<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER ___, 1998
REGISTRATION NO.
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 Applied For
(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 953,522/(1)/ $30.00 $28,605,660 $8,438.67
====================================================================================================
</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, and an additional 3% of the total number
of shares offered which may be issued by the Company, if necessary, to fill
orders resulting from misallocations.
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 925,750 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 $17,850,000 and $24,150,000, which establishes the number of shares
to be offered at a price of $30.00 per share. Subject to the approval of the
OTS, up to 925,750 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 $ 30.00 $ 30.00 $ 30.00 $ 30.00
Number of shares 595,000 700,000 805,000 925,750
Estimated Offering expenses $ 934,000 $ 1,000,000 $ 1,066,000 $ 1,142,000
Estimated Net Proceeds $16,916,000 $20,000,000 $23,084,000 $26,630,500
Estimated Net Proceeds per share $ 28.43 $ 28.57 $ 28.68 $ 28.77
</TABLE>
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 11 OF THIS DOCUMENT.
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.
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)
________.
TRIDENT SECURITIES, INC.
The date of this Prospectus is __________, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Questions and Answers About the Stock Offering...................................................... 4
Summary............................................................................................. 6
Selected Financial and Other Data of the Bank....................................................... 9
Risk Factors........................................................................................ 11
Innes Street Financial Corporation.................................................................. 17
Citizens Bank, FSB.................................................................................. 18
Use of Proceeds..................................................................................... 18
Dividend Policy..................................................................................... 20
Market for Common Stock............................................................................. 20
Capitalization...................................................................................... 21
Pro Forma Data...................................................................................... 23
Historical and Pro Forma Capital Compliance......................................................... 29
Stock Purchases by Directors and Executive Officers................................................. 30
Management's Discussion and Analysis of Financial Condition and Results of Operations............... 31
Business of the Company............................................................................. 42
Business of the Bank................................................................................ 42
Taxation............................................................................................ 63
Supervision and Regulation.......................................................................... 65
Management of the Company........................................................................... 71
Management of the Bank.............................................................................. 72
Description of Capital Stock........................................................................ 81
Restrictions on Acquisition of the Company.......................................................... 83
The Conversion...................................................................................... 86
Legal Opinions...................................................................................... 102
Experts............................................................................................. 102
Registration Requirements........................................................................... 102
Additional Information.............................................................................. 103
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 11 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
[MAP]
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 595,000 and 805,000 shares of Common Stock will be sold, all at a
price of $30.00 per share. The number of shares to be sold may be increased
to 925,750 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. Also, it is possible that the Company would
issue an additional 3% of the total shares sold in the event it is
necessary to correct an improper allocation of shares in 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, November 19, 1998. See pages 96 to 98.
Q. HOW MUCH STOCK MAY I PURCHASE?
A. The minimum purchase is 15 shares (or $450). The maximum purchase per
eligible depositor in the Subscription Offering is 20,000 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
20,000 shares (or $600,000) (subject to certain exceptions). The Bank may
decrease or increase the maximum purchase limitation without notifying you.
If shares are sold in a Community Offering, the maximum number of shares
that may be purchased by any party in the Community Offering is 20,000
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 20,000 shares (or $600,000) (subject to certain
exceptions). See pages 100 to 101.
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 90 to 93.
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 deposit account 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 805,000
shares are sold, to the extent of any shares sold over 805,000
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 deposit
account 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 ___________, 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 90 to 94.
Q. WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT
TO BUY THE STOCK?
A. In order to make an informed investment decision, you should read this
entire Prospectus, particularly the section entitled "Risk Factors."
Q. AS A DEPOSITOR OR BORROWER MEMBER OF THE BANK, WHAT WILL HAPPEN IF I DO NOT
PURCHASE ANY STOCK?
A. You presently have voting rights while the Bank is in the mutual form;
however, once the Bank converts to the stock form you will lose your voting
rights unless you purchase stock. You are not required to purchase stock.
Your deposit account, certificate accounts and any loans you may have with
the Bank will not be affected. See pages 88 to 90.
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 42.
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 42 to 63.
THE STOCK OFFERING
The Company is offering between 595,000 and 805,000 shares of Common
Stock at $30.00 per share. Subject to approval by the OTS, the number of shares
to be sold may be increased to 925,750 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 90 to 94.
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 pages 101 to 102.
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 August 28, 1998, such value ranged between $17,850,000 and
$24,150,000 (with a midpoint of $21,000,000) (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 $30.00 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 $17,850,000 or above $27,772,500, the Company will notify you and
you will have the opportunity to modify or cancel your order. See pages 94 to
96.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at 12:00 noon, Eastern Time,
on November 19, 1998. The Community Offering, if any, may terminate at any time
without notice but no later than January 4, 1999, without approval by the OTS.
The Subscription Offering and the Community Offering may not be extended beyond
November 19, 1998. See pages 90 to 94.
CONTINGENT SHARES
For a period of 30 days following the closing of the Conversion, the
Company's Board of Directors may determine to issue additional shares equal to
up to 3% of the Common Stock issued in the Conversion ("Contingent Shares").
These Contingent Shares may be issued, if necessary at the discretion of the
Company's Board of Directors, to fill orders resulting from (i) certain
allocation oversights in the event of an oversubscription, (ii) lost or damaged
stock order forms which the Board determines legitimately should have been
filled during the Conversion, or (iii) orders initially rejected but later found
to be legitimate. Any Contingent Shares issued will not be included in the total
number of shares for purposes of determining any individual or maximum purchase
limitations or the level of stock to be purchased by the ESOP or other benefit
plans. In addition, commissions will not be payable to Trident Securities on any
Contingent Shares. These shares will be allocated to a subscriber based on the
allocation of shares to persons who had the same or similar deposit account
balance as that subscriber.
BENEFITS TO MANAGEMENT FROM THE OFFERING
As a part of the Conversion, the Bank will enter a three-year
employment agreement with Ronald E. Bostian, President and Chief Executive
Officer of the Bank. Also, the Bank will adopt a Severance Plan for the benefit
of all of its employees. 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. Following the Conversion,subject to
approval by the Company's stockholders, the Bank intends to implement a
management recognition plan (the "MRP") for which the Company will reserve a
number of shares equal to 4% of the number of shares issued in the Conversion.
Under the MRP, directors and certain employees 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. In addition, 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. The Boards of Directors of the Bank and the Company have decided to
adopt an MRP and Option Plan no sooner than 12 months after the Conversion at
which time such plans will be presented to the stockholders of the Company for
their approval. See pages 75 to 81.
7
<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 109,000 shares. As a result, such persons
anticipate subscribing for 18.32% to 13.54% of the shares of Common Stock issued
in the Conversion based upon the minimum and 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 (1) 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 40.32% and 35.54% of the Common
Stock, based on the issuance of the minimum and maximum of the Estimated
Valuation range, respectively. See pages 15 to 16 and 30 to 31.
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.
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 18 to 21.
DIVIDENDS
After the Conversion, the Board of Directors of the Company will have
the authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. The Company anticipates paying quarterly cash dividends
on the Common Stock at an annual rate of $0.60 per share. In addition, the Board
of Directors may determine from time to time to pay special, nonrecurring cash
dividends. No assurances can be given that any dividends will in fact be paid on
the Common Stock. See page 20.
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.
Following the completion of the Offering, it is anticipated that the Common
Stock will be traded on the over-the-counter market with quotations available
through the OTC Electronic Bulletin Board. Trident Securities is expected to
make a market in the Common Stock by developing and maintaining historical stock
trading records, soliciting potential buyers and sellers of shares and
attempting to match buy and sell orders. In connection with its market making
activities, Trident Securities may buy or sell shares from time to time for its
own account. However, it will not be subject to any obligation with
8
<PAGE>
respect to such efforts. If the Common Stock cannot be quoted and traded on the
OTC Electronic Bulletin Board, it is expected that the transactions in the
Common Stock will be reported in the pink sheets of the National Quotation
Bureau, Inc. 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 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 20 to 21.
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 11 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."
9
<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 (8) 434
Non-interest expense 2,238 2,194 2,959 3,982 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% 0.05%(8) 0.56%
Return on average equity (3) 8.35% 6.59% 6.70% 0.72%(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% 2.04%(8) 1.42%
Non-performing assets to total assets (6) 0.07% 0.14% 0.17% 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)
---- ----
<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.
<PAGE>
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. 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
11
<PAGE>
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 805,000 shares of
Common Stock in the Conversion, the Company's ratio of equity to assets would
have been 16.81%. 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 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
12
<PAGE>
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. Following the completion of the Offering, it is anticipated that the
Common Stock will be traded on the over-the-counter market with quotations
available through the OTC Electronic Bulletin Board. Trident Securities is
expected to make a market in the Common Stock by developing and maintaining
historical stock trading records, soliciting potential buyers and sellers of
shares and attempting to match buy and sell orders. In connection with its
market making activities, Trident Securities may buy or sell shares from time to
time for its own account. However, it will not be subject to any obligation with
respect to such efforts. If the Common Stock cannot be quoted and traded on the
OTC Electronic Bulletin Board, it is expected that the transactions in the
Common Stock will be reported in the pink sheets of the National Quotation
Bureau, Inc.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's Offering (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.
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."
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
13
<PAGE>
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. 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 will also prepare
contingency plans in the event there are any system interruptions. The Bank
believes that its costs related to Year 2000 will be immaterial. There can be no
assurances, however, that such 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 material adverse effect on the Bank's business, financial condition,
results of operations and business prospects. Further, any Year 2000 failure on
the part of the Bank's customers could result in additional expense or loss to
the Bank. The Bank plans also to work with its customers to address any
potential Year 2000 problems.
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 805,000 shares of the Common Stock are issued in the
Conversion, it is expected that options to acquire 80,500 shares of the Common
Stock could be granted under the Option Plan, and awards of an additional 32,200
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 $30.00 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 805,000 to 917,700, the pro forma book value per share of
the outstanding Common Stock at June 30, 1998 would have been $42.69 compared
with $44.47 if such plans did not exist, and the pro forma net income per share
of the outstanding Common Stock for the nine months ended June 30, 1998 would
have been $1.61 compared with $1.73 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 805,000 shares of Common Stock are issued in the Conversion and the
MRP acquired 32,200 shares at a cost of $30.00 per share, the total annual
pre-tax expense of the MRP would be $193,200 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."
Any issuance of Contingent Shares would also have a dilutive effect. If
the maximum number of Contingent Shares were issued, such issuance would dilute
the voting interests of existing stockholders by approximately 3.0%, and it
would also decrease net income per share and stockholders' equity per share.
ANTI-TAKEOVER CONSIDERATIONS
14
<PAGE>
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 18.32% to 13.54% of the shares of Common 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
15
<PAGE>
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 40.32% or 35.54%, 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 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.
16
<PAGE>
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."
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
17
<PAGE>
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 $16.9 million and $23.1
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 $26.6 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 $30.00 per share with funds borrowed from the Company. The amount
loaned to the ESOP to enable such purchases is estimated to range from
$1,428,000 (if 595,000 shares are issued) to $1,932,000 (if 805,000 shares are
issued). See "MANAGEMENT OF THE BANK -- Employee Stock Ownership Plan."
18
<PAGE>
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. See "DIVIDEND POLICY."
At any time following approval of the MRP by the Company's
stockholders, it is expected that the MRP may acquire a number of shares of
Common Stock equal to 4% of the number of shares issued in the Conversion. See
"MANAGEMENT OF THE BANK -- Proposed Management Recognition Plan." Such shares
may be acquired in the open market or acquired through the Company's issuance of
authorized but unissued shares. In the event shares are acquired in the open
market, the funds for such purchase may be provided by the Bank from the
proceeds of the Conversion. It is estimated that between 23,800 and 32,200
shares may be acquired by the MRP, assuming the issuance
19
<PAGE>
of between 595,000 and 805,000 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 $30.00 per share, the Bank would contribute between
$714,000 and $966,000, 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 annual rate of $0.60 per share which is equal to
2% of the offering price for the Common Stock in the Conversion. In addition,
the Board of Directors may determine from time to time that it is prudent to pay
special nonrecurring cash dividends. Special cash dividends, if paid, may be in
addition to, or in lieu of, regular cash dividends. The Company's Board of
Directors will periodically review its policy concerning dividends. Declarations
of dividends, if any, by the Board of Directors will depend upon a number of
factors, including investment opportunities available to the Company and the
Bank, capital requirements, regulatory limitations, the Company's and the Bank's
results of operations and financial condition, tax considerations and general
economic conditions. Upon review of such considerations, the Board of Directors
of the Company may authorize dividends to be paid in the future if it deems such
payment appropriate and in compliance with applicable law and regulation. No
assurances can be given that any dividends will in fact be paid on the Common
Stock or, if dividends are paid, that they will not be reduced or discontinued
in the future.
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. Following the
completion of the Offering, it is anticipated that the Common Stock will be
traded on the over-the-counter market with quotations available through the OTC
Electronic Bulletin Board. Trident Securities is expected to make a market in
the Common Stock by developing and maintaining historical stock trading
records, soliciting potential buyers and sellers of shares and attempting to
match buy and sell orders. In connection with its market making activities,
Trident Securities may buy or sell shares from time to time for its own account.
However, it will not be subject to any obligation with respect to such efforts.
If the Common Stock cannot be quoted and traded on the OTC Electronic Bulletin
Board, it is expected that the transactions in the Common Stock will be reported
in the pink sheets of the National Quotation Bureau, Inc.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's Offering (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
20
<PAGE>
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 595,000, 700,000,
805,000 and 925,750 shares of Common stock are sold at $30.00 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."
21
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO FORMA CAPITALIZATION AT JUNE 30, 1998
BASED UPON SALE OF
--------------------------------------------------
CAPITALIZATION 595,000 700,000
OF BANK SHARES AT SHARES AT
AT 6-30-98 $30.00 PER SHARE $30.00 PER SHARE
---------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Deposits $159,819 $159,819 $159,819
Borrowings 13,000 13,000 13,000
------ ------ ------
Total Deposits and Borrowings/(2)/ $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 16,916 20,000
Less: Common stock to be acquired by the ESOP/(3)/ (1,428) (1,680)
Less: Common stock to be acquired by the MRP/(3)/ -- (714) (840)
Retained earnings - substantially restricted 15,491 15,491 15,491
Net unrealized gains on available for sale securities 120 120 120
-------- -------- --------
Total equity $ 15,611 $ 30,385 $ 33,091
======== ======== ========
<CAPTION>
-------------------------------------
805,000 925,750
SHARES AT SHARES AT
$30.00 PER SHARE $30.00 PER SHARE(1)
---------------- ----------------
<S> <C> <C>
Deposits $159,819 $159,819
Borrowings 13,000 13,000
------ ------
Total Deposits and Borrowings/(2)/ $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 23,084 26,631
Less: Common stock to be acquired by the ESOP/(3)/ (1,932) (2,222)
Less: Common stock to be acquired by the MRP/(3)/ (966) (1,111)
Retained earnings - substantially restricted 15,491 15,491
Net unrealized gains on available for sale securities 120 120
-------- --------
Total equity $ 35,797 $ 38,909
======== ========
</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."
22
<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 $16.9 million and $26.6 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) 25.1%, 22.6%, 20.7%
and 19.0% 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 $622,000. 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 August 28, 1998 is from a minimum of $17,850,000 to a maximum of
$24,150,000 with a midpoint of $21,000,000. 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 $27,772,500, 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
$16.9 million, $20.0 million, $23.1 million and $26.6 million(based upon the
issuance of 595,000, 700,000, 805,000 and 925,750 shares, respectively, at
$30.00 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.
23
<PAGE>
No effect has been given in the following table to the possible issuance
of any Contingent Shares. For a detailed discussion of the circumstances under
which these shares would be issued, see "The Conversion -Contingent Shares."
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.
24
<PAGE>
<TABLE>
<CAPTION>
At or For the Nine Months Ended June 30, 1998
595,000 700,000 805,000 925,750
shares at $30.00 shares at $30.00 shares at $30.00 shares at $30.00
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 $17,850 $21,000 $24,150 $27,773
Less Offering expenses and commissions (934) (1,000) (1,066) (1,142)
------- ------- ------- -------
Estimated net Conversion proceeds 16,916 20,000 23,084 26,631
Less shares to be acquired by ESOP/(1)/ (1,428) (1,680) (1,932) (2,222)
Less shares to be acquired by MRP/(2)/ (714) (840) (966) (1,111)
------- ------- ------- -------
Adjusted estimated net Conversion proceeds $14,774 $17,480 $20,186 $23,298
======= ======= ======= =======
Pro forma net income:
Historical net income $ 968 $ 968 $ 968 $ 968
Pro Forma adjustments:
Pro forma income on net proceeds 371 439 507 585
Pro forma ESOP adjustments/(1)/ (66) (78) (90) (103)
Pro forma MRP adjustments/(2)/ (66) (78) (90) (103)
------- ------- ------- -------
Pro forma net income $ 1,206 $ 1,251 $ 1,295 $ 1,346
======= ======= ======= =======
Pro forma net income per share/(4)/:
Historical net income per share $ 1.75 $ 1.49 $ 1.30 $ 1.13
Pro forma adjustments:
Pro forma income on net proceeds 0.67 0.68 0.68 0.68
Pro forma ESOP adjustments/(1)/ (0.12) (0.12) (0.12) (0.12)
Pro forma MRP adjustments/(2)/ (0.12) (0.12) (0.12) (0.12)
------- ------- ------- -------
Pro forma net income per share/(1)/(2)/(3)/(5)/ $ 2.18 $ 1.93 $ 1.73 $ 1.57
======= ======= ======= =======
Number of shares used in calculating income per share
/(5)/ 552,160 649,600 747,040 859,096
======= ======= ======= =======
Pro forma stockholders' equity (book value)/(4)/:
Historical retained earnings $15,611 $15,611 $15,611 $15,611
Estimated net Conversion proceeds 16,916 20,000 23,084 26,631
Less shares to be acquired by:
ESOP/(1)/ (1,428) (1,680) (1,932) (2,222)
MRP/(2)/ (714) (840) (966) (1,111)
------- ------- ------- -------
Pro forma stockholders' equity/(4)/ $30,385 $33,091 $35,797 $38,909
======= ======= ======= =======
Pro forma stockholders' equity per share/(5)/:
Historical retained earnings $ 26.24 $ 22.30 $ 19.39 $ 16.86
Estimated net Conversion proceeds 28.43 28.57 28.68 28.77
Less shares to be acquired by:
ESOP/(1)/ (2.40) (2.40) (2.40) (2.40)
MRP/(2)/ (1.20) (1.20) (1.20) (1.20)
------- ------- ------- -------
Pro forma stockholders' equity per share/(5)/ $ 51.07 $ 47.27 $ 44.47 $ 42.03
======= ======= ======= =======
Pro forma price to book value 58.7% 63.5% 67.5% 71.4%
Pro forma price to earnings (P/E ratio)/(6)/ 10.3x 11.7x 13.0x 14.3x
Number of shares used to calculate stockholders'
equity per share/(4)/ 595,000 700,000 805,000 925,750
======= ======= ======= =======
</TABLE>
25
<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 4,760, 5,600, 6,440 and 7,406
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 $30.00 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 $30.00 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 $2.13, $1.88, $1.69 and $1.53 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 10.6 x, 12.0 x, 13.3 x and 14.7 x; and pro forma
stockholders' equity per share would be $50.26, $46.61, $43.91 and
$41.57 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 59,500, 70,000, 80,500, and 92,575 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 $30.00 per share,
and the issuance of authorized but unissued shares upon exercise of
such options, the pro forma net income per share would be $2.05, $1.81,
$1.64 and $1.49, respectively, and pro forma stockholders' equity per
share would be $49.15, $45.70, $43.15, and $40.94, 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.
26
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30, 1997
-------------------------------------------------------------------------
595,000 700,000 805,000 925,750
shares at $30.00 shares at $30.00 shares at $30.00 shares at $30.00
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 $17,850 $21,000 $24,150 $27,773
Less Offering expenses and commissions (934) (1,000) (1,066) (1,142)
------- ------- ------- -------
Estimated net Conversion proceeds 16,916 20,000 23,084 26,631
Less shares to be acquired by ESOP/(1)/ (1,428) (1,680) (1,932) (2,222)
Less shares to be acquired by MRP/(2)/ (714) (840) (966) (1,111)
------- ------- ------- -------
Adjusted estimated net Conversion proceeds $14,774 $17,480 $20,186 $23,298
======= ======= ======= =======
Pro forma net income:
Historical net income $ 967 $ 967 $ 967 $ 967
Pro Forma adjustments:
Pro forma income on net proceeds 499 591 682 787
Pro forma ESOP adjustments/(1)/ (89) (104) (120) (138)
Pro forma MRP adjustments/(2)/ (89) (104) (120) (138)
------- ------- ------- -------
Pro forma net income $ 1,289 $ 1,349 $ 1,410 $ 1,479
======= ======= ======= =======
Pro forma net income per share/(4)/:
Historical net income per share $ 1.75 $ 1.49 $ 1.29 $ 1.13
Pro forma adjustments:
Pro forma income on net proceeds 0.90 0.91 0.91 0.92
Pro forma ESOP adjustments/(1)/ (0.16) (0.16) (0.16) (0.16)
Pro forma MRP adjustments/(2)/ (0.16) (0.16) (0.16) (0.16)
------- ------- ------- -------
Pro forma net income per share/(1)/(2)/(3)/(5)/ $ 2.33 $ 2.08 $ 1.89 $ 1.72
======= ======= ======= =======
Number of shares used in calculating income per share/(5)/ 552,160 649,600 747,040 859,096
======= ======= ======= =======
Pro forma stockholders' equity (book value) (4)/:
Historical retained earnings $14,629 $14,629 $14,629 $14,629
Estimated net Conversion proceeds 16,916 20,000 23,084 26,631
Less shares to be acquired by:
ESOP/(1)/ (1,428) (1,680) (1,932) (2,222)
MRP/(2)/ (714) (840) (966) (1,111)
------- ------- ------- -------
Pro forma stockholders' equity/(4)/ $29,403 $32,109 $34,815 $37,927
======= ======= ======= =======
Pro forma stockholders' equity per share/(5)/:
Historical retained earnings $ 24.59 $ 20.90 $ 18.17 $ 15.80
Estimated net Conversion proceeds 28.43 28.57 28.68 28.77
Less shares to be acquired by:
ESOP/(1)/ (2.40) (2.40) (2.40) (2.40)
MRP/(2)/ (1.20) (1.20) (1.20) (1.20)
------- ------- -------- -------
Pro forma stockholders' equity per share/(5)/ $ 49.42 $ 45.87 $ 43.25 $ 40.97
======= ======= ======== =======
Pro forma price to book value 60.7% 65.4% 69.4% 73.2%
Pro forma price to earnings (P/E ratio)/(5)/ 12.9x 14.4x 15.9x 17.4x
Number of shares used to calculate stockholders' equity
per share/(4)/ 595,000 700,000 805,000 925,750
======= ======= ======= =======
</TABLE>
27
<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 nine months ended June 30, 1998 and
for the year ended September 30, 1997 was made at the end of the
period, (ii) that 4,760, 5,600, 6,440 and 7,406 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 $30.00 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 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 $30.00 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 $2.28, $2.03, $1.85 and $1.69 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 13.2 x, 14.8 x, 16.2 x and 17.8 x; and pro forma stockholders'
equity per share would be $48.67, $45.26, $42.74, and $40.55 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 59,500, 70,000, 80,500, and 92,575 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 $30.00 per share,
and the issuance of authorized but unissued shares upon exercise of
such options, the pro forma net earnings per share would be $2.21,
$1.97, $1.80 and $1.65, 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.
28
<PAGE>
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
As of June 30, 1998, the Bank would have exceed 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 595,000 Midpoint of 700,000
June 30, 1998 at $30 Per Share at $30 Per Share
------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital/(2)/ $ 15,611 8.1% $ 21,927 10.9% $ 23,091 11.4%
======== ==== ======== ===== ======== =====
Tangible Capital/(3)/
Capital level $ 15,472 8.0% $ 21,788 10.9% $ 22,952 11.4%
Tangible capital requirement $ 2,889 1.5% $ 3,005 1.5% $ 3,026 1.5%
-------- ---- -------- ---- -------- ----
Excess $ 12,583 6.5% $ 18,783 9.4% $ 19,926 9.9%
Core Capital/(3)/ ======== ==== ======== ==== ======== ====
Capital level $ 15,472 8.0% $ 21,788 10.9% $ 22,952 11.4%
Core capital requirement/(4)/ $ 5,777 3.0% $ 6,010 3.0% $ 6,052 3.0%
-------- ---- -------- ---- -------- ----
Excess $ 9,695 5.0% $ 15,778 7.9% $ 16,900 8.4%
======== ==== ======== ==== ======== ====
Risk Based Capital/(3)/
Capital level/(5)/ $ 16,696 16.4% $ 23,012 22.2% $ 24,176 23.3%
Risk-based capital requirement/(1)/ $ 8,157 8.0% $ 8,281 8.0% $ 8,303 8.0%
-------- ---- -------- ---- -------- ----
Excess $ 8,539 8.0% $ 14,731 14.2% $ 15,873 15..3%
======== ==== ======== ===== ======== ======
<CAPTION>
Pro Forma at June 30, 1998
------------------------------------------------------------------
Maximum of 805,000 Maximum, as Adjusted, of 925,750
at $30 Per Share at $30 Per Share
---------------- ----------------
Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C>
GAAP Capital/(2)/ $ 24,255 11.9% $ 25,594 12.5%
======== ===== ======== =====
Tangible Capital/(3)/
Capital level $ 24,116 11.9% $ 25,455 12.4%
Tangible capital requirement $ 3,047 1.5% $ 3,072 1.5%
-------- ---- -------- ----
Excess $ 21,069 10.4% $ 22,383 10.9%
Core Capital/(3)/ ======== ===== ======== =====
Capital level $ 24,116 11.9% $ 25,455 12.4%
Core capital requirement/(4)/ $ 6,095 3.0% $ 6,143 3.0%
-------- ---- -------- ----
Excess $ 18,021 8.9% $ 19,312 9.4%
======== ==== ======== ====
Risk Based Capital/(3)/
Capital level/(5)/ $ 25,340 24.3% $ 26,679 25.6%
Risk-based capital requirement/(1)/ $ 8,326 8.0% $ 8,352 8.0%
-------- ---- -------- ----
Excess $ 17,014 16.3% $ 18,327 17.6%
======== ===== ======== =====
</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 $30.00 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, $200.5 million,
$201.9 million, $203.3 million and $204.9 million, respectively. Risk
weighted assets at the minimum, midpoint, maximum and 15% above the
maximum $103.5 million, $103.8 million, $104.1 million and $104.4
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."
29
<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 -- $30.00 -- 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 20,000 3.36% 2.48%
Chairman, CEO, and President
Harold C. Earnhardt 420,000 14,000 2.35% 1.74%
Vice Chairman
Malcolm B. Blankenship, Jr. 390,000 13,000 2.18% 1.61%
Director
James W. Duke 270,000 9,000 1.51% 1.12%
Director
K.V. Epting, Jr. 105,000 3,500 0.59% 0.44%
Director
Gordon P. Hurley 600,000 20,000 3.36% 2.48%
Director
Bobby A. Lomax 180,000 6,000 1.01% 0.75%
Director
Jeffrey C. Chisholm 600,000 20,000 3.36% 2.48%
Senior Vice President/
Chief Lending Officer
Dianne E. Hawkins
Vice President, Treasurer and Controller 105,000 3,500 0.59% 0.44%
------- ----- ----- -----
Total $3,270,000 109,000 18.32% 13.54%
========== ======= ====== ======
</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."
30
<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
31
<PAGE>
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.
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
32
<PAGE>
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 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."
33
<PAGE>
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.
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> <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.
34
<PAGE>
NET INTEREST INCOME
Net interest income represents the difference between income derived
from interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Bank's assets and liabilities for the 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).
35
<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.
<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.
37
<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
------------- ------------
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)
-----------
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>
38
<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
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
39
<PAGE>
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.
40
<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.
41
<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.
42
<PAGE>
As a federally-chartered savings bank, the Bank is subject to
examination and regulation by the OTS. The business and regulation of the Bank
are subject to legislative and regulatory changes from time to time. See
"SUPERVISION AND REGULATION -- Regulation of the Bank."
MARKET AREA
The Bank's primary market area consists of the communities in an
approximately 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.
43
<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.
44
<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>
45
<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
------- --------- --------- -----
(In Thousands)
TOTAL LOANS:
- -----------
<S> <C> <C> <C> <C>
Real estate loans:
1-4 family - fixed $ 983 $ 516 $ 45,482 $ 46,981
1-4 family - adjustable 48,296 41,922 697 90,915
Home Equity - fixed -- 131 1,195 1,326
Home Equity - adjustable 15,000 -- -- 15,000
Construction and Development - fixed 1,093 638 241 1,972
Construction and Development - adjustable 36 11 -- 47
Nonresidential - fixed 7 65 1,086 1,158
Nonresidential - adjustable 401 18 -- 419
Residential multi-family - fixed -- 15 -- 15
Residential multi-family - adjustable 703 632 15 1,350
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>
46
<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.
47
<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>
48
<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.
49
<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.
50
<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.
51
<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
------------ ------------ -------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
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.
52
<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
--------------------- --------------------- ---------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
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 -- $ --
========= ======= ========= ======== ======== ========
<CAPTION>
Loss
--------------------
Number Amount
------ ------
<S> <C> <C>
Real estate loans:
1-4 family -- $ --
Home equity -- --
Construction and development -- --
Nonresidential -- --
Multi-family -- --
----- -----
Total real estate loans -- --
----- -----
Other loans:
Commercial -- --
Consumer -- --
----- -----
Total other loans -- --
----- -----
Total -- $ --
===== =====
</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.
53
<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
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
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.
54
<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>
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.
56
<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
----------------- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
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.
57
<PAGE>
<TABLE>
<CAPTION>
After One Year Through After Five Years
One Year or Less Five Years Through Ten Years
-------------------------- --------------------------- -------------------
Weighted Weighted
Carrying Average Carrying Average Carrying
Value Yeild Value Yeild Value
----------- ------------- ------------ ------------- -------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agencies $ - - $ 666 6.24% $ 185
Securities held to maturity:
U.S. government and agencies - - 1,132 7.07% -
Other:
Interest-earning deposits 10,960 6.14% - - -
Term Federal Funds 4,000 5.55% - - -
Federal Home Loan Bank stock - - - - -
----------- ----------- --------- ---------- ------
Total $ 14,960 5.98% $ 1,798 6.76% $ 185
=========== =========== ========= ========== ======
<CAPTION>
After Ten Years Total
----------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Carrying Average Carrying Average
Yeild Value Yeild Value Yield
---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agencies 9.02% $ 6,979 6.64% $ 7,830 6.66%
Securities held to maturity:
U.S. government and agencies - 739 7.20% 1,871 7.12%
Other:
Interest-earning deposits - - - 10,960 6.14%
Term Federal Funds - - - 4,000 7.35%
Federal Home Loan Bank stock - 1,825 7.50% 1,825 7.50%
------- ------------ ---------- ----------- -----------
Total 9.02% $ 9,543 6.85% $ 26,486 6.37%
======= ============ ========== =========== ===========
</TABLE>
58
<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
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
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.
59
<PAGE>
<TABLE>
<CAPTION>
-----------------------------
At June 30, 1998 1997
------------------------------------------------ -----------------------------
Weighted % of Weighted
Amount Average Rate Deposits Amount Average Rate
--------------- ---------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Deposit accounts:
Passbook savings $ 38,194 4.52% 23.90% $ 31,395 4.52%
NOW accounts 5,798 1.42% 3.63% 5,248 1.35%
Money market deposit accounts 2,932 2.50% 1.83% 3,125 2.50%
Non-interest bearing accounts 1,376 -% 0.86% 1,550 -%
-------------- ------------- ------------ -------------- ------------
Total demand deposits 48,300 3.90% 30.22% 41,318 3.79%
-------------- ------------- ------------ -------------- ------------
Certificates of deposit 111,519 5.51% 69.78% 119,175 5.66%
-------------- ------------- ------------ -------------- ------------
Total deposits $ 159,819 5.02% 100.00% $ 160,493 5.18%
============== ============= ============ ============== ============
<CAPTION>
At September 30, 1996 1995
------------------- --------------------------------------------------------------
% of Weighted % of Weighted % of
Deposits Amount Average Rate Deposits Amount Average Rate Deposits
--------- ---------- -------------- ----------- ---------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Deposit accounts:
Passbook savings 19.56% $ 26,134 4.44% 17.84% $ 4.15% 11.76% 18,735
NOW accounts 3.27% 4,109 1.68% 2.81% 1.71% 2.44% 3,892
Money market deposit accounts 1.95% 3,547 2.56% 2.42% 2.71% 2.74% 4,368
Non-interest bearing accounts 0.97% -% 0.59% -% 0.55% 876 8.76
----------- ----------- --------- -------- ---------- -------- -----------
Total demand deposits 25.75% 34,656 3.81% 23.66% 3.45% 17.49% 27,871
----------- ----------- --------- -------- ---------- -------- -----------
Certificates of deposit 74.25% 111,794 5.71% 76.34% 5.81% 82.51% 131,438
----------- ----------- --------- -------- ---------- -------- -----------
Total deposits 100.00% $ 146,450 5.26% 100.00% $ 159,309 5.40% 100.00%
=========== ========== ========= ======== ========== ======== ===========
</TABLE>
60
<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
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
61
<PAGE>
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 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
62
<PAGE>
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 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.
63
<PAGE>
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.
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.
64
<PAGE>
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 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".
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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.
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
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"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; 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.
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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 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.
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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 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
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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 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
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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:
<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
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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 Citizens 1984
Bank
James W. Duke 69 Manufacturers Representative for M.W. Window 1979
Corp.
Harold C. Earnhardt 66 Retired General Officer of the North Carolina Air 1984
National Guard
K. V. Epting, Jr. 68 Retired Executive Director of the Salisbury- 1992
Rowan Chamber of Commere
Gordon P. Hurley 60 President, Hurley Foundation 1980
Bobby A. Lomax 70 Dentist 1977
</TABLE>
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.
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<PAGE>
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>
Ronald E. Bostian 60 Chairman, President and Chief 1990
Executive Officer
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.
73
<PAGE>
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION /1/ COMPENSATION
------------------ ------ ----- --------------- ------------
<S> <C> <C> <C> <C>
Ronald E. Bostian $162,4292 $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
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.
74
<PAGE>
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.
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 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
75
<PAGE>
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 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 47,600 and 64,400 shares assuming the
issuance of between 595,000 and 805,000 shares.
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
76
<PAGE>
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."
In connection with the establishment of the ESOP, the Company will
establish a committee of the Board of Directors to administer the ESOP. Trustees
for the ESOP will also be appointed prior to the Conversion. The ESOP committee
may instruct the trustees regarding investment of funds contributed to the ESOP.
Participating employees shall instruct the trustees as to the voting of all
shares allocated to their respective accounts and held in the ESOP. The
unallocated shares held in the suspense account, and all allocated shares for
which voting instructions are not received, will be voted by the trustees in
their discretion subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended.
The ESOP may be considered an "anti-takeover" device since the ESOP
may become the owner of a sufficient percentage of the total outstanding Common
Stock of the Company that the vote or decision whether to tender shares of the
ESOP may be used as a defense in a contested takeover. See "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
77
<PAGE>
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 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 805,000 shares in the Conversion and receipt
of stockholder approval, 32,200 shares would be issued pursuant to the MRP and
allocated as follows:
<TABLE>
<CAPTION>
ESTIMATED NUMBER
OF RESTRICTED SHARES PERCENTAGE OF TOTAL
RECIPIENT TITLE TO BE GRANTED RESTRICTED SHARES ISSUED
--------- ----- ------------- ------------------------
<S> <C> <C> <C>
Malcolm B. Blankenship, Jr. Director 3,220 10 %
James W. Duke Director 3,220 10 %
Harold C. Earnhardt Vice Chairman 3,220 10 %
K. V. Epting, Jr. Director 3,220 10 %
Gordon P. Hurley Director 1,610 5 %
Bobby A. Lomax Director 3,220 10 %
Ronald E. Bostian Chairman, President, and 6,440 20 %
Chief Executive Officer
Jeffrey C. Chisholm Senior Vice President and 4,025 12.5%
Chief Lending Officer
Dianne E. Hawkins Vice President, Treasurer, 4,025 12.5%
------ -----
and Controller
Total 32,200 100 %
====== =====
</TABLE>
78
<PAGE>
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 exercise of the stock
options granted under the Option Plan. Assuming the issuance of between 595,000
and 805,000 shares in the Conversion, an aggregate of between 59,500 and 80,500
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.
79
<PAGE>
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.
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 805,000 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:
80
<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 2,415 3%
James W. Duke Director 2,415 3%
Harold C. Earnhardt Vice Chairman 2,415 3%
K. V. Epting, Jr. Director 2,415 3%
Gordon P. Hurley Director 2,415 3%
Bobby A. Lomax Director 2,415 3%
Ronald E. Bostian Chairman, President, and 16,100 20%
Chief Executive Officer
Jeffrey C. Chisholm Senior Vice President and 8,050 10%
Chief Lending Officer
Dianne E. Hawkins Vice President, Treasurer, 8,050 10%
and Controller
Other Employees 33,810 42%
------ ---
Total 80,500 100%
====== ===
</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
81
<PAGE>
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.
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.
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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 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.
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Board of Directors. The Bylaws of the Company provide that the number
of directors shall not be less than five nor more than 15. The initial number of
directors is seven, but such number may be changed by resolution of the Board of
Directors. These provisions have the effect of enabling the Board of Directors
to elect directors friendly to management in the event of a non-negotiated
takeover attempt and may make it more difficult for a person seeking to acquire
control of the Company to gain majority representation on the Board of Directors
in a relatively short period of time. The Company believes these provisions to
be important to continuity in the composition and policies of the Board of
Directors.
The Articles of Incorporation provide that, if and when the number of
directors is at least nine, there will be staggered elections of directors so
that the directors will each be initially elected to one, two or three-year
terms, and thereafter (so long as the number of directors is nine or more) all
directors will be elected to terms of three years each. This provision also has
the effect of making it more difficult for a person seeking to acquire control
of the Company to gain majority representation on the Board of Directors.
The Articles of Incorporation and Bylaws of the Company provide that
directors may be removed prior to the end of their term only for cause.
Cumulative Voting. The Articles of Incorporation do not provide for
cumulative voting for any purpose. Cumulative voting in election of directors
entitles a stockholder to cast a total number of votes equal to the number of
directors to be elected multiplied by the number of his or her shares and to
distribute that number of votes among such number of nominees as the stockholder
chooses. The absence of cumulative voting for directors limits the ability of a
minority stockholder to elect directors. Because the holder of less than a
majority of the Company's shares cannot be assured representation on the Board
of Directors, the absence of cumulative voting may discourage accumulations of
the Company's shares or proxy contests that would result in changes in the
Company's management. The Board of Directors believes that (i) elimination of
cumulative voting will help to assure continuity and stability of management and
policies; (ii) directors should be elected by a majority of the stockholders to
represent the interests of the stockholders as a whole rather than be the
special representatives of particular minority interests; and (iii) efforts to
elect directors representing specific minority interests are potentially
divisive and could impair the operations of the Company.
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.
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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.
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 rcharter 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 40.32% or 35.54%, 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
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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, 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."
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,
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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 ____________, 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 November 19, 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.
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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."
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
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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.
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
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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.
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."
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. 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
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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 ($30.00) 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 November 19, 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 4, 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 (deposit account holders 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 (deposit
account holders 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 _______________, 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
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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 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
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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 4, 1999, unless further extended with the consent of the OTS. The
Offering may not be extended beyond November 19, 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 20,000 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 $30.00 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.
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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 4, 1999, unless further extended with the consent of the OTS.
The Offering may not be extended beyond November 19, 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 $30.00 per share. The purchase price was determined by the Boards of
Directors of the Company and the Bank in consultation with the Bank's financial
advisor and sales agent, Trident Securities, and was based upon a number of
factors. The Board of Directors considered a purchase price of $30.00 preferable
to a lower per share price for several reasons. It was hoped that, in the event
of an oversubscription, the higher price would result in a wider distribution of
the Common Stock. See "--Subscription Offering - Eligible Account Holders."
Additionally, the Board of Directors would like the Company and the Bank to be
more closely identified with the commercial banks doing business in its market
area which have common stock trading at per share prices in the range of
approximately $50.00 to $90.00.
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
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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. 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.
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
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 August 28, 1998, the Estimated
Valuation Range of the Bank and the Company was from a minimum of $17,850,000 to
a maximum of $24,150,000, with a midpoint of $21,000,000. Based upon such
valuation and a purchase price for shares offered in the Conversion of $30.00
per share, the number of shares to be offered ranges from a minimum of 595,000
shares to a maximum of 805,000 shares, with a midpoint of 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 $27,772,500 (925,750 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
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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."
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 November 19, 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
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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 ____________, 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.
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
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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
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
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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 $312,000 and $519,000 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.
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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 15 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.
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
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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
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.
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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.
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
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requirements and restrictions, annual and periodic reporting and other
requirements of the Exchange Act will be applicable to the Company.
ADDITIONAL INFORMATION
The Company has filed a registration statement with the SEC on Form S-1
under the Securities Act, with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all of the information set forth in the registration statement. Such
information can be examined and copied at the public reference facilities of the
SEC located at Room 1024, 450 Fifth Street, N. W., Washington, D.C. 20549, and
at the regional offices of the SEC at 75 Park Place, Fourteenth Floor, New York,
New York 10007 and Room 3190, John C. Kluczynski Building, 230 South Dearborn
Street, Chicago, Illinois 60604. Copies of such material can be obtained by mail
from the SEC at prescribed rates from the Public Reference Section of the SEC at
450 Fifth Street, N. W., Washington, D.C. 20549. In addition, the SEC maintains
a World Wide Web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC, including the Company; the address is (http://www.sec.gov.). The statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions of each material feature thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
The Bank has filed 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, 407
West Innes Street, Salisbury, North Carolina 28144-4232.
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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 of Citizens Bank,
FSB with account balances of at least $50.00
as of the close of business on December 31,
1996
ERISA Employee Retirement Income Security 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 $17,850,000 to
$24,150,000. The maximum of the Estimated
Valuation Range may be increased to
$27,772,500 without a resolicitation of
subscribers
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Time 12:00 noon, local time, on November 19, 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
MRP Management Recognition Plan to be adopted no
earlier than twelve months after the
Conversion
A-1
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NASD National Association of Securities Dealers,
Inc.
NPV Net Portfolio Value
Offering Subscription Offering, Community Offering
and Syndicated Community Offering,
collectively
Option Plan 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 (other than Eligible
Account Holders and Supplemental Eligible
Account Holders) and certain borrowers
(borrowers whose loans were
outstanding on 1998 _________________, and
continue to be outstanding) who are
entitled to vote at the Special Meeting due
to the existence of a savings 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 $30.00 per share price of the Common Stock
SAIF Savings Association Insurance Fund of the
FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards
adopted by FASB
Special Meeting Special Meeting of members of the Bank on
November 19, 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
Account Holders Depositors, who are not Eligible Account
Holders of the Bank, with account balances
of at least $50.00 on September 30, 1998
A-2
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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 __________________,
1998, the date for determining members
entitled to vote at the Special Meeting.
A-3
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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 925,750 SHARES
COMMON STOCK
($30.00 par value per share)
PROSPECTUS
TRIDENT SECURITIES, INC.
___________, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR
GUARANTEED
Until ____________, 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
II-1
<PAGE>
(y) in all other cases the director's conduct was at least not opposed to the
corporation's best interests, and (iii) in the case of any criminal proceeding,
the director had no reasonable cause to believe the director's conduct was
unlawful. A corporation may not indemnify a director in connection with a
proceeding by or in the right of the corporation in which the director was
adjudged liable to the corporation or in connection with a proceeding charging
improper personal benefit to the director. The above standard of conduct is
determined by the board of directors, or a committee or special legal counsel or
the shareholders as prescribed in Section 55-8-55.
Sections 55-8-52 and 55-8-26 of the NCBCA require a corporation to
indemnify a director or officer in the defense of any proceeding to which the
director or officer was a party against reasonable expenses when the director or
officer is wholly successful in the director's or officer's defense, unless the
articles of incorporation provide otherwise. Upon application, the court may
order indemnification of the director or officer if the director or officer is
adjudged fairly and reasonably so entitled under Section 55-8-54.
In addition, Section 55-8-57 permits a corporation to provide for
indemnification of directors, officers, employees or agents, in its articles of
incorporation or bylaws or by contract or resolution, against liability in
various proceedings and to purchase and maintain insurance policies on behalf of
these individuals.
The foregoing is only a general summary of certain aspects of North
Carolina law dealing with indemnification of directors and officers and does not
purport to be complete. It is qualified in its entirety by reference to the
relevant statutes, which contain detailed specific provisions regarding the
circumstances under which and the person for whose benefit indemnifications
shall or may be made.
Item 15. Recent Sales of Unregistered Securities. On August 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. (to be filed
subsequently)
(2) 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 (to
be filed subsequently)
(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
(10)(c) Form of the Management Recognition Plan and Trust
of Citizens Bank, FSB
II-3
<PAGE>
Exhibit No.
(Per Exhibit
Tables in
Item 601 of
Regulation S-K) Description
--------------- -----------
(10)(d) Form of Registrant's Stock Option Plan
(10)(e) Form of Citizens Bank, FSB Severance Plan
(10)(g) Amended and Restated Nonqualified Deferred
Compensation Plan
(10)(f) Amended and Restated Directors Deferred
Compensation Plan
(23)(a) Consent of Brooks, Pierce, McLendon, Humphrey &
Leonard LLP (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
(b) Financial Statement Schedules
-----------------------------
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
II-4
<PAGE>
Item 17. Undertakings.
------------
(a) The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter
to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
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;
II-5
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this 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 September 11, 1997.
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: September 11, 1998
- ------------------------------------------
Ronald E. Bostian
(President and Chief Executive Officer)
/s/ Dianne E. Hawkins Date: September 11, 1998
- ------------------------------------------
Dianne E. Hawkins
(Treasurer and Controller)
/s/ Malcolm B. Blankenship, Jr. Date: September 11, 1998
- ------------------------------------------
Malcolm B. Blankenship, Jr.
