title insurance for its one-to-four family
residential loans and 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.
HOME EQUITY LENDING. At June 30, 1998, the Bank had approximately $15
million in home equity line of credit loans, representing approximately 9.2% of
its portfolio, before net items. In addition, at such date, the Bank had
unfunded home equity lines of credit totaling $13.8 million. The Bank's home
equity lines of credit have adjustable interest rates tied to Wall Street
Journal Prime plus a margin. The home equity lines of credit require the payment
of interest monthly, and all outstanding amounts must be paid in full at the end
of 15 years. Home equity lines of credit are generally secured by subordinate
liens against residential real property. The Bank requires title opinions from
attorneys in connection with these loans. The Bank requires that fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least sufficient to cover its loan. Home equity lines
are generally limited so that the amount of such loans, along with any senior
indebtedness, does not exceed 90% of the value of the real estate security to
borrowers with excellent credit history. Under certain circumstances, the Bank
will provide lines of credit up to 100% of the value of the real estate security
to borrowers with excellent credit history.
The Bank had approximately $1.43 million in closed-end home equity loans on
June 30, 1998. These loans have maximum terms of 15 years and are usually made
for home improvements. These loans represent 0.9% of the Bank's loan portfolio,
before net items.
CONSTRUCTION LENDING. The Bank makes construction loans for the
construction of single-family dwellings. The aggregate outstanding balance of
such loans on June 30, 1998 was approximately $3.9 million, representing
approximately 2.4% of the Bank's loan portfolio, before net items, and included
construction loans in process of approximately $1.8 million. Some of these
loans were made to persons who are constructing properties for the purpose of
occupying them; others were made to builders who were constructing properties
for sale. Loans made to builders are generally "pure construction" loans which
require the payment of interest during the construction period of generally one
year or less and the payment of the principal in full at the end of the
construction period. Loans made to individual property owners are both pure
construction loans and "construction-permanent" loans which generally provide
for the payment of interest only during a construction period, after which the
loans convert to a permanent loan at fixed or adjustable interest rates having
terms similar to one-to-four family residential loans.
52
<PAGE>
Construction loans for one-to-four family real estate to be occupied by the
borrower generally have a maximum loan-to-value ratio of 80% of the appraised
value of the property. Title insurance is generally required for construction
loans. In addition, the Bank generally requires builders risk or casualty
insurance (and, if appropriate, flood insurance) on such loans.
The Bank occasionally makes loans for the development of land in
preparation for the construction of single family properties. The aggregate
outstanding balance of such loans on June 30, 1998, was $630,400, representing
0.4% of the Bank's loan portfolio, before net items. The maximum loan-to-value
for this type loan is 65%.
NONRESIDENTIAL LENDING. On June 30, 1998, the Bank had $1.63 million
outstanding in loans secured by nonresidential properties, comprising
approximately 1.0% of its loan portfolio, before net items. These loans are
secured by office, retail, and other commercial real estate and by church
properties in the Bank's primary market area and have either fixed or adjustable
interest rates. These loans generally do not exceed 75% of the appraised value
of the real estate securing the loans. These loans have terms of up to 15
years. The adjustable rate loans generally use the index and rate change
limitations as are used in one-to-four family residential lending. See "--One-
to-Four Family Residential Lending."
The Bank generally requires title insurance 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.
The Board of Directors is currently evaluating the opportunities available
in the market area for nonresidential lending. The Board may increase efforts
in this area to diversify the loan portfolio.
MULTI-FAMILY RESIDENTIAL LENDING. On June 30, 1998, the Bank had $1.37
million outstanding in loans secured by multi-family residential properties,
comprising approximately 0.84% of its loan portfolio, before net items. These
loans are secured by apartments and have fixed and adjustable interest rates.
These loans generally do not exceed 75% of the appraised value of the real
estate securing the loans. Multi-family residential loans have terms of up to
15 years. The loans generally use the same index and rate change limitations as
are used in one-to-four family residential lending. See "-- One-to-Four Family
Residential Real Estate Lending."
The Bank generally requires title insurance in connection with its multi-
family residential 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.
The Board of Directors is currently evaluating the opportunities available
in the market area for multi-family residential lending. The Board may increase
efforts in this area to diversify the loan portfolio.
COMMERCIAL LENDING. Although infrequent, the Bank has made commercial
loans. Those loans generally require publicly-traded common stock as security
and are limited to a margin of 60%. As of June 30, 1998, commercial loans
amounted to $1.48 million, or 0.9% of gross loans outstanding, before net items.
The Board of Directors is currently evaluating the opportunities available in
the market area for commercial lending. The Board may increase efforts in this
area to diversify the loan portfolio.
CONSUMER LENDING. At June 30, 1998, the Bank's consumer loan portfolio
amounted to $271,000, or 0.17% of gross loans outstanding, before net items.
The Board of Directors is currently evaluating the opportunities available in
the market area for consumer lending. The Board may increase efforts in this
area to diversify the loan portfolio.
53
<PAGE>
LOAN SOLICITATION, PROCESSING AND UNDERWRITING. Loan originations are
derived from a number of sources such as referrals from real estate brokers, the
Bank's 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. The Bank also obtains information concerning the income,
financial condition, employment and the credit history of the applicant. 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 an independent fee
appraisal on loans secured by a first mortgage on real estate. In some
instances, tax value is used for second lien position loans.
All real estate loans, except certain home equity loans, must be approved
by a Bank underwriter. All loans and lending relationships in excess of
$250,000 must receive full Board approval. All loan originations for the month
are reported monthly to the Board of Directors.
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 45 days of the commitment date. 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. No points are
charged unless the loan is actually closed. Approximately 15 percent of
commitments that are issued expire without the loan being closed.
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 policy 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.
NON-PERFORMING 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. Interest on loans is recorded as borrowers'
monthly payments become due. Accrual of interest on loans is suspended when
interest becomes 90 days past due or earlier when, in management's judgment,
doubts exist as to the collectibility of additional interest. Interest is
reserved by establishing an allowance for uncollected interest when a loan
becomes delinquent 90 days or more or earlier. Loans begin accruing interest
again when interest is brought current. In most cases, delinquencies are cured
promptly. 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 the Bank at prevailing market terms. 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 to recover its investment. As of June 30, 1998, 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 the lower of
cost or fair value at the date of foreclosure, establishing a new cost basis.
After foreclosure, valuations are periodically performed by an independent
appraiser, 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.
54
<PAGE>
The following table sets forth information with respect to non-performing
assets by the Bank, including nonaccrual loans and foreclosed real estate at the
dates indicated.
<TABLE>
<CAPTION>
At June 30, At September 30,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Nonaccrual loans $ 130 $ 211 $ 348 $ 2 $ --
Accruing loans past due 90 days or more -- -- -- -- --
Foreclosed real estate -- 62 -- 128 49
-------- -------- -------- -------- --------
Total non-performing assets $ 130 $ 273 $ 348 $ 130 $ 49
======== ======== ======== ======== ========
Non-performing loans to total gross loans 0.08% 0.13% 0.21% --% --%
======== ======== ======== ======== ========
Non-performing assets to total assets 0.07% 0.14% 0.17% 0.07% 0.02%
======== ======== ======== ======== ========
Total assets $192,715 $200,677 $199,616 $190,233 $202,170
Total gross loans $162,944 $164,966 $163,289 $163,456 $171,051
</TABLE>
During the nine months ended June 30, 1998 and the fiscal year ended
September 30, 1997, gross interest income of $25,680 and $7,625, respectively,
would have been recorded on non-performing assets if such assets had been
current in accordance with their terms and had been outstanding throughout the
period or since origination, if held for part of such period. The amount of
gross interest income actually recorded on such non-performing assets during the
periods was $7,700 and $3,856, respectively.
Applicable regulations require the Bank to "classify" its own assets on a
regular basis. In addition, in connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
and, if appropriate, classify them. Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below. The Bank also identifies assets which
possess credit deficiencies or potential weaknesses deserving close attention by
management. These assets are listed as "special mention" and do not warrant
adverse classification. At June 30, 1998, the Bank had four loans with an
aggregate outstanding balance of approximately $170,000 classified as "special
mention."
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 a well-defined
weakness with possible risk of loss if the deficiency is not corrected. Assets
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable." Assets classified "loss" are
those considered "uncollectible" and of such little value that their continuance
as assets without the establishment of a loss reserve is not warranted.
As of June 30, 1998, the Bank had approximately $268,000 loans internally
classified as "substandard," no loans classified as "doubtful" and no loans
classified as "loss." Total classified loans as of September 30, 1997 and 1996
were approximately $348,000 and approximately $130,000, respectively.
55
<PAGE>
The following table sets forth at June 30, 1998, the Bank's aggregate
carrying value of the assets classified as "substandard," "doubtful," "loss," or
criticized as "special mention."
<TABLE>
<CAPTION>
Special Mention List Substandard Doubtful Loss
-------------------- -------------- -------------- --------------
Number Amount Number Amount Number Amount Number Amount
--------- --------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real estate loans:
1-4 family 4 $170 3 $254 -- $ -- -- $ --
Home equity -- -- 1 14 -- -- -- --
Construction and development -- -- -- -- -- -- -- --
Nonresidential -- -- -- -- -- -- -- --
Multi-family -- -- -- -- -- -- -- --
--- ---- --- ---- ------ ------ ------ ------
Total real estate loans 4 170 4 268 -- -- -- --
--- ---- --- ---- ------ ------ ------ ------
Other loans:
Commercial -- -- -- -- -- -- -- --
Consumer -- -- -- -- -- -- -- --
--- ---- --- ---- ------ ------ ------ ------
Total other loans -- -- -- -- -- -- -- --
--- ---- --- ---- ------ ------ ------ ------
Total 4 $170 4 $268 -- $ -- -- $ --
=== ==== === ==== ====== ====== ====== ======
</TABLE>
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.
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 risk 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 OTS which can order the
establishment of additional loss allowances.
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.
56
<PAGE>
The following table describes the activity related to the Bank's allowance
for loan losses for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
June 30, Year Ended September 30,
----------------- -------------------------
1998 1997 1997 1996 1995
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Balance, beginning of period $1,223 $1,216 $1,216 $1,215 $1,205
Provision for loan losses -- -- -- -- --
Charge-offs -- -- -- -- --
Recoveries 1 9 7 1 10
------ ------ ------ ------ ------
Balance, end of period $1,224 $1,225 $1,223 $1,216 $1,215
====== ====== ====== ====== ======
</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.
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 June 30, 1998, the Bank's investment portfolio totaled $26.5
million and consisted of U.S. government and agency securities, interest-earning
deposits in other financial institutions and stock of the FHLB of Atlanta.
Investments are 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. Net
unrealized securities gains on the securities available-for-sale of $120,539,
net of related deferred tax assets of $77,605, are reported as a separate
component of equity in the Bank's financial statements at June 30, 1998. The
Bank established a trading account to satisfy the investment requirements of a
rabbi trust related to a deferred compensation plan. Given the relative
immateriality of these amounts, they are classified as other assets within the
statement of condition.
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.
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 residential mortgage loans and similar obligations or 5% of
its outstanding advances from the FHLB of Atlanta. No ready market exists for
such stock, which is carried at cost. As of June 30, 1998, the Bank was in
compliance with this requirement with an investment in stock of the FHLB of
Atlanta was $1.8 million.
OTS 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 jointly by Ronald E. Bostian, President and Chief Executive
Officer, and Dianne Hawkins, Vice President, Controller and Treasurer, and
reviewed monthly by the Board of Directors. The investment policy provides that
the objectives of the investment portfolio are to: (i) establish an acceptable
level of interest rate and credit risk for all investments; (ii) generate an
acceptable rate of return on investments; (iii) provide for adequate levels of
liquidity for the Bank; and (iv) provide guidance from the Board of Directors to
management on the investments desired for the Bank.
Permitted investments include FHLB daily time deposits, FHLB term deposits,
insured certificates of deposit, government securities and government agency
securities.
58
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------
At June 30, 1998 1997
------------------------------------ -----------------------------------
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>
Type of loan:
Real estate loans:
1-4 family $ 137 11.19% 84.87% $ 396 32.38% 86.23%
Home equity 484 39.55% 9.84% - - 6.78%
Construction and development 115 9.40% 2.37% 109 8.91% 3.45%
Nonresidential 52 4.25% 1.00% 16 1.31% 1.36%
Multi-family 40 3.27% 0.84% 4 0.33% 0.97%
--------- --------- -------- --------- -------- -------
Total real estate loans 828 67.66% 98.93% 525 42.93% 98.79%
--------- --------- -------- --------- -------- -------
Other loans:
Commercial 44 3.59% 0.91% - - 1.00%
Consumer 2 0.16% 0.17% 96 7.85% 0.21%
--------- --------- -------- --------- -------- -------
Total other loans 46 3.75% 1.07% 96 7.85% 1.21%
--------- --------- -------- --------- -------- -------
Unallocated 350 28.59% - 602 49.22% -
--------- --------- -------- --------- -------- -------
Total allowance for loan losses $ 1,224 100.00% 100.00% $ 1,223 100.00% 100.00%
========= ========= ======== ========= ======== =======
<CAPTION>
At September 30,
----------------------------------------------------------------------------
1996 1995
------------------------------------ -----------------------------------
Percent of Amount Percent of Amount
Allowance of Loans Allowance of Loans
Amount of to Total to Gross Amount of to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
--------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Type of loan:
Real estate loans:
1-4 family $ 393 32.35% 88.92% $ 429 35.31% 91.20%
Home equity - - 4.74% - - 2.63%
Construction and development 52 4.28% 2.27% 173 14.24% 2.90%
Nonresidential 46 3.79% 1.61% 76 6.26% 1.69%
Multi-family 6 0.49% 1.15% 9 0.74% 1.35%
--------- -------- ------- --------- -------- -------
Total real estate loans 497 40.91% 98.69% 687 56.55% 99.77%
--------- -------- ------- --------- -------- -------
Other loans:
Commercial - - 1.13% - - 0.03%
Consumer 105 8.64% 0.19% 17 1.40% 0.20%
--------- -------- ------- --------- -------- -------
Total other loans 105 8.64% 1.31% 17 1.40% 0.23%
--------- -------- ------- --------- -------- -------
Unallocated 613 50.45% - 511 42.05% -
--------- -------- ------- --------- -------- -------
Total allowance for loan losses $ 1,215 100.00% 100.00% $ 1,215 100.00% 100.00%
========= ======== ======= ========= ======== =======
</TABLE>
<PAGE>
The following table sets forth certain information regarding the Bank's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
----------------------------
At June 30, 1998 1997 1996 1995
---------------- -------- -------- --------
<S> <C> <C> <C> <C>
(In Thousands)
Securities available for sale:
U.S. government and agencies $ 7,830 $10,335 $12,492 $ --
Securities held to maturity:
U.S. government and agencies 1,871 2,328 2,521 15,454
Other:
Interest-earning deposits 10,960 14,164 8,118 5,162
Term Federal Funds 4,000 6,100 910 7,200
Federal Home Loan Bank stock 1,825 1,825 1,825 1,825
------- ------- ------- -------
Total $26,486 $34,752 $25,866 $29,641
======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
investment portfolio as of June 30, 1998. Mortgage-backed securities are not
due at a single maturity date, therefore, the table does not consider
prepayment of the underlying loans.
60
<PAGE>
<TABLE>
<CAPTION>
After One Year Through After Five Years
One Year or Less Five Years Through Ten Years After Ten Years
----------------- ---------------------- ------------------ ---------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- -------- ------------ -------- --------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agencies $ - - $ 666 6.24% $ 185 9.02% $ 6,979 6.64%
Securities held to maturity:
U.S. government and agencies - - 1,132 7.07% - - 739 7.20%
Other:
Interest-earning deposits 10,960 6.14% - - - - - -
Term Federal Funds 4,000 5.55% - - - - - -
Federal Home Loan Bank stock - - - - - - 1,825 7.50%
------- ------- ------- ------- ------- ------ --------- -------
Total $ 14,960 5.98% $ 1,798 6.76% $ 185 9.02% $ 9,543 6.85%
======= ======= ======= ======= ======= ====== ========= =======
<CAPTION>
Total
--------------------
Weighted
Carrying Average
Value Yield
--------- -------
<S> <C> <C>
Securities available for sale:
U.S. government and agencies 7,830 6.66%
6.66%
Securities held to maturity:
U.S. government and agencies 1,871 7.12%
Other:
Interest-earning deposits 10,960 6.14%
Term Federal Funds 4,000 5.55%
Federal Home Loan Bank stock 1,825 7.50%
--------- --------
Total $ 26,486 6.37%
========= ========
</TABLE>
61
<PAGE>
DEPOSITS AND BORROWINGS
GENERAL. Deposits are one of the primary sources of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal payments and prepayments, interest payments,
investment income and principal payments and prepayments, 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, negotiable order of withdrawal accounts, money market
demand accounts, non-interest-bearing accounts, and fixed interest rate
certificates with varying maturities. At June 30, 1998, 69.8% of the Bank's
deposits consisted of certificate accounts, 23.9% consisted of passbook savings
accounts, 5.5% consisted of interest-bearing transaction accounts and 0.86%
consisted of noninterest-bearing transaction accounts. Deposit flows are greatly
influenced by economic conditions, the general level of interest rates,
competition, and other factors. The Bank utilizes traditional marketing methods
to attract new customers and savings deposits, including print, television
advertising and direct mailings. The Bank plans to emphasize passbook and
checking accounts as a source of lower cost funds. The Bank recently began
issuing ATM cards to its customers as a way of increasing the number and
balances of such accounts.
The following table sets forth information relating to the Bank's deposit
flows during the periods shown and total deposits at the end of such periods.
<TABLE>
<CAPTION>
At or for the Nine Months At or for the Year
Ended June 30, Ended September 30,
-------------------------- ------------------------------
1998 1997 1997 1996 1995
------------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Total deposits at beginning of period $160,493 $146,450 $146,450 $159,309 $159,480
Net increase (decrease) before interest
credited (5,147) 7,390 8,048 (18,384) (4,769)
Interest credited 4,473 4,408 5,995 5,525 4,598
-------- -------- -------- -------- --------
Total deposits at end of period $159,819 $158,248 $160,493 $146,450 $159,309
======== ======== ======== ======== ========
</TABLE>
The following table sets forth certain other information regarding the
Bank's savings deposits at the dates indicated.
62
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------
At June 30, 1998 1997
--------------------------------- -------------------------------- ---------
Weighted Weighted
Average % of Average % of
Amount Rate Deposits Amount Rate Deposits Amount
--------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Deposit accounts:
Passbook savings $ 38,194 4.52% 23.90% $ 31,395 4.52% 19.56% $ 26,134
NOW accounts 5,798 1.42% 3.63% 5,248 1.35% 3.27% 4,109
Money market deposit accounts 2,932 2.50% 1.83% 3,125 2.50% 1.95% 3,547
Non-interest bearing accounts 1,376 -% 0.86% 1,550 -% 0.97% 866
--------- -------- -------- -------- --------- --------- --------
Total demand deposits 48,300 3.90% 30.22% 41,318 3.79% 25.75% 34,656
--------- -------- -------- -------- --------- --------- --------
Certificates of deposit 111,519 5.51% 69.78% 119,175 5.66% 74.25% 111,794
--------- -------- -------- -------- --------- --------- --------
Total deposits $ 159,819 5.02% 100.00% $160,493 5.18% 100.00% $146,450
========= ======== ======== ======== ========= ========= ========
<CAPTION>
1996 1995
--------------------------------- --------------------
Weighted Weighted
Average % of Average
Amount Rate Deposits Amount Rate
--------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Deposit accounts:
Passbook savings 4.44% 17.84% $ 18,735 4.15% 11.76%
NOW accounts 1.68% 2.81% 3,892 1.71% 2.44%
Money market deposit accounts 2.56% 2.42% 4,368 2.71% 2.74%
Non-interest bearing accounts -% 0.59% 876 -% 0.55%
-------- -------- -------- ------- ---------
Total demand deposits 3.81% 23.66% 27,871 3.45% 17.49%
-------- -------- -------- ------- ---------
Certificates of deposit 5.71% 76.34% 131,438 5.81% 82.51%
-------- -------- -------- ------- ---------
Total deposits 5.26% 100.00% $ 159,309 5.40% 100.00%
======== ======== ======== ======= =========
</TABLE>
63
<PAGE>
The following table presents the maturities by rates paid on all
certificates of deposit as of June 30, 1998.
<TABLE>
<CAPTION>
Amount Due During the Year Ending June 30,
---------------------------------------------------------
2003 and
1999 2000 2001 2002 thereafter Total
------ ------ ------ ------ ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit
2.00% to 3.99% $ 2,411 $ -- $ -- $ -- $ -- $ 2,411
4.00% to 5.99% 61,650 20,166 4,327 113 5 86,261
6.00% to 7.99% 14,188 6,514 845 100 182 21,829
8.00% to 9.99% 165 650 203 -- -- 1,018
------- ------- ------ ----- -------- --------
Total $78,414 $27,330 $5,375 $ 213 $ 187 $111,519
======= ======= ====== ===== ======== ========
</TABLE>
As of June 30, 1998, the aggregate amount of time certificates of deposit
in amounts greater than or equal to $100,000 outstanding was approximately $18.1
million, representing 16.26% of all certificates of deposit on such date.
Management believes that most of these deposits are held by long-time, local
customers of the Bank. The Bank also holds deposits of state and local
governments which are subject to rebidding from time to time and to
securitization requirements. The following table presents the maturity of these
time certificates of deposit greater than or equal to $100,000 at such date.
<TABLE>
<CAPTION>
At
June 30, 1998
--------------
(In Thousands)
<S> <C>
3 Months or less $ 2,097
Over 3 months through 6 months 2,931
Over 6 months through 12 months 7,185
Over 12 months 5,921
-------
Total $18,134
=======
</TABLE>
BORROWINGS. The Bank's principal source of long-term borrowings are
advances from the FHLB of Atlanta. The FHLB system functions in a reserve credit
capacity for savings institutions. As a member, the Bank is required to own
capital stock in the FHLB of Atlanta and is authorized to apply for advances
from the FHLB of Atlanta on the security of that stock and a floating lien on
certain of its real estate secured loans and other assets. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness. The Bank had $13.0 million in advances from the
FHLB of Atlanta on June 30, 1998 of which $9.0 million was due by June 30, 1999
and the remaining $4.0 million due by June 30, 2000.
SUBSIDIARIES
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<PAGE>
As a federally-chartered savings bank, the Bank is permitted by OTS
regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
bank may engage in directly.
Carolina Service Corporation, a wholly-owned subsidiary of the Bank which
had no material earnings, was liquidated on September 9, 1998.
PROPERTIES
The following table sets forth the location of the Bank's headquarters
office in Salisbury, and branch offices in Statesville and Rockwell, North
Carolina, as well as certain other real property owned or leased by the Bank and
information relating to such real estate as of June 30, 1998:
<TABLE>
<CAPTION>
Net Book
Value of
Property or Owned or
Improvements Leased
------------ --------
<S> <C> <C>
401 West Innes Street $353,697 Owned
Salisbury, North Carolina 28144-4232
427 West Innes Street 176,287 Owned
Salisbury, North Carolina 28144
307 North Center Street 414,641 Owned
Statesville, North Carolina 28677
106 West Main Street 38,487 Owned
Rockwell, North Carolina 28138
330 South Main Street $ 14,167 Leased
Salisbury, North Carolina 28144
</TABLE>
The total net book value of the Bank's furniture, fixtures and equipment at
June 30, 1998 was $211,273. The properties are considered by the Bank's
management to be in good condition.
LEGAL PROCEEDINGS
From time to time, the Bank is a party to legal proceedings which arise in
the ordinary course of its business. Most commonly, such proceedings are
commenced by the Bank to enforce obligations owed to it. From time to time,
claims are asserted against the Bank directly or as defenses and counterclaims
in actions filed by the Bank. At this time, the Bank is not a party to any
legal proceeding which is expected to have a material effect on its financial
condition or results of operations.
COMPETITION
The Bank has operated in the Salisbury community for more than 91 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
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<PAGE>
primary market area, including large financial institutions which have greater
financial and marketing resources available to them. As of June 30, 1997, in
Rowan County, where the Bank's Salisbury and Rockwell offices are located, there
were 37 commercial bank offices, two thrift institution offices and three credit
union offices, and in Iredell County, where the Bank's Statesville office is
located, there were 34 commercial bank offices, one thrift institution office
and one credit union office. Based upon 1997 FDIC comparative data, the Bank had
approximately 11.7% and approximately 10.4% of the deposits in Salisbury and
Rowan County, respectively, and approximately 8.0% and approximately 4.7% of the
deposits in Statesville and Iredell 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. While the Bank's market share of deposits has decreased in recent
years, its deposit base has grown principally due to economic growth in the
Bank's market area. The ability of the Bank to attract and retain savings
deposits depends on its ability to generally provide a rate of return, liquidity
and risk comparable to that offered by competing investment opportunities.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. The
Bank competes for loans primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions. See "RISK FACTORS --
Competition."
EMPLOYEES
As of June 30, 1998, the Bank had 40 full-time employees and two part-time
employees. Employees are not represented by any union or collective bargaining
group, and the Bank considers its employee relations to be good.
In connection with the Conversion, the Bank has adopted the ESOP, which
will provide benefits to employees of the Bank. See "MANAGEMENT OF THE BANK --
Employee Stock Ownership Plan." Also, the Boards of Directors of the Company
and the Bank are expected to adopt, and stockholders of the Company will be
asked to approve, a MRP and a 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."
Certain employees of the Bank participate in other benefit plans. See
"MANAGEMENT OF THE BANK -- Bonus Compensation", "-- Defined Benefit Pension
Plan", "-- 401K Retirement Plan", "-- Non-Qualified Deferred Compensation Plan
for Officers" and "-- Non-Qualified Pension Restoration Plan".
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
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<PAGE>
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 for losses on qualifying real property loans to exceed 6% of qualifying
real property loans at the end of the year. Moreover, the current year addition
to the reserve for losses on qualifying loans, when added to the experience
method deduction for nonqualifying loans, could not exceed the amount by which
12% of total deposits and withdrawable accounts exceeded the sum of surplus,
undivided profits and reserves at the beginning of the year. The experience
method amount 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 certain
agencies or instrumentalities 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 1995, 1996, and 1997.
Bad debt reserve balances as of the close of the last taxable year
beginning before January 1, 1988 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
of stock or in partial or complete liquidation 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 distribution plus the income tax resulting from
simultaneously recognizing the distribution as an item of taxable income
increased by the amount of income tax imposed on the inclusion. Dividends not in
excess of earnings and profits accumulated since December 31, 1951 will not
require inclusion of part or all of the bad debt reserve in taxable income. The
Bank has accumulated earnings and profits since December 31, 1951 and has an
excess bad debt reserve. Distributions in excess of current and accumulated
earnings and profits will increase taxable income. Net retained earnings at June
30, 1998 includes approximately $3.7 million for which no provision for federal
income tax has been made.
Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period. At June 30, 1998, the Bank's
post-1987 excess reserves amounted to approximately $471,000. A special
provision suspends recapture of post-1987 excess reserves for up to two years
if, during those years, the institution satisfies a "residential loan
requirement." This requirement will be met if the principal amount of the
institution's residential loans originated during the year exceeds a base year
amount, which is determined by reference to the average of the institution's
residential loans originated during the six most recent taxable years beginning
on or before December 31, 1995. The Bank did not meet the residential loan
requirement for its 1996 tax year and recaptured one-sixth of the excess
reserves. However, notwithstanding this special provision, recapture must begin
no later than the first taxable year beginning after December 31, 1997.
67
<PAGE>
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
for reasonable bad debt reserves over the amount that would have been allowed
had the institution maintained a reserve for all tax years 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
current earnings 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 were audited by the IRS for the 1994
tax year. There were no findings.
STATE AND LOCAL TAXATION
Under North Carolina law, the corporate income tax for tax years beginning
in 1997 is 7.5% of federal taxable income as computed under the Code, subject to
certain prescribed adjustments. Prior to 1997, the corporate income tax rate
was 7.75%. 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% for tax years
beginning in 1998, 7.0% in 1999, and 6.9% thereafter.
SUPERVISION AND REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its chartering agency, and the FDIC, as the deposit insurer. The
Bank is a member of the FHLB System. The Bank's deposit accounts are insured up
to applicable limits by the SAIF managed by the FDIC. The Bank must file reports
with the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to test
the Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether by
the OTS, the FDIC or the Congress, could have a material adverse impact on the
Company, the Bank and their operations. Assuming that the holding company form
of organization is utilized, the Company, as a savings and loan holding company,
will also be required to file certain reports with, and otherwise comply with
the rules and regulations of the OTS and of the SEC under the federal securities
laws.
Any change in the regulatory structure or the applicable statutes or
regulations, whether by the OTS, the FDIC or the Congress, could have a material
impact on the Company, the Bank, their operations or the Bank's Conversion.
Congress is expected to consider in 1998 the elimination of the federal thrift
charter and abolishment
68
<PAGE>
of the OTS. The results of such consideration, including possible enactment of
legislation is uncertain. Therefore, the Bank is unable to determine the extent
to which the results of consideration or possible legislation, if enacted, would
affect its business. See "Risk Factors--Regulatory Oversight".
Certain of the regulatory requirements applicable to the Bank and to the
Company are referred to below or elsewhere herein. The description of statutory
provisions and regulations applicable to savings associations set forth in this
Prospectus do not purport to be complete descriptions of such statutes and
regulations and their effects on the Bank and the Company and is qualified in
its entirety by reference to such statutes and regulations.
FEDERAL REGULATION OF THE BANK
Business Activities. The activities of federal savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDI Act") and the regulations
issued by the agencies to implement these statutes. These laws and regulations
delineate the nature and extent of the activities in which federal associations
may engage. In particular, many types of lending authority for federal
associations, e.g., commercial, nonresidential real property loans and consumer
loans, are limited to a specified percentage of the institution's capital or
assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limit on loans-to-one borrower. Generally, this
limit is 15% of the Bank's unimpaired capital and surplus, plus an additional
10% of unimpaired capital and surplus, if such loan is secured by readily-
marketable collateral, which is defined to include certain financial instruments
and bullion. At June 30, 1998, the Bank's general limit on loans-to-one borrower
was $2.50 million. At June 30, 1998, the Bank's largest aggregate amount of
loans-to-one borrower consisted of a $1.45 million commercial loan.
QTL Test. The HOLA requires savings institutions to meet a QTL test. Under
the QTL test, a savings association is required to maintain at least 65% of its
"portfolio assets" (total assets less: (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12-
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of June 30, 1998,
the Bank maintained 97.38% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered as "qualified thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in regulatory capital requirements before and after a proposed
capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice to, but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters. Any additional capital distributions would require prior OTS
approval. In the event the Bank's capital fell below its capital requirements or
the OTS notified it that it was in need of more than normal supervision, the
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
69
<PAGE>
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus short-
term borrowings. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Bank's average liquidity ratio for the quarter ended
June 30, 1998 was 20.16%, which exceeded the applicable requirements. The Bank
has never been subject to monetary penalties for failure to meet its liquidity
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Capital Resources and Liquidity."
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is based upon the savings institution's total
assets, including consolidated subsidiaries, as reported in the Bank's latest
quarterly Thrift Financial Report. Because the Bank has recently converted from
a state-chartered savings bank to a federally chartered savings bank no
assessment has been paid to the OTS as of June 30, 1998.
Branching. OTS regulations permit federally-chartered savings associations
to branch nationwide under certain conditions. Generally, federal savings
associations may establish interstate networks and geographically diversify
their loan portfolios and lines of business. The OTS authority preempts any
state law purporting to regulate branching by federal savings associations.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries that the Company may establish) is
limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A
restricts the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B generally requires that certain transactions with
affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against all "institution-affiliated parties," including stockholders, and any
attorneys, appraisers and accountants who knowingly or recklessly participate in
wrongful action likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a capital directive or
cease and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal and state law also establishes criminal penalties for
certain violations.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. The Guidelines address internal controls and information systems;
internal audit system; credit underwriting; loan documentation; interest rate
risk exposure; asset growth;
70
<PAGE>
asset quality; earnings; and compensation, fees and benefits. If the appropriate
federal banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the FDI Act. The final regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain non-cumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs") and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions. See "--Prompt
Corrective Regulatory Action."
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital currently
include cumulative preferred stock, long-term perpetual preferred stock,
mandatory convertible securities, subordinated debt and intermediate preferred
stock and, within specified limits, the allowance for loan and lease losses.
Overall, the amount of supplementary capital included as part of total capital
cannot exceed 100% of core capital.
The OTS has adopted an interest rate risk component into its regulatory
capital requirements; however, the OTS has postponed indefinitely any adjustment
to capital which would be required by such interest rate risk component. The
OTS interest rate risk rule as written would also adjust the risk-weighting for
certain mortgage derivative securities. Under the rule as written, savings
associations with "above normal" interest rate risk exposure would be subject to
a deduction from total capital for purposes of calculating their risk-based
capital requirements. A savings association's interest rate risk would be
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the Bank's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% would be required to deduct an
interest rate component in calculating its total risk-based capital. The
interest rate risk component would be an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the Bank's assets. That dollar
amount would be deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule as written,
there is a two quarter lag between the reporting date of an institution's
financial data and the effective date for the new capital requirement based on
that data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% would be not subject to the interest
rate risk component, unless the OTS determined otherwise. The rule also
provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. No prediction can be made
when such interest rate risk component requirement will be implemented, or if it
ever will be implemented.
At June 30, 1998, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. See "Historical and Pro Forma Capital
Compliance" for a table which sets forth in terms of dollars and percentages the
OTS tangible, leverage and risk-based capital requirements, the Bank's
historical amounts and percentages at
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<PAGE>
June 30, 1998, and pro forma amounts and percentages based upon the issuance of
the shares within the Estimated Price Range and assuming that a portion of the
net proceeds are retained by the Company.
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has a total risk-based capital of less
than 8.0% or a leverage ratio or a Tier 1 capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has a total
risk-based capital less than 6.0%, a Tier 1 risk-based capital ratio of less
than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the Banking regulator is
required to appoint a receiver or conservator for an institution that is
critically undercapitalized. The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
association receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. Assessment rates for SAIF member institutions currently range from 0
basis points to 27 basis points. The FDIC is authorized to raise the assessment
rates in certain circumstances. The FDIC has exercised this authority several
times in the past and may raise insurance premiums in the future. If such
action is taken by the FDIC, it could have an adverse effect on the earnings of
the Bank. The Bank's assessment rate for the years ended September 30, 1997,
1996 and 1995 was .093%, .26% and .23% of assessable deposits.
Under the FDIC Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and
hold shares of capital stock in the FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Bank was in compliance
with this requirement with an
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<PAGE>
investment in FHLB stock at June 30, 1998 of $1.8 million. FHLB advances must be
secured by specified types of collateral and all long-term advances may only be
obtained for the purpose of providing funds for residential housing finance. At
June 30, 1998, the Bank had $13.0 million in FHLB advances.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the fiscal years ended September 30, 1997, 1996
and 1995, cash dividends from the FHLB to the Bank amounted to $132,207,
$132,389 and $123,468, respectively. If dividends were reduced, the Bank's net
interest income would likely also be reduced. Further, there can be no assurance
that the impact of recent or future legislation on the FHLBs will not also cause
a decrease in the value of the FHLB stock held by the Bank.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$47.8 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $47.8 million, the
reserve requirement is $1.4 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
REGULATION OF THE COMPANY
The Company, if utilized, will be a non-diversified unitary savings and
loan holding company within the meaning of the HOLA. As such, the Company will
be required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. See "--
Federal Savings Institution Regulation--QTL Test" for a discussion of the QTL
requirements. Upon any non-supervisory acquisition by the Company of another
savings association, the Company would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary)
and would be subject to extensive limitations on the types of business
activities in which it could engage. The HOLA limits the activities of a
multiple savings and loan holding company and its non-insured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act, as amended (the "BHC
Act"), subject to the prior approval of the OTS, and to other activities
authorized by OTS regulation. Previously proposed legislation would have treated
all savings and loan holding companies as bank holding companies and limit the
activities of such companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution, or holding company thereof,
without prior written approval of the OTS; from acquiring or retaining, with
certain exceptions, more than
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5% of a non-subsidiary holding company or savings association. The HOLA also
prohibits a savings and loan holding company from acquiring more than 5% of a
company engaged in activities other than those authorized for savings and loan
holding companies by the HOLA, or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies, and (ii) the acquisition of
a savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant to
the Conversion. Upon completion of the Conversion, the Company's Common Stock
will be registered with the SEC under the Exchange Act. The Company will then
be subject to the information, proxy solicitation, insider trading restrictions
and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion 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
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Company meets the current public information requirements of Rule 144
under the Securities Act, each affiliate of the Company who complies with the
other conditions of Rule 144 (including those that require the affiliate's sale
to be aggregated with those of certain other persons) would be able to sell in
the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (i) 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.
MANAGEMENT OF THE COMPANY
The Board of Directors of the Company currently consists of seven
directors: Malcolm B. Blankenship, Jr., Ronald E. Bostian, James W. Duke, Harold
C. Earnhardt, K. V. Epting, Jr., Gordon P. Hurley, and Bobby A. Lomax. 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.
The executive officers of the Company who serve at the discretion of the
Board of Directors of the Company, are as follows:
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<PAGE>
<TABLE>
<CAPTION>
AGE AT POSITION HELD
NAME JUNE 30, 1998 WITH THE COMPANY
---- ------------- ----------------
<S> <C> <C>
Ronald E. Bostian 60 President and Chief Executive
Officer
Dianne E. Hawkins 35 Treasurer and Controller
Ralphelle S. Butler 50 Secretary
</TABLE>
Biographical information with respect to Mr. Bostian and Mrs. Hawkins 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 Mr. Bostian.
MANAGEMENT OF THE BANK
DIRECTORS
The direction and control of the Bank, as a federally-charted savings bank,
is 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 shall equal at least nine, so
that approximately one-third of the directors would be elected each year for
three-year terms. Upon consummation of the Conversion, the Company will own all
of the issued and outstanding shares of capital stock of the Bank, and the
Company will elect the directors of the Bank. The Company now plans to nominate
and re-elect all members of the Bank's existing board of directors when their
existing terms expire. The following table sets forth certain information with
respect to the persons who currently serve as members of the Board of Directors
of the Bank.
<TABLE>
<CAPTION>
AGE AT
JUNE 30, PRINCIPAL OCCUPATION DIRECTOR
NAME 1998 DURING LAST FIVE YEARS SINCE
- ---- -------- ---------------------- --------
<S> <C> <C> <C>
Malcolm B. Blankenship, Jr. 51 Law Partner - Kluttz, Reamer, Blankenship, 1991
Hayes & Randolph, L.L.P.
Ronald E. Bostian 60 President and Chief Executive Officer of 1984
Citizens Bank
James W. Duke 69 Manufacturers Representative for M.W. Window 1979
Corp.
Harold C. Earnhardt 66 Retired General Officer of the North Carolina 1984
Air National Guard
K. V. Epting, Jr. 68 Retired Executive Director of the Salisbury-Rowan
Chamber of Commere 1992
Gordon P. Hurley 60 President, Hurley Foundation 1980
Bobby A. Lomax 70 Dentist 1977
</TABLE>
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<PAGE>
BOARD MEETINGS AND COMMITTEES
The Bank's Board of Directors has regular monthly meetings, and held 12
regular meetings and one special meeting in the fiscal year ended September 30,
1997. The Board has also established three committees to whom certain
responsibilities have been delegated - an Asset/Liability Committee, an Audit
Committee, and a Nominating Committee. No director attended fewer than 75% of
the total number of Board meetings and meetings of Board committees on which he
served during the year ended September 30, 1997.
The Asset/Liability Committee is composed of all Board members and met 11
times during the fiscal year ended September 30, 1997.
The Audit Committee is composed of all members of the Board of Directors,
except Mr. Bostian. The Audit Committee is responsible for meeting with and
retaining independent auditors, overseeing the adequacy of internal controls,
ensuring compliance with the Bank's policies and procedures and with generally
accepted accounting principles. The Audit Committee met four times during the
fiscal year ended September 30, 1997.
The Nominating Committee is composed of Messrs. Duke, Earnhardt, and Lomax
and met one time during the fiscal year ended September 30, 1997.
DIRECTORS' FEES
For their service on the Bank's Board of Directors, each member of the
Bank's Board of Directors, including Mr. Bostian, receives a monthly retainer of
$700, $400 for each Board meeting attended, and $200 for each committee meeting
attended if the committee meeting is scheduled on a day different from the
regularly-scheduled Board meeting.
DIRECTORS DEFERRED COMPENSATION PLAN
The Bank maintains a non-qualified deferred compensation plan for all of
its directors. Under the plan, each director may elect to defer a portion or
all of his director's fees to the plan each year. Directors are fully vested in
all amounts they contribute to the plan.
Benefits under the plan are payable in the event of the director's
retirement, death, disability, or termination of service, in a lump sum.
Installment payments are available to a retiring director if so elected by the
director at the time of his initial deferral election. If the director dies
before receiving all of his accrued benefit under the plan, his beneficiary will
receive the remaining benefits due him under the plan in a lump sum.
The Bank has purchased life insurance on the lives of its directors to help
it meet its obligations under the plan. Effective June 30, 1998, the Bank
established a rabbi trust for each director to hold his accrued benefits under
the plan. The Bank does not anticipate any future expenses with respect to life
insurance associated with the deferred compensation plan for directors.
EXECUTIVE OFFICERS
The Bank has three executive officers. The following table sets forth
certain information with respect to such executive officers:
<TABLE>
<CAPTION>
AGE ON POSITIONS AND OCCUPATIONS EMPLOYED BY
NAME JUNE 30, 1998 DURING LAST FIVE YEARS THE BANK SINCE
- ----- ------------- ------------------------------- --------------
<S> <C> <C> <C>
Ronald E. Bostian 60 Chairman, President and Chief 1990
Executive Officer
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Jeffrey C. Chisholm 42 Senior Vice President and Chief 1991
Lending Officer
Dianne E. Hawkins 35 Vice President, Treasurer, and 1991
Controller
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended September 30, 1997
certain information as to the cash compensation earned by the chief executive
officer of the Bank. No other executive officers of the Bank received cash
compensation exceeding $100,000 for services in all capacities.
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION /1/ COMPENSATION
------------------ ------ ----- ---------------- ------------
<S> <C> <C> <C> <C>
Ronald E. Bostian $162,429/2/ $10,000 --- ---
President, Chief Executive Officer and
Director
</TABLE>
____________________
/1/ Under the "Other Annual Compensation" category, perquisites for the fiscal
year ended September 30, 1997 did not exceed the lesser of $50,000, or 10%
of salary and bonus.
/2/ Includes $14,900 in directors' fees paid to Mr. Bostian in the fiscal year
ended September 30, 1997.
The Board of Directors of the Bank does not have a compensation committee.
The Bank's full Board of Directors determines the compensation of the executive
officers. The salaries of each of the executive officers is determined based
upon the executive officer's contributions to the Bank's overall profitability,
maintenance of regulatory compliance standards, professional leadership, and
management effectiveness in meeting the needs of day-to-day operations. The
Board of Directors also compares the compensation of the Bank's executive
officers with compensation paid to executives of comparable financial
institutions in North Carolina and executives of other businesses in the Bank's
market area. Mr. Bostian 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
All employees, except Mr. Bostian, receive annual discretionary holiday
bonuses, which during fiscal year 1997 totaled $15,600 in the aggregate. The
Bank anticipates that discretionary bonuses will continue to be paid to its
employees in the future. However, as is the case with the Bank's compensation
arrangements in general, the Bank's bonus compensation is subject to regulatory
oversight and, therefore, could be changed in the future in response to
regulatory requirements or otherwise.
DEFINED BENEFIT PENSION PLAN
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<PAGE>
Prior to July 1998, the Bank maintained a non-contributory defined benefit
pension plan (the "Pension Plan") for the benefit of all of its employees who
had completed one (1) year of service and who were at least twenty-one (21)
years of age. Under the Pension Plan, the Bank annually contributed an
actuarially determined amount to provide a benefit for each participant at
retirement. The Board of Directors of the Bank terminated the Pension Plan on
March 31, 1998, effective July 31, 1998. At the time the Pension Plan was
terminated it was fully funded. The benefits accrued by employees under the
plan have been transferred, at the election of each employee, to the Bank's
401(k) retirement plan.
NON-QUALIFIED PENSION RESTORATION PLAN
The Bank implemented this plan to compensate for the lost accrued benefits
by certain officers in the Pension Plan because of deferrals to the non-
qualified deferred compensation plan for officers. The effect was an increase
in the Bank's liability for contributions due to the Pension Restoration Plan
and a decrease in the Bank's liability under the Pension Plan. The Board of
Directors of the Bank terminated the Non-Qualified Pension Restoration Plan on
March 31, 1998, effective July 31, 1998.
401(K) RETIREMENT PLAN
The Bank implemented a contributory savings plan for its employees which
meets the requirements of Section 401(k) of the Code, effective July 1, 1998.
All employees who have completed one month of service, who are at least 21 years
of age and who will work at least 1,050 hours annually may elect to contribute a
percentage of their compensation to the plan each year, subject to certain
maximums imposed by federal law. The Bank will match 50% of each participant's
contribution, up to a maximum employer contribution of 3% of the participant's
compensation. The Bank also intends to make discretionary contributions to the
plan, expected to be equal to approximately 3% of each participant's
compensation each year.
Participants will be fully vested in amounts they contribute to the plan.
Participants will be fully vested in amounts contributed to the plan on their
behalf by the Bank as employer matching contributions and as profit sharing
contributions after one year of service.
Benefits under the plan will be payable in the event of the participant's
retirement, death, disability, or termination of employment. Normal retirement
age under the plan is 65 years of age. The plan will not have an early
retirement provision.
The 401(k) plan provides that one of the funds which an employee may choose
as an investment vehicle for his or her account is a fund consisting of the
Common Stock of the Company (the "Employer Stock Fund"). In the Conversion,
each employee who has subscription rights by virtue of his or her deposits with
the Bank will be permitted to exercise those subscription rights through the use
of money in his or her 401(k) plan account. The plan will then submit
subscription forms on behalf of the employee who elects to invest in the
Employer Stock Fund. All shares purchased as a result of those subscription
forms will be held by the 401(k) plan but will be voted by the employee.
Whether or not a particular employee's subscription is satisfied will depend
upon whether that employee qualifies for one of the priority groups with
subscription rights.
DEFERRED COMPENSATION PLAN FOR OFFICERS
The Bank maintains a non-qualified deferred compensation plan for certain
officers of the Bank. Eligible officers selected by the Board of Directors may
elect to contribute a percentage of their compensation to the plan each year.
The Bank may make supplemental contributions to the plan as well, in amounts
determined by the Board of Directors each year. To date, the Bank has made no
such supplemental contributions. Participants are fully
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<PAGE>
vested in all amounts contributed to the plan by them or on their behalf.
Currently four management officers participate in the plan.
Benefits under the plan are payable in the event of the participant's
retirement, death, disability, or termination of employment, in a lump sum or in
installments if so elected by the participant at the time of his initial salary
reduction election. If the participant dies before receiving all of his accrued
benefit under the plan, his beneficiary will receive the remaining benefits due
him under the plan. Normal retirement age under the plan is 65 years of age.
The Bank has purchased life insurance on the lives of plan participants to
help it meet its obligations under the plan. Effective June 30, 1998, the Bank
established a rabbi trust for each participant to hold the participant's accrued
benefit under the plan. The Bank does not anticipate any future expenses with
respect to life insurance associated with the deferred compensation plan for
officers.
OTHER BENEFITS
The Bank provides its employees with group medical, dental, term life and
disability insurance. Employees are provided with vacation and sick leave.
EMPLOYMENT AGREEMENT
In connection with the Conversion, the Bank will enter into an employment
agreement with Ronald E. Bostian, 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 $147,528 and for an initial term of employment of three years.
Commencing on the first anniversary date and continuing on each anniversary date
thereafter, following a performance evaluation of the employee, each agreement
may be extended for an additional year so that the remaining term shall be three
years, unless written notice of non-renewal is given by the Board of Directors.
The agreements also provide that the base salary shall be reviewed by the Board
of Directors not less often than annually. In addition, the employment
agreement provides for possible profitability and discretionary bonuses and
participation in all other pension, profit-sharing or retirement plans
maintained by the Bank or the Company for employees of the Bank, as well as
fringe benefits normally associated with the employee's office. The employment
agreement provides that Mr. Bostian 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 the employee. In the event of a change in
control (as defined below) in lieu of continuing to be entitled to receive a
profitability bonus, Mr. Bostian'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.
The employment agreement provides that in the event of a change in control
of the Bank or the Company, the acquiror shall be bound by the terms of the
employment agreement for a period of three years beginning on the date of the
change in control and during such time the nature of Mr. Bostian's compensation,
duties or benefits cannot be diminished except as set forth in the agreement.
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
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<PAGE>
change in control, the remaining payments to be made under the agreement 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
"RESTRICTIONS ON ACQUISITION OF THE COMPANY -- Anti-Takeover Effect of the
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. The Severance Plan
provides that in the event there is a "change in control" (as defined in the
Severance Plan) of the Bank or the Company and (i) the Bank or any successor of
the Bank terminates the employment of any full time employee of the Bank in
connection with, or within 24 months after the change in control, other than for
"cause" (as defined in the Severance Plan), or (ii) an employee terminates his
or her employment with the Bank or any successor following a decrease in the
level of such employee's annual base salary rate or a transfer of such employee
to a location more than 40 miles distant from the employee's primary work
location within 24 months after a change in control, the employee shall be
entitled to a severance benefit equal to the greater of (a) an amount equal to
two weeks' salary at the employee's existing salary rate multiplied times the
employee's number of complete years of service as a Bank employee or (b) the
amount of one month's salary at the employee's salary rate at the time of
termination. Any officer of the Bank who, at the time of a "change in
control,"is a party to an employment agreement is not covered by the Severance
Plan.
EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has established the ESOP for its eligible employees. The ESOP
will become effective upon the Conversion. Employees with one year of service
with the Bank who have attained age 21 are eligible to participate. As part of
the Conversion, the ESOP intends to borrow funds from the Company and use the
funds to purchase up to 8% of the shares of Common Stock to be issued in the
Conversion, estimated to be between 115,600 and 156,400 shares assuming the
issuance of between 1,445,000 and 1,955,000 shares. Shares sold above the
maximum of the Estimated Valuation Range (1,955,000 shares) may be sold to the
ESOP to fill its subscription or the ESOP may purchase some or all of the shares
covered by its subscription after the Conversion in the open market.
Collateral for the Company's loan to the ESOP will be the Common Stock
purchased by the ESOP. It is expected that the loan will be repaid principally
from the Bank's discretionary contributions to the ESOP within ten years.
Regular cash dividends, if any, paid on shares held by the ESOP may also be used
to reduce the loan. It is anticipated that the interest rate for the loan will
be a commercially reasonable rate at the time of the loan inception. The loan
will not be guaranteed by the Bank. Shares purchased by the ESOP and pledged as
security for the loan will be held in a suspense account for allocation among
participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of relative compensation in the year of
allocation. Benefits will vest in full upon five years of service with credit
given for years of service prior to the Conversion. Benefits are payable upon
death or disability. The Bank's contributions to the ESOP are not fixed, so
benefits payable and corresponding expenses under the ESOP cannot be determined
although benefits payable and corresponding expenses have been estimated in
preparing the pro forma computations set forth in this Prospectus. See "PRO
FORMA DATA."
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<PAGE>
In connection with the establishment of the ESOP, the Company will
establish a committee of the Board of Directors to administer the ESOP. Trustees
for the ESOP will also be appointed prior to the Conversion. The ESOP committee
may instruct the trustees regarding investment of funds contributed to the ESOP.
Participating employees shall instruct the trustees as to the voting of all
shares allocated to their respective accounts and held in the ESOP. The
unallocated shares held in the suspense account, and all allocated shares for
which voting instructions are not received, will be voted by the trustees in
their discretion subject to the provisions of ERISA.
The ESOP may be considered an "anti-takeover" device since the ESOP may
become the owner of a sufficient percentage of the total outstanding Common
Stock of the Company that the vote or decision whether to tender shares of the
ESOP may be used as a defense in a contested takeover. See "RESTRICTIONS ON
ACQUISITION OF THE COMPANY -- Anti-Takeover Effect of Employment Agreement and
Benefit Plans."
PROPOSED MANAGEMENT RECOGNITION PLAN
The Boards of Directors of the Company and the Bank intend to adopt the
MRP, subject to approval of the stockholders of the Company at a meeting to be
held no sooner than 12 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 recognize past service and
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 MRP will be administered and interpreted by a committee of the board of
directors of the Bank that is composed solely of two or more "non-employee
directors", as defined by the Exchange Act. The board of directors of the Bank
will appoint the trustees of the trust established pursuant to the MRP (the "MRP
Trust"). The trustees will have the responsibility to invest all funds
contributed by the Bank to the 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.
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock which will vest over a period of time determined by the
committee. A recipient will be entitled to all voting and other stockholder
rights with respect to shares which have been awarded under the MRP. However,
until such shares have vested, they will be held in the MRP Trust. Such
unvested shares may not be sold, pledged or otherwise disposed of. In addition,
any cash dividends or stock dividends declared with respect to unvested share
awards will be held by the MRP Trust for the benefit of the recipients and such
dividends, including any interest thereon, will be paid out proportionately by
the MRP Trust to the recipients thereof as soon as practicable after the share
awards become vested. The MRP will provide that cash held by the MRP Trust
pursuant to receipt of dividends, including a special dividend or return of
capital, on the Common Stock held by the MRP Trust and unallocated to
participants may be used to purchase additional shares of Common Stock.
Under the terms of the MRP, if a recipient terminates employment for
reasons other than death or disability, the recipient will forfeit all rights to
the allocated shares which have not yet vested. All shares subject to an award
held by a recipient whose employment with or service to the Company, the Bank or
any subsidiary terminates due to death or disability, as defined in the MRP,
shall be vested as of the recipient's last day of
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employment with or service to the Company, the Bank or any subsidiary and shall
be distributed as soon as practicable thereafter. All shares subject to an award
held by a recipient also shall be vested in the event a recipient ceases to be
an employee or a director, as applicable, following a change in control of the
Company, as defined in the MRP.
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 when the stock grants vest.
Assuming the issuance of 1,955,000 shares in the Conversion and receipt of
stockholder approval, 78,200 shares would be issued pursuant to the MRP and
allocated as follows:
<TABLE>
<CAPTION>
ESTIMATED NUMBER PERCENTAGE OF TOTAL
OF RESTRICTED SHARES RESTRICTED SHARES
RECIPIENT TITLE TO BE GRANT ISSUED
-------- ------ ----------- ------
<S> <C> <C> <C>
Malcolm B. Blankenship, Jr. Director 7,820 10.0%
James W. Duke Director 7,820 10.0%
Harold C. Earnhardt Vice Chairman 7,820 10.0%
K. V. Epting, Jr. Director 7,820 10.0%
Gordon P. Hurley Director 3,910 5.0%
Bobby A. Lomax Director 7,820 10.0%
Ronald E. Bostian Chairman, President, and 15,640 20.0%
Chief Executive Officer
Jeffrey C. Chisholm Senior Vice President and 9,775 12.5%
Chief Lending Officer
Dianne E. Hawkins Vice President, Treasurer, 9,775 12.5%
and Controller
Total 78,200 100.0%
</TABLE>
It is currently anticipated that 20% of the aggregate number of shares
granted to directors, officers and employees will be vested on the date of grant
promptly after shareholder approval of the MRP and that 20% of the aggregate
number of shares granted will vest on each of the next four annual anniversary
dates thereafter. The committee, in its sole and absolute discretion, may
provide for an accelerated vesting schedule for directors, officers and
employees who are eligible for retirement before the expiration of the
anticipated four-year vesting schedule.
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 12 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
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exercise of the stock options granted under the Option Plan. Assuming the
issuance of between 1,445,000 and 1,955,000 shares in the Conversion, an
aggregate of between 144,500 and 195,500 shares of Common Stock would be
reserved for issuance. However, some or all of the shares issued upon the
exercise of options granted under the 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
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.
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 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.
All options granted to participants under the Option Plan shall become
vested and exercisable at the rate determined by the committee when making an
award. Unvested options may not vest after a participant's employment with the
Company, the Bank or any subsidiary is terminated for any reason other than the
participant's death, disability or retirement. Unless the committee shall
specifically state otherwise at the time an option is granted, all options
granted to participants shall become vested and exercisable in full on the date
an optionee terminates his employment with or service to the Company, the Bank
or any subsidiary because of his death, disability or retirement. In addition,
all stock options will become vested and exercisable in full in the event that
the optionee ceases to be an executive officer, employee or director of the Bank
or the Company for any reason following a change in control of the Company, as
defined in the Option Plan. Options granted under the Option Plan will have a
term of ten years.
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Payment for shares purchased upon the exercise of options may be made
either in cash, by check, bank draft or money order or, if permitted by the
committee, by delivering shares of Common Stock (including shares acquired
pursuant to the exercise of an option) with a fair market value equal to the
total option price, or a combination of the foregoing. To the extent an
optionee already owns shares of Common Stock prior to the exercise of his or her
option, such shares could be used (if permitted by the committee) as payment for
the exercise price of the option. If the fair market value of a share of Common
Stock at the time of exercise is greater than the exercise price per share, this
feature would enable the optionee to acquire a number of shares of Common Stock
upon exercise of the option which is greater than the number of shares delivered
as payment for the exercise price. Because options may be exercised in part
from time to time, the ability to deliver Common Stock as payment of the
exercise price could enable the optionee to turn a relatively small number of
shares into a large number of shares.
It is expected that options granted under the Option Plan will be granted
in tandem with stock appreciation rights, pursuant to which optionees will have
the right to surrender exercisable options in exchange for payment by the
Company of an amount equal to the excess of the market value of shares of Common
Stock subject to the surrendered options over the exercise price of the
surrendered options. In the discretion of the committee, this payment may be
made in cash or in shares of Common Stock or in some combination of cash and
Common Stock. Stock appreciation rights shall terminate upon the exercise of
the options to which they are attached. Stock appreciation rights will be
subject to the same vesting and termination provisions as are applicable to the
stock options to which they are attached.
The Option Plan will provide that the Company's Board of Directors shall
have the discretionary authority to authorize cash payments to the holders of
unexercised options, both vested and unvested, equal to the amount of dividends
which would have been paid on shares subject to options if the options had been
exercised. No such payment may be made in connection with dividends or other
distributions which result in a reduction in the option exercise price. If an
optionee receives such a cash payment with respect to any unvested option, and
if such option is later forfeited, the optionee must repay any cash payment made
with respect to the forfeited option.