(Director)
/s/ James W. Duke Date: September 11, 1998
- ------------------------------------------
James W. Duke
(Director)
/s/ Harold C. Earnhardt Date: September 11, 1998
- ------------------------------------------
Harold C. Earnhardt
(Vice Chairman)
/s/ K.V. Epting, Jr. Date: September 11, 1998
- ------------------------------------------
K.V. Epting, Jr.
(Director)
/s/ Gordon P. Hurley Date: September 11, 1998
- ------------------------------------------
Gordon P. Hurley
(Director)
/s/ Bobby A. Lomax Date: September 11, 1998
- ------------------------------------------
Bobby A. Lomax
(Director)
II-7
<PAGE>
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. (to be filed
subsequently)
(2) 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 (to
be filed subsequently)
(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
<PAGE>
April 27, 1998
Board of Directors
Citizens Savings Bank, SSB
401 West Innes Street
Salisbury, North Carolina 28145
RE: Conversion Stock Marketing Services
Gentlemen:
This letter sets forth the terms of the proposed engagement between Trident
Securities, Inc. ("Trident") and Citizens Savings Bank, SSB, Salisbury, North
Carolina (the "Bank") concerning our investment banking services in connection
with the conversion of the Bank from a mutual to a capital stock form of
organization.
Trident is prepared to assist the Bank in connection with the offering of its
shares of common stock during the subscription offering and community offering
as such terms are defined in the Bank's Plan of Conversion. The specific terms
of the services contemplated hereunder shall be set forth in a definitive sales
agency agreement (the "Agreement") between Trident and the Bank to be executed
on the date the offering circular/prospectus is declared effective by the
appropriate regulatory authorities. The price of the shares during the
subscription offering and community offering will be the price established by
the Bank's Board of Directors, based upon an independent appraisal as approved
by the appropriate regulatory authorities, provided such price is mutually
acceptable to Trident and the Bank.
In connection with the subscription offering and community offering, Trident
will act as financial advisor and exercise its best efforts to assist the Bank
in the sale of its common stock during the subscription offering and community
offering. Additionally, Trident may enter into agreements with other National
Association of Securities Dealers, Inc., ("NASD") member firms to act as
selected dealers, assisting in the sale of the common stock. Trident and the
Bank will determine the selected dealers to assist the Bank during the community
offering. At the appropriate time, Trident in conjunction with its counsel,
will conduct an examination of the relevant documents and records of the Bank as
Trident deems necessary and appropriate. The Bank will make all documents,
records and other information deemed necessary by Trident or its counsel
available to them upon request.
For its services hereunder, Trident will receive the following compensation and
reimbursement from the Bank:
1. A management fee in the amount of .25 percent (.25%) of the aggregate
dollar amount of capital stock sold in both the subscription and
community offering.
<PAGE>
Board of Directors
April 27, 1998
Page 2
2. A commission equal to two percent (2.00%) of the aggregate dollar
amount of capital stock sold in the subscription and community
offerings, excluding any shares of conversion stock sold to the Bank's
directors, executive officers and the employee benefit plan.
Additionally, commissions will be excluded on those shares sold to
"associates" of the Bank's directors and executive officers. The term
"associates" as used herein shall have the same meaning as that found
in the Bank's Plan of Conversion.
3. For stock sold by other NASD member firms under selected dealer's
agreements, the commission shall not exceed a fee to be agreed upon
jointly by Trident and the Bank to reflect market requirements at the
time of the stock allocation in a Syndicated Community Offering.
4. The foregoing fees and commissions are to be payable to Trident at
closing as defined in the Agreement to be entered into between the
Bank and Trident.
5. Trident shall be reimbursed for allocable expenses incurred by them,
including legal fees, whether or not the Agreement is consummated.
Trident's out-of-pocket expenses will not exceed $10,000 and its legal
fees will not exceed $27,500. The Bank will forward to Trident a check
in the amount of $10,000 as an advance payment to defray the allocable
expenses of Trident.
It further is understood that the Bank will pay all other expenses of the
conversion including but not limited to its attorneys' fees, NASD filing fees,
and filing and registration fees and fees of either Trident's attorneys or the
attorneys relating to any required state securities law filings, telephone
charges, air freight, rental equipment, supplies, transfer agent charges, fees
relating to auditing and accounting and costs of printing all documents
necessary in connection with the foregoing.
For purposes of Trident's obligation to file certain documents and to make
certain representations to the NASD in connection with the conversion, the Bank
warrants that: (a) the Bank has not privately placed any securities within the
last 18 months; (b) there have been no material dealings within the last 12
months between the Bank and any NASD member or any person related to or
associated with any such member; (c) none of the officers or directors of the
Bank has any affiliation with the NASD; (d) except as contemplated by this
engagement letter with Trident, the Bank has no financial or management
consulting contracts outstanding with any other person; (e) the Bank has not
granted Trident a right of first refusal with respect to the underwriting of any
future offering of the Bank stock; and (f) there has been no intermediary
between Trident and the Bank in connection with the public offering of the
Bank's shares, and no person is being compensated in any manner for providing
such service.
The Bank agrees to indemnify and hold harmless Trident and each person, if any,
who controls the firm against all losses, claims, damages or liabilities, joint
or several and all legal or other expenses reasonably incurred by them in
connection with the investigation or defense thereof
<PAGE>
Board of Directors
April 27, 1998
Page 3
(collectively, "Losses"), to which they may become subject under the securities
laws or under the common law, that arise out of or are based upon the conversion
or the engagement hereunder of Trident. If the foregoing indemnification is
unavailable for any reason, the Bank agrees to contribute to such Losses in the
proportion that its financial interest in the conversion bears to that of the
indemnified parties. If the Agreement is entered into with respect to the common
stock to be issued in the conversion, the Agreement will provide for
indemnification, which will be in addition to any rights that Trident or any
other indemnified party may have at common law or otherwise. The indemnification
provision of this paragraph will be superseded by the indemnification provisions
of the Agreement entered into by the Bank and Trident.
This letter is merely a statement of intent and is not a binding legal agreement
except as to paragraph (5) above with regard to the obligation to reimburse
Trident for allocable expenses to be incurred prior to the execution of the
Agreement and the indemnity described in the preceding paragraph. While Trident
and the Bank agree in principle to the contents hereof and propose to proceed
promptly, and in good faith, to work out the arrangements with respect to the
proposed offering, any legal obligations between Trident and the Bank shall be
only as set forth in a duly executed Agreement. Such Agreement shall be in form
and content satisfactory to Trident and the Bank, as well as their counsel, and
Trident's obligations thereunder shall be subject to, among other things, there
being in Trident's opinion no material adverse change in the condition or
obligations of the Bank or no market conditions which might render the sale of
the shares by the Bank hereby contemplated inadvisable.
Please acknowledge your agreement to the foregoing by signing below and
returning to Trident one copy of this letter along with the advance payment of
$10,000. This proposal is open for your acceptance for a period of thirty (30)
days from the date hereof.
Yours very truly,
TRIDENT SECURITIES, INC.
By: /s/ R. Lee Burrows, Jr.
--------------------------------
R. Lee Burrows, Jr.
Managing Director
Agreed and accepted to this 21st day
of May, 1998
CITIZENS SAVINGS BANK, SSB
By: /s/ Ronald E. Bostian
-----------------------------
Ronald E. Bostian
President
<PAGE>
PLAN OF CONVERSION
OF
CITIZENS BANK, FSB
SALISBURY, NORTH CAROLINA
FROM MUTUAL TO STOCK ORGANIZATION
I. GENERAL
On September 1, 1998, the Board of Directors of Citizens Bank, FSB,
Salisbury, North Carolina (the "Savings Bank") adopted a Plan of Conversion
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.
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 the estimated aggregate pro forma
market value of the Savings
<PAGE>
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).
N. Eligibility Record Date: The close of business on December 31, 1996.
2
<PAGE>
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 deposit 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 negotiable order of withdrawal 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.
MM. Special Meeting: The Special Meeting of Members called for the
purpose of considering approval of the Plan.
4
<PAGE>
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.
C. Copies of the Plan shall be made available for inspection at each
office of the Savings Bank.
5
<PAGE>
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.
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
6
<PAGE>
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, 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.
7
<PAGE>
The Holding Company may issue an additional 3% of the total number of
shares of Conversion Stock sold under certain circumstances involving an
improper allocation of shares in the Conversion.
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.
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
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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.
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
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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 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
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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 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.
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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.
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.
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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:
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
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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 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.
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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.
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
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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.
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
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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.
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
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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.
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.
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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 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
19
<PAGE>
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.
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
20
<PAGE>
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.
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
21
<PAGE>
(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 change sin control or amendment
of the charter may only be called by the Board of Directors.
22
<PAGE>
ARTICLES OF INCORPORATION
OF
INNES STREET FINANCIAL CORPORATION
ARTICLE I
The name of the corporation is Innes Street Financial Corporation (the
"Corporation").
ARTICLE II
SECTION 2.1. TOTAL AUTHORIZED SHARES OF CAPITAL STOCK. The Corporation
----------- ----------------------------------------
shall have authority to issue a total of 25,000,000 shares of capital stock,
none of which shall have any par value, divided into classes as follows:
Class Number of Shares
----- ----------------
Common Stock 20,000,000
Preferred Stock 5,000,000
SECTION 2.2. COMMON STOCK. The shares of Common Stock shall be of one
----------- ------------
and the same class. Subject to the rights of holders of the Preferred Stock as
determined by the Board of Directors pursuant to Section 2.3 hereof and by the
North Carolina Business Corporation Act ("NCBCA") as now constituted or
hereafter amended, the holders of shares of Common Stock shall have one vote per
share on all matters on which holders of shares of Common Stock are entitled to
vote and shall be entitled to participate pro rata after preferential rights of
holders of Preferred Stock in the distribution of the net assets of the
Corporation upon dissolution.
SECTION 2.3. PREFERRED STOCK. The shares of Preferred Stock may be
----------- ---------------
issued from time to time by the Corporation, and the Board of Directors may
create and divide such shares into
<PAGE>
series within that class, and such shares and the shares of each such series
shall have such voting powers, full or limited, or no voting powers, and such
designations, preferences, limitations and relative rights (or qualifications,
conditions or restrictions thereon) as the Board of Directors may and hereby is
authorized to determine.
ARTICLE III
The street address and county of the initial registered office of the
Corporation is 401 West Innes Street, Salisbury, Rowan County, North Carolina
28144. The mailing address of the initial registered office of the Corporation
is Post Office Box 1929, Salisbury, North Carolina 28145-1929. The name of the
initial registered agent is Ronald E. Bostian.
ARTICLE IV
The name and address of the incorporator is as follows:
Ronald E. Bostian
401 West Innes Street
Salisbury, North Carolina 28144
ARTICLE V
To the fullest extent permitted by the NCBCA as it exists or may hereafter
be amended, no person who is serving or has served as a director of the
Corporation shall be personally liable to the Corporation or any of its
shareholders or otherwise for monetary damages for breach of any duty as a
director. No amendment or repeal of this Article, nor the adoption of any
provision to these Articles of Incorporation inconsistent with this Article,
shall eliminate or reduce the protection granted herein with respect to any
matter that occurred prior to such amendment, repeal, or adoption.
2
<PAGE>
ARTICLE VI
The provisions of Article 9 and Article 9A of the NCBCA entitled "The North
Carolina Shareholder Protection Act" and "The North Carolina Control Share
Acquisition Act," respectively, shall not be applicable to the Corporation.
ARTICLE VII
SECTION 7.1. DEFINITIONS AND TERMS WITH RESPECT TO ARTICLE VII. For
----------- -------------------------------------------------
purposes of this Article VII, the following definitions shall apply:
(a) The terms "Business Combination" shall mean any transaction in
connection with (i) a combination or merger of the Corporation, (ii) the
acquisition of more than ten percent (10%) of the Corporation's outstanding
Voting Shares, or (iii) a purchase or sale of a substantial portion of the
assets of the Corporation or a Subsidiary thereof (a purchase or sale of 20% or
more of the total assets of the Corporation or a Subsidiary as of the end of the
most recent quarterly period being deemed as "substantial") in each case, as
applicable, which requires the approval of, or notice to and absence of
objection by (i) any federal or state regulatory authority of banks, savings
banks, savings and loan associations or their holding companies, (ii) the
Federal Trade Commission or the Anti-Trust Division of the United States
Department of Justice, or (iii) the shareholders of the Corporation, but
excluding any reorganization, acquisition, merger, purchase or sale of assets,
or combination initiated by the Corporation upon the vote of at least fifty-one
percent (51%) of the Continuing Directors.
(b) The term "Continuing Director" shall mean any member of the Board
of Directors of the Corporation who is unaffiliated with the Related Person and
was a member of the Board of Directors prior to the time that the Related Person
became a Related Person, and any
3
<PAGE>
successor of a Continuing Director who is unaffiliated with the Related Person
and is recommended to succeed a Continuing Director by a majority of the
Continuing Directors.
(c) The term "Person" shall mean an individual, a corporation, a
limited liability company, a partnership, an association, a joint stock company,
a trust, or an unincorporated organization or similar company, and also includes
a syndicate or any group of any of the foregoing formed or acting together in
concert for the purpose of acquiring, holding or disposing of the equity
securities or assets of the Corporation or any Subsidiary.
(d) The term "Related Person" shall mean any individual, partnership,
corporation, trust or other person or entity (together with its "affiliates" and
"associates," as defined in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended (the "1934 Act")) which as
of the date of its offer with respect to a Business Combination is a "beneficial
owner" (as defined in Rule 13d-3 under the 1934 Act) in the aggregate of ten
percent (10%) or more of the outstanding Voting Shares of the Corporation. A
Related Person shall be deemed to have acquired a share of the Voting Stock of
the Corporation at the time when such Related Person became the beneficial owner
thereof.
(e) The term "Subsidiary" shall mean any corporation or other entity
of which the Person in question owns not less than fifty percent (50%) of any
class of equity securities, directly or indirectly.
(f) The term "Voting Shares" shall mean any shares of the authorized
stock of the Corporation entitled to vote generally in the election of
directors.
(g) The term "Whole Board of Directors" shall mean the total number of
directors which the Corporation would have if there were no vacancies on the
Board.
4
<PAGE>
SECTION 7.2. RIGHTS OF SHAREHOLDERS. The affirmative vote of the
----------- ----------------------
holders of seventy-five percent (75%) or more of the outstanding Voting Shares,
voting separately as a class, shall be required for the approval or
authorization of any Business Combination, provided, however, that the seventy-
five percent (75%) voting requirement shall not be applicable and such Business
Combination may be approved by the shareholder vote required by law and any
other provision of these Articles of Incorporation if the Business Combination
is approved by the Board of Directors of the Corporation by the affirmative vote
of (a) at least seventy-five percent (75%) of the Whole Board of Directors, and
(b) if such Business Combination is proposed by a Related Person, at least
seventy-five percent (75%) of the Continuing Directors, in either case at a duly
called or convened regular or special meeting of the Board of Directors.
SECTION 7.3. FIDUCIARY OBLIGATIONS. Nothing contained in this Article
----------- ---------------------
VII shall be construed to relieve any Related Person from any fiduciary
obligation imposed by law or equity.
SECTION 7.4. STANDARDS OF BOARD OF DIRECTORS' EVALUATION OF AN OFFER.
----------- -------------------------------------------------------
The Board of Directors of the Corporation, when evaluating any offer of another
Person to effect a Business Combination shall, in connection with the exercise
of its judgment in determining what is in the best interests of the Corporation
and its shareholders, give due consideration to all relevant factors, including,
without limitation: (i) the social and economic effects of acceptance of such
offer on its depositors, borrowers, other customers, employees, and creditors of
the Corporation and its Subsidiaries, and on the communities in which the
Corporation and its Subsidiaries operate or are located; (ii) the ability of the
Corporation and its Subsidiaries to fulfill the objectives of a bank and/or
savings bank and/or savings and loan association holding company, as applicable,
and of commercial banking and/or savings bank and/or savings and loan entities,
5
<PAGE>
as applicable, under applicable federal and state statutes and regulations;
(iii) the business and financial condition and prospects and earnings prospects
of the Person or Persons proposing the Business Combination, including, but not
limited to, debt service and other existing financial obligations, financial
obligations to be incurred in connection with the Business Combination, and
other likely financial obligations of such Person or Persons, and the possible
effect of such conditions and prospects upon the Corporation and its
Subsidiaries and the communities in which the Corporation and its Subsidiaries
are located; (iv) the competence, experience, and integrity of the Person or
Persons proposing the Business Combination and its or their management; and (v)
the prospects for successful conclusion of the proposed Business Combination.
The provisions of this Article VII shall be deemed solely to grant discretionary
authority to the Board of Directors and shall not be deemed to provide any
constituency the right to be considered or to compel the consideration of its
interests.
SECTION 7.5. AMENDMENT AND REPEAL OF ARTICLE VII. Notwithstanding any
----------- -----------------------------------
other provision of these Articles of Incorporation or the Bylaws of the
Corporation (and notwithstanding the fact that a lesser percentage may be
specified by law) any amendment, change or repeal of this Article VII, or any
other amendment of these Articles of Incorporation which will have the effect of
modifying or permitting circumvention of this Article VII, shall require the
affirmative vote of the holders of at least seventy-five percent (75%) of the
then outstanding Voting Shares of the Corporation, voting separately as a class;
provided, however, that this restriction shall not apply to, and such seventy-
five percent (75%) vote shall not be required for, any such amendment, change or
repeal recommended to shareholders of the Corporation by the affirmative vote of
at least (a) seventy-five percent (75%) of the Whole Board
6
<PAGE>
of Directors, and (b) if at such time there shall be a Related Person, at least
seventy-five percent (75%) of the Continuing Board of Directors, and in either
such event such amendment, change or repeal so recommended shall require only
the vote, if any, required under the applicable provisions of the NCBCA.
ARTICLE VIII
SECTION 8.1. BOARD OF DIRECTORS. The number of directors of the
----------- ------------------
Corporation shall not be less than five (5) nor more than fifteen (15), with the
exact number to be fixed from time to time as provided in the Corporation's
Bylaws.
In the first election of directors, and in all elections thereafter, that
the total number of directors as fixed pursuant to the Corporation's Bylaws is
nine (9) or more, the directors shall be divided into three (3) classes, as
nearly equal as possible in number as may be, to serve in the first instance for
terms of one, two and three years, respectively, from the date such class of
directors takes office or until their earlier death, resignation, retirement,
removal or disqualification or until their successors shall be elected and shall
qualify, and thereafter the successors in each class of directors shall be
elected for terms of three (3) years or until their earlier death, resignation,
retirement, removal, or disqualification or until their successors shall be
elected and shall qualify. In the event of any increase or decrease in the
number of directors at a time that the directors are so classified, the
additional or eliminated directorships shall be classified or chosen so that all
classes of directors shall remain or become as nearly equal as possible in
number. At all times that the number of directors, as fixed pursuant to the
Corporation's Bylaws, is less than nine (9), each director shall be elected to a
term ending as of the next succeeding annual meeting of
7
<PAGE>
shareholders or until his or her earlier death, resignation, retirement, removal
or disqualification or until his or her successor shall be elected and shall
qualify.
SECTION 8.2. INITIAL BOARD OF DIRECTORS. The number of directors
----------- --------------------------
constituting the initial Board of Directors of the Corporation shall be seven
(7) and the names of the persons who are to serve as directors of the
Corporation until the first meeting of shareholders or until their successors
are elected and qualify are:
Malcolm B. Blankenship, Jr.
Ronald E. Bostian
James W. Duke
Harold C. Earnhardt
K. V. Epting, Jr.
Gordon P. Hurley
Bobby A. Lomax
This the 23rd day of June, 1998.
By: /s/ Ronald E. Bostian
----------------------------
Ronald E. Bostian
Incorporator
8
<PAGE>
BYLAWS
OF
INNES STREET FINANCIAL CORPORATION
ARTICLE I
OFFICES
-------
Section 1. Principal Office. The principal office of the corporation
----------------
shall be located at such place as the Board of Directors may fix from time to
time.
Section 2. Registered Office. The registered office of the
-----------------
corporation required by law to be maintained in the State of North Carolina may
be, but need not be, identical with the principal office.
Section 3. Other Offices. The corporation may have offices at such
-------------
other places, either within or without the State of North Carolina, as the Board
of Directors may designate or as the affairs of the corporation may require from
time to time.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. Place of Meetings. All meetings of shareholders shall be
-----------------
held at the principal office of the corporation, or at such other place, either
within or without the State of North Carolina, as shall in each case be (i)
fixed by the Chief Executive Officer, the President, the Chairman of the Board,
or the Board of Directors and designated in the notice of the meeting or (ii)
agreed upon by a majority of the shareholders entitled to vote at the meeting.
Section 2. Annual Meetings. The annual meeting of shareholders shall
---------------
be held during the first five (5) calendar months following the end of the
corporation's fiscal year, on any day (except Saturday, Sunday, or a legal
holiday) during that period as shall be determined by the Board of Directors,
for the purpose of electing directors of the corporation and for the transaction
of such other business as may be properly brought before the meeting.
Section 3. Substitute Annual Meeting. If the annual meeting shall
-------------------------
not be held within the time designated by these Bylaws, a substitute annual
meeting may be called in accordance with the provisions of Section 4 of this
Article II. A meeting so called shall be designated and treated for all
purposes as the annual meeting.
<PAGE>
Section 4. Special Meetings. Special meetings of the shareholders
----------------
may be called at any time by the Chief Executive Officer, the President, the
Chairman of the Board of Directors or the Board of Directors.
Section 5. Notice of Meetings. Written notice stating the date,
------------------
time, and place of the meeting shall be given not less than ten (10) nor more
than sixty (60) days before the date of any shareholders' meeting, either by
personal delivery, or by mail by or at the direction of the Chief Executive
Officer, the President, the Chairman of the Board of Directors or the Board of
Directors, to each shareholder entitled to vote at such meeting, provided that
such notice must be given to all shareholders with respect to any meeting at
which a merger or share exchange is to be considered and in such other instances
as required by law. If mailed, such notice shall be deemed to be effective when
deposited in the United States mail, correctly addressed to the shareholder at
the shareholder's address as it appears on the current record of shareholders of
the corporation, with postage thereon prepaid.
In the case of a special meeting, the notice of meeting shall include
a description of the purpose or purposes for which the meeting is called; but,
in the case of an annual or substitute annual meeting, the notice of meeting
need not include a description of the purpose or purposes for which the meeting
is called unless such a description is required by the provisions of the North
Carolina Business Corporation Act.
When a meeting is adjourned to a different date, time or place, notice
need not be given of the new date, time or place if the new date, time or place
is announced at the meeting before adjournment and if a new record date is not
fixed for the adjourned meeting. If a new record date is fixed for the
adjourned meeting (which must be done if the new date is more than 120 days
after the date of the original meeting), notice of the adjourned meeting must be
given as provided in this Section 5 to persons who are shareholders as of the
new record date.
Section 6. Waiver of Notice. Any shareholder may waive notice of any
----------------
meeting before or after the meeting. The waiver must be in writing, signed by
the shareholder, and delivered to the corporation for inclusion in the minutes
or filing with the corporate records. A shareholder's attendance, in person or
by proxy, at a meeting (i) waives objection to lack of notice or defective
notice of the meeting, unless the shareholder or his proxy at the beginning of
the meeting objects to holding the meeting or transacting business at the
meeting, and (ii) waives objection to consideration of a particular matter at
the meeting that is not within the purpose or purposes described in the meeting
notice, unless the shareholder or his proxy objects to considering the matter
before it is voted upon.
Section 7. Shareholders' List. Before each meeting of shareholders,
------------------
the Secretary of the corporation shall prepare an alphabetical list of the
shareholders entitled to notice of such meeting. The list shall be arranged by
voting group (and within each voting group by class or series of shares) and
show the address of and number of shares held by each shareholder. The list
shall be kept on file at the principal office of the corporation, or at a place
identified in the meeting notice in the city
2
<PAGE>
where the meeting will be held, for the period beginning two (2) business days
after notice of the meeting is given and continuing through the meeting, and
shall be available for inspection by any shareholder, his agent or attorney, at
any time during regular business hours. The list shall also be available at the
meeting and shall be subject to inspection by any shareholder, his agent or
attorney, at any time during the meeting or any adjournment thereof.
Section 8. Fixing Record Date. The Board of Directors may fix a
------------------
future date as the record date for one (1) or more voting groups in order to
determine the shareholders entitled to notice of a shareholders' meeting, to
demand a special meeting, to vote, or to take any other action. Such record
date may not be more than seventy (70) days before the meeting or action
requiring a determination of shareholders. A determination of shareholders
entitled to notice of or to vote at a shareholders' meeting is effective for any
adjournment of the meeting unless the Board of Directors fixes a new record date
for the adjourned meeting, which it must do if the meeting is adjourned to a
date more than 120 days after the date fixed for the original meeting.
If no record date is fixed by the Board of Directors for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, the close of business on the day before the first notice of the
meeting is delivered to shareholders shall be the record date for such
determination of shareholders.
Section 9. Voting Groups. All shares of one (1) or more classes or
-------------
series that, under the Articles of Incorporation or the North Carolina Business
Corporation Act, are entitled to vote and be counted together collectively on a
matter at a meeting of shareholders constitute a voting group. All shares
entitled by the Articles of Incorporation or the North Carolina Business
Corporation Act to vote generally on a matter are for that purpose a single
voting group. Classes or series of shares shall not be entitled to vote
separately by voting group unless expressly authorized by the Articles of
Incorporation or specifically required by law.
Section 10. Quorum. Shares entitled to vote as a separate voting
------
group may take action on a matter at the meeting only if a quorum of those
shares exists. A majority of the votes entitled to be cast on the matter by the
voting group constitutes a quorum of that voting group for action on that
matter.
Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.
In the absence of a quorum at the opening of any meeting of
shareholders, such meeting may be adjourned from time to time by the vote of a
majority of the votes cast on the motion to adjourn; and, subject to the
provisions of Section 5 of this Article II, at any adjourned meeting any
business may be transacted that might have been transacted at the original
meeting if a quorum exists with respect to the matter proposed.
3
<PAGE>
Section 11. Proxies. Shares may be voted either in person or by one
-------
(1) or more proxies authorized by a written appointment of proxy signed by the
shareholder or by his duly authorized attorney in fact. An appointment of proxy
is valid for eleven (11) months from the date of its execution, unless a
different period is expressly provided in the appointment form.
Section 12. Voting of Shares. Subject to the provisions of the
----------------
Articles of Incorporation, each outstanding share shall be entitled to one (1)
vote on each matter voted on at a meeting of shareholders.
Except in the election of directors as governed by the provisions of
Section 4 of Article III, if a quorum exists, action on a matter by a voting
group is approved if the votes cast within the voting group favoring the action
exceed the votes cast opposing the action, unless a greater vote is required by
law or the Articles of Incorporation or these Bylaws.
Absent special circumstances, shares of the corporation are not
entitled to vote if they are owned, directly or indirectly, by a second
corporation in which the corporation owns, directly or indirectly, a majority of
the shares entitled to vote for directors of the second corporation; provided
that this provision does not limit the power of the corporation or such second
corporation to vote shares held by it in a fiduciary capacity.
ARTICLE III
BOARD OF DIRECTORS
------------------
Section 1. General Powers. All corporate powers shall be exercised
--------------
by or under the authority of, and the business and affairs of the corporation
shall be managed under the direction of, the Board of Directors.
Section 2. Number and Qualification. The number of directors of the
------------------------
Corporation shall not be less than five (5) nor more than fifteen (15), with the
exact number to be fixed from time to time by the Board of Directors.
Section 3. Nominations. At any meeting of shareholders at which
-----------
directors are to be elected, nominations for election to the Board of Directors
may be made by the Board of Directors or, subject to the conditions described
below, by any holder of shares entitled to be voted at that meeting in the
election of directors. To be eligible for consideration at the meeting of
shareholders, all nominations, other than those made by the Board of Directors,
shall be in writing and must be delivered to Secretary of the corporation not
less than thirty (30) days nor more than fifty (50) days prior to the meeting at
which such nominations will be made; provided, however, that if less than
twenty-one (21) days' notice of the meeting is given to shareholders, such
nominations must be delivered to the Secretary of the corporation not later than
the close of business on the seventh day following the day on which the notice
of meeting was mailed.
4
<PAGE>
Section 4. Election. Except as provided in Section 7 of this Article
--------
III, the directors shall be elected at the annual meeting of shareholders.
Those persons who receive the highest number of votes at a meeting at which a
quorum is present shall be deemed to have been elected.
Section 5. Terms of Directors. Each initial director shall hold
------------------
office until the earliest of the first shareholders' meeting at which directors
are elected, or until such director's death, resignation, or removal.
At all times that the number of directors is less than nine (9), each
director shall be elected to a term ending as of the next succeeding annual
meeting of shareholders or until his or her earlier death, resignation,
retirement, removal or disqualification or until his or her successor shall be
elected and shall qualify.
In the first election of directors that the total number of directors
is nine (9) or more, the directors shall be divided into three (3) classes, as
nearly equal as possible in number as may be, to serve in the first instance for
terms of one (1), two (2) and three (3) years, respectively, from the date such
class of directors takes office or until their earlier death, resignation,
retirement, removal or disqualification or until their successors shall be
elected and shall qualify, and thereafter the successors in each class of
directors shall be elected for terms of three (3) years or until their earlier
death, resignation, retirement, removal, or disqualification or until their
successors shall be elected and shall qualify. In the event of any increase or
decrease in the number of directors at a time that the directors are so
classified, the additional or eliminated directorships shall be classified or
chosen so that all classes of directors shall remain or become as nearly equal
as possible in number.
Notwithstanding the provisions of this Section 5, a decrease in the
number of directors does not shorten an incumbent director's term. Despite the
expiration of a director's term, such director shall continue to serve until a
successor shall be elected and qualified or until there is a decrease in the
number of directors.
Section 6. Removal. Any director may be removed from office at any
-------
time, with or without cause, by a vote of the shareholders if the number of
votes cast to remove such director exceeds the number of votes cast not to
remove him. If a director is elected by a voting group of shareholders, only
the shareholders of that voting group may participate in the vote to remove him.
A director may not be removed by the shareholders at a meeting unless the notice
of that meeting states that the purpose, or one (1) of the purposes, of the
meeting is removal of the director. If any directors are so removed, new
directors may be elected at the same meeting.
Section 7. Vacancies. Any vacancy occurring in the Board of
---------
Directors, including without limitation a vacancy resulting from an increase in
the number of directors or from the failure by the shareholders to elect the
full authorized number of directors, may be filled by the shareholders or by the
Board of Directors, whichever group shall act first. If the directors remaining
in office do not constitute a quorum, the directors may fill the vacancy by the
affirmative vote of a majority of the remaining directors or by the sole
remaining director. If the vacant office was held by a director
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elected by voting group, only the remaining director or directors elected by
that voting group or the holders of shares of that voting group are entitled to
fill the vacancy.
Section 8. Chairman of the Board of Directors. There may be a
----------------------------------
Chairman of the Board of Directors elected by the directors from their number at
any meeting of the Board of Directors. The Chairman shall serve in such
position at the pleasure of the Board of Directors and shall preside at all
meetings of the Board of Directors and shareholders, serve as a member of the
Executive Committee, and perform such other duties as may be directed by the
Board of Directors.
In the absence of the Chairman, the President shall preside at
meetings of directors or shareholders.
Section 9. Compensation. The Board of Directors may provide for the
------------
compensation of directors for their services as such and for the payment or
reimbursement of any or all expenses incurred by them in connection with such
services.
ARTICLE IV
MEETINGS AND COMMITTEES OF DIRECTORS
------------------------------------
Section 1. Regular Meetings. A regular meeting of the Board of
----------------
Directors shall be held immediately after, and at the same place as, the annual
meeting of shareholders. In addition, the Board of Directors may provide, by
resolution, the time and place, either within or without the State of North
Carolina, for the holding of additional regular meetings.
Section 2. Special Meetings. Special meetings of the Board of
----------------
Directors may be called by or at the request of the Chairman of the Board or the
President if such officer is also a director, or by any three (3) or more
directors. Such a meeting may be held either within or without the State of
North Carolina, as fixed by the person or persons calling the meeting.
Section 3. Notice of Meetings. Regular meetings of the Board of
------------------
Directors may be held without notice. The person or persons calling a special
meeting of the Board of Directors shall, at least two (2) days before the
meeting, give or cause to be given notice thereof by any usual means of
communication. Such notice need not specify the purpose for which the meeting
is called. Any duly convened regular or special meeting may be adjourned by the
directors to a later time without further notice.
Section 4. Waiver of Notice. Any director may waive notice of any
----------------
meeting before or after the meeting. The waiver must be in writing, signed by
the director entitled to the notice, and be delivered to the corporation for
inclusion in the minutes or for filing with the corporate records. A director's
attendance at or participation in a meeting waives any required notice of such
meeting unless the director at the beginning of the meeting, or promptly upon
arrival, objects to holding the
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meeting or to transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
Section 5. Quorum. Unless the Articles of Incorporation or these
------
Bylaws provide otherwise, a majority of the number of directors fixed by or
pursuant to these Bylaws shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, or if no number is so fixed,
a majority of the number of directors in office immediately before the meeting
begins shall constitute a quorum.
Section 6. Manner of Acting. Except as otherwise provided in the
----------------
Articles of Incorporation or these Bylaws, including Section 9 of this Article
IV, the affirmative vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors.
Section 7. Presumption of Assent. A director who is present at a
---------------------
meeting of the Board of Directors or a committee of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless
(i) he objects at the beginning of the meeting, or promptly upon his arrival, to
holding it or to transacting business at the meeting, or (ii) his dissent or
abstention from the action taken is entered in the minutes of the meeting, or
(iii) he files written notice of his dissent or abstention with the presiding
officer of the meeting before its adjournment or with the corporation
immediately after the adjournment of the meeting. Such right of dissent or
abstention is not available to a director who votes in favor of the action
taken.
Section 8. Action Without Meeting. Action required or permitted to
----------------------
be taken at a meeting of the Board of Directors may be taken without a meeting
if the action is taken by all members of the Board of Directors. The action
must be evidenced by one (1) or more written consents signed by each director
before or after such action, describing the action taken, and included in the
minutes or filed with the corporate records.
Section 9. Committees of the Board of Directors. The Board of
------------------------------------
Directors may create such committees of the Board of Directors as it shall
consider appropriate, including without limitation those committees specifically
provided for in these Bylaws. The creation of a committee of the Board of
Directors and appointment of members to it must by approved by the greater of
(i) a majority of the number of directors in office when the action is taken or
(ii) the number of directors required to take action pursuant to Section 6 of
this Article IV. Each committee of the Board of Directors must have two (2) or
more members and, to the extent authorized by law, shall have such duties and
authority as may be described in these Bylaws or otherwise specified by the
Board of Directors. Each committee member shall serve at the pleasure of the
Board of Directors. The provisions in these Bylaws governing meetings, actions
without meeting and other requirements of the Board of Directors shall also
apply to any committees of the Board of Directors established pursuant to these
Bylaws.
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Section 10. Executive Committee. There may be a standing committee
-------------------
of the Board of Directors to be known as the Executive Committee and consisting
of not fewer than three (3) directors, one (1) of whom shall be the Chairman of
the Board of Directors and one (1) of whom shall be the President of the
corporation, if such officer is also a director. Except as limited by Section 9
of this Article IV or otherwise limited by law, the Executive Committee is
empowered to act for and on behalf of the Board of Directors in any and all
matters in the interim between meetings of the Board of Directors. Within the
powers conferred upon it, action by the Executive Committee shall be as binding
upon the corporation as if performed by the full Board of Directors. Such
actions shall be reported to the Board of Directors for review at its next
meeting following such action. The committee shall meet as often as it
considers necessary or advisable.
Section 11. Audit Committee. There may be a standing committee of
---------------
the Board of Directors to be known as the Audit Committee and consisting of not
fewer than three (3) directors. The Audit Committee shall supervise examination
of the assets and the liabilities and the internal audit program of the
corporation and its subsidiaries, cause outside audits to be performed on the
financial statements of the corporation, and shall make periodic reports to the
Board of Directors.
ARTICLE V
OFFICERS
--------
Section 1. Officers of the Corporation. The officers of the
---------------------------
corporation shall consist of a President, a Secretary, a Treasurer, and such
Vice Presidents or other officers (including assistant officers) as may from
time to time be appointed by or under the authority of the Board of Directors.
Any two (2) or more offices may be held by the same person, but no officer may
act in more than one (1) capacity where action of two (2) or more officers is
required.
Section 2. Appointment and Term. The officers of the corporation
--------------------
shall be appointed by the Board of Directors or by a duly appointed officer
authorized by the Board of Directors to appoint one (1) or more officers. Each
officer shall hold office until his death, resignation, retirement, removal,
disqualification, or his successor shall have been appointed.
Section 3. Compensation of Officers. The compensation of all
------------------------
officers of the corporation shall be fixed by or under the authority of the
Board of Directors, and no officer shall serve the corporation in any other
capacity and receive compensation therefor unless such additional compensation
shall be duly authorized. The appointment of an officer does not itself create
contract rights.
Section 4. Removal. Any officer may be removed by the Board of
-------
Directors at any time with or without cause; but such removal shall not itself
affect the officer's contract rights, if any, with the corporation except to the
extent, if any, specified in any such contract.
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Section 5. Resignation. An officer may resign at any time by
-----------
communicating his resignation to the corporation, orally or in writing. A
resignation is effective when communicated unless it specifies in writing a
later effective date. If a resignation is made effective at a later date that
is accepted by the corporation, the Board of Directors may fill the pending
vacancy before the effective date if the Board of Directors provides that the
successor does not take office until the effective date. An officer's
resignation does not affect the corporation's contract rights, if any, with the
officer except to the extent, if any, specified in any such contract.
Section 6. Bonds. The Board of Directors may by resolution require
-----
any officer, agent, or employee of the corporation to give bond to the
corporation, with sufficient sureties, conditioned on the faithful performance
of the duties of his respective office or position, and to comply with such
other conditions as may from time to time be required by the Board of Directors.
Section 7. President. The President shall be the principal executive
---------
officer of the corporation and, subject to the control of the Board of
Directors, shall in general supervise and control all of the business and
affairs of the corporation. He shall sign, with the Secretary, an Assistant
Secretary, or any other proper officer of the corporation thereunto authorized
by the Board of Directors, certificates for shares of the corporation, any
deeds, mortgages, bonds, contracts, or other instruments which the Board of
Directors has authorized to be executed, except in cases where the signing and
execution thereof shall be expressly delegated by the Board of Directors or by
these Bylaws to some other officer or agent of the corporation, or shall be
required by law to be otherwise signed or executed, and in general he shall
perform all duties incident to the office of the President and such other duties
as may be prescribed by the Board of Directors from time to time. The President
shall be entitled to attend all regular and special meetings and meetings of
committees of the Board of Directors. If the President of the corporation is
also a director of the corporation, he shall serve as a member of the Executive
Committee.
Section 8. Vice Presidents. In the absence of the President or in
---------------
the event of his death, inability or refusal to act, the Vice Presidents, unless
otherwise determined by the Board of Directors, shall perform the duties of the
President, and when so acting shall have all the powers of and be subject to all
the restrictions upon the President. Any Vice President (or Assistant Vice
President) may sign, with the Secretary, an Assistant Secretary, or any other
proper officer of the corporation thereunto authorized by the Board of
Directors, certificates for shares of the corporation and any other instruments
which may be signed by the President, and shall perform such other duties as
from time to time may be prescribed by the President or Board of Directors.
Section 9. Secretary. The Secretary shall: (i) keep the minutes of
---------
the meetings of shareholders, of the Board of Directors, and of all committees
of the Board of Directors, in one or more books provided for that purpose; (ii)
see that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law; (iii) maintain and authenticate the records of the
corporation and be custodian of the seal of the corporation and see that the
seal of the corporation is affixed to all documents the execution of which on
behalf of the corporation under its seal is duly authorized; (iv) sign with the
President or a Vice President, certificates for shares of the corporation,
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<PAGE>
the issuance of which shall have been authorized by resolution of the Board of
Directors; (v) maintain or cause to be maintained, and have general charge of,
the stock transfer books of the corporation; (vi) prepare or cause to be
prepared shareholder lists prior to each meeting of shareholders as required by
law; (vii) attest the signature or certify the incumbency or signature of any
officer of the corporation; and (viii) in general perform all duties incident to
the office of secretary and such other duties as from time to time may be
prescribed by the President or by the Board of Directors.
Section 10. Treasurer. The Treasurer shall be, and may be designated
---------
as such as, the corporation's Chief Financial Officer, and shall: (i) have
charge and custody of and be responsible for all funds and securities of the
corporation; receive and give receipts for moneys due and payable to the
corporation from any source whatsoever, and deposit all such moneys in the name
of the corporation in such depositories as shall be selected in accordance with
the provisions of Section 4 of Article VI of these Bylaws; (ii) maintain, or
cause to be maintained, appropriate accounting records as required by law; (iii)
prepare, or cause to be prepared, annual financial statements of the corporation
that include a balance sheet as of the end of the fiscal year and income and
cash flow statement for that year, which statements, or a written notice of
their availability, shall be mailed to each shareholder within 120 days after
the end of such fiscal year; and (iv) in general perform all of the duties
incident to the office of treasurer and such other duties as from time to time
may be prescribed by the President or by the Board of Directors.
Section 11. Assistant Officers. In the absence of a duly appointed
------------------
officer of the corporation, or in the event of his death, inability or refusal
to act, any person appointed by the Board of Directors and designated by title
as an assistant to that officer, unless otherwise determined by the Board of
Directors, may perform the duties of, and when so acting shall have all the
powers of and be subject to all the restrictions upon, that officer. Such
assistant officers shall perform such other duties as from time to time may be
prescribed by the President or by the Board of Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
--------------------------------------
Section 1. Contracts. The Board of Directors may authorize any
---------
officer or officers, agent or agents, to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the corporation, and such
authorization may be general or confined to specific instances. Also, the Board
of Directors may limit, condition, restrict or deny such authority to any
officer or officers, or any agent or agents.
Section 2. Loans. No loans shall be contracted on behalf of the
-----
corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the Board of Directors. Such authority may be general or confined
to specific instances.
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Section 3. Checks and Drafts. All checks, drafts, or other orders
-----------------
for the payment of money, issued in the name of the corporation, shall be signed
by such officer or officers, agent or agents of the corporation and in such
manner as shall from time to time be determined by the Board of Directors.
Section 4. Deposits. All funds of the corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the corporation
in such depositories as may be selected by or under the authority of the Board
of Directors.
ARTICLE VII
SHARES AND THEIR TRANSFER
-------------------------
Section 1. Certificate For Shares. The Board of Directors may
----------------------
authorize the issuance of some or all of the shares of the corporation's classes
or series without issuing certificates to represent such shares. If shares are
represented by certificates, the certificates shall be in such form as required
by law and as determined by the Board of Directors. Certificates shall be
signed, either manually or in facsimile, by the President or a Vice President,
and by the Secretary or Treasurer or an Assistant Secretary or an Assistant
Treasurer. All certificates for shares shall be consecutively numbered or
otherwise identified and entered into the stock transfer books of the
corporation. When shares are represented by certificates, the corporation shall
issue and deliver, to each shareholder to whom such shares have been issued or
transferred, certificates representing the shares owned by him. When shares are
not represented by certificates, then within a reasonable time after the
issuance or transfer of such shares, the corporation shall send the shareholder
to whom such shares have been issued or transferred a written statement of the
information required by law to be on certificates.
Section 2. Stock Transfer Books. The corporation shall keep or cause
--------------------
to be kept a book or set of books, to be known as the stock transfer books of
the corporation, containing the name of each shareholder of record, together
with such shareholder's address and the number and class or series of shares
held by him. Transfers of shares of the corporation shall be made only on the
stock transfer books of the corporation (i) by the holder of record thereof or
by his legal representative, who shall provide proper evidence of authority to
transfer; (ii) by his attorney authorized to effect such transfer by power of
attorney duly executed and filed with the Secretary; and (iii) on surrender for
cancellation of the certificate for such shares (if the shares are represented
by certificates).
Section 3. Lost Certificates. The Board of Directors may direct a
-----------------
new certificate to be issued in place of any certificate theretofore issued by
the corporation claimed to have been lost or destroyed, upon receipt of an
affidavit of such fact from the person claiming the certificate to have been
lost or destroyed. When authorizing such issue of a new certificate, the Board
of Directors shall require that the owner of such lost or destroyed certificate,
or his legal representative, give the corporation a bond in such sum and with
such surety or other security as the Board of Directors may direct as indemnity
against any claims that may be made against the corporation with respect to the
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certificate claimed to have been lost or destroyed, except where the Board of
Directors by resolution finds that in the judgment of the Board of Directors the
circumstances justify omission of a bond.
Section 4. Distribution or Share Dividend Record Date. The Board of
------------------------------------------
Directors may fix a date as the record date for determining shareholders
entitled to a distribution or share dividend. If no record date is fixed by the
Board of Directors for such determination, it is the date the Board of Directors
authorizes the distribution or share dividend.
Section 5. Holder of Record. Except as otherwise required by law,
----------------
the corporation may treat the person in whose name the shares stand of record on
its books as the absolute owner of the shares and the person exclusively
entitled to receive notification and distributions, to vote, and to otherwise
exercise the rights, powers, and privileges of ownership of such shares.
Section 6. Shares Held by Nominees. The corporation shall recognize
-----------------------
the beneficial owner of shares registered in the name of the nominee as the
owner and shareholder of such shares for certain purposes if the nominee in
whose name such shares are registered files with the Secretary a written
certificate in a form prescribed by the corporation, signed by the nominee,
indicating the following: (i) the name, address, and taxpayer identification
number of the nominee; (ii) the name, address, and taxpayer identification
number of the beneficial owner; (iii) the number and class or series of shares
registered in the name of the nominee as to which the beneficial owner shall be
recognized as the shareholder; and (iv) the purposes for which the beneficial
owner shall be recognized as the shareholder.