It is currently anticipated that 25% of the aggregate number of options
granted to executive officers and employees of the Company and the Bank will be
vested and exercisable on the date of grant and 25% of the aggregate number of
such options granted will vest and become exercisable on each of the next three
annual anniversary dates thereafter. It is expected that nonqualified stock
options granted to the nonemployee directors of the Company and the Bank will be
immediately vested and nonforfeitable.
Assuming the issuance of 1,955,000 shares in the Conversion and approval of
the Option Plan by the stockholders of the Company, the Board of Directors of
the Company and the Board of Directors of the Bank intend to grant options under
the Option Plan to the persons and in the amounts set forth below:
<TABLE>
<CAPTION>
ESTIMATED NUMBER
OF SHARES SUBJECT PERCENTAGE OF OPTIONS
RECIPIENT TITLE TO OPTION ISSUED
--------- ----- --------- -----
<S> <C> <C> <C>
Malcolm B. Blankenship, Jr. Director 5,865 3.0%
James W. Duke Director 5,865 3.0%
Harold C. Earnhardt Vice Chairman 5,865 3.0%
K. V. Epting, Jr. Director 5,865 3.0%
Gordon P. Hurley Director 5,865 3.0%
Bobby A. Lomax Director 5,865 3.0%
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Ronald E. Bostian Chairman, President, and 39,100 20.0%
Chief Executive Officer
Jeffrey C. Chisholm Senior Vice President and 19,550 10.0%
Chief Lending Officer
Dianne E. Hawkins Vice President, 19,550 10.0%
Treasurer,
and Controller
Other Employees 82,110 42.0%
------- -----
Total 195,500 100.0%
======= =====
</TABLE>
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 does not make loans to its directors or executive officers.
DESCRIPTION OF CAPITAL STOCK
THE COMPANY
The Company is authorized to issue 20,000,000 shares of Common Stock and
5,000,000 shares of preferred stock. Neither the authorized Common Stock nor
the authorized preferred stock has any par value.
COMMON STOCK. General. THE COMPANY'S COMMON STOCK WILL REPRESENT
NONWITHDRAWABLE CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL
NOT BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL ENTITY. Upon payment of
the purchase price for the Common Stock, all such stock will be duly authorized,
validly issued, fully paid, and nonassessable.
Dividends. The holders of the Company's Common Stock will be entitled to
receive and share ratably in such dividends on Common Stock as may be declared
by the Board of Directors of the Company out of funds legally available
therefor, subject to applicable statutory and regulatory restrictions. See
"SUPERVISION AND REGULATION -- Regulation of the Company -- Restrictions on
Dividends." The ability of the Company to pay dividends may be dependent on the
receipt of dividends from the Bank. See "DIVIDEND POLICY," "SUPERVISION AND
REGULATION -- Regulation of the Bank -- Limitations on Dividends and Other
Capital Distributions," and "TAXATION."
Stock Repurchases. The shares of Common Stock do not have any redemption
provisions. Stock repurchases are subject to North Carolina corporate laws
regarding capital distributions.
Voting Rights. Upon Conversion, the holders of Common Stock, as the only
class of capital stock of the Company then outstanding, will possess exclusive
voting rights with respect to the Company. Such holders will have the right to
elect the Company's Board of Directors and to act on such other matters as are
required to be presented to stockholders under North Carolina law or as are
otherwise presented to them. Each holder of Common Stock will be entitled to
one vote per share. The holders of Common Stock will have no right to vote
their shares cumulatively in the election of directors. As a result, the
holders of a majority of the shares of Common Stock will have the ability to
elect all of the directors on the Company's Board of Directors.
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<PAGE>
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, including the liquidation account
established in connection with the Conversion, 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 OTS 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 "RESTRICTIONS ON ACQUISITION
OF 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 "RESTRICTIONS ON ACQUISITIONS OF THE COMPANY --
Restrictions in Articles of Incorporation and Bylaws" and "-- Regulatory
Restrictions."
THE BANK
COMMON STOCK. After consummation of the Conversion, the Bank will be
authorized to issue 100,000 shares of common stock, $0.01 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 OTS regulations. See "DIVIDEND POLICY" and "SUPERVISION
AND REGULATION -- Federal Regulation of the Bank -- Limitations on 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."
VOTING RIGHTS. As a federally-chartered savings bank, the Bank currently
has no stockholders, and voting rights in the Bank are currently held by the
Bank's members (depositors). Members elect the Bank's Board of Directors and
vote on such other matters as are required to be presented to them under federal
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
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<PAGE>
as are required to be presented to stockholders under federal law or as are
otherwise presented to stockholders by the Bank's Board of Directors.
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."
RESTRICTIONS ON ACQUISITION. Acquisitions of the Bank and acquisitions of
its capital stock are restricted by various federal regulations. See
"RESTRICTIONS ON ACQUISITION OF THE COMPANY -- The Bank."
RESTRICTIONS ON ACQUISITION OF THE COMPANY
RESTRICTIONS IN ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and Bylaws of the Company contain certain provisions that are
intended to encourage a potential acquiror to negotiate any proposed acquisition
of the Company directly with the Company's Board of Directors. An unsolicited
non-negotiated takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirors to negotiate directly with
management. The Board of Directors believes that these provisions will encourage
such negotiations and discourage hostile takeover attempts. It is also the Board
of Directors' view that these provisions should not discourage persons from
proposing a merger or transaction at prices reflective of the true value of the
Company and that otherwise is in the best interests of all stockholders.
However, these provisions may have the effect of discouraging offers to purchase
the Company or its securities which are not approved by the Board of Directors
but which certain of the Company's stockholders may deem to be in their best
interests or pursuant to which stockholders would receive a substantial premium
for their shares over the current market prices. Therefore, the existence of
such anti-takeover provisions in fact may not always be in the best interests of
all shareholders. Stockholders who might desire to participate in such a
takeover not supported by management may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors and
management more difficult. Nevertheless, the Boards of Directors of the Bank and
the Company believe these provisions are in the best interests of the
stockholders because they will assist the Company's Board of Directors in
managing the affairs of the Company in the manner they believe to be in the best
interests of stockholders generally and because a company's board of directors
is often best able in terms of knowledge regarding the company's business and
prospects, as well as resources, to negotiate the best transaction for its
stockholders as a whole.
The following description of certain of the provisions of the Articles of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each instance to such Articles of Incorporation and Bylaws.
See "ADDITIONAL INFORMATION" regarding how to obtain a copy of these documents.
Board of Directors. The Bylaws of the Company provide that the number of
directors shall not be less than five nor more than 15. The initial number of
directors is seven, but such number may be changed by resolution of the Board of
Directors. These provisions have the effect of enabling the Board of Directors
to elect directors friendly to management in the event of a non-negotiated
takeover attempt and may make it more difficult for a person seeking to acquire
control of the Company to gain majority representation on the Board of Directors
in a relatively short period of time. The Company believes these provisions to
be important to continuity in the composition and policies of the Board of
Directors.
The Articles of Incorporation provide that, if and when the number of
directors is at least nine, there will be staggered elections of directors so
that the directors will each be initially elected to one, two or three-year
terms, and thereafter (so long as the number of directors is nine or more) all
directors will be elected to terms of three years
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each. This provision also has the effect of making it more difficult for a
person seeking to acquire control of the Company to gain majority representation
on the Board of Directors.
The Articles of Incorporation and Bylaws of the Company provide that
directors may be removed prior to the end of their term only for cause.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of the Company's shares cannot be assured representation on the Board
of Directors, the absence of cumulative voting may discourage accumulations of
the Company's shares or proxy contests that would result in changes in the
Company's management. The Board of Directors believes that (i) elimination of
cumulative voting will help to assure continuity and stability of management and
policies; (ii) directors should be elected by a majority of the stockholders to
represent the interests of the stockholders as a whole rather than be the
special representatives of particular minority interests; and (iii) efforts to
elect directors representing specific minority interests are potentially
divisive and could impair the operations of the Company.
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
rights, 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.
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Bank Charter. The Bank's stock charter provides that, for five years
following the Conversion, no person shall acquire more than ten percent of the
Bank's common stock. Any shares acquired in violation of this provision shall
be non-voting shares. Also, the Bank's charter permits only the Bank's Board of
Directors to call a special meeting of stockholders relating to a change in
control or recharter amendment during the five years following the Conversion.
SUPERMAJORITY VOTING PROVISIONS. The Company's Articles of Incorporation
require the affirmative vote of 75% of the outstanding shares entitled to vote
to approve a merger, consolidation, or other business combination, unless the
transaction is approved, prior to consummation, by the vote of at least 75% of
the number of the Continuing Directors (as defined in the Articles of
Incorporation) on the Company's Board of Directors. "Continuing Directors"
generally includes all members of the Board of Directors who are not affiliated
with any individual, partnership, trust or other person or entity (or the
affiliates and associates of such person or entity) which is a beneficial owner
of 10% or more of the voting shares of the Company. This provision could tend to
make the acquisition of the Company more difficult to accomplish without the
cooperation or favorable recommendation of the Company's Board of Directors.
ANTI-TAKEOVER EFFECT OF BENEFIT PLANS AND EMPLOYMENT AGREEMENT. The
existence of the ESOP may tend to discourage takeover attempts because employees
participating under the ESOP and the trustees of the ESOP will effectively
control the voting of the large block of shares held by the ESOP. See
"MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan." Also, if approved by
the stockholders of the Company at a meeting of stockholders following the
Conversion, the MRP and the 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 at a
meeting held no sooner than 12 months following 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 at a meeting
held no sooner than 12 months following the Conversion, all of the MRP shares
which could be granted to directors and executive officers are granted and
issued and all such shares are acquired in the open market, (iii) the ESOP
acquires 8% of the shares issued in the Conversion and none of such shares are
allocated, and (iv) the Company did not issue any additional shares of its
Common Stock, the shares held by directors and executive officers and their
associates as a group, including (a) shares purchased outright in the
Conversion, (b) shares purchased by the ESOP, (c) shares purchased pursuant to
the Option Plan and (d) shares granted under the MRP, would give such persons
effective control over as much as 44.63% or 38.73%, at the minimum and maximum
of the Estimated Valuation Range, respectively, of the Common Stock issued and
outstanding.
The existence of the employment agreement with employees could make a
business combination with the Bank more costly and could discourage such
transactions. See "MANAGEMENT OF THE BANK -- Employment Agreement."
REGULATORY RESTRICTIONS. A federal regulation prohibits any person prior
to the completion of a conversion from transferring, or entering into any
agreement or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire (if
the offer is opposed by the savings association) more than 10% of the stock of
any converted savings institution if such person is, or after consummation of
such acquisition would be, the beneficial owner of more than 10% of such stock.
In the event that any person, directly or indirectly, violates this regulation,
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the securities beneficially owned by such person in excess of 10% may not be
counted as shares entitled to vote and may not be voted by any person or counted
as voting shares in connection with any matter submitted to a vote of
stockholders. Like the provisions of the Articles of Incorporation outlined
above, these federal regulations can make a change in control more difficult,
even if desired by the holders of the majority of the shares of the stock. The
Board of Directors reserves the right to ask the OTS or other federal regulators
to enforce these restrictions against persons seeking to obtain control of the
Company, whether in a proxy solicitation or otherwise. The policy of the Board
is that these legal restrictions must be observed in every case, including
instances in which an acquisition of control of the Company is favored by a
majority of the stockholders.
Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes federally-chartered SAIF-insured
institutions and holding companies thereof.
Control, as defined under federal law, in general means ownership, control
of or holding irrevocable proxies representing more than 25% of any class of
voting stock, control in any manner of the election of a majority of a savings
association's directors, or a determination by the OTS that the acquiror has the
power to direct, or directly or indirectly to exercise a controlling influence
over, the management or policies of the institution. Acquisition of more than
10% of any class of a savings association's voting stock, if the acquiror also
is subject to any one of eight "control factors," constitutes a rebuttable
determination of control under the OTS regulations. Such control factors
include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The OTS regulations provide that persons or companies
which acquire beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a certification that the
holder is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice or
approval of the OTS, as applicable. See "SUPERVISION AND REGULATION --
Regulation of the Company."
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
AND BYLAW OF THE COMPANY
LIMITATIONS OF LIABILITY
The Articles of Incorporation of the Company provide that the directors
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.
INDEMNIFICATION
The Bylaws of the Company 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 fullest extent allowed by
applicable law for liability or litigation expense arising out of activities in
such capacities. Both the Bylaws and the
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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.
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
pursuant to the foregoing provisions, or otherwise, the Company has 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 of expenses incurred or paid by a director, officer or
controlling person of the Company 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 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.
THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED AND THE OTS HAS APPROVED
COMPLETION OF THE TRANSACTIONS DESCRIBED IN THE PLAN OF CONVERSION SUBJECT TO
APPROVAL BY THE MEMBERS OF THE BANK AND TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. APPROVAL BY THE OTS DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN OF CONVERSION BY THE OTS.
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 change, 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 of Conversion. 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 has
any agreement or understanding with respect to any possible business
combination.
The Board of Director's adoption of the Plan of Conversion is subject to
approval by the members of the Bank and receipt of required regulatory
approvals. Pursuant to the Plan of Conversion, the Bank will be converted from
a federally-chartered mutual savings bank to a federally-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 October 29, 1998, the OTS approved the Bank's
application for Conversion, subject to approval of the Plan of Conversion by the
members of the Bank and satisfaction of certain other conditions. The
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Special Meeting will be held on December 10, 1998 for the purpose of considering
approval of the Plan of Conversion.
THE FOLLOWING IS A SUMMARY OF ALL MATERIAL PROVISIONS OF THE PLAN OF
CONVERSION. IT IS QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF THE PLAN OF
CONVERSION, WHICH CONTAINS A MORE DETAILED DESCRIPTION OF THE TERMS OF THE
CONVERSION. THE PLAN OF CONVERSION IS ATTACHED AS ATTACHMENT I TO THE BANK'S
PROXY STATEMENT FOR THE SPECIAL MEETING WHICH HAS BEEN DELIVERED TO ANYONE WHO
RECEIVES A PROSPECTUS. THE PLAN OF CONVERSION 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 federally-chartered capital stock savings bank and the formation
of a holding 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, its Charter will be amended to authorize the
issuance of permanent nonwithdrawable capital stock to represent the ownership
of the Bank. 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.
VOTING RIGHTS. Under the Bank's current Charter, deposit account holders
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
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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 offices 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 in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a complete
liquidation of the Bank, each holder of a deposit account in the Bank in its
present mutual form would receive his or her pro rata share of any assets of the
Bank remaining after payment of claims of all creditors (including the claims of
all depositors in the amount of the withdrawal value of their accounts). Such
holder's pro rata share of such remaining assets, if any, would be in the same
proportion of such assets as the balance in his or her deposit account was to
the aggregate balance in all deposit accounts in the Bank at the time of
liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of a complete liquidation of the Bank,
would have a claim of the same general priority as the claims of all other
general creditors of the Bank in addition to the protection of FDIC insurance up
to applicable limits. Therefore, except as described below, the deposit account
holder's claim would be solely in the amount of the balance in his or her
deposit account plus accrued interest. The holder would have no interest in the
assets of the Bank above that amount.
The Plan of Conversion provides that there shall be established, upon the
completion of the Conversion, a special "liquidation account" for the benefit of
Eligible Account Holders (i.e., eligible depositors at December 31, 1996) and
Supplemental Eligible Account Holders (eligible depositors at September 30,
1998) in an amount equal to the net worth of the Bank as of the date of its
latest consolidated statement of financial condition contained in the final
prospectus relating to the sale of shares of Company Common Stock in the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account held in the Bank on the qualifying date. An Eligible Account
Holder and Supplemental Eligible Account Holder's interest as to each deposit
account would be in the same proportion of the total liquidation account as the
balance in his or her account on December 31, 1996 and September 30, 1998,
respectively, was to the aggregate balance in all deposit accounts of Eligible
Account Holders and Supplemental Eligible Account Holders on such dates.
However, if the amount in the deposit account of an Eligible Account Holder or
Supplemental Eligible Account Holder on any annual closing date of the Bank is
less than the lowest amount in such account on December 31, 1996 or September
30, 1998 and on any subsequent closing date, then the account holder's interest
in
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this special liquidation account would be reduced by an amount proportionate to
any such reduction, and the account holder's interest would cease to exist if
such deposit account were closed.
In addition, the interest in the special liquidation account would never be
increased despite any increase in the balance of the account holders' related
accounts after Conversion.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders were satisfied would be
distributed to the Company as the sole stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether the
Bank, as converted, or another SAIF-insured institution is the surviving
institution, is deemed to be a complete liquidation for purposes of distribution
of the liquidation account. In any such transactions, the liquidation account
would be assumed by the surviving institution.
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.
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PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR
TO THEM.
COMMON STOCK. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Description of Capital
Stock." COMMON STOCK ISSUED UNDER THE PLAN OF CONVERSION CANNOT, AND WILL NOT,
BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
THE BANK WILL CONTINUE, IMMEDIATELY AFTER COMPLETION OF THE CONVERSION, TO
PROVIDE ITS SERVICES TO DEPOSITORS AND BORROWERS PURSUANT TO ITS EXISTING
POLICIES AND WILL RETAIN THE EXISTING MANAGEMENT AND EMPLOYEES OF THE BANK.
OTHER THAN FOR PAYMENT OF CERTAIN EXPENSES INCIDENT TO THE CONVERSION, NO ASSETS
OF THE BANK WILL BE DISTRIBUTED IN THE CONVERSION. THE BANK WILL CONTINUE TO BE
A MEMBER OF THE FHLB SYSTEM, AND ITS DEPOSIT ACCOUNTS WILL CONTINUE TO BE
INSURED BY THE FDIC UP TO APPLICABLE LIMITS. THE AFFAIRS OF THE BANK WILL
CONTINUE TO BE DIRECTED BY THE EXISTING BOARD OF DIRECTORS AND MANAGEMENT.
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 residing or
located in the Local Community and trusts, 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 ("Selected Dealers") to be
formed and managed by Trident Securities acting as agent of the Company in the
sale of the Common Stock. See "-- Syndicated Community Offering." The Plan of
Conversion 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 OTS 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 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 OTS 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 December 8, 1998, unless, with the approval of the
OTS, the Offering period is extended by the Company and the Bank. The Community
Offering, if any, may begin at any time after the Subscription Offering begins
and will terminate at the Expiration Time or at any time thereafter, but not
later than January 25, 1999, unless extended with the approval of the OTS. 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 federal conversion regulations, be completed within 45 days after the
Expiration Time unless such period is extended with the approval of the OTS. 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
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subscriber will be canceled, funds submitted with the subscription will be
refunded promptly with interest at the Bank's passbook savings rate, and holds
on accounts from which withdrawals were designated will be released. Any such
solicitation will be by means of an amended prospectus filed with the SEC. In
such event, substantial additional printing, legal and accounting expenses may
be incurred in completing the Conversion.
The commencement and completion of any required Community or Syndicated
Community Offering may 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 of Conversion requires that the Conversion be
completed within 24 months after the date of approval of the Plan of Conversion
by the Bank's members.
SUBSCRIPTION OFFERING
In accordance with OTS conversion regulations, non-transferable
Subscription Rights have been granted under the Plan of Conversion to the
following persons in the following order of priority: (1) Eligible Account
Holders, provided, however, that the ESOP shall have first priority Subscription
Rights to the extent that the total number of shares of Common Stock sold in the
Conversion exceeds the maximum of the Estimated Valuation Range, (2) the ESOP;
provided, however, that the ESOP shall have first priority Subscription Rights
to the extent that the total number of shares of Common Stock sold in the
Conversion exceeds the maximum of the Estimated Valuation Range, (3)
Supplemental Eligible Account Holders, (4) Other Members (depositors of the Bank
and borrowers of the Bank at the close of business on October 30, 1998, the
voting record date for the Special Meeting) and (5) officers, directors and
employees of the Bank. All subscriptions received will be subject to the
availability of the Company's Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering,
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion. See "-- Minimum and Maximum Purchase Limitations."
ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder has been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the greater of $600,000 of Common Stock, one-tenth of one
percent of the total offering of Common Stock or 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the qualifying deposit of the Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Eligible Account
Holders. 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. Subscription Rights received by officers and directors
in this category based on their increased deposits in the Bank in the one-year
period preceding December 31, 1996 are subordinated to the Subscription Rights
of other Eligible Account Holders.
ESOP. The ESOP has been granted, without payment therefore, Subscription
Rights to purchase a number of shares equal to 8% of the aggregate number of
shares issued in the Conversion on a second priority basis. The ESOP intends to
purchase a total of 8% of the Common Stock issued in the Conversion under this
category. In the event the number of shares offered in the Conversion is
increased above the maximum of the Estimated Valuation Range, the ESOP shall
have a first priority right to purchase any such shares exceeding the maximum of
the Estimated Valuation Range up to an aggregate of 8% of the Common Stock.
However, the ESOP may purchase all or part of its shares in the open market
after the consummation of the Conversion.
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SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders and the ESOP, each Supplemental Eligible Account Holder has been granted
without payment therefore, non-transferable Subscription Rights to purchase
Common Stock up to the greater of $600,000 of Common Stock, one-tenth of one
percent of the total offering of Common Stock or 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the qualifying deposit of the Supplemental Eligible Account Holder and
the denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders. If Supplemental Eligible Account Holders subscribe for
more shares of Common Stock than are available for purchase, the shares offered
will first be allocated among the subscribing Supplemental Eligible Account
Holders so as to enable each subscribing Supplemental Eligible Account Holder to
the extent possible, to purchase the number of shares necessary to make his or
her total allocation of Common Stock equal to the lesser of 100 shares of Common
Stock or the number of shares subscribed for by such Supplemental Eligible
Account Holder. Any shares remaining after such allocation will be allocated
among the subscribing Supplemental Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that each such Supplemental Eligible
Account Holder's Qualifying Deposits bears to the total of the Qualifying
Deposits of all such Supplemental Eligible Account Holders.
OTHER MEMBERS. To the extent that shares remain available for purchase
after satisfaction of subscriptions of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders, Other Members, other than Eligible
Account Holders and Supplemental Eligible Account Holders, have each been
granted, without payment therefor, non-transferable Subscription Rights to
purchase Common Stock up to the greater of $600,000 of Common Stock or one-tenth
of one percent of the total offering of Common Stock in the Conversion. If
Other Members subscribe for more shares of Common Stock than remain available
for purchase by Other Members, shares will be allocated among the subscribing
Other Members in the proportion that the number of votes eligible to be cast by
each Other Member bears to the total number of votes eligible to be cast at the
Special Meeting by all Other Members whose subscriptions remain unsatisfied.
EMPLOYEES, OFFICERS AND DIRECTORS. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, the
Bank's employees, officers and directors who are not Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members have each been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to $600,000, so long as the aggregate of such purchases does not
exceed 21% of the shares of Common Stock issued in the Conversion. If more
shares are subscribed for by such employees, officers and directors than are
available for purchase by them, the available shares will be allocated among
subscribing employees, officers and directors pro rata on the basis of the
amount of their respective subscriptions.
COMMUNITY OFFERING
Any shares of Common Stock which remain unsubscribed for in the
Subscription Offering may be offered by the Company to members of the general
public in the Community Offering, which may commence at any time after
commencement of the Subscription Offering, with priority given to natural
persons and trusts of natural persons residing or located in Rowan and Iredell
Counties in North Carolina (the "Local Community"), including IRA accounts,
Keogh accounts and similar retirement accounts established for the benefit of
natural persons who are residents of the Local Community. The Community Offering
may terminate at the Expiration Time or at any time thereafter, but no later
than January 25, 1999, unless further extended with the consent of the OTS. The
Offerings may not be extended beyond December 10, 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.
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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 60,000 shares, which number
shall be determined by the Board of Directors of the Bank prior to the time the
Conversion is consummated with the intent to provide for a wide distribution of
shares among such subscribers. Any shares remaining after such allocation will
be allocated to each First Priority Community Subscriber whose order is accepted
in full or in part on an equal number of shares basis until all orders are
filled. Such allocation shall also be applied to subscriptions by other
subscribers in the Community Offering, in the event shares are available for
such subscribers but there is an oversubscription by them.
IN ORDER TO ENSURE PROPER ALLOCATION OF SHARES IN THE EVENT OF AN
OVERSUBSCRIPTION, IT IS THE RESPONSIBILITY OF SUBSCRIBERS IN THE COMMUNITY
OFFERING TO PROVIDE CORRECT ADDRESSES OF RESIDENCE ON THE ORDER FORMS.
SYNDICATED COMMUNITY OFFERING
The Plan of Conversion 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 Selected Dealers 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. No person will be permitted to
subscribe in the Syndicated Community Offering for shares of Common Stock with
an aggregate purchase price of more than $600,000.
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 will be returned
promptly with interest to the Selected Dealers, who, in turn, will promptly
credit their customers' brokerage accounts.
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The Syndicated Community Offering may close at any time after the
Expiration Time at the discretion of the Bank and the Company, but in no case
later than January 25, 1999, unless further extended with the consent of the
OTS. The Offerings may not be extended beyond December 10, 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 Offerings 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 the Bank's financial advisor
and sales agent, Trident Securities, and was based upon a number of factors,
including the market price per share of stock of other thrift institutions. The
OTS regulations governing conversions of federally-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 OTS 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 condition following commencement of the
Subscription Offering.
OTS 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 $29,000 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
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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 October 16, 1998, the Estimated
Valuation Range of the Bank and the Company was from a minimum of $14,450,000 to
a maximum of $19,550,000, with a midpoint of $17,000,000. 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 1,445,000
shares to a maximum of 1,955,000 shares, with a midpoint of 1,700,000
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.
Upon completion of the Offerings, 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 OTS, 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 $22,482,500 (2,248,250 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
and the OTS, 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 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 OTS, 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 of
Conversion may be terminated or such other actions as the OTS 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 of Conversion 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 Offering."
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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.
A copy of the complete appraisal by Ferguson is on file and available for
inspection at the principal office of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552 and at the Southeast Regional Office of the OTS, 1475 Peachtree
Street, N.E., Atlanta, Georgia 30309. A copy is also available for inspection at
the Stock Information Center, 401 West Innes Street, Salisbury, North Carolina
28144. 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 THE 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 Form (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 of the
Bank's deposit accounts (other than negotiable order of withdrawal accounts or
other demand deposit accounts), must be received by the Bank by the Expiration
Time, which is 12:00 noon, Eastern Time, on December 8, 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 Form, 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 or any time 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 a corrected Order Form or the remittance of full payment for
subscribed shares by such date as the Bank may 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, and 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 of Conversion and
of any acceptability of any Order Form will be final. The Bank has the right to
investigate any irregularity on any Order Form. Persons wishing to use funds in
a Bank IRA to purchase Common Stock must visit the Stock Information Center on
or before December 1, 1998 in order to complete that purchase so that the
necessary forms may be forwarded for execution and returned prior to the
Expiration Time.
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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 OTS, or to waive or permit correction of incomplete or
improperly executed Order Forms, but does not represent that it will do so.
The amount to be remitted with an Order Form shall be the aggregate dollar
amount that a subscriber or purchaser desires to invest in the Subscription and
Community Offerings. Complete payment must accompany all completed Order Forms
submitted in the Subscription and Community Offerings in order for subscriptions
to be valid. See "-- Purchase Price of Common Stock and Number of Shares
Offered."
Payment for shares will be permitted to be made by any of the following
means: (i) in cash, if delivered in person to any 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 Stock Order Forms contain appropriate means by which authorization of
withdrawals from deposit accounts may be made to pay for subscribed shares. Once
such a withdrawal has been authorized, none of the designated withdrawal amount
may be withdrawn (except by the Bank as payment for Common Stock) until the
Conversion is completed or terminated. Savings accounts will be permitted to be
established for the purpose of making payment for subscribed shares of Common
Stock. Funds authorized for withdrawal will continue to earn interest at the
applicable contract interest rate until completion or termination of the
Conversion or, in the case of an order submitted in the Community Offering,
until it is determined that such order cannot or will not be accepted.
Notwithstanding any regulatory provision regarding penalties for early
withdrawal from certificate accounts, payment for subscribed shares of Common
Stock will be permitted through authorization of withdrawals from such accounts
without the assessment of such penalties. However, if after such withdrawal the
applicable minimum balance requirement ceases to be satisfied, such certificate
account will be canceled and the remaining balance thereof will earn interest at
the Bank's passbook savings rate.
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Upon completion or termination of the Conversion, the Bank will return to
subscribers all amounts paid with subscriptions which are not applied to the
purchase price for shares, plus interest at its passbook savings rate from the
date good funds are received until the consummation or termination of the
Conversion, and the Bank will release deposit account withdrawal orders given in
connection with the subscriptions to the extent funds are not withdrawn and
applied toward the purchase of shares.
DELIVERY OF STOCK CERTIFICATES
Certificates representing Common Stock issued in the Conversion will be
mailed by the Company's transfer agent to persons entitled thereto at the
address of such persons appearing on the 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 of Conversion 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 of Conversion
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) a management fee equal to .25% of the aggregate dollar amount of Common
Stock sold in the Offerings; and (b) a commission equal to 2.0% of the aggregate
dollar amount of Common Stock sold in the Subscription and Community Offerings,
excluding shares purchased by the ESOP, directors, executive officers and their
"associates" (as defined in the Plan of Conversion). 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 $241,000 and $409,000 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 Selected 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 has been 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
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 50 shares. With
the exception of the ESOP, which is expected to subscribe for 8% of the shares
of Common Stock issued in the Conversion, the Plan of Conversion provides that
no person (including all persons on a joint account), either alone or together
with associates of or persons acting in concert with such person, may purchase
in the Conversion shares of Common Stock with an aggregate purchase price of
more than $600,000 (subject to certain exceptions). For purposes of the Plan of
Conversion, the directors of the Bank and of the Company are not deemed to be
acting in concert solely by reason of their Board membership. Pro rata
reductions within each Subscription Rights category will be made in allocating
shares to the extent that the maximum purchase limitations are exceeded.
The Bank's and the Company's Boards of Directors may, in their sole
discretion, increase the maximum purchase limitation set forth above up to 9.99%
of the shares of Common Stock sold in the Conversion, provided that orders for
shares which exceed 5% of the shares of Common Stock sold in the Conversion may
not exceed, in the aggregate, 10% of the shares sold in the Conversion. The
Bank and the Company do not intend to increase the
104
<PAGE>
maximum purchase limitation unless market conditions are such that an increase
in the maximum purchase limitation is necessary to sell a number of shares in
excess of the minimum of the Estimated Valuation Range. If the Boards of
Directors decide to increase the maximum purchase limitation, persons who
subscribed for the maximum number of shares of Common Stock will be, and other
large subscribers in the discretion of the Company and the Bank may be, given
the opportunity to increase their subscriptions accordingly, subject to the
rights and preferences of any person who has priority Subscription Rights.
The Plan of Conversion 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 parent or 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, excluding any tax-qualified employee
stock benefit plans.
For purposes of the foregoing limitations, (i) directors and officers of
the Bank or the Company shall not be deemed to be associates or a group of
persons acting in concert solely as a result of their serving in such
capacities, (ii) the ESOP will not be deemed to be acting in concert with any of
its trustees for purposes of determining the number of shares which any such
trustee, individually, may purchase and (iii) shares of Common Stock held by the
ESOP and attributed to an individual will not be aggregated with other shares
purchased directly by, or otherwise attributable to, that individual.
For purposes of the foregoing limitations, persons will be deemed to be
"acting in concert" if they are (i) knowingly participating in a joint activity
or interdependent conscious parallel action towards a common goal (whether or
not pursuant to an express agreement), with respect to the purchase, ownership,
voting or sale of Common Stock or (ii) engaged in a combination or pooling of
voting or other interests in the securities of the Company for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise. THE COMPANY AND THE BANK WILL PRESUME
THAT CERTAIN PERSONS ARE ACTING IN CONCERT BASED UPON, AMONG OTHER THINGS, JOINT
ACCOUNT RELATIONSHIPS, ACCOUNTS WITH THE SAME ADDRESS AND THE FACT THAT SUCH
PERSONS HAVE FILED JOINT SCHEDULES 13D WITH THE SEC WITH RESPECT TO OTHER
COMPANIES.
APPROVAL, INTERPRETATION, AMENDMENT AND TERMINATION
Under the Plan of Conversion, the OTS's approval thereof, and applicable
OTS conversion regulations, consummation of the Conversion is subject to
satisfaction of certain conditions, including the following: (i) approval of the
Plan of Conversion 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 OTS, and (iii) receipt by the Company and the Bank of favorable opinions
of counsel or other tax advisor as to the federal and state tax consequences of
the Conversion. See "-- Income Tax Consequences."
If all conditions for consummation of the Conversion are not satisfied, no
Common Stock will be issued, the Bank will continue to operate as federally-
chartered mutual savings bank, all subscription funds will be promptly
105
<PAGE>
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 of Conversion
and of the Order Forms and related materials for the Subscription and Community
Offering will be final, subject to the authority of the OTS. 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 of
Conversion 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 OTS. If the Bank determines upon the advice of counsel and
after consultation with the OTS 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 OTS, the Plan of
Conversion 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 OTS, notwithstanding approval of the Plan
of Conversion by the Members at the Special Meeting. The Plan of Conversion
terminates automatically 24 months after the Special Meeting.
CERTAIN RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS; FALSE OR MISLEADING
ORDER FORMS
THE SUBSCRIPTION RIGHTS GRANTED UNDER THE PLAN OF CONVERSION 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 of
Conversion 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 of Conversion 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 OTS as to compliance with
all regulations governing the Conversion, including the nontransferability of
Subscription Rights.
The Plan of Conversion 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 of Conversion 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.
RESTRICTIONS ON REPURCHASE OF STOCK
Except as permitted by applicable regulations, for a period of three years
following Conversion, the Company may not repurchase any shares of its capital
stock, except in the case of an offer to repurchase on a pro rata basis made to
all holders of capital stock of the Company. Any such offer shall be subject to
the prior approval of the OTS. Furthermore, the Company may not repurchase any
of its stock (i) if the result thereof would be to reduce the regulatory capital
of the Bank below the amount required for the liquidation account to be
established pursuant to OTS regulations and (ii) except in compliance with the
requirements of the OTS capital distribution rule.
106
<PAGE>
The above limitations are subject to the OTS conversion rules which
generally provide that the Company may repurchase its capital stock provided (i)
no repurchases occur within one year following the Conversion (subject to
certain exceptions), (ii) repurchases during the second and third year after
conversion are part of an open market stock repurchase program that does not
allow for a repurchase of more than 5% of the Company's outstanding capital
stock during a 12-month period, (iii) the repurchases do not cause the Bank to
become undercapitalized, and (iv) the Company provides notice to the OTS at
least ten days prior to the commencement of a repurchase program and the OTS
does not object to such regulations. In addition, the above limitations do not
preclude repurchases of capital stock by the Company in the event applicable
federal regulatory limitations are subsequently liberalized.
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 -
- - Effects of Conversion -- Income Tax Consequences." Certain legal matters will
be passed upon for Trident Securities by Muldoon, Murphy & Faucette.
EXPERTS
The consolidated financial statements of Citizens Savings Bank of
Salisbury, S.S.B. at September 30, 1997 and 1996, and for each of the three
years in the period ended September 30, 1997, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such 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 S-1
under the Securities Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all of the information set forth in the registration statement. Such
information can be examined and copied at the public reference facilities of the
SEC located at Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and
at the regional offices of the SEC at 75 Park Place, Fourteenth Floor, New York,
New York 10007 and Room 3190, John C. Kluczynski Building, 230 South Dearborn
Street, Chicago, Illinois 60604. Copies of such material can be obtained by
mail from the SEC at prescribed rates from the Public Reference Section of the
SEC at 450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including the Company; the address is (http://www.sec.gov.). The
statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are,
107
<PAGE>
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 a Form AC Application for Approval of Conversion with
the OTS. Pursuant to the OTS conversion regulations, this Prospectus omits
certain information contained in such Application. The Application, which
contains a copy of Ferguson's appraisal, may be inspected at the office of the
OTS, 1700 G Street, N.W., Washington, D.C. 20522 and at the office of the
Regional Director of the OTS at the Southeast Regional Office of the OTS, 1475
Peachtree Street, N.E., Atlanta, GA 30309. Copies of the Plan of Conversion,
copies of the Company's Articles of Incorporation and Bylaws and copies of the
Bank's proposed Charter and Bylaws are available for inspection at each office
of the Bank and may be obtained by writing to the Bank at 401 West Innes Street,
Salisbury, North Carolina 28144-4232, Attention: Ronald E. Bostian, President,
or by telephoning the Bank at (704) 633-2341. A copy of Ferguson's independent
appraisal is also available for inspection at the Stock Information Center, 401
West Innes Street, Salisbury, North Carolina 28144-4232.
108
<PAGE>
GLOSSARY
Bank Citizens Bank, FSB
BIF Bank Insurance Fund of the FDIC
Common Stock The Common Stock, no par value per share, of Innes
Street Financial Corporation
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 Innes Street Financial Corporation
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 (including holders of all
types of demand deposit accounts) of the Bank,
with account balances of at least $50.00 as of the
close of business on December 31, 1996
ERISA Employee Retirement Income Security Act of 1974,
as amended
ESOP The Citizens Bank, FSB Employee Stock Ownership
Plan and Trust
Estimated Valuation Range Estimated pro forma market value of the common
stock ranging from $14,450,000 to $19,550,000. The
maximum of the Estimated Valuation Range may be
increased to $22,482,500 without a resolicitation
of subscribers
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Time 12:00 noon, local time, on December 8, 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
<PAGE>
MRP Management Recognition Plan to be adopted no
earlier than twelve months after the Conversion
NASD National Association of Securities Dealers, Inc.
NPV Net Portfolio Value
Offerings Subscription Offering, Community Offering and
Syndicated Community Offering, collectively
Option Plan Stock Option Plan to be adopted no earlier than
twelve months after the Conversion
Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Other Members Savings account holders (including holders of all
types of demand deposit accounts) (other than
Eligible Account Holders and Supplemental Eligible
Account Holders) and certain borrowers (borrowers
whose loans were outstanding on October 30, 1998
and continue to be outstanding) who are entitled
to vote at the Special Meeting due to the
existence of an account or borrowing relationship,
respectively, on the Voting Record Date for the
Special Meeting
OTC Bulletin Board An electronic stock data system operated by Nasdaq
OTS Office of Thrift Supervision
Plan of Conversion Plan of the Bank to convert from a federal
chartered mutual savings bank to a federal
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
Qualifying Deposits A balance of $50.00 or more in any savings account
(including all types of demand deposit accounts)
in the Bank as of December 31, 1996 or September
30, 1998, as applicable; each savings account
(including all types of demand deposit accounts)
which is deemed to be a separate account for
purposes of FDIC insurance shall be deemed to be a
separate account for purposes of determining
whether a qualifying deposit exists
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 on December
10, 1998 for the purpose of approving the
Plan
A-2
<PAGE>
Subscription Offering Offering of non-transferable rights to subscribe
for the Common Stock, in order of priority, to
Eligible Account Holders, ESOP Supplemental
Eligible Account Holders, Other Members and
Directors, Officers and Employees
Subscription Rights Rights to subscribe for shares of Common Stock in
the Subscription Offering granted to certain
depositors and borrowers of the Bank, the ESOP and
certain others in accordance with the Plan of
Conversion.
Supplemental Eligible Savings account holders (including holders of all
types of demand deposit accounts) who are not
Eligible Account Holders of the Bank, with account
Account Holders balances of at least $50.00 on September 30, 1998
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 October 30, 1998, the
date for determining members entitled to vote at
the Special Meeting.
A-3
<PAGE>
Index to Financial Statements
Citizens Savings Bank of Salisbury, S.S.B.
Report of Independent Auditors..........................F-1
Audited Consolidated Financial Statements
Consolidated Statements of Condition....................F-2
Consolidated Statements of Income.......................F-3
Consolidated Statements of Equity.......................F-4
Consolidated Statements of Cash Flows...................F-5
Notes to Consolidated Financial Statements..............F-6
<PAGE>
Report of Independent Auditors
The Board of Directors
Citizens Savings Bank of Salisbury, S.S.B.
We have audited the accompanying consolidated statements of condition of
Citizens Savings Bank of Salisbury, S.S.B. and subsidiary as of September 30,
1997 and 1996, and the related consolidated statements of income, equity, and
cash flows for each of the three years in the period ended September 30, 1997.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citizens Savings
Bank of Salisbury, S.S.B. and subsidiary at September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Winston-Salem, North Carolina
November 7, 1997, except for Note 14,
as to which the date is September 10, 1998
F-1
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Consolidated Statements of Condition
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
(Unaudited)
ASSETS
Cash and due from banks $ 7,750,343 $ 12,019,170 $ 5,410,971
Federal funds sold-overnight 4,831,000 4,033,000 4,809,000
-------------------------------------------
Cash and cash equivalents 12,581,343 16,052,170 10,219,971
Federal funds sold-term 4,000,000 6,100,000 -
Mortgage-backed securities available for sale 7,829,635 10,334,785 12,492,227
Mortgage-backed securities held to maturity (fair
value of $1,918,491 (unaudited), $2,374,768
and $2,518,810 at June 30, 1998, September 30,
1997 and 1996, respectively) 1,871,390 2,328,072 2,520,595
Loans receivable, net 159,710,109 159,458,143 159,490,575
Accrued interest receivable - loans and
mortgage-backed securities 842,912 909,815 915,575
Accrued interest receivable - investments 149,444 96,696 60,324
Investment in Federal Home Loan Bank stock 1,824,800 1,824,800 1,824,800
Premises and equipment, net 1,230,189 1,337,835 1,328,586
Other 2,675,686 1,173,276 1,380,338
-------------------------------------------
Total assets $192,715,508 $199,615,592 $190,232,991
===========================================
LIABILITIES AND EQUITY
Deposit accounts $159,819,089 $160,492,564 $146,449,542
Advances from the Federal Home Loan Bank 13,000,000 22,000,000 27,000,000
Advances from borrowers for taxes and insurance 972,821 529,896 504,296
Accrued interest payable 11,992 57,268 48,763
Other 3,300,109 1,906,968 2,673,005
-------------------------------------------
Total liabilities 177,104,011 184,986,696 176,675,606
Retained earnings 15,490,958 14,522,513 13,555,281
Net unrealized appreciation on securities
available for sale 120,539 106,383 2,104
-------------------------------------------
Total equity 15,611,497 14,628,896 13,557,385
-------------------------------------------
Total liabilities and equity $192,715,508 $199,615,592 $190,232,991
===========================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Consolidated Statements of Income
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
1998 1997 1997 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Interest and fee income:
Loans receivable $ 9,007,152 $ 8,928,648 $11,927,459 $11,766,458 $12,297,018
Mortgage-backed securities 544,145 696,876 909,156 962,847 1,090,090
Other interest-earning assets 903,360 749,903 1,065,039 960,732 937,030
------------------------------------------------------------------
Total interest income 10,454,657 10,375,427 13,901,654 13,690,037 14,324,138
Interest expense:
Deposits 6,084,047 6,006,872 8,099,194 8,121,064 8,129,847
Borrowings 877,578 1,373,132 1,772,941 1,861,581 1,825,996
------------------------------------------------------------------
Total interest expense 6,961,625 7,380,004 9,872,135 9,982,645 9,955,843
------------------------------------------------------------------
Net interest income 3,493,032 2,995,423 4,029,519 3,707,392 4,368,295
Non-interest income:
Loan servicing fees 160,577 196,879 255,418 290,428 322,345
Gain on sales of loans, net 52,670 68,472 71,720 2,955 (2,679)
Other 71,783 68,993 88,423 94,794 114,368
------------------------------------------------------------------
Total non-interest income 285,030 334,344 415,561 388,177 434,034
Non-interest expense:
Compensation and benefits 1,135,334 1,096,126 1,478,837 1,221,117 1,198,017
Occupancy and equipment 268,302 273,097 374,605 322,428 338,007
SAIF special assessment - - 1,074,702 -
Advertising and promotion 160,676 165,330 217,679 148,498 124,844
Data processing 134,216 131,504 173,133 176,367 186,699
Deposit insurance premium 86,803 80,132 116,258 398,313 369,488
Other 452,463 447,694 597,625 640,869 693,400
------------------------------------------------------------------
Total non-interest expense 2,237,794 2,193,883 2,958,137 3,982,294 2,910,455
------------------------------------------------------------------
Income before income taxes 1,540,268 1,135,884 1,486,943 113,275 1,891,874
Provision for income taxes 571,823 430,674 519,711 11,541 743,129
------------------------------------------------------------------
Net income $ 968,445 $ 705,210 $ 967,232 $ 101,734 $ 1,148,745
==================================================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Consolidated Statements of Equity
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
ON SECURITIES
RETAINED AVAILABLE
EARNINGS FOR SALE
-----------------------------------
<S> <C> <C>
Balance at September 30, 1994 $12,304,802 $ -
Net income 1,148,745 -
-----------------------------------
Balance at September 30, 1995 13,453,547
Net income 101,734 -
Net unrealized appreciation on securities
available for sale, net of taxes of $1,347 - 2,104
-----------------------------------
Balance at September 30, 1996 13,555,281 2,104
Net income 967,232 -
Net changes in unrealized appreciation on securities
available for sale, net of taxes of $67,141 - 104,279
-----------------------------------
Balance at September 30, 1997 14,522,513 106,383
Net income (unaudited) 968,445 -
Net changes in unrealized appreciation on securities
available for sale, net of taxes of $9,116 (unaudited) - 14,156
-----------------------------------
Balance at June 30, 1998 (unaudited) $15,490,958 $120,539
===================================
Balance at September 30, 1996 $13,555,281 $ 2,104
Net income (unaudited) 705,210 -
Net changes in unrealized appreciation on securities
available for sale, net of taxes of $52,721 (unaudited) - 81,883
-----------------------------------
Balance at June 30, 1997 (unaudited) $14,260,491 $ 83,987
===================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
1998 1997 1997 1996 1995
------------------------------ ------------------------------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
OPERATING ACTIVITIES
Net income $ 968,445 $ 705,210 $ 967,232 $ 101,734 $ 1,148,745
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 117,684 118,576 163,466 147,738 167,521
Amortization of premium on investments 5,594 5,898 6,163 8,804 (37,827)
Amortization of deferred loan fees 48,404 26,857 46,347 23,024 (38,750)
Deferred income taxes 48,670 345,912 111,994 (331,785) 51,873
Gain on sales of loans, net (52,841) (68,471) (71,720) (2,955) 2,679
Other, net (195,536) (901,122) (872,727) 1,156,687 25,717
------------------------------ -----------------------------------------
Net cash provided by operating activities 940,420 232,860 350,755 1,103,247 1,319,958
INVESTING ACTIVITIES
Purchases of federal funds sold-term - (3,790,000) (6,100,000) - -
Proceeds from maturity of federal funds sold-term 2,100,000 -
Purchases of securities held to maturity - - - (2,651,015) (2,169,827)
Proceeds from maturity of securities held to
maturity - - 4,500,763
Principal repayment of mortgage-backed
securities 2,979,510 1,911,581 2,474,103 2,813,127 3,058,514
Proceeds from maturities of mortgage-backed
securities - - 41,119 273,462 -
Net (increase) decrease in loans (3,334,066) (7,314,475) (5,450,579) 4,487,781 (7,903,607)
Purchase of loans - - - - (10,853,867)
Proceeds from sales of loans 3,086,537 5,246,053 5,508,384 4,318,637 6,689,661
Proceeds from sales of foreclosed real estate - 58,500 115,718 - 70,777
Purchases of premises and equipment (12,678) (166,804) (175,923) (105,089) (43,209)
------------------------------ -----------------------------------------
Net cash provided by (used in) investing activities 4,819,303 (4,055,145) (3,587,178) 9,136,903 (6,650,795)
FINANCING ACTIVITIES
Net increase (decrease) in deposit amounts (673,475) 11,798,209 14,043,022 (12,859,535) (171,249)
Repayment of FHLB advances (9,000,000) (2,000,000) (5,000,000) - -
Net increase (decrease) in mortgage escrow funds 442,925 612,890 25,600 (410,203) 125,665
-------------------------------------------------------------------------
Net cash provided by (used in) financing activities (9,230,550) 10,411,099 9,068,622 (13,269,738) (45,584)
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (3,470,827) 6,588,814 5,832,199 (3,029,588) (5,376,421)
Cash and cash equivalents at beginning of period 16,052,170 10,219,971 10,219,971 13,249,559 18,625,980
------------------------------ -----------------------------------------
Cash and cash equivalents at end of period $12,581,343 $16,808,785 $16,052,170 $ 10,219,971 $ 13,249,559
=========================================================================
Supplemental disclosure of cash flow data:
Cash paid during the period for:
Interest $ 7,057,868 $ 7,388,599 $ 9,893,528 $ 9,993,704 $ 9,834,042
Taxes $ 650,342 $ 185,106 $ 234,045 $ 409,100 $ 629,800
Transfers from loans to foreclosed real estate $ - $ - $ - $ 79,426 $ 4,616
</TABLE>
See accompanying notes.
F-5
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements
September 30, 1997
1. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Citizens Savings Bank of Salisbury, S.S.B. (the Bank) is a state chartered
mutual savings bank offering full service banking to those within Salisbury and
the surrounding communities. The Bank's primary regulator is the Federal
Deposit Insurance Corporation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Citizens Savings
Bank of Salisbury, S.S.B. and its wholly-owned subsidiary, Carolina Service
Corporation. Significant intercompany accounts and transactions have been
eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited interim financial statements and related financial
information in the footnotes have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission for interim financial
statements and reflect all adjustments, which consist solely of normal recurring
accruals, which in the opinion of management, are necessary to present fairly
the financial position of the Bank at June 30, 1998 and the results of
operations and cash flows for the nine month periods ended June 30, 1998 and
1997. The nature of the Bank's business is such that the results of any interim
period may not be indicative of the results to be expected for the entire
period.
USE OF ESTIMATES
The financial statements are prepared in accordance with generally accepted
accounting principles which require management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks, and
overnight federal funds sold. The Bank considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents.
F-6
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
MORTGAGE-BACKED SECURITIES
Management determines the appropriate classification of securities at the time
of purchase. Securities are classified as held to maturity when the Bank has the
positive intent and ability to hold the securities to maturity. Held to
maturity securities are stated at amortized cost.
Securities not classified as held to maturity are classified as available for
sale. Available for sale securities are stated at fair value, with the
unrealized gains and losses, net of tax, reported in retained earnings.
The amortized cost of mortgage-backed securities is adjusted for amortization of
premiums and accretion of discounts over the estimated life of the security.
Such amortization is included in interest income from investments. The cost of
securities sold is based on the specific identification method.
LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses and any deferred fees or costs on originated loans and unearned income.
Loan origination and commitment fees and certain direct costs are deferred and
the net amount amortized as an adjustment of the related loan's yield over the
estimated lives of the related loans by use of the interest method.
The Bank provides a reserve for uncollected interest on all accrued interest on
loans which are more than ninety days delinquent. Interest income is recognized
on impaired loans only to the extent cash payments are received. The interest
reserve is a reduction of accrued interest receivable for financial reporting
purposes.
An allowance for loan losses is established by a provision charged to operations
based on management's evaluation of the probable loss inherent in the loan
portfolio. Such evaluation, which includes a review of all loans for which full
collectibility may not be reasonably assured, considers, among other matters,
the estimated net realizable value of the underlying collateral.
F-7
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
FORECLOSED REAL ESTATE
Foreclosed real estate acquired in settlement of loans is carried at the lower
of cost or the fair value minus estimated costs to sell. Costs relating to the
development and improvement of property are capitalized to the extent of the
property's net realizable value, whereas those relating to holding the property
are charged to expense.
PREMISES AND EQUIPMENT
Premises and equipment is stated at cost. Depreciation is computed by the
straight-line method over the assets' estimated useful lives for financial
reporting purposes.
INCOME TAXES
The Bank accounts for income taxes using the liability method in accordance with
FASB Statement No.E109, Accounting for Income Taxes, which requires an asset and
liability approach to accounting for income taxes. Under Statement No. 109,
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.
RECLASSIFICATIONS
Certain amounts reported in the previous year have been reclassified to conform
with the current method of presentation. These reclassifications did not impact
net income or retained earnings.
2. MORTGAGE-BACKED SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and market
values of investments in mortgage-backed securities are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
(UNAUDITED)
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
- ------------------------
Mortgage-backed securities $1,871,390 $ 47,101 $ - $1,918,491
AVAILABLE FOR SALE
- ------------------------
Mortgage-backed securities 7,631,492 198,143 - 7,829,635
------------------------------------------------
$9,502,882 $245,244 $ - $9,748,126
================================================
</TABLE>
F-8
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
2. MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
----------------
Mortgage-backed securities $ 2,328,072 $ 46,696 $ - $ 2,374,768
AVAILABLE FOR SALE
------------------
Mortgage-backed securities 10,159,914 191,032 16,161 10,334,785
--------------------------------------------------
$12,487,986 $237,728 $16,161 $12,709,553
==================================================
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY
----------------
Mortgage-backed securities $ 2,520,595 $ 2,228 $ 4,013 $ 2,518,810
AVAILABLE FOR SALE
----------------------------
Mortgage-backed securities 12,488,776 183,344 179,893 12,492,227
--------------------------------------------------
$15,009,371 $185,572 $183,906 $15,011,037
==================================================
</TABLE>
On December 12, 1995, the Bank reclassified securities with an amortized cost of
$14,921,491 (fair value $14,953,672) from held-to-maturity to available-for-
sale. The reclassification was made pursuant to a reassessment of the
investment securities portfolio based on the issuance of a special report by the
Financial Accounting Standards Board A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities. In
accordance with the report, business entities were allowed a one time
reclassification of the investment securities portfolio between November 15,
1995 and December 31, 1995.
Mortgage-backed securities are not due at a single maturity date. Hence, there
is no contractual maturity for mortgage-backed securities as of September 30,
1997.
Securities carried at $581,438 (unaudited), $1,957,271 and $893,442 at June 30,
1998, September 30, 1997 and 1996, respectively, were designated as security for
deposits and public funds.
F-9
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
3. LOANS RECEIVABLE, NET
Loans receivable, net consisted of the following:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1998 1997 1996
-------------- ---------------------------
<S> <C> <C> <C>
(UNAUDITED)
Mortgage loans $161,193,236 $161,369,776 $161,234,614
Other loans 1,751,107 1,918,690 2,220,839
------------- ---------------------------
162,944,343 163,288,466 163,455,453
Less:
Allowance for loan losses 1,223,627 1,222,675 1,215,301
Loans in process 1,843,857 2,446,664 2,618,575
Deferred fees, net 63,500 56,828 25,756
Unearned income 103,250 104,156 105,246
------------- ---------------------------
3,234,234 3,830,323 3,964,878
------------- ---------------------------
$159,710,109 $159,458,143 $159,490,575
============= ===========================
</TABLE>
Mortgage loans at June 30, 1998, September 30, 1997 and 1996, are net of
participations and whole loans serviced for others, in the amounts of
$56,958,484 (unaudited), $66,796,725 and $74,854,060, respectively. Custodial
escrow balances maintained in connection with loans serviced for others were
$536,411 (unaudited), $379,987 and $398,750 at June 30, 1998, September 30, 1997
and 1996, respectively.
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30 YEAR ENDED SEPTEMBER 30
1998 1997 1997 1996 1995
------------------------ -----------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning
of period $1,222,675 $1,215,301 $1,215,301 $1,214,570 $1,204,700
Charge-offs - - - - -
Recoveries 952 9,713 7,374 731 9,870
----------------------- ----------------------------------
Balance at end of
period $1,223,627 $1,225,014 $1,222,675 $1,215,301 $1,214,570
======================= ==================================
</TABLE>
F-10
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
3. LOANS RECEIVABLE, NET (CONTINUED)
The Bank primarily grants residential loans to customers in Salisbury, North
Carolina and surrounding communities. The loans typically do not exceed 80% of
the appraised value of the security property. Pursuant to underwriting
guidelines adopted by the Board of Directors, the Bank can lend up to 95% of the
appraised value of the property securing a one-to-four family residential loan;
however, the Bank generally obtains private mortgage insurance on the portion of
the principal amount that exceeds 80% of the appraised value of the security
property.
Effective October 1, 1995, the Bank prospectively adopted FASB Statement No. 114
Accounting by Creditors for Impairment of a Loan (FASB 114), as amended by FASB
Statement No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures (FASB 118). This standard defines a loan as
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Impaired loans are measured at the present value
of expected future cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain collateral dependent loans. The
adoption of FASB 114 and FASB 118 did not have a material impact on the
Corporation's financial position or results of operations. Impaired loans
totaled $129,691 (unaudited), $346,639 and $2,417 at June 30, 1998, September
30, 1997 and 1996, respectively.
The Bank adopted FASB Statement No. 122, Accounting for Mortgage Servicing
Rights, (FASB 122) as of October 1, 1996. This standard relates to the
capitalization of mortgage servicing rights applied to transactions involving
the sale of mortgage loans with servicing rights retained. The adoption of FASB
122 did not have a material impact on the Bank's financial position or results
of operations.
The Bank adopted FASB Statement No. 125 Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities, (FASB 125), as of January
1, 1997. This Statement, which supercedes FASB 122, provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of FASB 125 did not have a
material impact on the Bank's financial position or results of operations.
F-11
<PAGE>
CITIZENS SAVINGS BANK OF SALISBURY, S.S.B.
Notes to Consolidated Financial Statements (continued)
4. OPERATING LEASES
The following is a summary of future minimum rental payments for office
facilities required under operating leases that have initial or remaining
noncancellable lease terms in excess of one year:
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1998 $ 41,676
1999 41,676
2000 17,365
----------
Total minimum payments required $100,717
==========
</TABLE>
Rental expense was $31,257 (unaudited) for the nine months ended June 30, 1998
and 1997 and $41,676 for the years ended September 30, 1997, 1996 and 1995.
5. DEPOSIT ACCOUNTS
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30
1998 1997 1996
------------- ---------------------------
<S> <C> <C> <C>
(UNAUDITED)
Demand $ 1,376,276 $ 1,549,739 $ 864,583
NOW 5,797,720 5,247,427 4,109,642
Money market 2,931,831 3,125,504 3,547,375
Passbook savings 38,193,899 31,395,288 26,133,674
Certificates of deposit 111,519,363 119,174,606 111,794,268
-------------- ---------------------------
Total deposits $159,819,089 $160,492,564 $146,449,542
============== ===========================
</TABLE>
Demand deposits are non-interest bearing. All other deposit types bear
interest.