The purposes for which the corporation shall recognize the beneficial
owner as the shareholder may include the following: (i) receiving notice of,
voting at, and otherwise participating in shareholders' meetings; (ii) executing
consents with respect to the shares; (iii) exercising dissenters' rights under
the North Carolina Business Corporation Act; (iv) receiving distributions and
share dividends with respect to the shares; (v) exercising inspection rights;
(vi) receiving reports, financial statements, proxy statements, and other
communications from the corporation; (vii) making any demand upon the
corporation required or permitted by law; and (viii) exercising any other rights
or receiving any other benefits of a shareholder with respect to the shares.
The certificate shall be effective ten (10) business days after its
receipt by the corporation and until it is changed by the nominee, unless the
certificate specifies a later effective time or an earlier termination date.
If the certificate affects less than all of the shares registered in
the name of the nominee, the corporation may require the shares affected by the
certificate to be registered separately on the books of the corporation and be
represented by a share certificate that bears a conspicuous legend stating that
there is a nominee certificate in effect with respect to the shares represented
by that share certificate.
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ARTICLE VIII
GENERAL PROVISIONS
------------------
Section 1. Distributions. The Board of Directors may from time to
-------------
time authorize, and the corporation may grant, distributions and share dividends
to its shareholders pursuant to law and subject to the provisions of its
Articles of Incorporation.
Section 2. Seal. The corporate seal of the corporation shall consist
----
of two concentric circles between which is the name of the corporation and in
the center of which is inscribed SEAL; and such seal, as impressed or affixed on
the margin hereof, is hereby adopted as the corporate seal of the corporation.
Section 3. Fiscal Year. The fiscal year of the corporation shall be
-----------
fixed by the Board of Directors.
Section 4. Amendments. Except as otherwise provided in the Articles
----------
of Incorporation or by law, these Bylaws may be amended or repealed and new
Bylaws may be adopted by the Board of Directors.
No Bylaw adopted, amended, or repealed by the shareholders shall be
readopted, amended, or repealed by the Board of Directors, unless the Articles
of Incorporation or a Bylaw adopted by the shareholders authorizes the Board of
Directors to adopt, amend, or repeal that particular Bylaw or the Bylaws
generally.
Section 5. Definitions. Unless the context otherwise requires, terms
-----------
used in these Bylaws shall have the meanings assigned to them in the North
Carolina Business Corporation Act to the extent defined therein.
ARTICLE IX
INDEMNIFICATION
---------------
In addition to any indemnification required or permitted by law, and
except as otherwise provided in these Bylaws, any person who at any time serves
or has served as a director, officer, employee or agent of the Corporation and
any such person who serves or has served at the request of the Corporation as a
director, officer, 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 Corporation
to the full extent allowed by applicable law against liability and litigation
expense arising out of such status or activities in such capacity. "Liability
and litigation expense" shall include costs and expenses of litigation
(including reasonable attorneys' fees), judgments, fines and amounts paid in
settlement which are actually and reasonably
13
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incurred in connection with or as a consequence of any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, including appeals.
Promptly after the final disposition or termination of any matter
which involves liability or litigation expense as described above or at such
earlier time as it sees fit, the Corporation shall determine whether any person
described in this Article IX is entitled to indemnification thereunder. Such
determination shall be limited to the following issues: (i) whether the
persons to be indemnified are persons described in this Article IX, (ii) whether
the liability or litigation expense incurred arose out of the status or
activities of such persons as described in this Article IX, (iii) whether
liability was actually incurred and/or litigation expense was actually and
reasonably incurred, and (iv) whether the indemnification requested is permitted
by applicable law. Such determination shall be made by a majority vote of
directors who were not parties to the action, suit or proceeding (or, in
connection with "threatened" actions, suits or proceedings, who were not
"threatened parties"). If at least two such disinterested directors are not
obtainable, or, even if obtainable, if at least half of the number of
disinterested directors so direct, such determination shall be made by
independent legal counsel in written opinion.
Litigation expense incurred by a person described in this Article IX
in connection with a matter described in this Article IX may be paid by the
Corporation in advance of the final disposition or termination of such matter,
if the Corporation receives an undertaking, dated, in writing and signed by the
person to be indemnified, to repay all such sums unless such person is
ultimately determined to be entitled to be indemnified by the Corporation as
provided in this Article IX. Requests for payments in advance of final
disposition or termination shall be submitted in writing unless this requirement
is waived by the Corporation.
Notwithstanding the foregoing, no advance payment shall be made as to
any payment or portion of a payment for which the determination is made that the
person requesting payment will not be entitled to indemnification. Such
determination may be made only by a majority vote of disinterested directors or
by independent legal counsel as next provided. If there are not at least two
disinterested directors, the notice of all requests for advance payment shall be
delivered for review to independent legal counsel for the Corporation. Such
counsel shall have the authority to disapprove any advance payment or portion of
a payment for which it appears that the person requesting payment will not be
entitled to indemnification.
The Corporation shall not be obligated to indemnify persons described
in this Article IX for any amounts paid in settlement unless the Corporation
consents in writing to the settlement. The Corporation shall not unreasonably
withhold its consent to proposed settlements. The Corporation's consent to a
proposed settlement shall not constitute an agreement by the Corporation that
any person is entitled to indemnification hereunder. The Corporation may waive
the requirement of this section for its written consent as fairness and equity
may require.
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A person described in this Article IX may apply to the Corporation in
writing for indemnification or advance expenses. Such applications shall be
addressed to the Secretary or, in the absence of the Secretary, to any officer
of the Corporation. The Corporation shall respond in writing to such
applications as follows: to a request for indemnity under this Article IX,
within ninety days after receipt of the application; to a request for advance
expenses under this Article IX, within fifteen days after receipt of the
application.
If any action is necessary or appropriate to authorize the Corporation
to pay the indemnification required by these Bylaws, the Board of Directors
shall take such action, including (i) making a good faith evaluation of the
indemnification request, (ii) giving notice to, and obtaining approval by, the
shareholders of the Corporation, and (iii) taking any other action.
The right to indemnification or advance expenses provided herein shall
be enforceable in any court of competent jurisdiction. A legal action may be
commenced if a claim for indemnity or advance expenses is denied in whole or in
part, or upon the expiration of the time periods provided above. In any such
action, if the claimant establishes the right to indemnification, he or she
shall also have the right to be indemnified against the litigation expense
(including, without limitation, reasonable attorneys' fees) of such action.
As provided by N.C. Gen. Stat. (S)55-8-57, the Corporation shall have
the power to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the Corporation, or who is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or as a trustee or administrator under an employee benefit plan,
against any liability asserted against him and incurred by him in any such
capacity or arising out of his status as such, whether or not the Corporation
has the power to indemnify him against such liability.
The right to indemnification provided herein shall not be deemed
exclusive of any other rights to which any persons seeking indemnity may be
entitled apart from the provisions of this bylaw, except there shall be no right
to indemnification as to any liability or litigation expense for which such
person is entitled to receive payment under any insurance policy other than a
directors' and officers' liability insurance policy maintained by the
Corporation. Such right inures to the benefit of the heirs and legal
representatives of any persons entitled to such right. Any person who at any
time after the adoption of this bylaw serves or has served in any status or
capacity described in this Article IX, shall be deemed to be doing or to have
done so in reliance upon, and as consideration for, the right of indemnification
provided herein. Any repeal or modification hereof shall not affect any rights
or obligations then existing. The right provided herein shall not apply as to
persons serving institutions which are hereafter merged into or combined with
the Corporation, except after the effective date of such merger or combination
and only as to status and activities after such date.
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If this Article or any portion hereof shall be invalidated on any
ground by any court or agency of competent jurisdiction, then the Corporation
shall nevertheless indemnify each person described in this Article IX to the
full extent permitted by the portion of this Article that is not invalidated and
also to the full extent (not exceeding the benefits described herein) permitted
or required by other applicable law.
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[BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD, L.L.P. LETTERHEAD]
September 11, 1998
Board of Directors
Innes Street Financial Corporation
401 West Innes Street
Salisbury, North Carolina 28145-1929
Re: Registration Statement on Form S-1 under the Securities Act of 1933,
as amended
Gentlemen:
As special counsel to Innes Street Financial Corporation (the "Holding
Company"), the proposed parent holding company of Citizens Bank, FSB ("Citizens
Bank"), Salisbury, North Carolina, we are rendering this opinion to you in
connection with the acquisition by the Holding Company of Citizens Bank, upon
the conversion of Citizens Bank from a federally-chartered mutual savings bank
to a federally-chartered capital stock savings bank (the "Conversion"). As part
of the Conversion, the Holding Company will file with the Securities and
Exchange Commission a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended, for the offering and
sale by the Holding Company of its no par common stock, having an estimated
aggregate dollar value represented to us as being between $17,850,000 and
$24,150,000 (the "Shares").
In our capacity as special counsel, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of the Articles of
Incorporation, Bylaws and corporate resolutions of the Holding Company, the Plan
of Conversion, the Registration Statement and all exhibits thereto and the
relevant provisions of Chapter 55 of the North Carolina General Statutes and
the Securities Act of 1933, as amended, and the regulations promulgated under
all the aforesaid statutes, and Part 563g of Chapter V of Title 12 of the Code
of Federal Regulations, as we have considered necessary as a basis for the
opinion given herein. In addition, we have made reasonable inquiries of the
officers of Citizens Bank and the Holding Company as to all relevant items. In
all examinations of documents, we have assumed the genuineness of all original
documents and all signatures and the conformity to original documents of all
copies submitted to us as certified, conformed or photostatic copies. On the
basis of such examination, we are of the opinion that, when the Holding Company
has received full payment for the Shares as described in the Registration
Statement, all requisite corporate action will
<PAGE>
Board of Directors
Innes Street Financial Corporation
September 11, 1998
Page 2
have been taken with respect to the issuance and sale of the Shares and the
Shares will be validly authorized and issued, fully-paid and nonassessable
shares of common stock of the Holding Company.
This opinion is furnished by us solely for your benefit and for the benefit
of the purchasers of the Shares of the Holding Company in connection with the
Conversion, and may not be quoted or relied upon by, nor copies be delivered to,
any person or entity, or used for any other purpose, without our prior express
written consent.
We hereby consent to the use of this opinion in connection with the
registration of the offering and sale of the Shares with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and to the
reference to us in the Registration Statement and the Prospectus included
therein.
Very truly yours,
BROOKS, PIERCE, MCLENDON,
HUMPHREY & LEONARD, L.L.P.
By: /s/ Edward C. Winslow III
--------------------------------------
Edward C. Winslow III
ECWIII/blh
<PAGE>
[BROOKS, PIERCE, MCLENDON, HUMPHREY & LEONARD, L.L.P. LETTERHEAD]
September 11, 1998
Board of Directors
Citizens Bank, FSB
401 West Innes Street
Salisbury, North Carolina 28114-4232
Re: Conversion of Citizens Bank, FSB from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank and its
simultaneous acquisition by Innes Street Financial Corporation, a
savings and loan holding company
Members of the Board:
You have requested our opinions regarding certain income tax consequences
in connection with the proposed conversion of Citizens Bank, FSB ("Citizens
Mutual") from a federally-chartered mutual savings bank with federally insured
deposit accounts to a federally-chartered stock savings bank with federally
insured deposit accounts (such federally-chartered stock savings bank being
hereafter referred to as "Citizens"), and the simultaneous acquisition of
Citizens as a wholly-owned subsidiary by Innes Street Financial Corporation, a
savings and loan company organized under North Carolina law ("Holding Company").
This reorganization and conversion of Citizens Mutual and acquisition of
Citizens by the Holding Company shall be referred to as the "Conversion". Terms
not otherwise defined in this letter shall have the meanings assigned to them in
the Plan of Conversion adopted by the Board of Directors of Citizens Mutual on
September 10, 1998 (the "Plan").
In connection with our opinions, we have reviewed copies of applications
filed by Citizens Mutual and the Holding Company with the Office of Thrift
Supervision, to effect the Conversion (the "Applications"), Chapter 105 of the
North Carolina General Statutes, and applicable federal laws, rules and
regulations, including the Internal Revenue Code of 1986, as amended ("Code").
We have examined the Plan, Citizens Mutual's existing Charter and Bylaws, the
Federal Stock Charter for Citizens, the Bylaws for Citizens, the corporate
minutes approving the Conversion and related records of Citizens Mutual. We have
also examined the Holding Company's Articles of Incorporation, Bylaws, corporate
minutes approving the Conversion and related records. In addition, we have
examined certificates of officials of Citizens Mutual, Citizens and the Holding
Company, the Registration Statement of the Holding Company on Form S-1, which
the Holding Company intends to
<PAGE>
Board of Directors
Citizens Savings Bank, FSB
September 11, 1998
Page 2
file with the Securities and Exchange Commission on or about September 11, 1998
(the "Registration Statement") containing a proposed Prospectus (hereinafter
referred to as the "Prospectus") and such other documents as we have deemed
necessary or appropriate for purposes of giving the opinions set forth in this
letter. We have assumed the authenticity of all documents presented to us as
originals, the conformity to the originals of all documents presented to us as
copies, and the genuineness of all signatures of individuals, and we know of no
reason such assumptions are unwarranted for purposes of the opinions expressed
herein. We have assumed that all statements made in the above-described
documents are accurate and complete, and will be accurate and complete at all
times from now through the consummation of the Conversion. We have not
independently verified any factual matter relating to the Conversion in
connection with the preparation of our opinions herein and, accordingly, such
opinions do not take into account any matters not set forth herein which might
have been disclosed by independent verification. We have further assumed that
the Conversion will be consummated pursuant to the terms of the Plan.
In issuing the opinions set forth below, we have also assumed the accuracy
of the following representations of Citizens Mutual:
1. The fair market value of the deposit accounts and the interest in the
Liquidation Account received by each Eligible Account Holder and
Supplemental Eligible Account Holder in Citizens pursuant to the
Conversion will, in each instance, be equal to the fair market value of
the deposit accounts and the proprietary interest of each such Eligible
Account Holder and Supplemental Eligible Account Holder in Citizens
Mutual surrendered in the Conversion. The aggregate fair market value of
the deposit accounts and interests in the Liquidation Account held by
Eligible Account Holders as of the close of business on the Eligibility
Record Date will equal or exceed 99% of the aggregate fair market value
of all deposit accounts in Citizens Mutual (including accounts of less
than $50) as of the close of business on that date. The aggregate fair
market value of the deposit accounts and interests in the Liquidation
Account held by Supplemental Eligible Account Holders, officers and
directors of Citizens Mutual and their associates as of the close of
business on the Supplemental Eligibility Record Date will equal or
exceed 99% of the aggregate fair market value of all deposit accounts in
Citizens Mutual (including accounts of less than $50) as of the close of
business on that date.
2. The Subscription Rights to purchase Conversion Stock received in the
Conversion by each recipient have no fair market value. This assumption
is based upon your representation and the opinion of Ernst & Young, LLP
that such Subscription Rights have no fair market value because they
will be acquired by recipients without cost, are nontransferable and
afford the recipients the right only to purchase Conversion Stock at a
price equal to its estimated fair market value as of the date such
rights are issued, which will be the same price paid by all purchasers
in the Conversion.
<PAGE>
Board of Directors
Citizens Savings Bank, FSB
September 11, 1998
Page 3
3. Immediately following the Conversion, the Eligible Account Holders and
Supplemental Eligible Account Holders will own all of the outstanding
interests in the Liquidation Account and will own such interests solely
by reason of their ownership of deposits and proprietary interests in
Citizens Mutual on the Eligibility Record Date and Supplemental
Eligibility Record Date, respectively. Pursuant to the Plan, no
additional interests in the Liquidation Account shall be issued
following the Conversion.
4. Immediately following the consummation of the Conversion, Citizens will
possess the same assets and liabilities as Citizens Mutual held
immediately before the Conversion, plus proceeds from the sale of
Conversion Stock less proceeds retained by the Holding Company, less
assets used to pay expenses incurred in the Conversion. Assets of
Citizens Mutual used to pay expenses of the Conversion and all
distributions (except for regular, normal interest payments made by
Citizens Mutual immediately before the Conversion) in the aggregate will
constitute less than 1% of the net assets of Citizens Mutual.
5. Except for Citizens Mutual's agreement to sell all of Citizens' issued
and outstanding common stock to the Holding Company in the Conversion,
at the time of the Conversion, Citizens Mutual will not have outstanding
any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire stock in Citizens
Mutual.
6. Citizens has no plan or intention to reacquire any of its common stock
issued to the Holding Company in the Conversion. Citizens has no plan or
intention to issue additional shares of its common stock following the
Conversion. The common stock of Citizens issued to the Holding Company
in the Conversion will not be callable or subject to a put option.
7. Citizens has no plan or intention to sell or otherwise dispose of any of
the assets of Citizens Mutual acquired in the Conversion, except for
dispositions made in the ordinary course of business.
8. The liabilities of Citizens Mutual assumed by Citizens and the
liabilities, if any, to which the transferred assets are subject were
incurred by Citizens Mutual in the ordinary course of its business and
are associated with the assets transferred.
9. Following the Conversion, Citizens will continue the historic business
of Citizens Mutual, will use a significant portion of Citizens Mutual's
historic business assets in Citizens' business, and will continue to
engage in the same business in substantially the same manner as engaged
in by Citizens Mutual before the Conversion.
<PAGE>
Board of Directors
Citizens Savings Bank, FSB
September 11, 1998
Page 4
10. Citizens Mutual and Citizens (treated as one entity for purposes of
this representation) and the Holding Company will each pay their own
expenses attributable to the Conversion.
11. Citizens Mutual is not under the jurisdiction of a court as a debtor
under (i) Title 11 of the United States Code, or (ii) a receivership,
foreclosure, or similar proceeding in a federal or state court.
12. None of the compensation received by an employee of Citizens Mutual or
Citizens who is also an Eligible Account Holder, Supplemental Eligible
Account Holder or Other Member will be separate consideration for, or
allocable to, his or her status as an Eligible Account Holder,
Supplemental Eligible Account Holder or Other Member. None of the
interests in the Liquidation Account of Citizens received by an
employee of Citizens Mutual or Citizens who is an Eligible Account
Holder or Supplemental Eligible Account Holder will be separate
consideration for, or allocable to, any employment agreement or
arrangement. All compensation paid to Eligible Account Holders and
Supplemental Eligible Account Holders who are also employees of
Citizens Mutual or Citizens will be for services actually rendered and
commensurate with amounts paid to third parties bargaining at arm's-
length for similar services. Officers, directors and other employees
may in the future be issued restricted common stock of the Holding
Company for future services pursuant to the proposed Management
Recognition Plan of the Holding Company described in the Prospectus
("MRP").
13. No Eligible Account Holder or Supplemental Eligible Account Holder will
be excluded from participating in the Liquidation Account.
14. The Holding Company has no plan or intention to redeem or otherwise
acquire any of the Conversion Stock to be issued pursuant to the
Conversion, except as disclosed in the Prospectus regarding possible
purchases to fund the ESOP, MRP and stock option plans. The Holding
Company has no plan or intention to sell or otherwise dispose of the
common stock of Citizens received by it in the Conversion. The
Conversion Stock issued in the Conversion will not be callable or
subject to a put option.
15. At the time of Conversion, the fair market value of the assets of
Citizens Mutual on a going-concern basis will equal or exceed the
amount of its liabilities plus the amount of liabilities to which its
assets are subject. Immediately before the Conversion, Citizens Mutual
will have a positive net worth.
<PAGE>
Board of Directors
Citizens Savings Bank, FSB
September 11, 1998
Page 5
16. No cash or property will be given to Eligible Account Holders,
Supplemental Eligible Account Holders or any other grantee of
Subscription Rights in lieu of (i) Subscription Rights for Conversion
Stock, or (ii) an interest in the Liquidation Account of Citizens.
17. There is no plan or intention for Citizens to be liquidated or merged
with another corporation following the Conversion.
18. The Conversion described herein is motivated by valid business purposes
and not by tax avoidance purposes.
19. After the Conversion, Citizens will continue the corporate existence
and business of Citizens Mutual with only the following changes:
(i) An amended and restated Certificate of Incorporation to allow for
the issuance of capital stock of Citizens, and
(ii) New corporate Bylaws.
20. There exists no intercorporate indebtedness between Citizens Mutual and
Citizens (treated as one entity for purposes of this representation)
and the Holding Company, that was issued, acquired, or will be settled
at a discount.
21. In the Conversion, the Holding Company will acquire 100% of the issued
and outstanding common stock of Citizens.
22. Neither Citizens Mutual and Citizens (treated as one entity for
purposes of this representation) nor the Holding Company is an
"investment company," as defined in Section 368(a)(2)(F)(iii) and (iv)
of the Code.
Based upon the foregoing assumptions, our opinions with respect to the
federal and North Carolina income tax consequences of the Conversion are as
follows (for purposes of the opinions set forth below, Eligible Account Holders
shall include, if applicable pursuant to the Plan, Supplemental Eligible Account
Holders):
1. The Conversion of Citizens Mutual from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank will qualify
as a reorganization within the meaning of Section 368(a) of the Code,
and neither Citizens Mutual nor Citizens will recognize any gain or
loss as a result of such reorganization. Revenue Ruling 80-105, 1980-1
C.B. 78. Citizens Mutual in its form as a federally-chartered mutual
savings
<PAGE>
Board of Directors
Citizens Savings Bank, FSB
September 11, 1998
Page 6
bank and Citizens in its form as a federally-chartered stock savings
bank will each be a "party to a reorganization" within the meaning of
Section 368(b) of the Code.
2. Citizens' basis in each of Citizens Mutual's assets will be the same as
Citizens Mutual's basis immediately prior to the Conversion. Section
362(b) of the Code.
3. No gain or loss will be recognized by the Holding Company upon receipt
of money in exchange for the shares of the Conversion Stock issued
pursuant to the exercise of the Subscription Rights issued therefor.
Section 1032(a) of the Code.
4. No gain or loss will be recognized by Citizens upon receipt of money
from the Holding Company in exchange for the shares of its common stock
to be issued to the Holding Company in the Conversion. Section 1032(a)
of the Code.
5. The holding period of the Citizens assets after the Conversion will
include the period during which the assets were held by Citizens Mutual
prior to the Conversion. Section 1223(2) of the Code.
6. Gain or loss, if any, will be realized by an Eligible Account Holder on
the exchange of such person's deposit account and proprietary interest
in Citizens Mutual for (i) a withdrawable deposit account in Citizens in
the same dollar amount as such person's deposit account in Citizens
Mutual immediately prior to the Conversion, (ii) such person's interest
in the Liquidation Account of Citizens, and (iii) Subscription Rights to
purchase the Conversion Stock. Such gain, if any, will be recognized by
an Eligible Account Holder only to the extent of the fair market value
of such person's interest in the Subscription Rights received. Section
1001 of the Code. You have represented to us that the Subscription
Rights to purchase Conversion Stock have no fair market value.
Accordingly, gain recognized by an Eligible Account Holder as a result
of the Conversion is limited to an amount not in excess of the fair
market value of such person's interest in the Subscription Rights
received in the Conversion. Paulsen v. Commissioner, 469 U.S. 131, 139
-----------------------
(1985), quoting Society for Savings v. Bowers, 349 U.S. 143, 150 (1955).
-----------------------------
7. The basis of the deposit account in Citizens received by an Eligible
Account Holder will be the cost of such deposit account. The cost basis
of such deposit account in Citizens (i) will be equal to the fair market
value of such deposit account in Citizens and (ii) will be equal to such
person's basis in his or her deposit account in Citizens Mutual
exchanged therefor. Section 1012 of the Code.
<PAGE>
Board of Directors
Citizens Savings Bank, FSB
September 11, 1998
Page 7
8. The basis of the interest in the Liquidation Account received by an
Eligible Account Holder will be equal to the cost of such interest. The
cost of the Liquidation Account will be the fair market value of the
proprietary interest in Citizens Mutual given for the Liquidation
Account. Section 1012 of the Code. An interest in the Liquidation
Account will be deemed to have no value, or nominal, if any, fair
market value. Paulsen v. Commissioner, 469 U.S. 131, 139 (1985)
-----------------------
(quoting Society for Savings v. Bowers, 349 U.S. 143, 150 (1955)).
-----------------------------
9. The basis of Subscription Rights received by an Eligible Account Holder
will be zero, increased by the gain, if any, recognized on their
receipt. Section 1012 of the Code. Gain is recognized only to the
extent of the fair market value of the Subscription Rights. You have
represented to us that the Subscription Rights to purchase Conversion
Stock have no fair market value. Accordingly, the basis of the
Subscription Rights received by an Eligible Account Holder will be
zero.
10. The basis of the Conversion Stock purchased pursuant to the exercise of
Subscription Rights will be the purchase price thereof. Section 1012 of
the Code.
11. The holding period of the Conversion Stock acquired through the
exercise of Subscription Rights will commence upon the date of such
exercise. Section 1223(6) of the Code.
12. For purposes of Section 381 of the Code, Citizens will be treated just
as Citizens Mutual would have been treated had there been no
reorganization of Citizens Mutual from a federally-chartered mutual
savings bank to a federally-chartered stock savings bank. Accordingly,
and with regard only to the reorganization of Citizens Mutual into
Citizens, the tax attributes of Citizens Mutual enumerated in Section
381(c) of the Code shall be taken into account by Citizens as if there
had been no reorganization. Treasury Regulation (S)1.381(b)(1)(a)(2).
13. For North Carolina income tax purposes, the Conversion will be treated
in a manner identical to the way the Conversion is treated pursuant to
the Code. Sections 105-130.2, 105-130.3, 105-130.5, 105-134.5, and 105-
134.6 of the North Carolina General Statutes.
No opinion is expressed with regard to the following:
1. The tax treatment of any aspect of the Conversion that is not
specifically set forth and addressed in the foregoing opinions.
<PAGE>
Board of Directors
Citizens Savings Bank, FSB
September 11, 1998
Page 8
2. The status, including without limitation, the tax treatment, of Citizens
Mutual's and Citizens' bad-debt reserves before or after the Conversion.
3. For purposes of Section 381 of the Code, the effect upon Citizens Mutual
and Citizens of the acquisition of all of the common stock of Citizens
by the Holding Company in the Conversion.
The opinions herein expressed represent only our best judgments with
respect to the interpretation of published material and are not binding upon the
Internal Revenue Service or the courts. Our opinions are limited to matters of
North Carolina and federal law.
The opinions contained herein are rendered solely for your benefit and for
the benefit of purchasers of Conversion Stock and may not be used for any other
purpose whatsoever or relied upon by, published or communicated to any other
party without our prior written consent in each instance. We hereby consent to
the inclusion of this letter as an exhibit to the Applications being filed by
Citizens Mutual with the Administrator and as an exhibit to the Registration
Statement.
Sincerely,
BROOKS, PIERCE, McLENDON
HUMPHREY & LEONARD, L.L.P.
By: /s/ Howard L. Williams
----------------------------------------
Howard L. Williams
<PAGE>
Letterhead of Ferguson & Company
March 6, 1998
Board of Directors
Citizens Bank, FSB
401 West Innes Street
Salisbury, North Carolina
Plan of Conversion, Subscription Rights
Dear Directors:
Terms used in this letter not otherwise defined herein have the same
meanings for such terms in the Plan of Conversion adopted by the Board of
Directors of Citizens Bank,FSB("Citizens or the Bank") under which the bank will
convert from a mutual savings association to a stock savings bank and issue all
of the Bank's stock to Innes Street Financial Corporation (the "Holding
Company"). Simultaneously, the Holding Company will issue shares of common
stock.
We understand that in accordance with the Plan of Conversion,
Subscription Rights to purchase shares of Common Stock in the Holding Company
are to be issued to (1) Eligible Account Holders, (2) The Bank's tax qualified
employee plans, (3) Supplemental Eligible Account Holders, and (4) Other
Members. Based solely upon our observation that the Subscription Rights will be
available to such parties without cost, will be legally non-transferable and of
short duration, and will afford such parties the right only to purchase shares
of Common Stock at the same price to be paid by members of the general public in
the Community Offering, but without undertaking any independent investigation of
state or federal laws or the position of the Internal Revenue Service with
respect to such issue, in our opinion:
(1) the Subscription Rights will have no ascertainable market value;
and
(2) the price at which the Subscription Rights are exercisable will
not be more or less than the pro forma market value of the
shares upon issuance.
Changes in the local and national economy, the legislative and
regulatory environment, the stock market, interest rates and other external
forces (e.g., natural disasters or significant global events) occur from time to
time and may materially affect the value of thrift stocks as a whole or the
Holding Company's value. Accordingly, no assurance can be given that persons who
subscribe to shares of Common Stock in the Conversion will thereafter be able to
sell such shares at the same price paid in the Subscription Offering.
Sincerely,
/s/ Charles M. Herbert
Charles M. Hebert
Principal
<PAGE>
April 29, 1998
Board of Directors
Citizens Savings Bank of Salisbury
401 Innes Street
Salisbury, North Carolina 28144
Dear Directors:
This letter sets forth the agreement between Citizens Savings Bank of Salisbury
("Citizens" or "Association"), Salisbury, North Carolina, and Ferguson & Company
("F&C"), Hurst, Texas, under the terms of which Citizens has engaged F&C, in
connection with its conversion from mutual to stock form, to (1) determine the
pro forma market value of the shares of common stock to be issued and sold by
Citizens' holding company; and (2) assist Citizens in preparing a business plan
to be filed with the application for approval to convert to stock..
F&C agrees to deliver the written valuation and business plan to Citizens at the
above address on or before a mutually agreed upon date. Further, F&C agrees to
perform such other services as are necessary or required in connection with
comments from the applicable regulatory authorities relating to the business
plan and appraisal and the preparation of appraisal updates as requested by
Citizens or its counsel. It is understood that the services of F&C under this
agreement shall be limited as herein described.
F&C's fee for the business plan and initial appraisal valuation report and any
required updates shall be $24,000. In addition, Citizens shall reimburse F&C
for all out-of-pocket expenses, which will not exceed $5,000. Payment under
this agreement shall be made as follows:
1. Five thousand dollars ($5,000) upon execution of this engagement letter.
2. Nine thousand ($9,000) upon delivery of the business plan.
3. Ten thousand ($10,000) upon delivery of the completed appraisal report.
4. Out-of-pocket expenses are to be paid monthly.
If, during the course of Citizen's conversion, unforeseen events occur so as to
change materially the nature or the work content of the services described in
this contract, the terms of the contract shall be subject to renegotiation.
Such unforeseen events shall include, but not be limited to, major changes in
the conversion regulations, appraisal guidelines or processing procedures as
they relate to conversion appraisals, major changes in Citizen's management or
operating policies, execution of a merger agreement with another institution
prior to completion of conversion, and excessive delays or suspension of
processing of conversions by the regulatory authorities such that completion of
Citizen's conversion requires the preparation by F&C of a new appraisal report
or business plan, excluding appraisal updates during the course of the
engagement.
To induce F&C to provide the services described above, Citizens hereby agrees as
follows:
1. Citizens shall supply in a timely manner to F&C such information with
respect to its business and financial condition as F&C reasonably may request in
order to make the aforesaid valuation. Such information made available to F&C
shall include, but not be limited to, annual financial statements, periodic
regulatory filings, material agreements, debt instruments and corporate books
and records.
2. Citizens hereby represents and warrants, to the best of its knowledge, that
any information provided to F&C does not and will not, at any time relevant
hereto, contain any misstatement or untrue statement of a material fact or omit
any and all material facts required to be stated therein or necessary to make
the statements therein not false or misleading in light of the circumstances
under which they were made.
3. (a) Citizens shall indemnify and hold harmless F&C and any employees of F&C
who act for or on behalf of F&C in connection with the services called for under
this agreement, from and against any and all loss, cost, damage, claim,
liability or expense of any kind, including reasonable attorneys fees and other
expenses incurred in investigating, preparing to defend and defending any claim
or claims (specifically including, but not limited to, claims under federal and
state securities laws) arising out of any misstatement
<PAGE>
or untrue statement of a material fact contained in the information supplied by
Citizens to F&C or by an omission to state a material fact in the information so
provided which is required to be stated therein in order to make the statement
therein not false or misleading.
(b) F&C shall not be entitled to indemnification pursuant to Paragraph 3(a)
above with regard to any claim arising where, with regard to the basis for such
claim, F&C had knowledge that a statement of a fact material to the evaluation
and contained in the information supplied by Citizens was untrue or had
knowledge that a material fact was omitted from the information so provided and
that such material fact was necessary in order to make the statement made to F&C
not false or misleading.
(c) F&C additionally shall not be entitled to indemnification pursuant to
Paragraph 3(a) above notwithstanding its lack of actual knowledge of an
intentional misstatement or omission of a material fact in the information
provided if F&C is determined to have been negligent or to have failed to
exercise due diligence in the preparation of its valuation.
Citizens and F&C are not affiliated, and neither Citizens nor F&C has an
economic interest in, or held in common with, the other and has not derived a
significant portion of its gross revenue, receipts or net income for any period
from transactions with the other.
In order for F&C to consider this proposal binding, please acknowledge your
consent to the foregoing by executing the enclosed copies of this letter and
returning one copy to us, together with a check payable to Ferguson & Company in
the amount of $5,000. The extra copy of this letter is for your conversion
counsel.
Yours very truly,
/s/ Charles M. Hebert
Charles M. Hebert
Principal
Agreed to ($5,000 check enclosed):
Citizens Savings Bank of Salisbury
Salisbury, North Carolina
By: /s/ Ronald E. Bostian
<PAGE>
CITIZENS BANK, FSB
EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of _______________, 1998, by and
between CITIZENS BANK, FSB (hereinafter referred to as the "Bank") and RONALD E.
BOSTIAN (hereinafter referred to as the "Officer") and is joined in by INNES
STREET FINANCIAL CORPORATION, the parent holding company of the Bank
(hereinafter referred to as the "Holding Company").
WHEREAS, the Officer has heretofore been employed by the Bank as its
President and Chief Executive Officer; and
WHEREAS, the Bank is a federally chartered, stock-owned savings
association, chartered under the provisions of the Home Owners' Loan Act of
1934, and the wholly-owned subsidiary of the Holding Company; and
WHEREAS, the Bank desires to retain the services of the Officer as the
President and Chief Executive Officer of the Bank upon the terms and conditions
set forth herein; and
WHEREAS, the services of the Officer, his experience and knowledge of
the affairs of the Bank, and his reputation and contacts in the industry and the
local community are extremely valuable to the Bank; and
WHEREAS, the Bank wishes to attract and retain such well-qualified
executives and it is in the best interest of the Bank and of the Officer to
secure the continued services of the Officer notwithstanding any change in
control of the Bank or the Holding Company; and
WHEREAS, the Bank considers the establishment and maintenance of a
sound and vital management to be part of its overall corporate strategy and to
be essential to protecting and enhancing the best interests of the Bank and its
stockholders; and
<PAGE>
WHEREAS, the parties desire to enter into this Agreement in order to
set forth the terms and conditions of the Officer's employment relationship with
the Bank.
NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:
1. Employment. The Bank hereby agrees to employ the Officer and the
----------
Officer hereby agrees to accept employment, upon the terms and conditions stated
herein, as the President and Chief Executive Officer of the Bank. The Officer
shall render such administrative and management services to the Bank as are
customarily performed by persons situated in a similar executive capacity. The
Officer shall promote the business of the Bank and perform such other duties as
shall, from time to time, be reasonably prescribed by the Board of Directors of
the Bank (the "Board").
2. Compensation. The Bank shall pay the Officer during the term of
------------
this Agreement, as compensation for all service rendered by him to the Bank, a
base salary at the rate of $147,528 per annum, payable in cash not less
frequently than monthly; provided that the rate of such salary shall be reviewed
by the Board not less often than annually. Such rate of salary, or increased
rate of salary, as the case may be, may be further increased from time to time
in such amounts as the Board, in its discretion, may decide. In determining
salary increases, the Board shall compensate the Officer for increases in the
cost of living and may also provide for performance or merit increases.
Participation in incentive compensation, deferred compensation, discretionary
bonus, profit-sharing, retirement, stock option and other employee benefit plans
that the Bank or the Holding Company have adopted, or may from time to time
adopt, and participation in any fringe benefits, shall not reduce the salary
payable to the Officer under this
2
<PAGE>
Section. Any compensation provided to the Officer for his service as a member of
the Board or the Board of Directors of the Holding Company shall not reduce the
salary payable to the Officer under this Section or any benefit payable under
any other section of this Agreement. The Officer will be entitled to such
customary fringe benefits, vacation and sick leave as are consistent with the
normal practices and established policies of the Bank. In the event of a Change
in Control (as defined in Paragraph 10) the Officer's base salary shall be
adjusted as provided in Paragraph 3 and such adjusted base salary shall be
increased by not less than six percent (6%) on the effective date of the Change
in Control and at the end of each year thereafter for the remaining term of this
Agreement.
3. Raises and Discretionary Bonuses. During the term of this
--------------------------------
Agreement, no later than in December or January of each annual period, the
Officer shall be evaluated by the non-employee members of the Board and such
directors shall determine whether the Officer's base salary should be increased
and whether payment of a performance bonus is justified. The performance of the
Officer shall be evaluated by the directors in the following areas: capital
adequacy, asset quality, liquidity risk, interest rate risk, earnings, strategic
planning and progress, and contributions to shareholder values. The Board shall
also consider compensation provided for similarly situated officers at similarly
situated companies with the objective that the Officer will be compensated at or
above levels of compensation provided by peer companies for their chief
executive officers. No other compensation provided for in this Agreement shall
be deemed a substitute for the Officer's right to discretionary bonuses when and
as declared by the Board under this Section.
In the event of a Change in Control (as defined in Paragraph 10), the
Officer's base salary shall be adjusted to include an amount equal to the
average of bonuses awarded to the Officer during each of the two years
immediately before the earlier of the date of the Change in Control, or the date
3
<PAGE>
on which a definitive agreement respecting the Change in Control is executed.
Such adjusted base salary shall be increased upon and following the Change in
Control as provided in Paragraph 2.
4. Participation in Retirement and Employee Benefit Plans; Fringe
--------------------------------------------------------------
Benefits.
--------
(a) The Officer shall be entitled to participate in any plan relating
to deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical coverage, disability
coverage, education, or other retirement or employee benefits that the Bank or
the Holding Company have adopted, or may, from time to time adopt, for benefit
of their executive employees and for employees generally, whether such plans are
qualified or non-qualified, subject to the eligibility rules of such plans.
(b) The Officer shall also be entitled to participate in any other
fringe benefits which are now or may be or become applicable to the Officer or
the Bank's other executive employees, including the payment of reasonable
expenses for attending annual and periodic meetings of trade associations, and
any other benefits which are commensurate with the duties and responsibilities
to be performed by the Officer under this Agreement. Additionally, the Officer
shall be entitled to such vacation and sick leave as shall be established under
uniform employee policies promulgated by the Board. The Bank shall reimburse
the Officer for all out-of-pocket reasonable and necessary business expenses
which the Officer may incur in connection with his services on behalf of the
Bank.
(c) The Bank agrees to provide the Officer with one automobile of an
appropriate class and quality owned or leased by the Bank for use in connection
with the Officer's duties hereunder.
(d) The Bank agrees to provide at the Bank's expense a membership in
the Country Club of Salisbury for the use of the Officer and his family.
4
<PAGE>
5. Term. The initial term of employment under this Agreement shall
----
be for the period commencing upon the effective date of this Agreement and
ending three (3) calendar years from the effective date of this Agreement. On
each anniversary of the effective date of this Agreement of the Bank, the term
of this Agreement shall automatically be extended for an additional one-year
period beyond the then effective expiration date unless written notice from the
Bank or the Officer is received by the other party ninety (90) days prior to an
anniversary date advising the other party that this Agreement shall not be
further extended; provided that the Board shall review the Officer's performance
annually and make a specific determination pursuant to such review to renew this
Agreement prior to the ninety (90) day notice period. In the event of a Change
in Control (as defined in Paragraph 10), the term of employment shall
automatically be extended upon the effective date of such Change in Control so
that the remaining term at that point shall be for the period commencing on such
effective date and ending three (3) calendar years after such date.
6. Loyalty.
-------
(a) The Officer shall devote his full efforts and entire business time
to the performance of his duties and responsibilities under this Agreement.
(b) The Officer agrees that he will hold in confidence all knowledge
or information of a confidential nature with respect to the respective
businesses of the Holding Company, the Bank or of their subsidiaries, if any,
received by him during the term of this Agreement and will not disclose or make
use of such information without the prior written consent of the Holding Company
or the Bank.
7. Standards. The Officer shall perform his duties and
---------
responsibilities under this Agreement in accordance with such reasonable
standards expected of employees with comparable
5
<PAGE>
positions in comparable organizations and as may be established from time to
time by the Board. The Bank will provide the Officer with the working
facilities and staff customary for similar executives and necessary for him to
perform his duties.
8. Termination and Termination Pay.
-------------------------------
(a) The Officer's employment under this Agreement shall be terminated
upon the death of the Officer during the term of this Agreement, in which event,
the Officer's estate shall be entitled to receive the compensation due the
Officer through the last day of the calendar month in which his death shall have
occurred and for a period of one month thereafter. Notwithstanding the
foregoing, in the event of the Officer's death following a change in control (as
defined in Paragraph 10), the Officer's designated beneficiary or the designated
beneficiary's estate shall be entitled to receive the compensation due the
Officer through the last day of the remaining term of this Agreement.
(b) The Officer's employment under this Agreement may be terminated at
any time by the Officer upon sixty (60) days' written notice to the Board. Upon
such termination, the Officer shall be entitled to receive compensation through
the effective date of such termination.
(c) The Board may terminate the Officer's employment at any time, but
any termination by the Board, other than termination for cause, shall not
prejudice the Officer's right to compensation or other benefits under this
Agreement. The Officer shall have no right to receive compensation or other
benefits for any period after termination for "cause." Termination for "cause"
shall include termination because of the Officer's personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or material breach of any provisions of this
Agreement.
6
<PAGE>
9. Additional Regulatory Requirements.
----------------------------------
(a) If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under this Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay the Officer all or part of the compensation withheld while
its contract obligations were suspended and (ii) reinstate (in whole or in part)
any of its obligations which were suspended.
(b) If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) of Section 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(c) If the Bank is in default as defined in Section 3(x)(1) of the
Federal Deposit Insurance Act (12 U.S.C. (S) 1818(x)(1)), all obligations under
this Agreement shall terminate as of the date of default, but this paragraph
shall not affect any vested rights of the contracting parties.
(d) All obligations under this Agreement shall be terminated, except
to the extent determined that continuation of the Agreement is necessary for the
continued operation of the Bank, (i) by the Director of the Office of Thrift
Supervision ("Director") or the Director's designee, at the time the Federal
Deposit Insurance Corporation (the "Corporation") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. (S) 1818(c)); or
(ii) by the Director, or the Director's
7
<PAGE>
designee, at the time the Director or such designee approves a supervisory
merger to resolve problems related to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
(e) Any payments made to the Officer pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
(S) 1828(k) and any regulations promulgated thereunder.
(f) If any of the provisions of this Agreement conflict with the
requirements of 12 C.F.R. (S) 563.39, the latter shall control.
10. Change in Control.
-----------------
(a) In the event of a "Change in Control" (as defined in
Subparagraph (b) below), the acquiror shall be prohibited, during the remainder
of the term of this Agreement, from:
(i) Assigning the Officer any duties and/or responsibilities that
are inconsistent with his position, duties, responsibilities or status
at the time of the Change in Control or with his reporting
responsibilities or equivalent titles with the Bank in effect at such
time; or
(ii) Adjusting the Officer's annual base salary rate other than in
accordance with the provisions of Paragraph 2 of this Agreement; or
(iii) Reducing in level, scope or coverage or eliminating Officer's
life insurance, medical or hospitalization insurance, disability
insurance, profit sharing plans, stock option plans, stock purchase
plans, deferred compensation plans, management retention plans,
retirement plans or similar plans or benefits being provided by the
Bank or the Holding Company to the Officer as of the effective date of
the Change in Control; or
(iv) Transferring the Officer to a location which is an unreasonable
distance from his current principal work location or outside Rowan
County, without the Officer's express written consent.
8
<PAGE>
(b) For the purposes of this Agreement, the term "Change in Control" shall
mean any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K, as
in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Holding Company or Bank representing
25 percent or more of the combined voting power of the outstanding
Common Stock of the Holding Company or Common Stock of the Bank, as
applicable; or
(iii) individuals who constitute the Board or board of directors of
the Holding Company on the date hereof (the "Incumbent Board" and
"Incumbent Holding Company Board," respectively) cease for any reason
to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Holding Company Board, as
applicable, or whose nomination for election by the Bank's or Holding
Company's shareholders was approved by the Bank's or Holding Company's
Board of Directors or Nominating Committee, as applicable, shall be
considered as though he or she were a member of the Incumbent Board or
Incumbent Holding Company Board, as applicable; or
(iv) either the Holding Company or the Bank consolidates or merges
with or into another corporation, association or entity or is
otherwise reorganized, where neither the Holding Company nor the Bank,
respectively, is the surviving corporation in such transaction; or
(v) all or substantially all of the assets of either the Holding
Company or the Bank are sold or otherwise transferred to or are
acquired by any other entity or group; or
(vi) a change in control as determined by the OTS pursuant to 12
C.F.R., Part 574.
9
<PAGE>
Notwithstanding the other provisions of this Paragraph 10, a transaction or
event shall not be considered a Change in Control if, prior to the consummation
or occurrence of such transaction or event, the Officer and Bank agree in
writing that the same shall not be treated as a Change in Control for purposes
of this Agreement.
(c) In the event any dispute shall arise between the Officer and the
Bank as to the terms or interpretation of this Agreement, including this Section
10, whether instituted by formal legal proceedings or otherwise, including any
action taken by the Officer to enforce the terms of this Section 10 or in
defending against any action taken by the Bank, the Bank shall reimburse the
Officer for all costs and expenses incurred in such proceedings or actions,
including attorney's fees, in the event the Officer prevails in any such action.
11. Successors and Assigns.
----------------------
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank which shall acquire, directly or
indirectly, by conversion, merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Holding Company or the Bank.
(b) Since the Bank is contracting for the unique and personal skills
of the Officer, the Officer shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
12. Modification; Waiver; Amendments. No provision of this Agreement
--------------------------------
may be modified, waived or discharged unless such waiver, modification or
discharge is agreed to in writing, signed by the Officer and on behalf of the
Bank by such officer as may be specifically designated by the Board. No waiver
by either party hereto, at any time, of any breach by the other party hereto
10
<PAGE>
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
amendments or additions to this Agreement shall be binding unless in writing and
signed by both parties, except as herein otherwise provided.
13. Applicable Law. This Agreement shall be governed in all respects
--------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.
14. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first hereinabove written.
CITIZENS BANK, FSB
By:__________________________________________
Authorized Member of the Board
_______________________________________(SEAL)
Ronald E. Bostian
11
<PAGE>
The foregoing Agreement is consented and agreed to by INNES STREET
FINANCIAL CORPORATION, the parent holding company of CITIZENS BANK, FSB.
INNES STREET FINANCIAL CORPORATION
By: _______________________________________
Authorized Member of the Board
12
<PAGE>
CITIZENS BANK, FSB
MANAGEMENT RECOGNITION PLAN AND TRUST AGREEMENT
Citizens Bank, FSB, a federally-chartered savings bank (the "Bank"), does
herein set forth the terms of its Management Recognition Plan (the "Plan") and
Trust (the "Trust") and the Trustees hereby accept this Trust and agree to hold
the Trust assets existing on the date of the Agreement and all additions and
accretions thereto upon the terms and conditions hereinafter stated.
Section 1. Purpose of this Plan. The purpose of this Plan is to provide to
---------- --------------------
the directors, officers and employees (the "Participants") of the Bank and of
any corporation or other entity of which the Bank owns, directly or indirectly,
not less than fifty percent (50%) of any class of the equity securities thereof
(a "Subsidiary"), an ownership interest in the Bank's parent holding company,
Innes Street Financial Corporation (the "Corporation") by making awards
(hereinafter referred to as "Awards" or singularly, "Award") of shares of common
stock of the Corporation (the "Common Stock"). The Board of Directors of the
Bank (the "Board") and the board of directors of the Corporation believe that
participation in the ownership of the Corporation will induce Participants to
continue to serve the Bank or any Subsidiary as directors, officers and/or
employees and encourage them to contribute to the future growth and profits of
the Bank and the Corporation. In addition, the existence of this Plan will make
it possible for the Bank and its Subsidiaries to attract capable individuals to
serve as directors or officers of the Bank and its Subsidiaries. The Board
believes that the existence of this Plan will provide incentives to the
directors, officers and employees of the Bank and any Subsidiaries which will
contribute materially to the success of such companies.
Section 2. Administration of this Plan.
---------- ---------------------------
(a) This Plan shall be administered by a committee of the Board (the
"Committee") which shall consist of not less than two members of the Board who
are "Non-Employee Directors" as defined in Rule 16 b-3(b)(3) of the Rules and
Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In the absence of a duly appointed Committee, the Plan shall be
administered by the Board. The Committee shall have full power and authority to
construe, interpret and administer this Plan. All actions, decisions,
determinations, or interpretations of the Committee shall be final, conclusive,
and binding upon all parties. Members of the Committee shall serve at the
pleasure of the Board.
(b) The Committee shall decide (i) to whom Awards shall be made under this
Plan, (ii) the number of shares of Common Stock subject to each award, (iii) the
number of additional shares, if any, to be purchased or allocated for the
purposes of this Plan, (iv) the determination of leaves of absence which may be
granted to Participants without constituting a termination of their employment
for purposes of the Plan and (v) such additional terms and conditions for Awards
as the Committee shall deem appropriate, including, without limitation, any
determinations as to the restrictions or conditions on transfer of shares of
Common Stock that are necessary or appropriate to satisfy all applicable
securities laws, rules, regulations, and listing requirements.
(c) The Committee may designate any officers or employees of the Bank or of
any Subsidiary to assist in the administration of this Plan. The Committee may
authorize such individuals to execute documents on its behalf and may delegate
to them such other ministerial and limited discretionary duties as the Committee
may see fit.
<PAGE>
(d) Any shares of Common Stock held under this Plan, including without
limitation unallocated, undistributed and forfeited shares, shall be held by the
Trust.
(e) The Trustees shall be appointed by the Board.
Section 3. Contributions to Trust.
---------- ----------------------
(a) The Board shall determine the amount (or the method of computing the
amount) and timing of any contributions by the Bank and any Subsidiaries to the
Trust established under this Plan. Such amounts may be paid in cash or in
shares of Common Stock and shall be paid to the Trust at the designated time of
contribution. No contributions by Participants shall be permitted.
(b) Subject to Section 9 hereof, the Trustees shall invest all of the
Trust's assets primarily in Common Stock. The Trust shall acquire, in the
aggregate, ______ shares of Common Stock, which is equal to four percent (4%) of
the shares of Common Stock issued in connection with the conversion of the Bank
from a federally-chartered mutual savings bank to a federally-chartered stock
savings bank on ___________, 19__ (the "Conversion"). Such shares of Common
Stock may be purchased by the Trust in the open market, or, subject to approval
of the board of directors of the Corporation, may be acquired through the
issuance by the Corporation to the Trust of authorized but unissued shares of
Common Stock on such terms as may be approved by the Committee and the board of
directors of the Corporation. Such shares (the "Plan Shares") shall be held by
the Trust until they have been awarded and distributed pursuant to the terms of
this Plan. In the event that the Trust receives cash pursuant to receipt of
dividends on Common Stock held by the Trust which has not been awarded to
participants, including the receipt of a special cash dividend or return of
capital with respect to such shares, then such funds may be used by the Trustees
to purchase additional shares of Common Stock available for future award under
this Plan or the Trustees may distribute such cash received by the Trust along
with the Common Stock upon which it was earned upon the award of such previously
unallocated shares.
(c) The principal of the Trust, and any earnings thereon, shall be held
separate and apart from other funds of the Bank and shall be used exclusively
for the uses and purposes of Participants and general creditors as herein set
forth. Participants and their beneficiaries shall have no preferred claim on,
or any beneficial ownership interest in, any assets of the Trust. Any rights
created under the Plan and the Trust shall be mere unsecured contractual rights
of Participants and their beneficiaries against the Bank. Any assets held by
the Trust will be subject to the claims of the Bank's general creditors under
federal and state law in the event of insolvency or bankruptcy, as defined in
Section 9(e) herein.
Section 4. Eligibility and Award of Plan Shares.
---------- ------------------------------------
(a) The Participants in this Plan to whom Awards may be made shall be the
following: members of the Board, members of the board of directors of any
Subsidiary, and such officers and employees of the Bank and/or of any Subsidiary
as may be designated by the Committee. Notwithstanding the foregoing, no member
of the Committee is eligible to receive any grants or any Awards under this Plan
during the one-year period prior to serving on the Committee or during such
2
<PAGE>
service, except for the initial Awards of Plan Shares which will be distributed
after the Plan is approved by a majority of the shareholders of the Corporation.
Such initial Awards shall be made pursuant to the provisions of Section 4(b).
(b) As promptly as practicable after a determination is made that an Award
of Plan Shares is to be made, the Committee shall notify the Participant in
writing of the grant of the Award, the number of Plan Shares covered by the
Award, and the terms upon which the Plan Shares subject to the Award shall vest
and be distributed to the Participant. Awards of Plan Shares under this Plan
shall be effective upon execution and delivery of the Stock Grant Agreement
which sets forth the terms and conditions of the Award of Plan Shares (the
"Stock Grant Agreement").
(c) Notwithstanding anything to the contrary contained in Sections 4(a) and
4(b) above, no Participant shall have any right or entitlement to receive a Plan
Share Award hereunder, such awards being at the total discretion of the
Committee.
Section 5. Vesting and Distribution of Plan Shares.
---------- ---------------------------------------
(a) Shares granted under this Plan shall vest and the right of a
Participant to the Plan Shares shall be nonforfeitable as determined by the
Committee and as set forth in the Stock Grant Agreement.
(b) In determining the number of shares vested under any applicable vesting
schedule, a Participant shall not receive fractional shares. If the product
resulting from multiplying the vested percentage times the allocated shares
results in a fractional share, then a Participant's vested right shall be
rounded down to the nearest whole number of shares.
(c) In the event any Participant shall no longer be either a director or an
employee of the Bank or any Subsidiary for any reason (whichever position
resulted in the award, as set forth in the Stock Grant Agreement), other than as
provided in Sections 5(d) and 5(e) below, and such Participant does not have a
100% vested interest in his or her shares under the Plan, then any shares which
are not vested based upon the applicable schedule set forth in the Stock Grant
Agreement shall be forfeited and, provided this Plan has not terminated pursuant
to Section 16 below, shall be available again for Awards to Participants as may
be determined by the Committee.
(d) In the event that a Participant shall no longer be an employee or a
director of the Bank or any Subsidiary (whichever position resulted in the
award, as set forth in the Stock Grant Agreement), because of such Participant's
disability or death, prior to the date when all shares allocated to him or her
would be 100% vested in accordance with the schedule set forth in the Stock
Grant Agreement, then, notwithstanding such vesting schedule, all shares
allocated to such Participant shall immediately become fully vested and
nonforfeitable. For purposes of this Plan, the term "disability" shall be
defined in the same manner as such term is defined in Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended (the "Code").
3
<PAGE>
(e) In the event that a Participant ceases to be an employee or a director
of the Bank or a Subsidiary (whichever position resulted in the award, as set
forth in the Stock Grant Agreement), for any reason after the occurrence of a
"change in control" and prior to the time that all shares allocated to him or
her would be 100% vested in accordance with the schedule set forth in the Stock
Grant Agreement, then, notwithstanding such vesting schedule, all shares
allocated to such Participant shall immediately become fully vested and
nonforfeitable. For purposes of this Plan, a "change in control" shall mean (i)
a change in control of a nature that would be required to be reported by the
Corporation in response to Item 1 of the Current Report on Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act;
(ii) such time as any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) other than the Corporation is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation or Bank representing 25 percent or
more of the combined voting power of the outstanding Common Stock of the
Corporation or outstanding common stock of the Bank, as applicable; or (iii)
individuals who constitute the board of directors of the Corporation or the
Board on the date hereof (the "Incumbent Board" and "Incumbent Bank Board,"
respectively) cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or Incumbent Bank Board, as applicable, or whose
nomination for election by the Corporation's or Bank's shareholders was approved
by the Corporation's or Bank's Board of Directors or Nominating Committee, shall
be considered as though he or she were a member of the Incumbent Board or
Incumbent Bank Board, as applicable; or (iv) either the Corporation or the Bank
consolidates or merges with or into another corporation, association or entity
or is otherwise reorganized, where neither the Corporation nor the Bank,
respectively, is the surviving corporation in such transaction; or (v) all or
substantially all of the assets of either the Corporation or the Bank are sold
or otherwise transferred to or are acquired by any other entity or group.
(f) Plan Shares which have vested shall be distributed to the Participant
or any transferee permitted by Section 11 (a "Permitted Transferee"), as the
case may be, as soon as practicable after such Plan Shares have vested in
accordance with the schedule contained in the Stock Grant Agreement.
(g) The Trustees, the Corporation, the Bank and any Subsidiary shall have
the right to require any Participant or Permitted Transferee to remit to the
Corporation, the Bank or any Subsidiary an amount sufficient to satisfy any
federal, state and/or local withholding tax requirements prior to the delivery
or release of any certificate or certificates for Plan Shares or delivery of any
cash or other assets with respect to Plan Shares or otherwise pursuant to this
Plan. Alternatively, the Trustees, Corporation, Bank and any Subsidiary may
deliver or release Shares or make other distributions of cash or other assets
net of the number of shares or cash sufficient to satisfy the withholding tax
requirements. For withholding tax purposes, the shares of stock, cash and other
assets to be distributed shall be valued on the date the withholding obligation
is incurred.
(h) Each Participant receiving an Award of Plan Shares under this Plan
shall deliver to the Bank a Stock Grant Agreement, which shall be signed by such
Participant.
4
<PAGE>
Section 6. Restrictions on Selling of Plan Shares. Plan Share Awards may not
---------- --------------------------------------
be sold, assigned, pledged or otherwise disposed of prior to the time that they
are vested and distributed pursuant to the terms of this Plan. The Board or the
Committee may require the Participant or his Permitted Transferee, as the case
may be, to agree not to sell or otherwise dispose of his distributed Plan Shares
except in accordance with all then applicable federal and state securities laws,
and the Board or the Committee may cause a legend to be placed on the stock
certificate(s) representing the distributed Plan Shares in order to restrict the
transfer of the distributed Plan Shares for such period of time or under such
circumstances as the Board or the Committee, upon the advice of counsel, may
deem appropriate.
Section 7. Effect of Award on Status of Participant. The fact that an Award
---------- ----------------------------------------
is made to a Participant under this Plan shall not confer on such Participant
any right to continued service on the Board or on the board of directors of any
Subsidiary, nor any right to continued employment with the Bank or any
Subsidiary; nor shall it limit the right of the Bank, the Corporation, or any
Subsidiary to remove such Participant from any such boards, or to terminate his
or her employment at any time.
Section 8. Voting Rights; Dividends; Other Distributions. After an Award of
---------- ---------------------------------------------
Plan Shares has been made, the Participant or Permitted Transferee shall be
entitled to direct the Trustees as to the voting of the Plan Shares which are
covered by the Award and which are not yet vested and distributed to him,
subject to rules and procedures adopted by the Committee for this purpose. All
shares of Common Stock held by the Trust which have not been awarded under an
Award of Plan Shares and shares which have been awarded as to which Participants
or Permitted Transferees have not directed the voting shall be voted by the
Trustees in the same proportion as the trustees of the Bank's Employee Stock
Ownership Plan votes Common Stock held in trust associated therewith, and in the
absence of any such voting, shall be voted in the manner directed by the Board.
Any cash dividends or other cash or noncash distributions (including
special large and nonrecurring dividends and including one that has the effect
of a return of capital to the Corporation's stockholders) or stock dividends
declared in respect of each unvested Plan Share will be held by the Trustees for
the benefit of the Participant or Permitted Transferee on whose behalf such
Award is then held by the Trust and such dividends, including any interest
thereon, will be paid out proportionately by the Trust to the Participant or
Permitted Transferee thereof as soon as practicable after the Plan Shares become
vested in accordance with the Stock Grant Agreement, or otherwise. Any cash
dividends, cash or noncash distributions or stock dividends declared in respect
of each vested Plan Share held by the Trust will be paid by the Trust, as soon
as practicable after the Trust's receipt thereof, to the Participant or
Permitted Transferee on whose behalf such Plan Share is then held by the Trust.
In the event that the Trust receives cash pursuant to receipt of dividends or
other distributions on Common Stock held by the Trust and unallocated to
participants (including the receipt of a special cash dividend or return of
capital) then such funds may be used by the Trust to purchase additional shares
of Common Stock available for future award under this Plan, or the Committee or
Board may distribute such cash received by the Trust along with the Common Stock
upon which it was earned upon the award of such previously unallocated shares.
5
<PAGE>
Section 9. Trust.
---------- -----
(a) The Trustees shall receive, hold, administer, invest and make
distributions and disbursements from the Trust in accordance with the provisions
of this Plan and Trust and the applicable directions, rules, regulations,
procedures and policies established by the Board or the Committee pursuant to
the Plan.
(b) It is the intent of this Plan and Trust that the Trustees shall
have complete authority and discretion with respect to the arrangement, control
and investment of the Trust, and that the Trustees shall invest all assets of
the Trust in Common Stock to the fullest extent practicable, except to the
extent that the Trustees determine that the holding of monies in cash or cash
equivalents is necessary to meet the obligations of the Trust. In performing
their duties, the Trustees shall have the power to do all things and execute
such instruments as may be deemed necessary or proper, including the following
powers;
(i) To invest up to one hundred percent (100%) of all Trust
assets in Common Stock without regard to any law now or hereafter in force
limiting investments for trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and in
making such investment, the Trustees are authorized to purchase Common
Stock from the Corporation or from any other source, and such Common Stock
so purchased may be outstanding, newly issued, or treasury shares.
(ii) To invest any Trust assets not otherwise invested in
accordance with (i) above, in deposit accounts and certificates of deposit
at the Bank or in obligations of the United States Government or its
agencies or such other investments as shall be considered the equivalent of
cash.
(iii) To sell, exchange or otherwise dispose of any property at
any time held or acquired by the Trust.
(iv) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of the
Trust).
(v) To hold cash without interest in such amounts as may in
the opinion of the Trustees be reasonable for the proper operation of the
Plan and Trust.
(vi) To employ brokers, agents, custodians, consultants and
accountants.
(vii) To hire counsel to render advice with respect to their
rights, duties and obligations hereunder, and such other legal services or
representation as the Trustees deem desirable.
6
<PAGE>
(viii) To hold funds and securities representing the amounts to
be distributed to a Recipient or his Permitted Transferee as a consequence
of a dispute as to the disposition thereof, whether in a segregated account
or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustees
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of any court for the exercise of any power
herein contained, or give bond.
(c) The Trustees shall maintain accurate and detailed records and
accounts of all transactions of the Trust, which shall be available at all
reasonable times for inspection by any legally entitled person or entity to the
extent required by applicable law, or by any other person determined by the
Board or the Committee.
(d) Notwithstanding anything to the contrary in this Plan or Trust,
the assets of the Plan and Trust are subject to the payment of the claims of
creditors of the Bank in the event of its insolvency or bankruptcy. The Bank is
insolvent or bankrupt if it is the subject of a proceeding under the Bankruptcy
Code, 11 U.S.C. Section 101 et seq. or is unable to pay its debts. The Board or
the chief executive officer of the Bank must give written notice to the Trustees
of the Bank's bankruptcy or insolvency as soon as practicable following the
occurrence of such event. Upon receipt of such notice or other written
allegations of the Bank's bankruptcy or insolvency, or in the case of the
Trustees' actual knowledge of or determination of the Bank's bankruptcy or
insolvency, the Trustees shall discontinue delivery of Trust assets to the
Participants or the Bank and shall hold the assets of the Trust for the benefit
of the Bank's general creditors and, upon a determination that the Bank is
bankrupt or insolvent, shall distribute such assets to or for the benefit of the
general creditors. The Trustees shall resume delivery of Trust assets to the
Participants or the Bank only after it is determined that the Bank is no longer
bankrupt or insolvent. Determination of the bankruptcy or insolvency shall be
determined by a court of competent jurisdiction or by an arbitrator selected by
and pursuant to rules of the American Arbitration Association upon petition by
an interested party.
Section 10. Adjustment Upon Changes in Capitalization; Dissolution or
----------- ---------------------------------------------------------
Liquidation. In the event of a change in the number or type of shares of Common
- -----------
Stock outstanding, or in the event shares of Common Stock are decreased, changed
into or exchanged for securities of a different entity, by reason of a
reclassification, recapitalization, reorganization, other similar capital
adjustment; by reason of a merger or consolidation of the Corporation; by
reason of the sale by the Corporation of all or a substantial portion of its
assets; or by reason of the occurrence of any other event which could affect
the implementation of this Plan and the realization of its objectives, the
number or kind of shares subject to Awards which have occurred, or could occur,
under this Plan shall be proportionately and equitably adjusted by the
Committee.
Section 11. Non-Transferability. Prior to the time Plan Share Awards
----------- -------------------
become vested and are distributed by the Trustees, Plan Share Awards may not be
sold, pledged, assigned, hypothecated, transferred or disposed of in any manner
other than by will or by the laws of descent and distribution. Notwithstanding
the foregoing, or any other provision of this Plan, a Participant who holds Plan
Share Awards may transfer such awards to his or her spouse, lineal ascendants,
lineal descendants, or to a duly established trust for the benefit of one or
more of these individuals. Plan Share Awards so transferred
7
<PAGE>
may thereafter be transferred only to the Participant who originally received
the grant or to an individual or trust to whom the Participant could have
initially transferred the awards pursuant to this Section 11. Plan Share Awards
which are transferred pursuant to this Section 11 shall be subject to the same
terms and conditions as applied to the Participant. In addition, such shares
may be tendered in response to a tender offer for or a request or invitation to
tenders of greater than fifty percent (50%) of the outstanding Common Stock and
may be surrendered in a merger, consolidation or share exchange involving the
Corporation; provided, however, in each case, that except as otherwise provided
herein, the securities or other consideration received in exchange therefor
shall thereafter be subject to the restrictions and conditions set forth in this
Plan.
Section 12. Impact of Award on Other Benefits of Participant. The value of
----------- ------------------------------------------------
any Award, either on the date of the Award or at the time such shares become
vested, shall not be includable as compensation or earnings for purposes of any
other benefit plan offered by the Bank, the Corporation or any Subsidiary other
than any qualified employee benefit plan which provides that such value shall be
included as compensation or earnings for purposes of such plan.
Section 13. Corporate Action. The making of an Award under this Plan shall
----------- ----------------
not affect in any way the right or power of the Corporation or its shareholders
or the Bank or its shareholders or any Subsidiary or its shareholders to make or
authorize any adjustment, recapitalization, reorganization, or other change in
the Corporation's, the Bank's or any Subsidiary's capital structure or its
business, or any merger or consolidation of the Corporation, the Bank or any
Subsidiary, or the issuance of any bonds, debentures, preferred or other capital
stock or rights with respect thereto, or the dissolution or liquidation of the
Corporation, the Bank or any Subsidiary, or any sale or transfer of all or any
part of the Corporation's, the Bank's or any Subsidiary's assets or business.
Section 14. Exculpation and Indemnification. In connection with this plan,
----------- -------------------------------
no member of the Board, no member of the board of directors of the Corporation,
no member of the Committee and no Trustee shall be personally liable for any act
or omission to act in his capacity as a member of the Board, the board of
directors of the Corporation or the Committee or as Trustees, nor for any
mistake in judgment made in good faith, unless arising out of, or resulting
from, such person's own bad faith, willful misconduct, or criminal acts. To the
extent permitted by applicable law and regulation, the Bank shall indemnify,
defend and hold harmless the members of the Board, the members of the board of
directors of the Corporation, the members of the board of directors of any
Subsidiary, the Committee and each Trustee and each other officer or employee of
the Bank, the Corporation or of any Subsidiary to whom any duty or power
relating to the administration or interpretation of this Plan may be assigned or
delegated, from and against any and all liabilities (including any amount paid
in settlement of a claim with the approval of the Board) and any costs or
expenses (including counsel fees) incurred by such persons arising out of, or as
a result of, any act or omission to act in connection with the performance of
such person's duties, responsibilities, and obligations under this Plan, other
than such liabilities, costs, and expenses as may arise out of, or result from,
the bad faith, willful misconduct, or criminal acts of such persons.
Section 15. Amendment and Modification of this Plan. The Board may at any
----------- ---------------------------------------
time, and from time to time, amend or modify this Plan (including the form of
Stock Grant Agreement) in any respect, subject to any applicable regulatory
requirements and any required stockholder approval or any
8
<PAGE>
stockholder approval which the Board may deem advisable for any reason, such as
for the purpose of obtaining or retaining any statutory or regulatory benefits
under tax, securities or other laws or satisfying applicable stock exchange or
quotation system listing requirements. However, any amendment or modification
of this Plan shall not in any manner affect any Award of shares theretofore made
to a Participant under this Plan without the consent of such Participant or any
Permitted Transferee of such Participant.
Section 16. Termination and Expiration of this Plan. This Plan may be
----------- ---------------------------------------
abandoned, suspended, or terminated, in whole or in part, at any time by the
Board; provided, however, that abandonment, suspension, or termination of this
Plan shall not affect any Award theretofore made under this Plan. Unless sooner
terminated, this Plan shall terminate at the close of business on the day that
is the tenth (10th) anniversary of the date of approval of the Plan by the
shareholders of the Corporation; and no Award of shares may be made under this
Plan thereafter. Such termination shall not effect any Award of shares
theretofore made. In the event that the Board terminates this Plan in whole,
any shares held by the Trust which have not been allocated to eligible
Participants, together with any other assets held by the Trust, shall revert to
the Bank.
17. Tax Status of Trust. It is intended that the trust established hereby be
-------------------
treated as a Grantor Trust of the Corporation under the provisions of Section
671 et seq. of the Code, as the same may be amended from time to time.
-- ---
18. Miscellaneous.
-------------
(a) This Plan has been adopted by the Board to be effective as of the date of
approval of the Plan by the shareholders of the Corporation.
(b) Captions and paragraph headings used herein are for convenience only, do
not modify or affect the meaning of any provision herein, are not a part hereof,
and shall not serve as a basis for interpretation or construction of this Plan
or Trust. As used herein, the masculine gender shall include the feminine and
neuter, and the singular number shall include the plural, and vice versa,
whenever such meanings are appropriate.
(c) All costs and expenses incurred in the operation and administration of
this Plan shall be borne by the Bank or by a Subsidiary, or in the discretion of
the Bank, the Trust.
(d) Without regard to the principles of conflicts of laws, the laws of the
State of North Carolina shall govern and control the validity, interpretation,
performance, and enforcement of this Plan and Trust.
(e) A copy of this Plan, and any amendments thereto, shall be maintained by
the Secretary of the Bank and shall be shown to any proper person making inquiry
about it.
9
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF ROWAN
STOCK GRANT AGREEMENT
THIS STOCK GRANT AGREEMENT (the "Agreement") is made and entered into as of
the ____ of ___________________, _______ (the "Effective Date"), by and among
Citizens Bank, FSB (the "Bank"), a federally-chartered savings bank,
_______________________ (the "Participant") and ______________________,
___________________ and ____________________ (the "Trustees").
WHEREAS, a Management Recognition Plan (the "Plan") was adopted by the
Board of Directors of the Bank (the "Bank") and approved by the Board of
Directors and by the shareholders of Innes Street Financial Corporation, the
holding company of the Bank (the "Corporation") on ________________, ____.
WHEREAS, it has been determined that it is desirable and in the best
interest of the Bank to make an award (the "Award") of certain shares of the
Common Stock of the Corporation, under the Plan, to the Participant, subject to
certain restrictions as specified below; and
WHEREAS, capitalized terms not otherwise defined herein shall have the same
meaning given to such terms in the Plan.
NOW, THEREFORE, the Parties agree as follows:
1. Date of Award. The date of making the Award under this Agreement is
-------------
the _____ day of _________________, ______. This Award has been made in
recognition of the Participant's status and service as a ____________________ of
_____________________________________________. The Participant is ____ or _____
is not a director or executive officer of the Bank.
2. Award of Plan Shares. The Participant is awarded, in the aggregate,
--------------------
___________________________ (__________) shares of Common Stock (the "Plan
Shares"), which shares become vested and nonforfeitable pursuant to paragraph 5
of this Agreement.
3. Investment Representation and Transfer Restrictions.
---------------------------------------------------
(a) Investment Representation. Participant makes and agrees to the
-------------------------
investment representation, if any, attached hereto as Annex A, and the Committee
may cause a legend to be placed on any certificate representing any of the Plan
Shares to make appropriate reference to such representation, as necessary.
(b) Securities Law and Regulations. The Participant agrees that the
-------------------------------
Plan Shares shall be subject to such stop-transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock
1
<PAGE>
exchange or interdealer quotation system upon which the Common Stock is then
listed and any other applicable federal or state securities laws, rules or
regulations, and the Committee may cause a legend or legends to be placed on any
certificate representing any of the Plan Shares to make appropriate reference to
such restrictions.
(c) Other Transfer Restrictions. (Intentionally omitted.)
---------------------------
4. Receipt by the Trustees. The Trustees acknowledge and agree that the
-----------------------
Plan Shares shall be held by the Trustees and distributed or transferred in
accordance with the Plan and as set forth herein.
5. Vesting and Delivery of Plan Shares by the Trustees.
---------------------------------------------------
(a) Periodic Vesting. Plan Shares shall vest and become
----------------
nonforfeitable in accordance with the following schedule:
_________ shares on ___________________, 19___
_________ shares on ___________________, 20___
_________ shares on ___________________, 20___
_________ shares on ___________________, 20___
In addition, Plan Shares shall become vested and nonforfeitable upon disability,
death and a change in control as set forth in the Plan.
(b) Delivery of Vested Plan Shares to the Participant. After the date
-------------------------------------------------
on which the Plan Shares have become vested as provided in this Agreement and in
the Plan, the Committee shall instruct the Trustees to deliver to the
Participant, the Participant's designee, such other person as shall have been
designated as Participant's beneficiary in accordance with this Agreement, or
any other permitted recipient pursuant to the Plan, as applicable, certificates
representing the Plan Shares which have become vested and nonforfeitable, as the
Committee shall determine, free from any restrictions imposed by this Agreement
other than such restrictions and conditions as may be deemed necessary by the
Committee pursuant to paragraph 3 above.
(c) Delivery of Forfeited Plan Shares. If the Plan Shares, or any of
---------------------------------
them, are forfeited pursuant to the Plan, the Committee shall instruct the
Trustees concerning the disposition of such forfeited shares. Thereafter such
forfeited shares shall cease to be subject to this Agreement.
6. Payment of Dividends. As soon as practicable after the Plan Shares
--------------------
have become vested and delivered, the Trustees shall pay to the Participant, the
Participant's designee, such other person as shall have been designated as
Participant's beneficiary in accordance with the Agreement or any other
permitted recipient pursuant to the Plan, the proportional amount of any cash or
stock dividend, or other cash or noncash distributions, including any interest
earned thereon, declared in respect of such vested Plan Shares, which had been
held in the Trust for the benefit of the above-named person(s).
2
<PAGE>
7. Designation of Beneficiary. The Participant hereby designates the
--------------------------
person(s) described on Annex B as the beneficiary or beneficiaries who shall be
entitled to receive the Plan Shares and other assets, if any, distributable to
the Participant upon his death. The Participant may, from time to time, revoke
or change his beneficiary designation without the consent of any prior
beneficiary, if any, by filing a new designation with the Committee. The last
such designation received by the Committee shall be controlling; provided,
however, that no designation, or change or revocation thereof, shall be
effective unless received by the Committee prior to the Participant's death, and
in no event shall it be effective as of a date prior to such receipt.
If no such beneficiary designation is in effect at the time of the
Participant's death, or if no designated beneficiary survives the Participant,
or if such designation conflicts with law, the Participant's estate shall be
deemed to have been designated his beneficiary and shall receive the Plan Shares
and other assets, if any, distributable to the Participant upon his death. If
the Committee is in doubt as to the right of any person to receive such
distribution, the Committee may direct the Trustees to retain the Plan Shares
and other assets, without liability for any interest in respect thereof, until
the rights thereto are determined, or the Committee may direct the transfer of
such Plan Shares into any court of appropriate jurisdiction and such transfer
shall be deemed a complete discharge of the obligations of the Bank, the
Corporation, the Committee and Trustees hereunder.
8. Effect of Award on Status of Participant. The fact that an Award has
----------------------------------------
been made to the Participant under this Plan shall not confer on the Participant
any right to continued service on the Board, on the board of directors of the
Corporation or on the board of directors of any Subsidiary, nor to continued
employment with the Bank, the Corporation or any Subsidiary; nor shall it limit
the right of the Bank, the Corporation or of any Subsidiary to remove the
Participant from any such boards, or to terminate his employment at any time
without prior notice.
9. Impact of Award on Other Benefits of Participant. The value of the
------------------------------------------------
Plan Shares on the date of the Award or at the time the Plan Shares becomes
vested, shall not be includable as compensation or earnings for purposes of any
other benefit plan offered by the Bank, the Corporation or any Subsidiary other
than any qualified employee benefit plan which provides that such value shall be
included as compensation or earnings for purposes of such plans.
10. Tax Withholding. All Plan Shares distributed pursuant to this
---------------
Agreement shall be subject to applicable federal, state and local withholding
for taxes. The Participant expressly acknowledges and agrees to such
withholding without regard to whether the Plan Shares may then be sold or
otherwise transferred by the Participant. The Participant acknowledges and
agrees to the tax withholding provisions which are set forth in the Plan.
11. Notices. Any notices or other communications required or permitted to
-------
be given under this Agreement shall be in writing and shall be deemed to have
been sufficiently given if delivered personally or three business days after
deposit in the United States mail by Certified Mail, return receipt requested,
properly addressed and postage prepaid, if to the Bank, the Committee or the
Trustees at the Bank's principal office address at 401 West Innes Street,
Salisbury, North Carolina 28144; and, if to the Participant, at his last address
appearing on the books of the Bank. The Bank and the Participant may change
their address or addresses by giving written notice of such change as provided
herein. Any
3
<PAGE>
notice or other communication hereunder shall be deemed to have been given on
the date actually delivered or as of the third (3rd) business day following the
date mailed as set forth above, as the case may be.
12. Construction Controlled by Plan. The Plan, a copy of which is
-------------------------------
attached hereto as Annex C, is incorporated herein by reference. The Award of
Restricted Shares shall be subject to the terms and conditions of the Plan, and
the Participant hereby assumes and agrees to comply with all of the obligations
imposed upon the Participant in the Plan. This Agreement shall be construed so
as to be consistent with the Plan; and the provisions of the Plan shall be
deemed to be controlling in the event that any provision hereof should appear to
be inconsistent therewith.
13. Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such a manner as to be valid and enforceable under
applicable law, but if any provision of this Agreement is determined to be
unenforceable, invalid or illegal, the validity of any other provision or part
thereof shall not be affected thereby and this Agreement shall continue to be
binding on the parties hereto as if such unenforceable, invalid or illegal
provision or part thereof had not been included herein.
14. Governing Law. Without regard to the principles of conflicts of laws,
-------------
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Agreement.
15. Modification of Agreement; Waiver. This Agreement may be modified,
---------------------------------
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto or their successors in interest. No waiver hereunder shall constitute a
waiver with respect to any subsequent occurrence or other transaction hereunder
or of any other provision hereof.
16. Binding Effect. This Agreement shall be binding upon and shall inure
--------------
to the benefit of the parties hereto, and their respective heirs, legatees,
personal representatives, executors, and administrators, successors and assigns.
17. Entire Agreement. This Agreement and the Plan constitute and embody
----------------
the entire understanding and agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other agreements or understandings,
written or oral, in effect between the parties hereto relating to the matters
addressed herein.
18. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
19. Substitution of Trustees. In the event any new trustee is substituted
------------------------
for any Trustee pursuant to the Plan, such substitute trustee shall also be
substituted as a Trustee hereunder.
4
<PAGE>
IN WITNESS WHEREOF, the Bank has caused this instrument to be executed in
its corporate name by its President, or one of its Vice Presidents, and attested
by its Secretary or one of its Assistant Secretaries, and its corporate seal to
be hereto affixed, all by, authority of its Board of Directors first duly given;
and each individual party hereto has hereunto set his hand and adopted as his
seal the typewritten word "SEAL" appearing beside his name, all done this the
day and year first above written.
CITIZENS BANK, FSB
By:___________________________________________
__________________ President
ATTEST:
__________________________
__________Secretary
[Corporate Seal]
PARTICIPANT
______________________________(SEAL)
______________________________(SEAL)
______________________________(SEAL)
TRUSTEE
______________________________(SEAL)
TRUSTEE
______________________________(SEAL)
TRUSTEE
5
<PAGE>
ANNEX A
INVESTMENT REPRESENTATION
-------------------------
<PAGE>
ANNEX B
MANAGEMENT RECOGNITION PLAN
---------------------------
BENEFICIARY DESIGNATION FORM
----------------------------
As Beneficiary to receive any shares of stock distributable on my behalf
pursuant to the Citizens Bank, FSB Management Recognition Plan and Trust, I
hereby designate the following:
Name Address Relationship
Primary Beneficiary:
________________________________________________________
________________________________________________________
________________________________________________________
Contingent Beneficiary:
(if any)
________________________________________________________
________________________________________________________
________________________________________________________
If more than one primary beneficiary is named, shares will be paid in equal
shares to surviving primary beneficiaries. Should the contingent beneficiaries
be eligible to receive the benefits (i.e., all primary beneficiaries are
deceased), such benefits will be paid in equal shares to such surviving
contingent beneficiaries.
Name of Spouse if not given above: ____________________________________________
_________________________________ _____________________________________________
Witness Participant
_____________________________________________
Date
<PAGE>
ANNEX C
MANAGEMENT RECOGNITION PLAN
---------------------------
<PAGE>
INNES STREET FINANCIAL CORPORATION
STOCK OPTION PLAN
THIS IS THE STOCK OPTION PLAN ("Plan") of Innes Street Financial
Corporation (the "Corporation"), a North Carolina corporation, with its
principal office in Salisbury, Rowan County, North Carolina, adopted by the
Board of Directors of the Corporation and effective upon the approval of the
Plan by the shareholders of the Corporation, under which options may be granted
from time to time to eligible directors and employees of the Corporation,
Citizens Bank, FSB (the "Bank") and of any corporation or other entity of which
either the Corporation or the Bank owns, directly or indirectly, not less than
fifty percent (50%) of any class of equity securities (a "Subsidiary"), to
purchase shares of common stock of the Corporation ("Common Stock"), subject to
the provisions set forth below:
1. PURPOSE OF THE PLAN. The purpose of the Plan is to aid the
-------------------
Corporation, the Bank and any Subsidiary in attracting and retaining capable
directors and employees and to provide a long range incentive for directors,
employees and others to remain in the management and service of the Corporation,
the Bank or any Subsidiary, to perform at increasing levels of effectiveness and
to acquire a permanent stake in the Corporation with the interest and outlook of
an owner. These objectives will be promoted through the granting of options to
acquire shares of Common Stock pursuant to the terms of this Plan.
2. ADMINISTRATION. The Plan shall be administered by a committee (the
--------------
"Committee"), which shall consist of not less than two members of the Board of
Directors of the Corporation (the "Board") who are "Non-Employee Directors" as
defined in Rule 16b-3(b)(3) of the Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Members of the Committee
shall serve at the pleasure of the Board. In the absence at any time of a duly
appointed Committee, this Plan shall be administered by the Board. The Committee
may designate any officers or employees of the Corporation, the Bank or any
Subsidiary to assist in the administration of the Plan and to execute documents
on behalf of the Committee and perform such other ministerial duties as may be
delegated to them by the Committee.
Subject to the provisions of the Plan, the determinations or the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon all persons affected thereby. By way of
illustration and not of limitation, the Committee shall have the discretion (a)
to construe and interpret the Plan and all options granted hereunder and to
determine the terms and provisions (and amendments thereof) of the options
granted under the Plan (which need not be identical); (b) to define the terms
used in the Plan and in the options granted hereunder; (c) to prescribe, amend
and rescind the rules and regulations relating to the Plan; (d) to determine the
individuals to whom and the time or times at which such options shall be
granted, the number of shares to be subject to each option, the option price,
and the determination of leaves of absence which may be granted to participants
without constituting a termination of their employment for the purposes of the
Plan; and (e) to make all other determinations necessary or advisable for the
administration of the Plan.
<PAGE>
It shall be in the discretion of the Committee to grant options which
qualify as "incentive stock options," as that term is defined in Section 422 of
the Internal Revenue Code of 1986, as amended ("Incentive Stock Options") or
which do not qualify as Incentive Stock Options ("Nonqualified Stock Options")
(herein referred to collectively as "Options;" however, whenever reference is
specifically made only to "Incentive Stock Options" or "Nonqualified Stock
Options," such reference shall be deemed to be made to the exclusion of the
other). Any options granted which fail to satisfy the requirements for Incentive
Stock Options shall become Nonqualified Stock Options.
3. STOCK AVAILABLE FOR OPTIONS. In the discretion of the Committee, the
---------------------------
stock to be subject to Options under the Plan shall be authorized but unissued
shares of Common Stock which are issued directly to optionees upon exercise of
options and/or shares of Common Stock which are acquired by the Plan or the
Corporation in the open market. The total number of shares of Common Stock for
which Options may be granted under the Plan is _______ shares, which is ten
percent (10%) of the total number of shares of Common Stock issued by the
Corporation in connection with the conversion of the Bank from a federally-
chartered mutual savings bank to a federally-chartered stock savings bank on
_______________ (the "Conversion"). Such number of shares is subject to any
capital adjustments as provided in Section 16. In the event that an Option
granted under the Plan is forfeited, released, expires or is terminated
unexercised as to any shares covered thereby, such shares thereafter shall be
available for the granting of Options under the Plan; however, if the
forfeiture, expiration, release or termination date of an Option is beyond the
term of existence of the Plan as described in Section 21, then any shares
covered by forfeited, unexercised, released or terminated options shall not
reactivate the existence of the Plan and therefore may not be available for
additional grants under the Plan. The Corporation, during the term of the Plan,
will reserve and keep available a number of shares of Common Stock sufficient to
satisfy the requirements of the Plan. In the discretion of the Committee, the
shares of Common Stock necessary to be delivered to satisfy exercised options
may be from authorized and unissued shares of Common Stock or may be purchased
in the open market.
4. ELIGIBILITY. Options shall be granted only to individuals who meet all
-----------
of the following eligibility requirements:
(a) Such individual must be an employee or a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary. For this purpose,
an individual shall be considered to be an "employee" only if there exists
between the Corporation, the Bank or a Subsidiary and the individual the
legal and bona fide relationship of employer and employee. In determining
whether such relationship exists, the regulations of the United States
Treasury Department relating to the determination of such relationship for
the purpose of collection of income tax at the source on wages shall be
applied.
(b) Such individual must have such knowledge and experience in
financial and business matters that he or she is capable of evaluating the
merits and risks of the investment involved in the exercise of the Options.
2
<PAGE>
(c) Such individual, being otherwise eligible under this Section 4,
shall have been selected by the Committee as a person to whom an Option
shall be granted under the Plan.
In determining the directors and employees to whom Options shall be granted
and the number of shares to be covered by each Option, the Committee shall take
into account the nature of the services rendered by respective directors and
employees, their present and potential contributions to the success of the
Corporation, the Bank and any Subsidiary and such other factors as the Committee
shall deem relevant. A director or employee who has been granted an Option
under the Plan may be granted an additional Option or Options under the Plan if
the Committee shall so determine.
If, pursuant to the terms of the Plan, it is necessary that the percentage
of stock ownership of any individual be determined, stock ownership in the
Corporation or of a related corporation which is owned (directly or indirectly)
by or for such individual's brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants or by or for any corporation,
partnership, estate or trust of which such employee is a shareholder, partner or
beneficiary shall be considered as owned by such director or employee.
5. OPTION AGREEMENT Subject to the provisions of this Plan, Options shall
----------------
be awarded to the directors and employees in such amounts as are determined by
the Committee. The proper officers on behalf of the Corporation and each
Optionee shall execute a Stock Option Grant and Agreement (the "Option
Agreement") which shall set forth the total number of shares of Common Stock to
which it pertains, the exercise price, whether it is a Nonqualified Stock Option
or an Incentive Stock Option, and such other terms, conditions, restrictions and
privileges as the Committee in each instance shall deem appropriate, provided
they are not inconsistent with the terms, conditions and provisions of this
Plan. Each Optionee shall receive a copy of his executed Option Agreement. Any
Option granted with the intention that it will be an Incentive Stock Option but
which fails to satisfy a requirement for Incentive Stock Options shall continue
to be valid and shall be treated as a Nonqualified Stock Option.
6. OPTION PRICE.
------------
(a) The option price of each Option granted under the Plan shall be
not less than one hundred percent (100%) of the market value of the stock
on the date of grant of the Option. In the case of incentive stock options
granted to a shareholder who owns stock possessing more than 10 percent
(10%) of the total combined voting power of all classes of stock of the
Corporation, the Bank or a Subsidiary (a "ten percent shareholder"), the
option price of each Option granted under the Plan shall not be less than
one hundred and ten percent (110%) of the market value of the stock on the
date of grant of the Option. If the Common Stock is listed on a national
securities exchange (including for this purpose the Nasdaq Stock Market,
Inc. National Market) on the date in question, then the market value per
share shall be not less than the average of the highest and lowest selling
price on such exchange on such date, or if there were no sales on such
date, then the market price per share shall be equal to the average between
the bid and asked price on such date. If the Common Stock is traded
otherwise than on a national securities exchange (including for this
purpose the Nasdaq Stock Market, Inc.
3
<PAGE>
National Market) on the date in question, then the market price per share
shall be equal to the average between the bid and asked price on such date,
or, if there is no bid and asked price on such date, then on the next prior
business day on which there was a bid and asked price. If no such bid and
asked price is available, then the market value per share shall be its fair
market value as determined by the Committee, in its sole and absolute
discretion. The Committee shall maintain a written record of its method of
determining such value.
(b) The option price shall be payable to the Corporation either (i)
in cash or by check, bank draft or money order payable to the order of the
Corporation, or (ii) at the discretion of the Committee, through the
delivery of shares of the common stock of the Corporation owned by the
optionee with a market value (determined in a manner consistent with (i)
above) equal to the option price, or (iii) at the discretion of the
Committee by a combination of (i) and (ii) above. No shares shall be
delivered until full payment has been made.
7. EXPIRATION OF OPTIONS. The Committee shall determine the expiration
---------------------
date or dates of each Option, but such expiration date shall be not later than
ten (10) years after the date such Option is granted. In the event an Incentive
Stock Option is granted to a ten percent shareholder, the expiration date or
dates of each Option shall be not later than five (5) years after the date such
Option is granted. The Committee, in its discretion, may extend the expiration
date or dates of an Option after such date was originally set; however, such
expiration date may not exceed the maximum expiration date described in this
Section 7.
8. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
(a) All Options must be granted within ten (10) years of the
Effective Date of this Plan as defined in Section 20.
(b) The Committee may grant Options which are intended to be
Incentive Stock Options and Nonqualified Stock Options, either separately
or jointly, to an eligible employee.
(c) The grant of Options shall be evidenced by a written instrument
(an Option Agreement) containing terms and conditions established by the
Committee consistent with the provisions of this Plan.
(d) Not less than 100 shares may be purchased at any one time unless
the number purchased is the total number at that time purchasable under the
Plan.
(e) The recipient of an Option shall have no rights as a shareholder
with respect to any shares covered by his Option until payment in full by
him for the shares being purchased. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is
prior to the date such stock is fully paid for, except as provided in
Section 16.