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $18,134,108 (unaudited), $18,015,064 and $15,694,000 at June 30,
1998, September 30, 1997 and 1996, respectively.
At September 30, 1997, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1998 $ 86,590,788
1999 23,424,222
2000 8,495,616
2001 357,427
2002 and thereafter 306,553
--------------
$119,174,606
==============
</TABLE>
F-12
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
5. DEPOSIT ACCOUNTS (CONTINUED)
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30 YEAR ENDED SEPTEMBER 30
1998 1997 1997 1996 1995
------------------------ ------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NOW $ 59,746 $ 56,001 $ 73,973 $ 71,690 $ 83,261
Money market 53,595 63,637 83,380 102,698 154,270
Passbook savings 1,171,829 967,377 1,318,969 1,013,908 533,280
Certificates of deposit 4,798,877 4,919,857 6,622,872 6,932,768 7,359,036
------------------------ ------------------------------------
$6,084,047 $6,006,872 $8,099,194 $8,121,064 $8,129,847
======================== ====================================
</TABLE>
The Bank had on deposit amounts from certain directors and executive officers of
$821,116 (unaudited), $923,960 and $747,542 as of June 30, 1998, September 30,
1997 and 1996, respectively.
6. ADVANCES FROM THE FEDERAL HOME LOAN BANK
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB and qualifying first mortgage
loans. The carrying value of qualifying first mortgage loans was $139,250,257
(unaudited), $139,767,321 and $141,954,076 as of June 30, 1998, September 30,
1997 and 1996, respectively.
At September 30, 1997, scheduled maturities of FHLB advances are summarized as
follows:
<TABLE>
<CAPTION>
Year ending September 30:
<S> <C>
1998 $12,000,000
1999 9,000,000
2000 1,000,000
-------------
Total minimum payments required $22,000,000
=============
</TABLE>
Interest rates on FHLB advances are fixed, and the weighted average interest
rate was 6.89% at June 30, 1998 (unaudited) and September 30, 1997. The Bank
had available credit with the FHLB of $27,000,000 (unaudited) and $18,000,000 as
of June 30, 1998 and September 30, 1997, respectively.
F-13
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN
The Bank has a non-contributory defined benefit plan covering all employees
eligible based on age and years of service. Benefits are based on length of
service and a percentage of qualifying compensation. The Bank uses the
projected unit credit method as its actuarial method.
The following table sets forth the funded status and amount recognized for the
Bank's defined benefit plan in the consolidated statements of condition at
September 30:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
----------------------------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of $468,638 in
1997 and $412,426 in 1996 $(472,791) $(425,802)
============================
Actuarial present value of projected benefit obligation
for service rendered to date $(591,303) $(520,520)
Plan assets at fair value, primarily cash and cash
equivalents 636,569 591,828
----------------------------
Plan assets in excess of projected benefit obligation 45,266 71,308
Unrecognized net asset (23,255) (25,369)
Prior service cost not yet recognized in net periodic
pension cost (71,254) (77,163)
Unrecognized net gain (20,407) (23,032)
----------------------------
Accrued pension cost $ (69,650) $ (54,256)
============================
</TABLE>
Net pension cost included the following components:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
----------------------------
<S> <C> <C>
Service cost - benefits earned during the period $ 49,369 $ 55,329
Interest cost on projected benefit obligation 43,497 40,817
Expected return on investments at assumed rate
of return (51,016) (48,146)
Net amortization and deferral (8,113) (8,023)
----------------------------
Net pension cost $ 33,737 $ 39,977
============================
</TABLE>
F-14
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
7. PENSION PLAN (CONTINUED)
Following is a summary of significant actuarial assumptions used:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
--------------------------
<S> <C> <C>
Discount rates 8.0% 8.0%
Rates of increase in compensation levels 5.5 5.0
Expected long-term rate of return on assets 8.0 8.0
</TABLE>
8. INCOME TAXES
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 and liabilities are summarized as follows.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996
-------------------------
<S> <C> <C>
Deferred tax assets:
Deferred compensation $351,578 $ -
Allowance for loan losses 291,997 260,405
Depreciation 30,434 23,247
Loans to facilitate sales of foreclosed real estate 32,449 33,290
FDIC Special Assessment - 420,754
Other 65,495 38,036
-------------------------
Total deferred tax assets 771,953 775,732
Deferred tax liabilities:
FHLB stock dividends 198,782 198,782
Deferred fees 147,773 36,900
Net unrealized appreciation on securities available for 68,488 1,347
sale
Other 9,585 12,243
-------------------------
Total deferred tax liabilities 424,628 249,272
-------------------------
Net deferred tax asset $347,325 $526,460
=========================
</TABLE>
F-15
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The following is a summary of provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Current:
Federal $390,900 $ 342,537 $592,747
State 16,817 789 98,509
--------------------------------
Total current 407,717 343,326 691,256
Deferred:
Federal 90,519 (266,047) 41,595
State 21,475 (65,738) 10,278
--------------------------------
Total deferred 111,994 (331,785) 51,873
--------------------------------
$519,711 $ 11,541 $743,129
================================
</TABLE>
The Bank's effective tax rate differs from that computed at the statutory
federal income tax rate, as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Tax at statutory rate $505,559 $ 38,514 $643,237
State income tax, net of federal
income tax benefit 33,296 (30,259) 65,016
Other (19,144) 3,286 34,876
--------------------------------
$519,711 $ 11,541 $743,129
================================
</TABLE>
Savings and loan associations which met certain definitional tests and operating
requirements prescribed by the Internal Revenue Code were allowed a special bad
debt deduction, extended expiration dates for net operating loss carryforwards
and other special tax provisions.
F-16
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
The special bad debt deduction was based on either specified experience formulas
or a specified percentage of taxable income before such deduction. The
deduction was subject to certain limitations based on the aggregate loans,
savings account balances and retained earnings at year end. Gains and losses on
sales of repossessed property and provisions for losses on loans and real estate
foreclosed were generally adjustments to the tax bad debt reserve and not
included in the computation of taxable income before this deduction. Effective
October 1, 1996 this deduction was no longer allowed, therefore a portion of the
reserve was required to be recaptured in 1997. The Bank recaptured $95,428 into
income for income tax purposes for the year ended September 30, 1997.
Retained earnings at year end include tax bad debt reserves of approximately
$3,735,000, for which no provision for federal income tax has been made. If, in
the future, these amounts are used for any purpose other than to absorb bad debt
losses, or the Bank ceases to be qualified as a savings bank, they may be
subject to federal income tax at the then prevailing corporate tax rate. If
federal income taxes had been provided the deferred tax liability would have
been approximately $1,270,000.
9. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative 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 are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
As of September 30, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total
F-17
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
9. REGULATORY MATTERS (CONTINUED)
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institution's category.
(Dollars in thousands)
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
---------------- ------------------------------- ----------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------------- -------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998 (unaudited):
Tier 1 Capital
(to Risk Weighted Assets) $15,472 15.17% $4,078 Greater than 4.0% $ 6,118 Greater than 6.0%
Total Capital
(to Risk Weighted Assets) 16,696 16.37 8,157 Greater than 8.0 10,196 Greater than 10.0
Tier 1 Leverage
(to Average Assets) 15,472 8.07 7,668 Greater than 4.0 9,585 Greater than 5.0
As of September 30, 1997:
Tier 1 Capital
(to Risk Weighted Assets) 14,507 14.45 4,016 Greater than 6,024 Greater than
or Less than 4.0 or Less than 6.0
Total Capital
(to Risk Weighted Assets) 15,730 15.67 8,032 Greater than 10,040 Greater than
or Less than 8.0 or Less than 10.0
Tier 1 Leverage
(to Average Assets) 14,507 7.28 7,974 Greater than 9,967 Greater than
or Less than 4.0 or Less than 5.0
As of September 30, 1996:
Tier 1 Capital
(to Risk Weighted Assets) 13,555 13.92 3,895 Greater than 5,843 Greater than
or Less than 4.0 or Less than 6.0
Total Capital
(to Risk Weighted Assets) 14,770 15.17 7,790 Greater than 9,738 Greater than
or Less than 8.0 or Less than 10.0
Tier 1 Leverage
(to Average Assets) 13,555 7.10 7,637 Greater than 9,546 Greater than
or Less than 4.0 or Less than 5.0
</TABLE>
10. FDIC ASSESSMENT
The FDIC made a one-time assessment on all SAIF-insured deposits, for $.657 per
$100 of domestic deposits, held as of March 31, 1995. This one-time assessment
was intended to recapitalize the SAIF to the required level of 1.25% of insured
deposits, and was paid in the first quarter of fiscal 1997.
The effect on the Bank was a pretax charge of $1,074,702, or $654,000 after tax
for the year ended September 30, 1996.
F-18
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
11. OTHER NON-INTEREST EXPENSE
Other non-interest expense amounts are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30 YEAR ENDED SEPTEMBER 30
1998 1997 1997 1996 1995
-------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Printing, postage and
supplies $ 98,993 $ 96,006 $124,510 $112,020 $114,301
Professional and legal fees 75,718 68,207 83,658 90,019 96,718
Insurance premiums 23,538 26,426 33,068 45,292 51,690
Telephone 36,123 32,437 43,829 38,449 41,456
Other 218,091 224,618 312,560 355,089 389,235
-------------------- ----------------------------
$452,463 $447,694 $597,625 $640,869 $693,400
==================== ============================
</TABLE>
12. COMMITMENTS
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit. Loan commitments (unfunded loans and unused lines
of credit) are issued to accommodate the financing needs of the Bank's
customers. Loan commitments are agreements by the Bank to lend at a future
date, so long as there are no violations of any conditions established in the
agreement.
Financial instruments (primarily equity lines), where the contract amount
represents the Bank's credit risk included unused lines of credit of $13,955,811
(unaudited) and $8,927,327 at June 30, 1998 and September 30, 1997,
respectively.
These loan commitments are subject to the same credit policies and reviews as
loans on the statement of condition. Collateral, both the amount and nature, is
obtained based upon management's assessment of the credit risk. Since many of
the extensions of credit are expected to expire without being drawn, the total
commitment amounts do not necessarily represent future cash requirements.
Outstanding commitments on mortgage loans not yet closed amounted to
approximately $8,223,825 (unaudited) and $2,284,316 at June 30, 1998 and
September 30, 1997, respectively. Approximately 70% (unaudited) and 67% of
these commitments were at fixed interest rates as of June 30, 1998 and September
30, 1997, respectively Such commitments, which are funded subject to certain
limitations, extend over varying periods of time with the majority being funded
within a six-month period.
F-19
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value of expected cash flows or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rates and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. The fair value estimates presented herein are
based on pertinent information available to management. Such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Investment Securities
---------------------
Fair values for investment securities are based on quoted market prices.
For purposes of determining the fair value of Federal Home Loan Bank stock,
for which quoted market prices are not available, the carrying amount of
the stock has been considered the fair value.
Loans Receivable
----------------
The fair value of all categories of loans is estimated by discounting their
expected future cash flows using interest rates currently being offered for
loans with similar terms, reduced by an estimate of credit losses inherent
in the portfolio.
Deposit Accounts
----------------
The fair value of demand deposits (e.g., interest and non-interest bearing
and money market accounts) is assumed to be their carrying amount. The fair
value of savings certificates is estimated using a discounted cash flow
calculation that applies rates currently being offered on instruments with
similar remaining maturities.
F-20
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Advances from the Federal Home Loan Bank
----------------------------------------
The fair value of advances from the Federal Home Loan Bank is estimated
using discounted cash flow analysis based upon rates currently available to
the Bank on similar instruments.
Off-Balance Sheet Instruments
-----------------------------
Fair values of the Bank's commitments to extend credit and stand-by letters
of credit are nominal since they have short maturities, and the committed
rates approximate current rates offered for commitments with similar rate
and maturity characteristics.
Many of the Bank's assets and liabilities are short-term financial instruments
whose carrying amounts reported in the statement of condition approximate fair
value. These items include cash and due from banks, accrued interest receivable
and the financial instruments included in other assets and liabilities. The
estimated fair values of the Bank's remaining on-balance sheet financial
instruments are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
----------------------------
<S> <C> <C>
(UNAUDITED)
Financial assets:
Mortgage-backed securities $ 9,701,025 $ 9,748,126
Loans receivable 159,710,109 161,796,858
Federal Home Loan Bank stock 1,824,800 1,824,800
Financial liabilities:
Deposit accounts 159,819,089 159,886,726
Advances from the Federal Home Loan Bank 13,000,000 13,082,000
</TABLE>
F-21
<PAGE>
Citizens Savings Bank of Salisbury, S.S.B.
Notes to Consolidated Financial Statements (continued)
13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
--------------------------
<S> <C> <C>
Financial assets:
Mortgage-backed securities $ 12,662,857 $ 12,709,553
Loans receivable 159,458,143 161,354,447
Federal Home Loan Bank stock 1,824,800 1,824,800
Financial liabilities:
Deposit accounts 160,492,564 160,475,958
Advances from the Federal Home Loan Bank 22,000,000 22,141,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
CARRYING ESTIMATED
VALUE FAIR VALUE
--------------------------
<S> <C> <C>
Financial assets:
Mortgage-backed securities $ 15,012,822 $ 15,011,037
Loans receivable 159,490,575 159,215,963
Federal Home Loan Bank stock 1,824,800 1,824,800
Financial liabilities:
Deposit accounts 146,449,542 146,492,274
Advances from the Federal Home Loan Bank 27,000,000 27,146,000
</TABLE>
Statement No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Bank.
14. SUBSEQUENT EVENT
Effective September 2, 1998, the Bank converted from a North Carolina chartered
mutual savings bank to a federally chartered mutual savings bank. On September
10, 1998, the Board of Directors of the Bank adopted a Plan of Conversion (the
Plan) under which the Bank will convert from a federally chartered mutual
savings bank to a federally chartered stock savings bank. As part of the Plan,
the Bank will become a wholly-owned subsidiary of a holding company formed in
connection with the conversion. The holding company plans to issue common stock
to be sold in the conversion and will use a portion of the net proceeds to
purchase the capital stock of the Bank. The Plan is subject to approval by
regulatory authorities and the members of the Bank at a special meeting.
F-22
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by Innes Street Financial Corporation or
Citizens Bank, FSB. This Prospectus does not constitute an offer to sell or the
solicitation 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
solicitation is not authorized, or in which the person making such offer or
solicitation 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.
INNES STREET FINANCIAL CORPORATION
(Proposed Holding Company for
Citizens Bank, FSB)
UP TO 2,248,250 SHARES
COMMON STOCK
($10.00 par value per share)
PROSPECTUS
TRIDENT SECURITIES, INC.
November 12, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR
GUARANTEED
Until February 10, 1998, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution. Set forth below is an
-------------------------------------------
estimate of the amount of fees and expenses (other than the Underwriters
commissions) to be incurred in connection with the issuance and distribution of
the shares.
<TABLE>
<S> <C>
Registration and Filing Fees.............................. $ 55,000
Postage and Printing...................................... $ 100,000
Accounting Fees and Expenses.............................. $ 120,000
Appraisal and Business Plan Fees and Expenses............. $ 35,000
Legal Fees and Expenses................................... $ 165,000
Fees and Commissions to Sales Agent....................... $ 443,535
Sales Agent Expenses...................................... $ 37,500
Other .................................................... $ 45,000
-----------
$ 1,001,035
===========
</TABLE>
Item 14. Indemnification of Directors and Officers. The Registrant's
-----------------------------------------
Articles of Incorporation provide that, to the fullest extent permitted by the
North Carolina Business Corporation Act (the "NCBCA"), no person who serves as a
director shall be personally liable to the Registrant or any of its stockholders
or otherwise for monetary damages for breach of any duty as director. The
Registrant's Bylaws state that any person who at any time serves or has served
as a director or officer of the Registrant, or who, while serving as a director
or officer of the Registrant, serves or has served at the request of the
Registrant as a director, officer, partner, trustee, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, or
as a trustee or administrator under an employee benefit plan, shall have a right
to be indemnified by the Registrant to the fullest extent permitted by law
against (a) reasonable expenses, including attorneys' fees, incurred by him in
connection with any threatened, pending or completed civil, criminal,
administrative, investigative, or arbitrative action, suit, or proceeding (and
any appeal therein), whether or not brought by or on behalf of the Registrant,
seeking to hold him liable by reason of the fact that he is or was acting in
such capacity, and (b) reasonable payments made by him in satisfaction of any
judgment, money decree, fine (including an excise tax assessed with respect to
an employee benefit plan) or penalty for which he may have become liable in any
such action, suit or proceeding, or in connection with a settlement approved by
the board of directors of any such action, suit or proceeding.
Sections 55-8-50 through 55-8-58 of the NCBCA contain provisions
prescribing the extent to which directors and officers shall or may be
indemnified. Section 55-8-51 of the NCBCA permits a corporation, with certain
exceptions, to indemnify a present or former director against liability if (i)
the director conducted himself in good faith, (ii) the director reasonably
believed (x) that the director's conduct in the director's official capacity
with the corporation was in its best interests and (y) in all other cases the
director's conduct was at least not opposed to the corporation's best interests,
and (iii) in the case of any criminal proceeding, the director had no reasonable
cause to believe the director's conduct was unlawful. A corporation may not
indemnify a director in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the
II-1
<PAGE>
corporation or in connection with a proceeding charging improper personal
benefit to the director. The above standard of conduct is determined by the
board of directors, or a committee or special legal counsel or the shareholders
as prescribed in Section 55-8-55.
Sections 55-8-52 and 55-8-26 of the NCBCA require a corporation to
indemnify a director or officer in the defense of any proceeding to which the
director or officer was a party against reasonable expenses when the director or
officer is wholly successful in the director's or officer's defense, unless the
articles of incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if the director or officer is
adjudged fairly and reasonably so entitled under Section 55-8-54.
In addition, Section 55-8-57 permits a corporation to provide for
indemnification of directors, officers, employees or agents, in its articles of
incorporation or bylaws or by contract or resolution, against liability in
various proceedings and to purchase and maintain insurance policies on behalf of
these individuals.
The foregoing is only a general summary of certain aspects of North
Carolina law dealing with indemnification of directors and officers and does not
purport to be complete. It is qualified in its entirety by reference to the
relevant statutes, which contain detailed specific provisions regarding the
circumstances under which and the person for whose benefit indemnifications
shall or may be made.
Item 15. Recent Sales of Unregistered Securities. On August 31, 1998,
---------------------------------------
Registrant sold one share of common stock, no par value per share, to Ronald E.
Bostian for an aggregate purchase price of $10.00. Such sale was exempt from
registration under Section 4(2) of Securities Act of 1933.
Item 16. Exhibits. The following exhibits and financial statement schedules
--------
are filed herewith or will, as noted, be filed by amendment.
II-2
<PAGE>
(a) Exhibits
--------
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K) Description
--------------- -----------
*(1)(a) Engagement letter dated April 27, 1988 between
Citizens Savings Bank of Salisbury, SSB and
Trident Securities, Inc.
(1)(b) Form of Sales Agency Agreement among Innes
Street Financial Corporation, Citizens Bank, FSB
and Trident Securities, Inc.
(2) Amended and Restated Plan of Conversion of
Citizens Bank, FSB
*(3)(i) Articles of Incorporation of Innes Street
Financial Corporation
*(3)(ii) Bylaws of Innes Street Financial Corporation
(4) Forms of Stock Certificate for Innes Street
Financial Corporation and Citizens Bank, FSB
*(5) Opinion and consent of Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P. as to legality of
securities to be registered hereby
*(8)(a) Opinion and consent of Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P. as to federal and
state tax consequences
*(8)(b) Opinion of Ferguson & Company as to the value of
subscription rights
*(10)(a) Letter Agreement dated April 29, 1998 between
Citizens Savings Bank of Salisbury, SSB and
Ferguson & Company for appraisal services and
for services in connection with preparation of a
regulatory business plan
*(10)(b) Form of Employment Agreement to be entered into
between Citizens Bank, FSB and Ronald E. Bostian
II-3
<PAGE>
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K) Description
--------------- -----------
*(10)(c) Form of the Management Recognition Plan and
Trust of Citizens Bank, FSB
*(10)(d) Form of Registrant's Stock Option Plan
*(10)(e) Form of Citizens Bank, FSB Severance Plan
*(10)(f) Amended and Restated Nonqualified Deferred
Compensation Plan
*(10)(g) Amended and Restated Directors Deferred
Compensation Plan
*(23)(a) Consent of Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P. (See Exhibits (5) and (8)(a))
(23)(b) Consent of Ernst & Young, L.L.P.
(23)(c) Consent of Ferguson & Company
*(27) Financial Data Schedule (Electronic Filing Only)
(99)(a) Appraisal Report of Ferguson & Company
*(99)(b) Form of Stock Order Form
(99)(c) Summary Proxy Statement
*Filed Previously
(b) Financial Statement Schedules
-----------------------------
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
Item 17. Undertakings.
------------
(a) The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter
to permit prompt delivery to each purchaser.
II-4
<PAGE>
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement or Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Salisbury, North
Carolina, on October 30, 1998.
Innes Street Financial Corporation
By: /s/ Ronald E. Bostian
---------------------------------
Ronald E. Bostian
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ Ronald E. Bostian Date: October 30, 1998
- ----------------------------------------
Ronald E. Bostian
(President and Chief Executive Officer)
/s/ Dianne E. Hawkins Date: October 30, 1998
- ----------------------------------------
Dianne E. Hawkins
(Vice President, Treasurer and Controller)
/s/ Malcolm B. Blankenship, Jr. Date: October 30, 1998
- ----------------------------------------
Malcolm B. Blankenship, Jr.
(Director)
/s/ James W. Duke Date: October 30, 1998
- ----------------------------------------
James W. Duke
(Director)
/s/ Harold C. Earnhardt Date: October 30, 1998
- ----------------------------------------
Harold C. Earnhardt
(Vice Chairman)
/s/ K.V. Epting, Jr. Date: October 30, 1998
- ----------------------------------------
K.V. Epting, Jr.
(Director)
/s/ Gordon P. Hurley Date: October 30, 1998
- ----------------------------------------
Gordon P. Hurley
(Director)
/s/ Bobby A. Lomax Date: October 30, 1998
- ----------------------------------------
Bobby A. Lomax
(Director)
II-6
<PAGE>
(Director)
INDEX TO EXHIBITS
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K) Description
--------------- -----------
*(1)(a) Engagement letter dated April 27, 1988 between
Citizens Savings Bank of Salisbury, SSB and
Trident Securities, Inc.
(1)(b) Form of Sales Agency Agreement among Innes
Street Financial Corporation, Citizens Bank, FSB
and Trident Securities, Inc.
(2) Amended and Restated Plan of Conversion of
Citizens Bank, FSB
*(3)(i) Articles of Incorporation of Innes Street
Financial Corporation
*(3)(ii) Bylaws of Innes Street Financial Corporation
(4) Forms of Stock Certificate for Innes Street
Financial Corporation and Citizens Bank, FSB
*(5) Opinion and consent of Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P. as to legality of
securities to be registered hereby
*(8)(a) Opinion and consent of Brooks, Pierce, McLendon,
Humphrey & Leonard, L.L.P. as to federal and
state tax consequences
*(8)(b) Opinion of Ferguson & Company as to the value of
subscription rights
*(10)(a) Letter Agreement dated April 29, 1998 between
Citizens Savings Bank of Salisbury, SSB and
Ferguson & Company for appraisal services and
for services in connection with preparation of a
regulatory business plan
*(10)(b) Form of Employment Agreement to be entered into
between Citizens Bank, FSB and Ronald E.
Bostian
<PAGE>
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K) Description
--------------- -----------
*(10)(c) Form of the Management Recognition Plan and
Trust of Citizens Bank, FSB
*(10)(d) Form of Registrant's Stock Option Plan
*(10)(e) Form of Citizens Bank, FSB Severance Plan
*(10)(f) Amended and Restated Nonqualified Deferred
Compensation Plan
*(10)(g) Amended and Restated Directors Deferred
Compensation Plan
*(23)(a) Consent of Brooks, Pierce, McLendon, Humphrey &
Leonard, L.L.P. (See Exhibits (5) and (8)(a))
(23)(b) Consent of Ernst & Young, L.L.P.
(23)(c) Consent of Ferguson & Company
*(27) Financial Data Schedule (Electronic Filing Only)
(99)(a) Appraisal Report of Ferguson & Company
*(99)(b) Form of Stock Order Form
(99)(c) Summary Proxy Statement
*Filed Previously
<PAGE>
INNES STREET FINANCIAL CORPORATION
COMMON STOCK
1,445,000 TO 2,248,250 SHARES
$10.00 PER SHARE
SALES AGENCY AGREEMENT
----------------------
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Dear Sirs:
Innes Street Financial Corporation, a North Carolina-chartered corporation
(the "Company"), and Citizens Bank, FSB, a federally chartered and insured
mutual savings association (the "Bank"), hereby confirm, as of _____________,
their respective agreements with Trident Securities, Inc. ("Trident"), a broker-
dealer registered with the Securities and Exchange Commission ("Commission") and
a member of the National Association of Securities Dealers, Inc. ("NASD"), as
follows:
1. Introductory. The Bank intends to convert from a federally chartered
------------
mutual savings association to a federally chartered stock savings association as
a wholly owned subsidiary of the Company (together with the Offerings, as
defined below, the issuance of shares of common stock of the Bank to the Company
and the incorporation of the Company, the "Conversion") pursuant to a plan of
conversion adopted on September 10, 1998, (as amended, if amended, the "Plan").
In accordance with the Plan, the Company is offering shares of its common stock
(the "Shares" and the "Common Stock"), pursuant to nontransferable subscription
rights in a subscription offering (the "Subscription Offering") to certain
depositors and borrowers of the Bank and to the Bank's tax-qualified employee
benefit plans (i.e., the Bank's Employee Stock Ownership Plan (the "ESOP")).
Shares of the Common Stock not sold in the Subscription Offering may be offered
to the general public in a community offering, with preference given to natural
persons residing in Rowan and Iredell Counties, North Carolina, (the "Community
Offering"), subject to the right of the Company and the Bank, in their absolute
discretion, to reject orders in the Community Offering in whole or in part.
Shares not sold in the Subscription Offering or otherwise in the Community
Offering may be offered to certain members of the general public as part of the
Community Offering by a group of broker-dealers (the "Syndicated Community
Offering") (the Subscription Offering and, if any, the Community and Syndicated
Community Offerings are sometimes referred to collectively as the "Offerings").
In the Offerings, the Company is offering between 1,445,000 and 1,955,000
Shares, with the possibility
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 2
of offering up to 2,248,250 Shares without a resolicitation of subscribers, as
contemplated by Part 563b of Title 12 of the Code of Federal Regulations. With
the exception of the ESOP, no person (or persons through a single account) may
purchase in the Offerings more than 20,000 Shares; no person, together with
associates of and persons acting in concert with such person, may purchase in
the Offerings more than 20,000 Shares.
The Company and the Bank have been advised by Trident that it will utilize
its best efforts in assisting the Company and the Bank with the sale of the
Shares in the Offerings, including any Syndicated Community Offering. Prior to
the execution of this Agreement, the Company has delivered to Trident a
prospectus dated as of the date hereof and all supplements thereto to be used in
the Offerings. Such prospectus contains information with respect to the
Company, the Bank and the Shares.
2. Representations and Warranties.
------------------------------
(a) The Company and the Bank jointly and severally represent and
warrant to Trident that:
(i) The Company has filed with the Commission a registration
statement, including exhibits and an amendment or amendments thereto,
on Form S-1 (No. 333-63363), including a prospectus relating to the
Offerings, for the registration of the Shares under the Securities Act
of 1933, as amended (the "Act"); and such registration statement has
become effective under the Act and no stop order has been issued with
respect thereto and no proceedings therefor have been initiated or, to
the Company's best knowledge, threatened by the Commission. Except as
the context may otherwise require, such registration statement, as
amended or supplemented, on file with the Commission at the time the
registration statement became effective, including the prospectus,
financial statements, schedules, exhibits and all other documents
filed as part thereof, as amended and supplemented, is herein called
the "Registration Statement," and the prospectus, as amended or
supplemented, on file with the Commission at the time the Registration
Statement became effective is herein called the "Prospectus," except
that if the prospectus filed by the Company with the Commission
pursuant to Rule 424(b) of the general rules and regulations of the
Commission under the Act (together with the enforceable published
policies and actions of the Commission thereunder, the "SEC
Regulations") differs from the form of prospectus on file at the time
the Registration Statement became effective, the term "Prospectus"
shall refer to the Rule 424(b) prospectus from and after the time it
is filed with or mailed for filing to the Commission and shall include
any
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 3
amendments or supplements thereto from and after their dates of
effectiveness or use, respectively. If any Shares remain unsubscribed
following completion of the Subscription Offering and, if any, the
Community Offering, the Company (i) will promptly file with the
Commission a post-effective amendment to such Registration Statement
relating to the results of the Subscription Offering and, if any, the
Community Offering, any additional information with respect to the
proposed plan of distribution and any revised pricing information or
(ii) if no such post-effective amendment is required, will file with,
or mail for filing to, the Commission a prospectus or prospectus
supplement containing information relating to the results of the
Subscription Offering and, if any, the Community Offering and pricing
information pursuant to Rule 424(c) of the Regulations, in either case
in a form reasonably acceptable to the Company and Trident.
(ii) The Bank has filed an Application for Approval of
Conversion on Form AC, including exhibits (as amended or supplemented,
the "Form AC" and together with the Form H-(e)1-S referred to below,
the "Conversion Application") with the Office of Thrift Supervision
(the "Office") under the Home Owners' Loan Act, as amended (the
"HOLA") and the enforceable rules and regulations, including published
policies and actions, of the Office thereunder (the "OTS
Regulations"), which has been approved by the Office; and the
Prospectus and the proxy statement for the solicitation of proxies
from members for the special meeting to approve the Plan (the "Proxy
Statement") included as part of the Form AC have been approved for use
by the Office. No order has been issued by the Office preventing or
suspending the use of the Prospectus or the Proxy Statement; and no
action by or before the Office revoking such approvals is pending or,
to the Bank's best knowledge, threatened. The Company has filed with
the Office the Company's application on Form H-(e)1-S promulgated
under the savings and loan holding company provisions of the HOLA and
the OTS Regulations and has received approval of its acquisition of
the Bank from the Office.
(iii) At the date of the Prospectus and at all times subsequent
thereto through and including the Closing Date (i) the Registration
Statement and the Prospectus (as amended or supplemented, if amended
or supplemented) complied with the Act and the Regulations, (ii) the
Registration Statement (as amended or supplemented, if amended or
supplemented) did not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (iii) the
Prospectus (as amended or supplemented, if amended or supplemented)
did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 4
circumstances under which they were made, not misleading.
Representations or warranties in this subsection shall not apply to
statements or omissions made in reliance upon and in conformity with
written information furnished to the Company or the Bank relating to
Trident by or on behalf of Trident expressly for use in the
Registration Statement or Prospectus.
(iv) The Company has been duly organized as a North Carolina
corporation, and the Bank has been duly organized as a mutual savings
association under the laws of the United States, and each of them is
validly existing and in good standing under the laws of the
jurisdiction of its organization with full power and authority to own
its property and conduct its business as described in the Registration
Statement and Prospectus; the Bank is a member in good standing of the
Federal Home Loan Bank of Atlanta; and the deposit accounts of the
Bank are insured by the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC") up
to the applicable legal limits. Each of the Company and the Bank is
not required to be qualified to do business as a foreign corporation
in any jurisdiction where non-qualification would have a material
adverse effect on the Company and the Bank, taken as a whole. The Bank
does not own equity securities of or an equity interest in any
business enterprise except as described in the Prospectus. Upon
amendment of the Bank's charter and bylaws as provided in the rules
and regulations of the Office and completion of the sale by the
Company of the Shares as contemplated by the Prospectus, (i) the Bank
will be converted pursuant to the Plan to a federally chartered
capital stock savings association with full power and authority to own
its property and conduct its business as described in the Prospectus,
(ii) all of the authorized and outstanding capital stock of the Bank
will be owned of record and beneficially by the Company, and (iii) the
Company will have no direct subsidiaries other than the Bank.
(v) The Bank has good, marketable and insurable title to all
assets material to its business and to those assets described in the
Prospectus as owned by it, free and clear of all material liens,
charges, encumbrances or restrictions, except for liens for taxes not
yet due, except as described in the Prospectus and except as could not
in the aggregate have a material adverse effect upon the operations or
financial condition of the Bank; and all of the leases and subleases
material to the operations or financial condition of the Bank, under
which it holds properties, including those described in the
Prospectus, are in full force and effect as described therein.
(vi) The execution and delivery of this Agreement and the
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 5
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary actions on the part of each of
the Company and the Bank, and this Agreement is a valid and binding
obligation with valid execution and delivery of each of the Company
and the Bank, enforceable in accordance with its terms (except as the
enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of
creditors of savings and loan holding companies the accounts of whose
subsidiaries are insured by the FDIC or by general equity principles,
regardless of whether such enforceability is considered in a
proceeding in equity or at law, and except to the extent that the
provisions of Sections 8 and 9 hereof may be unenforceable as against
public policy or pursuant to Sections 23A and 23B of the Federal
Reserve Act, 12 U.S.C. Sections 371c and 371c-1 (collectively,
"Section 23A")).
(vii) There is no litigation or governmental proceeding pending
or, to the best knowledge of the Company or the Bank, threatened
against or involving the Company, the Bank or any of their respective
assets which individually or in the aggregate would reasonably be
expected to have a material adverse effect on the condition (financial
or otherwise), results of operations and business, including the
assets and properties, of the Company and the Bank, taken as a whole.
(viii) The Company and the Bank have received the opinions of
__________________ with respect to federal tax consequences of the
Conversion, and of __________________, with respect to North Carolina
tax consequences of the Conversion, to the effect that the Conversion
will constitute a tax-free reorganization under the Internal Revenue
Code of 1986, as amended, and will not be a taxable transaction for
the Bank or the Company under the laws of North Carolina, and the
facts relied upon in such opinions are accurate and complete.
(ix) Each of the Company and the Bank has all such corporate
power, authority, authorizations, approvals and orders as may be
required to enter into this Agreement and to carry out the provisions
and conditions hereof, subject to the limitations set forth herein and
subject to the satisfaction of certain conditions imposed by the
Office in connection with its approvals of the Form AC and the
Application H-(e)1-S, and, except as may be required under the
securities laws of various jurisdictions, and, in the case of the
Company, as of the Closing Date, will have such approvals and orders
to issue and sell the Shares to be sold by the Company as provided
herein, and, in the case of the Bank, as of the Closing Date, will
have such approvals and orders to issue and sell the Shares of its
Common
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 6
Stock to be sold to the Company as provided in the Plan, subject to
the issuance of an amended charter in the form required for federally
chartered stock savings associations (the "Stock Charter"), the form
of which Stock Charter has been approved by the Office.
(x) Neither the Company nor the Bank is in violation of any
rule or regulation of the Office or the FDIC that could reasonably be
expected to result in any enforcement action against the Company, the
Bank or their officers or directors that might have a material adverse
effect on the condition (financial or otherwise), operations,
businesses, assets or properties of the Company and the Bank, taken as
a whole.
(xi) The financial statements and any related notes or
schedules which are included in the Registration Statement and the
Prospectus fairly present the financial condition, income, retained
earnings and cash flows of the Bank at the respective dates thereof
and for the respective periods covered thereby and comply as to form
with the applicable accounting requirements of the SEC and OTS
Regulations. Such financial statements have been prepared in
accordance with generally accepted accounting principles consistently
applied throughout the periods involved, except as set forth therein,
and such financial statements are consistent with financial statements
and other reports filed by the Bank with supervisory and regulatory
authorities except as such generally accepted accounting principles
may otherwise require. The tables in the Prospectus accurately present
the information purported to be shown thereby at the respective dates
thereof and for the respective periods therein.
(xii) There has been no material change in the condition
(financial or otherwise), results of operations or business, including
assets and properties, of the Company and the Bank, taken as a whole,
since the latest date as of which such condition is set forth in the
Prospectus, except as set forth therein; and the capitalization,
assets, properties and business of each of the Company and the Bank
conform to the descriptions thereof contained in the Prospectus. None
of the Company or the Bank has any material liabilities of any kind,
contingent or otherwise, except as set forth in the Prospectus.
(xiii) There has been no breach or default (or the occurrence of
any event which, with notice or lapse of time or both, would
constitute a default) under, or creation or imposition of any lien,
charge or other encumbrance upon any of the properties or assets of
the Company or the Bank pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, debenture,
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 7
note, instrument or obligation to which the Company or the Bank is a
party or by which any of them or any of their respective assets or
properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, writ, injunction or
decree, which breach, default, encumbrance or violation would have a
material adverse effect on the condition (financial or otherwise),
operations, business, assets or properties of the Company and the
Bank, taken as a whole; all agreements which are material to the
condition (financial or otherwise), results of operations or business
of the Company and the Bank, taken as a whole are in full force and
effect, and no party to any such agreement has instituted or, to the
best knowledge of the Company and the Bank, threatened any action or
proceeding wherein the Company or the Bank would be alleged to be in
default thereunder.
(xiv) None of the Company or the Bank is in violation of its
respective charter or bylaws. The execution and delivery hereof and
the consummation of the transactions contemplated hereby by the
Company and the Bank do not conflict with or result in a breach of the
charter or bylaws of the Company or the Bank (in either mutual or
stock form) or constitute a material breach of or default (or an event
which, with notice or lapse of time or both, would constitute a
default) under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of
any lien, charge or other encumbrance upon any of the properties or
assets of the Company or the Bank pursuant to any of the terms,
provisions or conditions of, any material agreement, contract,
indenture, bond, debenture, note, instrument or obligation to which
the Company or the Bank is a party or violate any governmental license
or permit or any enforceable published law, administrative regulation
or order or court order, writ, injunction or decree (subject to the
satisfaction of certain conditions imposed by the Office in connection
with its approval of the Conversion Application), which breach,
default, encumbrance or violation would have a material adverse effect
on the condition (financial or otherwise), operations or business of
the Company and the Bank, taken as a whole.
(xv) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus and prior to the
Closing Date (as hereinafter defined), except as otherwise may be
indicated or contemplated therein, none of the Company or the Bank has
issued any securities which will remain issued at the Closing Date or
incurred any liability or obligation, direct or contingent, or
borrowed money, except borrowings in the ordinary course of business,
or entered into any other transaction not in the ordinary course of
business and consistent with prior practices, which is material in
light of the
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 8
business of the Company and the Bank, taken as a whole.
(xvi) Upon consummation of the Conversion, the authorized,
issued and outstanding equity capital of the Company shall be within
the range as set forth in the Prospectus under the caption
"Capitalization," and no Common Stock of the Company shall be
outstanding immediately prior to the Closing Date; the issuance and
the sale of the Shares of the Company have been duly authorized by all
necessary action of the Company and approved by the Office and, when
issued in accordance with the terms of the Plan and paid for, shall be
validly issued, fully paid and nonassessable and shall conform to the
description thereof contained in the Prospectus; the issuance of the
Shares is not subject to preemptive rights, except as set forth in the
Prospectus; and good title to the Shares will be transferred by the
Company upon issuance thereof against payment therefor, free and clear
of all claims, encumbrances, security interests and liens against the
Company whatsoever. The certificates representing the Shares will
conform in all material respects with the requirements of applicable
laws and regulations. The issuance and sale of the capital stock of
the Bank to the Company has been duly authorized by all necessary
action of the Bank and the Company and appropriate regulatory
authorities (subject to the satisfaction of various conditions imposed
by the Office in connection with its approval of the Conversion
Application), and such capital stock, when issued in accordance with
the terms of the Plan, will be fully paid and nonassessable and will
conform in all material respects to the description thereof contained
in the Prospectus.
(xvii) No approval of any regulatory or supervisory or other
public authority is required in connection with the execution and
delivery of this Agreement or the issuance of the Shares, except for
the declaration of effectiveness of any required post-effective
amendment by the Commission and approval thereof by the Office and
approval of the Company's application on Form H-(e)1-S by the Office,
the issuance of the Stock Charter by the Office and as may be required
under the securities laws of various jurisdictions.
(xviii) All contracts and other documents required to be filed as
exhibits to the Registration Statement or the Conversion Application
have been filed with the Commission and/or the Office, as the case may
be.
(xix) Ernst & Young LLP, which audited the financial statements
of the Bank at September 30, 1997 and 1996 and for each of the three
years in the period ended September 30, 1997 included in the
Prospectus, is an independent public accountant within the meaning of
the Code of Professional Ethics of the American
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 9
Institute of Certified Public Accountants and Title 12 of the Code of
Federal Regulations, Section 571.2(c)(3).
(xx) For the past five years, the Company and the Bank have
timely filed all required federal, state and local franchise tax
returns, and no deficiency has been asserted with respect to such
returns by any taxing authorities, and the Company and the Bank have
paid all taxes that have become due and, to the best of their
knowledge, have made adequate reserves for similar future tax
liabilities, except where any failure to make such filings, payments
and reserves, or the assertion of such a deficiency, would not have a
material adverse effect on the condition of the Company and the Bank,
taken as a whole.
(xxi) All of the loans represented as assets of the Bank on the
most recent financial statements of the Bank included in the
Prospectus meet or are exempt from all requirements of federal, state
or local law pertaining to lending and interest, including without
limitation truth in lending (including the requirements of Regulation
Z and 12 C.F.R. Part 226 and Section 563.99), real estate settlement
procedures, consumer credit protection, equal credit opportunity and
all disclosure laws applicable to such loans, except for violations
which, if asserted, would not have a material adverse effect on the
Company and the Bank, taken as a whole.
(xxii) The records of account holders, depositors, borrowers and
other members of the Bank delivered to Trident by the Bank or its
agent for use during the Conversion have been prepared or reviewed by
the Bank and, to the best knowledge of the Company and the Bank, are
reliable and accurate.
(xxiii) None of the Company, the Bank or, to the best knowledge
of the Company and the Bank, the employees of the Company or the Bank,
has made any payment of funds of the Company or the Bank prohibited by
law, and no funds of the Company or the Bank have been set aside to be
used for any payment prohibited by law.
(xxiv) To the best knowledge of the Company and the Bank, the
Company and the Bank are in compliance with all laws, rules and
regulations relating to the discharge, storage, handling and disposal
of hazardous or toxic substances, pollutants or contaminants and
neither the Company nor the Bank believes that the Company or the Bank
is subject to liability under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, or any
similar law, except for violations which, if asserted,
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 10
would not have a material adverse effect on the Company and the Bank,
taken as a whole. There are no actions, suits, regulatory
investigations or other proceedings pending or, to the best knowledge
of the Company or the Bank, threatened against the Company or the Bank
relating to the discharge, storage, handling and disposal of hazardous
or toxic substances, pollutants or contaminants. To the best knowledge
of the Company and the Bank, no disposal, release or discharge of
hazardous or toxic substances, pollutants or contaminants, including
petroleum and gas products, as any of such terms may be defined under
federal, state or local law, has been caused by the Company or the
Bank or, to the best knowledge of the Company or the Bank, has
occurred on, in or at any of the facilities or properties of the
Company or the Bank, except such disposal, release or discharge which
would not have a material adverse effect on the Company and the Bank,
taken as a whole.
(xxv) At the Closing Date, the Company and the Bank will have
completed the conditions precedent to, and shall have conducted the
Conversion in all material respects in accordance with, the Plan, the
HOLA, the OTS Regulations and all other applicable laws, regulations,
published decisions and orders, including all terms, conditions,
requirements and provisions precedent to the Conversion imposed by the
Office.
(b) Trident represents and warrants to the Company and the Bank that:
(i) Trident is registered as a broker-dealer with the
Commission, and is in good standing with the Commission and the NASD.
(ii) Trident is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation, with
full corporate power and authority to provide the services to be
furnished to the Company and the Bank hereunder.
(iii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary action on the part of Trident,
and this Agreement is a legal, valid and binding obligation of
Trident, enforceable in accordance with its terms (except as the
enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws relating to or affecting
the enforcement of creditors' rights generally or the rights of
creditors of registered broker-dealers accounts of whose may be
protected by the Securities Investor Protection Corporation or by
general equity principles, regardless of
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 11
whether such enforceability is considered in a proceeding in equity or
at law, and except to the extent that the provisions of Sections 8 and
9 hereof may be unenforceable as against public policy or pursuant to
Section 23A).
(iv) Each of Trident and, to Trident's knowledge, its employees,
agents and representatives who shall perform any of the services
required hereunder to be performed by Trident shall be duly authorized
and shall have all licenses, approvals and permits necessary to
perform such services, and Trident is a registered selling agent in
the jurisdictions listed in Exhibit A hereto and will remain
registered in such jurisdictions in which the Company is relying on
such registration for the sale of the Shares, until the Conversion is
consummated or terminated.
(v) The execution and delivery of this Agreement by Trident,
the fulfillment of the terms set forth herein and the consummation of
the transactions contemplated hereby shall not violate or conflict
with the corporate charter or bylaws of Trident or violate, conflict
with or constitute a breach of, or default (or an event which, with
notice or lapse of time, or both, would constitute a default) under,
any material agreement, indenture or other instrument by which Trident
is bound or under any governmental license or permit or any law,
administrative regulation, authorization, approval or order or court
decree, injunction or order.
(vi) Any funds received by Trident to purchase Common Stock will
be handled in accordance with Rule 15c2-4 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(vii) There is not now pending or, to Trident's knowledge,
threatened against Trident any action or proceeding before the
Commission, the NASD, any state securities commission or any state or
federal court concerning Trident's activities as a broker-dealer.
3. Employment of Trident; Sale and Delivery of the Shares. On the basis
------------------------------------------------------
of the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Bank hereby employ Trident
as their agent to utilize its best efforts in assisting the Company with the
Company's sale of the Shares in the Subscription Offering and, if any, the
Community Offering. The employment of Trident hereunder shall terminate (a)
forty-five (45) days after the Offerings close, unless the Company and the Bank,
with the approval of the Office, are permitted to extend such period of time, or
(b) upon consummation of the Conversion, whichever date shall first occur.
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 12
In the event the Company is unable to sell a minimum of 1,445,000 Shares
(or such lesser amount as the Office may permit) within the period herein
provided, this Agreement shall terminate, and the Company and the Bank shall
refund promptly to any persons who have subscribed for any of the Shares, the
full amount which it may have received from them, together with interest as
provided in the Prospectus, and no party to this Agreement shall have any
obligation to the other party hereunder, except as set forth in Sections 6, 8(a)
and 9 hereof. Appropriate arrangements for placing the funds received from
subscriptions for Shares in special interest-bearing accounts with the Bank
until all Shares are sold and paid for were made prior to the commencement of
the Offerings, with provision for prompt refund to the purchasers as set forth
above, or for delivery to the Company if all Shares are sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of all Shares required by the Plan to be sold, the
Company agrees to issue or have issued such Shares and to release for delivery
certificates to subscribers thereof for such Shares on the Closing Date against
payment to the Company by any means authorized pursuant to the Prospectus, at
the principal office of the Company at 401 West Innes Street, Salisbury, North
Carolina 28144, or at such other place as shall be agreed upon between the
parties hereto. The date upon which Trident is paid the compensation due
hereunder is herein called the "Closing Date."
Trident agrees either (a) upon receipt of an executed order form of a
subscriber to forward the offering price of the Common Stock ordered on or
before twelve noon on the next business day following receipt or execution of an
order form by Trident to the Bank for deposit in a segregated account or (b) to
solicit indications of interest in which event (i) Trident will subsequently
contact any potential subscriber indicating interest to confirm the interest and
give instructions to execute and return an order form or to receive
authorization to execute the order form on the subscriber's behalf, (ii) Trident
will mail acknowledgements of receipt of orders to each subscriber confirming
interest on the business day following such confirmation, (iii) Trident will
debit accounts of such subscribers on the third business day ("debit date")
following receipt of the confirmation referred to in (i), and (iv) Trident will
forward completed order forms together with such funds to the Bank on or before
twelve noon on the next business day following the debit date for deposit in a
segregated account. Trident acknowledges that if the procedure in (b) is
adopted, subscribers' funds are not required to be in their accounts until the
debit date.
In addition to the expenses specified in Section 6 hereof, Trident shall
receive the following compensation for its services hereunder:
(a)(i) a commission equal to 2.0% of the aggregate dollar amount of
Common Stock sold in the Subscription Offering and any Community Offering,
except no
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 13
commissions shall be payable on shares purchased by directors, executive
officers or their associates or employee benefit plans and (ii) a
commission to be agreed upon by Trident and the Company for Shares sold by
other member firms of the NASD through a selected dealers arrangement in
any Syndicated Community Offering. All commissions shall be based on the
amount of Common Stock sold. All such commissions are to be payable in
same-day funds to Trident on the Closing Date.
(b) Trident shall be reimbursed for allocable expenses, including but
not limited to travel, communications and postage and legal fees and
expenses, whether or not the Offerings are successfully completed;
provided, however, that neither the Company nor the Bank shall pay or
reimburse Trident for any of the foregoing expenses accrued after Trident
shall have notified the Company or the Bank of its election to terminate
this Agreement pursuant to Section 11 hereof or after such time as the
Company or the Bank shall have given notice in accordance with Section 12
hereof that Trident is in breach of this Agreement. Trident's out-of-pocket
expenses will not exceed $10,000, and its legal fees will not exceed
$27,500, without the consent of the Company and the Bank. Full payment to
defray Trident's reimbursable expenses shall be made in same-day funds on
the Closing Date or, if the Conversion is not completed and is terminated
for any reason, within ten (10) business days of receipt by the Company of
a written request from Trident for reimbursement of its expenses. Trident
acknowledges receipt of $10,000 advance payment from the Bank which shall
be credited against the total reimbursement due Trident hereunder.
(c) Notwithstanding the limitations on reimbursement of Trident for
allocable expenses provided in the immediately preceding paragraph (b), in
the event that a resolicitation or other event causes the Offerings to be
extended beyond their original expiration date, the Company and the Bank
shall reimburse Trident for its reasonable expenses incurred during such
extended period, even if the allowances for reimbursable expenses provided
for paragraph (b) above have been exhausted, provided that any
reimbursements in excess of the limitations in paragraph (b) would not be
expected to exceed an amount equal to the product obtained by dividing
$37,500 (the original reimbursable out-of-pocket expense limit),
respectively, by the total number of days of the unextended Subscription
Offering (calculated from the date of the Prospectus to the intended close
of the Subscription Offering as stated in the Prospectus) and multiplying
such product by the number of days of the extension (that number of days
from the date of the supplemental prospectus used in the extended offering
to the closing of the extension of the offering(s) described in such
supplemental prospectus).
The Company shall pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Shares. The Company and the Bank shall
also pay all expenses of the
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 14
Conversion incurred by them or on their prior approval including but not limited
to their attorneys' fees, NASD filing fees, and attorneys' fees relating to any
required state securities laws research and filings, telephone charges, air
freight, rental equipment, supplies, transfer agent charges, fees relating to
auditing and accounting and costs of printing all documents necessary in
connection with the Conversion.
4. Offering. Subject to the provisions of Section 7 hereof, Trident is
--------
assisting the Company on a best efforts basis in offering a minimum of 1,445,000
and a maximum of 1,955,000 Shares, with the possibility of offering up to
2,248,250 Shares (except as the Office may permit to be decreased or increased)
in the Offerings. The Shares are to be offered to the public at the price set
forth on the cover page of the Prospectus and the first page of this Agreement.
5. Further Agreements. The Company and the Bank jointly and severally
------------------
covenant and agree that:
(a) The Company shall deliver to Trident, from time to time, such
number of copies of the Prospectus as Trident reasonably may request. The
Company authorizes Trident to use the Prospectus in any lawful manner in
connection with the offer and sale of the Shares.
(b) The Company will notify Trident immediately upon discovery, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement becomes effective or any supplement to the
Prospectus has been filed, (ii) of the issuance by the Commission of any
stop order relating to the Registration Statement or of the initiation or
the threat of any proceedings for that purpose, (iii) of the receipt of any
notice with respect to the suspension of the qualification of the Shares
for offering or sale in any jurisdiction, and (iv) of the receipt of any
comments from the staff of the Commission relating to the Registration
Statement. If the Commission enters a stop order relating to the
Registration Statement at any time, the Company will make every reasonable
effort to obtain the lifting of such order at the earliest possible moment.
(c) During the time when a prospectus is required to be delivered
under the Act, the Company will comply so far as it is able with all
requirements imposed upon it by the Act, as now in effect and hereafter
amended, and by the Regulations, as from time to time in force, so far as
necessary to permit the continuance of offers and sales of or dealings in
the Shares in accordance with the provisions hereof and the Prospectus. If
during the period when the Prospectus is required to be delivered in
connection with the offer and sale of the Shares any event relating to or
affecting the Company and the Bank, taken as a whole, shall occur as a
result of which it is necessary, in the opinion of counsel for Trident,
with the concurrence of counsel to the Company, to amend or supplement the
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 15
Prospectus in order to make the Prospectus not false or misleading in light
of the circumstances existing at the time it is delivered to a purchaser of
the Shares, the Company forthwith shall prepare and furnish to Trident a
reasonable number of copies of an amendment or amendments or of a
supplement or supplements to the Prospectus (in form and substance
satisfactory to counsel for Trident) which shall amend or supplement the
Prospectus so that, as amended or supplemented, the Prospectus shall not
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser of the Shares, not misleading. The Company will not file or use
any amendment or supplement to the Registration Statement or the Prospectus
of which Trident has not first been furnished a copy or to which Trident
shall reasonably object after having been furnished such copy. For the
purposes of this subsection the Company and the Bank shall furnish such
information with respect to themselves as Trident from time to time may
reasonably request.
(d) The Company and the Bank have taken or will take all reasonably
necessary action as may be required to qualify or register the Shares for
offer and sale by the Company under the securities laws of such
jurisdictions as Trident and either the Company or its counsel may agree
upon; provided, however, that the Company shall not be obligated to qualify
as a foreign corporation to do business under the laws of any such
jurisdiction. In each jurisdiction where such qualification or registration
shall be effected, the Company, unless Trident agrees that such action is
not necessary or advisable in connection with the distribution of the
Shares, shall file and make such statements or reports as are, or
reasonably may be, required by the laws of such jurisdiction.
(e) Appropriate entries will be made in the financial records of the
Bank sufficient to establish a liquidation account for the benefit of
eligible account holders and supplemental eligible account holders in
accordance with the requirements of the Office.
(f) The Company will file a registration statement for the Common
Stock under Section 12(g) of the Exchange Act, prior to completion of the
stock offering pursuant to the Plan and shall request that such
registration statement be effective upon completion of the Conversion. The
Company shall maintain the effectiveness of such registration for a minimum
period of three years or for such shorter period as may be required by
applicable law.
(g) The Company will make generally available to its security holders
as soon as practicable, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 of the regulations promulgated under the Act)
covering a twelve-month period beginning not later than the
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 16
first day of the Company's fiscal quarter next following the effective date
(as defined in said Rule 158) of the Registration Statement.
(h) For a period of three (3) years from the date of this Agreement
(unless the Common Stock shall have been deregistered under the Exchange
Act), the Company will furnish to Trident, as soon as publicly available
after the end of each fiscal year, a copy of its annual report to
shareholders for such year; and the Company will furnish to Trident (i) as
soon as publicly available, a copy of each report or definitive proxy
statement of the Company filed with the Commission under the Exchange Act
or mailed to shareholders, and (ii) from time to time, such other public
information concerning the Company as Trident may reasonably request.
(i) The Company shall use the net proceeds from the sale of the Shares
consistently with the manner set forth in the Prospectus.
(j) The Company shall not deliver the Shares until each and every
condition set forth in Section 7 hereof has been satisfied, unless such
condition is waived in writing by Trident.
(k) The Company shall advise Trident, if necessary, as to the
allocation of deposits, in the case of eligible account holders, and votes,
in the case of other members, and of the Shares in the event of an
oversubscription and shall, after consultation with Trident, provide
Trident final instructions as to the allocation of the Shares ("Allocation
Instructions") in such event and such information shall be accurate and
reliable. Trident shall be entitled to rely on such instructions and shall
have no liability in respect of its reliance thereon, including without
limitation, no liability for or related to any denial or grant of a
subscription in whole or in part.
(l) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by Trident in order for Trident to
ensure compliance with the NASD's "Interpretation Relating to Free-Riding
and Withholding."
6. Payment of Expenses. Whether or not the Conversion is consummated,
-------------------
the Company and the Bank shall pay or reimburse Trident for (a) all filing fees
paid or incurred by Trident in connection with all filings with the NASD with
respect to the Offerings and, (b) in addition, if the Company is unable to sell
a minimum of 595,000 Shares or such lesser amount as the Office may permit or
the Conversion is otherwise terminated, the Company and the Bank shall reimburse
Trident for allocable expenses incurred by Trident relating to the offering of
the Shares as provided in Section 3 hereof; provided, however, that neither the
Company nor the Bank shall pay or reimburse Trident for any of the foregoing
expenses accrued after Trident shall
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 17
have notified the Company or the Bank of its election to terminate this
Agreement pursuant to Section 11 hereof or after such time as the Company or the
Bank shall have given notice in accordance with Section 12 hereof that Trident
is in breach of this Agreement.
7. Conditions of Trident's Obligations. Except as may be waived in
-----------------------------------
writing by Trident, the obligations of Trident as provided herein shall be
subject to the accuracy of the representations and warranties contained in
Section 2 hereof as of the date hereof and as of the Closing Date, to the
performance by the Company and the Bank of their obligations hereunder and to
the following conditions:
(a) At the Closing Date, Trident shall receive the favorable opinion
of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., special counsel
for the Company and the Bank, dated the Closing Date, addressed to Trident,
in form and substance reasonably satisfactory to counsel for Trident,
substantially as set forth in Exhibit B hereto.
(b) At the Closing Date, Trident shall receive the letter of Brooks,
Pierce, McLendon, Humphrey & Leonard, L.L.P., special counsel for the
Company and the Bank, dated the Closing Date, addressed to Trident, in form
and substance reasonably satisfactory to counsel for Trident, substantially
as set forth in Exhibit C hereto.
(c) Counsel for Trident shall have been furnished such documents as
they reasonably may require for the purpose of enabling them to review or
pass upon the matters required by Trident, and for the purpose of
evidencing the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained, including but
not limited to, resolutions of the Board of Directors of the Company and
the Bank regarding the authorization of this Agreement and the transactions
contemplated hereby.