4
<PAGE>
(f) The aggregate fair market value of the stock (determined as of
the time the Option is granted) with respect to which Incentive Stock
Options are exercisable for the first time by any participant during any
calendar year (under all benefit plans of the Corporation, the Bank or any
Subsidiary, if applicable) shall not exceed $100,000; provided, however,
that such $100,000 limit of this subsection (f) shall not apply to the
grant of Nonqualified Stock Options. The Committee may grant Options which
are exercisable in excess of the foregoing limitations, in which case
Options granted which are exercisable in excess of such limitation shall be
Nonqualified Stock Options.
(g) All stock obtained pursuant to an option which qualifies as an
Incentive Stock Option shall be held in escrow for a period which ends on
the later of (i) two (2) years from the date of the granting of the Option
or (ii) one (1) year after the transfer of the stock pursuant to the
exercise of the Option. The stock shall be held by the Corporation or its
designee. The employee who has exercised the Option shall during such
holding period have all rights of a shareholder, including but not limited
to the rights to vote, receive dividends and sell the stock. The sole
purpose of the escrow is to inform the Corporation of a disqualifying
disposition of the stock within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and it shall be administered solely for
that purpose.
9. EXERCISE OF OPTIONS.
-------------------
(a) Unless otherwise set forth in the Option Agreement, all Options
granted to an optionee by virtue of his position as a nonemployee director
of the Corporation or the Bank (as stated in the Option Agreement) shall be
fully vested, exercisable and nonforfeitable immediately at the time of the
grant.
(b) Options granted to an optionee by virtue of his position as an
employee (as stated in the Option Agreement) shall become vested and
exercisable at the times, at the rate and subject to such limitations as
may be set forth in the Option Agreement executed in connection therewith;
provided, however, that all outstanding and nonforfeited options shall be
exercisable, if not sooner, on the day prior to the expiration date
thereof.
(c) Notwithstanding the foregoing, Options shall become exercisable
with respect to all of the shares subject thereto upon the optionee's
death, retirement or disability within the meaning of Section 22(e)(3) of
the Internal Revenue Code of 1986, as amended, and in the event of a change
in control as set forth in Section 13 of this Plan.
(d) Any right to exercise Options in annual installments shall be
cumulative and any vested installments may be exercised, in whole or in
part, at the election of the optionee. The exercise of any Option must be
evidenced by written notice to the Corporation that the optionee intends to
exercise his Option.
(e) In no event shall an Option be deemed granted by the Corporation
or exercisable by a recipient prior to the mutual execution by the
Corporation and the
5
<PAGE>
recipient of an Option Agreement which comports with the requirements of
Section 5 and Section 8(c).
(f) The inability of the Corporation or Bank to obtain approval from
any regulatory body or authority deemed by counsel to be necessary to the
lawful issuance and sale of any shares of Common Stock hereunder shall
relieve the Corporation and the Bank of any liability in respect of the
non-issuance or sale of such shares. As a condition to the exercise of an
option, the Corporation may require the person exercising the Option to
make such representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of federal
or state securities laws.
(g) The Committee shall have the discretionary authority to impose in
the Option Agreements such restrictions on shares of Common Stock as it may
deem appropriate or desirable, including but not limited to the authority
to impose a right of first refusal or to establish repurchase rights or
both of these restrictions.
(h) Notwithstanding anything to the contrary herein, an optionee
receiving the grant of an Option by virtue of his or her position as a
director or as an employee of the Corporation, the Bank or a Subsidiary (as
stated in the Option Agreement), shall be required to exercise his or her
Options within the periods set forth in Sections 10, 11 and 12 below.
10. TERMINATION OF EMPLOYMENT - EXCEPT BY DISABILITY, RETIREMENT OR DEATH.
---------------------------------------------------------------------
If any optionee receiving the grant of an Option by virtue of his position as a
director (as stated in the Option Agreement) ceases to be a director of at least
one of the Corporation, the Bank or any Subsidiary for any reason other than
death, retirement (as defined in Section 11) or disability (as defined in
Section 11) or if any optionee receiving the grant of an Option by virtue of his
position as an employee (as stated in the Option Agreement) ceases to be an
employee of at least one of the Corporation, the Bank and any Subsidiary for any
reason other than death, retirement (as defined in Section 11) or disability (as
defined in Section 11), he may, (i) at any time within three (3) months after
his date of termination, but not later than the date of expiration of the
Option, exercise any Option designated in the Option Agreement as an Incentive
Stock Option and (ii) at any time prior to the date of expiration of the Option,
exercise any option designated in the Option Agreement as a Nonqualified Stock
Option. However, in either such event the optionee may exercise any Option only
to the extent it was vested and he or she was entitled to exercise the Option on
the date of termination. Any Options or portions of Options of terminated
optionees not so exercised shall terminate and be forfeited.
11. TERMINATION OF EMPLOYMENT - DISABILITY OR RETIREMENT. If any optionee
----------------------------------------------------
receiving the grant of an Option by virtue of his position as a director (as
stated in the Option Agreement) ceases to be a director of at least one of the
Corporation, the Bank or any Subsidiary due to his becoming disabled within the
meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended, or
if any employee receiving the grant of an Option by virtue of his position as an
employee (as stated in the Option Agreement) ceases to be employed by at least
one of the Corporation, the Bank and any Subsidiary due to his becoming disabled
within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
6
<PAGE>
amended, all unvested and forfeitable Options of such optionee shall immediately
become vested and nonforfeitable and he may, (i) at any time within 12 months
after his date of termination, but not later than the date of expiration of the
Option, exercise any option designated in the Option Agreement as an Incentive
Stock Option with respect to all shares subject thereto and (ii) at any time
prior to the date of expiration of the Option, exercise any Option designated in
the Option Agreement as a Nonqualified Stock Option with respect to all shares
subject thereto. Any portions of Options of optionees who are terminated
because they become disabled which are not so exercised shall terminate.
If any optionee receiving the grant of an Option by virtue of his position
as a director (as stated in the Option Agreement) ceases to be a director of at
least one of the Corporation, the Bank or any Subsidiary due to his retirement,
or if any employee receiving the grant of an Option by virtue of his position as
an employee (as stated in the Option Agreement) ceases to be employed by at
least one of the Corporation, the Bank and any Subsidiary due to his retirement,
all unvested and forfeitable Options of such optionee shall immediately become
vested and nonforfeitable and he may, at any time prior to the date of
expiration of the Option, exercise such Option; provided, however, that if the
Option is exercised more than three months after such retirement, the Option may
be treated as a Nonqualified Stock Option. Any portions of Options of retired
directors or employees not so exercised shall terminate. For purposes of this
Plan, the term "retirement," as it relates to any optionee receiving a grant of
an Option as a result of his or her position as an employee of the Corporation,
the Bank or any Subsidiary, shall mean (i) the termination of the optionee's
employment under conditions which would constitute retirement under any tax
qualified retirement plan maintained by the Corporation, the Bank or a
Subsidiary, or (ii) termination of employment after attaining age 65. The term
"retirement," as it relates to any optionee receiving a grant of an Option as a
result of his or her position as a director shall mean the cessation of
membership on such board of directors (i) with the approval of such board of
directors, at any time after such optionee reaches age 65, or (ii) at the
election of the optionee at any time after not less than 25 years of service as
a member of the such board of directors, as applicable.
12. TERMINATION OF EMPLOYMENT - DEATH. If an optionee receiving the
---------------------------------
grant of an option by virtue of his position as a director (as stated in the
Option Agreement) dies while a director of the Corporation, the Bank or any
Subsidiary or if any employee receiving the grant of an option by virtue of his
position as an employee (as stated in the Option Agreement) dies while in the
employment of the Corporation, the Bank or a Subsidiary, all unvested and
forfeitable Options of such optionee shall immediately become vested and
nonforfeitable and the person or persons to whom the Option is transferred by
will or by the laws of descent and distribution may exercise the Option at any
time until the term of the Option has expired, with respect to all shares
subject thereto, to the same extent and upon the same terms and conditions the
optionee would have been entitled to do so had he lived. Any Options or portions
of options of deceased directors or employees not so exercised shall terminate.
13. CHANGE IN CONTROL. In the event that an optionee ceases to be an
-----------------
employee, a director of the Corporation, the Bank or a Subsidiary (which
position resulted in his or her receipt of an option pursuant to this Plan) for
any reason after the occurrence of a "change in control" and prior to the time
that all shares allocated to him or her would be 100% vested, nonforfeitable and
exercisable in accordance with Sections 9 and 10 above, then,
7
<PAGE>
notwithstanding Sections 9 and 10 above, all Options granted to such optionee
shall immediately become fully vested and nonforfeitable. For purposes of this
Plan, a "change in control" shall mean (i) a change in control of a nature that
would be required to be reported by the Corporation in response to Item 1 of the
Current Report on Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Exchange Act; (ii) such time as any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation or Bank representing 25 percent
or more of the combined voting power of the outstanding Common Stock of the
Corporation or outstanding common stock of the Bank, as applicable; or (iii)
individuals who constitute the Board or the board of directors of the Bank on
the date hereof (the "Incumbent Board" and "Incumbent Bank Board," respectively)
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board or Incumbent Bank Board, as applicable, or whose nomination for
election by the Corporation's or Bank's shareholders was approved by the
Corporation's or Bank's Board of Directors or Nominating Committee, shall be
considered as though he or she were a member of the Incumbent Board or Incumbent
Bank Board, as applicable; or (iv) either the Corporation or the Bank
consolidates or merges with or into another corporation, association or entity
or is otherwise reorganized, where neither the Corporation nor the Bank,
respectively, is the surviving corporation in such transaction; or (v) all or
substantially all of the assets of either the Corporation or the Bank are sold
or otherwise transferred to or are acquired by any other entity or group.
As set forth in Section 10, in the event of such a termination after a
change in control, the Optionee must exercise any Incentive Stock Options within
three (3) months after his date of termination and may exercise any Nonqualified
Stock Options at any time prior to the date of expiration of the Option.
14. STOCK APPRECIATION RIGHTS.
-------------------------
(a) General Terms and Conditions. The Committee may, but shall not be
obligated to, grant rights to optionees to surrender an exercisable Option,
or any portion thereof, in consideration for the payment by the Corporation
of an amount equal to the excess of the market value (determined as set
forth in Section 6 above) of the shares of Common Stock subject to the
Option, or portion thereof, surrendered over the exercise price of the
Option with respect to such shares (any such authorized surrender and
payment being hereinafter referred to as a "Stock Appreciation Right").
Such payment, at the discretion of the Committee, may be made in shares of
Common Stock valued at the then market value thereof (determined as set
forth in Section 6 above), or in cash, or partly in cash and partly in
shares of Common Stock.
The terms and conditions set with respect to a Stock Appreciation
Right may include (without limitation), subject to other provisions of this
Section 14 and this Plan, the period during which, date by which or event
upon which the Stock Appreciation Right may be exercised (which shall be on
the same terms as the Option to which is related); the method for valuing
shares of Common Stock for purposes of this Section 14; a ceiling on the
amount of consideration which the Corporation may pay in
8
<PAGE>
connection with exercise of the Stock Appreciation Right; and arrangements
for income tax withholding. The Committee shall have complete discretion
to determine whether, when and to whom Stock Appreciation Rights may be
granted.
(b) Time Limitations. A Stock Appreciation Right may be exercised
only within the period, if any, within which the Option to which it relates
may be exercised. Notwithstanding the foregoing, any election by an
optionee to exercise Stock Appreciation Rights shall be made during the
period beginning on the third business day following the release for
publication of quarterly or annual financial information required to be
prepared and disseminated by the Corporation pursuant to the requirements
of the Exchange Act and ending on the twelfth business day following such
date. The required release of information shall be deemed to have been
satisfied when the specified financial data appears on or in a wire
service, financial news service or newspaper of general circulation or is
otherwise first made publicly available.
(c) Effects of Exercise of Stock Appreciation Rights or Options. Upon
the exercise of a Stock Appreciation Right, the number of shares of Common
Stock available under the Option to which it relates shall decrease by a
number equal to the number of shares for which the Stock Appreciation Right
was exercised. Upon the exercise of an Option, any related Stock
Appreciation Right shall terminate as to any number of shares of Common
Stock subject to the Stock Appreciation Right that exceeds the total number
of shares for which the Option remains unexercised.
(d) Time of Grant. A Stock Appreciation Right granted in connection
with an Incentive Stock Option must be granted concurrently with the Option
to which is relates, while a Stock Appreciation Right granted in connection
with a Nonqualified Stock Option may be granted concurrently with the
Option to which it relates or at any time thereafter prior to the exercise
or expiration of such Option. No optionee shall have any Stock Appreciation
Rights unless (i) in the case of Incentive Stock Options and Nonqualified
Stock Options, the Stock Option Agreement shall so state or (ii) in the
case of Nonqualified Stock Options, the Committee shall have executed an
amendment to the Stock Option Agreement so stating.
(e) Non-Transferable. A Stock Appreciation Right may not be
transferred or assigned except in connection with a transfer of the Option
to which it relates.
15. RESTRICTIONS ON TRANSFER. An Option granted under this Plan may not be
------------------------
transferred except by will or the laws of descent and distribution and, during
the lifetime of the optionee to whom it was granted, may be exercised only by
such optionee.
16. CAPITAL ADJUSTMENTS AFFECTING COMMON STOCK.
------------------------------------------
(a) If the outstanding shares of Common Stock of the Corporation are
increased, decreased, changed into or exchanged for a different number or
kind of shares or other securities of the Corporation or another entity as
a result of a recapitalization, reclassification, stock dividend, stock
split, amendment to the Corporation's Certificate of Incorporation, reverse
stock split, merger or consolidation, an appropriate adjustment
9
<PAGE>
shall be made in the number and/or kind of securities allocated to the
Options and Stock Appreciation Rights previously and subsequently granted
under the Plan, without change in the aggregate purchase price applicable
to the unexercised portion of the outstanding Options but with a
corresponding adjustment in the price for each share or other unit of any
security covered by the Options.
(b) In the event that the Corporation shall declare and pay any
dividend with respect to the Common Stock (other than a dividend payable in
shares of the Corporation's Common Stock or a regular quarterly cash
dividend), including a dividend which results in a nontaxable return of
capital to the holders of shares of Common Stock for federal income tax
purposes, or otherwise than by dividend makes distribution of property to
the holders of its shares of Common Stock, the Committee, in its discretion
applied uniformly to all outstanding Options, may adjust the exercise price
per share of outstanding Options in such a manner as the Committee may
determine to be necessary to reflect the effect of the dividend or other
distribution on the fair market value of a share of Common Stock.
(c) To the extent that the foregoing adjustments described in
Sections 16(a) and (b) above relate to particular Options or to particular
stock or securities of the Corporation subject to Option under this Plan,
such adjustments shall be made by the Committee, whose determination in
that respect shall be final and conclusive.
(d) The grant of an Option or Stock Appreciation Right pursuant to
this Plan shall not affect in any way the right or power of the Corporation
to make adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge or to consolidate or to dissolve,
liquidate or sell, or transfer all or any part of its business or assets.
(e) No fractional shares of stock shall be issued under the Plan for
any such adjustment.
(f) Any adjustment made pursuant to this Section 16, shall be made,
to the extent practicable, in such manner as not to constitute a
modification of any outstanding Incentive Stock Options within the meaning
of Section 424(h) of the Internal Revenue Code of 1986, as amended.
17. INVESTMENT PURPOSE. At the discretion of the Committee, any Option
------------------
Agreement may provide that the optionee shall, by accepting the Option,
represent and agree, for himself and his transferees by will or the laws of
descent and distribution, that all shares of stock purchased upon the exercise
of the Option will be acquired for investment and not for resale or
distribution, and that upon each exercise of any portion of an Option, the
person entitled to exercise the same shall furnish evidence of such facts which
is satisfactory to the Corporation. Certificates for shares of stock acquired
under the Plan may be issued bearing such restrictive legends as the Corporation
and its counsel may deem necessary to ensure that the optionee is not an
"underwriter" within the meaning of the regulations of the Securities Exchange
Commission.
10
<PAGE>
18. APPLICATION OF FUNDS. The proceeds received by the Corporation from
--------------------
the sale of Common Stock pursuant to Options will be used for general corporate
purposes.
19. NO OBLIGATION TO EXERCISE. The granting of an Option or Stock
-------------------------
Appreciation Right shall impose no obligation upon the optionee to exercise such
Option or Stock Appreciation Right.
20. EFFECTIVE DATE OF PLAN. The Plan will become effective upon the
----------------------
approval of the Plan by the shareholders of the Corporation and receipt of any
necessary regulatory approvals.
21. TERM OF PLAN. Options and Stock Appreciation Rights may be granted
------------
pursuant to this Plan from time to time within ten (10) years from the effective
date of the Plan.
22. TIME OF GRANTING OF OPTIONS. Nothing contained in the Plan or in any
---------------------------
resolution adopted or to be adopted by the Committee or the shareholders of the
Corporation and no action taken by the Committee shall constitute the granting
of any Option or Stock Appreciation Right hereunder. The granting of an Option
and Stock Appreciation Right pursuant to the Plan shall take place only when an
Option Agreement shall have been duly executed and delivered by and on behalf of
the Corporation at the direction of the Committee.
23. CASH PAYMENTS. At the time of the payment of any dividend or other
-------------
distribution with respect to the Common Stock, in the absolute discretion of,
and upon direction of the Board, the Corporation shall cause to be paid to
existing directors and employees of the Corporation, the Bank or any Subsidiary
who hold nonforfeited, unexercised Options under this Plan, regardless of
whether or not such Options are vested and nonforfeitable, a cash amount equal
to the number of shares of Common Stock subject to nonforfeited, unexercised
options held by such optionee multiplied by the amount of any dividends or other
distributions paid per share of Common Stock outstanding. The Board shall have
the discretion to approve cash payments at the time of some dividends or
distributions but not others. Notwithstanding the foregoing, no amounts shall
be paid to optionees pursuant to this Section 23 with respect to any dividend or
distribution if at the time of such dividend or distribution, the exercise price
of the Options shall have been reduced pursuant to Section 16(b) above.
If any director or employee of the Corporation, the Board or any Subsidiary
shall receive any cash payment from the Company, the Board or any Subsidiary
pursuant to this Section 23 with respect to an Option which is not vested and
exercisable, and if such Option shall be forfeited, then within 30 days after
the effective date of such forfeiture, the optionee shall pay to the
Corporation, the Bank or the Subsidiary (as applicable) an amount equal to the
cash payment received by such optionee with respect to such forfeited Option.
In the alternative, at the option of the Corporation, the Bank or the Subsidiary
(as applicable) the amount to be repaid may be withheld from the final
compensation payable to the optionee.
24. WITHHOLDING TAXES. Whenever the Corporation proposes or is required to
-----------------
cause to be issued or transferred shares of stock, cash or other assets pursuant
to this Plan, the Corporation shall have the right to require the optionee to
remit to the Corporation an amount sufficient to satisfy any federal, state
and/or local withholding tax requirements prior to the
11
<PAGE>
issuance of any certificate or certificates for such shares or delivery of such
cash or other assets. Alternatively, the Corporation may issue or transfer such
shares of stock or make other distributions of cash or other assets net of the
number of shares or other amounts sufficient to satisfy the withholding tax
requirements. For withholding tax purposes, the shares of stock, cash and other
assets to be distributed shall be valued on the date the withholding obligation
is incurred.
25. TERMINATION AND AMENDMENT. The Board may at any time alter, suspend,
-------------------------
terminate or discontinue the Plan, subject to any applicable regulatory
requirements and any required stockholder approval or any stockholder approval
which the Board may deem advisable for any reason, such as for the purpose of
obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying applicable stock exchange or quotation
system listing requirements. The Board may not, without the consent of the
holder of an Option or Stock Appreciation Right previously granted, make any
alteration which would deprive the optionee of his rights with respect thereto.
26. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction of, this Plan. As used herein, the masculine
gender shall include the feminine and neuter, and the singular number shall
include the plural, and vice versa, whenever such meanings are appropriate.
27. COST OF PLAN; EXCULPATION AND INDEMNIFICATION. All costs and expenses
---------------------------------------------
incurred in the operation and administration of the Plan shall be borne by the
Corporation, the Bank and the Subsidiaries. In connection with this Plan, no
member of the Board, no member of the Board of Directors of the Bank, and no
member of the Board of Directors of any Subsidiary, and no member of the
Committee shall be personally liable for any act or omission to act, nor for any
mistake in judgment made in good faith, unless arising out of, or resulting
from, such person's own bad faith, willful misconduct or criminal acts. To the
extent permitted by applicable law and regulation, the Corporation shall
indemnify, defend and hold harmless the members of the Board, the members of the
Board of Directors of the Bank and the members of the Board of Directors of any
Subsidiary, and members of the Committee, and each other officer or employee of
the Bank, the Corporation or of any Subsidiary to whom any power or duty
relating to the administration or interpretation of this Plan may be assigned or
delegated, from and against any and all liabilities (including any amount paid
in settlement of a claim with the approval of the Board), and any costs or
expenses (including counsel fees) incurred by such persons arising out of or as
a result of, any act or omission to act, in connection with the performance of
such person's duties, responsibilities and obligations under this Plan, other
than such liabilities, costs, and expenses as may arise out of, or result from
the bad faith, willful misconduct or criminal acts of such persons.
28. GOVERNING LAW. Without regard to the principles of conflicts of laws,
-------------
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
12
<PAGE>
29. INSPECTION OF PLAN. A copy of this Plan, and any amendments thereto,
------------------
shall be maintained by the Secretary of the Corporation and shall be shown to
any proper person making inquiry about it.
30. OTHER PROVISIONS. The Option Agreements authorized under this Plan
----------------
shall contain such other provisions not inconsistent with the foregoing,
including, without limitation, increased restrictions upon the exercise of
options, as the Committee may deem advisable.
13
<PAGE>
EXHIBIT A
---------
STOCK OPTION GRANT AND AGREEMENT
THIS STOCK OPTION GRANT AND AGREEMENT ("Agreement"), being made according
to and subject to the terms and conditions of the INNES STREET FINANCIAL
CORPORATION STOCK OPTION PLAN ("Plan"), a copy of which is attached hereto as
Annex A and is hereby incorporated by reference and made a part of this
Agreement, is herein executed and effective the _______ day of _______________,
_____, between Innes Street Financial Corporation (the "Corporation") and
____________________ ("Optionee"):
1. GRANT. As of the above date, the Corporation hereby grants to the
-----
Optionee (applicable provisions are marked):
[_] an Incentive Stock Option [as that term is defined in
Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code")] to purchase ________ shares of Common Stock of
the Corporation at the price stated in this Agreement;
[_] a Nonqualified Stock Option to purchase __________
shares of Common Stock of the Corporation at the price
stated in this Agreement.
The Optionee [_] shall [_] shall not have Stock Appreciation
Rights in connection with the Options granted hereby, in
accordance with Section 14 of the Plan.
The Option(s) and any Stock Appreciation Rights granted
under this section and as described in this Agreement is
(are) in all respects subject to and conditioned by the
terms, definitions, and provisions of this Agreement and of
the Plan. Capitalized terms in this Agreement which are not
otherwise defined but which are defined in the Plan shall
have the same meaning given to those terms in the Plan.
The Optionee has been granted Options under the Plan as a
result of the Optionee's position as a [_] director [_]
employee of the Corporation, the Bank or a Subsidiary.
2. PRICE. The Option price is $_____________ for each share.
-----
3. EXERCISE OF OPTION. The Option(s) granted under this Agreement shall
------------------
be exercisable pursuant to the terms and conditions of the Plan and as
set forth below:
1
<PAGE>
(a) Right to Exercise: In addition to the terms and conditions
-----------------
imposed on the Optionee's right to exercise his Options and any Stock
Appreciation Rights imposed in the Plan, the following terms and
conditions are applicable:
_____________________________________________________________________
_____________________________________________________________________
(b) [_] (Marked if applicable) Annual Installments: Subject to the
-------------------
terms and conditions of the Plan, the Incentive Stock Options can be
exercised in annual installments as follows:
__________________ shares beginning on __________________, 19__
__________________ shares beginning on __________________, 20__
__________________ shares beginning on __________________, 20__
__________________ shares beginning on __________________, 20__
__________________ shares beginning on __________________, 20__
Subject to the terms and conditions of the Plan, the Nonqualified
Options can be exercised in annual installments as follows:
__________________ shares beginning on __________________, 19__
__________________ shares beginning on __________________, 20__
__________________ shares beginning on __________________, 20__
__________________ shares beginning on __________________, 20__
__________________ shares beginning on __________________, 20__
The right to exercise the Option(s) in annual installments shall be
cumulative. In addition, the option(s) shall be exercisable upon
disability, death, retirement and a change in control as set forth in
the Plan.
(c) [_] (Marked if applicable) Immediate Vesting: Subject to the
-----------------
terms and conditions of the Plan, all of the Options are vested,
nonforfeitable and exercisable.
(d) Method of Exercise: The Options and any Stock Appreciation Rights
------------------
granted under this Agreement shall be exercisable by a written notice
to the Secretary of the Corporation which shall:
(1) State the election to exercise the Option or the
election to surrender an exercisable Option and
exercise Stock Appreciation Rights, the number of
shares in respect of which the Option or Stock
Appreciation Right is being exercised, the person in
whose name any stock certificate or certificates for
such shares of Common Stock is to be registered or to
whom
2
<PAGE>
any cash is to be paid, his or her address, and social
security number;
(2) Contain any such representation and agreements as
to Optionee's investment intent with respect to shares
of Common Stock as may be required by the Committee;
(3) Be signed by the person entitled to exercise the
Option and, if the Option is being exercised by any
person or persons other than the Optionee, be
accompanied by proof, satisfactory to the Corporation,
of the right of such person or persons to exercise the
Option or Stock Appreciation Rights in accordance with
the Plan; and
(4) Be accompanied by payment of the purchase price of
any shares with respect to which the Option is being
exercised which payment shall be in form acceptable to
the Committee pursuant to Section 6(b) of the Plan.
(e) Representations and Warranties: In order to exercise an Option or
------------------------------
Stock Appreciation Right, the person exercising the Option or Stock
Appreciation Right must make the representations and warranties to the
Corporation as may be required by any applicable law or regulation, or
as may otherwise be required pursuant to the Plan.
(f) Approvals. In order for an Option or Stock Appreciation Right to
---------
be exercised, all filings and approvals required by applicable law and
regulations or pursuant to the Plan must have been made and obtained.
4. NON-TRANSFERABILITY. Neither any Option nor any Stock Appreciation
-------------------
Rights may be transferred in any manner otherwise than by will or the laws of
descent and distribution and such Option and any Stock Appreciation Rights may
be exercised during the life of the Optionee only by him or her.
5. INVESTMENT PURPOSE. This Option and any Stock Appreciation Rights may
------------------
not be exercised if the issuance of shares or payment of cash upon such exercise
would constitute a violation of any applicable federal or state securities law
or other law or valid regulation.
6. EXPIRATION. This Option and any corresponding Stock Appreciation
----------
Rights shall expire on _____________, _________.
7. ESCROW. All stock purchased pursuant to an Incentive Stock Option
------
shall be held in escrow for a period which ends on the later of (i) two (2)
years from the date of the granting of the option or (ii) one (1) year after the
transfer of the stock pursuant to the exercise of the Option. The stock shall be
held by the Corporation or its designee. The Optionee who has exercised the
Option shall have all rights of a stockholder, including, but not limited to,
the rights to vote, receive dividends and sell the stock. The sole purpose of
the escrow is to inform
3
<PAGE>
the Corporation of a disqualifying disposition of the stock within the meaning
of Section 422 of the Code, and it shall be administered solely for this
purpose.
8. REPAYMENT OF CASH PAYMENTS. If the Optionee hereunder forfeits any
--------------------------
Options pursuant to the Plan, the Optionee shall, within 30 days after the
effective date of such forfeiture, pay the Corporation, the Bank or a Subsidiary
(as applicable) an amount equal to the cash payments received by the Optionee
from the Corporation, the Bank or any Subsidiary with respect to such forfeited
Options pursuant to Section 23 of the Plan. In the alternative, at the option of
the Corporation, the Bank or a Subsidiary, the amount to be repaid may be
withheld by the Corporation, the Bank or a Subsidiary from the final
compensation or fees payable to the Optionee. Each acceptance by an Optionee of
cash payments pursuant to such Section 23 with respect to Options still subject
to forfeiture shall constitute a reaffirmation of the agreements set forth in
this paragraph 8.
9. TAX WITHHOLDING. All stock, cash and other assets distributed pursuant
---------------
to this Agreement shall be subject to applicable federal, state and local
withholding for taxes. The Optionee expressly acknowledges and agrees to such
withholding. The Optionee acknowledges and agrees to the tax withholding
provisions which are set forth in the Plan.
10. RESOLUTION OF DISPUTES. Any dispute or disagreement which should arise
----------------------
under, or as a result of, or in any way relate to, the interpretation,
construction, or application of this Agreement or the Plan will be determined by
the Committee designated in Section 2 of the Plan. Any determination made by
such Committee shall be final, binding, and conclusive for all purposes.
11. CONSTRUCTION CONTROLLED BY PLAN. The Options and any corresponding
-------------------------------
Stock Appreciation Rights evidenced hereby shall be subject to all of the
requirements, conditions and provisions of the Plan. This Agreement shall be
construed so as to be consistent with the Plan; and the provisions of the Plan
shall be deemed to be controlling in the event that any provision should appear
to be inconsistent therewith.
12. SEVERABILITY. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such a manner as to be valid and enforceable under
applicable law, but if any provision of this Agreement is determined to be
unenforceable, invalid or illegal, the validity of any other provision or part
thereof shall not be affected thereby and this Agreement shall continue to be
binding on the parties hereto as if such unenforceable, invalid or illegal
provision or part thereof had not been included herein.
13. MODIFICATION OF AGREEMENT; WAIVER. This Agreement may be modified,
---------------------------------
amended, suspended or terminated, and any terms, representations or conditions
may be waived, but only by a written instrument signed by each of the parties
hereto and only subject to the limitations set forth in the Plan. No waiver
hereunder shall constitute a waiver with respect to any subsequent occurrence or
other transaction hereunder or of any other provision.
14. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction, of
4
<PAGE>
this Agreement. As used herein, the masculine gender shall include the feminine
and neuter, and the singular number shall include the plural, and vice versa,
whenever such meanings are appropriate.
15. GOVERNING LAW; VENUE AND JURISDICTION. Without regard to the
-------------------------------------
principles of conflicts of laws, the laws of the State of North Carolina shall
govern and control the validity, interpretation, performance, and enforcement of
this Agreement.
16. BINDING EFFECT. This Agreement shall be binding upon and shall inure
--------------
to the benefit of the Corporation, and its successors and assigns, and shall be
binding upon and inure to the benefit of the Optionee, and his or her heirs,
legatees, personal representative, executor, administrator and permitted
assigns.
17. ENTIRE AGREEMENT. This Agreement and the Plan constitute and embody
----------------
the entire understanding and agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other agreements or understandings,
written or oral, in effect between the parties hereto relating to the matters
addressed herein.
18. COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have set their hands and seals the day and
year first above written.
INNES STREET FINANCIAL CORPORATION
ATTEST:
__________________________ By:________________________________
(Corporate Seal) _______________President
OPTIONEE:
___________________________________
(SEAL)
5
<PAGE>
CITIZENS BANK, FSB
SEVERANCE PLAN
THIS IS THE SEVERANCE PLAN ("PLAN") OF CITIZENS BANK, FSB (THE "BANK"), A
FEDERALLY-CHARTERED SAVINGS BANK, WITH ITS PRINCIPAL OFFICE IN SALISBURY, NORTH
CAROLINA, ADOPTED BY THE BOARD OF DIRECTORS OF THE BANK, TO BE EFFECTIVE ON THE
DATE SET FORTH ON THE LAST PAGE HEREOF.
1. Purpose. The purpose of this Plan is to aid the Bank in attracting
-------
and retaining capable employees by providing the employees with the severance
benefits set forth herein in the event that there is a change in control of the
Bank. For purposes of this Plan, the term "Employee" means and includes any
person employed by the Bank on a full time basis on the date of consummation or
occurrence of a "Change in Control" (as defined in Subparagraph 2(c) below),
excluding any person employed by the Bank on such date pursuant to a written
employment agreement between any such employee and the Bank.
2. Severance Benefit.
-----------------
(a) In the event (i) the Bank or its successor terminates the employment
of any Employee in connection with, or within twenty-four (24) months
after, a "Change in Control" (as defined in Subparagraph (c) below),
other than for "cause" (as defined in Paragraph 3 below) or (ii) an
Employee terminates his employment following a Termination Event
pursuant to Paragraph 2(b) below, the Bank shall pay the Employee a
severance benefit equal to the greater of (A) an amount equal to two
weeks' salary at the Employee's existing salary rate at the time of
termination multiplied times the Employee's number of complete years
of service as an employee of the Bank or (B) the amount of one month's
salary at the Employee's existing salary rate at the time of
termination. Such sum shall be payable as provided in Subparagraph
(d) below.
(b) An Employee shall have the right to terminate his or her employment
upon the occurrence of any of the following events (the "Termination
Events") within twenty-four (24) months following a Change in Control:
(i) The Employee's annual base salary rate is decreased from the
level existing at the effective time of the Change in Control; or
(ii) The Employee is transferred to a location more than forty (40)
miles distant from the Employee's primary work location at the
time of the Change in Control.
A Termination Event shall be deemed to have occurred on the date such
action or event is implemented or takes effect.
<PAGE>
(c) For the purposes of this Plan, the term "Change in Control" shall mean
any of the following events:
(i) a change in control of a nature that would be required to be
reported in response to Item 1 of the Current Report on Form 8-K
by the Bank or by any parent holding company of the Bank
pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 as in effect on the date hereof (the "Exchange Act"); or
(ii) such time as any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Bank or any
parent holding company of the Bank representing 25 percent or
more of the combined voting power of the outstanding capital
stock of the Bank or any parent holding company of the Bank; or
(iii) individuals who constitute the Board of Directors of the Bank or
any parent holding company of the Bank on the date hereof (each,
an "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a
director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors
comprising the Incumbent Board or whose nomination for election
by the shareholders of the Bank or any parent holding company of
the Bank was approved by the Board of Directors of the Bank or
any parent holding company of the Bank or any Nominating
Committee of any such Board, as applicable, shall be considered
as though he or she were a member of the Incumbent Board; or
(iv) the Bank or any parent holding company of the Bank consolidates
or merges with or into another corporation, association or
entity or is otherwise reorganized, where the Bank or any parent
holding company of the Bank is not the surviving corporation in
such transaction; or
(v) all or substantially all of the assets of the Bank or any parent
holding company of the Bank are sold or otherwise transferred to
or are acquired by any other entity or group.
Notwithstanding the other provisions of this Paragraph 2(c), neither
(i) the conversion of the Bank from a mutual savings bank to a stock
savings bank ("Conversion") pursuant to the rules and regulations
regarding mutual to stock conversions, (ii) the acquisition of capital
stock of the Bank by a parent holding company formed by the Bank to
acquire the capital stock of the Bank issued in connection with a
Conversion (iii) the sale by such parent holding company of its
capital stock to the members of the Bank and the general public
pursuant to the rules and regulations regarding Conversions, or (iv)
any other event or transaction which the Board of Directors of the
Bank shall determine is not a Change in Control for purposes of its
Plan prior to the consummation or occurrence thereof, shall constitute
a Change in Control. In addition, a transaction
2
<PAGE>
or event shall not be considered a Change in Control with respect to
any Employee benefitted hereby if, prior to the consummation or
occurrence of such transaction or event, such Employee and the Bank
agree in writing that the same shall not be treated as a Change in
Control for purposes of this Plan.
(d) Amounts payable pursuant to this Paragraph 2 shall be paid, at the
option of the Bank or any successor in one lump sum or in equal
monthly payments over a period not to exceed a number of months equal
to the Employee's years of service with the Bank divided by two.
(e) Following a Termination Event which gives rise to an Employee's rights
hereunder, the Employee shall have six (6) months from the date of
occurrence of the Termination Event to terminate his or her employment
pursuant to this Paragraph 2. Any such termination shall be deemed to
have occurred only upon delivery to the Bank (or to any successor
corporation) of written notice of termination which describes the
Change in Control and Termination Event. If an Employee does not so
terminate his employment within such six-month period, he or she shall
thereafter have no further rights hereunder with respect to that
Termination Event, but shall retain rights, if any, hereunder with
respect to any other Termination Event as to which such six-month
period has yet to expire.
3. Termination for "Cause." Termination for "cause" shall include
----------------------
termination because of the Employee's personal dishonesty, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, or willful violation of any law, rule, regulation (other
than traffic violations or similar offenses) or final cease-and-desist order.
4. Effect on Other Benefits. The benefits payable to or owed to any
------------------------
Employee under this Plan shall not be reduced or otherwise affected by the
Employee's receipt or entitlement to benefits under (i) any agreement between
the Employee and the Bank or any parent holding company of the Bank, or (ii)
any other fringe benefit, compensation, or other employee benefit plan of the
Bank or any parent holding company of the Bank, including, but not limited to,
stock option plan, restricted stock agreements or employee stock ownership plan.
In addition, the benefits payable to or owed to any Employee under any such
fringe benefit, compensation or other employee benefit plan of the Bank or any
parent holding company of the Bank shall not be reduced or otherwise affected by
the Employee's receipt or entitlement to benefits under this Plan.
5. Binding Effect. This Plan shall be binding upon any corporate or
--------------
other successor of the Bank which shall acquire, directly or indirectly, by
merger, consolidation, purchase, or otherwise, all or substantially all of the
assets of the Bank.
6. Modification, Waiver, Amendments. Prior to the consummation or
--------------------------------
occurrence of a Change in Control, as defined herein, this Plan may be
terminated, modified or amended in any manner whatsoever, by resolution adopted
by the Bank's Board of Directors. Prior to the time of the consummation or
occurrence of any Change in Control, no employee shall have any vested rights
pursuant to this Plan. After the consummation or occurrence of a Change in
Control, all Employees
3
<PAGE>
shall have vested rights pursuant to this Plan, and this Plan may not be
terminated or modified or amended in a manner to reduce the benefits payable to
any Employee, without the written consent of such Employee.
7. Effect of Plan on Employees. This Plan shall not confer upon any
---------------------------
employee of the Bank the right to continued employment with the Bank or any
successor to the Bank, nor shall it limit the right of the Bank or any successor
of the Bank to terminate the employment of any employee at any time, subject to
the terms hereof.
8. Withholding. The Bank or any successor to the Bank shall have the
-----------
right to deduct or otherwise effect a withholding of any amount required by
federal or state laws to be withheld as a result of any payments required to be
made under this Plan.
9. Governing Law. Without regard to principles of conflicts of laws, the
-------------
laws of the State of North Carolina shall govern and control the validity,
interpretation, performance and enforcement of this Plan.
10. Inspection of Plan. A copy of this Plan, and any amendments thereto,
------------------
shall be maintained by the Secretary of the Bank and shall be shown to any
proper person making inquiry with respect thereto.
11. Waiver. Any Employee shall have the right to waive the receipt of any
------
benefits which would otherwise be payable to such Employee pursuant to this Plan
by executing a writing setting forth the terms of such waiver.
12. Excise Taxes. It is the intent of the parties hereto that all
------------
payments made pursuant to this Plan shall be deductible by the Bank for federal
income tax purposes and not result in the imposition of an excise tax on any
Employee. Notwithstanding anything contained in this Plan to the contrary, any
payments to be made to or for the benefit of any Employee which are deemed to be
"parachute payments," as such term is defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), shall be modified or reduced to
the extent, but only to the extent, reasonably deemed to be necessary by the
Bank to avoid the imposition of excise taxes on the Employee under Section 4999
of the Code or the disallowance of a deduction to the Bank under Section 280G(a)
of the Code.
Dated _________________, 1998
4
<PAGE>
EXHIBIT 10.(F)
AMENDED AND RESTATED
NONQUALIFIED DEFERRED COMPENSATION PLAN
OF
CITIZENS SAVINGS BANK
EFFECTIVE DATE: JULY 1, 1998
<PAGE>
TABLE OF CONTENTS
NONQUALIFIED DEFERRED COMPENSATION PLAN
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Purpose................................................... 1
Section 2. Definitions............................................... 1
Section 3. Credits to Deferred Compensation Account
and Employer Supplemental Account......................... 5
3.1 Salary reduction credits............................. 5
3.2 Employer matching credits............................ 6
3.3 Employer supplemental credits........................ 6
3.4 Pension plan benefit equivalent...................... 7
Section 4. Retirement; Termination of Service; Death................. 7
4.1 Normal retirement.................................... 7
4.2 Delayed retirement................................... 7
4.3 Disability retirement................................ 8
4.4 Termination of service............................... 8
4.5 Payment of benefit by reason of retirement........... 8
4.6 Payment of benefit by reason of death................ 9
4.7 Prepayment........................................... 9
4.8 Hardship distributions............................... 10
4.9 Termination events................................... 10
Section 5. Vesting................................................... 11
Section 6. Accounts; Adjustment of Accounts.......................... 11
Section 7. Administration by Committee............................... 13
Section 8. No Funding................................................ 16
Section 9. Allocation of Responsibilities............................ 17
Section 10 Benefits Not Assignable; Facility of Payments............. 17
Section 11 Beneficiary............................................... 18
Section 12 Amendment and Termination of Plan......................... 19
Section 13 Communication to Participants............................. 19
Section 14 Claims Procedure.......................................... 19
Section 15 Parties to the Plan....................................... 21
Section 16 Miscellaneous Provisions.................................. 22
16.1 Setoff............................................... 22
16.2 Notices.............................................. 22
16.3 Lost distributees.................................... 22
16.4 Reliance on data..................................... 23
16.5 Receipt and release for payments..................... 23
16.6 Headings............................................. 23
16.7 Continuation of employment........................... 23
16.8 Merger or consolidation.............................. 23
16.9 Construction......................................... 24
</TABLE>
<PAGE>
AMENDED AND RESTATED
NONQUALIFIED DEFERRED COMPENSATION PLAN
OF CITIZENS FEDERAL SAVINGS BANK
SECTION 1. PURPOSE:
--------- -------
This Amended and Restated Nonqualified Deferred Compensation Plan of
Citizens Savings Bank (the "plan") is established to permit certain management
employees of the Employer to defer receipt of current compensation from the
Employer in order to provide retirement and death benefits in behalf of such
employees. The Employer anticipates that these benefits will be enhanced through
supplemental Employer credits under the plan. The plan is not intended to be a
tax-qualified retirement plan under Section 401(a) of the Internal Revenue Code.
The plan is intended to be an unfunded plan maintained primarily for the purpose
of providing deferred compensation benefits for a select group of management or
highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of
the Employee Retirement Income Security Act of 1974. The plan amends, restates
and supersedes, effective as of July 1, 1998, the Nonqualified Deferred
Compensation Plan of Citizens Savings Bank SSB, which was first effective
December 20, 1992, and which was subsequently amended effective as of February
15, 1994, and July 29, 1997 (the "predecessor plan"), and the terms of this plan
shall be controlling on and after the effective date of this plan with respect
to accounts accrued under the predecessor plan.
SECTION 2. DEFINITIONS:
--------- -----------
As used in the plan, including this Section 2, references to one
gender shall include the other and, unless otherwise indicated by the context:
2.1 "Accrued benefit" shall mean, with respect to each participant,
the sum of the balances credited to his deferred compensation account and his
Employer supplemental account as of the applicable adjustment date, following
adjustment to such accounts as of such adjustment date as provided in Section 6.
<PAGE>
2.2 "Active participant" shall mean, with respect to any day or date,
a participant who is in service on such day or date; provided, that a
participant who is in service shall cease to be an active participant
immediately upon a determination by the Committee that the participant has
ceased to be an eligible employee.
2.3 "Adjustment date" shall mean each day that securities are traded
on a national securities exchange (except regularly scheduled holidays of the
Employer or any agent designated by the Employer to administer the investment of
participants' accounts under the plan); the last day of each payroll period
during a plan year; and such other dates as the Committee may select from time
to time. The last adjustment date occurring in each calendar year shall be
referred to herein as the "year-end adjustment date."
2.4 "Beneficiary" shall mean the person, persons, entity or entities
designated or determined pursuant to the provisions of Section 11 of the plan.
2.5 "Board" shall mean the Board of Directors of Citizens Savings
Bank, or such committee of the Board to which the Board shall assign all or part
of its duties and powers under the plan. See Section 15 for special provisions
concerning parties to the plan.
2.6 "Committee" shall mean the administrative committee provided for
in Section 7.
2.7 "Compensation" shall mean all remuneration payable by the
Employer to an employee during the plan year for service as reported or
reportable for federal income tax purposes on Form W-2, excluding amounts paid
to an employee as an allowance or reimbursement for travel or relocation
expenses, but including salary reduction credits under this plan.
2.8 "Deferred compensation account" shall mean the separate account
to be kept for each participant, as described in Sections 3.1 and 6, to which
salary reduction credits shall be credited.
2.9 "Disability" shall mean the inability, by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long continued or
-2-
<PAGE>
indefinite duration, of a participant to perform his regular duties as a
director of the Employer. The determination of the existence or nonexistence of
disability shall be made by the Committee pursuant to a medical examination by a
medical doctor selected or approved by the Committee.
2.10 "Effective date of the plan" shall be July 1, 1998.
2.11 "Eligible employee" shall mean each employee who is determined by
the Committee to be a highly compensated or management employee and who is
selected by the Committee to participate in the plan. An employee shall cease
to be an eligible employee immediately upon the first to occur of the following:
(i) the employee's termination of service; (ii) determination by the Committee
that the employee no longer is a highly compensated or management employee; or
(iii) determination by the Committee in its sole discretion that the employee
shall no longer be selected to participate in the plan. See Sections 2.2 and
2.18 with respect to provisions governing participation in the plan by an
eligible employee.
2.12 "Employee" shall mean an individual in the service of the
Employer if the relationship between the individual and the Employer is the
legal relationship of employer and employee.
2.13 "Employer" shall mean Citizens Savings Bank, a [North Carolina
banking corporation] with its principal office at Salisbury, North Carolina, or
any successor thereto by merger, consolidation or otherwise, or any affiliated
or subsidiary corporation or business organization of the Employer which, with
the consent of the Board, shall become a party to this plan. See Section 15 for
special provisions concerning parties to the plan.
2.14 "Employer matching credits" shall mean credits to a participant's
Employer supplemental account by the Employer pursuant to the provisions of
Section 3.2.
2.15 "Employer supplemental account" shall mean the separate account
to be kept for each participant, as described in Sections 3.2, 3.3 and 6, to
which Employer matching credits and Employer supplemental credits shall be
credited.
-3-
<PAGE>
2.16 "Employer supplemental credits" shall mean credits to a
participant's Employer supplemental account by the Employer pursuant to the
provisions of Section 3.3.
2.17 "Normal retirement age" of a participant shall be age sixty-five.
The "normal retirement date" of a participant shall mean the first day of the
calendar month coincident with or next following attainment by the participant
of his normal retirement age.
2.18 "Participant" shall mean with respect to any plan year an
eligible employee who has entered the plan and any other employee who has an
accrued benefit under the plan. An eligible employee who has not otherwise
entered the plan shall enter the plan and become a participant as of the date
determined by the Committee. A participant who separates from service with the
Employer and who later returns to service will not be eligible to defer
compensation or receive Employer matching credits or Employer supplemental
credits under the plan except upon satisfaction of such terms and conditions as
the Committee shall establish upon the participant's return to service, whether
or not the participant shall have an accrued benefit remaining under the plan on
the date of his return to service. See Section 2.2 for definition of "active
participant."
2.19 "Plan" shall mean the nonqualified deferred compensation plan as
herein set out or as duly amended.
2.20 "Plan year" shall mean the twelve-month period ending on December
31 of each year (including years prior to the effective date of the plan).
2.21 "Retire" or "retirement" shall mean retirement within the meaning
of Section 4.1, 4.2 or 4.3.
2.22 "Salary reduction agreement" shall mean a written agreement
entered into between a participant and the Employer pursuant to the provisions
of Section 3.1.
2.23 "Salary reduction credits" shall mean the amounts credited to the
participant's deferred compensation account by the Employer pursuant to the
provisions of Section 3.1.
-4-
<PAGE>
2.24 "Service" shall mean employment by the Employer as an employee.
2.25 "Spouse" or "surviving spouse" shall mean, except as otherwise
provided in the plan, the legally married spouse or surviving spouse of a
participant.
2.26 "Termination adjustment date" shall mean the adjustment date
coincident with or next following the date as of which a participant terminates
service with the Employer for any reason (including retirement or death).
SECTION 3. CREDITS TO DEFERRED COMPENSATION ACCOUNT
--------- ----------------------------------------
AND EMPLOYER SUPPLEMENTAL ACCOUNT:
---------------------------------
3.1 Salary reduction credits:
3.1.1 Amount of salary reduction credits: Each active participant
may elect, by entering into a salary reduction agreement with the Employer,
to reduce his compensation from the Employer by a whole number percentage
from one to fifty percent (in increments of one percent). The amount of
the participant's salary reduction credit shall be credited by the Employer
to the deferred compensation account maintained for the participant
pursuant to Section 6.
3.1.2 Time for crediting salary reduction credits: The Employer
shall credit to the participant's deferred compensation account as of each
adjustment date an amount equal to the total salary reduction credit for
the period beginning on the date next following the immediately preceding
adjustment date and ending on the current adjustment date.
3.1.3 Administrative rules governing salary reduction agreements:
(a) An election pursuant to Section 3.1.1 shall be
made by the participant by executing and delivering a salary
reduction agreement to the Committee. Such salary reduction
agreement shall become effective with respect to such
participant as of the first full payroll period commencing
on or immediately following the effective date of the plan,
and thereafter the January 1 which next follows by at least
fifteen days the date of receipt by the Committee of such
salary reduction agreement. Such election shall continue in
effect, unless earlier modified by the participant, until
the service of the participant is terminated, or, if
earlier, until the participant ceases to be an active
participant under the plan.
(b) A participant may unilaterally modify a salary
reduction agreement (either to increase or decrease the
portion of his future compensation which is subject to
salary reduction within the percentage
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limits set forth in Section 3.1.1, or to terminate salary
reduction credits under the plan) by providing a written
modification of the salary reduction agreement to the
Employer. A modification shall become effective as of the
first full payroll period commencing on or immediately
following the January 1 which next follows by at least
fifteen days the date such written modification is received
by the Committee. A termination shall be effective
immediately; provided that a participant who terminates his
or her salary reduction agreement shall not be eligible to
enter into a new salary agreement except pursuant to the
provisions of subparagraph (a).
(c) The Committee may from time to time establish
policies or rules governing the manner in which salary
reduction credits may be made.
3.2 Employer matching credits: As of each adjustment date on which
salary reduction credits are credited to a participant's deferred compensation
account (the "current adjustment date"), the Employer may credit to a
participant's Employer supplemental account the amount of the Employer matching
credit under the plan for the payroll period ending on the current adjustment
date (the "deferral period"). The amount (if any) of the Employer matching
credit with respect to a deferral period shall be determined by the Board in its
sole and absolute discretion, and shall be announced to participants prior to
the beginning of the deferral period for which such amount or rate is effective.
3.3 Employer supplemental credits: For each plan year commencing on
or after the effective date of the plan, the Employer may provide for an
Employer supplemental credit to the Employer supplemental accounts of
participants in the plan. The amount of the Employer supplemental credit with
respect to any participant shall be determined by the Board in its sole and
absolute discretion, and such determination shall be binding on all persons
claiming benefits under the plan. Such Employer supplemental credit shall be
credited to such participant's Employer supplemental account as of the
adjustment date designated by the Committee.
3.4 Pension plan benefit equivalent: In addition to the amounts
credited to a participant's deferred compensation account pursuant to Section
3.1, there shall be credited to such
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account as of the June 30, 1998 adjustment date an amount equal to the pension
plan benefit equivalent. The "pension plan benefit equivalent" shall equal the
lump sum present value of the difference, if any, between (i) and (ii) where (i)
is the accrued benefit that the participant would have earned under the terms of
the Citizens Federal Savings & Loan Association Employees' Pension Plan (the
"Pension Plan") as in effect on such adjustment date if he had not elected to
defer compensation under this plan, and (ii) is the accrued benefit actually
earned by the participant as of such adjustment date under such Pension Plan.
The determination of the pension plan benefit equivalent shall be made by
actuaries selected by the Committee to service this plan pursuant to the
actuarial assumptions set forth in the Pension Plan at the time such pension
plan benefit equivalent is determined, and the determination of such actuaries
shall be final and conclusive upon all parties claiming benefits under the plan.
SECTION 4. RETIREMENT; TERMINATION OF SERVICE; DEATH:
--------- -----------------------------------------
4.1 Normal retirement: A participant who is in service shall be
eligible to retire from service at his normal retirement date and commence
receiving payment of his accrued benefit, determined as of his termination
adjustment date, pursuant to Section 4.5.
4.2 Delayed retirement: If a participant shall remain in service
following his normal retirement date, his retirement date shall be the date he
shall actually terminate service for reasons other than death, whereupon he
shall commence receiving payment of his accrued benefit, determined as his
termination adjustment date, pursuant to Section 4.5. During the period that
such participant remains in service pursuant to this Section 4.2, he shall
continue to be a participant for and including each plan year in which he meets
the requirements therefor. If an employee not otherwise a participant becomes
eligible to enter the plan following his normal retirement date, the provisions
of this Section 4.2 shall apply in determining his retirement date.
4.3 Disability retirement: If a participant shall suffer disability
while in service prior to his normal retirement date, he shall retire as of the
date of establishment of his disability and his
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accrued benefit, determined as of his termination adjustment date, shall be
payable as provided in Section 4.5, treating for this purpose such date of his
disability retirement as if it were his normal retirement date.
4.4 Termination of service: If the service of a participant with the
Employer shall be terminated for any reason other than retirement or death, or
before his attainment of age sixty, his accrued benefit, determined as of his
termination adjustment date, shall be paid to him in cash in a lump sum as soon
as practicable (but no later than thirty days) following such termination
adjustment date. If the service of a participant is terminated because of
retirement or death, or after his attainment of age fifty-five, such accrued
benefit shall be payable as provided in Section 4.5, treating his termination
adjustment date as if it were his normal retirement date.
4.5 Payment of benefit by reason of retirement: If a participant
shall retire, his accrued benefit, determined as of his termination adjustment
date, shall be paid to him in cash in a lump sum or in equal annual installments
over a term certain of five, ten, fifteen or twenty years, as elected by the
participant in his initial salary reduction agreement, commencing as of the
first day of the calendar quarter next following such termination adjustment
date, and on each anniversary of such date for the remainder of the term
certain. If the participant elects to receive payment of his accrued benefit in
annual installments for a term certain, the amount of each succeeding annual
installment shall be adjusted, as of the adjustment date immediately preceding
the date as of which such annual installment shall be paid, for additions to the
participant's accounts pursuant to Section 6. Such adjustment shall be made by
dividing the aggregate of his account balances as of such date (following
adjustment as of such date) by the number of annual installments remaining to be
paid hereunder; provided, that the last annual installment due hereunder shall
be the entire amount credited to the participant's accounts on the date of
payment.
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4.6 Payment of benefit by reason of death:
4.6.1 If the participant shall die while in service, the
participant's accrued benefit, determined as of his termination
adjustment date, shall be payable to his beneficiary in the
manner elected by the participant in his initial salary deferral
election, commencing as soon as practicable (but no later than
thirty days) following such adjustment date.
4.6.2 If the participant shall die following his
termination of service and before all payments to him under the
plan have been made, the balance of the participant's accrued
benefit, determined as of the adjustment date coincident with or
next following the date such death occurs, shall be paid to the
participant's beneficiary in the manner elected by the
participant in his initial salary deferral election, treating the
beneficiary for this purpose as the participant.
4.7 Prepayment: Notwithstanding any other provisions of this plan,
if a participant or any other person (a "recipient") is entitled to receive
payments under the plan, the Committee in its sole discretion may direct the
prepayment of all or any part of the payments remaining to be made to or in
behalf of the recipient, or to shorten the payment period. The amount of such
prepayment shall be in full satisfaction of the Employer's obligations hereunder
to the recipient and to all persons claiming under or through the recipient with
respect to the payments being prepaid. In the event of a partial prepayment,
the Committee shall designate which installments are being prepaid and, if
applicable, the accounts of the participant from which such prepayments shall be
debited. The Committee's determinations under this Section 4.7 shall be final
and conclusive upon all parties claiming benefits under this plan.
4.8 Hardship distributions:
4.8.1 A participant may, at any time prior to the
commencement of payments hereunder, make application to the
Committee to receive a payment in a lump sum of all or a portion
of the balance credited to his deferred compensation account by
reason of a hardship affecting the participant. The amount of a
payment on account of hardship shall not exceed the amount
required to meet the immediate financial need created by the
hardship and not otherwise available from other resources of the
participant. For this purpose, a "hardship" shall mean an
"unforeseeable emergency," which shall mean a severe financial
hardship to the participant resulting from a sudden and
unexpected illness or accident of the participant or a dependent,
loss of the participant's property due to casualty, or other
similar extraordinary and unforeseeable circumstance arising as a
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result of events beyond the participant's control. The determination of
whether a financial need constitutes an "unforeseeable emergency" within
the scope of this Section 4.8.1 shall be made by the Committee in its sole
and absolute discretion, and its decision to grant or deny a payment on
account of hardship shall be final. The Committee shall apply uniform and
nondiscriminatory standards in making its decision.
4.8.2 The participant's request for a payment on account of hardship
must be made in writing to the Committee. The request must specify the
nature of the hardship, the total amount to be paid and the total amount of
the actual expense incurred or to be incurred on account of hardship.
4.8.3 If a payment under this Section 4.8 is approved, such payment
shall be made as of the next following adjustment date. The processing of
the request shall be completed as soon as practicable after the date on
which the Committee receives the properly completed written request for a
payment on account of financial hardship. If a participant terminates
service after a request is approved in accordance with this Section 4.8 but
prior to distribution of the full amount approved, the approval of his
request shall be automatically void and the benefits he is entitled to
receive under the plan shall be distributed in accordance with the
applicable payment provisions of the plan. Only one payment because of
financial hardship shall be made within any plan year.
4.8.4 The Committee may from time to time adopt additional policies
or rules governing the manner in which such payments because of financial
hardship may be made so that the plan may be conveniently administered.
4.9 Termination events:
4.9.1 Notwithstanding any other provision of this plan, this plan
shall be terminated as of the date on which first occurs either of the
following events (a "Termination Event"):
(i) There shall be a change in control of the
Employer. For purposes of this subsection (iii), a "change
in control of the Employer" shall be deemed to have occurred
if: (1) any person (as such term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934)
acquires or becomes the beneficial owner, directly or
indirectly, of securities of the Employer representing
twenty-five percent or more of the combined voting power of
the Employer's then outstanding securities and thereafter,
the membership of the Board of Directors of the Employer
becomes such that a majority are persons who were not
members of the Board at the time of the acquisition of
securities; or (2) the Employer, or its assets, are acquired
by or combined with another corporation and less than a
majority of the outstanding voting shares of the parent or
surviving corporation after such acquisition or combination
are owned, immediately after such acquisition or
combination, by the owners of voting shares of the Employer
outstanding immediately prior
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to such acquisition or combination; or
(ii) The Employer shall terminate the plan pursuant
to Section 12.
4.9.2 If a Termination Event shall occur prior to the date payment of
benefits is made or commences under this plan, the participant's accrued
benefit (as adjusted) as of the date such Termination Event occurs shall be
paid to the participant (or his beneficiary) in cash in a lump sum within
thirty days of the occurrence of such event.
4.9.3 If a Termination Event shall occur after the date installment
benefit payments under this plan have commenced, the present value of the
remaining installment payments to be made shall be paid to the Employee (or
his beneficiary) in cash in a lump sum within thirty days of the date of
the Termination Event.
4.9.4 Notwithstanding the provisions of Sections 4.9.2 and 4.9.3, in
the event that a "change in control of the Employer" (as defined in Section
4.9.1(i)) occurs, and if, prior to the effective date of such change in
control, the Employer and the Employee shall agree in writing, such change
in control shall not be deemed a Termination Event with respect to such
Employee, and subject to the provisions of Section 16.8, the plan shall
continue in effect pursuant to the terms thereof.
SECTION 5. VESTING:
--------- -------
The benefit of each participant in his deferred compensation account
and his Employer supplemental account shall be fully vested (that is,
nonforfeitable) at all times.
SECTION 6. ACCOUNTS; ADJUSTMENT OF ACCOUNTS:
--------- --------------------------------
6.1 Accounts: The Committee shall establish book reserve accounts,
entitled the "deferred compensation account" and the "Employer supplemental
account," as defined in Sections 2.8 and 2.15, respectively, in behalf of each
participant. Each such account shall be adjusted as of each adjustment date
pursuant to the provisions of Section 6.3 or 6.4, whichever shall be applicable.
6.2 Deemed investment: The deferred compensation account and the
Employer supplemental account of a participant shall be credited with an
investment return determined as if the account were invested in one or more
investment alternatives selected by the Committee, including, without
limitation, shares of Employer stock. For this purpose, the investment return
credited by the Committee shall reflect the administrative charges, if any, paid
or payable by the Company on any
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investment acquired and held by the Company to pay benefits under this plan. The
participant shall elect the investment alternative in which his deferred
compensation account and his Employer supplemental account shall be deemed
invested. Such election shall be made in the manner prescribed by the Committee
and shall take effect upon the entry of the participant into the plan. The
investment election of the participant shall remain in effect until a new
election is made by the participant. In the event the participant fails for any
reason to make an effective election of the investment return to be credited to
his account, the investment return shall be determined by the Committee.
6.3 Adjustments to deferred compensation accounts: With respect to
each participant who has a deferred compensation account under the plan, the
amount credited to such account as of each adjustment date shall be adjusted as
of each succeeding adjustment date by the following debits and credits, in the
order stated:
6.3.1 The deferred compensation account shall be debited with the
total amount of any payments made from such account since the last
preceding adjustment date to him or for his benefit.
6.3.2 The deferred compensation account shall be credited with the
total amount of any salary reduction credits to such account since the last
preceding adjustment date.
6.3.3 The deferred compensation account shall be credited or debited
with the amount of deemed investment gain or loss resulting from the
performance of the investment funds elected by the participant in
accordance with Section 6.2. The amount of such deemed investment gain or
loss shall be determined by the Committee and such determination shall be
final and conclusive upon all concerned.
6.4 Adjustments to Employer supplemental accounts: With respect to
each participant who has an Employer supplemental account under the plan, the
amount credited to such account as of each adjustment date shall be adjusted as
of each succeeding adjustment date by the following debits and credits, in the
order stated:
6.4.1 The Employer supplemental account shall be debited with the
total amount of any payments made from such account since the last
preceding adjustment date to him or for his benefit.
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6.4.2 The Employer supplemental account shall be credited with the
total amount of any Employer matching credits and Employer supplemental
credits to such account since the last preceding adjustment date.
6.4.3 The Employer supplemental account shall be credited or debited
with the amount of deemed investment gain or loss resulting from the
performance of the investment funds elected by the participant in
accordance with Section 6.2. The amount of such deemed investment gain or
loss shall be determined by the Committee and such determination shall be
final and conclusive upon all concerned.
SECTION 7. ADMINISTRATION BY COMMITTEE:
--------- ---------------------------
7.1 The Committee shall consist of not fewer than three nor more than
five individuals who shall be appointed by the Board to serve at the pleasure of
the Board. Any member of the Committee may resign, and his successor, if any,
shall be appointed by the Board. The Committee shall be responsible for the
general administration and interpretation of the plan and for carrying out its
provisions, except to the extent all or any of such obligations are specifically
imposed on the Board.
7.2 The members of the Committee shall elect a Chairman and may elect
an acting Chairman. They shall also elect a Secretary and may elect an acting
Secretary, either of whom may be but need not be a member of the Committee. The
Committee may appoint from its membership such subcommittees with such powers as
the Committee shall determine, and may authorize one or more of its members or
any agent to execute or deliver any instruments or to make any payment in behalf
of the Committee. The Committee shall appoint the plan administrator, or may
itself act as plan administrator.
7.3 The Committee shall hold such meetings upon such notice, at such
places and at such intervals as it may from time to time determine. Notice of
meetings shall not be required if notice is waived in writing by all the members
of the Committee at the time in office, or if all such members are present at
the meeting.
7.4 A majority of the members of the Committee at the time in office
shall constitute a quorum for the transaction of business. All resolutions or
other actions taken by the Committee at any
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meeting shall be by vote of a majority of those present at any such meeting and
entitled to vote. Resolutions may be adopted or other action taken without a
meeting upon written consent thereto signed by all of the members of the
Committee.
7.5 The Committee shall maintain full and complete records of its
deliberations and decisions. The minutes of its proceedings shall be conclusive
proof of the facts of the operation of the plan. The records of the Committee
shall contain all relevant data pertaining to individual participants and their
rights under the plan.
7.6 Subject to the limitations of the plan, the Committee may from
time to time establish rules or by-laws for the administration of the plan and
the transaction of its business.
7.7 No individual member of the Committee shall have any right to
vote or decide upon any matter relating solely to himself or to any of his
rights or benefits under the plan (except that such member may sign unanimous
written consent to resolutions adopted or other action taken without a meeting),
except relating to the terms of his salary reduction agreement.
7.8 The Committee may correct errors and, so far as practicable, may
adjust any benefit or credit or payment accordingly. The Committee may in its
discretion waive any notice requirements in the plan; provided, that a waiver of
notice in one or more cases shall not be deemed to constitute a waiver of notice
in any other case. With respect to any power or authority which the Committee
has discretion to exercise under the plan, such discretion shall be exercised in
a nondiscriminatory manner.
7.9 Subject to the claims procedure set forth in Section 14, the plan
administrator and the Committee shall have the duty and discretionary authority
to interpret and construe the provisions of the plan and to decide any dispute
which may arise regarding the rights of participants hereunder, including the
discretionary authority to construe the plan and to make determinations as to
eligibility and benefits under the plan. Determinations by the plan
administrator and the Committee shall
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apply uniformly to all persons similarly situated and shall be binding and
conclusive upon all interested persons.
7.10 The Committee may engage an attorney, accountant, actuary or any
other technical advisor on matters regarding the operation of the plan and to
perform such other duties as shall be required in connection therewith, and may
employ such clerical and related personnel as the Committee shall deem requisite
or desirable in carrying out the provisions of the plan. The Committee shall
from time to time, but no less frequently than annually, review the financial
condition of the plan and determine the financial and liquidity needs of the
plan. The Committee shall communicate such needs to the Employer so that its
policies may be appropriately coordinated to meet such needs.
7.11 No fee or compensation shall be paid to any member of the
Committee for his service as such.
7.12 The Committee shall be entitled to reimbursement by the Employer
for its reasonable expenses properly and actually incurred in the performance of
its duties in the administration of the plan.
7.13 No member of the Committee shall be personally liable by reason
of any contract or other instrument executed by him or on his behalf as a member
of the Committee nor for any mistake of judgment made in good faith, and the
Employer shall indemnify and hold harmless, directly from its own assets
(including the proceeds of any insurance policy the premiums for which are paid
from the Employer's own assets), each member of the Committee and each other
officer, employee, or director of the Employer to whom any duty or power
relating to the administration or interpretation of the plan may be delegated or
allocated, against any unreimbursed or uninsured cost or expense (including any
sum paid in settlement of a claim with the prior written approval of the Board)
arising out of any act or omission to act in connection with the plan unless
arising out of such person's own fraud, bad faith, willful misconduct or gross
negligence.
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SECTION 8. NO FUNDING:
--------- ----------
The obligation of the Employer to make payments hereunder shall
constitute a contractual liability of the Employer to the participant. Such
payments shall be made from the general funds of the Employer, and the Employer
shall not be required to establish or maintain any special or separate fund, or
otherwise to segregate assets to assure that such payments shall be made, and
the participant shall not have any interest in any particular assets of the
Employer by reason of its obligations hereunder. Nothing contained in this plan
shall create or be construed as creating a trust of any kind or any other
fiduciary relationship between the Employer and the participant or any other
person. To the extent that any person acquires a right to receive payment from
the Employer, such right shall be no greater than the right of an unsecured
creditor of the Employer. Notwithstanding the foregoing, the Employer may
establish a grantor trust in substantially the form provided for by IRS Revenue
Procedure 92-62 with one or more participants in the plan with respect to the
payment of such participants' benefit under the plan.
SECTION 9. ALLOCATION OF RESPONSIBILITIES:
--------- ------------------------------
The persons responsible for the plan and the duties and
responsibilities allocated to each are as follows:
9.1 Board:
(i) To amend the plan;
(ii) To appoint and remove members of the Committee; and
(iii) To terminate the plan.
9.2 Committee:
(i) To designate eligible employees and participants;
(ii) To interpret the provisions of the plan and to determine
the rights of the participants under the plan, except to the extent
otherwise provided in Section 14 relating to claims procedure;
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(iii) To administer the plan in accordance with its terms,
except to the extent powers to administer the plan are specifically
delegated to another person or persons as provided in the plan;
(iv) To account for the accrued benefits of participants; and
(v) To direct the Employer in the payment of benefits.
9.3 Plan Administrator:
(i) To file such reports as may be required with the United
States Department of Labor, the Internal Revenue Service and any other
government agency to which reports may be required to be submitted
from time to time; and
(ii) To administer the claims procedure to the extent provided
in Section 14.
SECTION 10. BENEFITS NOT ASSIGNABLE; FACILITY OF PAYMENTS:
---------- ---------------------------------------------
10.1 No portion of any benefit credited or paid under the plan with
respect to any participant shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any
attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or
charge the same shall be void, nor shall any portion of such benefit be in any
manner payable to any assignee, receiver or any one trustee, or be liable for
his debts, contracts, liabilities, engagements or torts.
10.2 If any individual entitled to receive a payment under the plan
shall be physically, mentally or legally incapable of receiving or acknowledging
receipt of such payment, the Committee, upon the receipt of satisfactory
evidence of his incapacity and satisfactory evidence that another person or
institution is maintaining him and that no guardian or committee has been
appointed for him, may cause any payment otherwise payable to him to be made to
such person or institution so maintaining him. Payment to such person or
institution shall be in full satisfaction of all claims by or through the
participant to the extent of the amount thereof.
SECTION 11. BENEFICIARY:
---------- -----------
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The participant's beneficiary shall be the person or persons
designated by the participant on the beneficiary designation form provided by
and filed with the Committee or its designee. If the participant does not
designate a beneficiary, the beneficiary shall be his surviving spouse. If the
participant does not designate a beneficiary and has no surviving spouse, the
beneficiary shall be the participant's estate. The designation of a beneficiary
may be changed or revoked only by filing a new beneficiary designation form with
the Committee or its designee. If a beneficiary (the "primary beneficiary") is
receiving or is entitled to receive payments under the plan and dies before
receiving all of the payments due him, the balance to which he is entitled shall
be paid to the contingent beneficiary, if any, named in the participant's
current beneficiary designation form. If there is no contingent beneficiary,
the balance shall be paid to the estate of the primary beneficiary. Any
beneficiary may disclaim all or any part of any benefit to which such
beneficiary shall be entitled hereunder by filing a written disclaimer with the
Committee before payment of such benefit is to be made. Such a disclaimer shall
be made in form satisfactory to the Committee and shall be irrevocable when
filed. Any benefit disclaimed shall be payable from the plan in the same manner
as if the beneficiary who filed the disclaimer had died on the date of such
filing.
SECTION 12. AMENDMENT AND TERMINATION OF PLAN:
---------- ---------------------------------
The Board may amend any provision of the plan, including the
provisions of Section 4.9, or may terminate the plan at any time; provided, that
in no event shall such amendment or termination reduce any participant's accrued
benefit as of the date of such amendment or termination, nor shall any such
amendment affect the terms of the plan relating to the payment of such accrued
benefit (other than the provisions of Section 4.9) without the participant's
written consent.
SECTION 13. COMMUNICATION TO PARTICIPANTS:
---------- -----------------------------
The Employer shall make a copy of the plan available for inspection by
participants and their beneficiaries during reasonable hours at the principal
office of the Employer.
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SECTION 14. CLAIMS PROCEDURE:
---------- ----------------
The following claims procedure shall apply with respect to the plan:
14.1 Filing of a claim for benefits: If a participant or beneficiary
(the "claimant") believes that he is entitled to benefits under the plan which
are not being paid to him or which are not being accrued for his benefit, he
shall file a written claim therefor with the plan administrator. In the event
the plan administrator shall be the claimant, all actions which are required to
be taken by the plan administrator pursuant to this Section 14 shall be taken
instead by another member of the Committee designated by the Committee.
14.2 Notification to claimant of decision: Within 90 days after
receipt of a claim by the plan administrator (or within 180 days if special
circumstances require an extension of time), the plan administrator shall notify
the claimant of his decision with regard to the claim. In the event of such
special circumstances requiring an extension of time, there shall be furnished
to the claimant prior to expiration of the initial 90-day period written notice
of the extension, which notice shall set forth the special circumstances and the
date by which the decision shall be furnished. If such claim shall be wholly or
partially denied, notice thereof shall be in writing and worded in a manner
calculated to be understood by the claimant, and shall set forth: (i) the
specific reason or reasons for the denial; (ii) specific reference to pertinent
provisions of the plan on which the denial is based; (iii) a description of any
additional material or information necessary for the claimant to perfect the
claim and an explanation of why such material or information is necessary; and
(iv) an explanation of the procedure for review of the denial. If the plan
administrator fails to notify the claimant of the decision in timely manner, the
claim shall be deemed denied as of the close of the initial 90-day period (or
the close of the extension period, if applicable).
14.3 Procedure for review: Within 60 days following receipt by the
claimant of notice denying his claim, in whole or in part, or, if such notice
shall not be given, within 60 days follow-
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ing the latest date on which such notice could have been timely given, the
claimant shall appeal denial of the claim by filing a written application for
review with the Committee. Following such request for review, the Committee
shall fully and fairly review the decision denying the claim. Prior to the
decision of the Committee, the claimant shall be given an opportunity to review
pertinent documents and to submit issues and comments in writing.
14.4 Decision on review: The decision on review of a claim denied in
whole or in part by the plan administrator shall be made in the following
manner:
14.4.1 Within 60 days following receipt by the Committee of the
request for review (or within 120 days if special circumstances require an
extension of time), the Committee shall notify the claimant in writing of
its decision with regard to the claim. In the event of such special
circumstances requiring an extension of time, written notice of the
extension shall be furnished to the claimant prior to the commencement of
the extension. If the decision on review is not furnished in a timely
manner, the claim shall be deemed denied as of the close of the initial 60-
day period (or the close of the extension period, if applicable).
14.4.2 With respect to a claim that is denied in whole or in part,
the decision on review shall set forth specific reasons for the decision,
shall be written in a manner calculated to be understood by the claimant,
and shall cite specific references to the pertinent plan provisions on
which the decision is based.
14.4.3 The decision of the Committee shall be final and conclusive.
14.5 Action by authorized representative of claimant: All actions set
forth in this Section 14 to be taken by the claimant may likewise be taken by a
representative of the claimant duly authorized by him to act in his behalf on
such matters. The plan administrator and the Committee may require such
evidence as either may reasonably deem necessary or advisable of the authority
to act of any such representative.
SECTION 15. PARTIES TO THE PLAN:
---------- -------------------
As of the effective date of the plan, Citizens Savings Bank
("Citizens") shall be the sole party to the plan. After the effective date, any
affiliate of Citizens may, with the consent of Citizens, become a party to the
plan provided a written agreement to this effect is made between such employer
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<PAGE>
and Citizens. Any such original or additional party to the plan shall be
subject to the following special provisions of this Section 15, except (in the
case of such an additional party to the plan) as may otherwise be specifically
provided in the agreement making such employer a party to the plan:
15.1 As used in the plan, except as otherwise specifically set forth
herein, the term "Employer" shall mean collectively all parties to the plan.
The plan shall be applied as a single plan with respect to all parties as if
there were only one employer-party, and service for purposes of the plan shall
be interchangeable among employer-parties to the plan and shall not be deemed to
be interrupted or terminated by the transfer at any time of an employee from the
service of one employer-party to the plan to service of another employer-party.
15.2 The Board of Directors of Citizens shall have the power to amend
the plan as applied to each party to the plan. The Board of Directors of each
party to the plan (and only such Board of Directors) shall have authority to
terminate the plan as applied to such party to the plan, irrespective of whether
the plan is terminated as applied to other parties to the plan.
15.3 The Committee which administers the plan as applied to Citizens
shall also be the Committee as applied to each other party to the plan.
SECTION 16. MISCELLANEOUS PROVISIONS:
--------------------------------------
16.1 Setoff: Notwithstanding any other provision of this plan, the
Employer may reduce the amount of any payment otherwise payable to or in behalf
of a participant hereunder by the amount of any loan, cash advance, extension of
credit or other obligation of the participant to the Employer that is then due
and payable, and the participant shall be deemed to have consented to such
reduction.
16.2 Notices: Each participant who is not in service and each
beneficiary shall be responsible for furnishing the Committee or its designee
with his current address for the mailing of notices and benefit payments. Any
notice required or permitted to be given to such participant or
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<PAGE>
beneficiary shall be deemed given if directed to such address and mailed by
regular United States mail, first class, postage prepaid. If any check mailed to
such address is returned as undeliverable to the addressee, mailing of checks
will be suspended until the participant or beneficiary furnishes the proper
address. This provision shall not be construed as requiring the mailing of any
notice or notification otherwise permitted to be given by posting or by other
publication.
16.3 Lost distributees: A benefit shall be deemed forfeited if the
plan administrator is unable to locate the participant or beneficiary to whom
payment is due on or before the fifth anniversary of the date payment is to be
made or commence; provided, that the participant's accounts shall cease to be
adjusted pursuant to Section 6 following the first anniversary of such date;
provided further, however, that such benefit shall be reinstated if a valid
claim is made by or on behalf of the participant or beneficiary for all or part
of the forfeited benefit.
16.4 Reliance on data: The Employer, the Committee and the plan
administrator shall have the right to rely on any data provided by the
participant or by any beneficiary. Representations of such data shall be
binding upon any party seeking to claim a benefit through a participant, and the
Employer, the Committee and the plan administrator shall have no obligation to
inquire into the accuracy of any representation made at any time by a
participant or beneficiary.
16.5 Receipt and release for payments: Subject to the provisions of
Section 16.1, any payment made from the plan to or with respect to any
participant or beneficiary, or pursuant to a disclaimer by a beneficiary, shall,
to the extent thereof, be in full satisfaction of all claims hereunder against
the plan and the Employer with respect to the plan. The recipient of any
payment from the plan may be required by the Committee, as a condition precedent
to such payment, to execute a receipt and release with respect thereto in such
form as shall be acceptable to the Committee.
16.6 Headings: The headings and subheadings of the plan have been
inserted for convenience of reference and are to be ignored in any construction
of the provisions hereof.
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<PAGE>
16.7 Continuation of employment: The establishment of the plan shall
not be construed as conferring any legal or other rights upon any employee or
any persons for continuation of employment, nor shall it interfere with the
right of the Employer to discharge any employee or to deal with him without
regard to the effect thereof under the plan.
16.8 Merger or consolidation: Citizens Savings Bank shall not
consolidate or merge into or with another corporation or entity, or transfer all
or substantially all of its assets to another corporation, partnership, trust or
other entity (a "Successor Entity") unless such Successor Entity shall assume
the rights, obligations and liabilities of Citizens Savings Bank under the plan
and upon such assumption, the Successor Entity shall become obligated to perform
the terms and conditions of the plan.
16.9 Construction: The provisions of the plan shall be construed and
enforced according to the laws of the State of North Carolina.
IN WITNESS WHEREOF, this nonqualified deferred compensation plan is
executed in behalf of each of the parties hereto as of the 30th day of
----
June, 1998.
- ----
CITIZENS SAVINGS BANK
By:/s/ Ronald C. Bostian
---------------------------
President
Attest:
/s/ Ralphelle S. Butler
- --------------------------------
Secretary
[Corporate Seal]
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<PAGE>
Merrill Lynch Non-Qualified Deferred
Compensation Plan Trust Agreement
TRUST UNDER:
Citizens Savings Bank of Salisbury Employee's Plan
- --------------------------------------------------------------------------------
DEFERRED COMPENSATION PLAN
This Agreement made this 27th day of May, 1998 by and between Citizens
Savings Bank (Company) and Merrill Lynch Trust Company of North Carolina, a
North Carolina corporation (Trustee);
WHEREAS, Company has adopted the non-qualified deferred compensation
Plan(s) identified above and such other plan(s) as are listed in Appendix A.
WHEREAS, Company has incurred or expects to incur liability under the terms
of such Plan(s) with respect to the individuals participating in such Plan(s).
WHEREAS, Company wishes to establish a trust (the "Trust") and to
contribute to the Trust assets that shall be held therein, subject to the claims
of the Company's creditors in the event of the Company's Insolvency, as herein
defined, until paid to Plan participants and their beneficiaries in such manner
and at such times as specified in the Plan(s);
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Plan(s) as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purpose of Title I of the Employee Retirement Income Security Act of 1974.
WHEREAS, it is the intention of Company to make contributions to the Trust
to provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan(s);
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust
(a) Company hereby deposits with Trustee in trust such cash and/or
marketable securities, if any, listed in Appendix B, which shall become the
principal of the Trust to be held, administered and disposed of by Trustee as
provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, Part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon, shall be held
separate and apart from other funds of Company and shall be used exclusively for
the uses and purposes of Plan participants and general creditors as herein set
forth. Plan participants and their beneficiaries shall have no preferred claim
on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan(s) and this Trust Agreement shall be mere
unsecured contractual rights of Plan participants and their beneficiaries
against Company. Any assets held by the Trust will be subject to the claims of
Company's general creditors under federal and state law in the event of
Insolvency, as defined in Section 3(a) herein.
<PAGE>
(e) Company, in its sole discretion, may at any time, or from time to
time, make additional deposits of cash or other property in trust with Trustee
to augment the principal to be held, administered and disposed of by Trustee as
provided in this Trust Agreement. Neither Trustee nor any Plan participant or
beneficiary shall have any right to compel such additional deposits.
(f) Trustee shall not be obligated to receive such cash and/or property
unless prior thereto Trustee has agreed that such cash and/or property is
acceptable to Trustee and Trustee has received such reconciliation, allocation,
investment or other information concerning, or representation with respect to,
the cash and/or property as Trustee may require. Trustee shall have no duty or
authority to (a) require any deposits to be made under the Plan or to Trustee,
(b) compute any amount to be deposited under the Plan to Trustee, or (c)
determine whether amounts received by Trustee comply with the Plan. Assets of
the Trust may, in Trustee's discretion, be held in an account with an affiliate
of Trustee.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) With respect to each Plan participant, Company shall deliver to
Trustee a schedule (the "Payment Schedule") that indicates the amounts payable
in respect of the participant (and his or her beneficiaries), that provides a
formula or other instructions acceptable to Trustee for determining the amounts
so payable, the form in which such amount is to be paid (as provided for or
available under the Plan(s)), and the time of commencement for payment of such
amounts. The Payment Schedule shall be delivered to Trustee not more than (30)
business days nor fewer than (15) business days prior to the first date on which
a payment is to be made to the Plan participant. Any change to a Payment
Schedule shall be delivered to Trustee not more than (30) days nor fewer than
(15) days prior to the date on which the first payment is to be made in
accordance with the changed Payment Schedule. Except as otherwise provided
herein, Trustee shall make payments to Plan participants and their beneficiaries
in accordance with such Payment Schedule. The Trustee shall make provisions for
the reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and paid
by Company, it being understood among the parties hereto that (1) Company shall
on a timely basis provide Trustee specific information as to the amount of taxes
to be withheld and (2) Company shall be obligated to receive such withheld taxes
from Trustee and properly pay and report such amounts to the appropriate taxing
authorities.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan(s) shall be determined by Company or such party as it
shall designate under the Plan(s), and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan(s).
(c) Company may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan(s). Company
shall notify Trustee of its decision to make payment of benefits directly prior
to the time amounts are payable to participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan(s), Company shall make the balance of each payment as it falls due.
Trustee shall notify Company where principal and earnings are not sufficient.
(d) Trustee shall have no responsibility to determine whether the Trust is
sufficient to meet the liabilities under the Plan(s), and shall not be liable
for payments or Plan(s) liabilities in excess of the value of the Trust's
assets.
Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary
When Company Is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is
<PAGE>
Insolvent. Company shall be considered "Insolvent" for purposes of this Trust
Agreement if (i) Company is unable to pay its debts as they become due, or (ii)
Company is subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of Company under federal and state law as set forth
below.
(1) The Board of Directors and the Chief Executive Officer of Company (or,
if there is no Chief Executive Officer, the highest ranking officer) shall have
the duty to inform Trustee in writing of Company's Insolvency. If a person
claiming to be a creditor of Company alleges in writing to Trustee that Company
has become Insolvent, Trustee shall determine whether Company is Insolvent and,
pending such determination, Trustee shall discontinue payment of benefits to
Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or has
received notice from Company or a person claiming to be a creditor alleging that
Company is Insolvent, Trustee shall have no duty to inquire whether Company is
Insolvent. Trustee may in all events rely on such evidence concerning Company's
solvency as may be furnished to Trustee and that provides Trustee with a
reasonable basis for making a determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is Insolvent,
Trustee shall discontinue payments to Plan participants or their beneficiaries
and shall hold the assets of the Trust for the benefit of Company's general
creditors. Nothing in this Trust Agreement shall in any way diminish any rights
of Plan participants or their beneficiaries to pursue their rights as general
creditors of Company with respect to benefits due under the Plan(s) or
otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants or
their beneficiaries in accordance with Section 2 of this Trust Agreement only
after Trustee has determined that Company is not Insolvent (or is no longer
Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan(s) for the
period of such discontinuance, less the aggregate amount of any payments made to
Plan participants provided for hereunder during any such period of
discontinuance; provided that Company has given Trustee information with respect
to such payments made during the period of discontinuance prior to resumption of
payments by the Trustee.
Section 4. Payments to Company.
Except as provided in Section 3 hereof, since the Trust is irrevocable, in
accordance with Section 1(b) hereof, Company shall have no right or power to
direct Trustee to return to Company or to divert to others any of the Trust
assets before all payment of benefits have been made to Plan participants and
their beneficiaries pursuant to the terms of the Plan(s).
Section 5. Investment Authority.
(a) Trustee may invest in securities (including stock or rights to acquire
stock) or obligations issued by Company. All rights associated with assets of
the Trust shall be exercised by Trustee or the person designated by Trustee, and
shall in no event be exercised by or rest with Plan participants, except that
voting rights with respect to
<PAGE>
Trust assets will be exercised by Company, unless an investment adviser has been
appointed pursuant to Section 5(c) and voting authority has been delegated to
such investment adviser.
(b) Company shall have the right at anytime, and from time to time in its
sole discretion, to substitute assets of equal fair market value for any asset
held by the Trust. This right is exercised by Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary capacity.
(c) Trustee may appoint one or more investment advisers who are registered
as investment advisers under the Investment Advisers Act of 1940, who may be
affiliates of Trustee, to provide investment advice on a discretionary or non-
discretionary basis with respect to all or a specified portion of the assets of
the Trust.
(d) Trustee, or the Trustee's designee, is authorized and empowered:
(1) To invest and reinvest Trust assets, together with the income
therefrom, in common stock, preferred stock, convertible preferred stock, bonds,
debentures, convertible debentures and bonds, mortgages, notes, commercial paper
and other evidences of indebtedness (including those issued by the Trustee),
shares of mutual funds (which funds may be sponsored, managed or offered by an
affiliate of the Trustee), guaranteed investment contracts, bank investment
contracts, other securities, policies of life insurance, annuity contracts,
options, options to buy or sell securities or other assets, and all other
property of any type (personal, real or mixed, and tangible or intangible);
(2) To deposit or invest all or any part of the assets of the Trust
in savings accounts or certificates of deposit or other deposits in a bank or
saving and loan association or other depository institution, including the
Trustee or any of its affiliates, provided with respect to such deposits with
Trustee or an affiliate the deposits bear a reasonable interest rate;
(3) To hold, manage, improve, repair and control all property, real
or personal, forming part of the Trust; to sell, convey, transfer, exchange,
partition, lease for any term, even extending beyond the duration of this Trust,
and otherwise dispose of the same from time to time;
(4) To hold in cash, without liability for interest, such portion of
the Trust as is pending investments, or payment of expenses, or the distribution
of benefits;
(5) To take such actions as may be necessary or desirable to protect
the Trust from loss due to the default on mortgages held in the Trust including
the appointment of agents or trustees in such other jurisdictions as may seem
desirable, to transfer property to such agents or trustees, to grant to such
agents such powers as are necessary or desirable to protect the Trust, to direct
such agent or trustee, or to delegate such power to direct, and to remove such
agent or trustee;
<PAGE>
(6) To settle, compromise or abandon all claims and demands in favor
of or against the Trust;
(7) To exercise all of the further rights, powers, options and
privileges granted, provided for, or vested in trustees generally under the laws
of the state in which the Trustee is incorporated as set forth above, so that
the powers conferred upon the Trustee herein shall not be in limitation of any
authority conferred by law, but shall be in addition thereto;
(8) To borrow money from any source and to execute promissory notes,
mortgages or other obligations and to pledge or mortgage any trust assets as
security; and
(9) To maintain accounts at, execute transactions through, and lend
on an adequately secured basis stocks, bonds or other securities to, any
brokerage or other firm, including any firm which is an affiliate of Trustee.
Section 6. Additional Powers of Trustee.
To the extent necessary or which it deems appropriate to implement its
powers under Section 5 or otherwise to fulfill any of its duties and
responsibilities as Trustee of the Trust, the Trustee shall have the following
additional powers and authority:
(a) to register securities, or any other property, in its name or in the
name of any nominee, including the name of any affiliate or the nominee name
designated by any affiliate, with or without indication of the capacity in which
property shall be held, or to hold securities in bearer form and to deposit any
securities or other property in an depository or clearing corporation;
(b) to designate and engage the services of, and to delegate powers and
responsibilities to, such agents, representatives, advisers, counsel and
accountants as the Trustee considers necessary or appropriate, any of whom may
be an affiliate of the Trustee or a person who renders services to such an
affiliate, and, as a part of its expenses under this Trust Agreement, to pay
their reasonable expenses and compensation;
(c) to make, execute and deliver, as Trustee, any and all deeds, leases,
mortgages, conveyances, waivers, releases or other instruments in writing
necessary or appropriate for the accomplishment of any of the powers listed in
this Trust Agreement; and
(d) generally to do all other acts which Trustee deems necessary or
appropriate for the protection of the Trust.
Section 7. Disposition of Income.
(a) During the term of this Trust, all income received by the Trust, net
of expenses and taxes, shall be accumulated and reinvested.
Section 8. Accounting by Trustee.
(a) Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within 90 days following the close of each calendar year
and within 90 days after removal
<PAGE>
or resignation of Trustee, Trustee shall deliver to Company a written account of
its administration of the Trust during such year or during the period from the
close of the last preceding year to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other transactions
effected by it, including a description of all securities and investments
purchased and sold with the cost or net proceeds of such purchases or sales
(accrued interest paid or receivable being shown separately), and showing all
cash, securities and other property held in the Trust at the end of such year or
as of the date of such removal or resignation, as the case may be. Trustee may
satisfy its obligation under this Section 8 by rendering to Company monthly
statements setting forth the information required by this Section separately for
the month covered by the statement.
Section 9. Responsibility and Indemnity of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims, provided, however, that Trustee shall incur
no liability to any person for any action taken pursuant to a direction, request
or approval given by Company which is contemplated by, and in conformity with,
the terms of the Plan(s) and this Trust and is given in writing by Company.
Trustee shall also incur no liability to any person for any failure to act in
the absence of direction, request or approval from the Company which is
contemplated by, and in conformity with, the terms of this Trust. In the event
of a dispute between Company and a party, Trustee may apply to a court of
competent jurisdiction to resolve the dispute.