(d) Prior to and at the Closing Date, in the reasonable opinion of
Trident, (i) there shall have been no material change in the condition,
financial or otherwise, business or results of operations of the Company
and the Bank, taken as a whole, since the latest date as of which such
condition is set forth in the Prospectus, except as referred to therein;
(ii) there shall have been no transaction entered into by the Company or
the Bank after the latest date as of which the financial condition of the
Company or the Bank is set forth in the Prospectus other than transactions
referred to or contemplated therein, transactions in the ordinary course of
business, and transactions which are not material to the Company and the
Bank, taken as a whole; (iii) none of the Company or the Bank shall have
received from the Office or Commission any direction (oral or written) to
make any change in the method of conducting their respective businesses
which is material to the business of the Company and the Bank, taken as a
whole, with which they have not
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 18
complied; (iv) no action, suit or proceeding, at law or in equity or before
or by any federal or state commission, board or other administrative
agency, shall be pending or threatened against the Company or the Bank or
affecting any of their respective assets, wherein an unfavorable decision,
ruling or finding would have a material adverse effect on the business,
operations, financial condition or income of the Company and the Bank,
taken as a whole; and (v) the Shares shall have been qualified or
registered for offering and sale by the Company under the securities laws
of such jurisdictions as Trident and the Company shall have agreed upon.
(e) At the Closing Date, Trident shall receive a certificate of the
principal executive, financial and accounting officer(s) of each of the
Company and the Bank, dated the Closing Date, to the effect that: (i) they
have examined the Prospectus and, at the time the Prospectus became
authorized by the Company for use, the Prospectus did not contain an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading with respect to the Company or the
Bank; (ii) since the date the Prospectus became authorized by the Company
for use, no event has occurred which should have been set forth in an
amendment or supplement to the Prospectus which has not been so set forth,
including specifically, but without limitation, any material change in the
business, condition (financial or otherwise) or results of operations of
the Company or the Bank and, the conditions set forth in clauses (ii)
through (iv) inclusive of subsection (d) of this Section 7 have been
satisfied; (iii) to the best knowledge of such officers, no order has been
issued by the Commission or the Office to suspend the Offerings or the
effectiveness of the Prospectus, and no action for such purposes has been
instituted or threatened by the Commission or the Office; (iv) to the best
knowledge of such officers, no person has sought to obtain review of the
final actions of the Office and division approving the Plan; and (v) all of
the representations and warranties contained in Section 2 of this Agreement
are true and correct, with the same force and effect as though expressly
made on the Closing Date.
(f) At the Closing Date, Trident shall receive, among other documents,
(i) copies of the letters from the Office authorizing the use of the
Prospectus and the Proxy Statement, (ii) a copy of the order of the
Commission declaring the Registration Statement effective; (iii) copies of
the letters from the Office evidencing the corporate existence of the Bank;
(iv) a copy of the letter from the appropriate North Carolina authority
evidencing the incorporation (and, if generally available from such
authority, good standing) of the Company; (v) a copy of the Company's
articles of incorporation certified by the appropriate North Carolina
governmental authority; and, (vi) if available, a copy of the letter from
the Office approving the Bank's Stock Charter.
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 19
(g) As soon as available after the Closing Date, Trident shall receive
a copy of the Bank's Certified Stock Charter executed by the appropriate
federal governmental authority.
(h) Concurrently with the execution of this Agreement, Trident
acknowledges receipt of a letter from Ernst & Young LLP, independent
certified public accountants, addressed to Trident and the Company, in
substance and form satisfactory to counsel for Trident, with respect to the
financial statements and certain financial information contained in the
Prospectus.
(i) At the Closing Date, Trident shall receive a letter in form and
substance satisfactory to counsel for Trident from Ernst & Young LLP,
independent certified public accountants, dated the Closing Date and
addressed to Trident and the Company, confirming the statements made by
them in the letter delivered by them pursuant to the preceding subsection
as of a specified date not more than five (5) days prior to the Closing
Date.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of Trident and its counsel, satisfactory to Trident and its counsel.
Any certificates signed by an officer or director of the Company or the Bank
prepared for Trident's reliance and delivered to Trident or to counsel for
Trident shall be deemed a representation and warranty by the Company and the
Bank to Trident as to the statements made therein. If any condition to
Trident's obligations hereunder to be fulfilled prior to or at the Closing Date
is not so fulfilled, Trident may terminate this Agreement or, if Trident so
elects, may waive in writing any such conditions which have not been fulfilled,
or may extend the time of their fulfillment. If Trident terminates this
Agreement as aforesaid, the Company and the Bank shall reimburse Trident for its
expenses as provided in Section 3(b) hereof.
8. Indemnification.
---------------
(a) The Company and the Bank jointly and severally agree to indemnify
and hold harmless Trident, its officers, directors and employees and each
person, if any, who controls Trident within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, against any and all loss,
liability, claim, damage and expense whatsoever and shall further promptly
reimburse such persons for any legal or other expenses reasonably incurred
by each or any of them in investigating, preparing to defend or defending
against any such action, proceeding or claim (whether commenced or
threatened) arising out of or based upon (A) any misrepresentation by the
Company or the Bank in this Agreement or any breach of warranty by the
Company or the Bank with
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 20
respect to this Agreement or arising out of or based upon any untrue or
alleged untrue statement of a material fact or the omission or alleged
omission of a material fact required to be stated or necessary to make not
misleading any statements contained in (i) the Registration Statement or
the Prospectus or (ii) any application (including the Form AC and the Form
H-(e)1-S) or other document or communication (in this Section 8
collectively called "Application") prepared or executed by or on behalf of
the Company or the Bank or based upon written information furnished by or
on behalf of the Company or the Bank, whether or not filed in any
jurisdiction, to effect the Conversion or qualify the Shares under the
securities laws thereof or filed with the Office or Commission, unless such
statement or omission was made in reliance upon and in conformity with
written information furnished to the Company or the Bank with respect to
Trident by or on behalf of Trident expressly for use in the Prospectus or
any amendment or supplement thereof or in any Application, as the case may
be, or (B) the participation by Trident in the Conversion. This indemnity
shall be in addition to any liability the Company and the Bank may have to
Trident otherwise.
(b) The Company shall indemnify and hold Trident harmless for any
liability whatsoever arising out of (i) the Allocation Instructions or (ii)
any records of account holders, depositors, borrowers and other members of
the Bank delivered to Trident by the Bank or its agents for use during the
Conversion.
(c) Trident agrees to indemnify and hold harmless the Company and the
Bank, their officers, directors and employees and each person, if any, who
controls the Company or the Bank within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act, to the same extent as the
foregoing indemnity from the Company and the Bank to Trident, but only with
respect to (A) statements or omissions, if any, made in the Prospectus or
any amendment or supplement thereof, in any Application or to a purchaser
of the Shares in reliance upon, and in conformity with, written information
furnished to the Company or the Bank with respect to Trident by or on
behalf of Trident expressly for use in the Prospectus or in any
Application; (B) any misrepresentation by Trident in Section 2(b) of this
Agreement; or (C) any liability of the Company or the Bank which is found
in a final judgment by a court of competent jurisdiction (not subject to
further appeal) to have principally and directly resulted from gross
negligence or willful misconduct of Trident.
(d) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 21
indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein and, to the extent that it may wish,
jointly with the other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than the reasonable cost of
investigation except as otherwise provided herein. In the event the
indemnifying party elects to assume the defense of any such action and
retain counsel acceptable to the indemnified party, the indemnified party
may retain additional counsel, but shall bear the fees and expenses of such
counsel unless (i) the indemnifying party shall have specifically
authorized the indemnified party to retain such counsel or (ii) the parties
to such suit include such indemnifying party and the indemnified party, and
such indemnified party shall have been advised by counsel that one or more
material legal defenses may be available to the indemnified party which may
not be available to the indemnifying party, in which case the indemnifying
party shall not be entitled to assume the defense of such suit
notwithstanding the indemnifying party's obligation to bear the fees and
expenses of such counsel. An indemnifying party against whom indemnity may
be sought shall not be liable to indemnify an indemnified party under this
Section 8 if any settlement of any such action is effected without such
indemnifying party's consent. To the extent required by law, this Section 8
is subject to and limited by the provisions of Section 23A.
9. Contribution. In order to provide for just and equitable contribution
------------
in circumstances in which the indemnity agreement provided for in Section 8
above is for any reason held to be unavailable to Trident, the Company and/or
the Bank other than in accordance with its terms, the Company or the Bank and
Trident shall contribute to the aggregate losses, liabilities, claims, damages,
and expenses of the nature contemplated by said indemnity agreement incurred by
the Company or the Bank and Trident (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Bank on the one
hand and Trident on the other from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above, but also the relative fault of the Company or
the Bank on the one hand and Trident on the other hand in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or judgments, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Bank on
the one hand and Trident on the other shall be deemed to be in the same
proportions as the total net proceeds from the Conversion received by the
Company and the
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 22
Bank bear to the total commissions received by Trident under
this Agreement. The relative fault of the Company or the Bank on the one hand
and Trident on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Bank or by Trident and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Bank and Trident agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by the indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, Trident shall not be required
to contribute any amount in excess of the amount by which commissions owed
Trident pursuant to this Agreement exceeds the amount of any damages which
Trident has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. To the extent required by law, this Section 8 is
subject to and limited by the provisions of Section 23A.
10. Survival of Agreements, Representations and Indemnities. The
-------------------------------------------------------
respective indemnities of the Company and the Bank and Trident and the
representation and warranties of the Company and the Bank and of Trident set
forth in or made pursuant to this Agreement shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of Trident or the Company or the Bank or any
controlling person or indemnified party referred to in Section 8 hereof, and
shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of Trident, the Company,
the Bank and any such controlling persons shall be entitled to the benefit of
the respective agreements, indemnities, warranties and representations.
11. Termination. Trident may terminate this Agreement by giving the
-----------
notice indicated below in this Section at any time after this Agreement becomes
effective as follows:
(a) If any domestic or international event or act or occurrence has
materially disrupted the United States securities markets such as to make
it, in Trident's reasonable opinion, impracticable to proceed with the
offering of the Shares; or if trading on the New York Stock Exchange shall
have suspended; or if the United States shall have become
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 23
involved in a war or major hostilities; or if a general banking moratorium
has been declared by a state or federal authority which has material effect
on the Bank or the Conversion; or if a moratorium in foreign exchange
trading by major international banks or persons has been declared; or if
there shall have been a material change in the capitalization, condition or
business of the Company, or if the Bank shall have sustained a material or
substantial loss by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act, whether or not said loss shall
have been insured; or if there shall have been a material adverse change in
the condition or prospects of the Company, the Bank or the Subsidiary.
(b) If Trident elects to terminate this Agreement as provided in this
Section, the Company and the Bank shall be notified promptly by Trident by
telephone or telegram, confirmed by letter.
(c) If this Agreement is terminated by Trident for any of the reasons
set forth in subsection (a) above, and to fulfill its obligations, if any,
pursuant to Sections 3, 6, 8(a) and 9 of this Agreement and upon demand,
the Company and the Bank shall pay Trident the full amount so owing
thereunder.
(d) The Bank may terminate the Conversion in accordance with the terms
of the Plan. Such termination shall be without liability to any party,
except that the Company and the Bank shall be required to fulfill their
obligations, if any, pursuant to Sections 3(b), 6, 8(a) and 9 of this
Agreement.
12. Notices. All communications hereunder, except as herein otherwise
-------
specifically provided, shall be in writing and if sent to Trident shall be
mailed, delivered or telegraphed and confirmed to Trident Securities, Inc., 4601
Six Forks Road, Suite 400, Raleigh, North Carolina 27609, Attention: Mr. R. Lee
Burrows, Jr. (with a copy to Muldoon, Murphy & Faucette, 5101 Wisconsin Avenue,
N.W., Washington, D.C. 20016, Attention: George W. Murphy, Jr., Esquire) and if
sent to the Company or the Bank, shall be mailed, delivered or telegraphed and
confirmed to Innes Street Financial Corporation, P.O. Box 1929, 401 West Innes
Street, Salisbury, North Carolina 28145-1929, Attention: Ronald E. Bostian,
President (with a copy to Brooks, Pierce, McLendon, Humphrey & Leonard, 2000
Renaissance Plaza, P.O. Box 26000, Greensboro, North Carolina 27420, Attention:
Jean Brooks, Esquire).
13. Parties. This Agreement shall inure solely to the benefit of, and
-------
shall be binding upon, Trident, the Company, the Bank and the controlling and
other persons referred to in Section 8 hereof, and their respective successors,
legal representatives and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Agreement or any provision herein contained.
<PAGE>
Trident Securities, Inc.
Innes Street Financial Corporation
Sales Agency Agreement
Page 24
14. Construction. Unless governed by preemptive federal law, this
------------
Agreement shall be governed by and construed in accordance with the substantive
laws of North Carolina.
15. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which when so executed and delivered shall be an original,
but all of which together shall constitute but one and the same instrument.
* * *
<PAGE>
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
INNES STREET FINANCIAL CITIZENS BANK, FSB
CORPORATION
By: ________________________ By:________________________
Ronald E. Bostian Ronald E. Bostian
President and Chief Executive President and Chief Executive
Officer Officer
Date: October __, 1998 Date: October __, 1998
Agreed to and accepted:
TRIDENT SECURITIES, INC.
By: ________________________
Date: October __, 1998
<PAGE>
Exhibit A
<PAGE>
Trident Securities, Inc. is a registered selling agent in the jurisdictions
--
listed below:
Alabama Missouri
Alaska Montana
Arizona Nebraska
Arkansas Nevada
California New Hampshire
Colorado New Jersey
Connecticut New Mexico
Delaware New York
District of Columbia North Carolina
Florida North Dakota (Trident Securities, Inc. only, no agent)
Georgia Ohio
Idaho Oklahoma
Illinois Oregon
Indiana Pennsylvania
Iowa Rhode Island
Kansas South Carolina
Kentucky Tennessee
Louisiana Texas
Maine Vermont
Maryland Virginia
Massachusetts Washington
Michigan Tennessee
Minnesota Utah
Mississippi Wisconsin
Wyoming
Trident Securities, Inc. is not a registered selling agent in the jurisdictions
------
listed below:
Hawaii
South Dakota
<PAGE>
Exhibit B
<PAGE>
[Letterhead of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.]
_______________, 1998
Trident Securities, Inc.
4601 Six Forks Road
Suite 400
Raleigh, North Carolina 27609
Re: Citizens Bank, FSB - Innes Street Financial Corporation
To Whom It May Concern:
We are rendering this opinion to Trident Securities, Inc. ("Trident" or
"you") as special counsel for Citizens Bank, FSB (the "Bank") and Innes Street
Financial Corporation (the "Company") pursuant to Section 7(a) of the Agency
Agreement dated _____________ (the "Agency Agreement") by and among the Bank,
the Company and you, as agent for the sale of up to2,248,250 shares of common
stock, no par value, of the Company (the "Common Stock") issued in connection
with the conversion of the Bank from a federally chartered mutual savings
association to a federally chartered capital stock savings association and the
simultaneous issuance of all of the issued and outstanding stock of the
converted Bank to the Company in accordance with the Bank's Plan of Conversion
(the "Plan"). All references in this opinion to instruments and other defined
terms shall mean the instruments and other terms as defined in the Agency
Agreement, except to the extent they are otherwise defined herein or the context
otherwise requires.
As special counsel for the Bank and the Company, we have reviewed such
corporate records, certificates, and other documents, and such questions of law,
as we have considered necessary for the purpose of rendering this opinion. In
the course of our review, we have assumed the genuineness of all signatures on
original documents, and the due execution and delivery of all documents
requiring due execution and delivery for the effectiveness thereof, except with
respect to execution and delivery of the Agency Agreement by the Company and the
Bank as to which we have relied upon representations of officers of the Bank and
the Company. With respect to questions of good standing of the Bank and the
Company, we have relied solely upon the official letters of appropriate
governmental authorities and representations of officers of the Bank and the
Company.
As to questions of fact material to the opinions hereinafter expressed, we
have relied upon the representations and warranties of the Company and the Bank
made in the Agency Agreement and the certificates of officers delivered at the
closing. We have made no examination or investigation for purposes of these
opinions to verify the accuracy or completeness of any financial, accounting,
pro forma, valuation, or statistical information or information with respect to
Trident set forth in the
<PAGE>
Trident Securities, Inc.
_______________, 1998
Page 2
Registration Statement, the Prospectus, the Agency Agreement, or any of the
documents referred to herein or otherwise furnished to Trident or with respect
to any other accounting or financial matters and express no opinion with respect
thereto. We have also assumed for the purposes of the opinions expressed herein
that the Agency Agreement is a valid and binding obligation of Trident.
Anything to the contrary, expressly stated or implied, notwithstanding,
each of the opinions hereinafter expressed is subject to the following further
qualifications whether or not such opinions refer to such qualifications:
(1) We offer no opinion and do not purport to opine as to the
enforceability of provisions contained in any documents relating to the
Conversion or contemplated by the Agency Agreement or documents as to which the
Bank or the Company is a party (a) relating to disclaimers, liability
limitations with respect to third parties, releases, or legal or equitable
rights, or discharges of defenses and remedies, (b) fixing the amount of
liquidated damages, (c) requiring the payment of interest on interest, (d)
providing for indemnification or contribution, and (e) relating to the payment
of attorney's fees.
(2) Our opinions below are limited to the matters expressly set forth in
this opinion letter, and no opinion is to be implied or inferred beyond the
matters stated. Without limiting the foregoing, we express no opinion as to the
anti-fraud provisions of federal and state securities laws.
(3) We have made no independent investigation for purposes of these
opinions as to the accuracy or completeness of any representation, warranty,
date, or other information, written or oral, made or furnished in connection
with the Agency Agreement, and we have relied on the certificates of officers of
the Company and the Bank that none of such information contains any untrue
statement of a material fact or omits a material fact necessary to make the
statements made not misleading.
(4) We are not required to be licensed to practice law in any jurisdiction
other than North Carolina. The opinions expressed herein are limited solely to
the federal banking and securities laws and regulations and North Carolina
corporate law applicable to the Agency Agreement and the transactions
contemplated thereby, and we do not opine on any other federal law or the laws
of any other applicable jurisdiction.
(5) We have acted as special counsel in connection with the application of
federal securities and banking law and regulations and North Carolina corporate
law applicable to the Agency Agreement and the Conversion and, consequently,
there may exist matters of a legal nature concerning the Company, the Bank,
their subsidiary, or affiliated parties in connection with which we have not
been consulted and have not represented the Company, the Bank, or their
subsidiary.
(6) This opinion should in no way be construed as an opinion as to the
materiality of the
<PAGE>
Trident Securities, Inc.
____________, 1998
Page 3
contents of the Registration Statement, the Prospectus, or the Conversion
Application.
(7) Except as otherwise expressly stated, this opinion shall be governed
and interpreted in accordance with the Legal Opinion Accord of the American Bar
Association Section of Business Law (1991).
Based upon and subject to the foregoing and in reliance thereon, and
subject to the assumptions, exceptions and qualifications set forth herein, it
is our opinion that:
(i) the Company has been duly incorporated and is validly existing
as a corporation under the laws of the State of North Carolina, and the
Bank is validly existing as a savings association in mutual form under the
laws of the United States, each with full corporate power and authority to
own its properties and conduct its business as such properties and business
are described in the Prospectus;
(ii) the Bank is a member of the Federal Home Loan Bank of Atlanta,
and the deposit accounts of the Bank are insured by the SAIF up to the
applicable legal limits;
(iii) to our actual knowledge, the activities of the Bank, as such
activities are described in the Prospectus, are permitted under federal law
and are permissible for a subsidiary of a North Carolina business
corporation, and, to our actual knowledge, the Bank does not have any
subsidiaries;
(iv) to our actual knowledge, the Bank has obtained all licenses,
permits and other governmental authorizations currently required for the
conduct of its business as such business is described in the Prospectus,
all such licenses, permits and other governmental authorizations are in
full force and effect and the Bank is in all material respects complying
therewith, except where the failure to hold such licenses, permits or
governmental authorizations or the failure to so comply would not have a
material adverse effect on the Company and the Bank, taken as a whole;
(v) there are no material legal or governmental proceedings pending
or, to our actual knowledge, threatened against or involving the assets of
the Company or the Bank (provided that for this purpose this firm does not
regard any litigation or governmental procedure to be "threatened" unless
the potential litigant or government authority has manifested to the
management of the Company or the Bank, or to this firm, a present intention
to initiate such litigation or proceeding);
(vi) to our actual knowledge, the execution and delivery of the
Agreement and the consummation of the Conversion by the Company and the
Bank do not constitute a material breach of or default (or an event which,
with notice or lapse of time or both, would constitute
<PAGE>
Trident Securities, Inc.
____________, 1998
Page 4
a default) under, give rise to any right of termination, cancellation or
acceleration contained in, or result in the creation or imposition of any
lien, charge or other encumbrance upon any of the properties or assets of
the Company or the Bank pursuant to any of the terms, provisions or
conditions of, any material agreement, contract, indenture, bond,
debenture, note, instrument or obligation to which the Company or the Bank
is a party or violate any governmental license or permit or any enforceable
published law, administrative regulation or order or court order, writ,
injunction or decree (subject to the satisfaction of certain conditions
imposed by the Office of Thrift Supervision (the "Office") in connection
with its approval of the Conversion Application), which breach, default,
encumbrance or violation would have a material adverse effect on the
condition (financial or otherwise), operations, business, assets or
properties of the Company and the Bank taken as a whole;
(vii) to our actual knowledge, there has been no material breach of
any provision of the Company's articles of incorporation or bylaws or the
Bank's charter or bylaws or breach or default (or the occurrence of any
event which, with notice or lapse of time or both, would constitute a
default) under any agreement, contract, indenture, bond, debenture, note,
instrument or obligation to which the Company or the Bank is a party or by
which any of them or any of their respective assets or properties may be
bound, or any governmental license or permit, or a violation of any
enforceable published law, administrative regulation or order, or court
order, writ, injunction or decree which breach, default, encumbrance or
violation would have a material adverse effect on the condition (financial
or otherwise), operations, business, assets or properties of the Company
and the Bank taken as a whole;
(viii) the Agreement is a legal, valid and binding obligation of each
of the Company and the Bank, enforceable in accordance with its terms
(except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, reorganization, receivership, conservatorship or
similar laws relating to or affecting the enforcement of creditors, rights
generally or the rights of creditors of depository institutions whose
accounts are insured by the FDIC or savings and loan holding companies the
accounts of whose subsidiaries are insured by the FDIC or by general equity
principles, regardless of whether such enforceability is considered in a
proceeding in equity or at law, and except to the extent that the
provisions of Sections 8 and 9 hereof may be unenforceable as against
public policy or pursuant to Section 23A, as to which we render no
opinion); and
(ix) each of the Company and the Bank has been qualified to do
business and, to our actual knowledge, is in good standing as a foreign
corporation in each jurisdiction where the ownership or leasing of its
properties or the conduct of its business requires such qualification or,
if not so qualified and in good standing, failure to so qualify would not
have a material adverse effect on the Company and the Bank, taken as a
whole.
(x) the Plan complies with, and, to our actual knowledge, the
Conversion has been
<PAGE>
Trident Securities, Inc.
____________, 1998
Page 5
effected in all material respects in accordance with, the HOLA and the OTS
regulations; to our actual knowledge, all of the terms, conditions,
requirements and provisions with respect to the Plan and the Conversion
imposed by the Office, except with respect to the filing or submission of
certain required post-Conversion reports or other materials by the Company
or the Bank, have been complied with by the Company and the Bank; and, to
our actual knowledge, no person has sought to obtain regulatory or judicial
review of the final action of the Office in approving the Plan;
(xi) the Company has authorized Common Stock as set forth in the
Registration Statement and the Prospectus, and the description of such
Common Stock in the Registration Statement and the Prospectus is accurate
in all material respects;
(xii) the issuance and sale of the Shares have been duly and validly
authorized by all necessary corporate action on the part of the Company;
the Shares, upon receipt of payment and issuance in accordance with the
terms of the Plan and the Agreement, will be validly issued, fully paid,
nonassessable and, except as disclosed in the Prospectus, free of
preemptive rights, and purchasers of the Shares from the Company, upon
issuance thereof against payment therefor, will acquire such Shares free
and clear of all claims, encumbrances, security interests and liens created
by the Company;
(xiii) the form of certificate used to evidence the Shares is in
proper form and complies in all material respects with applicable North
Carolina law;
(xiv) the issuance and sale of the capital stock of the Bank to the
Company have been duly authorized by all necessary corporate action of the
Bank and the Company and have received the approval of the Office, and such
capital stock, upon receipt of payment and issuance in accordance with the
terms of the Plan, will be validly issued, fully paid and nonassessable and
owned of record and, to our actual knowledge, beneficially by the Company;
(xv) subject to the satisfaction of the conditions of the Office's
approval of the Conversion Application, no further approval, authorization,
consent or other order of any federal governmental board or body is
required in connection with the execution and delivery of the Agreement and
the consummation of the Conversion, except with respect to the issuance to
the Bank of the Stock Charter by the Office and as may be required under
the securities laws of various jurisdictions and except as may be required
under the rules and regulations of the NASD;
(xvi) the execution and delivery of the Agreement and the
consummation of the Conversion have been duly and validly authorized by all
necessary corporate action on the part of each of the Company and the Bank;
<PAGE>
Trident Securities, Inc.
____________, 1998
Page 6
(xvii) the statements in the Prospectus and incorporated by reference
in the Proxy Statement under the captions "Supervision and Regulation,"
"Taxation," "Restrictions on Acquisition of the Company," and "Description
of Capital Stock," insofar as they are, or refer to, statements of law or
legal conclusions (excluding financial data included therein, as to which
no opinion is expressed), have been prepared or reviewed by us and are
correct in all material respects;
(xviii) the Form AC has been approved by the Office, and the
Prospectus and the Proxy Statement have been authorized for use by the
Office; the Registration Statement has been declared effective by the
Commission; and to our actual knowledge, no proceedings are pending by or
before the Commission or the Office seeking to revoke or rescind the orders
declaring the Registration Statement effective or approving the Conversion
Application or, to our actual knowledge, are contemplated or threatened;
(xix) the execution and delivery of the Agreement and the
consummation of the Conversion by the Company and the Bank do not conflict
with or result in a breach of the charter or bylaws of the Company or the
Bank (in either mutual or stock form); and
(xx) the Conversion Application, the Registration Statement, the
Prospectus and the Proxy Statement, in each case as amended, if amended,
comply as to form in all material respects with the requirements of the
Securities Act of 1933, the HOLA, the SEC Regulations and the OTS
Regulations, as the case may be (except as to information with respect to
Trident included therein and financial statements, notes to financial
statements, financial tables and other financial and statistical data,
included therein, as to which no opinion is expressed); to our actual
knowledge, all documents and exhibits required to be filed with the
Conversion Application and the Registration Statement have been so filed
and the descriptions in the Conversion Application and the Registration
Statement of these documents and exhibits are accurate in all material
respects.
This opinion is being rendered solely for the benefit of the addressee
hereof and may not be relied upon by, nor may copies be delivered to, any other
person without our prior written consent. The opinion may be delivered to your
counsel. This opinion is given as of the date hereof and we assume no obligation
to advise you of changes that may hereafter be brought to our attention.
Very truly yours,
BROOKS, PIERCE, MCLENDON, HUMPHREY
& LEONARD, L.L.P.
<PAGE>
Exhibit C
<PAGE>
[Letterhead of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.]
______________, 1998
Trident Securities, Inc.
4601 Six Forks Road
Suite 400
Raleigh, North Carolina 27609
Re: Citizens Bank, FSB; Innes Street Financial Corporation
To Whom It May Concern:
We have acted as special counsel for Innes Street Financial Corporation
(the "Company") and Citizens Bank, FSB (the "Bank") in connection with the
preparation and filing with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Securities
Act"), of the Company's Registration Statement on Form S-1 (File No. 333-63363),
as amended, and the Bank's Application for Conversion on Form AC, as amended,
relating to the offering of the Company's common stock (the "Common Stock") in a
subscription offering in connection with the conversion of the Bank from a
federally chartered mutual savings association to a federally chartered stock
savings bank and the issuance of the Bank's capital stock to the Company
pursuant to the Bank's plan of conversion, adopted by the Bank's Board of
Directors on September 10, 1998. Such registration statement, as amended, when
it became effective is herein called the "Registration Statement," and the
related Prospectus dated November __, 1998 is herein called the "Prospectus."
Such application for conversion, as amended, when it receives approval is herein
called the "Conversion Application." This letter is furnished pursuant to
Section 7 (b) of the Agency Agreement dated ____________, 1998 (the "Agency
Agreement") among the Company, the Bank, and Trident Securities, Inc. ("Trident"
or "you"). All references in this letter to instruments and other defined terms
shall mean the instruments and other terms as defined in the Agency Agreement,
except to the extent they are otherwise defined herein or the context otherwise
requires.
Because the primary purpose of our professional engagement was not to
establish or confirm factual matters or financial, accounting, or statistical
matters and because of the wholly or partially non-legal character of many of
the statements contained in the Conversion Application, the Registration
Statement, and the Prospectus, for purposes of this letter, we are not passing
upon and do not assume any responsibility for the accuracy, completeness, or
fairness of the statements contained in the Conversion Application, the
Registration Statement, or the Prospectus and we make no representation that we
have independently verified the accuracy, completeness, or fairness of such
statements. Without limiting the foregoing, for purposes of this letter, we
assume no responsibility for, and have not independently verified, the accuracy,
completeness, or fairness of the financial statements and schedules and other
financial
<PAGE>
Trident Securities, Inc,
______________, 1998
Page 2
and statistical data and stock valuation information, or information regarding
you included in the Conversion Application, the Registration Statement, and the
Prospectus, and we have not examined the accounting, financial, or statistical
records from which such financial statements, schedules, and data are derived.
We note that, although certain portions of the Conversion Application, the
Registration Statement, and the Prospectus (including financial statements and
schedules and stock valuation information) have been included therein on the
authority of "experts" within the meaning of the Securities Act, we are not such
experts with respect to any portion of the Conversion Application or the
Registration Statement, including without limitation such financial statements
or schedules or the other financial or statistical data included therein.
However, in the course of our acting as special counsel to the Company and
the Bank in connection with its preparation of the Conversion Application, the
Registration Statement, and the Prospectus:
(i) We participated in conferences with certain officers of, the
independent public and internal accountants for, and other representatives of
the Company and the Bank, and you and your counsel, at which, conferences the
Conversion Application, the Registration Statement and the Prospectus and
related matters were discussed and, while, for purposes of this letter, we have
not confirmed the accuracy or completeness of or otherwise verified the
information contained in the Conversion Application, the Registration Statement
or the Prospectus, and do not assume any responsibility for such information,
based upon such conferences and a review of documents deemed relevant for the
purpose of rendering our opinion (relying as to factual matters on certificates
of officers and other factual representations by the Company and the Bank) ,
nothing has come to our attention that would lead us to believe that the
Conversion Application, the Registration Statement, the Prospectus, or any
amendment or supplement thereto (except as to information in respect of Trident
contained therein and except as to the financial statements, the notes thereto,
statements concerning recent accounting pronouncements, and other tabular,
financial, statistical and appraisal data included therein as to which no view
is made) contained, as of the date of approval or effectiveness, as the case may
be, and as of the date hereof, an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood that for purposes of this letter we have not
undertaken to verify independently the information in the Registration
Statement, the Conversion Application or the Prospectus and we, therefore, do
not assume any responsibility for the accuracy or completeness thereof.)
(ii) Since _________________ 1998, we have not participated with
representatives of the Bank or Company, representatives of the Company's
accountants, your representatives and counsel in any conferences or telephone
conversations during which the Conversion Application, the Registration
Statement, or the Prospectus were discussed, and since ___________, 1998, we
have not, for purposes of this letter, otherwise undertaken any additional
procedures for your
<PAGE>
Trident Securities, Inc,
______________, 1998
Page 3
benefit that were intended or likely to elicit information concerning the
accuracy, completeness, or fairness of the statements made in the Conversion
Application, the Registration Statement or the Prospectus.
We are furnishing this letter to you solely for your benefit. This letter
is not to be used, circulated, quoted, or otherwise referred to for any other
purpose, except that a copy may be provided to your counsel.
Very truly yours,
BROOKS, PIERCE, MCLENDON, HUMPHREY
& LEONARD, L.L.P.
<PAGE>
AMENDED AND RESTATED
PLAN OF CONVERSION
OF
CITIZENS BANK, FSB
SALISBURY, NORTH CAROLINA
FROM MUTUAL TO STOCK ORGANIZATION
I. GENERAL
Effective October 26, 1998, the Board of Directors of Citizens Bank, FSB,
Salisbury, North Carolina (the "Savings Bank") adopted an Amended and Restated
Plan of Conversion (the "Plan") pursuant to which the Savings Bank will convert
from a federal-chartered mutual savings bank to a federal-chartered capital
stock savings bank and simultaneously become a wholly-owned subsidiary of Innes
Street Financial Corporation, a savings and loan holding company organized under
North Carolina law. The Plan amends, restates, supersedes and replaces the Plan
of Conversion adopted by the Board of Directors on September 10, 1998.
This Plan is subject to the prior approval of the Office of Thrift
Supervision, Department of the Treasury, and must be adopted by the affirmative
vote of the members of the Savings Bank holding not less than a majority of the
total outstanding votes eligible to be cast.
II. DEFINITIONS
As used in this Plan, the terms set forth below have the following
meanings:
A. Acting in Concert: 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
Conversion Stock or (ii) engaged in a combination or pooling of voting or other
interests in the securities of the Holding Company for a common purpose pursuant
to any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise.
B. Actual Purchase Price: The actual price per share, determined as
provided in Article VI hereof, at which the shares of common stock of the
Holding Company will be issued and sold by the Holding Company to subscribers.
C. Affiliate: The term "affiliate" of, or a person "affiliated with," a
specified person, means a person that directly or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with,
the person specified.
D. Aggregate Valuation Range: The range of value for the aggregate
number of shares of common stock of the Holding Company to be offered in the
Conversion, which range is established pursuant to Article VI hereof and which
shall be from a low of 15 percent (15%) below
<PAGE>
the estimated aggregate pro forma market value of the Savings Bank and the
Holding Company to a high of 15 percent (15%) above the estimated aggregate pro
forma market value of the Savings Bank and the Holding Company, as such range
may be amended from time to time by an independent appraiser.
E. Amended Charter: The Savings Bank's federal stock savings bank
charter in the form permitted by the OTS.
F. Applications: The Savings Bank's Application for Approval of
Conversion (Form AC) and the Holding Company's Application H-(e)1-S, including
amendments thereto, as filed with the OTS pursuant to the Regulations.
G. Associate: The term "Associate," when used to indicate a relationship
with any Person, means (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 of the Savings Bank, the Holding Company or any parent or subsidiary of
the Savings Bank or of the Holding Company; (ii) any corporation or organization
(other than the Savings Bank, the Holding Company or a majority-owned subsidiary
of the Savings Bank or the Holding Company) of which 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, excluding any tax-qualified
employee stock benefit plans.
H. Charter: The federal mutual savings bank charter of Citizens Bank,
FSB.
I. Community Offering: The offering for sale of shares of Conversion
Stock to the general public, subsequent to termination of the Subscription
Offering, with priority given to natural persons and trusts of natural persons
residing in the Local Community (including Retirement Accounts established for
the benefit of natural persons who are residents of such area).
J. Conversion: The conversion of the Savings Bank to a federal-chartered
stock savings bank, the deposit accounts of which will be insured by the SAIF of
the FDIC, pursuant to, and in accordance with, the Regulations, the Plan and the
Applications.
K. Conversion Stock: The shares of common stock of the Holding Company
to be issued and sold in the Conversion.
L. Converted Savings Bank: Citizens Bank, FSB, the federal capital stock
savings bank resulting from the Conversion.
M. Director: A member of the Board of Directors of the Savings Bank,
the Converted Savings Bank or the Holding Company (as applicable).
2
<PAGE>
N. Eligibility Record Date: The close of business on December 31, 1996.
O. Eligible Account Holder: The holder of a Qualifying Deposit on the
Eligibility Record Date, with the beneficial owner of a Retirement Account being
deemed the holder thereof.
P. ESOP: The Savings Bank's tax-qualified Employee Stock Ownership Plan
adopted by the Board of Directors of the Savings Bank to be effective upon
consummation of the Conversion.
Q. Executive Officer: An officer of the Savings Bank, the Converted
Savings Bank or the Holding Company (as applicable) performing a policy-making
function for such entity.
R. FDIC: The Federal Deposit Insurance Corporation.
S. First Priority Community Subscribers: Natural persons and trusts of
natural persons residing in the Local Community, including Retirement Accounts
established for the benefit of natural persons residing in the Local Community.
T. Holding Company: The North Carolina corporation under the name of
Innes Street Financial Corporation which, upon completion of the Conversion,
will become a savings and loan holding company owning all of the outstanding
capital stock of the Converted Savings Bank.
U. Liquidation Account: That account established by the Converted
Savings Bank pursuant to Article XI of this Plan.
V. Local Community: Iredell and Rowan Counties in North Carolina.
W. Market Maker: A dealer (i.e., any person who engages directly or
indirectly as agent, broker or principal in the business of offering, buying,
selling, or otherwise dealing or trading in securities issued by another person)
who, with respect to a particular security, (i) regularly publishes bona fide,
competitive bid and offer quotations in a recognized inter-dealer quotation
system; or (ii) furnishes bona fide competitive bid and offer quotations on
request; and (iii) is ready, willing, and able to effect transactions in
reasonable quantities at its quoted prices with other brokers or dealers.
X. Members: All persons or entities who qualify as members of the
Savings Bank pursuant to its Charter and bylaws prior to the Conversion,
including beneficial owners of Retirement Accounts at the Savings Bank.
Y. OTS: Office of Thrift Supervision, Department of the Treasury.
Z. Order Forms: The order forms to be used to subscribe for Conversion
Stock in the Subscription and Community Offerings pursuant to the Plan.
3
<PAGE>
AA. Other Members: As of the Voting Record Date, holders of Savings
Accounts at the Savings Bank (other than Eligible Account Holders and
Supplemental Eligible Account Holders, with the beneficial owners of Retirement
Accounts being deemed the holders of such accounts.
BB. Person: An individual, a corporation, a partnership, an association,
a joint stock company, a trust, an unincorporated organization, or a government
or political subdivision thereof.
CC. Plan: This Plan of Conversion and any duly adopted amendments
thereto.
DD. Prospectus: The document containing information about and a
description of the Savings Bank, the Holding Company, this Plan and the process
of issuing the Conversion Stock, which will be distributed to the Members in the
Subscription Offering and which may be distributed to the general public in the
Community Offering and Syndicated Community Offering.
EE. Proxy Statement: The written information distributed by the Savings
Bank to the Members in its solicitation of their votes in connection with
consideration of the Plan at the Special Meeting, which written information may
be in summary form.
FF. Qualifying Deposit: A balance of $50 or more in any Savings Account
in the Savings Bank as of the Eligibility Record Date or the Supplemental
Eligibility Record Date, as applicable. Each Savings Account which is deemed to
be a separate account for purposes of FDIC insurance shall be deemed to be a
separate account for purposes of determining whether a Qualifying Deposit
exists.
GG. Regulations: The Rules and Regulations of the OTS set forth in 12 CFR
Part 563b.
HH. Retirement Accounts: Individual retirement accounts, Keogh savings
accounts or similar retirement accounts.
II. SAIF: The Savings Association Insurance Fund of the FDIC.
JJ. Savings Accounts: Withdrawable deposits, certificates or other
savings and deposit accounts of the Savings Bank, including money market deposit
accounts and all types of demand deposit accounts, held by Members. Each such
deposit, certificate or other deposit account which is deemed to be a separate
account for FDIC insurance shall be deemed to be a separate Savings Account for
purposes of the Plan.
KK. Savings Bank: Citizens Bank, FSB, Salisbury, North Carolina, a
federal-chartered mutual savings bank.
LL. SEC: The Securities and Exchange Commission.
4
<PAGE>
MM. Special Meeting: The Special Meeting of Members called for the
purpose of considering approval of the Plan.
NN. Subscription Offering: The offering of shares of Conversion Stock to
Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders, Other
Members, and Directors, officers and employees of the Savings Bank pursuant to
the Plan.
OO. Subscription Rights: Non-transferable, non-negotiable, personal
rights distributed, without payment, to Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders, Other Members, and Directors, officers
and employees of the Savings Bank to subscribe for shares of Conversion Stock in
the Subscription Offering pursuant to the Plan.
PP. Supplemental Eligibility Record Date: The last day of the calendar
quarter preceding the approval of the Applications by the OTS, if the
establishment of such date is required by the Regulations.
QQ. Supplemental Eligible Account Holder: The holder of a Qualifying
Deposit (other than an Executive Officer or Director of the Savings Bank or any
Associate of such Person), on the Supplemental Eligibility Record Date, except a
Director, an Executive Officer, or Associate of such Director or Executive
Officer, with the beneficial owner of a Retirement Account being deemed the
holder thereof.
RR. Syndicated Community Offering: The offering for sale of shares of
Conversion Stock to the general public through a syndicate of registered broker-
dealers to be formed and managed by the sales agent in the Subscription Offering
and Community Offering.
SS. Voting Record Date: The date fixed by the Board of Directors of the
Savings Bank for determining Members entitled to vote at the Special Meeting.
III. STEPS PRIOR TO SUBMISSION OF PLAN OF CONVERSION TO THE MEMBERS FOR APPROVAL
Prior to submission of the Plan to the Members of the Savings Bank for
approval, the Savings Bank must receive OTS approval of the Applications. The
following steps must be taken prior to such regulatory approvals:
A. The Board of Directors of the Savings Bank and the Board of Directors
of the Holding Company shall adopt and approve the Plan by the affirmative vote
of not less than two-thirds of its members.
B. The Savings Bank shall notify its members of the adoption of the Plan
by publishing a statement in a newspaper having a general circulation in the
communities in which the Savings Bank maintains offices or by mailing a letter
to each of its Members.
5
<PAGE>
C. Copies of the Plan shall be made available for inspection at each
office of the Savings Bank.
D. The Savings Bank and the Holding Company shall submit the requisite
number of copies of the Applications to the OTS. Immediately upon filing of the
Applications with the OTS, the Savings Bank shall publish a "Notice of Filing of
an Application for Conversion To Convert To A Stock Savings Bank" in a newspaper
of general circulation in each community in which the Savings Bank maintains an
office. The Savings Bank also shall prominently display a copy of such notice in
each of its offices.
E. The Savings Bank shall obtain an opinion of counsel or tax advisor or
a favorable ruling from the Internal Revenue Service and the North Carolina
Department of Revenue to the effect that the Conversion of the Savings Bank from
a federal-chartered mutual savings bank to a federal-chartered capital stock
savings bank, the sale of the Conversion Stock to subscribers in the
Subscription, Community and Syndicated Community Offerings and the issuance of
the shares of common stock of the Converted Savings Bank to the Holding Company,
all in accordance with the terms of the Plan, should not result in any gain or
loss for federal or North Carolina income tax purposes, to the Savings Bank, the
Converted Savings Bank, the Holding Company or the Members of the Savings Bank.
Receipt of an opinion or favorable rulings is a condition precedent to
completion of the Conversion.
F. The Holding Company shall file a registration statement with the SEC
with respect to the Conversion Stock to be offered pursuant to the Plan and such
registration statement shall be declared effective.
IV. MEETING OF MEMBERS
Upon receipt of OTS approval of the Applications, a Special Meeting of the
Members of the Savings Bank shall be scheduled in accordance with the Savings
Bank's bylaws for the purpose of voting on approval of the Plan. Promptly after
receipt of OTS approval and at least 20 days, but not more than 45 days, prior
to the Special Meeting, the Savings Bank will distribute proxy solicitation
materials to all Members as of the Voting Record Date. The proxy materials will
include the Proxy Statement and the Prospectus and other documents authorized
for use by the regulatory authorities and may also include a copy of the Plan.
At the Special Meeting, an affirmative vote of not less than a majority of
the total votes entitled to be cast by the Savings Bank's Members will be
required for approval of the Plan. Voting may be in person or by proxy. The OTS
shall be promptly notified of the results of the vote of the Members at the
Special Meeting.
6
<PAGE>
V. PROCEDURE
The Conversion Stock shall be offered for sale in the Subscription Offering
to Eligible Account Holders, the ESOP, Supplemental Eligible Account Holders,
Other Members, and Directors, officers and employees of the Savings Bank. The
Subscription Offering may commence concurrently with or during the solicitation
of proxies for the Special Meeting. The Community Offering may commence at any
time following commencement of the Subscription Offering. The Syndicated
Community Offering, if any, may commence concurrently with or during the
Community Offering or as promptly thereafter as is practicable. The
Subscription Offering may be closed before the Special Meeting, provided that
the offer and sale of the Conversion Stock shall be conditioned upon approval of
the Plan by the Members at the Special Meeting.
The period for the Subscription Offering shall not be less than 20 days nor
more than 45 days. Any unsubscribed shares of Conversion Stock are to be offered
for sale to the general public in the Community Offering with priority being
given to natural persons and trusts of natural persons residing in the Local
Community, including Retirement Accounts established for the benefit of natural
persons who reside in such area. The Community Offering may commence, subject
to the availability of shares, at any time following commencement of the
Subscription Offering. Any shares of Conversion Stock offered but not
subscribed for in the Subscription and Community Offerings may, in the
discretion of the Savings Bank and the Holding Company, be offered for sale in
the Syndicated Community Offering. Completion of the sale of all shares of
Conversion Stock not sold in the Subscription Offering shall occur within 45
days after termination of the Subscription Offering, subject to extension of
such 45-day period by the Savings Bank and the Holding Company with the approval
of the OTS. The Boards of Directors of the Savings Bank and the Holding Company
may seek one or more extensions of such 45-day period if necessary to complete
the sale of all shares of Conversion Stock. In connection with any such
extension, subscribers shall be permitted to increase, decrease or rescind their
subscriptions to the extent required by the OTS in approving the extensions. As
provided in Article XIII hereof, completion of the sale of all shares of
Conversion Stock must occur in any event within 24 months after the date of the
Special Meeting.
VI. STOCK OFFERING
A. Purchase Price and Number of Shares of Conversion Stock
-------------------------------------------------------
The total number of shares and the subscription price per share of the
Conversion Stock being issued and sold by the Holding Company in the Conversion
will be determined by the Holding Company. The aggregate purchase price at which
all shares of the Conversion Stock will be sold in the Conversion will be based
upon the estimated pro forma market value of the Converted Savings Bank and the
Holding Company, as determined by an independent valuation. The aggregate
purchase price will be within the Aggregate Valuation Range as stated in the
approval or amended approval of the Plan by the OTS; provided, however, that
with the consent of the OTS, the aggregate purchase price of the Conversion
Stock sold may be increased to up to 15% above the maximum of the Aggregate
Valuation Range, without any resolicitation of subscribers or any right to
cancel,
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rescind or change subscription orders, to reflect changes in market and
financial conditions following commencement of the Subscription Offering. The
appraisal will be made by an investment banking or financial consulting firm
selected by the Savings Bank and which is experienced and expert in the area of
savings institution appraisals. Such appraisal will be updated prior to the
commencement of the Subscription Offering, if necessary, and will be further
updated upon completion of the later of the Subscription Offering, the Community
Offering or the Syndicated Community Offering.
The Actual Purchase Price per share at which the Conversion Stock will be
offered to subscribers in the Subscription, Community and Syndicated Community
Offerings will be determined by the Holding Company immediately prior to the
commencement of the Subscription Offering. All shares of Conversion Stock sold
in the Conversion will be sold at the same price per share.
B. Method of Offering Shares
-------------------------
On the date Order Forms are mailed, Subscription Rights to purchase shares
will be issued at no cost to Eligible Account Holders, the ESOP, Supplemental
Eligible Account Holders (if applicable), Other Members, and Directors, officers
and employees of the Savings Bank pursuant to priorities established by this
Plan and the Regulations. With respect to Eligible Account Holders,
Supplemental Eligible Account Holders and Voting Members who are beneficial
owners of Retirement Accounts, such persons have the right to exercise
Subscription Rights only to the extent Subscription Rights granted with respect
to such Retirement Accounts are not exercised directly by such Retirement
Accounts. Each subscriber shall purchase the number of whole shares indicated
on the Order Form of such subscriber, subject to the purchase limitations set
forth herein, and any excess amounts shall be refunded. To the extent that
shares are available, no subscriber will be allowed to purchase Conversion Stock
having an aggregate purchase price of less than $500.
The priorities established by applicable Regulations for the purchase of
shares are as follows:
1. Category No. 1: Eligible Account Holders
Each Eligible Account Holder shall receive, without payment,
nontransferable Subscription Rights to purchase an amount of Conversion Stock
equal to the greater of the maximum purchase limitation set forth in Section D.1
of this Article, or one-tenth of one percent (.10%) of the total offering of
Conversion Stock, or 15 times the product (rounded to the next whole number)
obtained by multiplying the total number of shares of Conversion Stock to be
issued by a fraction of which the numerator is the amount of the Qualifying
Deposit of the Eligible Account Holder and the denominator is the total amount
of Qualifying Deposits of all Eligible Account Holders in the Converted Savings
Bank. The Subscription Rights of Eligible Account Holders are subordinate to
the limited priority rights of the ESOP as set forth in this Article VI.
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In the event of an oversubscription for the Conversion Stock among Eligible
Account Holders, shares shall be allocated among Eligible Account Holders as
follows. The Conversion Stock shall be allocated among subscribing Eligible
Account Holders so as to permit each such Eligible Account Holder, to the extent
possible, to purchase the lesser of (a) the number of shares for which such
Eligible Account Holder subscribed, or (b) 100 shares. Any shares remaining
after that allocation shall be allocated among subscribing Eligible Account
Holders whose subscriptions remain unsatisfied in the proportion that the amount
of Qualifying Deposits of each such Eligible Account Holder bears to the total
amount of Qualifying Deposits of all Eligible Account Holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more Eligible Account Holders, the excess shall be
reallocated (one or more times as necessary) among those Eligible Account
Holders whose subscriptions are still not fully satisfied on the same principle
described above until all available shares have been allocated or all
subscriptions satisfied. All computations shall be rounded down to the nearest
whole share.
2. Category No. 2: ESOP
The ESOP shall receive, without payment, nontransferable Subscription
Rights to purchase a number of shares of Conversion Stock equal to eight percent
(8%) of the total number of shares of Conversion Stock offered and sold in the
Conversion. Subscription Rights received pursuant to this Category shall be
subordinated to all Subscription Rights received pursuant to Category No. 1
above; provided, however, that notwithstanding any other provision of this Plan
to the contrary, the ESOP shall have a first priority Subscription Right to the
extent that the total number of shares of Holding Company Conversion Stock sold
in the Conversion exceeds the maximum of the appraisal range as set forth in the
subscription prospectus.
3. Category No. 3: Supplemental Eligible Account Holders
In the event that the Eligibility Record Date is more than 15 months prior
to the date of the latest amendment of the Applications filed prior to OTS
approval, then, and only in that event, each Supplemental Eligible Account
Holder of the Savings Bank shall receive, without payment, nontransferable
Subscription Rights to purchase an amount of Conversion Stock equal to the
greater of the maximum purchase limitation set forth in Section D.1 of this
Article, or one-tenth of one percent (.10%) of the total offering of Conversion
Stock, or 15 times the product (rounded to the next whole number) obtained by
multiplying the total number of shares of Conversion Stock to be issued by a
fraction of which the numerator is the amount of the Qualifying Deposit of the
Eligible Account Holder and the denominator is the total amount of Qualifying
Deposits of all Eligible Account Holders in the Converted Savings Bank.
Subscription Rights received pursuant to this Category shall be subordinated to
all Subscription Rights received pursuant to Category Nos. 1 and 2. Any
Subscription Rights received by an Eligible Account Holder in accordance with
Category No. 1 shall reduce, to the extent thereof, the Subscription Rights to
be distributed to such account holder pursuant to this Category.
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In the event of an oversubscription for the Conversion Stock, shares shall
be allocated among the Supplemental Eligible Account Holders as follows. The
Conversion Stock shall be allocated among subscribing Supplemental Eligible
Account Holders so as to permit each such Supplemental Eligible Account Holder,
to the extent possible, to purchase the lesser of (including the number of
shares, if any allocated in accordance with Category No. 1) (a) the number of
shares for which such Supplemental Eligible Account Holder subscribed, or (b)
100 shares. Any shares remaining after that allocation shall be allocated among
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposits of each
such Supplemental Eligible Account Holder bears to the total amount of
Qualifying Deposits of all Supplemental Eligible Account Holders whose
subscriptions remain unsatisfied. If the amount so allocated exceeds the amount
subscribed for by any one or more Supplemental Eligible Account Holders, the
excess shall be reallocated (one or more times as necessary) among those
Supplemental Eligible Account Holders whose subscriptions are still not fully
satisfied on the same principle described above until all available shares have
been allocated or all subscriptions satisfied. All computations shall be
rounded down to the nearest whole share.
4. Category No. 4: Other Members
Each Other Member shall receive, without payment, nontransferable
Subscription Rights to purchase an amount of Conversion Stock equal to the
greater of the maximum purchase limitation set forth in Section D.1 of this
Article or one-tenth of one percent (.10%) of the total offering of Conversion
Stock. Subscription Rights received pursuant to this Category shall be
subordinated to all Subscription Rights received pursuant to Category Nos. 1-3.
In the event of an oversubscription for shares of Conversion Stock under
this Category, the Conversion Stock available shall be allocated among the
subscribing Other Members whose subscriptions are not satisfied in the
proportion that the number of votes eligible to be cast by each such Other
Member at the Special Meeting bears to the total number of votes eligible to be
cast by all Other Members whose subscriptions remain unsatisfied. If the amount
so allocated exceeds the amount subscribed for by any one or more Other Member,
the excess shall be reallocated (one or more times as necessary) among those
Other Members whose subscriptions are still not satisfied on the same principle
described above until all available shares have been allocated or all
subscriptions satisfied. All computations shall be rounded down to the nearest
whole share.
5. Category No. 5: Directors, Officers and Employees
Each Director and officer of the Savings Bank, and each employee of the
Savings Bank, as of the date of the commencement of the Subscription Offering
shall receive, without payment, Subscription Rights to purchase an amount of
Conversion Stock equal to the maximum purchase limitation set forth in Section
D.1 of this Article. Subscription Rights received pursuant to this Category
shall be subordinated to all Subscription Rights received pursuant to Category
Nos. 1-4. Any Subscription Rights received by a Director, officer or employee in
accordance with Category Nos. 1, 3, or 4 shall reduce, to the extent thereof,
the Subscription Rights to be distributed to such
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<PAGE>
Director, officer or employee pursuant to this Category. The total number of
shares of Conversion Stock which may be purchased under this Category may not
exceed 21% of the total number of shares to be issued.
In the event of an oversubscription for shares of Conversion Stock under
this Category, the shares available shall be allocated among the subscribing
Directors, officers and employees of the Savings Bank whose subscriptions are
not satisfied pro rata on the basis of the amounts of their respective
subscriptions. All computations shall be rounded down to the nearest whole
share.
6. Category No. 6: Community Offering
Any shares of Conversion Stock not purchased through the exercise of
Subscription Rights received pursuant to Category Nos. 1-5 above may be sold to
the general public in a Community Offering. The Community Offering may
commence, subject to the availability of shares, at any time following
commencement of the Subscription Offering and may terminate at any time
thereafter. The Community Offering must be completed within 45 days after the
last day of the Subscription Offering, unless extended by the Savings Bank and
the Holding Company with the approval of the OTS.
The Savings Bank and the Holding Company may accept or reject, in whole or
in part, orders received in the Community Offering in their sole discretion.
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
(i) subscriptions of First Priority Community Subscribers will be filled
in full up to applicable purchase limitations (to the extent such
subscriptions are not rejected by the Savings Bank and the Holding
Company),
(ii) then subscriptions of other subscribers in the Community Offering will
be filled up to applicable purchase limitations (to the extent such
subscriptions are not rejected by the Savings Bank and the Holding
Company).
In the event of an oversubscription by First Priority Community Subscribers
whose orders would otherwise be accepted, shares of Conversion Stock will be
allocated first to each First Priority Community Subscriber whose order is
accepted in full or in part by the Savings Bank and the Holding Company in the
entire amount of such order up to a number of shares no greater than the number
which would have an aggregate purchase price of $600,000, which number shall be
determined by the Board of Directors of the Savings 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
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<PAGE>
Community Offering, in the event shares are available for subscribers in such
category but there is an oversubscription within such category. All computations
shall be rounded down to the nearest whole share.
The Conversion Stock to be offered in this Category No. 6 will be offered
and sold, in accordance with OTS regulations, in a manner that will achieve the
widest distribution of such stock.
7. Category No. 7: Syndicated Community Offering
If necessary, all shares of Conversion Stock not purchased in the
Subscription and Community Offerings, if any, may, at the option of the Savings
Bank and Holding Company, be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
as selected dealers to be formed and managed by the sales agent in the
Subscription and Community Offerings. The Holding Company and Savings Bank have
the right to reject orders, in whole or part, in their sole discretion in the
Syndicated Community Offering. During the Syndicated Community Offering, shares
of Conversion Stock will be sold subject to such conditions, terms and
procedures as may be determined by the Holding Company and the Savings Bank.
Shares of Conversion Stock sold in the Syndicated Community Offering will be
sold in a manner calculated to achieve the widest distribution of Conversion
Stock.
The Syndicated Community Offering may close as early as the Community
Offering, or thereafter at the discretion of the Savings Bank and the Holding
Company. The Syndicated Community Offering may run concurrently with the
Community Offering or subsequent to such offering.
D. Additional Limitations Upon Purchases of Shares of Conversion Stock
The following additional limitations and exceptions shall apply to all
purchases of Conversion Stock in the Conversion:
1. The aggregate purchase price of shares of Conversion Stock purchased
by any Person (or Persons exercising Subscription Rights through a single
account) together with all Associates thereof, or a group of Persons acting in
concert, shall not exceed $600,000 (which limit may be decreased or increased by
the Board of Directors of the Savings Bank in accordance with Section D.4 of
this Article) provided, however, that the ESOP may purchase in the aggregate a
number of shares not more than eight percent (8%) of the total number of shares
of Conversion Stock offered and sold in the Conversion. Any shares held by the
ESOP and attributed to a natural person shall not be aggregated with other
shares purchased directly by or otherwise attributable to that natural person.
2. The Boards of Directors of the Savings Bank and Holding Company will
not be deemed to be Associates or a group acting in concert solely as a result
of membership on the Boards of Directors.