(b) Company hereby indemnifies Trustee and each of its affiliates
(collectively, the "Indemnified Parties") against, and shall hold them harmless
from, any and all loss, claims, liability, and expense, including reasonable
attorneys' fees, imposed upon or incurred by any Indemnified Party as a result
of any acts taken, or any failure to act, in accordance with the directions from
the Company or any designee of the Company, or by reason of the Indemnified
Party's good faith execution of its duties with respect to the Trust, including,
but not limited to, its holding of assets of the Trust, the Company's
obligations in the foregoing regard to be satisfied promptly by the Company,
provided that in the event the loss, claim, liability or expense involved is
determined by a no longer appealable final judgment entered in a lawsuit or
proceeding to have resulted from the gross negligence or willful misconduct of
the Trustee, Trustee shall promptly on request thereafter return to the Company
any amount previously received by the Trustee under this Section with respect to
such loss, claim, liability or expense. If Company does not pay such costs,
expenses and liabilities in a reasonably timely manner, Trustee may obtain
payment from the Trust without direction from Company.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisers,
financial consultants or other professionals to assist it in performing any of
its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on Trustee
by applicable law, unless expressly provided otherwise herein, provided,
however, that if an insurance policy is held as an asset of the Trust, Trustee
shall have no power to name a beneficiary of the policy other than the Trust, to
assign the policy (as distinct from conversion of the policy to a different
form) other than to a successor Trustee, or to loan to any person the proceeds
of any borrowing against such policy.
<PAGE>
(f) However, notwithstanding the provisions of Section 9(e) above, Trustee
may loan to Company the proceeds of any borrowing against an insurance policy
held as an asset of the Trust.
(g) Notwithstanding any powers to Trustee pursuant to this Trust Agreement
or to applicable law, Trustee shall not have any power that could give this
Trust the objective of carrying on a business and dividing the gains therefrom,
within the meaning of Section 301.7701-2 of the Procedure and Administrative
Regulations promulgated pursuant to the Internal Revenue Code.
Section 10. Compensation and Expenses of Trustee.
Trustee is authorized, unless otherwise agreed by Trustee, to withdraw from
the Trust without direction from Company the amount of its fees in accordance
with the fee schedule agreed to by the Company and Trustee. Company shall pay
all administrative expenses, but if not so paid, the expenses shall be paid from
the Trust.
Section 11. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective 30 days after receipt of such notice unless Company and
Trustee agree otherwise.
(b) Trustee may be removed by Company on 30 days notice or upon shorter
notice accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within 60 days after receipt of notice of
resignation, removal or transfer, unless Company extends the time limit,
provided that Trustee is provided assurance by Company satisfactory to Trustee
that all fees and expenses reasonably anticipated will be paid.
(d) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 12 hereof, by the effective date of resignation or
removal under paragraph(s) (a) or (b) of this section. If no such appointment
has been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
(e) Upon settlement of the account and transfer of the Trust assets to the
successor Trustee, all rights and privileges under this Trust Agreement shall
vest in the successor Trustee and all responsibility and liability of Trustee
with respect to the Trust and assets thereof shall terminate subject only to the
requirement that Trustee execute all necessary documents to transfer the Trust
assets to the successor Trustee.
<PAGE>
Section 12. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 11(a) or
(b) hereof, Company may appoint any third party, such as a bank trust department
or other party that may be granted corporate trustee powers under state law, as
a successor to replace Trustee upon resignation or removal. The appointment
shall be effective when accepted in writing by the new Trustee, who shall have
all of the rights and powers of the former Trustee, including ownership rights
in the Trust assets. The former Trustee shall execute any instrument necessary
or reasonably requested by Company or the successor Trustee to evidence the
transfer.
(b) The successor Trustee need not examine the records and act of any prior
Trustee and may retain or dispose of existing Trust assets, subject to Sections
7 and 8 hereof. The successor Trustee shall not be responsible for and Company
shall indemnify and defend the successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes successor Trustee.
Section 13. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan(s) or shall make the Trust revocable, since
the Trust is irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan participants
and their beneficiaries are no longer entitled to benefits pursuant to the terms
of the Plan(s). Upon termination of the Trust any assets remaining in the Trust
shall be returned to Company.
(c) Upon written approval to participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan(s), Company may terminate
this Trust prior to the time all benefit payments under the Plan(s) have been
made. All assets in the Trust at termination shall be returned to Company.
Section 14. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
<PAGE>
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of the state in which Trustee is incorporated as set forth above.
(d) The provisions of Sections 2(d), 3(b)(3), 9(b) and 15 of this
Agreement shall survive termination of this Agreement.
(e) The rights, duties, responsibilities, obligations and liabilities of
the Trustee are as set forth in this Trust Agreement, and no provision of the
Plan(s) or any other documents shall affect such rights, responsibilities,
obligations and liabilities. If there is a conflict between provisions of the
Plan(s) and this Trust Agreement with respect to any subject involving the
Trustee, including but not limited to the responsibility, authority or powers of
the Trustee, the provisions of this Trust Agreement shall be controlling.
(f) For purposes of this Trust, Change of Control shall mean: The purchase
or other acquisition by any person, entity or group of persons, within the
meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934
("Act"), or any comparable successor provisions, of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of
either the outstanding shares of common stock or the combined voting power of
Company's then outstanding voting securities entitled to vote generally, or the
approval by the stockholders of Company of a reorganization, merger, or
consolidation, in each case, with respect to which persons who were stockholders
of Company immediately prior to such reorganization, merger or consolidation do
not immediately thereafter, own more than 50 percent of the combined voting
power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated Company's then outstanding securities, or a
liquidation or dissolution of Company or of the sale of all or substantially all
of Company's assets.
Section 15. Arbitration.
SYMBOL 176 \f "Symbol" Arbitration is final and binding on the parties.
SYMBOL 176 \f "Symbol" The parties waiving their right to seek remedies
in court, including the right to jury trial.
SYMBOL 176 \f "Symbol" Pre-arbitration discovery is generally more
limited than and different from court proceedings.
SYMBOL 176 \f "Symbol" The arbitrators' award is not required to include
factual findings or legal reasoning and any party's right to appeal or seek
modification of rulings by the arbitrators is strictly limited.
SYMBOL 176 \f "Symbol" The panel of arbitrators will typically include a
minority of arbitrators who were or are affiliated with the securities
industry.
Company agrees that all controversies which may arise between the Company and
either or both the Trustee and its affiliate Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("MLPF&S") in connection with the Trust, including, but not
limited to, those involving any transactions, or the construction, performance,
or breach of this or any other agreement between Company and either or both the
Trustee and MLPF&S, whether entered into prior, on, or subsequent to the date
hereof, shall be determined by arbitration. Any arbitration under this
Agreement shall be conducted only before the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., or arbitration facility provided by any other
exchange of which MLPF&S is a member, the National Association of Securities
Dealers, Inc., or the Municipal Securities Rulemaking Board, and in accordance
with its arbitration rules then in force. Company may elect in the first
instance whether arbitration shall be conducted before the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., other exchange of which
MLPF&S is a member, the National Association of Securities Dealers, Inc., or the
Municipal Securities Rulemaking Board, but if the Company
<PAGE>
fails to make such election, by registered letter or telegram addressed to
Merrill Lynch Trust Company, Employee Benefit Trust Operations, P.O. Box 30532,
New Brunswick, New Jersey 08989-0532, before the expiration of five days after
receipt of a written request from MLPF&S and/or the Trustee to make such
election then MLPF&S and/or the Trustee may make such election. Judgment upon
the award of arbitrators may be entered in any court, state or federal, having
jurisdiction. No person shall bring a putative or certified class action to
arbitration, nor seek to enforce any pre-dispute arbitration agreement against
any person who has initiated in court a putative class action; who is a member
of putative class who has not opted out of the class with respect to any claims
encompassed by the putative class action until:
(i) the class certification is denied;
(ii) the class is decertified; or
(iii) the customer is excluded from the class by the court. Such forbearance
to enforce an agreement to arbitrate shall not constitute a waiver of any rights
under this agreement except to the extent stated herein.
Section 16. Effective Date.
The effective date of this Trust Agreement shall be July 1, 1998.
IN WITNESS WHEREOF, the Company and the Trustee have executed this Trust
Agreement each by action of a duly authorized person.
By signing this Agreement, the undersigned Company acknowledges (1) that,
in accordance with Section 15 of this Agreement, the Company is agreeing in
advance to arbitrate any controversies which may arise with either or both the
Trustee or MLPF&S and (2) receipt of a copy of this Agreement.
-----------------------------------
(Company)
By: /s/ Ronald E. Bostian
-------------------------------
(Signature)
Name/Title: Ronald E. Bostian
-----------------------
-----------------------------------
-----------------------------------
(Trustee)
By: /s/ Melanie Madeira
-------------------------------
(Signature)
Name/Title: Melanie Madeira
-----------------------
New Account Trust Officer
-----------------------------------
<PAGE>
Appendix A
Name of Non-Qualified Deferred Compensation Plan(s):
________________________________________________ Plan
________________________________________________ Plan
<PAGE>
Appendix B
Deposit of cash and/or marketable securities to the Trust:
Cash: $________________________________
Marketable Securities:_________________
____________________________
____________________________
____________________________
____________________________
<PAGE>
EXHIBIT 10.(G)
AMENDED AND RESTATED
DIRECTORS' DEFERRED COMPENSATION PLAN
OF
CITIZENS SAVINGS BANK
EFFECTIVE DATE: JULY 1, 1998
<PAGE>
TABLE OF CONTENTS
DIRECTORS' DEFERRED COMPENSATION PLAN
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Definitions......................................... 1
Section 2. Credits to Deferred Compensation Account............ 3
Section 3. Retirement; Termination of Service; Death.......... 4
3.1 Normal retirement............................. 4
3.2 Delayed retirement............................ 4
3.3 Disability.................................... 5
3.4 Termination of service........................ 5
3.5 Payment of benefit by reason of retirement.... 5
3.6 Payment of benefit by reason of death......... 6
3.7 Prepayment.................................... 6
3.8 Hardship distributions........................ 6
3.9 Termination events............................ 7
Section 4. Vesting............................................. 8
Section 5. Adjustment of Accounts.............................. 8
Section 6. Administration by Committee......................... 10
Section 7. No Funding.......................................... 12
Section 8. Allocation of Responsibilities...................... 13
Section 9. Benefits Not Assignable; Facility of Payments....... 14
Section 10. Beneficiary......................................... 14
Section 11. Amendment and Termination of Plan................... 15
Section 12. Communication to Participants....................... 16
Section 13. Claims Procedure.................................... 16
Section 14. Miscellaneous Provisions............................ 18
14.1 Notices....................................... 18
14.2 Lost distributees............................. 18
14.3 Reliance on data.............................. 18
14.4 Receipt and release for payments.............. 19
14.5 Headings...................................... 19
14.6 Continuation of service....................... 19
14.7 Merger or consolidation....................... 19
14.8 Construction.................................. 19
</TABLE>
<PAGE>
AMENDED AND RESTATED
DIRECTORS' DEFERRED COMPENSATION PLAN
OF CITIZENS SAVINGS BANK
SECTION 1. DEFINITIONS:
--------- -----------
As used in the plan, including this Section 1, references to one
gender shall include the other and, unless otherwise indicated by the context:
1.1 "Accrued benefit" shall mean with respect to each participant the
balance credited to his deferred compensation account as of the applicable
adjustment date, following adjustment to such account as of such adjustment date
as provided in Section 5.
1.2 "Adjustment date" shall mean each day that securities are traded
on a national securities exchange (except regularly scheduled holidays of the
Corporation or any agent designated by the Corporation to administer the
investment of participants' accounts under the plan); the last day of each
payroll period during a plan year; and such other dates as the Committee may
select from time to time. The last adjustment date occurring in each calendar
year shall be referred to herein as the "year-end adjustment date."
1.3 "Beneficiary" shall mean the person, persons or entity designated
or determined pursuant to the provisions of Section 10 of the plan.
1.4 "Board" shall mean the Board of Directors of the Corporation, or
a Committee of such Board to whom the Board shall assign or delegate all or part
of its duties and powers under this plan.
1.5 "Committee" shall mean the administrative committee provided for
in Section 6.
1.6 "Compensation" shall mean for any participant the remuneration
paid or payable with respect to such participant by the Corporation during the
plan year for services actually rendered by the participant as a member of the
Board of Directors of the Corporation including, without limitation, meeting
fees and monthly retainer payments.
<PAGE>
1.7 "Corporation" shall mean shall mean Citizens Savings Bank, a
[North Carolina banking corporation] with its principal office at Salisbury,
North Carolina, or any successor thereto by merger, consolidation or otherwise.
1.8 "Deferred compensation account" shall mean a book reserve account
to which a Director's fee deferral amounts shall be credited.
1.9 "Director" shall mean an individual in the service of the
Corporation as a member of the Board of Directors (including individuals who are
also employees of the Corporation).
1.10 "Disability" shall mean the inability, by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long continued or indefinite duration, of a participant to
perform his regular duties as a director of the Corporation.
1.11 "Effective date of the plan" shall be July 1, 1998.
1.12 "Entry date" shall mean January 1 of each calendar year.
1.13 "Fee deferral agreement" shall mean a written agreement entered
into by a participant pursuant to the provisions of Section 2.1 of the plan.
1.14 "Normal retirement age" of a participant shall be age sixty-five.
The "normal retirement date" of a participant shall mean the first day of the
calendar month coincident with or next following attainment of his normal
retirement age.
1.15 "Participant" shall mean with respect to any plan year a director
who has entered the plan and any former director who has an accrued benefit
under the plan. A director who has not otherwise entered the plan shall enter
the plan and become a participant as of the entry date (commencing on or after
the effective date of the plan) coincident with or next following the date he
shall first complete such terms and conditions as the Committee shall from time
to time establish. A director who terminates service as a member of the Board
and later reenters such service shall immediately become a participant in the
plan upon his return to service.
-2-
<PAGE>
1.16 "Plan" shall mean the deferred compensation plan as herein set
out or as duly amended.
1.17 "Plan year" shall mean the twelve calendar month period ending
on December 31 of each year.
1.18 "Retire" or "retirement" shall mean retirement within the
meaning of Section 3.1, 3.2 or 3.3.
1.19 "Service" shall mean service by an individual in behalf of the
Corporation as a director.
1.20 "Spouse" or "surviving spouse" shall mean, except as otherwise
provided in the plan, the legally married spouse or surviving spouse of a
participant.
1.21 "Termination adjustment date" shall mean the adjustment date
coincident with or next following the date as of which a participant terminates
service with the Corporation for any reason (including retirement or death).
SECTION 2. CREDITS TO DEFERRED COMPENSATION ACCOUNT:
--------- ----------------------------------------
2.1 Fee deferral amounts: Each participant may elect, by entering
into a fee deferral agreement with the Corporation, to reduce his compensation
from the Corporation for services as a director (including meeting fees and
monthly retainer payments) by a whole number percentage from one to one hundred
percent (in increments of one percent). The amount of the participant's
compensation deferral shall be credited by the Corporation to a deferred
compensation account maintained for the participant pursuant to Section 5. On
each adjustment date as of which fees are payable to directors, the Corporation
shall credit to the participant's deferred compensation account an amount equal
to the participant's fees deferred for the period ending on such adjustment
date.
2.2 Administrative rules governing fee deferral agreements:
2.2.1 An election pursuant to Section 2.1 shall be made by the
participant by
-3-
<PAGE>
executing and delivering to the Corporation a fee deferral agreement.
Such fee deferral agreement shall become effective with respect to
such participant at the beginning of the first full fee period which
commences immediately following the date of receipt by the Committee
of such fee deferral agreement. Such election shall continue in
effect, unless it is modified or revoked by the participant, until
such time as the participant terminates his service with the
Corporation.
2.2.2 Fee deferral agreements may be modified by the unilateral
action of the participant (either to increase or decrease the portion
of his compensation which is subject to deferral within the percentage
limits set forth in Section 2.1). Any such modification shall be made
by executing and delivering to the Corporation an amended fee deferral
agreement, which shall become effective as of the first full fee
period which commences on or immediately following the entry next
following the date of receipt by the Committee of the amended fee
deferral agreement.
2.2.3 A participant may unilaterally revoke a fee deferral
agreement at any time by providing advance written notice to the
Corporation. The revocation shall become effective at the beginning of
the first full fee period which commences immediately following the
date such written revocation is received by the Committee. In the
event a participant revokes a fee deferral agreement, he shall be
ineligible to elect for fee deferral credits to recommence until the
first fee period which commences on or immediately following the entry
date next following the date the revocation became effective.
SECTION 3. RETIREMENT; TERMINATION OF SERVICE; DEATH:
--------- -----------------------------------------
3.1 Normal retirement: A participant who is in service shall be
eligible to retire from service at his normal retirement date and commence
receiving payment of his accrued benefit, determined as of his termination
adjustment date. Payment of such benefit shall be made by the Corporation
pursuant to Section 3.5.
3.2 Delayed retirement: If a participant shall remain in service
following his normal retirement date, his retirement date shall be the date he
shall actually terminate service for reasons other than death, whereupon he
shall commence receiving payment of his accrued benefit, determined as his
termination adjustment date. Payment of such benefit shall be made by the
Corporation pursuant to Section 3.5. During the period that such participant
remains in service pursuant to this Section 3.2, he shall continue to be a
participant for and including each plan year in which he meets the requirements
therefor. If a director not otherwise a participant becomes eligible to enter
the plan following his normal
-4-
<PAGE>
retirement date, the provisions of this Section 3.2 shall apply in determining
his retirement date.
3.3 Disability retirement: If a participant shall suffer disability
while in service prior to his normal retirement date, he shall retire as of the
date of establishment of his disability, whereupon he shall commence receiving
payment of his accrued benefit, determined as of his termination adjustment
date. Such benefit shall be paid by the Corporation as provided in Section 3.5,
treating for this purpose the date of the participant's disability retirement as
if it were his normal retirement date.
3.4 Termination of service: If the service of a participant with
the Corporation shall be terminated for any reason other than retirement or
death, his accrued benefit, determined as of his termination adjustment date,
shall be paid to him by the Corporation in cash in a lump sum as soon as
practicable following his termination adjustment date.
3.5 Payment of benefit by reason of retirement: If a participant
shall retire, his accrued benefit, determined as of his termination adjustment
date, shall be paid to him by the Corporation in cash in a lump sum or in equal
annual installments over a term certain of five, ten, fifteen or twenty years,
as elected by the participant in his initial fee deferral agreement. Payment of
such benefit shall be made or commence as of the first day of the calendar year
next following such termination adjustment date, and on each anniversary of such
date for the remainder of the term certain. If the participant elects to
receive payment of his accrued benefit in annual installments for a term
certain, the amount of each succeeding annual installment shall be adjusted, as
of the adjustment date immediately preceding the date as of which such annual
installment shall be paid, for additions to the participant's account pursuant
to Section 5. Such adjustment shall be made by dividing his account balance as
of such date (following adjustment as of such date) by the number of annual
installments remaining to be paid hereunder; provided, that the last annual
installment due hereunder shall be the entire amount credited to the
participant's account on the date of payment.
-5-
<PAGE>
3.6 Payment of benefit by reason of death:
3.6.1 If the participant shall die while in service, the
Corporation shall pay the participant's accrued benefit, determined as
of his termination adjustment date, to the participant's beneficiary
in cash in a lump sum as soon as practicable following such adjustment
date.
3.6.2 If the participant shall die following his termination of
service and before all payments to him under the plan have been made,
the balance of the participant's accrued benefit, determined as of the
adjustment date coincident with or next following the date such death
occurs, shall be paid by the Corporation to the participant's
beneficiary in cash in a lump sum as soon as practicable following
such adjustment date.
3.7 Prepayment: Notwithstanding any other provisions of this plan,
if a participant or any other person (a "recipient") is entitled to receive
payments under the plan, upon receipt of a request in writing from the
recipient, the Committee in its sole discretion may direct the Corporation to
prepay of all or any part of the payments remaining to be made to or in behalf
of the recipient, or to shorten the payment period. The amount of such
prepayment shall be in full satisfaction of the Corporation's obligations
hereunder to the recipient and to all persons claiming under or through the
recipient with respect to the payments being prepaid. In the event of a partial
prepayment, the Committee shall designate which installments are being prepaid.
The Committee's determinations under this Section 3.7 shall be final and
conclusive upon all parties claiming benefits under this plan.
3.8 Hardship distributions:
3.8.1 A participant may, at any time prior to the commencement
of payments hereunder, make application to the Committee to receive a
payment in a lump sum of all or a portion of the balance credited to
his deferred compensation account by reason of the immediate and heavy
financial need of the participant. The amount of a payment on account
of hardship shall not exceed the amount required to meet the immediate
financial need created by the hardship and not otherwise reasonably
available from other resources of the participant. Examples of
immediate and heavy financial need shall include but shall not be
limited to those financial needs arising on account of illness,
accident, disability or death of a person who contributes materially
to the financial support of the participant and his immediate family.
The determination of whether a financial need constitutes an
"immediate and heavy financial need" within the scope of this Section
3.8.1 shall be made by the Committee in its sole and absolute
discretion, and its decision to grant or deny a payment on account of
financial hardship shall be final.
-6-
<PAGE>
The Committee shall apply uniform and nondiscriminatory standards in
making its decision.
3.8.2 The participant's request for a payment on account of
financial hardship must be made in writing to the Committee. The
request must specify the nature of the financial hardship, the total
amount to be paid and the total amount of the actual expense incurred
or to be incurred on account of hardship.
3.8.3 If a payment under this Section 3.8 is approved, such
payment shall be made by the Corporation as of the next following
adjustment date. The processing of the request shall be completed as
soon as practicable after the date on which the Committee receives the
properly completed written request for a payment on account of
financial hardship. If a participant terminates service after a
request is approved in accordance with this Section 3.8 but prior to
distribution of the full amount approved, the approval of his request
shall be automatically void and the benefits he is entitled to receive
under the plan shall be distributed in accordance with the applicable
payment provisions of the plan. Only one payment because of financial
hardship shall be made within any plan year.
3.8.4 The Committee may from time to time adopt additional
policies or rules governing the manner in which such payments because
of financial hardship may be made so that the plan may be conveniently
administered.
3.9 Termination events:
3.9.1 Notwithstanding any other provision of this plan, this
plan shall be terminated as of the date on which first occurs either
of the following events (a "Termination Event"):
(i) There shall be a change in control of the
Corporation. For purposes of this subsection (iii), a
"change in control of the Corporation" shall be deemed to
have occurred if: (1) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934) acquires or becomes the beneficial owner, directly
or indirectly, of securities of the Employer representing
twenty-five percent or more of the combined voting power of
the Corporation's then outstanding securities and
thereafter, the membership of the Board of Directors of the
Corporation becomes such that a majority are persons who
were not members of the Board at the time of the acquisition
of securities; or (2) the Corporation, or its assets, are
acquired by or combined with another corporation and less
than a majority of the outstanding voting shares of the
parent or surviving corporation after such acquisition or
combination are owned, immediately after such acquisition or
combination, by the owners of voting shares of the
Corporation outstanding immediately prior to such
acquisition or combination; or
-7-
<PAGE>
(ii) The Corporation shall terminate the plan
pursuant to Section 11.
3.9.2 If a Termination Event shall occur prior to the date
payment of benefits is made or commences under this plan, the
participant's accrued benefit (as adjusted) as of the date such
Termination Event occurs shall be paid to the participant (or his
beneficiary) in cash in a lump sum within thirty days of the
occurrence of such event.
3.9.3 If a Termination Event shall occur after the date
installment benefit payments under this plan have commenced, the
present value of the remaining installment payments to be made shall
be paid to the participant (or his beneficiary) in cash in a lump sum
within thirty days of the date of the Termination Event.
3.9.4 Notwithstanding the provisions of Sections 3.9.2 and
3.9.3, in the event that a "change in control of the Company" (as
defined in Section 3.9.1(i)) occurs, and if, prior to the effective
date of such change in control, the Company and the participant shall
agree in writing, such change in control shall not be deemed a
Termination Event with respect to such participant, and subject to the
provisions of Section 14.7, the plan shall continue in effect pursuant
to the terms thereof.
SECTION 4. VESTING:
--------- -------
The accrued benefit of each participant under the plan shall be fully
vested (that is, nonforfeitable) in him at all times.
SECTION 5. ADJUSTMENT OF ACCOUNTS:
--------- ----------------------
5.1 Accounts: The Committee shall establish a book reserve accounts,
entitled the "deferred compensation account," in behalf of each participant.
Each such account shall be adjusted as of each adjustment date pursuant to the
provisions of Section 5.3.
5.2 Deemed investment: The deferred compensation account of a
participant shall be credited with an investment return determined as if the
account were invested in one or more investment alternatives selected by the
Committee, including, without limitation, shares of Corporation stock. For this
purpose, the investment return credited by the Committee shall reflect the
administrative charges, if any, paid or payable by the Corporation on any
investment acquired and held by the Corporation to pay benefits under this plan.
The participant shall elect the investment alternative in which his deferred
compensation account shall be deemed invested. Such election shall be made in
the
-8-
<PAGE>
manner prescribed by the Committee and shall take effect upon the entry of the
participant into the plan. The investment election of the participant shall
remain in effect until a new election is made by the participant. In the event
the participant fails for any reason to make an effective election of the
investment return to be credited to his account, the investment return shall be
determined by the Committee.
5.3 Adjustments to deferred compensation accounts: With respect to
each participant who has a deferred compensation account under the plan, the
amount credited to such account as of each adjustment date shall be adjusted as
of each succeeding adjustment date by the following debits and credits, in the
order stated:
5.3.1 The deferred compensation account shall be debited with the
total amount of any payments made from such account since the last
preceding adjustment date to him or for his benefit.
5.3.2 The deferred compensation account shall be credited with the
total amount of any salary reduction credits to such account since the last
preceding adjustment date.
5.3.3 The deferred compensation account shall be credited or debited
with the amount of deemed investment gain or loss resulting from the
performance of the investment funds elected by the participant in
accordance with Section 5.2. The amount of such deemed investment gain or
loss shall be determined by the Committee and such determination shall be
final and conclusive upon all concerned.
SECTION 6. ADMINISTRATION BY COMMITTEE:
--------- ---------------------------
6.1 The Committee shall consist of not fewer than three nor more
than five individuals who shall be appointed by the Board to serve at the
pleasure of the Board. Any member of the Committee may resign, and his
successor, if any, shall be appointed by the Board. The Committee shall be
responsible for the general administration and interpretation of the plan and
for carrying out its provisions, except to the extent all or any of such
obligations are specifically imposed on the Board.
6.2 The members of the Committee shall elect a Chairman and may
elect an acting Chairman. They shall also elect a Secretary and may elect an
acting Secretary, either of whom may be
-9-
<PAGE>
but need not be a member of the Committee. The Committee may appoint from its
membership such subcommittees with such powers as the Committee shall determine,
and may authorize one or more of its members or any agent to execute or deliver
any instruments or to make any payment in behalf of the Committee. The Committee
shall appoint the plan administrator.
6.3 The Committee shall hold such meetings upon such notice, at such
places and at such intervals as it may from time to time determine. Notice of
meetings shall not be required if notice is waived in writing by all the members
of the Committee at the time in office, or if all such members are present at
the meeting.
6.4 A majority of the members of the Committee at the time in office
shall constitute a quorum for the transaction of business. All resolutions or
other actions taken by the Committee at any meeting shall be by vote of a
majority of those present at any such meeting and entitled to vote. Resolutions
may be adopted or other action taken without a meeting upon written consent
thereto signed by all of the members of the Committee.
6.5 The Committee shall maintain full and complete records of its
deliberations and decisions. The minutes of its proceedings shall be conclusive
proof of the facts of the operation of the plan. The records of the Committee
shall contain all relevant data pertaining to individual participants and their
rights under the plan.
6.6 Subject to the limitations of the plan, the Committee may from
time to time establish rules or by-laws for the administration of the plan and
the transaction of its business.
6.7 No individual member of the Committee shall have any right to
vote or decide upon any matter relating solely to himself or to any of his
rights or benefits under the plan (except that such member may sign unanimous
written consent to resolutions adopted or other action taken without a meeting).
-10-
<PAGE>
6.8 The Committee may correct errors and, so far as practicable, may
adjust any benefit or credit or payment accordingly. The Committee may in its
discretion waive any notice requirements in the plan; provided, that a waiver of
notice in one or more cases shall not be deemed to constitute a waiver of notice
in any other case. With respect to any power or authority which the Committee
has discretion to exercise under the plan, such discretion shall be exercised in
a nondiscriminatory manner.
6.9 Subject to the claims procedure set forth in Section 13, the
Committee shall have the duty and authority to interpret and construe the
provisions of the plan and to decide any dispute which may arise regarding the
rights of participants hereunder, which determinations shall be binding and
conclusive upon all interested persons.
6.10 The Committee may engage an attorney, accountant or any other
technical advisor on matters regarding the operation of the plan and to perform
such other duties as shall be required in connection therewith, and may employ
such clerical and related personnel as the Committee shall deem requisite or
desirable in carrying out the provisions of the plan. The Committee shall from
time to time, but no less frequently than annually, review the financial
condition of the plan and determine the financial and liquidity needs of the
plan. The Committee shall communicate such needs to the Corporation so that its
policies may be appropriately coordinated to meet such needs.
6.11 No fee or compensation shall be paid to any member of the
Committee for his service as such.
6.12 The Committee shall be entitled to reimbursement by the
Corporation for its reasonable expenses properly and actually incurred in the
performance of its duties in the administration of the plan.
6.13 No member of the Committee shall be personally liable by reason
of any contract or other instrument executed by him or on his behalf as a member
of the Committee nor for any
-11-
<PAGE>
mistake of judgment made in good faith, and the Corporation shall indemnify and
hold harmless, directly from its own assets (including the proceeds of any
insurance policy the premiums for which are paid from the Corporation's own
assets), each member of the Committee and each other officer, employee, or
director of the Corporation to whom any duty or power relating to the
administration or interpretation of the plan may be delegated or allocated,
against any unreimbursed or uninsured cost or expense (including any sum paid in
settlement of a claim with the prior written approval of the Board) arising out
of any act or omission to act in connection with the plan unless arising out of
such person's own fraud, bad faith, willful misconduct or gross negligence.
SECTION 7. NO FUNDING:
--------- ----------
The obligation of the Corporation to make payments hereunder shall
constitute a liability of the Corporation to the participant. Such payments
shall be made from the general funds of the Corporation, and the Corporation
shall not be required to establish or maintain any special or separate fund, or
otherwise to segregate assets to assure that such payments shall be made, and
the participant shall not have any interest in any particular assets of the
Corporation by reason of its obligations hereunder. Nothing contained in this
plan shall create or be construed as creating a trust of any kind or any other
fiduciary relationship between the Corporation and the participant or any other
person. To the extent that any person acquires a right to receive payment from
the Corporation, such right shall be no greater than the right of an unsecured
creditor of the Corporation. Notwithstanding the foregoing, the Employer may
establish a grantor trust in substantially the form provided for by IRS Revenue
Procedure 92-62 with one or more participants in the plan with respect to the
payment of such participants' benefit under the plan.
SECTION 8. ALLOCATION OF RESPONSIBILITIES:
--------- ------------------------------
The persons responsible for the plan and the duties and
responsibilities allocated to each are as follows:
-12-
<PAGE>
8.1. Board:
(i) To amend the plan;
(ii) To appoint and remove members of the Committee; and
(iii) To terminate the plan.
8.2 Committee:
(i) To interpret the provisions of the plan and to determine
the rights of the participants under the plan, except to the extent
otherwise provided in Section 13 relating to claims procedure;
(ii) To administer the plan in accordance with its terms,
except to the extent powers to administer the plan are specifically
delegated to another person or persons as provided in the plan;
(iii) To account for the accrued benefits of participants; and
(iv) To direct the Corporation in the distribution of benefits.
8.3 Plan Administrator:
(i) To file such reports as may be required with the United
States Department of Labor, the Internal Revenue Service and any other
government agencies to which reports may be required to be submitted
from time to time;
(ii) To provide for disclosure of plan provisions and other
information relating to the plan to participants and other interested
parties; and
(iii) To administer the claims procedure to the extent provided
in Section 13.
SECTION 9. BENEFITS NOT ASSIGNABLE; FACILITY OF PAYMENTS:
--------- ---------------------------------------------
9.1 No portion of any benefit held or paid under the plan with
respect to any participant shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any
attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or
charge the same shall be void, nor shall any portion of such benefit be in any
manner payable to any assignee, receiver or any one trustee, or be liable for
his debts, contracts, liabilities, engagements or torts, or be subject to any
legal process to levy upon or attach.
-13-
<PAGE>
9.2 If any individual entitled to receive a payment under the plan
shall be physically, mentally or legally incapable of receiving or acknowledging
receipt of such payment, the Committee, upon the receipt of satisfactory
evidence of his incapacity and satisfactory evidence that another person or
institution is maintaining him and that no guardian or committee has been
appointed for him, may cause any payment otherwise payable to him to be made to
such person or institution so maintaining him. Payment to such person or
institution shall be in full satisfaction of all claims by or through the
participant to the extent of the amount thereof.
SECTION 10. BENEFICIARY:
---------- -----------
The participant's beneficiary shall be his surviving spouse, if any;
provided, that if he leaves no surviving spouse, or if he files a written
election with the Committee, the participant's beneficiary (which may include
more than one person, natural or otherwise, and one or more secondary or
contingent beneficiaries) shall be the beneficiary designated in the beneficiary
designation form provided by the Committee. The election of a beneficiary may
be revoked at any time by a writing of the participant, in which event the
surviving spouse, if any, shall be the beneficiary. Any other change in
beneficiary shall be made only by the filing of a revised written election. If
the participant's beneficiary dies prior to asserting a written claim for any
death benefit payable under the plan, or if such participant fails to designate
a beneficiary then and in any of such events, such benefit shall be payable to
his estate. If a beneficiary is receiving or is entitled to receive payments
under the plan and dies before receiving all of the payments due him, the
balance to which he is entitled shall be paid to the contingent beneficiary, if
any, named pursuant to an election. If there is no contingent beneficiary, the
balance shall be paid to the estate of the beneficiary as of the adjustment date
coincident with or next following the date of his death. Any beneficiary may
disclaim all or any part of any benefit to which such beneficiary shall be
entitled hereunder by filing a written disclaimer with the Committee at least
ten days before payment of such benefit is to be made. Such a disclaimer shall
be made in form satisfactory to the
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<PAGE>
Committee and shall be irrevocable when filed. Any benefit disclaimed shall be
payable from the plan in the same manner as if the beneficiary who filed the
disclaimer had died on the date of such filing.
SECTION 11. AMENDMENT AND TERMINATION OF PLAN:
---------- ---------------------------------
The Board may amend any provision of the plan, including the
provisions of Section 3.9, or may terminate the plan at any time; provided, that
in no event shall such amendment or termination reduce any participant's accrued
benefit as of the date of such amendment or termination, nor shall any such
amendment affect the terms of the plan relating to the payment of such accrued
benefit (other than the provisions of Section 3.9) without the participant's
written consent.
SECTION 12. COMMUNICATION TO PARTICIPANTS:
---------- -----------------------------
The Corporation shall make a copy of the plan available for inspection
by participants and their beneficiaries during reasonable hours, at the
principal office of the Corporation.
SECTION 13. CLAIMS PROCEDURE:
---------- ----------------
The following claims procedure shall apply with respect to the plan:
13.1 Filing of a claim for benefits: If a participant or beneficiary
(the "claimant") believes that he is entitled to benefits under the plan which
are not being paid to him or which are not being accrued for his benefit, he
shall file a written claim therefor with the plan administrator. In the event
the plan administrator shall be the claimant, all actions which are required to
be taken by the plan administrator pursuant to this Section 13 shall be taken
instead by another member of the Committee designated by the Committee.
13.2 Notification to claimant of decision: Within 90 days after
receipt of a claim by the plan administrator (or within 180 days if special
circumstances require an extension of time), the plan administrator shall notify
the claimant of his decision with regard to the claim. In the event of such
special circumstances requiring an extension of time, there shall be furnished
to the claimant prior to expiration of the initial 90-day period written notice
of the extension, which notice shall set forth the
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<PAGE>
special circumstances and the date by which the decision shall be furnished. If
such claim shall be wholly or partially denied, notice thereof shall be in
writing and worded in a manner calculated to be understood by the claimant, and
shall set forth: (i) the specific reason or reasons for the denial; (ii)
specific reference to pertinent provisions of the plan on which the denial is
based; (iii) a description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why such material or
information :is necessary; and (iv) an explanation of the procedure for review
of the denial. If the plan administrator fails to notify the claimant of the
decision in timely manner, the claim shall be deemed denied as of the close of
the initial 90-day period (or the close of the extension period, if applicable).
13.3 Procedure for review: Within 60 days following receipt by the
claimant of notice denying his claim, in whole or in part, or, if such notice
shall not be given, within 60 days following the latest date on which such
notice could have been timely given, the claimant shall appeal denial of the
claim by filing a written application for review with the Committee. Following
such request for review, the Committee shall fully and fairly review the
decision denying the claim. Prior to the decision of the Committee, the claimant
shall be given an opportunity to review pertinent documents and to submit issues
and comments in writing.
13.4 Decision on review: The decision on review of a claim denied
in whole or in part by the plan administrator shall be made in the following
manner:
13.4.1 Within 60 days following receipt by the Committee of the
request for review (or within 120 days if special circumstances require an
extension of time), the Committee shall notify the claimant in writing of
its decision with regard to the claim. In the event of such special
circumstances requiring an extension of time, written notice of the
extension shall be furnished to the claimant prior to the commencement of
the extension. If the decision on review is not furnished in a timely
manner, the claim shall be deemed denied as of the close of the initial 60-
day period (or the close of the extension period, if applicable).
13.4.2 With respect to a claim that is denied in whole or in part,
the decision on review shall set forth specific reasons for the decision,
shall be written in a manner
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<PAGE>
calculated to be understood by the claimant, and shall cite specific
references to the pertinent plan provisions on which the decision is based.
13.4.3 The decision of the Committee shall be final and conclusive.
13.5 Action by authorized representative of claimant: All actions
set forth in this Section 13 to be taken by the claimant may likewise be taken
by a representative of the claimant duly authorized by him to act in his behalf
on such matters. The plan administrator and the Committee may require such
evidence as either may reasonably deem necessary or advisable of the authority
to act of any such representative.
SECTION 14. MISCELLANEOUS PROVISIONS:
---------- ------------------------
14.1 Notices: Each participant who is not in service and each
beneficiary shall be responsible for furnishing the plan administrator with his
current address for the mailing of notices, reports, and benefit payments. Any
notice required or permitted to be given to such participant or beneficiary
shall be deemed given if directed to such address and mailed by regular United
States mail, first class, postage prepaid. If any check mailed to such address
is returned as undeliverable to the addressee, mailing of checks will be
suspended until the participant or beneficiary furnishes the proper address.
This provision shall not be construed as requiring the mailing of any notice or
notification otherwise permitted to be given by posting or by other publication.
14.2 Lost distributees: A benefit shall be deemed forfeited if the
Committee is unable to locate the participant or beneficiary to whom payment is
due on or before the fifth anniversary of the date payment is to be made or
commence; provided, that the participant's account shall cease to be adjusted
pursuant to Section 5 following the first anniversary of such date; provided
further, however, that such benefit shall be reinstated if a valid claim is made
by or on behalf of the participant or beneficiary for all or part of the
forfeited benefit.
14.3 Reliance on data: The Corporation, the Committee and the plan
administrator
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<PAGE>
shall have the right to rely on any data provided by the participant or by any
beneficiary. Representations of such data shall be binding upon any party
seeking to claim a benefit through a participant, and the Corporation, the
Committee and the plan administrator shall have no obligation to inquire into
the accuracy of any representation made at any time by a participant or
beneficiary.
14.4 Receipt and release for payments: Any payment made from the plan
to or with respect to any participant or beneficiary, or pursuant to a
disclaimer by a beneficiary, shall, to the extent thereof, be in full
satisfaction of all claims hereunder against the plan and the Corporation with
respect to the plan. The recipient of any payment from the plan may be required
by the Committee, as a condition precedent to such payment, to execute a receipt
and release with respect thereto in such form as shall be acceptable to the
Committee.
14.5 Headings: The headings and subheadings of the plan have been
inserted for convenience of reference and are to be ignored in any construction
of the provisions hereof.
14.6 Continuation of service: The establishment of the plan shall not
be construed as conferring any legal or other rights upon any participant or any
persons for continuation of service as a director, nor shall it interfere with
the right of the Corporation to discharge any person from service as a director
or to deal with him without regard to the effect thereof under the plan.
14.7 Merger or consolidation The Corporation shall not consolidate or
merge into or with another corporation or entity, or transfer all or
substantially all of its assets to another corporation, partnership, trust or
other entity (a "Successor Entity") unless such Successor Entity shall assume
the rights, obligations and liabilities of the Corporation under the plan, and
upon such assumption, the Successor Entity shall become obligated to carry out
the terms and conditions of the plan.
14.8 Construction: The provisions of the plan shall be construed and
enforced according to the laws of the State of North Carolina.
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<PAGE>
IN WITNESS WHEREOF, this directors' deferred compensation plan is
executed in behalf of the Corporation on the 30th day of June, 1998.
---- ----
CITIZENS SAVINGS BANK
By:/s/ Ronald E. Bostian
-----------------------------
President
Attest:
Secretary
[Corporate Seal]
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<PAGE>
Merrill Lynch Non-Qualified Deferred
Compensation Plan Trust Agreement
TRUST UNDER:
Citizens Savings Bank of Salisbury Directors' Plan
- --------------------------------------------------------------------------------
DEFERRED COMPENSATION PLAN
This Agreement made this 27th day of May, 1998 by and between Citizens
Savings Bank (Company) and Merrill Lynch Trust Company of North Carolina, a
North Carolina corporation (Trustee);
WHEREAS, Company has adopted the non-qualified deferred compensation
Plan(s) identified above and such other plan(s) as are listed in Appendix A.
WHEREAS, Company has incurred or expects to incur liability under the terms
of such Plan(s) with respect to the individuals participating in such Plan(s).
WHEREAS, Company wishes to establish a trust (the "Trust") and to
contribute to the Trust assets that shall be held therein, subject to the claims
of the Company's creditors in the event of the Company's Insolvency, as herein
defined, until paid to Plan participants and their beneficiaries in such manner
and at such times as specified in the Plan(s);
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Plan(s) as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purpose of Title I of the Employee Retirement Income Security Act of 1974.
WHEREAS, it is the intention of Company to make contributions to the Trust
to provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan(s);
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust
(a) Company hereby deposits with Trustee in trust such cash and/or
marketable securities, if any, listed in Appendix B, which shall become the
principal of the Trust to be held, administered and disposed of by Trustee as
provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, Part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon, shall be held
separate and apart from other funds of Company and shall be used exclusively for
the uses and purposes of Plan participants and general creditors as herein set
forth. Plan participants and their beneficiaries shall have no preferred claim
on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan(s) and this Trust Agreement shall be mere
unsecured contractual rights of Plan participants and their beneficiaries
against Company. Any assets held by the Trust will be subject to the claims of
Company's general creditors under federal and state law in the event of
Insolvency, as defined in Section 3(a) herein.
<PAGE>
(e) Company, in its sole discretion, may at any time, or from time to
time, make additional deposits of cash or other property in trust with Trustee
to augment the principal to be held, administered and disposed of by Trustee as
provided in this Trust Agreement. Neither Trustee nor any Plan participant or
beneficiary shall have any right to compel such additional deposits.
(f) Trustee shall not be obligated to receive such cash and/or property
unless prior thereto Trustee has agreed that such cash and/or property is
acceptable to Trustee and Trustee has received such reconciliation, allocation,
investment or other information concerning, or representation with respect to,
the cash and/or property as Trustee may require. Trustee shall have no duty or
authority to (a) require any deposits to be made under the Plan or to Trustee,
(b) compute any amount to be deposited under the Plan to Trustee, or (c)
determine whether amounts received by Trustee comply with the Plan. Assets of
the Trust may, in Trustee's discretion, be held in an account with an affiliate
of Trustee.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) With respect to each Plan participant, Company shall deliver to
Trustee a schedule (the "Payment Schedule") that indicates the amounts payable
in respect of the participant (and his or her beneficiaries), that provides a
formula or other instructions acceptable to Trustee for determining the amounts
so payable, the form in which such amount is to be paid (as provided for or
available under the Plan(s)), and the time of commencement for payment of such
amounts. The Payment Schedule shall be delivered to Trustee not more than (30)
business days nor fewer than (15) business days prior to the first date on which
a payment is to be made to the Plan participant. Any change to a Payment
Schedule shall be delivered to Trustee not more than (30) days nor fewer than
(15) days prior to the date on which the first payment is to be made in
accordance with the changed Payment Schedule. Except as otherwise provided
herein, Trustee shall make payments to Plan participants and their beneficiaries
in accordance with such Payment Schedule. The Trustee shall make provisions for
the reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and paid
by Company, it being understood among the parties hereto that (1) Company shall
on a timely basis provide Trustee specific information as to the amount of taxes
to be withheld and (2) Company shall be obligated to receive such withheld taxes
from Trustee and properly pay and report such amounts to the appropriate taxing
authorities.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan(s) shall be determined by Company or such party as it
shall designate under the Plan(s), and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan(s).
(c) Company may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan(s). Company
shall notify Trustee of its decision to make payment of benefits directly prior
to the time amounts are payable to participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan(s), Company shall make the balance of each payment as it falls due.
Trustee shall notify Company where principal and earnings are not sufficient.
(d) Trustee shall have no responsibility to determine whether the Trust is
sufficient to meet the liabilities under the Plan(s), and shall not be liable
for payments or Plan(s) liabilities in excess of the value of the Trust's
assets.
Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary
When Company Is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is
<PAGE>
Insolvent. Company shall be considered "Insolvent" for purposes of this Trust
Agreement if (i) Company is unable to pay its debts as they become due, or (ii)
Company is subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of Company under federal and state law as set forth
below.