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<PAGE>
3. Directors and Executive Officers and their Associates may not purchase
in all categories in the Conversion an aggregate of more than 32% of the
Conversion Stock. For purposes of this paragraph, an Associate of a Person does
not include the ESOP. Moreover, any shares attributable to the Directors and
Executive Officers and their Associates, but held by the ESOP shall not be
included in calculating the number of shares which may be purchased under the
limitation in this paragraph.
4. To the extent that Conversion Stock is available, no subscriber will
be allowed to purchase less than 15 shares of Conversion Stock.
5. Either before or subsequent to approval of the Plan by the Members and
prior to consummation of the sale of the Conversion Stock, the Board of
Directors of the Savings Bank may, in its sole discretion, (i) increase the
maximum purchase limitations set forth in Sections D.1 of this Article to an
amount not greater than ten percent (10%) of the aggregate purchase price of
shares of Conversion Stock offered and sold in the Conversion or (ii) reduce
such maximum purchase limitations to an amount not less than one percent (1%) of
the aggregate purchase price of shares of Conversion Stock offered and sold in
the Conversion, each without further approval of the Members; provided, however,
that orders for Conversion Stock exceeding 5% of the Conversion Stock to be sold
in the Conversion shall not exceed, in the aggregate, 10% of the Conversion
Stock to be sold in the Conversion.
6. Each person purchasing Conversion Stock in the Conversion shall be
deemed to confirm that such purchase does not conflict with the purchase
limitations under the Plan or otherwise imposed by law, rule or regulation.
7. Subscription Rights to purchase the Conversion Stock received by
Executive Officers and Directors of the Savings Bank and their Associates, based
on their increased deposits in the Savings Bank in the one-year period preceding
the Eligibility Record Date shall be subordinated to all other subscriptions
involving the exercise of Subscription Rights to purchase the Conversion Stock
pursuant to Category No. 1.
E. Restrictions on and Other Characteristics of Stock Being Sold
1. Transferability. Conversion Stock purchased by Directors or Executive
Officers of the Converted Savings Bank shall not be sold or otherwise disposed
of for value for a period of not less than one year from the date of purchase,
except for any disposition of such shares following the death of the original
purchaser.
The Conversion Stock issued by the Holding Company to Directors and
Executive Officers of the Converted Savings Bank shall bear a legend giving
appropriate notice of the one-year holding period restriction. This legend will
state as follows:
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The shares of stock evidenced by this Certificate may not be sold, except
in the event of the death of the registered holder, for a period of one
year from the date of this certificate.
In addition, the Holding Company shall give appropriate instructions to the
transfer agent with respect to the applicable restrictions relating to the
transfer of restricted stock. Any shares subsequently issued as a stock
dividend, stock split, or otherwise with respect to any such restricted stock,
shall be subject to the same holding period restrictions for Directors and
Executive Officers of the Converted Savings Bank as may be then applicable to
such restricted stock.
No Director, Executive Officer or Associate of a Director or Executive
Officer of the Converted Savings Bank shall purchase any outstanding shares of
common stock of the Holding Company for a period of three years following the
Conversion without the prior written approval of the OTS, except (a) through a
broker or dealer registered with the SEC or (b) in a "negotiated transaction"
involving more than one percent of the then outstanding shares of capital stock
of the Holding Company or (c) through the purchase of common stock made by and
held by one or more tax-qualified or non-tax-qualified employee stock benefit
plans of the Converted Savings Bank or the Holding Company which may be
attributable to Executive Officers or Directors. As used herein, the term
"negotiated transaction" means a transaction in which the securities are offered
and the terms and arrangements relating to any sale are arrived at through
direct communications between the seller or any Person acting on his or her
behalf and the purchaser or his or her investment representative. The term
"investment representative" shall mean a professional investment advisor acting
as agent for the purchaser and independent of the seller and not acting on
behalf of the seller in connection with the transaction.
2. Repurchase and Dividend Rights. Except as permitted by applicable
regulations, for a period of three years following the Conversion, the Converted
Savings Bank shall not repurchase any shares of its capital stock, except in the
case of an offer to repurchase on a pro rata basis made to all holders of
capital stock of the Converted Savings Bank. A repurchase of qualifying shares
of a Director shall not be deemed to be a repurchase for purposes of this
limitation.
Also, the Converted Savings Bank may not declare or pay a cash dividend on
or repurchase any of its stock (i) if the result thereof would be to reduce the
regulatory capital of the Converted Savings Bank below the amount required for
the liquidation account to be established pursuant to Section XI hereof, and
(ii) except in compliance with requirements of Section 563.134 of the
Regulations.
The above limitations are subject to Section 563b.3(g)(3) of the
Regulations, which generally provides that the Converted Savings Bank may
repurchase its capital stock provided (i) no repurchase occur within one year
following conversion, (ii) repurchases during the second and third year after
conversion are part of an open market stock repurchase program that does not
allow for a repurchase of more than 5% of the Savings Bank's outstanding capital
stock during a twelve-month period without OTS approval, (iii) the repurchases
do not cause the Savings Bank to become
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<PAGE>
undercapitalized, and (iv) the Savings Bank provides notice to the OTS at least
10 days prior to the commencement of a repurchase program and the OTS does not
object. In addition, the above limitations shall not preclude payments of
dividends or repurchases of capital stock by the Converted Savings Bank in the
event applicable federal regulatory limitations are liberalized or waived by the
OTS subsequent to OTS approval of the Plan.
3. Voting Rights. After the Conversion, holders of Savings Accounts and
obligors on loans will not have voting rights in the Converted Savings Bank.
Exclusive voting rights shall be vested in the Holding Company as the owner of
all of the capital stock of the Converted Savings Bank. Each holder of common
stock of the Holding Company will be entitled to vote on any matter coming
before the stockholders of the Holding Company for consideration and will be
entitled to one vote for each share of common stock of the Holding Company owned
by such stockholder.
F. Mailing of Offering Materials and Collation of Subscriptions
After (i) approval of the Applications by the OTS and (ii) the SEC's
declaration of the effectiveness of the registration statement containing the
Prospectus, the Holding Company shall distribute the Prospectus and Order Forms
for the purchase of shares to holders of Subscription Rights in accordance with
the terms of the Plan.
As set forth in the Prospectus, each such recipient of an Order Form will
be given a period of not less than 20 days nor more than 45 days from the date
of mailing, unless extended, to properly complete, execute and return the Order
Form to the Savings Bank on behalf of the Holding Company. Self-addressed,
postage-paid return envelopes will accompany these forms when mailed. The
Savings Bank will collate the returned executed forms upon completion of the
subscription period. Failure of any eligible subscriber in the Subscription or
Community Offerings to return a properly completed and executed Order Form with
full payment for all shares subscribed for within the prescribed time limits
shall be deemed a waiver and a release by such person of any rights to purchase
shares hereunder.
The Savings Bank may require a Person to provide evidence satisfactory to
the Savings Bank that such Person qualifies as an Eligible Account Holder,
Supplemental Eligible Account Holder, Other Member, or First Priority Community
Subscriber, as the case may be. All determinations as to whether a Person
qualifies to purchase in a particular category shall be made by the Savings Bank
in its sole discretion and shall be final and conclusive.
In the event the Savings Bank's Board of Directors determines that a
subscriber (i) has submitted 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 Conversion Stock in violation of provisions of
the Plan or (iii) fails to cooperate with attempts by the Savings Bank or the
Holding 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.
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<PAGE>
G. Method of Payment
Payment for all shares of Conversion Stock subscribed for in the
Subscription and Community Offerings may be made in cash, if delivered in
person, by check or money order, or if the subscriber has a Savings Account
(other than a demand deposit or NOW account), by withdrawal authorization from
the Savings Account for the purchase amount. Unless payment is to be made by
withdrawal from a Savings Account, it shall accompany the Order Forms.
Notwithstanding the foregoing, the ESOP shall not be required to make payment
for shares subscribed for until the date set for consummation of the Conversion,
provided that, at the time the ESOP submits its Order Form, it has obtained a
commitment from the Holding Company or an independent third party lender to loan
it the funds necessary to satisfy its order.
If a subscriber authorizes the withdrawal from his or her Savings Account,
the funds may be withdrawn from the subscriber's Savings Account at any time
after receipt of the subscriber's stock order form and will continue to earn
interest at the applicable rate for such Savings Account until the Conversion is
completed or terminated. The withdrawal will be given effect only to the extent
necessary to satisfy the subscription at a price equal to the aggregate Actual
Purchase Price of the Conversion Stock sold to the subscriber. The Savings Bank
will allow subscribers to purchase shares of Conversion Stock by withdrawing
funds from certificate accounts without the assessment of early withdrawal
penalties. In the case of early withdrawal of only a portion of such account,
the certificate evidencing such account shall be canceled if the remaining
balance of the account is less than the applicable minimum balance requirement.
In that event, the remaining balance will earn interest at the passbook savings
rate. This waiver of the early withdrawal penalty is applicable only to
withdrawals made in connection with the purchase of Conversion Stock under the
Plan.
A subscriber who is the beneficial owner of a Retirement Account may pay
for shares of Conversion Stock subscribed for by authorizing and directing the
Savings Bank on the Order Form to roll over the subscriber's Retirement Account
to a self-directed Retirement Account at an independent trustee, who shall then
be directed to make a withdrawal from such Retirement Account in an amount equal
to the Actual Purchase Price of such shares. Such shares shall then become part
of the Retirement Account estate.
All amounts received for the purchase of Conversion Stock in the
Subscription Offering and the Community Offering (other than by charge against
the Subscriber's account or as provided above) shall be placed in a special
escrow account with the Savings Bank. The Savings Bank shall pay interest to the
subscriber at the passbook savings rate on such amounts paid to purchase
Conversion Stock from the date payment in good funds is received until the
Conversion is completed or terminated, as the case may be. The Savings Bank
shall deliver all amounts received for the purchase of Conversion Stock in the
Subscription Offering and the Community Offering to the Holding Company on the
date the Conversion is consummated.
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<PAGE>
H. Undelivered, Defective or Late Order Forms; Insufficient Payment
If an Order Form in the Subscription or Community Offering (a) is not
delivered and is returned by the United States Postal Service (or the Savings
Bank is unable to locate the addressee); (b) is not received by the Savings Bank
or is received by the Savings Bank after the date specified for receipt therein;
(c) is defectively completed or executed; (d) is not accompanied by the total
required payment for the shares of Conversion Stock subscribed for (including
cases in which the subscriber's Savings Account is insufficient to cover the
amount of such required payment pursuant to a withdrawal authorization); (e) is
not accompanied by immediately available funds, or (f) is submitted by or on
behalf of a Person whose representations the Directors of the Holding Company
and the Savings Bank believe to be false or who they otherwise believe, either
alone or acting in concert with others, is violating, evading or circumventing,
or intends to violate, evade or circumvent, the terms and conditions of this
Plan, the Subscription Rights and other rights to purchase of the person to whom
such rights have been granted will be deemed waived and will not be honored. The
Savings Bank may, but will not be required to, waive any irregularity relating
to any Order Form or require the submission of a corrected Order Form or the
remittance of full payment for subscribed shares by such date as the Savings
Bank may specify. Subscription orders, once tendered, cannot be revoked. The
Savings Bank's interpretation of the terms and conditions of this Plan and
acceptability of the Order Forms will be final.
I. Members in Non-Qualified States or in Foreign Countries
The Holding Company will make reasonable efforts to comply with the
securities laws of all states of the United States in which Eligible Account
Holders, Supplemental Eligible Account Holders, or Other Members entitled to
subscribe for shares of Conversion Stock reside. However, the Holding Company
shall not elect to offer or sell shares of Conversion Stock or Subscription
Rights under the Plan of Conversion in a foreign country, and may elect not to
offer or sell shares of Conversion Stock or Subscription Rights in a state in
the United States (i) where a small number of persons otherwise eligible to
subscribe for shares under this Plan reside or (ii) if the Holding 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 Holding Company, the Savings Bank or any employee or
representative thereof register as a broker, dealer, agent or salesperson or
register or otherwise qualify the Subscription Rights or Conversion 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.
J. Acquisition of Capital Stock of the Converted Savings Bank
One half of the net proceeds from the sale of the Conversion Stock (after
such net proceeds are reduced by the amount of any loan made by the Holding
Company to the ESOP), will be used by the Holding Company to purchase all of the
outstanding capital stock of the Converted Savings Bank.
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VII. CONVERTED SAVINGS BANK AMENDED CHARTER AND BYLAWS; HOLDING COMPANY
ARTICLES OF INCORPORATION
As part of the Conversion and this Plan, the Amended Charter and new
bylaws of the Converted Savings Bank will be adopted to authorize the Converted
Savings Bank to operate as a federal capital stock savings bank under the name
Citizens Bank, FSB. A copy of the Amended Charter and new bylaws is available
upon request. By approving the Plan, the Members will thereby approve the
Amended Charter and new bylaws. Accordingly, the Amended Charter and new bylaws
may be amended in the same manner as the Plan pursuant to Article XIII.
A copy of the Articles of Incorporation of the Holding Company are
available from the Savings Bank upon request.
VIII. CONSUMMATION OF CONVERSION
After approval of the Plan by the Members, completion of the issuance and
sale of the Conversion Stock, and provided the Amended Charter and new bylaws
have been filed with and approved by the OTS, the Conversion will become
effective. The effective time of such Conversion will be the date of completion
of such issuance and sale unless a later date is specified by the Savings Bank.
The Conversion shall constitute a change of form of organization of the Savings
Bank and shall not impair or affect any contracts, rights, liabilities,
obligations, interest and relations of whatever kind of the Savings Bank.
The Conversion of the Savings Bank from a federal-chartered mutual
savings bank to a federal-chartered capital stock savings bank shall be deemed
to be an extension of the corporate existence of the Savings Bank, and all
property of the Savings Bank including all its rights, title and interest in and
to all property of whatever kind, whether real, personal or mixed, and things in
action, and every right, privilege, interest and asset of any conceivable value
or benefit then existing, belonging or pertaining to it, or which would inure to
it, shall immediately by act of law and without any conveyance or transfer, and
without any further act or deed, be vested in and become the property of the
Converted Savings Bank, which shall have, hold and enjoy the same in its own
right as fully and to the same extent as the same was possessed, held and
enjoyed by the Savings Bank, and the Converted Savings Bank shall succeed to all
the rights, obligations and relations of the Savings Bank.
IX. REGISTRATION AND MARKET MAKING
Promptly following the Conversion, the Conversion Stock will be
registered with the SEC pursuant to the Securities Exchange Act of 1934, as
amended. In connection with the registration, the Holding Company hereby
undertakes not to deregister such stock for a period of three years thereafter.
18
<PAGE>
The Holding Company will use its best efforts to encourage and assist a
Market Maker to establish and maintain a market for the shares of the Conversion
Stock. The Holding Company will also use its best efforts to list the
Conversion Stock on a national or regional securities exchange or on the
National Association of Securities Dealers Inc. Automated Quotation System.
X. STATUS OF SAVINGS ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION
All Savings Accounts will retain the same status after Conversion as these
accounts had prior to Conversion. Each Savings Account holder shall retain,
without payment, a Savings Account or Accounts in the Converted Savings Bank,
equal in amount to the withdrawable value of such account holder's Savings
Account or Accounts in the Savings Bank prior to Conversion. All Savings
Accounts will continue to be insured by the SAIF of the FDIC up to the
applicable limits of insurance coverage. All loans shall retain the same status
after Conversion as such loans had prior to Conversion.
XI. LIQUIDATION ACCOUNT
After the Conversion, holders of Savings Accounts and borrowers will not
have voting rights in the Converted Savings Bank and will not be entitled to
share in the residual assets after liquidation of the Converted Savings Bank.
However, pursuant to the Regulations, the Savings Bank shall, at the time of
Conversion, establish a Liquidation Account on the records of the Converted
Savings Bank in an amount equal to its net worth as of the latest practicable
date prior to the Conversion. The function of the Liquidation Account is to
establish a priority on liquidation and, except as provided in Article VI.E.2
above, the existence of the Liquidation Account shall not operate to restrict
the use or applications of any of the net worth, regulatory capital or other
accounts of the Converted Savings Bank.
The Liquidation Account shall be maintained by the Converted Saving Bank
subsequent to Conversion for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders (as applicable) who maintain Savings
Accounts in the Converted Savings Bank. Each Eligible Account Holder and
Supplemental Eligible Account Holder shall, with respect to each Savings Account
held, have a related inchoate interest in a portion of the Liquidation Account
balance (the "subaccount balance").
The initial subaccount balance for a Savings Account held by an Eligible
Account Holder or a Supplemental Eligible Account Holder shall be determined by
multiplying the total opening balance in the Liquidation Account by a fraction,
of which the numerator is the amount of the Qualifying Deposits in the related
Savings Account on the Eligibility Record Date or the Supplemental Eligibility
Record Date (as applicable) and of which the denominator is the total amount of
all Qualifying Deposits of all Eligible Account Holders or Supplemental Eligible
Account Holders (as applicable) on such dates. For Savings Accounts in
existence at both dates, separate subaccounts shall be determined on the basis
of the Qualifying Deposits in such Savings Accounts
19
<PAGE>
on such record dates. Each such initial subaccount balance in the Liquidation
Account shall never be increased, but shall be subject to downward adjustment as
provided below.
If the deposit balance in any Savings Account of an Eligible Account Holder
or Supplemental Eligible Account Holder at the close of business on any annual
closing date subsequent to the Eligibility Record Date or Supplemental
Eligibility Record Date (as applicable) is less than the lesser of (a) the
deposit balance in such Savings Account at the close of business on any previous
annual closing date subsequent to the Eligibility Record Date or the
Supplemental Eligibility Record Date, as applicable, or (b) the amount of the
Qualifying Deposit in such Savings Account on the Eligibility Record Date or the
Supplemental Eligibility Record Date, as applicable, then the subaccount balance
for such Savings Account shall be adjusted by reducing such subaccount balance
in an amount proportionate to the reduction in such deposit balance. In the
event of a downward adjustment, the subaccount balance shall not be subsequently
increased, notwithstanding any increase in the deposit balance of the related
Savings Account. The Converted Savings Bank shall not be required to recompute
the Liquidation Account and subaccount balances provided the Converted Savings
Bank maintains records sufficient to make necessary computations in the event of
a complete liquidation or such other events as may require a computation of the
balance of the Liquidation Account. The subaccount balance of a Savings Account
holder shall be maintained for as long as the Savings Account holder maintains
an account with the same social security number with the Converted Savings Bank.
In the event of a complete liquidation of the Converted Savings Bank (and
only in such event), each Eligible Account Holder and Supplemental Eligible
Account Holder, as applicable, shall be entitled to receive a liquidation
distribution from the Liquidation Account in the amount of the then current
adjusted subaccount balances for Savings Accounts then held, after the payment
of creditors of the Converted Savings Bank, including deposit account holders,
but before any liquidation distribution may be made to the Converted Savings
Bank's stockholders. No merger, consolidation, purchase of bulk assets with
assumption of deposit accounts and other liabilities, or similar combination or
transaction with or by another SAIF-insured institution shall be considered to
be a complete liquidation for this purpose. In such transactions, the
Liquidation Account shall be assumed by the surviving institution.
XII. MANAGEMENT
Each member of the Board of Directors of the Savings Bank at the time of
the Conversion will thereupon become a director of the Converted Savings Bank.
The Savings Bank or the Holding Company have entered or will enter into
contracts of employment with selected executives; the Savings Bank intends to
adopt and approve the ESOP; and, subject to approval of the stockholders of the
Holding Company, the Holding Company intends to approve and adopt stock option
plans for employees and directors of the Holding Company and/or the Savings Bank
and a management recognition plan providing for the issuance of restricted stock
of the Holding Company to certain employees and directors of the Holding Company
and/or the Savings Bank.
20
<PAGE>
XIII. AMENDMENT OR TERMINATION OF PLAN
If necessary or desirable, the Plan may be amended at any time prior to
submission of the Plan and proxy materials to the Members by a two-thirds vote
of the Board of Directors of the Savings Bank. After submission of the Plan and
proxy materials to the Members, the Plan may be amended by a two-thirds vote of
the Board of Directors of the Savings Bank, but only with the concurrence of the
OTS.
In the event that mandatory new regulations pertaining to conversions are
adopted by the OTS or FDIC prior to the completion of the Conversion, the Plan
will be amended as provided above to conform to the new mandatory regulations
without a re-solicitation of proxies or another Special Meeting. In the event
that new conversion regulations adopted by the OTS or FDIC prior to completion
of the Conversion contain optional provisions, the Plan may be amended as
provided above to utilize such optional provisions without a re-solicitation of
proxies or another Special Meeting.
The Plan may be terminated by a two-thirds vote of the Board of Directors
of the Savings Bank at any time prior to the Special Meeting, and at any time
following such Special Meeting with the concurrence of the OTS. The Plan shall
terminate automatically if the sale of all shares of Conversion Stock required
to be sold is not completed within 24 months of the date of the Special Meeting.
By adoption of the Plan, the Members authorize the Board of Directors of
the Savings Bank to amend or terminate the Plan under the circumstances set
forth above.
XIV. EXPENSES OF THE CONVERSION
The Savings Bank will use its best efforts to assure that expenses
incurred in connection with the Conversion shall be reasonable.
XV. PROHIBITION ON EXTENSIONS OF CREDIT
The Savings Bank, the Holding Company or any subsidiary of either of them
may not knowingly loan funds or otherwise extend credit to any Person to
purchase shares of Conversion Stock.
XVI. STOCK BENEFIT PLANS
The Holding Company and the Savings Bank may make scheduled discretionary
contributions to the ESOP or any other tax-qualified or non-qualified employee
stock benefit plan established by the Savings Bank or Holding Company for the
benefit of the Directors, Executive Officers and employees, provided such
contributions do not cause the Savings Bank to fail to meet its regulatory
requirements.
21
<PAGE>
XVII. RESTRICTIONS ON ACQUISITION OF CONVERTED BANK
Regulations of the OTS limit acquisitions, and offers to acquire, direct
or indirect beneficial ownership of more than 10% of any class of an equity
security of the Converted Bank or the Holding Company. In addition, consistent
with the regulations of the OTS, the charter of the Converted Bank shall provide
that for a period of five years following completion of the Conversion: (i) no
Person (i.e., no individual, group acting in concert, corporation, partnership,
association, joint stock company, trust, or unincorporated organization or
similar company, syndicate, or any other group formed for the purpose of
acquiring, holding or disposing of securities of an insured institution) shall
directly or indirectly offer to acquire or acquire beneficial ownership of more
than 10% of any class of the Bank's equity securities. Shares beneficially owned
in violation of this charter provision shall not be counted as shares entitled
to vote and shall not be voted by any Person or counted as voting shares in
connection with any matter submitted to the shareholders for a vote. This
limitation shall not apply to 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 date of completion of the Conversion; (ii) shareholders shall not
be permitted to cumulate their votes for elections of directors; and (iii)
special meetings of the shareholders relating to changes in control or amendment
of the charter may only be called by the Board of Directors.
22
<PAGE>
================================================================================
------ ------
NUMBER SHARES
1 *1,000*
------ -------
------------------------------
CITIZENS BANK FSB
------------------------------
This Certifies that Innes Street Financial Corporation is the registered holder
of One Thousand (1,000) fully paid and nonassessable Shares of common stock, no
par value per share, of Citizens Bank, FSB.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate property endorsed.
The security evidenced by this Certificate is not a deposit account or savings
account and is not federally insured or guaranteed. IN WITNESS WHEREOF, THE SAID
CORPORATION HAS CAUSED THIS CERTIFICATE TO BE SIGNED BY ITS DULY AUTHORIZED
OFFICERS AND ITS CORPORATE SEAL TO BE HEREUNTO AFFIXED.
THIS ____________ DAY OF __________________ A.D. 1998.
__________________________ _________________________________
President Secretary
================================================================================
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-............Custodian...........
TEN ENT - as tenants by the entireries (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act.........................
in common (State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
For value received hereby sell, assign and transfer unto
----------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute
and appoint
-----------------------------------------------------------------
- -----------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated,
---------------------
In presence of -----------------------------
- --------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
<PAGE>
INNES STREET FINANCIAL CORPORATION
SALISBURY, NORTH CAROLINA
COMMON STOCK CUSIP 45768F 10 3
INCORPORATED UNDER THE LAWS OF THE STATE OF NORTH CAROLINA
SEE REVERSE FOR CERTAIN DEFINITIONS
This certifies that
is the registered owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF
INNES STREET FINANCIAL CORPORATION, SALISBURY, NORTH CAROLINA (the
"Corporation")
The shares evidenced by this Certificate are transferable only on the
books of the Corporation by the holder hereof, in person or by duly
authorized attorney or legal representative, upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are subject to all the provisions of the Articles of Incorporation
and ByLaws of the Corporation and any and all amendments thereto. The
shares represented by this Certificate are not deposits or accounts and are
not federally insured or guaranteed.
This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
In WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officer and has
caused its facsimile seal to be affixed hereto.
Dated
[SEAL APPEARS HERE]
/s/ Ralphelle S. Butler /s/ Ronald E. Bostian
Secretary President and Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
Transfer Agent
and Registrar
By
Authorized Signature
<PAGE>
INNES STREET FINANCIAL CORPORATION
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The Corporation will furnish to any stockholder upon request and without
charge a copy of the Articles of Incorporation and Bylaws of the Corporation,
which set forth certain other provisions with respect to acquisition of shares
of the Corporation, as well as a description of the Corporation's authorized
common and preferred stock and other provisions affecting stockholder rights and
corporate governance.
The following abbreviations, when used in the inscription on the face of this
certificate , shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - .....Custodian.....
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors
JT TEN - as joint tenants with right Act..........................
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For Value Received, _______________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAXPAYER IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
_______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF
ASSIGNER)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________ shares
of the Common Stock represented by this Certificate, and do hereby irrevocably
constitute and appoint
___________________________________________________________________ as Attorney
to transfer the said shares on the books of the within named Corporation, with
full power of substitution.
Dated ________________________
_______________________________________
Signature
_______________________________________
Signature
NOTICE: The signature(s) to this assignment must correspond with the name(s) as
written upon the face of the Certificate in every particular, without alteration
or enlargement, or any change whatever. The signature(s) should be guaranteed by
an eligible guarantor institution (bank, stockbroker, savings and loan
association or credit union) with membership in an approved signature guarantee
medallion program, pursuant to S.E.C. Rule 17Ad-15.
<PAGE>
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated November 7, 1997 (except Note 14, as to which the date
is September 10, 1998) to each of the Application for Conversion (Form AC) of
Citizens Bank, FSB and Amendments No. 1 to the the Registration Statement
(Form S-1) and the related Prospectus of Innes Street Financial Corporation
for the registration of shares of its common stock.
/s/ Ernst & Young LLP
Ernst & Young LLP
Winston-Salem, North Carolina
October 29, 1998
<PAGE>
[FERGUSON & COMPANY LETTERHEAD APPEARS HERE]
Financial
Institution
Consulting
Suite 305
860 W. Airport Frwy
Hurst, Texas 76054
(817) 577-9558 October 30, 1998
(817) 577-3054 Fax
Board of Directors
Citizens Bank, FSB
401 West Innes Street
Salisbury, North Carolina 28144
Directors:
We hereby consent to the use of our firm's name in the Form AC
Application for Conversion of Citizens Bank, FSB, Salisbury, North Carolina, and
any amendments thereto, and in the Form S-1 Registration Statement of Innes
Street Financial Corporation and any amendments thereto. We also hereby
consent to the inclusion of, summary of, and references to our Appraisal Report
and our opinion concerning subscription rights in such filings including the
Prospectus of Innes Street Financial Corporation.
/s/ Robin L. Fussell
Robin L. Fussell
Principal
<PAGE>
[LETTERHEAD OF FERGUSON & COMPANY]
OCTOBER 21, 1998
BOARD OF DIRECTORS
CITIZENS BANK, FSB
401 WEST INNES STREET
SALISBURY, NC 28144
DEAR DIRECTORS:
We have completed and hereby provide, as of October 16, 1998, an updated
independent appraisal of the estimated pro forma market value of Citizens Bank,
FSB, Salisbury, North Carolina ("Citizens" or the "Bank"), in connection with
the conversion of Citizens from the mutual to stock form of organization
("Conversion"). This appraisal report update is furnished pursuant to an
amendment to the Bank's Application for Conversion filed with the Office of
Thrift Supervision ("OTS"). Our original appraisal report, dated August 28,
1998, is incorporated herein by reference.
In preparing this appraisal update, we reviewed our original appraisal and the
Form AC, including the proxy statement. We considered, among other items,
recent developments in stock market conditions and available financial
information on Citizens. In addition, where appropriate, we considered
information based on other available published sources that we believe is
reliable; however, we cannot guarantee the accuracy or completeness of such
information.
Our appraisal update is based on the Bank's representation that the
information in the application for conversion and additional evidence furnished
us by the Bank are accurate and complete. We did not independently verify the
financial statements and other information furnished by the Bank, nor did we
independently value its assets and liabilities. The appraisal update considers
the Bank as a going concern and should not be considered as an indication of its
liquidation value.
Our valuation is not intended, and must not be construed, as a recommendation
of any kind as to the advisability of purchasing shares of common stock in the
merger/conversion. 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 who purchase
shares of common stock in the merger/conversion will thereafter be able to sell
such shares at prices related to the foregoing estimate of the Bank's pro forma
market value. Ferguson & Company ("F&C") is not a seller of securities within
the meaning of any federal or state securities laws and any report prepared by
F&C shall not be used as an offer or solicitation with respect to the purchase
or sale of any securities.
<PAGE>
BOARD OF DIRECTORS
OCTOBER 21, 1998
PAGE 2
RECENT FINANCIAL PERFORMANCE
- ----------------------------
The Bank has a September 30 fiscal year. The original Form AC has June 30,
1998, unaudited financial statements. Our original appraisal of August 28,
1998, was based on June 30, 1998, financial statements. This amendment will
have June 30, 1998 and June 30, 1997, unaudited financial statements, and a
recent developments section. Since the recent developments information is not
available as of the date of this appraisal update, this appraisal update also
utilizes the year ended June 30, 1998, for appraisal income purposes.
GENERAL
- -------
Since our original appraisal as of August 28, 1998, the overall thrift equity
market has shown significant erratic movement in value. Exhibit I shows the
movement of the SNL Thrift index from December 31, 1997, to October 16, 1998,
the date of this update. The table shows that the index increased by 4.1% from
August 28, 1998, to October 16, 1998. From May 29, 1998, to October 16, 1998,
the index declined by 26.8%. It increased by 3.1% from August 28, 1998, to
September 30, 1998, decreased by 18.7% from September 30, 1998, to October 8,
1998, and then increased by 24.1% from October 8, 1998, to October 16, 1998.
The index decreased by 19.1% from December 31, 1997, to October 16, 1998. The
general level of interest rates has decreased during the update period (see
Exhibit II). The Federal Reserve Board reduced the federal funds rate by 25
basis points twice during the current update period.
Exhibit III provides information on thrift conversions completed since March
31, 1998. Fourteen of the twenty-two thrifts have decreased in value since
conversion, one experienced no change, and seven increased in value. The
thrifts have averaged a decrease of 6.1%, with a median decrease of 6.3%.
Individual changes have ranged from a decrease of 30.0% to an increase of 37.5%.
Short term price increases have occurred as follows: One day--average 23.2%,
median 14.4%; one week--average 22.7%, median 14.4%; and one month--average
22.8%, median 15.0%. Interestingly, twenty were selling for less on October 16,
1998, than they closed for on their first day of trading, with two (NBCP and
GBNK) decreasing by over 35%. Five of the seven most recent conversions
decreased in value the first day, one experienced no change, and one increased
in value.
The group of comparative institutions, which is included in Exhibit V,
experienced an average decrease in per share value of 6.5% and a median decrease
in per share value of 7.9% during the update period, with eight decreasing in
value and three increasing in value.
During 1993, it was not unusual for conversion stocks to increase in price by
30% immediately. Conversions completed between June 30, 1997, and June 30, 1998,
were experiencing more dramatic increases. However, those completed since mid-
year 1998 are not performing nearly as well. And the ones completed earlier
with large pops are experiencing significant declines. Overall thrift values
have experienced significant declines since mid-year. For example, all publicly
held thrifts traded on major exchanges were selling for an average of 171% of
book value at May 29, 1998, versus 127% at October 16, 1998.
<PAGE>
BOARD OF DIRECTORS
OCTOBER 21, 1998
PAGE 3
VALUATION APPROACH
- ------------------
Table VI indicates the pro forma market valuation of Citizens versus the
comparative group and all publicly held thrifts. Pro forma pricing ratios for
Citizens are based on the financial information shown in Exhibit VIII. Pro
forma earnings are based on currently available interest rates and pro forma
assets and book value information are taken from the June 30, 1998, financial
data included in the offering circular.
At the $17,000,000 midpoint of the range, Citizens is valued at 57.3% of pro
forma book value, representing a discount of 54.6% from the mean and 53.1% from
the median of the comparative group. The midpoint price is 11.1 times pro forma
earnings, representing a discount of 25.0% from the mean and 15.9% from the
median of the comparative group.
As compared to all publicly held thrifts, at the midpoint of the range,
Citizens' price earnings ratio represents a discount of 34.7% from the mean and
31.1% from the median. Citizens' value of 57.3% of pro forma book value is well
below the mean of 126.7% and median of 115.1% of all publicly held thrifts.
As compared to thrift conversions completed within the past six months (see
Exhibit III.1), Citizens' price to pro forma book of 57.3% represents a 24.4%
discount from the mean and a discount of 25.2% from the median. And its price
earnings ratio of 11.1 represents a 32.3% discount from the mean and a 31.1%
discount from the median.
At the maximum, Citizens' price to pro forma book ratio of 61.4% represents a
discount of 19.0% from the mean and 19.8% from the median of major exchange
conversions completed since March 31, 1998. And its price to earnings ratio of
12.4 represents a discount of 24.4% from the mean and 23.0% from the median.
CONCLUSION
- ----------
In our opinion, Citizens' estimated pro forma market value at October 16,
1998, was $17,000,000, which decreased 19.0% from our most recent appraisal
update as of August 28, 1998. The resulting valuation range is $14,450,000 at
the minimum to $19,550,000 at the maximum, based on a range of 15% below and 15%
above the midpoint valuation. The supermaximum is $22,482,500, based on 1.15
times the maximum. Pro forma comparisons with the comparative group are
presented in Exhibit VI based on calculations shown in Exhibit VIII.
During the update period from August 28, 1998, to October 16, 1998, thrift
equity markets have been very erratic. Interest rates have decreased during the
update period. The SNL Thrift Index increased 4.1%, the average value of the
comparative group decreased 6.5%, and the median value of the comparative group
decreased 7.9%. Recent conversions have shown declining receptivity since June
30, 1998, recent price increases have dwindled and most recent conversions have
declined in value since the first day of trading. More recently, first day
declines have occurred. The SNL index declined 18.7% from 651.3 to 529.7 during
the eight-day period from September 30, 1998, to October 8, 1998. It then
increased in value by 24.1% from 529.7 to 657.1 during the eight-day period from
October 8, 1998, to October 16, 1998. Recent conversions have been more
difficult to complete because of the declining participation by
<PAGE>
BOARD OF DIRECTORS
OCTOBER 21, 1998
PAGE 4
professional investors, funds, and institutional investors. Considering all of
the above factors together, we believe that the decrease in the midpoint value
is justified.
Our opinion is based upon circumstances as of the date hereof, including
current conditions in the United States securities markets. Events occurring
after the date hereof, including, but not limited to, changes affecting the
United States securities markets and subsequent results of operations of
Citizens could materially affect the assumptions used in preparing this opinion.
Respectfully,
Ferguson & Company
/s/ Robin L. Fussell
Robin L. Fussell
Principal
<PAGE>
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER Title Page
- -------------- ----------------------------------------------------- -------------
<S> <C> <C>
I SNL Index 1
II Selected Interest Rates 2
III Recent Conversions Including MHC's 3
III.1 Recent Conversions Excluding MHC's 6
IV Selected Publicly Held Thrifts 9
V Comparative Group Price Changes 24
VI Pro Forma Comparisons 26
VII Comparison of Pricing Ratios 28
VIII Pro Forma Assumptions 29
Pro Forma Effect of Conversion Proceeds 30
Pro Forma Analysis Sheet 34
</TABLE>
<PAGE>
FERGUSON & COMPANY EXHIBIT I - SNL INDEX
- ------------------
<TABLE>
<CAPTION>
% CHANGE SINCE
---------------------------------------
SNL PREVIOUS
DATE INDEX DATE 12/31/97 8/28/98
---- ----- ---- -------- -------
<S> <C> <C> <C> <C>
12/31/97 814.1
1/31/98 768.3 -5.6% -5.6%
2/27/98 818.7 6.6% 0.6%
3/31/98 869.3 6.2% 6.8%
4/30/98 882.1 1.5% 8.4%
5/31/98 897.2 1.7% 10.2%
6/30/98 833.5 -7.1% 2.4%
7/31/98 783.7 -6.0% -3.7%
8/28/98 631.5 -19.4% -22.4%
9/30/98 651.3 3.1% -20.0% 3.1%
10/8/98 529.7 -18.7% -34.9% -16.1%
10/16/98 657.1 24.1% -19.3% 4.1%
</TABLE>
[GRAPH APPEARS HERE]
SOURCE: SNL & F&C CALCULATIONS
1
<PAGE>
FERGUSON & COMPANY
- -----------------
EXHIBIT II - SELECTED INTEREST RATES
<TABLE>
<CAPTION>
10/16/98 vs.
8/28/98
----------------
Increase
10/16/98 8/28/98 (Decrease)
----------------- ------------------ ----------------
<S> <C> <C> <C>
Federal funds rate 5.14 5.48 (0.34)
3 month T-bill discount (1) 3.87 4.89 (1.02)
1 year T-bill discount (1) 4.03 4.85 (0.82)
5 year treasury rate 4.30 5.07 (0.77)
10 year treasury rate 4.66 5.20 (0.54)
Long term treasury rate 5.05 5.42 (0.37)
</TABLE>
(1) Rates presented represent discounts, not yields.
SOURCE: FEDERAL RESERVE BANK
OF ST. LOUIS
2
<PAGE>
FERGUSON & COMPANY Exhibit III - Recent Conversions Including MHC's
- ------------------
(Completed since March 31,1998)
<TABLE>
<CAPTION>
Conversion Gross Offering
Assets Proceeds Price
Ticker Short Name State IPO Date ($000) ($000) ($)
<S> <C> <C> <C> <C> <C> <C>
SFFS Sound Federal Bancorp (MHC) NY 10/08/98 254,749 22,995 10.000
CNYF CNY Financial Corp. NY 10/06/98 233,729 52,516 10.000
WEBK West Essex Bancorp (MHC) NJ 10/05/98 299,025 17,729 10.000
CITZ CFS Bancorp Inc. IN 07/24/98 746,050 178,538 10.000
HSTD Homestead Bancorp Inc. LA 07/20/98 NA NA 10.000
PSBI PSB Bancorp Inc. PA 07/17/98 NA NA 10.000
THTL Thistle Group Holdings Co. PA 07/14/98 NA NA 10.000
UCFC United Community Finl Corp. OH 07/09/98 1,044,993 334,656 10.000
BCSB BCSB Bankcorp Inc. (MHC) MD 07/08/98 251,738 22,866 10.000
HRBT Hudson River Bancorp NY 07/01/98 664,996 173,337 10.000
LIBB Liberty Bancorp Inc. (MHC) NJ 07/01/98 217,437 18,336 10.000
FKAN First Kansas Financial Corp. KS 06/29/98 95,655 15,539 10.000
NBCP Niagara Bancorp Inc. (MHC) NY 04/20/98 1,176,451 135,016 10.000
CFKY Columbia Financial of Kentucky KY 04/15/98 104,006 26,715 10.000
SBAN SouthBanc Shares Inc. SC 04/15/98 NA NA 20.000
GBNK Gaston Federal Bancorp (MHC) NC 04/13/98 173,470 21,134 10.000
FSLA First Source Bancorp Inc. NJ 04/09/98 NA NA 10.000
TSBS Peoples Bancorp Inc. NJ 04/09/98 NA NA 10.000
EFC EFC Bancorp Inc. IL 04/07/98 315,910 69,365 10.000
HBSC Heritage Bancorp Inc. SC 04/07/98 247,499 69,431 15.000
NEP Northeast PA Financial Corp. PA 04/01/98 369,242 59,515 10.000
PFSL Pocahontas Bancorp Inc. AR 04/01/98 NA NA 10.000
Maximum 1,176,451 334,656 20.000
Minimum 95,655 15,539 10.000
Average 412,997 81,179 10.682
Median 254,749 52,516 10.000
7-1-98 to
10-16-98:
- -------------
Maximum 1,044,993 334,656 10.000
Minimum 217,437 17,729 10.000
Average 464,090 102,622 10.000
Median 276,887 37,756 10.000
4-1-98 to
6-30-98:
- -------------
Maximum 1,176,451 135,016 20.000
Minimum 95,655 15,539 10.000
Average 354,605 56,674 11.364
Median 247,499 59,515 10.000
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
3
<PAGE>
FERGUSON & COMPANY EXHIBIT III- RECENT CONVERSIONS INCLUDING MHC's
- ------------------ (COMPLETED SINCE MARCH 31, 1998)
<TABLE>
<CAPTION>
Conversion Pricing Ratios
----------------------------------------------------------------------
Price/ Price/ Price/ Price/ Current Current Current
Pro-Forma Pro-Forma Pro-Forma Adjusted Stock Price/ Price/ Tang
Book Value Tang. Book Earnings Assets Price Book Value Book Value
Ticker (%) (%) (x) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
SFFS 100.0 100.0 15.6 8.3 9.000 NA NA
CNYF 69.9 69.9 47.2 18.3 9.563 NA NA
WEBK 95.4 95.4 40.2 5.6 9.500 NA NA
CITZ 71.7 NA 18.2 19.3 9.375 NA NA
HSTD 100.0 NA NA NA 7.500 NA NA
PSBI 100.0 NA NA NA 7.000 NA NA
THTL 100.0 NA NA NA 9.000 NA NA
UCFC 77.8 77.8 14.1 24.3 13.750 NA NA
BCSB 142.3 142.3 26.1 8.3 10.750 NA NA
HRBT 80.1 NA 22.3 20.7 9.813 NA NA
LIBB 121.6 121.6 20.4 7.8 8.000 NA NA
FKAN 78.5 78.5 14.0 14.0 9.625 71.5 72.4
NBCP 122.1 122.1 20.7 10.3 9.813 114.1 114.1
CFKY 74.5 74.5 19.6 20.4 13.000 92.7 92.7
SBAN 100.0 NA NA NA 17.000 95.9 95.9
GBNK 116.8 NA 24.5 10.9 11.500 125.8 125.8
FSLA 100.0 NA NA NA 8.063 98.7 101.9
TSBS 100.0 NA NA NA 10.000 106.4 109.7
EFC 76.6 76.6 13.5 18.0 10.125 80.6 80.6
HBSC 78.0 NA 16.1 21.9 15.875 77.6 77.6
NEP 75.4 75.4 18.7 13.9 10.688 74.4 74.4
PFSL 100.0 NA NA NA 8.875 101.5 104.9
Maximum 142.3 142.3 47.2 24.3 17.000 125.8 125.8
Minimum 69.9 69.9 13.5 5.6 7.000 71.5 72.4
Average 94.6 94.0 22.1 14.8 10.355 94.5 95.5
Median 100.0 78.5 19.6 14.0 9.719 95.9 95.9
7-1-98 to
10-16-98:
- -----------
Maximum 142.3 142.3 47.2 24.3 13.750 - -
Minimum 69.9 69.9 14.1 5.6 7.000 - -
Average 96.3 101.2 25.5 14.1 9.386 - -
Median 100.0 97.7 21.4 13.3 9.375 - -
4-1-98 to
6-30-98:
- -----------
Maximum 122.1 122.1 24.5 21.9 17.000 125.8 125.8
Minimum 74.5 74.5 13.5 10.3 8.063 71.5 72.4
Average 92.9 85.4 18.2 15.6 11.324 94.5 95.5
Median 100.0 76.6 18.7 14.0 10.125 95.9 95.9
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
4
<PAGE>
FERGUSON & COMPANY Exhibit III - Recent Conversions Including MHC's
- ------------------
(Completed since March 31, 1998)
<TABLE>
<CAPTION>
Price One Price One Price One
Day After Week After Month After
Conversion Conversion Conversion
Ticker ($) ($) ($)
<S> <C> <C> <C>
SFFS 8.500 8.938 NA
CNYF 9.500 9.500 NA
WEBK 10.000 9.938 NA
CITZ 11.438 10.938 9.750
HSTD 9.313 9.250 8.500
PSBI 9.188 9.125 7.813
THTL 9.938 9.813 9.000
UCFC 15.000 16.000 15.750
BCSB 12.563 12.625 11.625
HRBT 12.563 13.500 13.375
LIBB 11.438 11.625 11.250
FKAN 12.313 12.250 11.500
NBCP 16.313 16.563 16.250
CFKY 17.125 15.938 16.000
SBAN 22.750 22.500 20.875
GBNK 18.000 16.375 16.750
FSLA 10.563 10.500 10.500
TSBS 10.438 10.563 10.625
EFC 14.750 14.938 14.125
HBSC 22.313 22.000 22.000
NEP 15.500 15.375 15.438
PFSL 10.438 10.250 9.938
Maximum 22.750 22.500 22.000
Minimum 8.500 8.938 7.813
Average 13.179 13.114 13.214
Median 11.876 11.938 11.625
7-1-98 to
10-16-98:
- ------------
Maximum 15.000 16.000 15.750
Minimum 8.500 8.938 7.813
Average 10.858 11.023 10.883
Median 10.000 9.938 10.500
4-1-98 to
6-30-98:
- ------------
Maximum 22.750 22.500 22.000
Minimum 10.438 10.250 9.938
Average 15.500 15.205 14.909
Median 15.500 15.375 15.438
<CAPTION>
Post Conversion Price Changes
------------------------------------------------------------
One One One To Since
Day Week Month Date First Day
Ticker (%) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C>
SFFS (15.0) (10.6) NA (10.0) 5.9
CNYF (5.0) (5.0) NA (4.4) 0.7
WEBK - (0.6) NA (5.0) (5.0)
CITZ 14.4 9.4 (2.5) (6.3) (18.0)
HSTD (6.9) (7.5) (15.0) (25.0) (19.5)
PSBI (8.1) (8.8) (21.9) (30.0) (23.8)
THTL (0.6) (1.9) (10.0) (10.0) (9.4)
UCFC 50.0 60.0 57.5 37.5 (8.3)
BCSB 25.6 26.3 16.3 7.5 (14.4)
HRBT 25.6 35.0 33.8 (1.9) (21.9)
LIBB 14.4 16.3 12.5 (20.0) (30.1)
FKAN 23.1 22.5 15.0 (3.8) (21.8)
NBCP 63.1 65.6 62.5 (1.9) (39.8)
CFKY 71.3 59.4 60.0 30.0 (24.1)
SBAN 13.8 12.5 4.4 (15.0) (25.3)
GBNK 80.0 63.8 67.5 15.0 (36.1)
FSLA 5.6 5.0 5.0 (19.4) (23.7)
TSBS 4.4 5.6 6.3 - (4.2)
EFC 47.5 49.4 41.3 1.3 (31.4)
HBSC 48.8 46.7 46.7 5.8 (28.9)
NEP 55.0 53.8 54.4 6.9 (31.0)
PFSL 4.4 2.5 (0.6) (11.3) (15.0)
Maximum 80.0 65.6 67.5 37.5 5.9
Minimum (15.0) (10.6) (21.9) (30.0) (39.8)
Average 23.2 22.7 22.8 (2.7) (19.3)
Median 14.4 14.4 15.0 (4.1) (21.9)
7-1-98 to
10-16-98:
- ------------
Maximum 50.0 60.0 57.5 37.5 5.9
Minimum (15.0) (10.6) (21.9) (30.0) (30.1)
Average 8.6 10.2 8.8 (6.1) (13.1)
Median - (0.6) 5.0 (6.3) (14.4)
4-1-98 to
6-30-98:
- ------------
Maximum 80.0 65.6 67.5 30.0 (4.2)
Minimum 4.4 2.5 (0.6) (19.4) (39.8)
Average 37.9 35.2 32.9 0.7 (25.6)
Median 47.5 46.7 41.3 - (25.3)
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
5
<PAGE>
FERGUSON & COMPANY Exhibit III.1 - Recent Conversions Excluding MHC's
- ------------------
(Completed since March 31,1998)
<TABLE>
<CAPTION>
Conversion Gross Offering
Assets Proceeds Price
Ticker Short Name State IPO Date ($000) ($000) ($)
<S> <C> <C> <C> <C> <C> <C>
CNYF CNY Financial Corp. NY 10/06/98 233,729 52,516 10.000
CITZ CFS Bancorp Inc. IN 07/24/98 746,050 178,538 10.000
UCFC United Community Finl Corp. OH 07/09/98 1,044,993 334,656 10.000
HRBT Hudson River Bancorp NY 07/01/98 664,996 173,337 10.000
FKAN First Kansas Financial Corp. KS 06/29/98 95,655 15,539 10.000
CFKY Columbia Financial of Kentucky KY 04/15/98 104,006 26,715 10.000
EFC EFC Bancorp Inc. IL 04/07/98 315,910 69,365 10.000
HBSC Heritage Bancorp Inc. SC 04/07/98 247,499 69,431 15.000
NEP Northeast PA Financial Corp. PA 04/01/98 369,242 59,515 10.000
Maximum 1,044,993 334,656 15.000
Minimum 95,655 15,539 10.000
Average 424,676 108,846 10.556
Median 315,910 69,365 10.000
7-1-98 to
10-16-98:
- --------------
Maximum 1,044,993 334,656 10.000
Minimum 233,729 52,516 10.000
Average 672,442 184,762 10.000
Median 705,523 175,938 10.000
4-1-98 to
6-30-98:
- --------------
Maximum 369,242 69,431 15.000
Minimum 95,655 15,539 10.000
Average 226,462 48,113 11.000
Median 247,499 59,515 10.000
</TABLE>
Source: SNL & F&C calculations
6
<PAGE>
FERGUSON & COMPANY EXHIBIT III.1 - RECENT CONVERSIONS EXCLUDING MHC's
- ------------------
(COMPLETED SINCE MARCH 31, 1998)
<TABLE>
<CAPTION>
Conversion Pricing Ratios
-----------------------------------------------------
Price/ Price/ Price/ Price/ Current Current Current
Pro-Forma Pro-Forma Pro-Forma Adjusted Stock Price/ Price/Tang
Book Value Tang. Book Earnings Assets Price Book Value Book Value
Ticker (%) (%) (x) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
CNYF 69.9 69.9 47.2 18.3 9.563 NA NA
CITZ 71.7 NA 18.2 19.3 9.375 NA NA
UCFC 77.8 77.8 14.1 24.3 13.750 NA NA
HRBT 80.1 NA 22.3 20.7 9.813 NA NA
FKAN 78.5 78.5 14.0 14.0 9.625 71.5 72.4
CFKY 74.5 74.5 19.6 20.4 13.000 92.7 92.7
EFC 76.6 76.6 13.5 18.0 10.125 80.6 80.6
HBSC 78.0 NA 16.1 21.9 15.875 77.6 77.6
NEP 75.4 75.4 18.7 13.9 10.688 74.4 74.4
Maximum 80.1 78.5 47.2 24.3 15.875 92.7 92.7
Minimum 69.9 69.9 13.5 13.9 9.375 71.5 72.4
Average 75.8 75.5 20.4 19.0 11.313 79.4 79.5
Median 76.6 76.0 18.2 19.3 10.125 77.6 77.6
7-1-98 to
10-16-98:
- --------------
Maximum 80.1 77.8 47.2 24.3 13.750 - -
Minimum 69.9 69.9 14.1 18.3 9.375 - -
Average 74.9 73.9 25.5 20.7 10.625 - -
Median 74.8 73.9 20.3 20.0 9.688 - -
4-1-98 to
6-30-98:
- --------------
Maximum 78.5 78.5 19.6 21.9 15.875 92.7 92.7
Minimum 74.5 74.5 13.5 13.9 9.625 71.5 72.4
Average 76.6 76.3 16.4 17.6 11.863 79.4 79.5
Median 76.6 76.0 16.1 18.0 10.688 77.6 77.6
</TABLE>
Source: SNL & F&C calculations
7
<PAGE>
FERGUSON & COMPANY EXHIBIT III.1 - RECENT CONVERSIONS EXCLUDING MHC's
- ------------------
(COMPLETED SINCE MARCH 31, 1998)
<TABLE>
<CAPTION>
Price One Price One Price One Post Conversion Price Changes
------------------------------------------------------------
Day After Week After Month After One One One To Since
Conversion Conversion Conversion Day Week Month Date First Day
Ticker ($) ($) ($) (%) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CNYF 9.500 9.500 NA (5.0) (5.0) NA (4.4) 0.7
CITZ 11.438 10.938 9.750 14.4 9.4 (2.5) (6.3) (18.0)
UCFC 15.000 16.000 15.750 50.0 60.0 57.5 37.5 (8.3)
HRBT 12.563 13.500 13.375 25.6 35.0 33.8 (1.9) (21.9)
FKAN 12.313 12.250 11.500 23.1 22.5 15.0 (3.8) (21.8)
CFKY 17.125 15.938 16.000 71.3 59.4 60.0 30.0 (24.1)
EFC 14.750 14.938 14.125 47.5 49.4 41.3 1.3 (31.4)
HBSC 22.313 22.000 22.000 48.8 46.7 46.7 5.8 (28.9)
NEP 15.500 15.375 15.438 55.0 53.8 54.4 6.9 (31.0)
Maximum 22.313 22.000 22.000 71.3 60.0 60.0 37.5 0.7
Minimum 9.500 9.500 9.750 (5.0) (5.0) (2.5) (6.3) (31.4)
Average 14.500 14.493 14.742 36.7 36.8 38.3 7.2 (20.5)
Median 14.750 14.938 14.782 47.5 46.7 44.0 1.3 (21.9)
7-1-98 to
10-16-98:
- -------------
Maximum 15.000 16.000 15.750 50.0 60.0 57.5 37.5 0.7
Minimum 9.500 9.500 9.750 (5.0) (5.0) (2.5) (6.3) (21.9)
Average 12.125 12.485 12.958 21.3 24.8 29.6 6.3 (11.9)
Median 12.001 12.219 13.375 20.0 22.2 33.8 (3.1) (13.2)
4-1-98 to
6-30-98:
- -------------
Maximum 22.313 22.000 22.000 71.3 59.4 60.0 30.0 (21.8)
Minimum 12.313 12.250 11.500 23.1 22.5 15.0 (3.8) (31.4)
Average 16.400 16.100 15.813 49.1 46.3 43.5 8.0 (27.4)
Median 15.500 15.375 15.438 48.8 49.4 46.7 5.8 (28.9)
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
8
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECETED PUBLICLY HED THRIFTS
<TABLE>
<CAPTION>
Deposit
Insurance
Agency
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date
<S> <C> <C> <C> <C> <C> <C> <C>
AABC Access Anytime Bancorp Inc. Clovis NM SW SAIF NASDAQ 08/08/86
ABBK Abington Bancorp Inc. Abington MA NE BIF NASDAQ 06/10/86
ABCL Alliance Bancorp Hinsdale IL MW SAIF NASDAQ 07/07/92
ABCW Anchor BanCorp Wisconsin Madison WI MW SAIF NASDAQ 07/16/92
AFBC Advance Financial Bancorp Wellsburg WV SE SAIF NASDAQ 01/02/97
AHCI Ambanc Holding Co. Amsterdam NY MA BIF NASDAQ 12/27/95
ALBC Albion Banc Corp. Albion NY MA SAIF NASDAQ 07/26/93
ALLB Alliance Bank (MHC) Broomall PA MA SAIF NASDAQ 03/03/95
AMFC AMB Financial Corp. Munster IN MW SAIF NASDAQ 04/01/96
ANA Acadiana Bancshares Inc. Lafayette LA SW SAIF AMSE 07/16/96
ANDB Andover Bancorp Inc. Andover MA NE BIF NASDAQ 05/08/86
ANE Alliance Bncp of New England Vernon CT NE BIF AMSE 12/19/86
ASBI Ameriana Bancorp New Castle IN MW SAIF NASDAQ 03/02/87
ASBP ASB Financial Corp. Portsmouth OH MW SAIF NASDAQ 05/11/95
ASFC Astoria Financial Corp. Lake Success NY MA SAIF NASDAQ 11/18/93
BANC BankAtlantic Bancorp Inc. Fort Lauderdale FL SE SAIF NASDAQ 11/29/83
BDJI First Federal Bancorp. Bemidji MN MW SAIF NASDAQ 04/04/95
BFD BostonFed Bancorp Inc. Burlington MA NE SAIF AMSE 10/24/95
BFSB Bedford Bancshares Inc. Bedford VA SE SAIF NASDAQ 08/22/94
BKC American Bank of Connecticut Waterbury CT NE BIF AMSE 12/01/81
BKCT Bancorp Connecticut Inc. Southington CT NE BIF NASDAQ 07/03/86
BKUNA BankUnited Financial Corp. Coral Gables FL SE SAIF NASDAQ 12/11/85
BNKU Bank United Corp. Houston TX SW SAIF NASDAQ 08/09/96
BPLS Bank Plus Corp. Los Angeles CA WE SAIF NASDAQ NA
BVCC Bay View Capital Corp. San Mateo CA WE SAIF NASDAQ 05/09/86
BWFC Bank West Financial Corp. Grand Rapids MI MW SAIF NASDAQ 03/30/95
CAFI Camco Financial Corp. Cambridge OH MW SAIF NASDAQ NA
CASB Cascade Financial Corp. Everett WA WE SAIF NASDAQ 09/16/92
CASH First Midwest Financial Inc. Storm Lake IA MW SAIF NASDAQ 09/20/93
CATB Catskill Financial Corp. Catskill NY MA BIF NASDAQ 04/18/96
CBES CBES Bancorp Inc. Excelsior Springs MO MW SAIF NASDAQ 09/30/96
CBK Citizens First Financial Corp. Bloomington IL MW SAIF AMSE 05/01/96
CBSA Coastal Bancorp Inc. Houston TX SW SAIF NASDAQ NA
CEBK Central Co-operative Bank Somerville MA NE BIF NASDAQ 10/24/86
CENB Century Bancorp Inc. Thomasville NC SE SAIF NASDAQ 12/23/96
CFB Commercial Federal Corp. Omaha NE MW SAIF NYSE 12/31/84
CFCP Coastal Financial Corp. Myrtle Beach SC SE SAIF NASDAQ 09/26/90
CFFC Community Financial Corp. Staunton VA SE SAIF NASDAQ 03/30/88
CFNC Carolina Fincorp Inc. Rockingham NC SE SAIF NASDAQ 11/25/96
CFSB CFSB Bancorp Inc. Lansing MI MW SAIF NASDAQ 06/22/90
CFTP Community Federal Bancorp Tupelo MS SE SAIF NASDAQ 03/26/96
CIBI Community Investors Bancorp Bucyrus OH MW SAIF NASDAQ 02/07/95
CKFB CKF Bancorp Inc. Danville KY MW SAIF NASDAQ 01/04/95
CLAS Classic Bancshares Inc. Ashland KY MW SAIF NASDAQ 12/29/95
CMRN Cameron Financial Corp Cameron MO MW SAIF NASDAQ 04/03/95
CMSB Commonwealth Bancorp Inc. Norristown PA MA SAIF NASDAQ 06/17/96
CMSV Community Savings Bnkshrs(MHC) North Palm Beach FL SE SAIF NASDAQ 10/24/94
CNIT CENIT Bancorp Inc. Norfolk VA SE SAIF NASDAQ 08/06/92
CNSB CNS Bancorp Inc. Jefferson City MO MW SAIF NASDAQ 06/12/96
CNY Carver Bancorp Inc. New York NY MA SAIF AMSE 10/25/94
COFI Charter One Financial Cleveland OH MW SAIF NASDAQ 01/22/88
COOP Cooperative Bankshares Inc. Wilmington NC SE SAIF NASDAQ 08/21/91
CRSB Crusader Holding Corp. Philadelphia PA MA SAIF NASDAQ NA
CRZY Crazy Woman Creek Bancorp Buffalo WY WE SAIF NASDAQ 03/29/96
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
9
<PAGE>
FERGUSON & COMPANY EXHIBIT IV SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Deposit
Insurance
Agency
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date
<S> <C> <C> <C> <C> <C> <C> <C>
CSBF CSB Financial Group Inc. Centralia IL MW SAIF NASDAQ 10/09/95
CVAL Chester Valley Bancorp Inc. Downingtown PA MA SAIF NASDAQ 03/27/87
DCBI Delphos Citizens Bancorp Inc. Delphos OH MW SAIF NASDAQ 11/21/96
DCOM Dime Community Bancshares Inc. Brooklyn NY MA BIF NASDAQ 06/26/96
DME Dime Bancorp Inc. New York NY MA BIF NYSE 08/19/86
DNFC D & N Financial Corp. Hancock MI MW SAIF NASDAQ 02/13/85
DSL Downey Financial Corp. Newport Beach CA WE SAIF NYSE 01/01/71
EBSI Eagle Bancshares Tucker GA SE SAIF NASDAQ 04/01/86
EFBC Empire Federal Bancorp Inc. Livingston MT WE SAIF NASDAQ 01/27/97
EMLD Emerald Financial Corp. Strongsville OH MW SAIF NASDAQ 10/05/93
EQSB Equitable Federal Savings Bank Wheaton MD MA SAIF NASDAQ 09/10/93
ESBF ESB Financial Corp. Ellwood City PA MA SAIF NASDAQ 06/13/90
ESBK Elmira Savings Bank (The) Elmira NY MA BIF NASDAQ 03/01/85
ETFS East Texas Financial Services Tyler TX SW SAIF NASDAQ 01/10/95
FAB FIRSTFED AMERICA BANCORP INC. Swansea MA NE SAIF AMSE 01/15/97
FBBC First Bell Bancorp Inc. Pittsburgh PA MA SAIF NASDAQ 06/29/95
FBHC Fort Bend Holding Corp. Rosenberg TX SW SAIF NASDAQ 06/30/93
FBSI First Bancshares Inc. Mountain Grove MO MW SAIF NASDAQ 12/22/93
FCB Falmouth Bancorp Inc. Falmouth MA NE BIF AMSE 03/28/96
FCBF FCB Financial Corp. Oshkosh WI MW SAIF NASDAQ 09/24/93
FCME First Coastal Corp. Westbrook ME NE BIF NASDAQ NA
FDEF First Defiance Financial Defiance OH MW SAIF NASDAQ 10/02/95
FED FirstFed Financial Corp. Santa Monica CA WE SAIF NYSE 12/16/83
FESX First Essex Bancorp Inc. Andover MA NE BIF NASDAQ 08/04/87
FFBH First Federal Bancshares of AR Harrison AR SE SAIF NASDAQ 05/03/96
FFBZ First Federal Bancorp Inc. Zanesville OH MW SAIF NASDAQ 07/13/92
FFCH First Financial Holdings Inc. Charleston SC SE SAIF NASDAQ 11/10/83
FFDB FirstFed Bancorp Inc. Bessemer AL SE SAIF NASDAQ 11/19/91
FFDF FFD Financial Corp. Dover OH MW SAIF NASDAQ 04/03/96
FFES First Federal of East Hartford East Hartford CT NE SAIF NASDAQ 06/23/87
FFFD North Central Bancshares Inc. Fort Dodge IA MW SAIF NASDAQ 03/21/96
FFFL Fidelity Bankshares Inc. (MHC) West Palm Beach FL SE SAIF NASDAQ 01/07/94
FFHH FSF Financial Corp. Hutchinson MN MW SAIF NASDAQ 10/07/94
FFHS First Franklin Corp. Cincinnati OH MW SAIF NASDAQ 01/26/88
FFIC Flushing Financial Corp. Flushing NY MA BIF NASDAQ 11/21/95
FFKY First Federal Financial Corp. Elizabethtown KY MW SAIF NASDAQ 07/15/87
FFLC FFLC Bancorp Inc. Leesburg FL SE SAIF NASDAQ 01/04/94
FFSL First Independence Corp. Independence KS MW SAIF NASDAQ 10/08/93
FFSX First Fed SB of Siouxland(MHC) Sioux City IA MW SAIF NASDAQ 07/13/92
FFWC FFW Corp. Wabash IN MW SAIF NASDAQ 04/05/93
FFWD Wood Bancorp Inc. Bowling Green OH MW SAIF NASDAQ 08/31/93
FFYF FFY Financial Corp. Youngstown OH MW SAIF NASDAQ 06/28/93
FGHC First Georgia Holding Inc. Brunswick GA SE SAIF NASDAQ 02/11/87
FISB First Indiana Corp. Indianapolis IN MW SAIF NASDAQ 08/02/83
FKFS First Keystone Financial Media PA MA SAIF NASDAQ 01/26/95
FKKY Frankfort First Bancorp Inc. Frankfort KY MW SAIF NASDAQ 07/10/95
FLAG FLAG Financial Corp. LaGrange GA SE SAIF NASDAQ 12/11/86
FLFC First Liberty Financial Corp. Macon GA SE SAIF NASDAQ 12/06/83
FLGS Flagstar Bancorp Inc. Bloomfield Hills MI MW SAIF NASDAQ NA
FLKY First Lancaster Bancshares Lancaster KY MW SAIF NASDAQ 07/01/96
FMCO FMS Financial Corp. Burlington NJ MA SAIF NASDAQ 12/14/88
FMSB First Mutual Savings Bank Bellevue WA WE BIF NASDAQ 12/17/85
FNGB First Northern Capital Corp. Green Bay WI MW SAIF NASDAQ 12/29/83
FSBI Fidelity Bancorp Inc. Pittsburgh PA MA SAIF NASDAQ 06/24/88
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
10
<PAGE>
<TABLE>
<CAPTION>
FERGUSSOM & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- -------------------
Deposit
Insurance
Agency
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date
<S> <C> <C> <C> <C> <C> <C> <C>
FSPT FirstSpartan Financial Corp. Spartanburg SC SE SAIF NASDAQ 07/09/97
FSTC First Citizens Corp. Newnan GA SE SAIF NASDAQ 03/01/86
FTF Texarkana First Financial Corp Texarkana AR SE SAIF AMSE 07/07/95
FTFC First Federal Capital Corp. La Crosse WI MW SAIF NASDAQ 11/02/89
FTNB Fulton Bancorp Inc. Fulton MO MW SAIF NASDAQ 10/18/96
FTSB Fort Thomas Financial Corp. Fort Thomas KY MW SAIF NASDAQ 06/28/95
FWWB First Washington Bancorp Inc. Walla Walla WA WE SAIF NASDAQ 11/01/95
GAF GA Financial Inc. Pittsburgh PA MA SAIF AMSE 03/26/96
GDW Golden West Financial Oakland CA WE SAIF NYSE 05/29/59
GPT GreenPoint Financial Corp. New York NY MA BIF NYSE 01/28/94
GSFC Green Street Financial Corp. Fayetteville NC SE SAIF NASDAQ 04/04/96
GSLA GS Financial Corp. Metairie LA SW SAIF NASDAQ 04/01/97
GTPS Great American Bancorp Champaign IL MW SAIF NASDAQ 06/30/95
GUPB GFSB Bancorp Inc. Gallup NM SW SAIF NASDAQ 06/30/95
HALL Hallmark Capital Corp. West Allis WI MW SAIF NASDAQ 01/03/94
HARL Harleysville Savings Bank Harleysville PA MA SAIF NASDAQ 08/04/87
HAVN Haven Bancorp Inc. Westbury NY MA SAIF NASDAQ 09/23/93
HBFW Home Bancorp Fort Wayne IN MW SAIF NASDAQ 03/30/95
HBNK Highland Bancorp Inc. Burbank CA WE SAIF NASDAQ NA
HBS Haywood Bancshares Inc. Waynesville NC SE SAIF AMSE 12/18/87
HCFC Home City Financial Corp. Springfield OH MW SAIF NASDAQ 12/30/96
HFFB Harrodsburg First Fin Bancorp Harrodsburg KY MW SAIF NASDAQ 10/04/95
HFFC HF Financial Corp. Sioux Falls SD MW SAIF NASDAQ 04/08/92
HFSA Hardin Bancorp Inc. Hardin MO MW SAIF NASDAQ 09/29/95
HHFC Harvest Home Financial Corp. Cheviot OH MW SAIF NASDAQ 10/10/94
HIFS Hingham Instit. for Savings Hingham MA NE BIF NASDAQ 12/20/88
HMLK Hemlock Federal Financial Corp Oak Forest IL MW SAIF NASDAQ 04/02/97
HMNF HMN Financial Inc. Spring Valley MN MW SAIF NASDAQ 06/30/94
HOMF Home Federal Bancorp Seymour IN MW SAIF NASDAQ 01/23/88
HPBC Home Port Bancorp Inc. Nantucket MA NE BIF NASDAQ 08/25/88
HRBF Harbor Federal Bancorp Inc. Baltimore MD MA SAIF NASDAQ 08/12/94
HRZB Horizon Financial Corp. Bellingham WA WE BIF NASDAQ 08/01/86
HTHR Hawthorne Financial Corp. El Segundo CA WE SAIF NASDAQ NA
HWEN Home Financial Bancorp Spencer IN MW SAIF NASDAQ 07/02/96
HZFS Horizon Financial Svcs Corp. Oskaloosa IA MW SAIF NASDAQ 06/30/94
IFSB Independence Federal Svgs Bank Washington DC MA SAIF NASDAQ 06/06/85
INBI Industrial Bancorp Inc. Bellevue OH MW SAIF NASDAQ 08/01/95
IPSW Ipswich Savings Bank Ipswich MA NE BIF NASDAQ 05/26/93
ITLA ITLA Capital Corp. La Jolla CA WE BIF NASDAQ 10/24/95
IWBK InterWest Bancorp Inc. Oak Harbor WA WE SAIF NASDAQ NA
JSB JSB Financial Inc. Lynbrook NY MA BIF NYSE 06/27/90
JSBA Jefferson Savings Bancorp Inc. Ballwin MO MW SAIF NASDAQ 04/08/93
JXVL Jacksonville Bancorp Inc. Jacksonville TX SW SAIF NASDAQ 04/01/96
KFBI Klamath First Bancorp Klamath Falls OR WE SAIF NASDAQ 10/05/95
KNK Kankakee Bancorp Inc. Kankakee IL MW SAIF AMSE 01/06/93
KSBK KSB Bancorp Inc. Kingfield ME NE BIF NASDAQ 06/24/93
KYF Kentucky First Bancorp Inc. Cynthiana KY MW SAIF AMSE 08/29/95
LARK Landmark Bancshares Inc. Dodge City KS MW SAIF NASDAQ 03/28/94
LARL Laurel Capital Group Inc. Allison Park PA MA SAIF NASDAQ 02/20/87
LFCO Life Financial Corp. Riverside CA WE SAIF NASDAQ NA
LFED Leeds Federal Bankshares (MHC) Baltimore MD MA SAIF NASDAQ 05/02/94
LOGN Logansport Financial Corp. Logansport IN MW SAIF NASDAQ 06/14/95
LSBI LSB Financial Corp. Lafayette IN MW BIF NASDAQ 02/03/95
LSBX Lawrence Savings Bank North Andover MA NE BIF NASDAQ 05/02/86
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
11
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICITY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Deposit
Insurance
Agency
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date
<S> <C> <C> <C> <C> <C> <C> <C>
LVSB Lakeview Financial Corp. Paterson NJ MA SAIF NASDAQ 12/22/93
LXMO Lexington B&L Financial Corp. Lexington MO MW SAIF NASDAQ 06/06/96
MAFB MAF Bancorp Inc. Clarendon Hills IL MW SAIF NASDAQ 01/12/90
MARN Marion Capital Holdings Marion IN MW SAIF NASDAQ 03/18/93
MASB MASSBANK Corp. Reading MA NE BIF NASDAQ 05/28/86
MBBC Monterey Bay Bancorp Inc. Watsonville CA WE SAIF NASDAQ 02/15/95
MBLF MBLA Financial Corp. Macon MO MW SAIF NASDAQ 06/24/93
MCBN Mid-Coast Bancorp Inc. Waldoboro ME NE SAIF NASDAQ 11/02/89
MDBK Medford Bancorp Inc. Medford MA NE BIF NASDAQ 03/18/86
MECH MECH Financial Inc. Hartford CT NE BIF NASDAQ 06/26/96
METF Metropolitan Financial Corp. Mayfield Heights OH MW SAIF NASDAQ NA
MFBC MFB Corp. Mishawaka IN MW SAIF NASDAQ 03/25/94
MFFC Milton Federal Financial Corp. West Milton OH MW SAIF NASDAQ 10/07/94
MFLR Mayflower Co-operative Bank Middleboro MA NE BIF NASDAQ 12/23/87
MRKF Market Financial Corp. Mount Healthy OH MW SAIF NASDAQ 03/27/97
MSBF MSB Financial Inc. Marshall MI MW SAIF NASDAQ 02/06/95
MWBI Midwest Bancshares Inc. Burlington IA MW SAIF NASDAQ 11/12/92
MWBX MetroWest Bank Framingham MA NE BIF NASDAQ 10/10/86
NBN Northeast Bancorp Auburn ME NE BIF AMSE 08/19/87
NEIB Northeast Indiana Bancorp Huntington IN MW SAIF NASDAQ 06/28/95
NHTB New Hampshire Thrift Bncshrs Newport NH NE SAIF NASDAQ 05/22/86
NMSB NewMil Bancorp Inc. New Milford CT NE BIF NASDAQ 02/01/86
NSLB NS&L Bancorp Inc. Neosho MO MW SAIF NASDAQ 06/08/95
NWEQ Northwest Equity Corp. Amery WI MW SAIF NASDAQ 10/11/94
NWSB Northwest Bancorp Inc. (MHC) Warren PA MA SAIF NASDAQ 11/07/94
OCFC Ocean Financial Corp. Toms River NJ MA SAIF NASDAQ 07/03/96
OFCP Ottawa Financial Corp. Holland MI MW SAIF NASDAQ 08/19/94
OHSL OHSL Financial Corp. Cincinnati OH MW SAIF NASDAQ 02/10/93
PBCI Pamrapo Bancorp Inc. Bayonne NJ MA SAIF NASDAQ 11/14/89
PBCT People's Bank (MHC) Bridgeport CT NE BIF NASDAQ 07/06/88
PBHC Pathfinder Bancorp Inc. (MHC) Oswego NY MA BIF NASDAQ 11/16/95
PBKB People's Bancshares Inc. New Bedford MA NE BIF NASDAQ 10/30/86
PCBC Perry County Financial Corp. Perryville MO MW SAIF NASDAQ 02/13/95
PDB Piedmont Bancorp Inc. Hillsborough NC SE SAIF AMSE 12/08/95
PEEK Peekskill Financial Corp. Peekskill NY MA SAIF NASDAQ 12/29/95
PERM Permanent Bancorp Inc. Evansville IN MW SAIF NASDAQ 04/04/94
PFDC Peoples Bancorp Auburn IN MW SAIF NASDAQ 07/07/87
PFED Park Bancorp Inc. Chicago IL MW SAIF NASDAQ 08/12/96
PFFB PFF Bancorp Inc. Pomona CA WE SAIF NASDAQ 03/29/96
PFFC Peoples Financial Corp. Massillon OH MW SAIF NASDAQ 09/13/96
PFNC Progress Financial Corp. Blue Bell PA MA SAIF NASDAQ 07/18/83
PFSB PennFed Financial Services Inc West Orange NJ MA SAIF NASDAQ 07/15/94
PHBK Peoples Heritage Finl Group Portland ME NE BIF NASDAQ 12/04/86
PHFC Pittsburgh Home Financial Corp Pittsburgh PA MA SAIF NASDAQ 04/01/96
PHSB Peoples Home Savings Bk (MHC) Beaver Falls PA MA SAIF NASDAQ 07/10/97
PLSK Pulaski Savings Bank (MHC) Springfield NJ MA SAIF NASDAQ 04/03/97
PRBC Prestige Bancorp Inc. Pleasant Hills PA MA SAIF NASDAQ 06/27/96
PROV Provident Financial Holdings Riverside CA WE SAIF NASDAQ 06/28/96
PSFC Peoples-Sidney Financial Corp. Sidney OH MW SAIF NASDAQ 04/28/97
PSFI PS Financial Inc. Chicago IL MW SAIF NASDAQ 11/27/96
PTRS Potters Financial Corp. East Liverpool OH MW SAIF NASDAQ 12/31/93
PULB Pulaski Bank, FSB (MHC) St. Louis MO MW SAIF NASDAQ 05/11/94
PVFC PVF Capital Corp. Bedford Heights OH MW SAIF NASDAQ 12/30/92
PVSA Parkvale Financial Corp. Monroeville PA MA SAIF NASDAQ 07/16/87
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
12
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Deposit
Insurance
Agency
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date
<S> <C> <C> <C> <C> <C> <C> <C>
PWBK Pennwood Bancorp Inc. Pittsburgh PA MA SAIF NASDAQ 07/15/96
QCBC Quaker City Bancorp Inc. Whittier CA WE SAIF NASDAQ 12/30/93
QCFB QCF Bancorp Inc. Virginia MN MW SAIF NASDAQ 04/03/95
QCSB Queens County Bancorp Inc. Flushing NY MA BIF NASDAQ 11/23/93
RELY Reliance Bancorp Inc. Garden City NY MA SAIF NASDAQ 03/31/94
RIVR River Valley Bancorp Madison IN MW SAIF NASDAQ 12/20/96
RSLN Roslyn Bancorp Inc. Roslyn NY MA BIF NASDAQ 01/13/97
SCBS Southern Community Bancshares Cullman AL SE SAIF NASDAQ 12/23/96
SCCB S. Carolina Community Bancshrs Winnsboro SC SE SAIF NASDAQ 07/07/94
SFFC StateFed Financial Corp. Des Moines IA MW SAIF NASDAQ 01/05/94
SFIN Statewide Financial Corp. Jersey City NJ MA SAIF NASDAQ 10/02/95
SGVB SGV Bancorp Inc. West Covina CA WE SAIF NASDAQ 06/29/95
SKAN Skaneateles Bancorp Inc. Skaneateles NY MA BIF NASDAQ 06/02/86
SMBC Southern Missouri Bancorp Inc. Poplar Bluff MO MW SAIF NASDAQ 04/13/94
SOBI Sobieski Bancorp Inc. South Bend IN MW SAIF NASDAQ 03/31/95
SOPN First Savings Bancorp Inc. Southern Pines NC SE SAIF NASDAQ 01/06/94
SPBC St. Paul Bancorp Inc. Chicago IL MW SAIF NASDAQ 05/18/87
SRN Southern Banc Co. Gadsden AL SE SAIF AMSE 10/05/95
SSM Stone Street Bancorp Inc. Mocksville NC SE SAIF AMSE 04/01/96
STFR St. Francis Capital Corp. Brookfield WI MW SAIF NASDAQ 06/21/93
STSA Sterling Financial Corp. Spokane WA WE SAIF NASDAQ NA
SVRN Sovereign Bancorp Inc. Wyomissing PA MA SAIF NASDAQ 08/12/86
SZB SouthFirst Bancshares Inc. Sylacauga AL SE SAIF AMSE 02/14/95
THR Three Rivers Financial Corp. Three Rivers MI MW SAIF AMSE 08/24/95
THRD TF Financial Corp. Newtown PA MA SAIF NASDAQ 07/13/94
TRIC Tri-County Bancorp Inc. Torrington WY WE SAIF NASDAQ 09/30/93
TSH Teche Holding Co. Franklin LA SW SAIF AMSE 04/19/95
TWIN Twin City Bancorp Bristol TN SE SAIF NASDAQ 01/04/95
UFBS Union Financial Bcshs Inc. Union SC SE SAIF NASDAQ NA
WAMU Washington Mutual Inc. Seattle WA WE BIF NASDAQ 03/11/83
WAYN Wayne Savings Bancshares (MHC) Wooster OH MW SAIF NASDAQ 06/25/93
WBST Webster Financial Corp. Waterbury CT NE SAIF NASDAQ 12/12/86
WCFB Webster City Federal SB (MHC) Webster City IA MW SAIF NASDAQ 08/15/94
WEFC Wells Financial Corp. Wells MN MW SAIF NASDAQ 04/11/95
WFI Winton Financial Corp. Cincinnati OH MW SAIF AMSE 08/04/88
WFSL Washington Federal Inc. Seattle WA WE SAIF NASDAQ 11/17/82
WHGB WHG Bancshares Corp. Lutherville MD MA SAIF NASDAQ 04/01/96
WRNB Warren Bancorp Inc. Peabody MA NE BIF NASDAQ 07/09/86
WSB Washington Savings Bank, FSB Bowie MD MA SAIF AMSE NA
WSFS WSFS Financial Corp. Wilmington DE MA BIF NASDAQ 11/26/86
WSTR WesterFed Financial Corp. Missoula MT WE SAIF NASDAQ 01/10/94
WVFC WVS Financial Corp. Pittsburgh PA MA SAIF NASDAQ 11/29/93
YFCB Yonkers Financial Corp. Yonkers NY MA SAIF NASDAQ 04/18/96
YFED York Financial Corp. York PA MA SAIF NASDAQ 02/01/84
</TABLE>
Maximum
Minimum
Average
Median
SOURCE: SNL & F&C CALCULATIONS
13
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible
Current Current Price/ Current Current Current Total Equity/ Equity/ Core
Stock Market LTM Price/ Price/T Price/ Dividend Assets Assets T Assets EPS
Price Value Core EPS Book V Book V Assets Yield ($000) (%) (%) ($)
Ticker ($) ($M) (x) (%) (%) (%) (%) MRQ MRQ MRQ LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AABC 7.500 9.13 6.8 98.6 98.6 7.8 - 116,921 7.9 7.9 1.10
ABBK 14.750 51.66 16.8 149.8 164.3 9.5 1.36 546,208 6.4 5.8 0.88
ABCL 17.250 197.24 11.7 109.2 110.1 9.5 2.55 2,068,197 8.7 8.7 1.47
ABCW 20.438 363.38 20.4 278.1 282.3 17.7 0.98 2,057,635 6.4 6.3 1.00
AFBC 13.750 14.17 18.6 95.0 95.0 12.4 2.33 114,185 13.1 13.1 0.74
AHCI 13.250 54.39 23.3 93.2 93.2 9.6 1.81 565,387 10.3 10.3 0.57
ALBC 8.000 6.02 16.7 95.6 95.6 8.1 1.50 74,118 8.5 8.5 0.48
ALLB 14.000 45.82 22.6 154.5 154.5 16.5 - 277,490 10.7 10.7 0.62
AMFC 12.000 10.44 19.7 77.8 77.8 9.9 2.33 111,338 12.7 12.7 0.61
ANA 15.250 34.75 13.4 87.0 87.0 12.8 2.89 298,148 14.7 14.7 1.14
ANDB 29.250 189.56 12.8 166.1 166.1 13.6 2.46 1,392,342 8.2 8.2 2.29
ANE 9.625 22.06 21.9 121.8 124.5 9.5 2.08 252,287 7.8 7.7 0.44
ASBI 17.750 57.74 17.8 126.5 128.8 15.4 3.61 375,297 12.2 12.0 1.00
ASBP 11.000 18.20 16.7 125.6 125.6 15.6 3.64 116,437 12.4 12.4 0.66
ASFC 40.000 1,063.74 13.4 118.9 166.0 9.2 2.00 11,575,551 8.1 6.1 2.98
BANC 8.625 281.52 28.8 123.9 160.3 8.4 1.16 3,756,571 6.8 5.3 0.30
BDJI 13.500 13.48 13.8 106.3 106.3 11.1 - 121,315 10.5 10.5 0.98
BFD 17.375 93.26 16.7 107.4 111.2 8.9 2.30 1,058,207 7.8 7.6 1.04
BFSB 11.500 26.43 15.1 127.5 127.5 16.9 2.78 156,308 13.3 13.3 0.76
BKC 20.500 96.08 13.6 162.1 167.1 14.0 3.90 685,545 8.7 8.4 1.51
BKCT 15.750 80.56 15.9 164.4 164.4 16.3 3.43 495,178 9.9 9.9 0.99
BKUNA 8.500 151.18 30.4 82.6 98.8 4.2 - 3,584,123 5.4 4.6 0.28
BNKU 35.000 1,105.90 10.9 165.2 181.8 8.4 1.83 13,095,947 5.1 4.7 3.22
BPLS 3.625 70.29 6.6 38.0 41.4 1.6 - 4,286,237 4.3 4.0 0.55
BVCC 15.375 301.14 11.1 79.1 122.8 5.5 2.60 5,522,374 6.9 4.6 1.38
BWFC 9.750 25.58 28.7 109.9 109.9 14.1 - 181,469 12.8 12.8 0.34
CAFI 14.875 81.42 16.2 140.2 149.1 13.9 2.76 588,220 9.9 9.4 0.92
CASB 12.000 51.71 17.9 162.8 162.8 11.5 - 444,155 7.1 7.1 0.67
CASH 16.000 41.69 17.2 97.6 109.2 9.9 3.00 421,258 10.2 9.2 0.93
CATB 12.875 57.11 14.3 81.9 81.9 18.7 2.87 309,566 22.0 22.0 0.90
CBES 15.000 14.09 18.8 83.6 83.6 11.4 3.20 123,856 13.6 13.6 0.80
CBK 15.000 34.33 34.9 96.6 96.6 13.5 - 281,068 14.0 14.0 0.43
CBSA 16.000 117.79 7.4 103.4 142.2 3.8 2.00 3,126,286 3.7 2.7 2.17
CEBK 17.875 35.12 14.9 94.4 103.6 9.2 1.79 381,857 9.7 9.0 1.20
CENB 13.438 17.08 12.8 91.2 91.2 17.6 5.06 96,866 19.3 19.3 1.05
CFB 23.500 1,419.19 11.8 153.7 173.4 11.2 0.94 8,852,640 7.3 6.5 2.00
CFCP 17.000 106.35 20.5 292.1 292.1 17.2 1.65 616,887 5.9 5.9 0.83
CFFC 11.750 30.20 17.8 116.9 117.4 16.5 - 183,230 14.1 14.0 0.66
CFNC 8.000 15.24 11.8 99.0 99.0 13.4 3.00 113,911 13.5 13.5 0.68
CFSB 21.750 177.60 18.0 269.2 269.2 21.0 2.39 847,769 7.8 7.8 1.21
CFTP 15.000 65.97 25.9 101.0 101.0 25.1 2.13 263,246 22.3 22.3 0.58
CIBI 12.250 15.35 18.0 149.9 149.9 15.1 1.96 102,535 10.1 10.1 0.68
CKFB 16.625 14.02 16.6 96.2 96.2 22.3 3.25 62,759 21.6 21.6 1.00
CLAS 13.250 17.22 21.7 83.9 97.6 12.5 2.42 137,984 14.9 13.1 0.61
CMRN 15.375 37.42 15.4 85.3 85.3 17.0 1.82 220,784 19.9 19.9 1.00
CMSB 15.250 232.93 25.4 118.1 150.0 10.0 2.10 2,368,247 8.4 6.8 0.60
CMSV 20.438 104.31 22.0 122.7 122.7 13.6 4.40 765,488 10.9 10.9 0.93
CNIT 18.375 92.21 15.3 169.5 183.0 14.1 2.40 651,857 7.9 7.4 1.20
CNSB 13.000 19.40 28.9 88.1 88.1 21.8 2.31 97,988 24.8 24.8 0.45
CNY 8.750 20.25 20.8 56.4 58.4 4.7 - 427,371 8.4 8.1 0.42
COFI 26.813 3,588.44 15.6 242.9 258.1 18.1 1.99 19,813,254 7.5 7.1 1.72
COOP 13.750 41.74 20.2 137.5 137.5 10.9 - 381,054 8.0 8.0 0.68
CRSB 12.250 46.95 10.6 202.2 213.4 23.2 - 202,034 11.5 11.0 1.16
CRZY 12.375 11.36 14.9 80.6 80.6 18.9 3.23 61,478 23.4 23.4 0.83
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
14
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible
Current Current Price/ Current Current Current Total Equity/ Equity/ Core
Stock Market LTM Price/ Price/ T Price/ Dividend Assets Assets T Assets EPS
Price Value Core EPS Book V Book V Assets Yield ($000) (%) (%) ($)
Ticker ($) ($M) (x) (%) (%) (%) (%) MRQ MRQ MRQ LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CSBF 9.750 8.00 27.9 73.1 77.4 17.0 - 47,218 23.2 22.2 0.35
CVAL 26.000 60.54 18.6 199.5 199.5 16.9 1.61 377,012 8.5 8.5 1.40
DCBI 17.000 29.85 17.9 114.6 114.6 25.8 1.41 115,901 22.5 22.5 0.95
DCOM 22.188 259.91 21.3 145.0 166.5 16.6 2.16 1,623,926 11.5 10.2 1.04
DME 24.750 2,772.67 33.0 206.9 250.5 13.1 0.81 21,242,833 6.3 5.3 0.75
DNFC 17.000 155.79 13.4 139.1 NA 7.8 1.18 1,998,299 5.6 NA 1.27
DSL 24.500 689.23 13.8 146.4 147.9 11.7 1.31 5,910,579 8.0 7.9 1.78
EBSI 19.000 110.39 13.3 142.2 142.2 9.9 3.37 1,120,232 6.9 6.9 1.43
EFBC 12.000 29.77 17.9 76.8 76.8 27.8 2.67 106,940 36.2 36.2 0.67
EMLD 11.500 118.15 19.5 225.1 227.7 19.1 1.22 617,369 8.5 8.4 0.59
EQSB 19.250 23.64 11.6 131.2 131.2 6.7 - 350,555 5.1 5.1 1.66
ESBF 15.063 81.17 14.6 127.2 142.5 8.9 2.39 956,146 7.0 6.3 1.03
ESBK 19.875 14.44 16.2 97.7 97.7 6.2 3.22 231,725 6.3 6.3 1.23
ETFS 10.500 15.37 28.4 76.3 76.3 13.2 - 122,594 17.3 17.3 0.37
FAB 13.063 102.65 18.7 82.9 82.9 8.2 - 1,315,743 8.9 8.9 0.70
FBBC 13.281 82.72 10.2 111.6 111.6 11.0 3.01 750,365 9.9 9.9 1.30
FBHC 19.000 34.52 30.2 151.8 160.5 10.8 - 318,348 7.2 6.8 0.63
FBSI 12.750 28.22 15.2 115.8 120.7 16.4 0.94 172,173 14.2 13.7 0.84
FCB 14.250 20.73 23.8 87.8 87.8 18.8 1.68 110,523 21.4 21.4 0.60
FCBF 23.750 91.61 14.9 121.6 121.6 17.8 3.71 515,516 14.6 14.6 1.59
FCME 8.875 12.07 11.1 78.5 78.5 7.0 - 171,719 9.0 9.0 0.80
FDEF 12.500 101.97 19.8 98.7 98.7 17.5 2.88 582,124 17.7 17.7 0.63
FED 17.250 365.96 13.4 152.3 153.2 9.1 - 4,010,381 6.0 6.0 1.29
FESX 17.125 129.51 14.9 138.0 190.1 9.9 3.27 1,314,752 7.1 5.3 1.15
FFBH 17.125 79.65 14.5 98.1 98.1 14.4 1.64 578,142 14.7 14.7 1.18
FFBZ 10.375 32.69 22.1 198.4 198.4 15.8 1.54 207,381 8.0 8.0 0.47
FFCH 16.625 226.69 15.1 186.4 186.4 12.1 2.53 1,874,198 6.5 6.5 1.10
FFDB 10.500 25.56 15.9 143.6 155.6 14.2 2.67 179,893 9.9 9.2 0.66
FFDF 15.500 22.40 31.0 141.6 141.6 24.6 1.94 90,966 17.4 17.4 0.50
FFES 22.750 62.50 10.1 88.4 88.4 6.4 2.99 980,415 7.2 7.2 2.26
FFFD 16.500 51.20 13.0 104.9 121.1 15.6 1.94 331,124 14.9 13.1 1.27
FFFL 22.000 149.65 23.7 165.7 170.5 10.2 4.55 1,468,351 6.2 6.0 0.93
FFHH 15.000 43.92 14.3 91.6 91.6 10.6 3.33 414,072 10.4 10.4 1.05
FFHS 15.250 25.99 17.1 124.6 125.0 11.2 1.97 231,879 9.0 9.0 0.89
FFIC 14.000 164.03 15.6 117.4 121.9 15.0 1.71 1,091,908 12.8 12.4 0.90
FFKY 25.500 105.31 17.5 192.6 202.9 25.7 2.35 409,651 13.4 12.8 1.46
FFLC 16.500 60.95 15.0 115.4 115.4 14.4 2.18 422,228 12.5 12.5 1.10
FFSL 9.750 9.33 11.5 79.0 79.0 7.6 3.08 123,366 9.6 9.6 0.85
FFSX 22.000 62.48 19.0 148.7 184.4 11.3 - 551,593 7.6 6.2 1.16
FFWC 14.875 21.69 12.9 113.4 123.2 10.7 2.82 203,311 9.4 8.7 1.15
FFWD 14.000 37.59 20.0 165.7 165.7 22.5 2.57 166,150 13.6 13.6 0.70
FFYF 27.000 106.76 13.9 128.6 128.6 16.6 2.96 651,746 12.9 12.9 1.94
FGHC 9.000 43.19 23.7 293.2 313.6 23.9 - 180,806 8.2 7.7 0.38
FISB 18.750 238.28 18.8 149.5 151.1 13.7 2.56 1,750,819 9.2 9.1 1.00
FKFS 14.375 34.69 13.4 136.5 136.5 8.9 1.39 390,970 6.5 6.5 1.07
FKKY 14.125 22.55 14.7 100.8 100.8 17.0 5.66 134,485 16.9 16.9 0.96
FLAG 12.875 66.64 25.8 172.6 172.6 15.0 1.86 442,879 8.7 8.7 0.50
FLFC 17.375 232.28 21.5 197.9 216.1 15.4 1.73 1,511,776 7.8 7.2 0.81
FLGS 23.375 319.54 10.9 223.9 230.1 12.4 1.20 2,573,280 5.6 5.4 2.15
FLKY 12.000 11.51 21.1 81.5 81.5 21.4 5.00 53,747 26.3 26.3 0.57
FMCO 9.250 66.79 13.0 162.6 163.7 9.9 1.30 673,699 6.1 6.0 0.71
FMSB 12.500 53.05 12.6 155.9 155.9 11.3 1.60 470,866 7.2 7.2 0.99
FNGB 10.500 92.42 15.0 122.5 122.5 13.0 3.43 710,428 10.6 10.6 0.70
FSBI 16.500 32.57 11.9 116.0 116.0 8.2 - 396,180 7.1 7.1 1.39
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
15
<PAGE>
FERGUSON & COMAPNY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible
Current Current Price/ Current Current Current Total Equity/ Equity/ Core
Stock Market LTM Price/ Price/ T Price/ Dividend Assets Assets T Assets EPS
Price Value Core EPS Book V Book V Assets Yield ($000) (%) (%) ($)
Ticker ($) ($M) (x) (%) (%) (%) (%) MRQ MRQ MRQ LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FSPT 30.625 128.90 18.3 107.2 107.2 24.3 1.96 530,412 22.7 22.7 1.67
FSTC 25.000 69.94 16.6 184.4 224.6 18.4 1.44 379,694 10.0 8.3 1.51
FTF 21.500 36.03 12.3 132.5 132.5 19.7 2.98 189,557 14.9 14.9 1.75
FTFC 13.250 245.56 23.3 206.4 216.9 15.5 2.11 1,584,405 7.5 7.2 0.57
FTNB 16.688 28.69 30.9 112.5 112.5 26.1 1.80 110,110 23.2 23.2 0.54
FTSB 10.250 15.11 12.7 92.8 92.8 14.9 2.44 101,352 16.1 16.1 0.81
FWWB 21.250 247.50 18.3 130.0 157.3 18.3 1.69 1,362,063 12.6 10.6 1.16
GAF 12.875 92.96 12.0 86.2 87.0 11.1 - 838,272 12.9 12.8 1.07
GDW 87.813 5,020.47 12.5 168.1 168.1 12.8 0.57 39,383,006 7.6 7.6 7.04
GPT 31.188 2,966.70 15.1 145.7 340.1 21.8 2.05 13,612,611 13.2 6.1 2.07
GSFC 12.625 51.55 18.6 85.3 85.3 29.8 3.80 173,265 34.9 34.9 0.68
GSLA 11.750 38.38 27.3 73.4 73.4 26.4 2.38 145,151 36.0 36.0 0.43
GTPS 15.000 22.63 24.6 87.9 87.9 16.1 2.93 148,342 18.3 18.3 0.61
GUPB 14.000 15.50 18.4 114.9 114.9 13.2 2.14 123,209 11.5 11.5 0.76
HALL 11.500 33.79 12.8 95.5 95.5 7.7 - 438,374 7.6 7.6 0.90
HARL 29.125 48.79 14.4 192.4 192.4 12.3 - 395,383 6.4 6.4 2.02
HAVN 11.500 101.77 11.2 86.3 90.3 4.5 2.61 2,265,248 5.2 5.0 1.03
HBFW 27.125 63.77 21.7 148.5 148.5 17.7 1.18 360,286 11.9 11.9 1.25
HBNK 34.000 74.10 12.7 175.6 175.6 13.8 1.47 573,412 7.9 7.9 2.67
HBS 17.500 21.88 9.9 99.0 102.2 14.4 3.43 151,718 14.6 14.2 1.77
HCFC 13.500 12.21 13.2 112.8 112.8 15.7 - 78,042 13.9 13.9 1.02
HFFB 15.063 29.02 18.6 93.1 93.1 26.7 2.66 109,033 26.5 26.5 0.81
HFFC 12.750 56.04 10.4 99.0 99.0 9.8 - 570,060 9.9 9.9 1.23
HFSA 15.000 12.25 16.5 90.9 90.9 9.2 4.00 133,320 10.1 10.1 0.91
HHFC 13.375 11.76 23.5 114.3 114.3 12.2 3.29 96,085 10.7 10.7 0.57
HIFS 16.000 31.43 11.5 138.8 138.8 13.1 1.67 239,148 9.4 9.4 1.39
HMLK 14.000 27.51 16.3 94.5 94.5 14.3 2.29 192,271 15.1 15.1 0.86
HMNF 11.625 62.93 18.5 89.2 97.1 8.7 2.07 725,180 9.8 9.0 0.63
HOMF 21.875 112.49 14.7 167.9 172.2 15.6 - 719,549 9.3 9.1 1.49
HPBC 19.750 36.38 10.4 160.3 160.3 14.0 4.05 260,456 8.7 8.7 1.90
HRBF 19.500 36.32 20.5 122.3 122.3 15.4 2.67 235,733 12.6 12.6 0.95
HRZB 13.000 97.34 12.0 114.0 114.0 17.6 3.39 553,063 15.4 15.4 1.08
HTHR 14.125 73.27 7.9 93.7 93.7 3.7 - 1,201,331 4.0 4.0 1.80
HWEN 6.500 5.87 18.1 80.5 80.5 14.2 1.54 42,560 17.6 17.6 0.36
HZFS 14.250 12.54 17.4 147.7 147.7 13.9 1.26 89,947 9.4 9.4 0.82
IFSB 11.750 15.05 17.8 71.1 77.9 5.7 2.13 265,940 8.0 7.3 0.66
INBI 17.625 88.39 16.0 144.6 144.6 23.1 3.40 382,841 16.0 16.0 1.10
IPSW 13.750 32.86 13.2 251.8 251.8 14.1 1.16 233,662 5.6 5.6 1.04
ITLA 12.688 97.70 7.4 91.6 91.9 9.6 - 1,021,343 10.4 10.4 1.72
IWBK 22.750 356.45 18.5 212.2 219.0 15.2 2.46 2,351,248 7.2 6.9 1.23
JSB 50.000 492.68 13.1 129.4 129.4 31.4 3.20 1,563,460 24.3 24.3 3.82
JSBA 13.000 130.50 16.7 99.8 123.2 10.4 2.15 1,248,923 9.7 8.0 0.78
JXVL 15.000 36.33 11.9 103.6 103.6 15.0 3.33 242,673 14.5 14.5 1.26
KFBI 18.000 178.50 19.6 112.4 122.7 17.7 2.00 1,008,688 14.0 13.0 0.92
KNK 24.750 34.15 13.3 87.1 101.9 8.5 - 401,934 9.8 8.5 1.86
KSBK 13.375 16.84 9.7 134.2 152.7 10.7 - 157,745 8.0 7.1 1.38
KYF 12.125 14.51 16.4 104.4 104.4 18.3 4.12 82,046 17.6 17.6 0.74
LARK 19.500 29.11 16.4 100.8 100.8 13.2 - 229,337 13.1 13.1 1.19
LARL 16.500 36.40 12.2 153.8 153.8 16.4 3.64 220,986 10.6 10.6 1.35
LFCO 3.938 25.84 2.2 42.0 42.0 6.8 - 380,343 16.2 16.2 1.79
LFED 13.500 69.37 21.1 142.3 142.3 23.2 4.15 302,737 16.3 16.3 0.64
LOGN 14.000 17.67 13.7 104.0 104.0 19.6 3.14 90,264 18.8 18.8 1.02
LSBI 28.500 27.10 17.5 139.3 139.3 12.4 1.40 218,633 8.4 8.4 1.63
LSBX 10.250 44.38 5.1 106.6 106.6 12.9 - 344,874 12.1 12.1 2.00
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
16
<PAGE>
FERGUSON & COMAPNY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible
Current Current Price/ Current Current Current Total Equity/ Equity/ Core
Stock Market LTM Price/ Price/ T Price/ Dividend Assets Assets T Assets EPS
Price Value Core EPS Book V Book V Assets Yield ($000) (%) (%) ($)
Ticker ($) ($M) (x) (%) (%) (%) (%) MRQ MRQ MRQ LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LVSB 17.000 82.96 17.2 146.6 218.5 14.0 1.47 593,856 9.5 6.6 0.99
LXMO 13.000 13.11 21.0 85.7 91.9 13.8 2.31 95,301 16.1 15.1 0.62
MAFB 24.000 542.60 15.8 193.6 216.8 15.2 1.17 3,569,656 7.8 7.1 1.52
MARN 21.750 35.63 16.9 98.2 100.3 19.1 4.05 193,963 19.4 19.1 1.29
MASB 36.500 131.41 14.5 119.9 121.5 14.1 - 929,672 11.8 11.6 2.52
MBBC 11.000 43.15 34.4 86.0 93.9 9.9 1.09 436,193 10.8 9.9 0.32
MBLF 20.500 25.56 14.4 91.8 91.8 12.6 2.93 203,228 13.7 13.7 1.42
MCBN 8.000 5.70 15.1 108.8 108.8 8.7 2.50 65,309 8.0 8.0 0.53
MDBK 16.500 143.84 13.8 139.5 146.7 12.7 2.42 1,134,102 9.1 8.7 1.20
MECH 24.625 130.40 14.1 138.1 138.1 13.6 - 960,017 9.8 9.8 1.75
METF 9.000 63.46 11.3 160.4 173.1 6.0 - 1,058,887 3.7 3.5 0.80
MFBC 18.000 28.62 14.3 86.5 86.5 9.8 1.89 290,936 11.4 11.4 1.26
MFFC 13.750 30.76 24.1 109.3 109.3 13.1 4.36 235,105 11.1 11.1 0.57
MFLR 20.000 17.99 15.0 136.3 138.3 12.6 4.00 142,965 9.2 9.1 1.33
MRKF 10.000 13.36 19.6 84.9 84.9 24.9 2.80 53,653 29.3 29.3 0.51
MSBF 13.750 18.34 17.0 138.2 138.2 23.0 2.18 79,967 16.7 16.7 0.81
MWBI 12.000 12.61 11.4 110.6 110.6 7.9 2.67 159,460 7.2 7.2 1.05
MWBX 6.250 89.11 11.4 179.1 179.1 13.3 3.20 669,111 7.4 7.4 0.55
NBN 8.875 23.20 11.2 96.2 104.5 7.2 2.39 322,533 7.8 7.2 0.79
NEIB 16.875 27.39 11.9 105.0 105.0 13.7 2.02 203,263 13.0 13.0 1.42
NHTB 14.750 30.89 11.6 117.1 134.0 9.5 4.07 324,320 8.1 7.2 1.27
NMSB 12.875 49.40 22.2 142.9 142.9 13.4 - 369,777 9.4 9.4 0.58
NSLB 13.875 9.01 21.4 82.2 82.8 15.2 3.60 62,648 18.5 18.4 0.65
NWEQ 15.750 13.00 11.4 110.6 110.6 13.5 - 96,452 12.2 12.2 1.38
NWSB 10.625 497.69 24.7 228.5 254.2 19.4 1.51 2,562,584 8.5 7.7 0.43
OCFC 14.750 226.92 15.4 108.7 109.3 14.9 3.25 1,538,264 13.7 13.7 0.96
OFCP 20.250 112.15 17.8 153.1 186.8 12.6 1.98 919,865 8.2 6.8 1.14
OHSL 14.750 36.82 19.2 132.6 132.6 14.6 3.39 252,396 10.8 10.8 0.77
PBCI 25.000 71.07 15.6 144.5 145.3 18.0 4.48 394,271 12.5 12.4 1.60
PBCT 24.000 1,539.52 23.1 179.6 214.3 16.0 3.83 9,619,500 8.9 7.6 1.04
PBHC 9.875 27.96 24.7 116.6 136.6 14.1 2.03 198,091 11.9 10.3 0.40
PBKB 17.375 57.62 26.3 177.5 185.2 6.7 3.22 858,377 3.8 3.6 0.66
PCBC 19.500 16.14 18.2 97.4 97.4 18.0 2.56 89,761 18.5 18.5 1.07
PDB 9.625 26.48 16.3 122.6 122.6 20.3 4.99 130,541 16.6 16.6 0.59
PEEK 12.625 36.08 18.8 84.6 84.6 18.3 2.85 200,341 21.6 21.6 0.67
PERM 12.438 52.85 21.4 118.2 145.0 10.4 1.93 506,725 8.6 7.1 0.58
PFDC 20.000 67.50 15.9 147.4 147.4 22.1 2.40 304,320 15.0 15.0 1.26
PFED 13.250 28.33 17.0 80.1 80.1 16.3 - 196,813 20.3 20.3 0.78
PFFB 14.125 218.09 15.2 94.7 95.7 7.6 - 3,007,845 8.0 8.0 0.93
PFFC 11.000 14.87 29.7 101.0 101.0 17.5 5.46 84,906 17.3 17.3 0.37
PFNC 12.000 62.30 16.2 148.2 NA 10.1 1.27 618,049 6.8 NA 0.74
PFSB 12.625 116.53 11.3 106.4 122.2 7.6 1.11 1,551,938 6.7 5.9 1.12
PHBK 17.063 1,496.64 13.1 206.6 248.7 15.3 2.58 9,768,079 7.4 6.2 1.30
PHFC 12.750 24.24 12.3 97.2 98.2 6.7 1.88 372,533 6.9 6.9 1.04
PHSB 11.500 31.74 20.9 108.3 108.3 13.4 2.44 236,916 12.4 12.4 0.55
PLSK 10.625 22.40 20.4 100.9 100.9 11.9 2.82 187,776 11.8 11.8 0.52
PRBC 12.500 12.49 18.1 82.6 82.6 8.0 - 164,656 9.7 9.7 0.69
PROV 15.188 70.25 33.0 85.1 85.1 9.0 - 815,970 10.6 10.6 0.46
PSFC 16.250 28.85 22.0 135.9 135.9 27.4 1.72 105,903 18.5 18.5 0.74
PSFI 9.125 16.89 13.4 80.9 80.9 21.7 5.26 85,000 26.8 26.8 0.68
PTRS 13.000 12.02 14.8 113.1 113.1 9.7 - 128,149 8.5 8.5 0.88
PULB 18.000 37.91 24.0 151.6 151.6 20.3 6.11 186,917 13.4 13.4 0.75
PVFC 10.000 39.91 8.9 127.9 127.9 9.2 - 433,279 7.2 7.2 1.12
PVSA 20.500 130.81 12.1 155.8 156.5 11.7 2.34 1,123,324 7.5 7.5 1.69
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
17
<PAGE>
FERGUSON & COMAPNY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible
Current Current Price/ Current Current Current Total Equity/ Equity/ Core
Stock Market LTM Price/ Price/ T Price/ Dividend Assets Assets T Assets EPS
Price Value Core EPS Book V Book V Assets Yield ($000) (%) (%) ($)
Ticker ($) ($M) (x) (%) (%) (%) (%) MRQ MRQ MRQ LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PWBK 10.750 7.50 29.1 87.1 87.1 16.3 2.61 46,080 17.3 17.3 0.37
QCBC 14.500 84.49 13.0 109.4 109.4 9.5 - 887,480 8.7 8.7 1.12
QCFB 25.250 29.66 11.3 126.7 126.7 22.2 - 150,486 17.5 17.5 2.24
QCSB 28.000 599.73 24.6 321.5 321.5 36.6 2.38 1,715,164 9.9 9.9 1.14
RELY 25.250 226.84 13.1 122.3 177.6 9.1 2.85 2,493,186 7.4 5.3 1.93
RIVR 14.250 16.96 14.0 91.8 92.9 12.5 1.54 135,683 13.6 13.5 1.02
RSLN 16.063 665.01 13.7 112.3 112.8 17.9 2.49 3,719,166 15.9 15.9 1.17
SCBS 13.000 14.79 14.3 125.5 125.5 21.8 - 67,920 17.3 17.3 0.91
SCCB 16.000 9.27 23.5 98.5 98.5 19.3 4.00 47,992 19.6 19.6 0.68
SFFC 10.250 15.93 15.5 99.8 99.8 17.9 1.95 89,802 17.9 17.9 0.66
SFIN 16.250 70.85 13.5 112.0 112.2 10.9 3.20 656,635 9.7 9.7 1.20
SGVB 12.500 27.88 21.2 91.0 92.1 7.2 - 408,346 7.9 7.8 0.59
SKAN 13.625 19.71 13.1 107.3 109.9 7.4 2.06 266,730 6.9 6.7 1.04
SMBC 15.938 22.50 22.8 98.1 98.1 15.2 - 155,924 15.5 15.5 0.70
SOBI 14.000 10.95 19.2 77.7 77.7 11.6 2.29 92,497 13.9 13.9 0.73
SOPN 21.500 80.08 16.5 114.8 114.8 26.2 4.65 304,088 22.9 22.9 1.30
SPBC 20.438 829.74 16.1 165.5 NA 14.0 2.94 5,948,226 8.4 NA 1.27
SRN 13.375 16.46 27.3 88.6 89.3 15.7 - 105,087 17.7 17.6 0.49
SSM 14.000 25.25 17.5 84.1 84.1 23.0 3.29 112,253 27.3 27.3 0.80
STFR 35.500 181.25 16.4 137.7 154.0 10.3 - 1,754,803 7.5 6.7 2.16
STSA 15.875 120.74 12.2 114.2 290.2 5.8 - 2,076,759 5.1 2.1 1.30
SVRN 13.000 2,063.08 15.7 185.2 210.0 10.5 0.62 18,847,318 5.5 4.9 0.83
SZB 15.625 15.12 23.7 93.3 95.7 9.3 3.84 162,975 9.9 9.7 0.66
THR 15.375 12.04 16.0 94.9 95.2 12.2 2.86 98,885 12.8 12.8 0.96
THRD 19.063 60.84 18.5 106.9 125.9 8.8 2.52 689,284 7.5 6.4 1.03
TRIC 11.250 13.13 15.2 92.3 92.3 15.2 3.91 86,549 16.4 16.4 0.74
TSH 14.500 44.88 12.6 87.4 87.4 12.1 3.45 412,426 13.8 13.8 1.15
TWIN 13.500 16.76 18.8 119.6 119.6 15.2 2.96 110,610 12.7 12.7 0.72
UFBS 15.000 19.13 16.1 129.8 NA 10.5 2.48 183,066 8.1 NA 0.93
WAMU 38.813 23,016.11 16.2 260.7 277.0 14.5 2.13 103,396,952 5.5 5.2 2.39
WAYN 18.000 44.76 27.7 181.1 181.1 17.3 3.44 259,402 9.5 9.5 0.65
WBST 22.125 839.50 12.0 148.4 173.3 9.2 1.99 9,163,686 6.2 5.3 1.85
WCFB 15.500 32.77 24.2 144.2 144.2 33.8 - 97,096 23.4 23.4 0.64
WEFC 15.500 28.45 13.4 100.5 100.5 15.4 3.87 188,677 15.4 15.4 1.16
WFI 12.250 24.33 17.0 188.8 191.7 13.7 2.04 358,573 7.3 7.2 0.72
WFSL 25.000 1,311.46 12.3 169.7 182.8 23.6 3.68 5,558,970 13.9 13.0 2.04
WHGB 10.250 14.24 20.9 70.6 70.6 10.8 - 131,967 15.3 15.3 0.49
WRNB 8.750 69.21 12.3 174.3 174.3 18.3 4.11 378,137 10.5 10.5 0.71
WSB 4.250 18.79 14.2 81.6 81.6 6.9 2.35 273,549 8.4 8.4 0.30
WSFS 13.875 173.78 10.6 182.1 183.1 11.2 0.87 1,551,631 6.2 6.1 1.31
WSTR 18.000 100.60 14.0 91.7 112.4 9.8 - 1,022,136 10.7 8.9 1.29
WVFC 15.250 55.86 14.5 167.2 167.2 18.6 3.93 297,054 11.1 11.1 1.05
YFCB 14.000 38.17 14.4 93.9 93.9 9.7 - 401,565 10.3 10.3 0.97
YFED 16.500 147.97 19.6 135.5 135.5 12.0 3.15 1,229,268 8.9 8.9 0.84
Maximum 87.813 23,016.11 34.9 321.5 340.1 36.6 6.11 103,396,952 36.2 36.2 7.04
Minimum 3.625 5.70 2.2 38.0 41.4 1.6 - 42,560 3.7 2.1 0.28
Average 16.402 262.95 17.0 126.7 133.4 14.2 2.02 1,738,710 11.9 11.7 1.07
Median 14.875 43.17 16.1 115.1 121.5 13.6 2.12 365,032 10.1 10.0 0.96
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
18
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core NAPAs/ Price/ Core Core Core
ROAA ROAE Merger Current Assets Core EPS ROAA ROAE
(%) (%) Target? Pricing (%) EPS ($) (%) (%)
Ticker LTM LTM (Y/N) Date MRQ (x) MRQ MRQ MRQ
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AABC 1.24 15.11 N 10/16/98 0.08 93.8 0.02 0.10 1.25
ABBK 0.65 9.70 N 10/16/98 0.14 23.1 0.16 0.46 7.25
ABCL 0.89 9.76 N 10/16/98 0.13 13.5 0.32 0.80 8.86
ABCW 0.97 14.73 N 10/16/98 0.58 18.9 0.27 1.00 15.11
AFBC 0.68 4.62 N 10/16/98 0.33 34.4 0.10 0.34 2.49
AHCI 0.41 3.52 N 10/16/98 0.52 20.7 0.16 0.40 3.56
ALBC 0.50 5.82 N 10/16/98 0.47 16.7 0.12 0.47 5.56
ALLB 0.76 6.88 N 10/16/98 0.99 21.9 0.16 0.75 7.05
AMFC 0.53 3.77 N 10/16/98 0.19 18.8 0.16 0.49 3.68
ANA 0.98 6.07 N 10/16/98 0.29 14.7 0.26 0.82 5.40
ANDB 1.16 14.67 N 10/16/98 0.38 9.6 0.76 1.49 18.75
ANE 0.46 6.20 N 10/16/98 0.47 18.5 0.13 0.54 6.88
ASBI 0.84 7.33 N 10/16/98 0.49 18.5 0.24 0.83 7.02
ASBP 0.94 6.29 N 10/16/98 0.28 15.3 0.18 1.00 7.21
ASFC 0.76 9.18 N 10/16/98 0.38 13.0 0.77 0.76 9.25
BANC 0.38 6.43 N 10/16/98 0.72 19.6 0.11 0.53 8.91
BDJI 0.71 6.72 N 10/16/98 0.16 12.1 0.28 0.80 7.48
BFD 0.58 6.81 N 10/16/98 0.17 18.1 0.24 0.50 6.25
BFSB 1.23 8.79 N 10/16/98 0.21 13.1 0.22 1.33 9.92
BKC 1.15 13.62 N 10/16/98 2.08 12.2 0.42 1.22 14.64
BKCT 1.22 11.90 N 10/16/98 0.61 14.6 0.27 1.26 12.52
BKUNA 0.19 3.70 N 10/16/98 0.46 NM - 0.03 0.50
BNKU 0.84 16.70 N 10/16/98 0.68 13.1 0.67 0.66 13.09
BPLS 0.27 6.35 N 10/16/98 1.75 NM - - 0.12
BVCC 0.53 8.03 N 10/16/98 0.34 12.0 0.32 0.46 7.57
BWFC 0.51 3.72 N 10/16/98 0.57 30.5 0.08 0.52 3.99
CAFI 0.89 9.23 N 10/16/98 0.47 16.9 0.22 0.84 8.49
CASB 0.74 10.83 N 10/16/98 0.45 17.7 0.17 0.75 10.24
CASH 0.64 5.95 N 10/16/98 1.24 12.9 0.31 0.81 7.82
CATB 1.30 5.39 N 10/16/98 0.22 14.0 0.23 1.26 5.57
CBES 0.67 4.36 N 10/16/98 0.59 20.8 0.18 0.54 3.90
CBK 0.41 2.93 N 10/16/98 0.48 34.1 0.11 0.41 2.94
CBSA 0.57 15.48 N 10/16/98 0.56 8.3 0.48 0.49 12.98
CEBK 0.63 6.45 N 10/16/98 0.40 15.4 0.29 0.60 6.11
CENB 1.18 4.48 N 10/16/98 0.35 13.4 0.25 1.18 6.35
CFB 0.95 14.11 N 10/16/98 0.78 12.2 0.48 0.89 12.87
CFCP 0.99 16.06 N 10/16/98 0.48 19.3 0.22 0.95 15.91
CFFC 0.96 7.01 N 10/16/98 1.30 18.4 0.16 0.95 6.78
CFNC 1.03 4.74 N 10/16/98 0.13 10.5 0.19 1.15 6.38
CFSB 1.23 15.80 N 10/16/98 0.21 17.0 0.32 1.33 17.04
CFTP 1.07 4.27 N 10/16/98 0.28 25.0 0.15 1.01 4.51
CIBI 0.90 8.22 N 10/16/98 0.67 19.1 0.16 0.80 7.58
CKFB 1.34 5.97 N 10/16/98 0.08 18.9 0.22 1.12 5.21
CLAS 0.56 3.72 N 10/16/98 0.28 20.7 0.16 0.58 3.83
CMRN 1.12 5.36 N 10/16/98 0.40 13.7 0.28 1.19 5.88
CMSB 0.41 4.42 N 10/16/98 0.41 38.1 0.10 0.25 2.87
CMSV 0.65 5.82 N 10/16/98 0.27 20.4 0.25 0.67 6.18
CNIT 0.84 11.65 N 10/16/98 0.17 17.0 0.27 0.76 10.30
CNSB 0.76 3.09 N 10/16/98 0.06 40.6 0.08 0.58 2.33
CNY 0.22 2.65 N 10/16/98 1.91 15.6 0.14 0.29 3.59
COFI 1.16 16.13 N 10/16/98 0.31 14.0 0.48 1.33 17.87
COOP 0.60 7.68 N 10/16/98 - 16.4 0.21 0.70 8.94
CRSB 2.04 33.43 N 10/16/98 0.64 10.2 0.30 2.22 19.82
CRZY 1.23 5.15 N 10/16/98 0.13 16.3 0.19 1.12 4.73
</TABLE>
Source: SNL & F&C calculations
19
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core NPAs/ Price/ Core Core Core
ROAA ROAE Merger Current Assets Core EPS ROAA ROAE
(%) (%) Target? Pricing (%) EPS ($) (%) (%)
Ticker LTM LTM (Y/N) Date MRQ (x) MRQ MRQ MRQ
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CSBF 0.60 2.55 N 10/16/98 1.13 20.3 0.12 0.77 3.34
CVAL 1.01 11.66 N 10/16/98 0.33 21.7 0.30 0.82 9.54
DCBI 1.48 6.03 N 10/16/98 NA 17.7 0.24 1.54 6.63
DCOM 0.86 6.75 N 10/16/98 0.35 17.9 0.31 0.94 8.01
DME 0.41 6.78 N 10/16/98 NA 41.3 0.15 0.34 5.21
DNFC 0.65 11.72 N 10/16/98 0.50 15.2 0.28 0.54 9.59
DSL 0.86 11.35 N 10/16/98 0.75 14.9 0.41 0.79 10.04
EBSI 0.89 11.51 N 10/16/98 1.20 10.6 0.45 0.95 14.68
EFBC 1.45 3.94 N 10/16/98 - 17.7 0.17 1.44 3.95
EMLD 1.04 12.96 N 10/16/98 0.25 18.0 0.16 1.13 13.59
EQSB 0.66 12.91 N 10/16/98 0.22 12.7 0.38 0.58 11.33
ESBF 0.66 8.61 N 10/16/98 0.60 14.5 0.26 0.63 8.83
ESBK 0.38 6.11 N 10/16/98 0.83 11.6 0.43 0.53 8.48
ETFS 0.46 2.62 N 10/16/98 0.41 43.8 0.06 0.33 1.87
FAB 0.48 4.44 N 10/16/98 0.29 18.1 0.18 0.44 4.61
FBBC 1.08 10.25 N 10/16/98 0.08 9.8 0.34 1.03 10.67
FBHC 0.44 6.65 N 10/16/98 0.27 29.7 0.16 0.47 6.81
FBSI 1.07 7.77 N 10/16/98 0.03 16.8 0.19 0.99 7.18
FCB 0.84 3.59 N 10/16/98 - 25.5 0.14 0.75 3.44
FCBF 1.16 8.14 N 10/16/98 0.22 16.1 0.37 1.09 7.52
FCME 0.73 7.42 N 10/16/98 0.21 11.7 0.19 0.65 6.88
FDEF 0.89 4.72 N 10/16/98 0.29 16.5 0.19 1.00 5.62
FED 0.68 12.49 N 10/16/98 0.84 12.0 0.36 0.78 13.29
FESX 0.73 9.96 N 10/16/98 0.45 17.8 0.24 0.60 8.07
FFBH 0.99 6.63 N 10/16/98 0.85 14.3 0.30 0.99 6.72
FFBZ 0.77 10.08 N 10/16/98 0.54 20.0 0.13 0.83 10.67
FFCH 0.85 13.51 N 10/16/98 1.16 14.8 0.28 0.83 12.96
FFDB 0.89 9.22 N 10/16/98 0.89 17.5 0.15 0.83 8.49
FFDF 0.75 3.29 N 10/16/98 0.09 38.8 0.10 0.59 2.98
FFES 0.64 9.39 N 10/16/98 0.30 10.2 0.56 0.64 9.08
FFFD 1.49 8.16 N 10/16/98 0.12 11.8 0.35 1.35 8.79
FFFL 0.52 7.22 N 10/16/98 0.27 25.0 0.22 0.43 6.73
FFHH 0.75 6.91 N 10/16/98 0.20 15.6 0.24 0.66 6.31
FFHS 0.68 7.39 N 10/16/98 NA 20.1 0.19 0.56 6.17
FFIC 0.95 7.20 N 10/16/98 0.31 14.0 0.25 0.99 7.79
FFKY 1.53 11.38 N 10/16/98 0.03 17.2 0.37 1.51 11.38
FFLC 1.03 7.99 N 10/16/98 0.19 13.8 0.30 1.08 8.55
FFSL 0.72 7.31 N 10/16/98 0.49 9.0 0.27 0.87 9.15
FFSX 0.69 8.16 N 10/16/98 0.42 19.0 0.29 0.61 8.10
FFWC 0.86 9.02 N 10/16/98 0.43 20.7 0.18 0.51 5.37
FFWD 1.17 9.09 N 10/16/98 0.02 21.9 0.16 1.04 7.79
FFYF 1.22 9.08 N 10/16/98 0.51 14.1 0.48 1.15 8.81
FGHC 1.16 14.15 N 10/16/98 1.65 22.5 0.10 1.15 14.40
FISB 0.83 8.69 N 10/16/98 1.11 21.3 0.22 0.69 7.43
FKFS 0.67 9.87 N 10/16/98 1.21 12.4 0.29 0.68 10.30
FKKY 1.18 6.58 N 10/16/98 - 14.7 0.24 1.24 6.75
FLAG 0.68 7.69 N 10/16/98 1.26 29.3 0.11 0.58 6.74
FLFC 0.76 10.18 N 10/16/98 0.77 20.7 0.21 0.83 10.98
FLGS 1.37 23.46 N 10/16/98 2.26 8.0 0.73 1.49 29.40
FLKY 0.95 4.08 N 10/16/98 1.43 20.0 0.15 1.00 3.77
FMCO 0.85 13.56 N 10/16/98 0.70 12.9 0.18 0.79 13.27
FMSB 0.93 13.55 N 10/16/98 0.05 13.0 0.24 0.92 12.99
FNGB 0.91 8.32 N 10/16/98 NA 13.8 0.19 0.94 8.74
FSBI 0.72 10.49 N 10/16/98 0.17 12.1 0.34 0.70 10.04
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
20
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core NPAs/ Price/ Core Core Core
ROAA ROAE Merger Current Assets Core EPS ROAA ROAE
(%) (%) Target? Pricing (%) EPS ($) (%) (%)
Ticker LTM LTM (Y/N) Date MRQ (x) MRQ MRQ MRQ
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FSPT 1.34 5.26 N 10/16/98 NA 20.7 0.37 1.13 4.79
FSTC 1.28 12.77 N 10/16/98 1.08 18.4 0.34 1.11 11.10
FTF 1.66 10.88 N 10/16/98 - 11.4 0.47 1.73 11.49
FTFC 0.71 10.26 N 10/16/98 0.23 33.1 0.10 0.51 7.02
FTNB 0.82 3.45 N 10/16/98 0.44 41.7 0.10 0.67 2.86
FTSB 1.18 7.39 N 10/16/98 1.93 12.8 0.20 1.16 7.30
FWWB 1.06 7.88 N 10/16/98 0.42 18.3 0.29 0.98 7.44
GAF 0.96 6.67 N 10/16/98 0.24 13.4 0.24 0.82 5.99
GDW 1.04 14.58 N 10/16/98 NA 12.3 1.78 1.06 14.06
GPT 1.20 11.83 N 10/16/98 2.27 14.4 0.54 1.31 11.33
GSFC 1.58 4.46 N 10/16/98 0.07 18.6 0.17 1.60 4.52
GSLA 1.01 2.41 N 10/16/98 0.12 49.0 0.06 0.54 1.38
GTPS 0.70 3.60 N 10/16/98 0.01 20.8 0.18 0.75 4.09
GUPB 0.84 5.97 N 10/16/98 0.70 17.5 0.20 0.70 5.84
HALL 0.63 8.30 N 10/16/98 0.31 13.1 0.22 0.62 8.02
HARL 0.97 14.71 N 10/16/98 - 14.0 0.52 0.95 14.49
HAVN 0.48 8.32 N 10/16/98 0.45 14.4 0.20 0.35 6.53
HBFW 0.83 6.68 N 10/16/98 - 20.6 0.33 0.84 6.99
HBNK 1.20 15.59 N 10/16/98 1.84 10.8 0.79 1.37 17.38
HBS 1.44 9.97 N 10/16/98 0.60 13.3 0.33 1.09 7.38
HCFC 1.29 6.93 N 10/16/98 0.59 13.0 0.26 1.24 7.64
HFFB 1.35 5.06 N 10/16/98 - 17.9 0.21 1.38 5.22
HFFC 0.98 10.18 N 10/16/98 0.44 12.3 0.26 0.86 8.67
HFSA 0.61 5.40 N 10/16/98 0.14 17.9 0.21 0.52 4.99
HHFC 0.56 4.98 N 10/16/98 0.09 23.9 0.14 0.56 5.13
HIFS 1.25 12.94 N 10/16/98 0.17 11.1 0.36 1.22 12.77
HMLK 0.92 5.28 N 10/16/98 0.16 16.7 0.21 0.79 5.04
HMNF 0.57 4.50 N 10/16/98 0.05 19.4 0.15 0.45 4.18
HOMF 1.16 13.09 N 10/16/98 0.59 15.6 0.35 1.10 11.88
HPBC 1.60 16.07 N 10/16/98 - 9.3 0.53 1.55 17.59
HRBF 0.75 5.88 N 10/16/98 0.32 18.1 0.27 0.85 6.71
HRZB 1.53 9.74 N 10/16/98 0.02 12.5 0.26 1.47 9.55
HTHR 1.18 23.83 N 10/16/98 5.28 6.3 0.56 1.17 27.46
HWEN 0.71 4.09 N 10/16/98 1.10 20.3 0.08 0.63 3.53
HZFS 0.79 8.26 N 10/16/98 1.03 17.0 0.21 0.76 8.17
IFSB 0.32 4.39 N 10/16/98 1.31 6.8 0.43 0.82 10.87
INBI 1.47 8.80 N 10/16/98 0.23 15.2 0.29 1.47 9.14
IPSW 1.18 21.92 N 10/16/98 0.80 14.3 0.24 1.03 19.19
ITLA 1.44 13.80 N 10/16/98 1.07 6.9 0.46 1.46 14.16
IWBK 0.80 11.66 N 10/16/98 0.67 20.3 0.28 0.77 10.90
JSB 2.52 10.72 N 10/16/98 0.14 9.8 1.27 3.31 13.90
JSBA 0.62 6.66 N 10/16/98 0.70 20.3 0.16 0.53 5.53
JXVL 1.33 9.13 N 10/16/98 0.62 12.1 0.31 1.26 8.64
KFBI 0.91 6.03 N 10/16/98 0.05 18.0 0.25 0.93 6.51
KNK 0.75 7.21 N 10/16/98 0.71 16.3 0.38 0.56 5.80
KSBK 1.11 14.65 N 10/16/98 1.74 9.8 0.34 1.11 14.16
KYF 1.06 6.28 N 10/16/98 0.04 19.0 0.16 0.96 5.56
LARK 0.90 6.45 N 10/16/98 0.06 18.8 0.26 0.76 5.59
LARL 1.46 13.93 N 10/16/98 0.32 10.9 0.38 1.62 15.89
LFCO 2.78 21.42 N 10/16/98 NA 3.7 0.27 1.34 11.95
LFED 1.13 6.86 N 10/16/98 0.83 22.5 0.15 1.01 6.16
LOGN 1.50 7.90 N 10/16/98 0.26 14.0 0.25 1.44 7.65
LSBI 0.72 8.52 N 10/16/98 1.20 18.3 0.39 0.68 8.05
LSBX 2.55 24.90 N 10/16/98 0.24 6.4 0.40 2.09 18.27
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
21
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core NPAs/ Price/ Core Core Core
ROAA ROAE Merger Current Assets Core EPS ROAA ROAE
(%) (%) Target? Pricing (%) EPS ($) (%) (%)
Ticker LTM LTM (Y/N) Date MRQ (x) MRQ MRQ MRQ
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LVSB 0.75 6.96 N 10/16/98 NA 32.7 0.13 0.36 3.71
LXMO 0.77 3.80 N 10/16/98 0.47 21.7 0.15 0.66 3.88
MAFB 1.04 13.42 N 10/16/98 0.50 15.4 0.39 1.03 13.24
MARN 1.25 5.94 N 10/16/98 1.02 15.1 0.36 1.33 6.64
MASB 1.00 8.98 N 10/16/98 0.20 14.7 0.62 1.00 8.52
MBBC 0.31 2.82 N 10/16/98 0.55 137.5 0.02 0.07 0.64
MBLF 0.85 6.57 N 10/16/98 0.45 17.1 0.30 0.76 5.62
MCBN 0.61 7.27 N 10/16/98 0.38 28.6 0.07 0.33 4.01
MDBK 1.01 11.17 N 10/16/98 NA 14.2 0.29 0.94 10.47
MECH 1.01 10.25 N 10/16/98 0.51 12.3 0.50 1.11 11.35
METF 0.61 15.47 N 10/16/98 1.30 15.0 0.15 0.43 11.01
MFBC 0.78 6.28 N 10/16/98 0.06 15.5 0.29 0.65 5.57
MFFC 0.56 4.70 N 10/16/98 0.16 24.6 0.14 0.52 4.72
MFLR 0.93 9.67 N 10/16/98 0.59 18.5 0.27 0.74 7.83
MRKF 1.09 3.15 N 10/16/98 - 20.8 0.12 1.03 3.17
MSBF 1.35 8.10 N 10/16/98 0.41 15.6 0.22 1.32 7.89
MWBI 0.76 10.90 N 10/16/98 0.66 11.5 0.26 0.73 10.41
MWBX 1.22 16.51 N 10/16/98 0.37 10.4 0.15 1.23 16.59
NBN 0.76 9.53 N 10/16/98 0.81 8.5 0.26 0.91 11.75
NEIB 1.18 8.55 N 10/16/98 0.41 11.1 0.38 1.16 8.82
NHTB 0.86 11.02 N 10/16/98 1.00 11.5 0.32 0.86 10.76
NMSB 0.67 7.13 N 10/16/98 NA 17.9 0.18 0.77 8.38
NSLB 0.67 3.48 N 10/16/98 0.01 16.5 0.21 0.87 4.68
NWEQ 1.13 9.74 N 10/16/98 1.71 10.9 0.36 1.22 10.40
NWSB 0.91 9.94 N 10/16/98 0.50 24.2 0.11 0.83 9.59
OCFC 0.92 6.37 N 10/16/98 0.40 16.8 0.22 0.81 5.91
OFCP 0.79 9.33 N 10/16/98 0.49 16.9 0.30 0.81 9.91
OHSL 0.78 7.17 N 10/16/98 NA 19.4 0.19 0.77 7.09
PBCI 1.21 9.36 N 10/16/98 1.48 16.9 0.37 1.10 8.52
PBCT 0.76 8.26 N 10/16/98 0.59 18.2 0.33 0.92 9.94
PBHC 0.58 4.96 N 10/16/98 1.30 22.4 0.11 0.66 5.68
PBKB 0.30 7.18 N 10/16/98 0.35 29.0 0.15 0.24 6.18
PCBC 0.97 5.11 N 10/16/98 - 18.8 0.26 0.92 4.94
PDB 1.23 7.50 N 10/16/98 0.71 18.5 0.13 1.14 6.96
PEEK 1.01 4.11 N 10/16/98 0.61 18.6 0.17 0.93 4.18
PERM 0.58 5.97 N 10/16/98 0.18 23.9 0.13 0.53 5.28
PFDC 1.45 9.56 N 10/16/98 0.16 16.7 0.30 1.32 8.86
PFED 0.93 4.36 N 10/16/98 0.07 13.8 0.24 1.08 5.35
PFFB 0.56 5.94 N 10/16/98 1.06 13.6 0.26 0.56 6.54
PFFC 0.59 3.00 N 10/16/98 0.15 27.5 0.10 0.62 3.39
PFNC 0.74 12.03 N 10/16/98 NA 14.3 0.21 0.81 11.68
PFSB 0.76 10.63 N 10/16/98 0.44 11.3 0.28 0.72 10.28
PHBK 1.20 16.11 N 10/16/98 0.68 12.9 0.33 1.26 16.82
PHFC 0.62 7.19 N 10/16/98 1.24 11.8 0.27 0.55 7.81
PHSB 0.66 5.14 N 10/16/98 NA 24.0 0.12 0.56 4.42
PLSK 0.58 4.89 N 10/16/98 0.63 22.1 0.12 0.51 4.39
PRBC 0.45 4.29 N 10/16/98 0.35 16.5 0.19 0.45 4.65
PROV 0.30 2.50 N 10/16/98 1.04 63.3 0.06 0.14 1.32
PSFC 1.18 5.44 N 10/16/98 0.67 29.0 0.14 0.85 3.90
PSFI 1.72 5.52 N 10/16/98 0.41 12.7 0.18 1.65 6.05
PTRS 0.69 7.69 N 10/16/98 0.32 14.8 0.22 0.68 7.74
PULB 0.87 6.54 N 10/16/98 NA 26.5 0.17 0.79 5.91
PVFC 1.15 16.01 N 10/16/98 0.92 10.9 0.23 0.90 12.56
PVSA 1.06 14.36 N 10/16/98 NA 12.2 0.42 1.01 13.86
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
22
<PAGE>
FERGUSON & COMPANY EXHIBIT IV - SELECTED PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core NPAs/ Price/ Core Core Core
ROAA ROAE Merger Current Assets Core EPS ROAA ROAE
(%) (%) Target? Pricing (%) EPS ($) (%) (%)
Ticker LTM LTM (Y/N) Date MRQ (x) MRQ MRQ MRQ
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PWBK 0.53 2.91 N 10/16/98 0.72 134.4 0.02 0.09 0.48
QCBC 0.76 8.80 N 10/16/98 1.11 11.7 0.31 0.82 9.30
QCFB 1.67 9.55 N 10/16/98 0.08 11.3 0.56 1.67 9.48
QCSB 1.49 14.18 N 10/16/98 0.39 21.9 0.32 1.63 16.30
RELY 0.81 9.78 N 10/16/98 NA 12.6 0.50 0.76 9.94
RIVR 0.82 6.27 N 10/16/98 0.55 13.7 0.26 0.87 6.38
RSLN 1.24 7.52 N 10/16/98 0.16 13.0 0.31 1.26 8.03
SCBS 1.22 6.49 N 10/16/98 0.18 11.2 0.29 1.57 9.46
SCCB 0.88 4.00 N 10/16/98 1.87 25.0 0.16 0.82 4.12
SFFC 1.16 6.50 N 10/16/98 1.54 16.0 0.16 1.13 6.34
SFIN 0.75 7.85 N 10/16/98 0.42 16.9 0.24 0.62 6.23
SGVB 0.36 4.70 N 10/16/98 1.12 18.4 0.17 0.43 5.41
SKAN 0.61 8.69 N 10/16/98 1.74 12.6 0.27 0.61 8.76
SMBC 0.69 4.23 N 10/16/98 0.98 18.1 0.22 0.89 5.45
SOBI 0.61 4.22 N 10/16/98 0.08 15.2 0.23 0.70 5.01
SOPN 1.76 7.64 N 10/16/98 0.18 16.3 0.33 1.76 7.68
SPBC 0.93 10.11 N 10/16/98 NA 21.3 0.24 0.70 7.58
SRN 0.52 2.96 N 10/16/98 0.01 23.9 0.14 0.56 3.18
SSM 1.40 4.84 N 10/16/98 - 21.9 0.16 1.07 4.02
STFR 0.68 8.56 N 10/16/98 0.18 15.3 0.58 0.69 9.03
STSA 0.54 9.76 N 10/16/98 0.52 9.9 0.40 0.61 11.13
SVRN 0.71 12.80 N 10/16/98 0.54 14.1 0.23 0.77 13.84
SZB 0.41 3.71 N 10/16/98 0.05 55.8 0.07 0.15 1.49
THR 0.76 5.80 N 10/16/98 0.83 16.0 0.24 0.74 5.58
THRD 0.57 6.40 N 10/16/98 0.30 19.9 0.24 0.47 6.08
TRIC 1.03 6.60 N 10/16/98 - 16.5 0.17 0.99 6.11
TSH 0.93 6.84 N 10/16/98 0.18 12.1 0.30 0.96 6.91
TWIN 0.82 6.41 N 10/16/98 0.37 18.8 0.18 0.80 6.29
UFBS 0.70 8.86 N 10/16/98 NA 16.3 0.23 0.68 8.70
WAMU 0.93 16.82 N 10/16/98 0.74 14.5 0.67 0.98 18.29
WAYN 0.65 6.81 N 10/16/98 0.48 26.5 0.17 0.65 6.82
WBST 0.75 13.35 N 10/16/98 0.39 11.1 0.50 0.84 14.02
WCFB 1.40 5.96 N 10/16/98 0.05 24.2 0.16 1.36 5.80
WEFC 1.10 7.63 N 10/16/98 0.14 13.4 0.29 1.12 7.63
WFI 0.90 12.34 N 10/16/98 0.39 16.1 0.19 0.92 12.60
WFSL 1.92 14.69 N 10/16/98 0.70 12.0 0.52 1.98 14.34
WHGB 0.59 3.21 N 10/16/98 0.59 17.1 0.15 0.63 3.93
WRNB 1.54 14.31 N 10/16/98 1.15 12.2 0.18 1.57 14.64
WSB 0.50 5.92 N 10/16/98 NA 13.3 0.08 0.51 5.96
WSFS 1.09 18.58 N 10/16/98 1.12 10.2 0.34 1.12 18.11
WSTR 0.72 6.73 N 10/16/98 0.43 14.5 0.31 0.70 6.44
WVFC 1.29 11.23 N 10/16/98 0.20 13.6 0.28 1.27 11.37
YFCB 0.81 6.16 N 10/16/98 0.15 17.5 0.20 0.59 5.10
YFED 0.67 7.58 N 10/16/98 0.98 19.6 0.21 0.64 7.30
Maximum 2.78 33.43 5.28 137.5 1.78 3.31 29.40
Minimum 0.19 2.41 - 3.7 - - 0.12
Average 0.92 8.59 0.55 18.8 0.27 0.88 8.30
Median 0.86 7.55 0.42 16.4 0.24 0.82 7.50
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
23
<PAGE>
FERGUSON & COMPANY
- ------------------
EXHIBIT V - COMPARATIVE GROUP PRICE CHANGES
<TABLE>
<CAPTION>
Total
Number Assets
of ($000)
Ticker Short Name City State Offices Mst RctQ
<S> <C> <C> <C> <C> <C>
AMFC AMB Financial Corp. Munster IN 3 111,338
CLAS Classic Bancshares Inc. Ashland KY 5 137,984
FCME First Coastal Corp. Westbrook ME 8 171,719
FFDB FirstFed Bancorp Inc. Bessemer AL 8 179,893
HBS Haywood Bancshares Inc. Waynesville NC 4 151,718
HIFS (1) Hingham Instit. for Savings Hingham MA 5 239,148
HRBF Harbor Federal Bancorp Inc. Baltimore MD 9 235,733
IPSW Ipswich Savings Bank Ipswich MA 8 233,662
JXVL Jacksonville Bancorp Inc. Jacksonville TX 7 242,673
LARL Laurel Capital Group Inc. Allison Park PA 6 220,986
MFLR Mayflower Co-operative Bank Middleboro MA 5 142,965
Maximum 9 242,673
Minimum 3 111,338
Average 6 187,984
Median 6 179,893
</TABLE>
(1) HIFS declared a 3 for 2 stock split payable 10-5 to holders
of record as of 9-14. The August 28 price of $24.625 has been
adjusted to $16.433 for comparative purposes.
SOURCE: SNL & F&C CALCULATIONS
24
<PAGE>
FERGUSON & COMPANY
- ------------------
EXHIBIT V - COMPARATIVE GROUP PRICE CHANGES
<TABLE>
<CAPTION>
OCTOBER 16, 1998 AUGUST 29, 1998 10-16-98 vs. 8-28-98
----------------------- -----------------------
Current Current Current Current INCREASE (DECREASE)
-----------------------------
Stock Market Stock Market Stock Market
Price Value Price Value Price Value
Ticker IPO Date ($) ($M) ($) ($M) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
AMFC 04/01/96 12.000 10.44 14.750 13.51 (18.6) (22.7)
CLAS 12/29/95 13.250 17.22 15.250 19.82 (13.1) (13.1)
FCME NA 8.875 12.07 10.500 14.29 (15.5) (15.5)
FFDB 11/19/91 10.500 25.56 12.750 31.04 (17.6) (17.7)
HBS 12/18/87 17.500 21.88 19.000 23.76 (7.9) (7.9)
HIFS (1) 12/20/88 16.000 31.43 16.433 32.25 (2.6) (2.5)
HRBF 08/12/94 19.500 36.32 18.125 33.76 7.6 7.6
IPSW 05/26/93 13.750 32.86 12.000 28.68 14.6 14.6
JXVL 04/01/96 15.000 36.33 16.250 39.35 (7.7) (7.7)
LARL 02/20/87 16.500 36.40 19.000 41.64 (13.2) (12.6)
MFLR 12/23/87 20.000 17.99 19.500 17.54 2.6 2.6
Maximum 20.000 36.40 19.500 41.64 14.6 14.6
Minimum 8.875 10.44 10.500 13.51 (18.6) (22.7)
Average 14.807 25.32 15.778 26.88 (6.5) (6.8)
Median 15.000 25.56 16.250 28.68 (7.9) (7.9)
</TABLE>
SOURCE: SNL & F&C CALCULATIONS 25
<PAGE>
FERGUSON & COMPANY EXHIBIT VI-PRO FORMA COMPARISONS
- ------------------
AS OF OCTOBER 16, 1998
<TABLE>
<CAPTION>
Ticker Name Price Mk Value PE P/Book P/TBook P/Assets Div Yld
($) ($Mil) (X) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CITIZENS BANK, SALISBURY, NC
----------------------------
Before Conversion N/A N/A N/A N/A N/A N/A N/A
Pro Forma Supermaximum 10.000 22.48 13.8 65.4 65.4 10.6 2.00
Pro Forma Maximum 10.000 19.55 12.4 61.4 61.4 9.4 2.00
Pro Forma Midpoint 10.000 17.00 11.1 57.3 57.3 8.2 2.00
Pro Forma Minimum 10.000 14.45 9.7 52.6 52.6 7.1 2.00
COMPARATIVE GROUP
-----------------
Averages 14.807 25.32 14.8 126.3 129.1 13.1 2.48
Medians 15.000 25.56 13.2 122.3 122.3 14.1 2.67
NORTH CAROLINA THRIFTS
----------------------
Averages 13.805 34.91 15.4 104.2 104.6 19.5 3.53
Medians 13.594 25.87 16.4 99.0 100.6 19.0 3.62
SOUTHEAST REGION THRIFTS
------------------------
Averages 15.429 70.66 18.8 133.1 138.2 16.2 2.44
Medians 15.000 43.19 17.8 122.6 121.1 15.2 2.48
ALL PUBLIC THRIFTS
------------------
Averages 16.402 262.95 17.0 126.7 133.4 14.2 2.02
Medians 14.875 43.17 16.1 115.1 121.5 13.6 2.12
COMPARATIVE GROUP
-----------------
AMFC AMBFinancial-IN 12.000 10.44 19.7 77.8 77.8 9.9 2.33
CLAS ClassicBcshs-KY 13.250 17.22 21.7 83.9 97.6 12.5 2.42
FCME FirstCoastal-ME 8.875 12.07 11.1 78.5 78.5 7.0 -
FFDB FirstFedBncpInc-AL 10.500 25.56 15.9 143.6 155.6 14.2 2.67
HBS HaywoodBcshs-NC 17.500 21.88 9.9 99.0 102.2 14.4 3.43
HIFS Hingham-MA 16.000 31.43 11.5 138.8 138.8 13.1 1.67
HRBF HarborFedBncp-MD 19.500 36.32 20.5 122.3 122.3 15.4 2.67
IPSW IpswichSB-MA 13.750 32.86 13.2 251.8 251.8 14.1 1.16
JXVL Jacksonville-TX 15.000 36.33 11.9 103.6 103.6 15.0 3.33
LARL LaurelCapital-PA 16.500 36.40 12.2 153.8 153.8 16.4 3.64
MFLR MayflowerCo-op-MA 20.000 17.99 15.0 136.3 138.3 12.6 4.00
</TABLE>
26
<PAGE>
FERGUSON & COMPANY EXHIBIT VI-PRO FORMA COMPARISONS
- ------------------
As of October 16, 1998
<TABLE>
<CAPTION>
Ticker Name Assets Eq/A TEq/A EPS ROAA ROAE
($000) (%) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
Citizens Bank, Salisbury, NC
----------------------------
Before Conversion 192,716 8.1 8.1 N/A 0.63 8.21
Pro Forma Supermaximum 211,467 16.2 16.2 0.73 0.76 4.85
Pro Forma Maximum 208,947 15.2 15.2 0.81 0.74 5.06
Pro Forma Midpoint 206,756 14.3 14.3 0.90 0.73 5.28
Pro Forma Minimum 204,566 13.4 13.4 1.03 0.71 5.53
Comparative Group
-----------------
Averages 187,984 11.2 10.9 1.07 1.00 9.78
Medians 179,893 10.6 10.6 1.04 0.93 9.22
North Carolina Thrifts
----------------------
Averages 182,962 19.6 19.6 0.94 1.28 6.41
Medians 141,130 17.9 17.9 0.74 1.32 6.17
Southeast Region Thrifts
------------------------
Averages 603,183 13.4 13.4 0.89 0.97 7.69
Medians 189,557 12.7 12.9 0.80 0.96 7.22
All Public Thrifts
------------------
Averages 1,738,710 11.9 11.7 1.07 0.92 8.59
Medians 365,032 10.1 10.0 0.96 0.86 7.55
Comparative Group
-----------------
AMFC AMBFinancial-IN 111,338 12.7 12.7 0.61 0.53 3.77
CLAS ClassicBcshs-KY 137,984 14.9 13.1 0.61 0.56 3.72
FCME FirstCoastal-ME 171,719 9.0 9.0 0.80 0.73 7.42
FFDB FirstFedBncpInc-AL 179,893 9.9 9.2 0.66 0.89 9.22
HBS HaywoodBcshs-NC 151,718 14.6 14.2 1.77 1.44 9.97
HIFS Hingham-MA 239,148 9.4 9.4 1.39 1.25 12.94
HRBF HarborFedBncp-MD 235,733 12.6 12.6 0.95 0.75 5.88
IPSW IpswichSB-MA 233,662 5.6 5.6 1.04 1.18 21.92
JXVL Jacksonville-TX 242,673 14.5 14.5 1.26 1.33 9.13
LARL LaurelCapital-PA 220,986 10.6 10.6 1.35 1.46 13.93
MFLR MayflowerCo-op-MA 142,965 9.2 9.1 1.33 0.93 9.67
</TABLE>
Stock prices are closing prices or last trade. Pro forma
calculations for Citizens are based on sales at $10 a
share with a minimum of $14,450,000, midpoint of
$17,000,000, maximum of $19,550,000, and supermaximum of
$22,482,500. Sources: Citizens' audited and unaudited
financial Statements, SNL Securities, and F&C
calculations.
27
<PAGE>
FERGUSON & COMPANY EXHIBIT VII
COMPARISON OF PRICING RATIOS
<TABLE>
<CAPTION>
GROUP PERCENT PREMIUM
CITIZENS COMPARED TO (DISCOUNT) VERSUS
----------------------------------- ----------------------------
BANK AVERAGE MEDIAN AVERAGE MEDIAN
--------------- ----------------- ----------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
COMPARISON OF PE RATIO AT
MIDPOINT TO:
- ----------------------------------------
Comparative group 11.1 14.8 13.2 (25.0) (15.9)
North Carolina thrifts 11.1 15.4 16.4 (27.9) (32.3)
Southeast Region thrifts 11.1 18.8 17.8 (41.0) (37.6)
All public thrifts 11.1 17.0 16.1 (34.7) (31.1)
Recent conversions (Exhibit III.1) 11.1 16.4 16.1 (32.3) (31.1)
COMPARISON OF PE RATIO AT
MAXIMUM TO:
- ----------------------------------------
Comparative group 12.4 14.8 13.2 (16.2) (6.1)
North Carolina thrifts 12.4 15.4 16.4 (19.5) (24.4)
Southeast Region thrifts 12.4 18.8 17.8 (34.0) (30.3)
All public thrifts 12.4 17.0 16.1 (27.1) (23.0)
Recent conversions (Exhibit III.1) 12.4 16.4 16.1 (24.4) (23.0)
COMPARISON OF PE RATIO AT
SUPERMAXIMUM TO:
- ----------------------------------------
Comparative group 13.8 14.8 13.2 (6.8) 4.5
North Carolina thrifts 13.8 15.4 16.4 (10.4) (15.9)
Southeast Region thrifts 13.8 18.8 17.8 (26.6) (22.5)
All public thrifts 13.8 17.0 16.1 (18.8) (14.3)
Recent conversions (Exhibit III.1) 13.8 16.4 16.1 (15.9) (14.3)
COMPARISON OF PB RATIO AT
MIDPOINT TO:
- ----------------------------------------
Comparative group 57.3 126.3 122.3 (54.6) (53.1)
North Carolina thrifts 57.3 104.2 99.0 (45.0) (42.1)
Southeast Region thrifts 57.3 133.1 122.6 (56.9) (53.3)
All public thrifts 57.3 126.7 115.1 (54.8) (50.2)
Recent conversions (Exhibit III.1) 57.3 75.8 76.6 (24.4) (25.2)
COMPARISON OF PB RATIO AT
MAXIMUM TO:
- ----------------------------------------
Comparative group 61.4 126.3 122.3 (51.4) (49.8)
North Carolina thrifts 61.4 104.2 99.0 (41.1) (38.0)
Southeast Region thrifts 61.4 133.1 122.6 (53.9) (49.9)
All public thrifts 61.4 126.7 115.1 (51.5) (46.7)
Recent conversions (Exhibit III.1) 61.4 75.8 76.6 (19.0) (19.8)
COMPARISON OF PB RATIO AT
SUPERMAXIMUM TO:
- ----------------------------------------
Comparative group 65.4 126.3 122.3 (48.2) (46.5)
North Carolina thrifts 65.4 104.2 99.0 (37.2) (33.9)
Southeast Region thrifts 65.4 133.1 122.6 (50.9) (46.7)
All public thrifts 65.4 126.7 115.1 (48.4) (43.2)
Recent conversions (Exhibit III.1) 65.4 75.8 76.6 (13.7) (14.6)
</TABLE>
SOURCE: SNL & F&C CALCULATIONS
28
<PAGE>
FERGUSON & COMPANY EXHIBIT VIII
- ------------------
PRO FORMA ASSUMPTIONS
1. Net proceeds from the conversion were invested at the beginning of the
period at 5.4%, which was the approximate rate on the one-year treasury bill on
June 30, 1998. This rate was selected because it is considered more
representative of the rate the Bank is likely to earn.
2. Citizens' ESOP will acquire 8% of the conversion stock with loan proceeds
obtained from the Holding Company; therefore, there will be no interest expense.
We assumed that the ESOP expense is 1/10 annually of the initial purchase.
3. Citizens' RP will acquire 4% of the stock through open market purchases at
$10 per share and the expense is recognized ratably over five years as the
shares vest.
4. All pro forma income and expense items are adjusted for income taxes at a
combined state and federal rate of 38.0%.
5. In calculating the pro forma adjustments to net worth, the ESOP and RP are
deducted in accordance with generally accepted accounting principles.
6. Earnings per share ("EPS") calculations have ignored AICPA SOP 93-6.
Calculating EPS under SOP 93-6 and assuming 1/10 of the ESOP shares are
committed to be released and allocated to the individual accounts at the
beginning of the period would yield EPS of $1.11, $.97, $.87, and $.78, and
price to earnings ratios of 9.0, 10.3, 11.5, and 12.8, at the minimum, midpoint,
maximum, and supermaximum of the range, respectively.
29
<PAGE>
FERGUSON & COMPANY
- ------------------
EXHIBIT VIII
PRO FORMA EFFECT OF CONVERSION PROCEEDS
AT THE MINIMUM OF THE CONVERSION VALUATION RANGE
VALUATION DATE AS OF OCTOBER 16, 1998
<TABLE>
<CAPTION>
CITIZENS BANK
- -------------------------------------------------------------------------------------------
<S> <C> <C>
1. Conversion Proceeds
Pro Forma Market Value $ 14,450,000
Less: Estimated Expenses (866,000)
------------------------
Net Conversion Proceeds $ 13,584,000
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 13,584,000
Less: ESOP Contributions (1,156,000)
RP Contributions (578,000)
------------------------
Net Conversion Proceeds after ESOP & RP $ 11,850,000
Estimated Incremental Rate of Return(1) 3.35%
------------------------
Estimated Additional Income $ 396,738
Less: ESOP Expense (71,672)
RP Expense (71,672)
------------------------
$ 253,394
------------------------
3. Pro Forma Calculations
<CAPTION>
Before Conversion After
Period Conversion Results Conversion
------------------------------------------------------------------------
<S> <C> <C> <C>
a. Pro Forma Earnings
Twelve Months Ended
June 30, 1998 $ 1,230,000 $ 253,394 $ 1,483,394
b. Pro Forma Net Worth
June 30, 1998 $ 15,612,000 $ 11,850,000 $ 27,462,000
c. Pro Forma Net Assets
June 30, 1998 $ 192,716,000 $ 11,850,000 $ 204,566,000
</TABLE>
(1) Assumes Proceeds can be reinvested at 5.4 percent and earnings taxed at a
rate of 38.0 percent.
30
<PAGE>
FERGUSON & COMPAMY
- ------------------
EXHIBIT VIII
PRO FORMA EFFECT OF CONVERSION PROCEEDS
AT THE MIDPOINT OF THE CONVERSION VALUATION RANGE
VALUATION DATE AS OF OCTOBER 16, 1998
<TABLE>
<CAPTION>
CITIZENS BANK
- -------------------------------------------------------------------------------------------
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation $ 17,000,000
Less: Estimated Expenses (920,000)
-------------
Net Conversion Proceeds $ 16,080,000
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 16,080,000
Less: ESOP Contributions (1,360,000)
RP Contributions (680,000)
-------------
Net Conversion Proceeds after ESOP & RP $ 14,040,000
Estimated Incremental Rate of Return(1) 3.35%
-------------
Estimated Additional Income $ 470,059
Less: ESOP Expense (84,320)
RP Expense (84,320)
-------------
$ 301,419
-------------
3. Pro Forma Calculations
<CAPTION>
Before Conversion After
Period Conversion Results Conversion
------------------------------------------------------------------------
<S> <C> <C> <C>
a. Pro Forma Earnings
Twelve Months Ended
June 30, 1998 $ 1,230,000 $ 301,419 $ 1,531,419
b. Pro Forma Net Worth
June 30, 1998 $ 15,612,000 $ 14,040,000 $ 29,652,000
c. Pro Forma Net Assets
June 30, 1998 $ 192,716,000 $ 14,040,000 $ 206,756,000
</TABLE>
(1) Assumes Proceeds can be reinvested at 5.4 percent and earnings taxed at a
rate of 38.0 percent.
31
<PAGE>
FERGUSON & COMPANY
- ------------------
EXHIBIT VIII
PRO FORMA EFFECT OF CONVERSION PROCEEDS
AT THE MAXIMUM OF THE CONVERSION VALUATION RANGE
VALUATION DATE AS OF OCTOBER 16, 1998
<TABLE>
<CAPTION>
CITIZENS BANK
- --------------------------------------------------------------------------------
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation $ 19,550,000
Less: Estimated Expenses (973,000)
------------------------
Net Conversion Proceeds $ 18,577,000
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 18,577,000
Less: ESOP Contributions (1,564,000)
RP Contributions (782,000)
------------------------
Net Conversion Proceeds after ESOP & RP $ 16,231,000
Estimated Incremental Rate of Return(1) 3.35%
------------------------
Estimated Additional Income $ 543,414
Less: ESOP Expense (96,968)
RP Expense (96,968)
------------------------
$ 349,478
------------------------
</TABLE>
3. Pro Forma Calculations
<TABLE>
<CAPTION>
Before Conversion After
Period Conversion Results Conversion
------------------------------------------------------------------------
<S> <C> <C> <C>
a. Pro Forma Earnings
Twelve Months Ended
June 30, 1998 $ 1,230,000 $ 349,478 $ 1,579,478
b. Pro Forma Net Worth
June 30, 1998 $ 15,612,000 $ 16,231,000 $ 31,843,000
c. Pro Forma Net Assets
June 30, 1998 $ 192,716,000 $ 16,231,000 $ 208,947,000
</TABLE>
(1) Assumes Proceeds can be reinvested at 5.4 percent and earnings taxed at a
rate of 38.0 percent.
32
<PAGE>
FERGUSON & COMPANY
- ------------------
EXHIBIT VIII
PRO FORMA EFFECT OF CONVERSION PROCEEDS
AT THE SUPERMAX OF THE CONVERSION VALUATION RANGE
VALUATION DATE AS OF OCTOBER 16, 1998
<TABLE>
<CAPTION>
CITIZENS BANK
- --------------------------------------------------------------------------------
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation $ 22,482,500
Less: Estimated Expenses $ (1,034,000)
------------------------
Net Conversion Proceeds $ 21,448,500
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 21,448,500
Less: ESOP Contributions $ (1,798,600)
RP Contributions $ (899,300)
------------------------
Net Conversion Proceeds after ESOP & RP $ 18,750,600
Estimated Incremental Rate of Return(1) 3.35%
------------------------
Estimated Additional Income $ 627,770
Less: ESOP Expense $ (111,513)
RP Expense $ (111,513)
------------------------
$ 404,744
------------------------
</TABLE>
3. Pro Forma Calculations
<TABLE>
<CAPTION>
Before Conversion After
Period Conversion Results Conversion
------------------------------------------------------------------------
<S> <C> <C> <C>
a. Pro Forma Earnings
Twelve Months Ended
June 30, 1998 $ 1,230,000 $ 404,744 $ 1,634,744
b. Pro Forma Net Worth
June 30, 1998 $ 15,612,000 $ 18,750,600 $ 34,362,600
c. Pro Forma Net Assets
June 30, 1998 $ 192,716,000 $ 18,750,600 $ 211,466,600
</TABLE>
(1) Assumes Proceeds can be reinvested at 5.4 percent and earnings taxed at a
rate of 38.0 percent.
33
<PAGE>
FERGUSON & COMPANY
- ------------------
EXHIBIT VIII
PRO FORMA ANALYSIS SHEET
<TABLE>
<CAPTION>
Name of Association: CITIZENS BANK
Date of Market Prices: October 16, 1998 NC PUBLICLY All Publicly
COMPARATIVES HELD THRIFTS HELD THRIFTS
SYMBOLS VALUE MEAN MEDIAN MEAN MEDIAN MEAN MEDIAN
------------------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PRICE-EARNINGS RATIO P/E
- --------------------
Last Twelve Months N/A
At Minimum of Range 9.7
-------------------------------------------------------------------------------------
At Midpoint of Range 11.1 14.8 13.2 15.4 16.4 17.0 16.1
-------------------------------------------------------------------------------------
At Maximum of Range 12.4
At Supermax of Range 13.8
PRICE-BOOK RATIO P/B
- ----------------
At Minimum of Range 52.6%
-------------------------------------------------------------------------------------
At Midpoint of Range 57.3% 126.3 122.3 104.2 99.0 126.7 115.1
-------------------------------------------------------------------------------------
At Maximum of Range 61.4%
At Supermax of Range 65.4%
PRICE-ASSET RATIO P/A
- -----------------
At Minimum of Range 7.1%
-------------------------------------------------------------------------------------
At Midpoint of Range 8.2% 13.1 14.1 19.5 19.0 14.2 13.6
-------------------------------------------------------------------------------------
At Maximum of Range 9.4%
At Supermax of Range 10.6%
Twelve Mo. Earnings Base Y $ 1,230,000
Period Ended June 30, 1998
Book Value B $ 15,612,000
As of June 30, 1998
Total Assets A $ 192,716,000
As of June 30, 1998
Return on Money (1) R 3.35%
Conversion Expense X $ 920,000
Underwriting Commission C 0.00%
Percentage Underwritten S 0.00%
Estimated Dividend
Dollar Amount DA $ 340,000
Yield DY 2.00%
ESOP Contributions P $ 1,360,000
RP Contributions I $ 680,000
ESOP Annual Expense E $ 84,320
RP Annual Contributions M $ 84,320
Cost of ESOP Borrowings F 0.00%
</TABLE>
(1) Assumes Proceeds can be reinvested at 5.4 percent and earnings taxed at a
rate of 38.0 percent.
34
<PAGE>
FERGUSON & COMPANY
- ------------------
EXHIBIT VIII
PRO FORMA ANALYSIS SHEET
Calculation of Estimated Value (V) at Midpoint Value
<TABLE>
<S> <C> <C> <C> <C>
1. V= P/A(A-X-P-I) $ 17,000,000
---------------------------
1-P/A(1-(CxS))
2. V= P/B(B-X-P-I) $ 17,000,000
---------------------------
1-P/B(1-(CxX))
3. V= P/E(Y-R(X+P+I)-(E+M)) $ 17,000,000
------------------------------
1-P/E(R(1-(CxX))
Value
Estimated Value Per Share Total Shares Date
---------------------------- ------------- ------------------ ---------------------
$17,000,000 $10.00 1,700,000 October 16, 1998
</TABLE>
Range of Value
$17.0 million x 1.15 = $19.55 million or 1,955,000 shares at $10.00 per share
$17.0 million x 0.85 = $14.45 million or 1,445,000 shares at $10.00 per share
35
<PAGE>
CITIZENS BANK, FSB
POST OFFICE BOX 1929
401 WEST INNES STREET
SALISBURY, NORTH CAROLINA 28145-1929
(704) 633-2341
---------------------------------
NOTICE OF SPECIAL MEETING OF
MEMBERS
TO BE HELD ON DECEMBER 10, 1998
---------------------------------
NOTICE IS HEREBY GIVEN, that a special meeting (the "Special Meeting") of
the members of Citizens Bank, FSB (the "Bank") will be held at the Bank's office
at 401 West Innes Street, Salisbury, North Carolina on December 10, 1998 at 7:00
p.m., Eastern Time, to consider and vote upon:
1. The Plan of Conversion (the "Plan of Conversion") pursuant to which,
among other things, (i) the Bank will convert from a federally-
chartered savings bank organized in mutual form to a federally-
chartered savings bank organized in stock form (the "Conversion"), and
in connection therewith will adopt a federal stock savings bank
charter and bylaws, (ii) the Bank will sell its capital stock to Innes
Street Financial Corporation (the "Company"), a North Carolina
corporation, and become the wholly-owned subsidiary of the Company,
and (iii) the Company will offer and sell shares of its common stock
in a Subscription Offering and, if necessary, in a Community Offering
and a Syndicated Community Offering, all as more specifically set
forth in the Plan of Conversion; and
2. Such other business as may relate to the purposes set forth in this
Notice of Special Meeting and properly come before the meeting and any
adjournment(s) thereof. Management is not aware of any such other
business.
The Board of Directors has fixed the close of business on October 30, 1998
as the record date for the determination of members entitled to notice of and to
vote at the Special Meeting and at any adjournment(s) thereof. Members of the
Bank of record as of the close of business on that date who cease to be members
prior to the date of the Special Meeting will not be entitled to vote at the
Special Meeting. Approval of the Plan of Conversion requires the affirmative
vote, cast in person or by proxy, of a majority of the total outstanding votes
entitled to be cast by voting members at the Special Meeting. A copy of the
Plan of Conversion is attached to this Summary Proxy Statement as Attachment I.
BY ORDER OF THE BOARD OF DIRECTORS
Ralphelle S. Butler
Secretary
Salisbury, North Carolina
November 12, 1998
<PAGE>
PLEASE COMPLETE, DATE, SIGN AND RETURN THE ACCOMPANYING PROXY CARD(S) IN THE
ENCLOSED POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE SPECIAL MEETING. THIS WILL ASSURE YOUR REPRESENTATION AT THE SPECIAL
MEETING AND MAY AVOID THE COST OF ADDITIONAL COMMUNICATIONS. THIS WILL NOT
PREVENT YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING. YOU MAY
REVOKE YOUR WRITTEN PROXY BY DELIVERING A WRITTEN INSTRUMENT TO SUCH EFFECT TO
THE SECRETARY OF THE BANK AT ANY TIME PRIOR TO OR AT THE SPECIAL MEETING OR BY
DELIVERING TO THE SECRETARY OF THE BANK PRIOR TO THE SPECIAL MEETING A DULY
EXECUTED PROXY BEARING A LATER DATE. PROPERLY COMPLETED PROXIES WILL BE VOTED
IN ACCORDANCE WITH THE INSTRUCTIONS INDICATED THEREON, OR IF NO INSTRUCTIONS ARE
INDICATED, FOR APPROVAL OF THE PLAN OF CONVERSION.
---
YOUR PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE BANK. THE BANK'S
BOARD OF DIRECTORS RECOMMENDS THAT VOTING MEMBERS VOTE FOR APPROVAL OF THE PLAN
OF CONVERSION. FAILURE TO VOTE IN PERSON OR BY PROXY WILL HAVE THE SAME EFFECT
AS A VOTE AGAINST THE PLAN OF CONVERSION. VOTING IN FAVOR OF THE PLAN OF
-------
CONVERSION WILL NOT OBLIGATE ANY PERSON TO PURCHASE COMMON STOCK, AND VOTING
AGAINST THE PLAN OF CONVERSION OR A FAILURE TO VOTE WILL NOT PRECLUDE ANY SUCH
PURCHASE.
THE ENCLOSED PROXY IS SOLICITED FOR THIS SPECIAL MEETING ONLY, AND ANY
ADJOURNMENT(S) THEREOF, AND WILL NOT BE USED FOR ANY OTHER MEETING. NO
PREVIOUSLY PROVIDED GENERAL PROXIES WILL BE VOTED AT THE SPECIAL MEETING FOR
APPROVAL OF THE PLAN OF CONVERSION.
ii
<PAGE>
TABLE OF CONTENTS
Page
----
Purpose of the Special Meeting..................................... 1
Information Relating to Voting at the Special Meeting.............. 2
Recommendation of Management....................................... 3
The Conversion..................................................... 4
Stock Purchases by Directors and Executive Officers................ 22
Benefits to Directors and Employees................................ 24
Use of Proceeds.................................................... 31
Dividend Policy.................................................... 33
Market for Common Stock............................................ 34
Registration Requirements.......................................... 34
Additional Information and Order Forms............................. 34
Glossary........................................................... A-1
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY THE COMMON STOCK. SUCH OFFERS ARE MADE ONLY BY THE PROSPECTUS.
iii
<PAGE>
CITIZENS BANK, FSB
-------------------------------------
SUMMARY PROXY
STATEMENT
-------------------------------------
SPECIAL MEETING OF MEMBERS TO BE HELD ON DECEMBER 10, 1998
PURPOSE OF THE SPECIAL MEETING
This Summary Proxy Statement (the "Proxy Statement") is being furnished to
you in connection with the solicitation by the Board of Directors of Citizens
Bank, FSB (the "Bank") of proxies to be voted at a special meeting of members
(the "Special Meeting") to be held at the Bank's office at 401 West Innes
Street, Salisbury, North Carolina on December 10, 1998 at 7:00 p.m., Eastern
Time.
The Special Meeting will be held for the purpose of considering and voting
upon the proposed Plan of Conversion approved by the Board of Directors of the
Bank on September 10, 1998 (the "Plan of Conversion"), which provides for the
adoption by the Bank of a federal stock savings bank charter and bylaws. If the
Plan of Conversion is approved by a majority of the total votes eligible to be
cast and if certain other conditions are satisfied, the Bank will convert from a
federally-chartered mutual savings bank to a federally-chartered stock savings
bank, and the Bank will become the wholly-owned subsidiary of Innes Street
Financial Corporation (the "Company"), a North Carolina corporation formed by
the Bank to own all of the stock of the Bank issued pursuant to the Plan of
Conversion (the "Conversion"). The proposed Plan of Conversion is attached to
this Proxy Statement as Attachment I. For a description of the Conversion, see
"THE CONVERSION."
This Proxy Statement is dated November 12, 1998, and is first being mailed
to members of the Bank, together with the Prospectus dated November 12, 1998
(the "Prospectus"), on or about November 12, 1998.
The following information is not complete and is qualified in its entirety
by the Plan of Conversion, which is attached to this Proxy Statement, the
information contained in this Proxy Statement and the information and financial
statements and accompanying notes contained in the Prospectus which accompanies
this Proxy Statement.
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INNES STREET FINANCIAL CORPORATION
The Company was incorporated on July 6, 1998 as a North Carolina
corporation to acquire all of the capital stock that the Bank will issue upon
its Conversion from the mutual to stock form of ownership. The Company has not
as yet engaged in any business. Upon completion of the Conversion, its business
initially will consist solely of owning the Bank and investing the proceeds of
the Conversion that are retained by the Company. The Company has received the
approval of the Office of Thrift Supervision (the "OTS") to acquire the Bank.
The executive office of the Company is located at 401 West Innes Street,
Salisbury, North Carolina, and its telephone number is (704) 633-2341.
CITIZENS BANK, FSB
The Bank, which has been in operation since 1907, converted from a North
Carolina-chartered mutual savings bank to a federally-chartered mutual savings
bank effective September 2, 1998. The Bank offers a variety of financial
services to meet the needs of the communities it serves from its three full
service offices located in Salisbury, Statesville and Rockwell, North Carolina.
The Bank is a member of the FHLB system and its deposits are federally insured
by the FDIC under the SAIF to the maximum amount permitted by law. The Bank
emphasizes residential mortgage lending, primarily originating one-to-four-
family mortgage loans in its primary market area, consisting of communities
within a 10-mile radius of its offices and includes portions of Rowan and
Iredell Counties, North Carolina. The Bank also makes home equity loans,
nonresidential loans, multi-family residential loans, construction and
development loans, commercial loans and consumer loans. The Bank sells a
portion of its loan production into the secondary market to reduce its interest
rate risk exposure. At June 30, 1998, the Bank had total assets of $192.7
million, deposits of $159.8 million, and equity of $15.6 million.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Bank has fixed the close of business on
October 30, 1998 (the "Voting Record Date") as the record date for determining
the members entitled to notice of and to vote at the Special Meeting. The
Bank's depositors (including beneficial owners of Individual Retirement Accounts
("IRAs") or Keogh accounts) are members of the Bank entitled to vote under its
current Charter and Bylaws. The legal owners of other fiduciary accounts,
rather than the beneficial owners, will be treated as the member entitled to
cast the votes for such account, unless the trust agreement or any other
agreement relating to the fiduciary's authority provides otherwise.
At the Special Meeting, each depositor member (including IRA and Keogh
account beneficiaries) will be entitled to cast one vote for each $100, or
fraction thereof, of the aggregate withdrawal value of all of such depositor's
accounts in the Bank as of the Voting Record Date, up to a maximum of 1,000
votes. In general, accounts held in different ownership capacities will be
treated as separate memberships for purposes of applying the 1,000 vote
limitation. For example, if two persons hold a $100,000 account in their joint
names and each of the persons also holds a separate account for $100,000 in his
own name, each person would be entitled to 1,000 votes for each separate account
and they would together be entitled to cast 1,000 votes on the basis of the
joint account. Where no proxies are received from IRA and Keogh account
beneficiaries, after due notification, the Bank, as trustee of these accounts,
is entitled to vote these accounts in favor of the Plan of Conversion.
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Any number of members represented in person or by proxy at the Special
Meeting will constitute a quorum for the transaction of business. The
affirmative vote of at least a majority of the total outstanding votes of the
Bank's members eligible to be cast at the Special Meeting is required for
approval of the Plan of Conversion. As of the Voting Record Date, the Bank's
records disclose that there were _______________ votes entitled to be cast at
the Special Meeting, of which ____________________ votes would represent a
majority.
Members may vote at the Special Meeting in person or by proxy. Each proxy
solicited hereby, if properly executed, duly returned by the date of the Special
Meeting, and not revoked prior to or at the Special Meeting, will be voted at
the Special Meeting in accordance with the member's instructions indicated
thereon. IF NO VOTING INSTRUCTIONS ARE INDICATED ON THE PROXY CARD, THE PROXY
WILL BE VOTED FOR THE PLAN OF CONVERSION. If any other matters are properly
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presented before the Special Meeting, the proxies solicited hereby will be voted
on such matters in accordance with the best judgment of the proxyholders named
therein. Management of the Bank is not aware of any other business to be
presented at the Special Meeting.
Any member giving a proxy may revoke it at any time before it is voted by
delivering to the Secretary of the Bank before or at the Special Meeting either
a written revocation of the proxy or by delivering to the Secretary of the Bank
prior to the Special Meeting a duly executed proxy bearing a later date, or by
attending the Special Meeting and voting in person. Proxies are being solicited
only for use at the Special Meeting and any and all adjournments thereof and
will not be used for any other meeting. No previously provided general proxies
will be voted at the Special Meeting for approval of the Plan of Conversion.
The Board of Directors' solicitation of proxies for the Special Meeting is
being made by means of this Proxy Statement. It may be followed by further
letters and personal calls to members by employees or agents of the Bank. All
costs of this proxy solicitation will be paid by the Bank.
The directors and executive officers of the Bank were entitled to cast
_________________ votes as of the Voting Record Date for the Special Meeting.
RECOMMENDATION OF MANAGEMENT
THE BOARD OF DIRECTORS OF THE BANK RECOMMENDS THAT YOU VOTE FOR THE PLAN OF
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CONVERSION.
THE DIRECTORS AND CERTAIN OFFICERS OF THE BANK HAVE A PERSONAL INTEREST IN
THE APPROVAL OF THE CONVERSION TO THE EXTENT THAT THEY WILL RECEIVE CERTAIN
BENEFITS AS A RESULT OF THE CONVERSION. SEE "BENEFITS TO DIRECTORS AND
EMPLOYEES" IN THIS PROXY STATEMENT AND "MANAGEMENT OF THE BANK" IN THE
PROSPECTUS.
FAILURE TO VOTE IN FAVOR OF THE PLAN OF CONVERSION, IN PERSON OR BY PROXY,
WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PLAN OF CONVERSION. VOTING IN
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FAVOR OF THE PLAN OF CONVERSION WILL NOT OBLIGATE ANY PERSON TO SUBSCRIBE FOR
THE PURCHASE OF ANY STOCK, AND VOTING AGAINST THE PLAN OR FAILING TO VOTE WILL
NOT PRECLUDE ANY SUCH PURCHASE.
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THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK HAS ADOPTED AND THE OTS HAS APPROVED
COMPLETION OF THE TRANSACTIONS DESCRIBED IN THE PLAN OF CONVERSION SUBJECT TO
APPROVAL BY THE MEMBERS OF THE BANK AND TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS. APPROVAL BY THE OTS DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN OF CONVERSION BY THE OTS.
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 change, 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 of Conversion. 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 has
any agreement or understanding with respect to any possible business
combination.
The Board of Director's adoption of the Plan of Conversion is subject to
approval by the members of the Bank and receipt of required regulatory
approvals. Pursuant to the Plan of Conversion, the Bank will be converted from
a federally-chartered mutual savings bank to a federally-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 October 29, 1998, the OTS approved the Bank's
application for Conversion, subject to approval of the Plan of Conversion by the
members of the Bank and satisfaction of certain other conditions. The Special
Meeting will be held on December 10, 1998 for the purpose of considering
approval of the Plan of Conversion.
THE FOLLOWING IS A SUMMARY OF ALL MATERIAL PROVISIONS OF THE PLAN OF
CONVERSION. IT IS QUALIFIED IN ITS ENTIRETY BY THE PROVISIONS OF THE PLAN OF
CONVERSION, WHICH CONTAINS A MORE DETAILED DESCRIPTION OF THE TERMS OF THE
CONVERSION. THE PLAN OF CONVERSION IS ATTACHED AS ATTACHMENT I TO THE BANK'S
PROXY STATEMENT FOR THE SPECIAL MEETING WHICH HAS BEEN DELIVERED TO ANYONE WHO
RECEIVES A PROSPECTUS. THE PLAN OF CONVERSION CAN ALSO BE OBTAINED BY WRITTEN
REQUEST FROM THE BANK. See "ADDITIONAL INFORMATION AND ORDER FORMS."
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
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commercial banks, other business entities and a substantial number of savings
institutions. Conversion to a federally-chartered capital stock savings bank and
the formation of a holding 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" in the Prospectus.
Formation of the Company will provide greater flexibility than the Bank
would otherwise have to expand and diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
with, both mutual and stock institutions, as well as other companies. However,
there are no current plans, arrangements, understandings or agreements regarding
any such business combinations.
EFFECTS OF CONVERSION
GENERAL. Each person with a deposit account in the Bank has pro rata
rights, based upon the balance in his or her account, in the net worth of the
Bank upon liquidation. However, this right is tied to the depositor's account
and has no tangible market value separate from such deposit account. Further,
the Bank's depositors can realize value with respect to their interests only in
the unlikely event that the Bank is liquidated and has a positive net worth. In
such an event, the depositors of record at that time, as owners, would share pro
rata in any residual surplus after other claims, including those with respect to
the deposit accounts of depositors, are paid.
Upon the Bank's Conversion, its Charter will be amended to authorize the
issuance of permanent nonwithdrawable capital stock to represent the ownership
of the Bank. 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.
VOTING RIGHTS. Under the Bank's current Charter, deposit account holders
have voting rights with respect to certain matters relating to the Bank,
including the election of directors. After the Conversion, (i) neither deposit
account holders nor borrowers will have voting rights with respect to the Bank
and will therefore not be able to elect directors of the Bank or control its
affairs; (ii) voting rights with respect to the Bank will be vested in the
Company as the sole stockholder of the Bank; and (iii) voting rights with
respect to the Company will be vested in the Company's stockholders. Each
purchaser of Common Stock will be entitled to vote on any matters to be
considered by the Company's stockholders. For a description of the voting
rights of the holders of Common Stock, see "DESCRIPTION OF CAPITAL STOCK" in the
Prospectus.
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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 offices 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 in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a complete
liquidation of the Bank, each holder of a deposit account in the Bank in its
present mutual form would receive his or her pro rata share of any assets of the
Bank remaining after payment of claims of all creditors (including the claims of
all depositors in the amount of the withdrawal value of their accounts). Such
holder's pro rata share of such remaining assets, if any, would be in the same
proportion of such assets as the balance in his or her deposit account was to
the aggregate balance in all deposit accounts in the Bank at the time of
liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of a complete liquidation of the Bank,
would have a claim of the same general priority as the claims of all other
general creditors of the Bank in addition to the protection of FDIC insurance up
to applicable limits. Therefore, except as described below, the deposit account
holder's claim would be solely in the amount of the balance in his or her
deposit account plus accrued interest. The holder would have no interest in the
assets of the Bank above that amount.
The Plan of Conversion provides that there shall be established, upon the
completion of the Conversion, a special "liquidation account" for the benefit of
Eligible Account Holders (i.e., eligible depositors at December 31, 1996) and
Supplemental Eligible Account Holders (eligible depositors at September 30,
1998) in an amount equal to the net worth of the Bank as of the date of its
latest consolidated statement of financial condition contained in the final
prospectus relating to the sale of shares of Company Common Stock in the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account held in the Bank on the qualifying date. An Eligible Account
Holder and Supplemental Eligible Account Holder's interest as to each deposit
account would be in the same proportion of the total liquidation account as the
balance in his or her account on December 31, 1996 and September 30, 1998,
respectively, was to the aggregate balance in all deposit accounts of Eligible
Account Holders and Supplemental Eligible Account Holders on such dates.
However, if the amount in the deposit account of an Eligible Account Holder or
Supplemental Eligible Account Holder on any annual closing date of the Bank is
less than the lowest amount in such account on December 31, 1996 or September
30, 1998 and on any subsequent closing date, then the account holder's interest
in this special liquidation account would be reduced by an amount proportionate
to any such reduction, and the account holder's interest would cease to exist if
such deposit account were closed.
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In addition, the interest in the special liquidation account would never be
increased despite any increase in the balance of the account holders' related
accounts after Conversion.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders were satisfied would be
distributed to the Company as the sole stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether the
Bank, as converted, or another SAIF-insured institution is the surviving
institution, is deemed to be a complete liquidation for purposes of distribution
of the liquidation account. In any such transactions, the liquidation account
would be assumed by the surviving institution.
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
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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.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES OF THE CONVERSION PARTICULAR TO THEM.
COMMON STOCK. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Description of Capital
Stock." COMMON STOCK ISSUED UNDER THE PLAN OF CONVERSION CANNOT, AND WILL NOT,
BE INSURED BY THE FDIC OR ANY OTHER GOVERNMENTAL AGENCY.
THE BANK WILL CONTINUE, IMMEDIATELY AFTER COMPLETION OF THE CONVERSION, TO
PROVIDE ITS SERVICES TO DEPOSITORS AND BORROWERS PURSUANT TO ITS EXISTING
POLICIES AND WILL RETAIN THE EXISTING MANAGEMENT AND EMPLOYEES OF THE BANK.
OTHER THAN FOR PAYMENT OF CERTAIN EXPENSES INCIDENT TO THE CONVERSION, NO ASSETS
OF THE BANK WILL BE DISTRIBUTED IN THE CONVERSION. THE BANK WILL CONTINUE TO BE
A MEMBER OF THE FHLB SYSTEM, AND ITS DEPOSIT ACCOUNTS WILL CONTINUE TO BE
INSURED BY THE FDIC UP TO APPLICABLE LIMITS. THE AFFAIRS OF THE BANK WILL
CONTINUE TO BE DIRECTED BY THE EXISTING BOARD OF DIRECTORS AND MANAGEMENT.
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
residing or located in the Local Community and trusts, 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 ("Selected Dealers") to
be formed and managed by Trident Securities acting as agent of the Company in
the sale of the Common Stock. See "-- Syndicated Community Offering." The Plan
of Conversion 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 OTS 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 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 OTS 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 December 8, 1998, unless, with the approval of the
OTS, the Offering period is extended by the
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Company and the Bank. The Community Offering, if any, may begin at any time
after the Subscription Offering begins and will terminate at the Expiration Time
or at any time thereafter, but not later than January 25, 1999, unless extended
with the approval of the OTS. 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 federal conversion regulations, be
completed within 45 days after the Expiration Time unless such period is
extended with the approval of the OTS. In the event such an extension is
approved, subscribers would be resolicited and would be given the opportunity to
increase (subject to maximum purchase limitations), decrease (subject to minimum
purchase limitations) or rescind their subscriptions. If a subscriber fails to
respond to the resolicitation by the end of the resolicitation period, the
subscription of such subscriber will be canceled, funds submitted with the
subscription will be refunded promptly with interest at the Bank's passbook
savings rate, and holds on accounts from which withdrawals were designated will
be released. Any such solicitation will be by means of an amended prospectus
filed with the SEC. In such event, substantial additional printing, legal and
accounting expenses may be incurred in completing the Conversion.
The commencement and completion of any required Community or Syndicated
Community Offering may 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 of Conversion requires that the Conversion be
completed within 24 months after the date of approval of the Plan of Conversion
by the Bank's members.
SUBSCRIPTION OFFERING
In accordance with OTS conversion regulations, non-transferable
Subscription Rights have been granted under the Plan of Conversion to the
following persons in the following order of priority: (1) Eligible Account
Holders (savings account holders (including all types of demand deposit
accounts) of the Bank maintaining an aggregate balance of $50 or more as of
December 31, 1996), provided, however, that the ESOP shall have first priority
Subscription Rights to the extent that the total number of shares of Common
Stock sold in the Conversion exceeds the maximum of the Estimated Valuation
Range, (2) the ESOP; provided, however, that the ESOP shall have first priority
Subscription Rights to the extent that the total number of shares of Common
Stock sold in the Conversion exceeds the maximum of the Estimated Valuation
Range, (3) Supplemental Eligible Account Holders (savings account holders
(including all types of demand deposit accounts) of the Bank maintaining a
balance of $50 or more as of September 30, 1998), (4) Other Members (depositors
of the Bank and borrowers of the Bank at the close of business on October 30,
1998, the voting record date for the Special Meeting) and (5) officers,
directors and employees of the Bank. All subscriptions received will be subject
to the availability of the Company's Common Stock after satisfaction of all
subscriptions of all persons having prior rights in the Subscription Offering,
and to the maximum and minimum purchase limitations set forth in the Plan of
Conversion. See "-- Minimum and Maximum Purchase Limitations."
ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder has been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to the greater of $600,000 of Common Stock, one-tenth of one
percent of the total offering of Common Stock or 15 times the product
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(rounded down to the next whole number) obtained by multiplying the total number
of shares of Common Stock to be issued by a fraction of which the numerator is
the amount of the qualifying deposit of the Eligible Account Holder and the
denominator is the total amount of qualifying deposits of all Eligible Account
Holders. 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. Subscription Rights received by officers and directors
in this category based on their increased deposits in the Bank in the one-year
period preceding December 31, 1996 are subordinated to the Subscription Rights
of other Eligible Account Holders.
ESOP. The ESOP has been granted, without payment therefore, Subscription
Rights to purchase a number of shares equal to 8% of the aggregate number of
shares issued in the Conversion on a second priority basis. The ESOP intends to
purchase a total of 8% of the Common Stock issued in the Conversion under this
category. In the event the number of shares offered in the Conversion is
increased above the maximum of the Estimated Valuation Range, the ESOP shall
have a first priority right to purchase any such shares exceeding the maximum of
the Estimated Valuation Range up to an aggregate of 8% of the Common Stock.
However, the ESOP may purchase all or part of its shares in the open market
after the consummation of the Conversion.
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders and the ESOP, each Supplemental Eligible Account Holder has been granted
without payment therefore, non-transferable Subscription Rights to purchase
Common Stock up to the greater of $600,000 of Common Stock, one-tenth of one
percent of the total offering of Common Stock or 15 times the product (rounded
down to the next whole number) obtained by multiplying the total number of
shares of Common Stock to be issued by a fraction of which the numerator is the
amount of the qualifying deposit of the Supplemental Eligible Account Holder and
the denominator is the total amount of qualifying deposits of all Supplemental
Eligible Account Holders. If Supplemental Eligible Account Holders subscribe
for more shares of Common Stock than are available for purchase, the shares
offered will first be allocated among the subscribing Supplemental Eligible
Account Holders so as to enable each subscribing Supplemental Eligible Account
Holder to the extent possible, to purchase the number of shares necessary to
make his or her total allocation of Common Stock equal to the lesser of 100
shares of Common Stock or the number of shares subscribed for by such
Supplemental Eligible Account Holder. Any shares remaining after such
allocation will be allocated among the subscribing Supplemental Eligible Account
Holders whose subscriptions remain unsatisfied in the proportion that each such
Supplemental Eligible Account Holder's Qualifying Deposits bears to the total of
the Qualifying Deposits of all such Supplemental Eligible Account Holders.
OTHER MEMBERS. To the extent that shares remain available for purchase
after satisfaction of subscriptions of Eligible Account Holders, the ESOP and
Supplemental Eligible Account Holders, Other Members, other than Eligible
Account Holders and Supplemental Eligible Account Holders, have each been
granted, without payment therefor, non-transferable Subscription Rights to
purchase Common Stock up to the greater of $600,000 of Common Stock or one-tenth
of one percent of the total offering of Common Stock in the Conversion. If
Other Members subscribe for more shares of Common Stock than remain available
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for purchase by Other Members, shares will be allocated among the subscribing
Other Members in the proportion that the number of votes eligible to be cast by
each Other Member bears to the total number of votes eligible to be cast at the
Special Meeting by all Other Members whose subscriptions remain unsatisfied.
EMPLOYEES, OFFICERS AND DIRECTORS. To the extent that shares remain
available for purchase after satisfaction of subscriptions of Eligible Account
Holders, the ESOP, Supplemental Eligible Account Holders and Other Members, the
Bank's employees, officers and directors who are not Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members have each been granted,
without payment therefor, non-transferable Subscription Rights to purchase
Common Stock up to $600,000, so long as the aggregate of such purchases does not
exceed 21% of the shares of Common Stock issued in the Conversion. If more
shares are subscribed for by such employees, officers and directors than are
available for purchase by them, the available shares will be allocated among
subscribing employees, officers and directors pro rata on the basis of the
amount of their respective subscriptions.
COMMUNITY OFFERING
Any shares of Common Stock which remain unsubscribed for in the
Subscription Offering may be offered by the Company to members of the general
public in the Community Offering, which may commence at any time after
commencement of the Subscription Offering, with priority given to natural
persons and trusts of natural persons residing or located in Rowan and Iredell
Counties in North Carolina (the "Local Community"), including IRA accounts,
Keogh accounts and similar retirement accounts established for the benefit of
natural persons who are residents of the Local Community. The Community
Offering may terminate at the Expiration Time or at any time thereafter, but no
later than January 25, 1999, unless further extended with the consent of the
OTS. The Offerings may not be extended beyond December 10, 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 60,000 shares, which number
shall be determined by the Board of Directors of the Bank prior to the time the
Conversion is consummated with the intent to provide for a wide distribution of
shares among such subscribers. Any shares remaining after such allocation will
be allocated to each First Priority Community Subscriber whose order is accepted
in full or in part on an equal number of shares basis until all orders are
filled. Such allocation shall also be applied to
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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 of Conversion 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 Selected Dealers 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. No person will be permitted to
subscribe in the Syndicated Community Offering for shares of Common Stock with
an aggregate purchase price of more than $600,000.
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 will be returned
promptly with interest to the Selected Dealers, who, in turn, will promptly
credit their customers' brokerage accounts.
The Syndicated Community Offering may close at any time after the
Expiration Time at the discretion of the Bank and the Company, but in no case
later than January 25, 1999, unless further extended with the consent of the
OTS. The Offering may not be extended beyond December 10, 2000.
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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 Offerings 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 the Bank's financial advisor
and sales agent, Trident Securities, and was based upon a number of factors,
including the market price per share of stock of other thrift institutions. The
OTS regulations governing conversions of federally-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 OTS 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 condition following commencement of the
Subscription Offering.
OTS 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 $29,000 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
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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 October 16, 1998, the Estimated
Valuation Range of the Bank and the Company was from a minimum of $14,450,000 to
a maximum of $19,550,000, with a midpoint of $17,000,000. 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 1,445,000
shares to a maximum of 1,955,000 shares, with a midpoint of 1,700,000 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.
Upon completion of the Offerings, 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 OTS, 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 $22,482,500 (2,248,250 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. In addition, it is possible that the
Company would issue an additional 3% of the total shares sold under certain
circumstances involving an improper allocation of shares in the Conversion.
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
and the OTS, 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 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 OTS, 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 of
Conversion may be terminated or such other actions as the OTS may permit may be
taken.
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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 of Conversion 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 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.
A copy of the complete appraisal by Ferguson is on file and available for
inspection at the principal office of the OTS, 1700 G Street, N.W., Washington,
D.C. 20552 and at the Southeast Regional Office of the OTS, 1475 Peachtree
Street, N.E., Atlanta, Georgia 30309. A copy is also available for inspection
at the Stock Information Center, 401 West Innes Street, Salisbury, North
Carolina 28144. 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 AND ORDER FORMS."
EXERCISE OF SUBSCRIPTION RIGHTS AND PURCHASES IN THE 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 Form (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 of the
Bank's deposit accounts (other than negotiable order of withdrawal accounts or
other demand deposit accounts), must be received by the Bank by the Expiration
Time, which is 12:00 noon, Eastern Time, on December 8, 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 Form, 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 or any time subsequent to the
Expiration Time. No orders will be accepted from persons who do not have
Subscription Rights in the Subscription Offering unless a Community Offering is
commenced.
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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 a corrected Order Form or the remittance of full payment for
subscribed shares by such date as the Bank may 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, and 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 of Conversion and
of any acceptability of any Order Form will be final. The Bank has the right to
investigate any irregularity on any Order Form. Persons wishing to use funds in
a Bank IRA to purchase Common Stock must visit the Stock Information Center on
or before December 1, 1998 in order to complete that purchase so that the
necessary forms may be forwarded for execution and returned prior to the
Expiration Time.
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 OTS, or to waive or permit correction of incomplete or
improperly executed Order Forms, but does not represent that it will do so.
The amount to be remitted with an Order Form shall be the aggregate dollar
amount that a subscriber or purchaser desires to invest in the Subscription and
Community Offerings. Complete payment must accompany all completed Order Forms
submitted in the Subscription and Community Offerings in order for subscriptions
to be valid. See "-- Purchase Price of Common Stock and Number of Shares
Offered."
Payment for shares will be permitted to be made by any of the following
means: (i) in cash, if delivered in person to any 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.
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Interest will be paid by the Bank on payments for Common Stock made in cash
or by check, bank draft, negotiable order of withdrawal or money order at the
Bank's passbook savings rate. Such interest shall be paid from the date the
order is accepted for processing and payment in good funds is received by the
Bank until consummation or termination of the Conversion. The Bank shall be
entitled to invest all amounts paid on subscriptions for Common Stock for its
own account until completion or termination of the Conversion. The Bank may not
knowingly lend funds or otherwise extend credit to any person to purchase Common
Stock. After amounts submitted for payment are applied to the purchase price for
shares sold, they will no longer earn interest, and they will not be insured by
the FDIC or any other government agency or other entity.
The Stock Order Forms contain appropriate means by which authorization of
withdrawals from deposit accounts may be made to pay for subscribed shares.
Once such a withdrawal has been authorized, none of the designated withdrawal
amount may be withdrawn (except by the Bank as payment for Common Stock) until
the Conversion is completed or terminated. Savings accounts will be permitted
to be established for the purpose of making payment for subscribed shares of
Common Stock. Funds authorized for withdrawal will continue to earn interest at
the applicable contract interest rate until completion or termination of the
Conversion or, in the case of an order submitted in the Community Offering,
until it is determined that such order cannot or will not be accepted.
Notwithstanding any regulatory provision regarding penalties for early
withdrawal from certificate accounts, payment for subscribed shares of Common
Stock will be permitted through authorization of withdrawals from such accounts
without the assessment of such penalties. However, if after such withdrawal the
applicable minimum balance requirement ceases to be satisfied, such certificate
account will be canceled and the remaining balance thereof will earn interest at
the Bank's passbook savings rate.
Upon completion or termination of the Conversion, the Bank will return to
subscribers all amounts paid with subscriptions which are not applied to the
purchase price for shares, plus interest at its passbook savings rate from the
date good funds are received until the consummation or termination of the
Conversion, and the Bank will release deposit account withdrawal orders given in
connection with the subscriptions to the extent funds are not withdrawn and
applied toward the purchase of shares.
DELIVERY OF STOCK CERTIFICATES
Certificates representing Common Stock issued in the Conversion will be
mailed by the Company's transfer agent to persons entitled thereto at the
address of such persons appearing on the 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
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Subscription Rights under the Plan of Conversion 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 of Conversion
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) a management fee equal to .25% of the aggregate dollar amount of Common
Stock sold in the Offerings; and (b) a commission equal to 2.0% of the aggregate
dollar amount of Common Stock sold in the Subscription and Community Offerings,
excluding shares purchased by the ESOP, directors, executive officers and their
"associates" (as defined in the Plan of Conversion). The Bank has also agreed
to pay to Selected Dealers, if any, negotiated commissions.
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 $241,000 and $409,000 at the minimum and 15% above the maximum,
respectively, of the Estimated Valuation Range. See "PRO FORMA DATA" in the
Prospectus for the assumptions used to determine these estimates.
Sales of Common Stock will be made primarily through registered
representatives affiliated with Trident Securities or by Selected 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
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<PAGE>
provide advice regarding the purchase of Common Stock. A Stock Information
Center has been 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
The Plan of Conversion provides for certain limitations to be placed upon
the purchase of Common Stock by eligible subscribers and others in the
Conversion. Each subscriber must subscribe for a minimum of 50 shares. With
the exception of the ESOP, which is expected to subscribe for 8% of the shares
of Common Stock issued in the Conversion, the Plan of Conversion provides that
no person (including all persons on a joint account), either alone or together
with associates of or persons acting in concert with such person, may purchase
in the Conversion shares of Common Stock with an aggregate purchase price of
more than $600,000 (subject to certain exceptions). For purposes of the Plan of
Conversion, the directors of the Bank and of the Company are not deemed to be
acting in concert solely by reason of their Board membership. Pro rata
reductions within each Subscription Rights category will be made in allocating
shares to the extent that the maximum purchase limitations are exceeded.
The Bank's and the Company's Boards of Directors may, in their sole
discretion, increase the maximum purchase limitation set forth above up to 9.99%
of the shares of Common Stock sold in the Conversion, provided that orders for
shares which exceed 5% of the shares of Common Stock sold in the Conversion may
not exceed, in the aggregate, 10% of the shares sold in the Conversion. The
Bank and the Company do not intend to increase the maximum purchase limitation
unless market conditions are such that an increase in the maximum purchase
limitation is necessary to sell a number of shares in excess of the minimum of
the Estimated Valuation Range. If the Boards of Directors decide to increase
the maximum purchase limitation, persons who subscribed for the maximum number
of shares of Common Stock will be, and other large subscribers in the discretion
of the Company and the Bank may be, given the opportunity to increase their
subscriptions accordingly, subject to the rights and preferences of any person
who has priority Subscription Rights.
19
<PAGE>
The Plan of Conversion 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 parent or 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, excluding any tax-qualified employee
stock benefit plans.
For purposes of the foregoing limitations, (i) directors and officers of
the Bank or the Company shall not be deemed to be associates or a group of
persons acting in concert solely as a result of their serving in such
capacities, (ii) the ESOP will not be deemed to be acting in concert with any of
its trustees for purposes of determining the number of shares which any such
trustee, individually, may purchase and (iii) shares of Common Stock held by the
ESOP and attributed to an individual will not be aggregated with other shares
purchased directly by, or otherwise attributable to, that individual.
For purposes of the foregoing limitations, persons will be deemed to be
"acting in concert" if they are (i) knowingly participating in a joint activity
or interdependent conscious parallel action towards a common goal (whether or
not pursuant to an express agreement), with respect to the purchase, ownership,
voting or sale of Common Stock or (ii) engaged in a combination or pooling of
voting or other interests in the securities of the Company for a common purpose
pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise. THE COMPANY AND THE BANK WILL
PRESUME THAT CERTAIN PERSONS ARE ACTING IN CONCERT BASED UPON, AMONG OTHER
THINGS, JOINT ACCOUNT RELATIONSHIPS, ACCOUNTS WITH THE SAME ADDRESS AND THE FACT
THAT SUCH PERSONS HAVE FILED JOINT SCHEDULES 13D WITH THE SEC WITH RESPECT TO
OTHER COMPANIES.
APPROVAL, INTERPRETATION, AMENDMENT AND TERMINATION
Under the Plan of Conversion, the OTS's approval thereof, and applicable
OTS conversion regulations, consummation of the Conversion is subject to
satisfaction of certain conditions, including the following: (i) approval of the
Plan of Conversion 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 OTS, and (iii) receipt by the Company and the Bank of favorable opinions
of counsel or other tax advisor as to the federal and state tax consequences of
the Conversion. See "-- Income Tax Consequences."
If all conditions for consummation of the Conversion are not satisfied, no
Common Stock will be issued, the Bank will continue to operate as federally-
chartered mutual savings bank, all subscription funds
20
<PAGE>
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 of Conversion
and of the Order Forms and related materials for the Subscription and Community
Offering will be final, subject to the authority of the OTS. 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 of
Conversion 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 OTS. If the Bank determines upon the advice of counsel and
after consultation with the OTS 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 OTS, the Plan of
Conversion 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 OTS, notwithstanding approval of the Plan
of Conversion by the Members at the Special Meeting. The Plan of Conversion
terminates automatically 24 months after the Special Meeting.
CERTAIN RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS; FALSE OR MISLEADING
ORDER FORMS
THE SUBSCRIPTION RIGHTS GRANTED UNDER THE PLAN OF CONVERSION 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 of
Conversion 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 of Conversion 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 OTS as to compliance with
all regulations governing the Conversion, including the nontransferability of
Subscription Rights.
The Plan of Conversion 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 of Conversion or (iii) fails to cooperate with attempts
21
<PAGE>
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.
RESTRICTIONS ON REPURCHASE OF STOCK
Except as permitted by applicable regulations, for a period of three years
following Conversion, the Company may not repurchase any shares of its capital
stock, except in the case of an offer to repurchase on a pro rata basis made to
all holders of capital stock of the Company. Any such offer shall be subject to
the prior approval of the OTS. Furthermore, the Company may not repurchase any
of its stock (i) if the result thereof would be to reduce the regulatory capital
of the Bank below the amount required for the liquidation account to be
established pursuant to OTS regulations and (ii) except in compliance with the
requirements of the OTS capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Company may repurchase its capital stock provided (i)
no repurchases occur within one year following the Conversion (subject to
certain exceptions), (ii) repurchases during the second and third year after
conversion are part of an open market stock repurchase program that does not
allow for a repurchase of more than 5% of the Company's outstanding capital
stock during a 12-month period, (iii) the repurchases do not cause the Bank to
become undercapitalized, and (iv) the Company provides notice to the OTS at
least ten days prior to the commencement of a repurchase program and the OTS
does not object to such regulations. In addition, the above limitations do not
preclude repurchases of capital stock by the Company in the event applicable
federal regulatory limitations are subsequently liberalized.
STOCK PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as to the approximate
purchase of Common Stock by each director and executive officer of the Bank,
including their associates, as defined by applicable regulations. No individual
has entered into a binding agreement with respect to such intended purchases,
and, therefore, actual purchases could be more or less than indicated below.
Directors and officers of the Bank and their associates may not purchase in
excess of 32% of the shares sold in the Conversion. For purposes of the
following table, it has been assumed that sufficient shares will be available to
satisfy subscriptions in all categories. Directors, officers and employees will
pay the same price -- $10.00 -- for the shares for which they subscribe as the
price that will be paid by all other subscribers.
22
<PAGE>
<TABLE>
<CAPTION>
ANTICIPATED
ANTICIPATED NUMBER PERCENT OF SHARES PERCENT OF SHARES
AMOUNT OF SHARES AT MINIMUM OF AT MAXIMUM OF
TO BE PAID TO BE ESTIMATED ESTIMATED
NAME FOR SHARES/(1)/ PURCHASED VALUATION RANGE VALUATION RANGE
- ---- ---------- --------- --------------- ---------------
<S> <C> <C> <C> <C>
Ronald E. Bostian $ 600,000 60,000 4.15% 3.07%
Chairman, CEO, and President
Harold C. Earnhardt 420,000 42,000 2.91% 2.15%
Vice Chairman
Malcolm B. Blankenship, Jr. 390,000 39,000 2.70% 1.99%
Director
James W. Duke 270,000 27,000 1.87% 1.38%
Director
K.V. Epting, Jr. 105,000 10,500 0.73% 0.54%
Director
Gordon P. Hurley 600,000 60,000 4.15% 3.07%
Director
Bobby A. Lomax 180,000 18,000 1.24% 0.92%
Director
Jeffrey C. Chisholm 600,000 60,000 4.15% 3.07%
Senior Vice President/
Chief Lending Officer
Dianne E. Hawkins 105,000 10,500 0.73% 0.54%
Vice President, Treasurer and Controller ---------- ------- ----- -----
Total $3,270,000 327,000 22.63% 16.73%
========== ======= ===== =====
</TABLE>
_______________
(1) Subscriptions by the ESOP are not aggregated with shares of Common Stock
purchased by the executive officers and directors listed above. It is
expected that the ESOP will acquire 8% of the shares issued in the
Conversion. Recipients of shares under the ESOP will have voting control
over the shares allocated to them, and trustees of the ESOP (directors of
the Bank) will have voting control over unallocated shares. See
"MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan." Also, 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."
Without the prior written consent of the OTS, 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 (i) upon death of
the director or executive officer or (ii) by reason of an exchange of securities
in connection with a merger or acquisition approved by the applicable regulatory
authorities. Such restriction
23
<PAGE>
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 OTS 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
unless the prior written approval of the OTS is obtained. This provision does
not apply to negotiated transactions involving more than 1% of the Company's
outstanding Common Stock or to purchases of stock made by or held by one or more
tax-qualified or non-tax-qualified employee stock benefit plans of the Bank or
the Company which may be attributable to individual executive officers or
directors. Purchases and sales of Common Stock by officers and directors will
also be subject to the short-swing trading prohibitions contained in Section
16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and the
short-swing trading and other rules promulgated pursuant to the Exchange Act.
BENEFITS TO DIRECTORS AND EMPLOYEES
In connection with this Conversion, certain benefits will be provided to
directors, officers and employees of the Bank.
Employment Agreement. In connection with the Conversion, the Bank will
enter into an employment agreement with Ronald E. Bostian, 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 $147,528 and for an initial term of
employment of three years. Commencing on the first anniversary date and
continuing on each anniversary date thereafter, following a performance
evaluation of the employee, each agreement may be extended for an additional
year so that the remaining term shall be three years, unless written notice of
non-renewal is given by the Board of Directors. The agreements also provide
that the base salary shall be reviewed by the Board of Directors not less often
than annually. In addition, the employment agreement provides for possible
profitability and discretionary bonuses and participation in all other pension,
profit-sharing or retirement plans maintained by the Bank or the Company for
employees of the Bank, as well as fringe benefits normally associated with the
employee's office. The employment agreement provides that Mr. Bostian 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 the
employee. In the event of a change in control (as defined below) in lieu of
continuing to be entitled to receive a profitability bonus, Mr. Bostian'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.
The employment agreement provides that in the event of a change in control
of the Bank or the Company, the acquiror shall be bound by the terms of the
employment agreement for a period of three years beginning on the date of the
change in control and during such time the nature of Mr. Bostian's compensation,
duties or benefits cannot be diminished except as set forth in the agreement.
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
24
<PAGE>
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 agreement will be made to the employee's
beneficiary or the beneficiary's estate. See "MANAGEMENT OF THE BANK -
Employment Agreement" in the Prospectus.
Severance Plan. In connection with the Conversion, the Bank's Board of
Directors plans to adopt a Severance Plan for the benefit of its employees. The
Severance Plan provides that in the event there is a "change in control" (as
defined in the Severance Plan) of the Bank or the Company and (i) the Bank or
any successor of the Bank terminates the employment of any full time employee of
the Bank in connection with, or within 24 months after the change in control,
other than for "cause" (as defined in the Severance Plan), or (ii) an employee
terminates his or her employment with the Bank or any successor following a
decrease in the level of such employee's annual base salary rate or a transfer
of such employee to a location more than 40 miles distant from the employee's
primary work location within 24 months after a change in control, the employee
shall be entitled to a severance benefit equal to the greater of (a) an amount
equal to two weeks' salary at the employee's existing salary rate multiplied
times the employee's number of complete years of service as a Bank employee or
(b) the amount of one month's salary at the employee's salary rate at the time
of termination. Any officer of the Bank who, at the time of a "change in
control,"is a party to an employment agreement is not covered by the Severance
Plan. See "MANAGEMENT OF THE BANK - Severance Plan" in the Prospectus.
ESOP. The Bank has established the ESOP for its eligible employees. The
ESOP will become effective upon the Conversion. Employees with one year of
service with the Bank who have attained age 21 are eligible to participate. As
part of the Conversion, the ESOP intends to borrow funds from the Company and
use the funds to purchase up to 8% of the shares of Common Stock to be issued in
the Conversion, estimated to be between 115,600 and 156,400 shares assuming the
issuance of between 1,445,000 and 1,955,000 shares. Shares sold above the
maximum of the Estimated Valuation Range (1,955,000 shares) may be sold to the
ESOP to fill its subscription or the ESOP may purchase some or all of the shares
covered by its subscription after the Conversion in the open market.
Collateral for the Company's loan to the ESOP will be the Common Stock
purchased by the ESOP. It is expected that the loan will be repaid principally
from the Bank's discretionary contributions to the ESOP within ten years.
Regular cash dividends, if any, paid on shares held by the ESOP may also be used
to reduce the loan. It is anticipated that the interest rate for the loan will
be a commercially reasonable rate at the time of the loan inception. The loan
will not be guaranteed by the Bank. Shares purchased by the ESOP and pledged as
security for the loan will be held in a suspense account for allocation among
participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of relative compensation in the year of
allocation. Benefits will vest in full upon five years of service with credit
given for years of service prior to the Conversion. Benefits are payable upon
death or disability. The Bank's contributions to the ESOP are not fixed, so
benefits payable and corresponding expenses under the ESOP cannot be determined
although benefits payable and corresponding expenses have been estimated in
25
<PAGE>
preparing the pro forma computations set forth in this Prospectus. See "PRO
FORMA DATA" in the Prospectus.
In connection with the establishment of the ESOP, the Company will
establish a committee of the Board of Directors to administer the ESOP.
Trustees for the ESOP will also be appointed prior to the Conversion. The ESOP
committee may instruct the trustees regarding investment of funds contributed to
the ESOP. Participating employees shall instruct the trustees as to the voting
of all shares allocated to their respective accounts and held in the ESOP. The
unallocated shares held in the suspense account, and all allocated shares for
which voting instructions are not received, will be voted by the trustees in
their discretion subject to the provisions of ERISA.
The ESOP may be considered an "anti-takeover" device since the ESOP may
become the owner of a sufficient percentage of the total outstanding Common
Stock of the Company that the vote or decision whether to tender shares of the
ESOP may be used as a defense in a contested takeover. See "RESTRICTIONS ON
ACQUISITION OF THE COMPANY -- Anti-Takeover Effect of Employment Agreement and
Benefit Plans" in the Prospectus.
MRP. 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 12 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 recognize past service
and 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 MRP will be administered and interpreted by a committee of the board of
directors of the Bank that is composed solely of two or more "non-employee
directors", as defined by the Exchange Act. The board of directors of the Bank
will appoint the trustees of the trust established pursuant to the MRP (the "MRP
Trust"). The trustees will have the responsibility to invest all funds
contributed by the Bank to the 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.
Shares of Common Stock granted pursuant to the MRP will be in the form of
restricted stock which will vest over a period of time determined by the
committee. A recipient will be entitled to all voting and other stockholder
rights with respect to shares which have been awarded under the MRP. However,
until such shares have vested, they will be held in the MRP Trust. Such
unvested shares may not be sold, pledged
26
<PAGE>
or otherwise disposed of. In addition, any cash dividends or stock dividends
declared with respect to unvested share awards will be held by the MRP Trust for
the benefit of the recipients and such dividends, including any interest
thereon, will be paid out proportionately by the MRP Trust to the recipients
thereof as soon as practicable after the share awards become vested. The MRP
will provide that cash held by the MRP Trust pursuant to receipt of dividends,
including a special dividend or return of capital, on the Common Stock held by
the MRP Trust and unallocated to participants may be used to purchase additional
shares of Common Stock.
Under the terms of the MRP, if a recipient terminates employment for
reasons other than death or disability, the recipient will forfeit all rights to
the allocated shares which have not yet vested. All shares subject to an award
held by a recipient whose employment with or service to the Company, the Bank or
any subsidiary terminates due to death or disability, as defined in the MRP,
shall be vested as of the recipient's last day of employment with or service to
the Company, the Bank or any subsidiary and shall be distributed as soon as
practicable thereafter. All shares subject to an award held by a recipient also
shall be vested in the event a recipient ceases to be an employee or a director,
as applicable, following a change in control of the Company, as defined in the
MRP.
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 when the stock grants vest.
Assuming the issuance of 1,955,000 shares in the Conversion and receipt of
stockholder approval, 78,200 shares would be issued pursuant to the MRP and
allocated as follows:
27
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED NUMBER PERCENTAGE OF TOTAL
OF RESTRICTED SHARES RESTRICTED SHARES
RECIPIENT TITLE TO BE GRANTED ISSUED
- --------- ----- ------------- ------
<S> <C> <C> <C>
Malcolm B. Blankenship, Jr. Director 7,820 10.0%
James W. Duke Director 7,820 10.0%
Harold C. Earnhardt Vice Chairman 7.820 10.0%
K. V. Epting, Jr. Director 7,820 10.0%
Gordon P. Hurley Director 3,910 5.0%
Bobby A. Lomax Director 7,820 10.0%
Ronald E. Bostian Chairman, 15,640 20.0%
President, and
Chief Executive
Officer
Jeffrey C. Chisholm Senior Vice 9,775 12.5%
President and Chief
Lending Officer
Dianne E. Hawkins Vice President, 9,775 12.5%
Treasurer, and ------ -----
Controller
Total 78,200 100.0%
====== =====
</TABLE>
It is currently anticipated that 20% of the aggregate number of shares
granted to directors, officers and employees will be vested on the date of grant
promptly after shareholder approval of the MRP and that 20% of the aggregate
number of shares granted will vest on each of the next four annual anniversary
dates thereafter. The committee, in its sole and absolute discretion, may
provide for an accelerated vesting schedule for directors, officers and
employees who are eligible for retirement before the expiration of the
anticipated four-year vesting schedule. See "MANAGEMENT OF THE BANK" --
Proposed Management Recognition Plan" in the Prospectus.
Stock Options. 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 12 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 1,445,000 and 1,955,000 shares in the Conversion, an
aggregate
28
<PAGE>
of between 144,500 and 195,500 shares of Common Stock would be reserved for
issuance. However, some or all of the shares issued upon the exercise of options
granted under the 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
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.
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 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.
All options granted to participants under the Option Plan shall become
vested and exercisable at the rate determined by the committee when making an
award. Unvested options may not vest after a
29
<PAGE>
participant's employment with the Company, the Bank or any subsidiary is
terminated for any reason other than the participant's death, disability or
retirement. Unless the committee shall specifically state otherwise at the time
an option is granted, all options granted to participants shall become vested
and exercisable in full on the date an optionee terminates his employment with
or service to the Company, the Bank or any subsidiary because of his death,
disability or retirement. In addition, all stock options will become vested and
exercisable in full in the event that the optionee ceases to be an executive
officer, employee or director of the Bank or the Company for any reason
following a change in control of the Company, as defined in the Option Plan.
Options granted under the Option Plan will have a term of ten years.
Payment for shares purchased upon the exercise of options may be made
either in cash, by check, bank draft or money order or, if permitted by the
committee, by delivering shares of Common Stock (including shares acquired
pursuant to the exercise of an option) with a fair market value equal to the
total option price, or a combination of the foregoing. To the extent an
optionee already owns shares of Common Stock prior to the exercise of his or her
option, such shares could be used (if permitted by the committee) as payment for
the exercise price of the option. If the fair market value of a share of Common
Stock at the time of exercise is greater than the exercise price per share, this
feature would enable the optionee to acquire a number of shares of Common Stock
upon exercise of the option which is greater than the number of shares delivered
as payment for the exercise price. Because options may be exercised in part
from time to time, the ability to deliver Common Stock as payment of the
exercise price could enable the optionee to turn a relatively small number of
shares into a large number of shares.
It is expected that options granted under the Option Plan will be granted
in tandem with stock appreciation rights, pursuant to which optionees will have
the right to surrender exercisable options in exchange for payment by the
Company of an amount equal to the excess of the market value of shares of Common
Stock subject to the surrendered options over the exercise price of the
surrendered options. In the discretion of the committee, this payment may be
made in cash or in shares of Common Stock or in some combination of cash and
Common Stock. Stock appreciation rights shall terminate upon the exercise of
the options to which they are attached. Stock appreciation rights will be
subject to the same vesting and termination provisions as are applicable to the
stock options to which they are attached.
The Option Plan will provide that the Company's Board of Directors shall
have the discretionary authority to authorize cash payments to the holders of
unexercised options, both vested and unvested, equal to the amount of dividends
which would have been paid on shares subject to options if the options had been
exercised. No such payment may be made in connection with dividends or other
distributions which result in a reduction in the option exercise price. If an
optionee receives such a cash payment with respect to any unvested option, and
if such option is later forfeited, the optionee must repay any cash payment made
with respect to the forfeited option.
It is currently anticipated that 25% of the aggregate number of options
granted to executive officers and employees of the Company and the Bank will be
vested and exercisable on the date of grant and 25% of the aggregate number of
such options granted will vest and become exercisable on each of the next three
annual anniversary dates thereafter. It is expected that nonqualified stock
options granted to the nonemployee directors of the Company and the Bank will be
immediately vested and nonforfeitable.
Assuming the issuance of 1,955,000 shares in the Conversion and approval of
the Option Plan by the stockholders of the Company, the Board of Directors of
the Company and the Board of Directors of the Bank intend to grant options under
the Option Plan to the persons and in the amounts set forth below:
30
<PAGE>
<TABLE>
<CAPTION>
ESTIMATED NUMBER
OF SHARES SUBJECT PERCENTAGE OF OPTIONS
RECIPIENT TITLE TO OPTION ISSUED
--------- ----- ----------------- ---------------------
<S> <C> <C> <C>
Malcolm B. Blankenship, Jr. Director 5,865 3.0%
James W. Duke Director 5,865 3.0%
Harold C. Earnhardt Vice Chairman 5,865 3.0%
K. V. Epting, Jr. Director 5,865 3.0%
Gordon P. Hurley Director 5,865 3.0%
Bobby A. Lomax Director 5,865 3.0%
Ronald E. Bostian Chairman, 39,100 20.0%
President, and
Chief Executive
Officer
Jeffrey C. Chisholm Senior Vice 19,550 10.0%
President and Chief
Lending Officer
Dianne E. Hawkins Vice President, 19,550 10.0%
Treasurer, and
Controller
Other Employees 82,110 42.0%
------- -----
Total 195,500 100.0%
======= =====
</TABLE>
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. See "MANAGEMENT OF THE BANK" -- Proposed Option Plan" in the
Prospectus.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently estimated that
such net proceeds will be between $13.6 million and $18.6 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 be $21.4 million. See "PRO FORMA DATA" in the
Prospectus for the assumptions used to arrive at these amounts. The actual net
proceeds may vary materially from the estimated amounts described herein. The
estimated amount of net proceeds includes proceeds from the sale of the shares
31
<PAGE>
which are expected to be purchased by the ESOP in the Subscription Offering at
$10.00 per share with funds borrowed from the Company. The amount loaned to the
ESOP to enable such purchases is estimated to range from $1,156,000 (if
1,445,000 shares are issued) to $1,564,000 (if 1,955,000 shares are issued).
See "MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan" in the Prospectus.
The Company has received conditional OTS approval to purchase all of the
capital stock of the Bank to be issued in the Conversion in exchange for 50% of
the net proceeds of the Offering. The Company expects to use the portion of the
net proceeds it retains to make a loan to the ESOP to fund its purchase of 8% of
the shares of Common Stock sold in the Conversion and to use the remainder of
the net proceeds for working capital and investment purposes. The Company does
not expect to have significant operating expenses and anticipates that it will
initially invest the net proceeds it retains primarily in interest-earning
deposits, U.S. government, federal agency and other marketable securities and
mortgage-backed securities. The types and amounts of such investments will vary
from time to time based upon the interest rate environment, asset/liability mix
considerations and other factors.
Net proceeds paid to the Bank will become part of the Bank's general funds
and will be invested primarily in mortgage, consumer and other loans, and
investments consisting primarily of interest-earning deposit balances, U.S.
government and federal agency obligations and other marketable securities in
accordance with the Bank's lending and investment policies. The relative
amounts to be invested in each of these types of investments will depend upon
loan demand, rates of return and asset/liability matching considerations at the
time the investments are to be made. Management is not able to predict the
yields which will be produced by the investment of the proceeds of the Offerings
because such yields will be significantly influenced by general economic
conditions and the interest rate environment existing at the time the
investments are made. Remaining net proceeds paid to the Bank will be used for
general corporate purposes.
The proceeds of the Offerings will result in an increase in the Bank's net
worth and regulatory capital and may enhance the potential for growth through
increased lending and investment activities, branch expansion, ATMs or
otherwise. The net proceeds retained by the Company could be used to support
the future expansion of operations of the Company through the opening of one or
more branch offices in or near the Bank's primary market area. The Bank has no
current plans to open any additional offices. 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.
The proceeds may also be utilized by the Company to repurchase (at prices
which may be above or below the initial offering price) shares of the Common
Stock through an open market repurchase program subject to limitations contained
in OTS regulations, although the Company currently has no specific plan to
repurchase any of its stock. In the future, the Board of Directors of the
Company will make decisions on the repurchase of the Common Stock based on its
view of the appropriateness of the price of the Common Stock as well as the
Company's and the Bank's investment opportunities and capital needs. Under
current OTS regulations, no repurchases may be made within the first year
following Conversion except with OTS approval under "exceptional circumstances."
During the second and third years following Conversion, OTS regulations permit,
subject to certain limitations, the repurchase of up to five percent of the
outstanding shares of stock during each twelve-month period with a greater
amount permitted with OTS approval. In general, the OTS regulations do not
restrict repurchases thereafter, other than limits on the Bank's ability to pay
dividends to the Company to fund the repurchase. For a description of the
32
<PAGE>
restrictions on the Bank's ability to provide the Company with funds through
dividends or other distributions, see "DIVIDEND POLICY" and "SUPERVISION AND
REGULATION -- Federal Regulation of the Bank -- "Limitation on Capital
Distributions" in the Prospectus.
The Company and the Bank have no present intention to file consolidated tax
returns which will preserve for the Company the ability to use a portion of the
proceeds to make a return of capital in the future. However, the Company has not
made any decision to pay such a return of capital dividend. In accordance with
OTS policy, the Company and the Bank will take no actions in furtherance of the
payment of a return of capital, including filing a private letter ruling request
with the IRS regarding the tax-free nature of a possible one time cash
distribution to the Company's stockholders for a period of one year following
the Conversion.
At any time following approval of the MRP by the Company's stockholders, it
is expected that the MRP may acquire a number of shares of Common Stock equal to
4% of the number of shares issued in the Conversion. See "MANAGEMENT OF THE
BANK -- Proposed Management Recognition Plan" in the Prospectus. Such shares
may be acquired in the open market or acquired through the Company's issuance of
authorized but unissued shares. In the event shares are acquired in the open
market, the funds for such purchase may be provided by the Bank from the
proceeds of the Conversion. It is estimated that between 57,800 and 78,200
shares may be acquired by the MRP, assuming the issuance of between 1,445,000
and 1,955,000 shares, respectively, in the Conversion. If all such shares were
acquired by the MRP in the open market, and if such shares were acquired at a
price of $10.00 per share, the Bank would contribute between $578,000 and
$782,000, respectively, to the MRP for this purpose.
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company anticipates paying
quarterly dividends on the Common Stock, subject to statutory and regulatory
requirements, at an initial quarterly rate of $0.05 per share (or an annual rate
of $0.20 per share which is equal to 2% of the Purchase Price for the Common
Stock in the Conversion). In addition, the Board of Directors may determine
from time to time that it is prudent to pay special nonrecurring cash dividends.
Special cash dividends, if paid, may be in addition to, or in lieu of, regular
cash dividends. The Company's Board of Directors will periodically review its
policy concerning dividends. Declarations of dividends, if any, by the Board of
Directors will depend upon a number of factors, including investment
opportunities available to the Company and the Bank, capital requirements,
regulatory limitations, the Company's and the Bank's results of operations and
financial condition, tax considerations and general economic conditions. Upon
review of such considerations, the Board of Directors of the Company may
authorize dividends to be paid in the future if it deems such payment
appropriate and in compliance with applicable law and regulation. No assurances
can be given that any dividends will in fact be paid on the Common Stock or, if
dividends are paid, that they will not be reduced or discontinued in the
future.
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. The Bank, like all savings banks
regulated by the OTS, is subject to certain restrictions on the payment of
dividends based on its net income, its capital in excess of the regulatory
capital requirements and the amount of regulatory capital required for the
liquidation account to be established in connection with the Conversion. See
"SUPERVISION AND REGULATION -- Regulation of the Bank --Limitations on Capital
Distributions" in the Prospectus. See "THE CONVERSION -- Effects of Conversion
33
<PAGE>
- --Liquidation Rights" in the Prospectus. Also, see "TAXATION -- Federal Income
Taxation" in the Prospectus for a discussion of federal income tax provisions
that may limit the ability of the Bank to pay dividends to the Company without
incurring a recapture tax.
34
<PAGE>
MARKET FOR COMMON STOCK
The Company has never issued its Common Stock to the public. Consequently,
there is no established market for the Common Stock. The Company expects the
Common Stock to be quoted on the Nasdaq Small-Cap Market under the symbol "ISFC"
subject to certain conditions which it believes will be met, including a minimum
market capitalization and minimum number of market makers and stockholders of
record. If the Common Stock does not qualify for quotation on the Nasdaq Small-
Cap Market, the Company expects it to be quoted on the OTC Electronic Bulletin
Board. Trident Securities is expected to make a market in the Common Stock
following consummation of the Conversion and will assist the Company in seeking
to encourage at least two additional market makers to establish and maintain a
market in the Common Stock. Making a market involves maintaining bid and ask
quotations and being able, as principal, to effect transactions in reasonable
quantities at those quoted prices, subject to various securities laws and other
regulatory requirements. Due to the amount of Common Stock to be issued in the
Conversion, the Company cannot assure investors that the conditions for
quotation on the Nasdaq Small-Cap Market or the OTC Electronic Bulletin Board
will be satisfied.
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 (1,700,000 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 purchase price.
See "RISK FACTORS" in the Prospectus.
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 AND ORDER FORMS
The Prospectus contains the following: audited consolidated financial
statements of the Bank for the three fiscal years ended September 30, 1997,
1996 and 1995; unaudited consolidated financial statements of the Bank for the
nine-month periods ended June 30, 1998 and 1997; capitalization of the Company
and the Bank; Management's Discussion and Analysis of Financial Condition and
Results of Operations; a description of the Bank's lending and savings and
investment activities; information concerning compensation and other benefits of
directors and officers; a description of the Common Stock; anti-takeover
provisions of the Company; and additional information about the business and
financial condition of the Bank. The Prospectus also contains forms (the "Stock
Order Forms") for subscribing or submitting an order for the Common Stock. A
35
<PAGE>
copy of the Prospectus accompanies this Proxy Statement. Requests for an
additional copy of the Prospectus and any questions about the Conversion or the
Special Meeting, including questions about proxy voting procedures, should be
directed to the Bank's Stock Information Center at Post Office Box 1829, 401
West Innes Street, Salisbury, North Carolina 28145-1829, or call (704) 638-5816.
The Company has filed a registration statement with the SEC on Form S-1
under the Securities Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, the 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 the 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 a Form AC Application for Approval of Conversion with
the OTS. Pursuant to the OTS conversion regulations, the Prospectus and this
Summary Proxy Statement omits certain information contained in such Application.
The Application, which contains a copy of Ferguson's appraisal, may be inspected
at the office of the OTS, 1700 G Street, N.W., Washington, D.C. 20522 and at the
office of the Regional Director of the OTS at the Southeast Regional Office of
the OTS, 1475 Peachtree Street, N.E., Atlanta, GA 30309. Copies of the Plan of
Conversion, copies of the Company's Articles of Incorporation and Bylaws and
copies of the Bank's proposed Charter and Bylaws are available for inspection at
each office of the Bank and may be obtained by writing to the Bank at Post
Office Box 1929, 401 West Innes Street, Salisbury, North Carolina 28145-1929,
Attention: Ronald E. Bostian, President, or by telephoning the Bank at (704)
633-2341. A copy of Ferguson's independent appraisal is also available for
inspection at the Stock Information Center, 401 West Innes Street, Salisbury,
North Carolina 28144-4232.
THIS PROXY STATEMENT IS NOT AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK. SUCH OFFERS ARE MADE ONLY BY THE PROSPECTUS.
36
<PAGE>
GLOSSARY
Bank Citizens Bank, FSB
Common Stock The Common Stock, no par value per share, of Innes
Street Financial Corporation
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 Innes Street Financial Corporation
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 (including holders of all
types of demand deposit accounts) of the Bank, with
account balances of at least $50.00 as of the close
of business on December 31, 1996
ERISA Employment Retirement Income Security Act of 1974, as
amended
ESOP The Citizens Bank, FSB Employee Stock Ownership Plan
and Trust
Estimated Valuation Range Estimated pro forma market value of the common stock
ranging from $14,450,000 to $19,550,000. The maximum
of the Estimated Valuation Range may be increased to
$22,482,500 without a resolicitation of subscribers
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Time 12:00 noon, local time, on December 8, 1998
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
IRS Internal Revenue Service
MRP Management Recognition Plan to be adopted no earlier
than twelve months after the Conversion
NPV Net Portfolio Value
Offering Subscription Offering, Community Offering and
Syndicated Community Offering, collectively
A-1
<PAGE>
Option Plan Stock Option Plan to be adopted no earlier than
twelve months after the Conversion
Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Other Members Savings account holders (including holders of all
types of demand deposit accounts) (other than
Eligible Account Holders and Supplemental Eligible
Account Holders) and certain borrowers (borrowers
whose loans were outstanding on October 30, 1998 and
continue to be outstanding) who are entitled to vote
at the Special Meeting due to the existence of an
account or borrowing relationship, respectively, on
the Voting Record Date for the Special Meeting
OTC Bulletin Board An electronic stock data system operated by Nasdaq
OTS Office of Thrift Supervision
Plan of Conversion Plan of the Bank to convert from a federal chartered
mutual savings bank to a federal 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
Qualifying Deposits A balance of $50.00 or more in any savings account
(including all types of demand deposit accounts) in
the Bank as of December 31, 1996 or September 30,
1998, as applicable; each savings account (including
all types of demand deposit accounts) which is deemed
to be a separate account for purposes of FDIC
insurance shall be deemed to be a separate account
for purposes of determining whether a qualifying
deposit exists
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
Special Meeting Special Meeting of members of the Bank on December
10, 1998 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, ESOP Supplemental Eligible Account
Holders, Other Members and Directors, Officers and
Employees
Subscription Rights Rights to subscribe for shares of Common Stock in the
Subscription Offering granted to certain depositors
and borrowers of the Bank, the ESOP and certain
others in accordance with the Plan of Conversion.
Supplemental Eligible Savings account holders (including holders of all
Account Holders types of demand deposit accounts) who are not
Eligible Account Holders of the Bank, with account
balances of at least $50.00 on September 30, 1998.
A-2
<PAGE>
Syndicated Community Offering of shares of Common Stock remaining after
Offering 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 October 30, 1998, the date
of determining members entitled to vote at the
Special Meeting.
A-3