(1) The Board of Directors and the Chief Executive Officer of Company (or,
if there is no Chief Executive Officer, the highest ranking officer) shall have
the duty to inform Trustee in writing of Company's Insolvency. If a person
claiming to be a creditor of Company alleges in writing to Trustee that Company
has become Insolvent, Trustee shall determine whether Company is Insolvent and,
pending such determination, Trustee shall discontinue payment of benefits to
Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or has
received notice from Company or a person claiming to be a creditor alleging that
Company is Insolvent, Trustee shall have no duty to inquire whether Company is
Insolvent. Trustee may in all events rely on such evidence concerning Company's
solvency as may be furnished to Trustee and that provides Trustee with a
reasonable basis for making a determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is Insolvent,
Trustee shall discontinue payments to Plan participants or their beneficiaries
and shall hold the assets of the Trust for the benefit of Company's general
creditors. Nothing in this Trust Agreement shall in any way diminish any rights
of Plan participants or their beneficiaries to pursue their rights as general
creditors of Company with respect to benefits due under the Plan(s) or
otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants or
their beneficiaries in accordance with Section 2 of this Trust Agreement only
after Trustee has determined that Company is not Insolvent (or is no longer
Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan(s) for the
period of such discontinuance, less the aggregate amount of any payments made to
Plan participants provided for hereunder during any such period of
discontinuance; provided that Company has given Trustee information with respect
to such payments made during the period of discontinuance prior to resumption of
payments by the Trustee.
Section 4. Payments to Company.
Except as provided in Section 3 hereof, since the Trust is irrevocable, in
accordance with Section 1(b) hereof, Company shall have no right or power to
direct Trustee to return to Company or to divert to others any of the Trust
assets before all payment of benefits have been made to Plan participants and
their beneficiaries pursuant to the terms of the Plan(s).
Section 5. Investment Authority.
(a) Trustee may invest in securities (including stock or rights to acquire
stock) or obligations issued by Company. All rights associated with assets of
the Trust shall be exercised by Trustee or the person designated by Trustee, and
shall in no event be exercised by or rest with Plan participants, except that
voting rights with respect to
<PAGE>
Trust assets will be exercised by Company, unless an investment adviser has been
appointed pursuant to Section 5(c) and voting authority has been delegated to
such investment adviser.
(b) Company shall have the right at anytime, and from time to time in its
sole discretion, to substitute assets of equal fair market value for any asset
held by the Trust. This right is exercised by Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary capacity.
(c) Trustee may appoint one or more investment advisers who are registered
as investment advisers under the Investment Advisers Act of 1940, who may be
affiliates of Trustee, to provide investment advice on a discretionary or non-
discretionary basis with respect to all or a specified portion of the assets of
the Trust.
(d) Trustee, or the Trustee's designee, is authorized and empowered:
(1) To invest and reinvest Trust assets, together with the income
therefrom, in common stock, preferred stock, convertible preferred stock, bonds,
debentures, convertible debentures and bonds, mortgages, notes, commercial paper
and other evidences of indebtedness (including those issued by the Trustee),
shares of mutual funds (which funds may be sponsored, managed or offered by an
affiliate of the Trustee), guaranteed investment contracts, bank investment
contracts, other securities, policies of life insurance, annuity contracts,
options, options to buy or sell securities or other assets, and all other
property of any type (personal, real or mixed, and tangible or intangible);
(2) To deposit or invest all or any part of the assets of the Trust
in savings accounts or certificates of deposit or other deposits in a bank or
saving and loan association or other depository institution, including the
Trustee or any of its affiliates, provided with respect to such deposits with
Trustee or an affiliate the deposits bear a reasonable interest rate;
(3) To hold, manage, improve, repair and control all property, real
or personal, forming part of the Trust; to sell, convey, transfer, exchange,
partition, lease for any term, even extending beyond the duration of this Trust,
and otherwise dispose of the same from time to time;
(4) To hold in cash, without liability for interest, such portion of
the Trust as is pending investments, or payment of expenses, or the distribution
of benefits;
(5) To take such actions as may be necessary or desirable to protect
the Trust from loss due to the default on mortgages held in the Trust including
the appointment of agents or trustees in such other jurisdictions as may seem
desirable, to transfer property to such agents or trustees, to grant to such
agents such powers as are necessary or desirable to protect the Trust, to direct
such agent or trustee, or to delegate such power to direct, and to remove such
agent or trustee;
<PAGE>
(6) To settle, compromise or abandon all claims and demands in favor
of or against the Trust;
(7) To exercise all of the further rights, powers, options and
privileges granted, provided for, or vested in trustees generally under the laws
of the state in which the Trustee is incorporated as set forth above, so that
the powers conferred upon the Trustee herein shall not be in limitation of any
authority conferred by law, but shall be in addition thereto;
(8) To borrow money from any source and to execute promissory notes,
mortgages or other obligations and to pledge or mortgage any trust assets as
security; and
(9) To maintain accounts at, execute transactions through, and lend
on an adequately secured basis stocks, bonds or other securities to, any
brokerage or other firm, including any firm which is an affiliate of Trustee.
Section 6. Additional Powers of Trustee.
To the extent necessary or which it deems appropriate to implement its
powers under Section 5 or otherwise to fulfill any of its duties and
responsibilities as Trustee of the Trust, the Trustee shall have the following
additional powers and authority:
(a) to register securities, or any other property, in its name or in the
name of any nominee, including the name of any affiliate or the nominee name
designated by any affiliate, with or without indication of the capacity in which
property shall be held, or to hold securities in bearer form and to deposit any
securities or other property in an depository or clearing corporation;
(b) to designate and engage the services of, and to delegate powers and
responsibilities to, such agents, representatives, advisers, counsel and
accountants as the Trustee considers necessary or appropriate, any of whom may
be an affiliate of the Trustee or a person who renders services to such an
affiliate, and, as a part of its expenses under this Trust Agreement, to pay
their reasonable expenses and compensation;
(c) to make, execute and deliver, as Trustee, any and all deeds, leases,
mortgages, conveyances, waivers, releases or other instruments in writing
necessary or appropriate for the accomplishment of any of the powers listed in
this Trust Agreement; and
(d) generally to do all other acts which Trustee deems necessary or
appropriate for the protection of the Trust.
Section 7. Disposition of Income.
(a) During the term of this Trust, all income received by the Trust, net
of expenses and taxes, shall be accumulated and reinvested.
Section 8. Accounting by Trustee.
(a) Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within 90 days following the close of each calendar year
and within 90 days after removal
<PAGE>
or resignation of Trustee, Trustee shall deliver to Company a written account of
its administration of the Trust during such year or during the period from the
close of the last preceding year to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other transactions
effected by it, including a description of all securities and investments
purchased and sold with the cost or net proceeds of such purchases or sales
(accrued interest paid or receivable being shown separately), and showing all
cash, securities and other property held in the Trust at the end of such year or
as of the date of such removal or resignation, as the case may be. Trustee may
satisfy its obligation under this Section 8 by rendering to Company monthly
statements setting forth the information required by this Section separately for
the month covered by the statement.
Section 9. Responsibility and Indemnity of Trustee.
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims, provided, however, that Trustee shall incur
no liability to any person for any action taken pursuant to a direction, request
or approval given by Company which is contemplated by, and in conformity with,
the terms of the Plan(s) and this Trust and is given in writing by Company.
Trustee shall also incur no liability to any person for any failure to act in
the absence of direction, request or approval from the Company which is
contemplated by, and in conformity with, the terms of this Trust. In the event
of a dispute between Company and a party, Trustee may apply to a court of
competent jurisdiction to resolve the dispute.
(b) Company hereby indemnifies Trustee and each of its affiliates
(collectively, the "Indemnified Parties") against, and shall hold them harmless
from, any and all loss, claims, liability, and expense, including reasonable
attorneys' fees, imposed upon or incurred by any Indemnified Party as a result
of any acts taken, or any failure to act, in accordance with the directions from
the Company or any designee of the Company, or by reason of the Indemnified
Party's good faith execution of its duties with respect to the Trust, including,
but not limited to, its holding of assets of the Trust, the Company's
obligations in the foregoing regard to be satisfied promptly by the Company,
provided that in the event the loss, claim, liability or expense involved is
determined by a no longer appealable final judgment entered in a lawsuit or
proceeding to have resulted from the gross negligence or willful misconduct of
the Trustee, Trustee shall promptly on request thereafter return to the Company
any amount previously received by the Trustee under this Section with respect to
such loss, claim, liability or expense. If Company does not pay such costs,
expenses and liabilities in a reasonably timely manner, Trustee may obtain
payment from the Trust without direction from Company.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisers,
financial consultants or other professionals to assist it in performing any of
its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on Trustee
by applicable law, unless expressly provided otherwise herein, provided,
however, that if an insurance policy is held as an asset of the Trust, Trustee
shall have no power to name a beneficiary of the policy other than the Trust, to
assign the policy (as distinct from conversion of the policy to a different
form) other than to a successor Trustee, or to loan to any person the proceeds
of any borrowing against such policy.
<PAGE>
(f) However, notwithstanding the provisions of Section 9(e) above, Trustee
may loan to Company the proceeds of any borrowing against an insurance policy
held as an asset of the Trust.
(g) Notwithstanding any powers to Trustee pursuant to this Trust Agreement
or to applicable law, Trustee shall not have any power that could give this
Trust the objective of carrying on a business and dividing the gains therefrom,
within the meaning of Section 301.7701-2 of the Procedure and Administrative
Regulations promulgated pursuant to the Internal Revenue Code.
Section 10. Compensation and Expenses of Trustee.
Trustee is authorized, unless otherwise agreed by Trustee, to withdraw from
the Trust without direction from Company the amount of its fees in accordance
with the fee schedule agreed to by the Company and Trustee. Company shall pay
all administrative expenses, but if not so paid, the expenses shall be paid from
the Trust.
Section 11. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective 30 days after receipt of such notice unless Company and
Trustee agree otherwise.
(b) Trustee may be removed by Company on 30 days notice or upon shorter
notice accepted by Trustee.
(c) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within 60 days after receipt of notice of
resignation, removal or transfer, unless Company extends the time limit,
provided that Trustee is provided assurance by Company satisfactory to Trustee
that all fees and expenses reasonably anticipated will be paid.
(d) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 12 hereof, by the effective date of resignation or
removal under paragraph(s) (a) or (b) of this section. If no such appointment
has been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
(e) Upon settlement of the account and transfer of the Trust assets to the
successor Trustee, all rights and privileges under this Trust Agreement shall
vest in the successor Trustee and all responsibility and liability of Trustee
with respect to the Trust and assets thereof shall terminate subject only to the
requirement that Trustee execute all necessary documents to transfer the Trust
assets to the successor Trustee.
<PAGE>
Section 12. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 11(a) or
(b) hereof, Company may appoint any third party, such as a bank trust department
or other party that may be granted corporate trustee powers under state law, as
a successor to replace Trustee upon resignation or removal. The appointment
shall be effective when accepted in writing by the new Trustee, who shall have
all of the rights and powers of the former Trustee, including ownership rights
in the Trust assets. The former Trustee shall execute any instrument necessary
or reasonably requested by Company or the successor Trustee to evidence the
transfer.
(b) The successor Trustee need not examine the records and act of any prior
Trustee and may retain or dispose of existing Trust assets, subject to Sections
7 and 8 hereof. The successor Trustee shall not be responsible for and Company
shall indemnify and defend the successor Trustee from any claim or liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes successor Trustee.
Section 13. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan(s) or shall make the Trust revocable, since
the Trust is irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan participants
and their beneficiaries are no longer entitled to benefits pursuant to the terms
of the Plan(s). Upon termination of the Trust any assets remaining in the Trust
shall be returned to Company.
(c) Upon written approval to participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan(s), Company may terminate
this Trust prior to the time all benefit payments under the Plan(s) have been
made. All assets in the Trust at termination shall be returned to Company.
Section 14. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
<PAGE>
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of the state in which Trustee is incorporated as set forth above.
(d) The provisions of Sections 2(d), 3(b)(3), 9(b) and 15 of this
Agreement shall survive termination of this Agreement.
(e) The rights, duties, responsibilities, obligations and liabilities of
the Trustee are as set forth in this Trust Agreement, and no provision of the
Plan(s) or any other documents shall affect such rights, responsibilities,
obligations and liabilities. If there is a conflict between provisions of the
Plan(s) and this Trust Agreement with respect to any subject involving the
Trustee, including but not limited to the responsibility, authority or powers of
the Trustee, the provisions of this Trust Agreement shall be controlling.
(f) For purposes of this Trust, Change of Control shall mean: The purchase
or other acquisition by any person, entity or group of persons, within the
meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934
("Act"), or any comparable successor provisions, of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of
either the outstanding shares of common stock or the combined voting power of
Company's then outstanding voting securities entitled to vote generally, or the
approval by the stockholders of Company of a reorganization, merger, or
consolidation, in each case, with respect to which persons who were stockholders
of Company immediately prior to such reorganization, merger or consolidation do
not immediately thereafter, own more than 50 percent of the combined voting
power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated Company's then outstanding securities, or a
liquidation or dissolution of Company or of the sale of all or substantially all
of Company's assets.
Section 15. Arbitration.
SYMBOL 176 \f "Symbol" Arbitration is final and binding on the parties.
SYMBOL 176 \f "Symbol" The parties waiving their right to seek remedies
in court, including the right to jury trial.
SYMBOL 176 \f "Symbol" Pre-arbitration discovery is generally more
limited than and different from court proceedings.
SYMBOL 176 \f "Symbol" The arbitrators' award is not required to include
factual findings or legal reasoning and any party's right to appeal or seek
modification of rulings by the arbitrators is strictly limited.
SYMBOL 176 \f "Symbol" The panel of arbitrators will typically include a
minority of arbitrators who were or are affiliated with the securities
industry.
Company agrees that all controversies which may arise between the Company and
either or both the Trustee and its affiliate Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("MLPF&S") in connection with the Trust, including, but not
limited to, those involving any transactions, or the construction, performance,
or breach of this or any other agreement between Company and either or both the
Trustee and MLPF&S, whether entered into prior, on, or subsequent to the date
hereof, shall be determined by arbitration. Any arbitration under this
Agreement shall be conducted only before the New York Stock Exchange, Inc., the
American Stock Exchange, Inc., or arbitration facility provided by any other
exchange of which MLPF&S is a member, the National Association of Securities
Dealers, Inc., or the Municipal Securities Rulemaking Board, and in accordance
with its arbitration rules then in force. Company may elect in the first
instance whether arbitration shall be conducted before the New York Stock
Exchange, Inc., the American Stock Exchange, Inc., other exchange of which
MLPF&S is a member, the National Association of Securities Dealers, Inc., or the
Municipal Securities Rulemaking Board, but if the Company
<PAGE>
fails to make such election, by registered letter or telegram addressed to
Merrill Lynch Trust Company, Employee Benefit Trust Operations, P.O. Box 30532,
New Brunswick, New Jersey 08989-0532, before the expiration of five days after
receipt of a written request from MLPF&S and/or the Trustee to make such
election then MLPF&S and/or the Trustee may make such election. Judgment upon
the award of arbitrators may be entered in any court, state or federal, having
jurisdiction. No person shall bring a putative or certified class action to
arbitration, nor seek to enforce any pre-dispute arbitration agreement against
any person who has initiated in court a putative class action; who is a member
of putative class who has not opted out of the class with respect to any claims
encompassed by the putative class action until:
(i) the class certification is denied;
(ii) the class is decertified; or
(iii) the customer is excluded from the class by the court. Such forbearance
to enforce an agreement to arbitrate shall not constitute a waiver of any rights
under this agreement except to the extent stated herein.
Section 16. Effective Date.
The effective date of this Trust Agreement shall be July 1, 1998.
IN WITNESS WHEREOF, the Company and the Trustee have executed this Trust
Agreement each by action of a duly authorized person.
By signing this Agreement, the undersigned Company acknowledges (1) that,
in accordance with Section 15 of this Agreement, the Company is agreeing in
advance to arbitrate any controversies which may arise with either or both the
Trustee or MLPF&S and (2) receipt of a copy of this Agreement.
-----------------------------------
(Company)
By: /s/ Ronald E. Bostian
-------------------------------
(Signature)
Name/Title: Ronald E. Bostian
-----------------------
-----------------------------------
-----------------------------------
(Trustee)
By: /s/ Melanie Madeira
-------------------------------
(Signature)
Name/Title: Melanie Madeira
-----------------------
New Account Trust Officer
-----------------------------------
<PAGE>
Appendix A
Name of Non-Qualified Deferred Compensation Plan(s):
________________________________________________ Plan
________________________________________________ Plan
<PAGE>
Appendix B
Deposit of cash and/or marketable securities to the Trust:
Cash: $________________________________
Marketable Securities:_________________
____________________________
____________________________
____________________________
____________________________
<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 the Registration Statement (Form S-1) and the related
Prospectus of Innes Street Financial Corporation for the registration of shares
of its common stock.
Ernst & Young LLP
Winston-Salem, North Carolina
September 14, 1998
<PAGE>
[FERGUSON & COMPANY LETTERHEAD APPEARS HERE]
September 11, 1998
Board of Directors
Citizens Savings, 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/ Charles M. Hebert
Charles M. Hebert
Principal
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-START> OCT-01-1997 OCT-01-1996
<PERIOD-END> JUN-30-1998 SEP-30-1997
<CASH> 1,621 1,888
<INT-BEARING-DEPOSITS> 6,129 10,131
<FED-FUNDS-SOLD> 8,831 10,133
<TRADING-ASSETS> 1,211 0
<INVESTMENTS-HELD-FOR-SALE> 7,830 10,335
<INVESTMENTS-CARRYING> 1,871 2,328
<INVESTMENTS-MARKET> 1,918 2,375
<LOANS> 160,934 160,681
<ALLOWANCE> 1,224 1,223
<TOTAL-ASSETS> 192,716 199,616
<DEPOSITS> 159,819 160,493
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 4,285 2,494
<LONG-TERM> 13,000 22,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 15,612 14,629
<TOTAL-LIABILITIES-AND-EQUITY> 192,716 199,616
<INTEREST-LOAN> 9,007 11,928
<INTEREST-INVEST> 544 909
<INTEREST-OTHER> 904 1,065
<INTEREST-TOTAL> 10,455 13,902
<INTEREST-DEPOSIT> 6,084 8,099
<INTEREST-EXPENSE> 6,962 9,872
<INTEREST-INCOME-NET> 3,493 4,030
<LOAN-LOSSES> 0 0
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 2,238 2,958
<INCOME-PRETAX> 1,540 1,487
<INCOME-PRE-EXTRAORDINARY> 968 967
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 968 967
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.39 7.21
<LOANS-NON> 130 348
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1,223 1,216
<CHARGE-OFFS> 0 0
<RECOVERIES> 1 7
<ALLOWANCE-CLOSE> 1,224 1,223
<ALLOWANCE-DOMESTIC> 874 621
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 350 602
</TABLE>
<PAGE>
CONVERSION VALUATION REPORT
=================================
Valued as of August 28, 1998
CITIZENS BANK, FSB
SALISBURY, NORTH CAROLINA
Prepared By:
Ferguson & Company
Suite 305
860 West Airport Freeway
Hurst, TX 76054
817-577-9558
<PAGE>
September 9, 1998
Board of Directors
Citizens Bank, FSB
401 West Innes Street
Salisbury, North Carolina 28144
Dear Directors:
We have completed and hereby provide, as of August 28, 1998, an independent
appraisal of the estimated pro forma market value of Citizens Bank, FSB
("Citizens" or the "Bank"), Salisbury, North Carolina, in connection with the
conversion of Citizens from the mutual form to the stock form of organization
("Conversion"). This appraisal report is furnished pursuant to the regulatory
filing of the Bank's Application for Conversion ("Form AC") with the Office of
Thrift Supervision ("OTS").
Ferguson & Company ("F&C") is a consulting firm that specializes in providing
financial, economic, and regulatory services to financial institutions. The
background and experience of F&C is presented in Exhibit I. We believe that,
except for the fees we will receive for preparing the appraisal and assisting
with Citizens' business plan, we are independent. F&C personnel are prohibited
from owning stock in conversion clients for a period of at least one year after
conversion.
In preparing our appraisal, we have reviewed Citizens' Application for
Approval of Conversion, including the Proxy Statement as filed with the OTS. We
conducted an analysis of Citizens that included discussions with Ernst & Young,
LLP, the Bank's independent auditors, and with Brooks, Pierce, McLendon,
Humphrey & Leonard, L. L. P., the Bank's conversion counsel. 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.
We also reviewed the economy in Citizens' primary market area (assessment
area) and compared the Bank's financial condition and operating results with
that of selected publicly traded thrift institutions. We reviewed conditions in
the securities markets in general and in the market for thrifts stock in
particular.
Our appraisal is based on Citizens' representation that the information
contained in the Form AC and additional evidence furnished to us by the Bank and
its independent auditors are truthful, accurate, and complete. We did not
independently verify the financial statements and other information provided by
Citizens and its auditors, nor did we independently value the Bank's assets or
liabilities. The valuation considers Citizens only as a going concern and
should not be considered an indication of its liquidation value
It is our opinion that, as of August 28, 1998, the estimated pro forma market
value of Citizens was $21,000,000, or 700,000 shares at $30.00 per share. The
resultant valuation range was $17,850,000 at the minimum (595,000 shares at
$30.00 per share) to $24,150,000 at the maximum (805,000 shares at $30.00 per
share), based on a range of 15 percent below and above the midpoint valuation.
The supermaximum was $27,772,500 (925,750 shares at $30.00 per share).
<PAGE>
Board of Directors
September 9, 1998
Page 2
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
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 conversion will thereafter be able to sell such shares at
prices related to the foregoing estimate of the Bank's pro forma market value.
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.
Our opinion is based on 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 appraisal.
The valuation reported herein will be updated as provided in the OTS
conversion regulations and guidelines. All updates will consider, among other
things, any developments or changes in Citizens' financial performance and
condition, management policies, and current conditions in the equity markets for
thrift shares. Should any such new developments or changes be material, in our
opinion, to the valuation of the shares, appropriate adjustments will be made to
the estimated pro forma market value. The reasons for any such adjustments will
be explained in detail at the time.
Respectfully,
Ferguson & Company
/s/ Charles M. Hebert
Charles M. Hebert
Principal
<PAGE>
STATEMENT OF APPRAISER'S INDEPENDENCE
CITIZENS BANK, FSB
------------------
Salisbury, North Carolina
-------------------------
We are the appraiser for Citizens Bank, FSB, Salisbury, North Carolina, in
connection with its conversion, reorganization and issuance of Public Shares.
We are submitting our independent estimate of the pro forma market value of the
Citizens Bank's stock to be issued in the conversion and reorganization. In
connection with our appraisal of the to-be-issued stock, we have received a fee
which was not related to the estimated final value. The estimated pro forma
market value is solely the opinion of our company and it was not unduly
influenced by Citizens Bank, its conversion counsel, its selling agent, or any
other party connected with the conversion.
Citizens Bank has agreed to indemnify Ferguson & Company under certain
circumstances against liabilities arising out of our services. Specifically, we
are indemnified against liabilities arising from our appraisal except to the
extent such liabilities are determined to have arisen because of our negligence
or willful conduct.
Ferguson & Company
/s/ Charles M. Hebert
Charles M. Hebert
Principal
September 9, 1998
<PAGE>
FERGUSON & COMPANY
- ------------------
TABLE OF CONTENTS
Citizens Savings Bank
Salisbury, North Carolina
PAGE
----
INTRODUCTION 1
SECTION I. - FINANCIAL CHARACTERISTICS 3
PAST & PROJECTED ECONOMIC CONDITIONS 3
FINANCIAL CONDITION OF INSTITUTION 4
Balance Sheet Trends 4
Asset/liability Management 5
Income And Expense Trends 10
Regulatory Capital Requirements 11
Lending 11
Nonperforming Assets 17
Loan Loss Allowance 18
Mortgage Backed Securities And Investments 20
Savings Deposits 22
Borrowings 22
Subsidiaries 22
Legal Proceedings 23
EARNINGS CAPACITY OF THE INSTITUTION 23
Asset-size-efficiency Of Asset Utilization 23
Intangible Values 23
Effect Of Government Regulations 23
Office Facilities 24
i
<PAGE>
FERGUSON & COMPANY
- ------------------
TABLE OF CONTENTS - CONTINUED
Citizens Savings Bank
Salisbury, North Carolina
PAGE
----
SECTION II - MARKET AREA 1
DEMOGRAPHICS 1
Employment By Industry 4
Market Area Deposits 5
SECTION III - COMPARISON WITH PUBLICLY TRADED THRIFTS 1
COMPARATIVE DISCUSSION 1
Selection Criteria 1
Profitability 2
Balance Sheet Characteristics 2
Risk Factors 3
Summary Of Financial Comparison 3
FUTURE PLANS 3
SECTION IV - CORRELATION OF MARKET VALUE 1
MARKETABILITY & LIQUIDITY OF STOCK TO BE ISSUED 1
Financial Aspects 1
Market Area 3
Management 3
Dividends 3
Liquidity 3
Thrift Equity Market Conditions 4
EFFECT OF INTEREST RATES ON THRIFT STOCK 4
ii
<PAGE>
FERGUSON & COMPANY
- ------------------
TABLE OF CONTENTS - CONTINUED
Citizens Savings Bank
Salisbury, North Carolina
PAGE
----
SECTION IV - CORRELATION OF MARKET VALUE - continued
NORTH CAROLINA ACQUISITIONS 6
Adjustments Conclusion 7
Valuation Approach 7
Valuation Conclusion 8
iii
<PAGE>
FERGUSON & COMPANY
- ------------------
LIST OF TABLES
Citizens Savings Bank
Salisbury, North Carolina
TABLE
NUMBER TABLE TITLE PAGE
- ------- ----------- ----
SECTION I - FINANCIAL CHARACTERISTICS
1 Selected Financial and Other Data 6
2 Selected Operating Ratios and Other Data 7
3 Loan Maturity Schedule 8
4 Interest Rate Sensitivity 9
5 Net Portfolio Value 9
6 Regulatory Capital Compliance 11
7 Analysis of Loan Portfolio Composition 12
8 Loan Activity Originations Sales - Repayments 13
9 Average Balances, Yields, Costs (Nine Months) 14
9a Average Balances Yields, Costs (Three Years) 15
10 Rate/Volume Analysis 16
11 Non-Performing Assets 17
12 Schedule of Classified Assets 17
13 Analysis of Allowance for Loan Losses 18
14 Allocation of Allowance for Loan Losses 19
15 Classification of Investment Securities 20
16 Deposit Portfolio 21
17 Jumbo CD's at June 30, 1998 22
18 Office Facilities and Locations 24
SECTION II - MARKET AREA
1 Key Economic Indicators 2
2 Employment by Industry 4
3 Market Area Deposits 5
iv
<PAGE>
FERGUSON & COMPANY
- ------------------
LIST OF TABLES - CONTINUED
Citizens Savings Bank
Salisbury, North Carolina
TABLE
NUMBER TABLE TITLE PAGE
- -------- ----------- ----
SECTION III - COMPARISON WITH PUBLICLY
TRADED THRIFTS
1 Comparatives General Characteristics 4
2 Key Financial Indicators 5
3 Pro Forma Comparisons 6
4 Comparative Selection 8
SECTION IV - CORRELATION OF MARKET VALUE
1 Appraisal Earnings 2
2 Acquisitions Since January 1, 1997 9
3 Recent Conversions 11
4 Comparison of Pricing Ratios 14
FIGURES
NUMBER
- ------
1 SNL Index 15
2 Interest Rates 16
v
<PAGE>
FERGUSON & COMPANY
- ------------------
EXHIBITS
Citizens Savings Bank
Salisbury, North Carolina
EXHIBIT TITLE
Exhibit I - Ferguson & Company. Qualifications
Exhibit II - Selected National, Region, State, and Comparatives Information
Exhibit III - Financial Highlights Citizens Savings Bank
Exhibit IV Financial Highlights of the Comparative Group TAFS and BankSource
Reports
Exhibit V - Pro Forma Calculations
Pro Forma Assumptions
Pro Forma Effect of Conversion Proceeds at the Minimum of the Range
Pro Forma Effect of Conversion Proceeds at the Midpoint of the Range
Pro Forma Effect of Conversion Proceeds at the Maximum of the Range
Pro Forma Effect of Conversion Proceeds at the SuperMax of the Range
Pro Forma Analysis Sheet
vi
<PAGE>
SECTION I
FINANCIAL CHARACTERISTICS
<PAGE>
FERGUSON & COMPANY SECTION 1.
- ------------------ ----------
INTRODUCTION
CITIZENS SAVINGS BANK OF SALISBURY, SSB
Citizens Savings Bank of Salisbury ("Citizens" or "Bank"), Salisbury, North
Carolina, operates as a federally chartered mutual savings bank located in
Salisbury, North Carolina. Founded in 1907 as a North Carolina-chartered mutual
savings and loan, it now operates with three full service offices located in
Salisbury, Statesville, and Rockwell, North Carolina. The Bank is a member of
the FHLB systems, and the FDIC insures its deposits. 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 in
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, to
reduce interest rate risk exposure, in the secondary market. As of June 30,
1998, the Bank had total assets of $192.72 million, deposits of $159.82 million,
and retained earnings of $15.61 million.
The Bank converted to a federally chartered association in 1980, and adopted
the name "Citizens Federal Savings and Loan Association of Salisbury. In 1993,
the charter was changed to that of a state savings bank, and the name was
changed to Citizens Savings Bank of Salisbury, SSB.
INNES STREET FINANCIAL CORPORATION
Innes Street Financial Corporation ("the Company" or "ISFC"), a North Carolina
Corporation, was organized by the Bank in 1998 for the purpose of holding all of
the common stock of the Bank. The Company has made application for approval from
the Office of Thrift Supervision ("OTS") to become a savings and loan holding
company through the acquisition of 100% of the capital stock of the Bank. Upon
completion of the Conversion and Reorganization, the only significant assets of
the Company will be all of the Bank's outstanding common stock, 50% of the net
proceeds of the offering as permitted by the OTS, less the note evidencing the
loan to the ESOP to enable the purchase of 8% of the Common Stock issued in the
Conversion. That portion of the net proceeds from the offering retained by the
company is to be used for general business activities.
Citizens is a traditional thrift. The asset composition of the institution
suggests that it is primarily managed as a traditional thrift. The Bank's net
loan portfolio totaled approximately $159.71 million on June 30, 1998, which
represented 82.87% of the Bank's total assets. One-to-four family residential
mortgage loans comprised 86.59% of the Bank's gross loan portfolio. Home equity
loans represented 10.04% of the gross loan portfolio, and loans secured by
construction and development property, multi-family residential property,
nonresidential property, secured commercial loans and personal (consumer) loans
comprised the remaining 3.37%.
The Bank offers a variety of loan products to accommodate its customer base.
Single family loans, both fixed rate and adjustable rate mortgages ("ARM's") are
originated. Generally, the ARM's are retained in the Bank's portfolio, and a
portion of the fixed rate mortgages are sold into the secondary market. The
Bank is active in interim construction lending. At June 30, 1998, construction
loans were $3.87 million, or 2.42% of the total loan portfolio, and at June 30,
1998, commercial real estate loans were $1.63 million (1.02% of total loans).
Clearly, the asset composition of the Bank and the risk component of the
portfolio more closely resemble that of traditional thrift.
1
<PAGE>
FERGUSON & COMPANY SECTION 1.
- ------------------ ----------
Citizens had $130 thousand in non-performing assets at June 30, 1998 (0.07% of
total assets) compared to $348 thousand at September 30, 1997 (0.17% of total
assets). At June 30, 1998, assets classified as "Substandard" were $268
thousand (1.65% of gross loans and 1.39% of total assets). The current level of
nonperforming assets and classified loans is nominal. Management has adequate
control of the problem assets and does a more than adequate job of managing such
assets. The current nonperforming or classified asset level is not likely to
have a significant impact on the future earning capacity or capital position of
the Bank.
Deposit accounts balances have fluctuated during the three years and nine
months from September 30,1995, to June 30, 1998. Deposits actually decreased
from $159.3 million to $146.5 million between 1995 and 1996. That decrease was
mainly due to the discontinuation of the solicitation of deposits from credit
unions, by $61.7 million. Between September 30, 1996, and September 30, 1997,
deposits increased from $146.45 million to $160.49 million. During the nine
month period between September 30, 1997, and June 30, 1998, the deposits
decreased slightly to $159.82. At June 30, 1998, 69.78% of the Bank's deposits
were in certificate accounts, 23.9% were in savings accounts, 5.26% were in
interest bearing transaction accounts, and 0.86% were in non-interest bearing
transaction accounts.
The Bank's capital to assets ratio has shown steady growth. Equity capital,
as a percentage of average assets, increased from 5.77% at September 30, 1993,
to 6.13% at September 30, 1994. Between September 30, 1994, and September 30,
1995, capital increased as a percentage of assets to 6.65%. September 30, 1996
saw equity capital as a percentage of assets advances to 7.13%. Between
September 30, 1996, and September 30, 1997, equity capital increased further to
7.33% of assets. In the nine months ended June 30, 1998, capital increased to
8.10% of assets. The period between September 30, 1993, and March 31, 1998,
reflects an increase in equity accounts of 56.83%. This growth in equity
supported asset growth of 11.79%, and pre-conversion capital levels remain
ample. Equity capital, in dollars, has increased from $9.95 million to $15.61
million in four years and nine months. The increase in capital, as a percentage
of total assets, is demonstrative of continued profitability and controlled
growth. In other words, Management allowed capital to increase at a rate that
was significantly higher than asset growth.
Citizens' profitability, as measured by return on average assets ("ROAA"), was
below its peer group average of savings banks filing Call Reports with the FDIC,
consisting of FDIC supervised thrifts with assets from $100 million to $300
million, between December 31, 1994, and December 31, 1997. For the years ending
December 31, 1994, 1995, 1996, and 1997, Citizens ranked in the 29th, 7th, 4th,
5th, and 10th percentile, respectively, in ROAA./1/
__________________
/1/ "TAFS" by Sheshunoff Information Services, Inc., as of December 31, 1997.
2
<PAGE>
FERGUSON & COMPANY SECTION 1.
- ------------------ ----------
I. FINANCIAL CHARACTERISTICS
PAST & PROJECTED ECONOMIC CONDITIONS
Fluctuations in thrift earnings in recent years have occurred within the time
frames as a result of changing temporary trends in interest rates and other
economic factors. However, the year-to-year results have been upward, while the
general trends in the thrift industry have been improving as interest rates
declined. Interest rates began a general upward movement during late 1993,
followed by a decline in interest margins and profitability. Rates began a
general decline in mid 1995. Since early 1996, rates have moved in a narrow
band. From mid-March until early June there was a slight upward trend, with the
spread between the short end and the long end increasing. Currently, the spread
between the one-year T-bill and the 30-year is in the 50 to 60 basis point range
and has been more flat in the past. The downward trend in interest rates
started in the third quarter of 1997, and has continued through the first,
second and third quarters of 1998. The recent pass by the Federal Reserve to
raise rates has not provided stability in the equities market. Comments made by
Chairman Greenspan following the FOMC meeting was interpreted by many analyst to
mean that rates will not go up since inflation is not a current threat and rates
might go down to help the global economy. The market reaction was favorable.
The overall economic environment has been conducive to profitability in the
industry as well as in the area of equity markets. The economy continues to
expand slowly, unemployment is still at low levels even though it backed off the
record low, and for the moment, inflation seems to be in restraint. Currently,
a consensus indicates that although growing, the economy is not as robust as
some would desire, that inflation is, for the moment, under control, and that
the chance of a rate increase is nominal. These factors have caused the equities
market to rise beyond the expectations of most reasonable analysts although
there have been major swings in the market caused by global market concerns and
the problem currently being experienced by the President..
The general rise in the equity market has translated into overall gains in the
thrift equity market. Recently, conversion stocks have become of interest to
some mutual funds and institutional buyers. The number of "conversion stock
speculators" has grown as thrift and bank acquisitions have continued.
In the recent months, the thrift equities market has generally paralleled the
other major equities markets. Some interim fluctuations have been caused by
changes or anticipated changes in interest rates or other economic conditions
that influence, or that are perceived to influence the market. In the general
equities market, increased prices usually respond to improved profits or
anticipated improvements in profits, with price-to-earnings ratios increasing as
increased earnings potentials are anticipated. There is little economic news
that would indicate that the market would stop its upward trend, although there
may be periodic adjustments similar to the one in late October, 1997. However,
it is not realistic to think that any market can continue to rise at a 15% to
20% rate per annum for an indefinite period, but accurately anticipating the
change is unlikely. In addition, it is unlikely that the economy can
indefinitely dodge the realities of the Asian rim economies. Many of the
economies in the Asian rim are essentially bankrupt. Their near-term emphasis
will be on generating cash to pay debts. To raise the cash, they will export at
low prices, competing with U.S. producers, and they will reduce buying to
conserve cash. Such conditions could create problems in our domestic economy.
The current crisis in the Japanese banking system could also create problems in
the U.S. economy. Weak economies in Asia have produced problems in some of the
major Asian currencies. The Yen has fallen to near record lows against the
dollar. The Chinese may be forced to let their currency float like the Russians
Ruble.
The thrift industry generally is better equipped to cope with changing
interest rates than it was in the past, and investors have recognized the
demonstrated ability of the thrift industry to maintain interest margins in
spite of rising interest rates. However, much of the industry is still a long
lender and, for the
3
<PAGE>
FERGUSON & COMPANY SECTION 1.
- ------------------ ----------
most part, a short borrower. Periods of gradually rising interest rates can be
readily managed, but periods of rapidly rising rates and interest rate spikes
can negate, to a certain degree, the positive impact of adjustable rate loans
and investments
FINANCIAL CONDITION OF INSTITUTION
BALANCE SHEET TRENDS
As Table I.1 shows, Citizens demonstrated a general increase in assets during
the four year period between September 30, 1993, and September 30, 1997,
although there were fluctuations in total assets within the stated period.
Assets increased from $172.39 million at September 30, 1993, to $200.71 million
at September 30, 1994, and to $202.17 million at September 30, 1995. Total
assets then declined to $190.23 million at September 30, 1996. This decrease in
assets is mainly revealed in the investments and loan portfolio. Corresponding
decreases in liabilities were principally disclosed in the decrease in deposits.
The following year ended September 30, 1997, recorded an increase in assets to
$199.61 million with the principal asset increase being in the investment
portfolio, and the increase in liabilities was mainly in the deposits. In the
nine-month period ending June 30, 1998, the total assets of Citizens declined
once more to $192.72 million. Principal asset reductions were in investments.
Citizens' ratio of interest earning assets ("IEA's") to interest bearing
liabilities ("IBL's") has remained relatively flat until June 30, 1998. Prior
to that, the ratio of IEA's to IBL's was 107.12%, 107.70%, and 107.52% at
September 30, 1995, 1996, and 1997, respectively. At June 30, 1998, the ratio
had increased to 108.43% (see Tables I.9 and I.9a). A consistently low interest
spread and a weak net interest margin have served to suppress the earnings. The
sustainability of earnings is not questioned. The increase in the net interest
margin and in the IEA to IBL ratio in the June 30, 1998, earnings is an
excellent sign, but one quarter does not establish a trend. The capital infused
by the Conversion will improve profitability measured by return on assets, but
the additional capital will likely have a negative impact on the return on
equity calculation. Prospects for continued modest earnings are excellent. The
high level of single family residential loans dominates the composition of the
loan portfolio and lowers the yield on earning assets. Coupling a low earning
asset yield with a relatively high cost of funds insures a limited degree of
profitability. As mentioned earlier, the new capital infusion will improve
profitability. Offsetting limited profitability is the limited amount of risk
in the portfolio and the limited amount of interest rate risk. Management, in
an attempt to increase the spreads and improve profitability, has begun making
home equity loans. This move to improve the composition of the portfolio should
be positive if the additional risk does not offset income.
Equity accounts increased steadily from $13.30 million at September 30, 1995,
to $14.26 million at September 30, 1996, and to $14.43 million in at September
30, 1997. Equity was $16.49 million at the end of the nine-month period ending
June 30, 1998. As a percentage of average assets, equity was 6.65%, 7.13%, and
7.33% at September 30, 1995, 1996, and 1997, respectively. At June 30, 1998,
equity was 8.10% of average assets. Although equity has increased in real
dollars, the increase in equity as a percent of average assets is due mainly to
controlled growth. Profitability had been generally below peer average and
Management has compensated by limiting growth while experiencing modest
earnings. During this period, in 1996, the Bank was subjected to the SAIF
assessment and there was noticeable impact on earnings. Net interest margins
are low even by thrift standards and reflects the composition of the loan
portfolio. Citizens is dependent upon certificates of deposit and does not have
the volume of transaction accounts necessary to reduce cost of funds and improve
profitability.
4
<PAGE>
FERGUSON & COMPANY SECTION 1.
- ------------------ ----------
ASSET/LIABILITY MANAGEMENT
Managing interest rate risk is a major and necessary component of the strategy
used in operating a financial institution. Most of a thrift's interest earning
assets are long term, while most of the interest bearing liabilities have short
to intermediate terms to contractual maturity. To compensate, asset/liability
management techniques include: (1) making long-term loans with interest rates
that adjust to market periodically, (2) investing in assets with shorter terms
to maturity, (3) lengthening the terms of savings deposits, and (4) seeking to
employ any combination of the aforementioned techniques artificially through the
use of synthetic hedge instruments.
Table I.3 contains information on contractual loan maturities at March 31,
1998. However, this table must be read in conjunction with Table I.4, and Table
I.5. Table I.3 shows that $65.55 million of the loan portfolio (41.04%) is
scheduled to mature or reprice within one year. Loans with scheduled repricing
of maturities greater than one year and less than five years total $43.99
million (27.54% of the portfolio). Loans with maturities or loans that reprice
in more than five years total $50.18 million (31.42% of the portfolio).
Table I.4 shows that loans that mature or reprice before June 30, 1999 (within
one year) total $87.68 million. Table I.4 shows the interest rate sensitivity,
and compares the interest earning assets ("IEA's") to the interest bearing
liabilities ("IBL's"). This table reveals that in the first year there are
$111.94 million in IEA's maturing to offset the $118.21 million in IBL's that
are also maturing. This asset-liability mix results in a one-year cumulative
negative gap position of only $6.27 million, which is 0.03% gap to total earning
assets. The negative gap position progresses until the end of the five year
plus maturities to a total cumulative negative gap position of $22.11 million,
or a negative 11.73% gap to total earning assets. This indicates a limited
interest rate risk position. This limited level of interest rate risk is
unusual in thrift portfolios.
Efforts on the part of Management to mitigate interest rate risk are
recognized as successful. However, Table I.5 presents an interesting dichotomy
when compared to Table I.4. Table I.4 shows only limited interest rate risk,
and Table I.5 shows a greater albeit acceptable degree of interest rates risk.
The contradiction can be found in the different basic assumptions used in
preparing the two tables. Table I.4 indicates that approximately 25.00% of the
fixed rate loans will reprice within one year. The prepayment rate used in
Table I.5 assumes a much lower repayment rate. On the liability side, Table I.4
uses internal decay rates for repricing the transactional accounts, and the
information in Table I.5 uses the standard cash flow analysis of the OTS. In
reality, the actual level of interest rate risk is probably between that
displayed in Table I.4 and the amount shown in Table I.5. However, the level of
interest rate risk is acceptable, and reflective of Management's efforts to
control that component of risk. In addition, the capital that comes with the
Conversion can be used to further mitigate the interest rate risk.
The Bank has interest rate risk and would suffer some deterioration in
profitability, as well as erosion in the value of its portfolio equity in a
period of rising interest rates. In addition, that portion of the benefit to
income that would be derived from a fall in interest rates would be nominal.
The lengthened maturities of the liability side of the equation would cause the
income levels to decrease as the loan portfolio began to adjust downward while
being funded by the liability mix that was adjusting downward at a slower rate.
This is clearly demonstrated in the lower half of Table I.5.
5
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
TABLE I.1 - SELECTED CONSOLIDATED FINANCIAL INFORMATION
<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) 1994 (7) 1993 (7)
-------- -------- -------- -------- -------- -------- --------
($ in Thousands) ($ in Thousands)
FINANCIAL CONDITION DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $192,716 $200,781 $199,616 $190,233 $202,170 $200,712 $172,394
Investments (1) 26,486 33,149 30,719 21,967 26,053 24,845 18,539
Loans receivable, net (2) 159,710 161,601 159,458 159,491 168,396 156,297 145,533
Deposits 159,619 158,248 160,493 146,450 159,309 159,480 155,412
Equity 15,611 14,344 14,629 13,557 13,454 12,305 9,954
OPERATING DATA:
Interest income $ 10,455 $ 10,376 $ 13,902 $ 13,690 $ 14,324 $ 11,947 $ 11,772
Interest expense 6,962 7,380 9,872 9,983 9,956 6,805 6,837
Net interest income 3,493 2,996 4,030 3,707 4,368 5,142 4,935
Provision for loan losses - - - - - - -
Net interest income after
Provision for loan losses 3,493 2,996 4,030 3,707 4,368 5,142 4,935
Non-interest income 285 334 416 388 434 609 861
Non-interest expense 2,238 2,194 2,959 3,982 2,910 2,708 2,539
Income before income taxes 1,540 1,136 1,487 113 1,892 3,043 3,257
Income tax expense 572 431 520 11 743 1,206 1,210
Inc. before cumulative effect
of a change in accounting
principle 968 705 967 102 1,149 1,837 2,047
Cum. Effect on prior years of
changing to a different
method of
Accounting for - - - - - 514 -
income taxes
Net income $ 968 $ 705 $ 967 $ 102 $ 1,149 $ 2,351 $ 2,047
=========================================================================================================
</TABLE>
(1) Includes interest bearing deposits, certificates of depostit, FHLB stock and
investment securities.
(2) Loans, net represent 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) Nonperforming 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.
SOURCE: OFFERING CIRCULAR
6
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
TABLE I.2 - SELECTED OPERATING RATIOS AND OTHER DATA
<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) 1994 (7) 1993 (7)
-------- -------- -------- -------- ------- -------- --------
($ in Thousands) ($ in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER SELECTED DATA:
Number of outstanding loans 3,725 3,654 3,620 3,631 3,721 3,588 3,498
Number of deposit accounts 9,496 10,090 9,989 10,030 10,607 10,667 11,206
Number of full-service offices open 3 3 3 3 3 3 3
Return on average assets (3) 0.67% 0.48% 0.49% 0.05% 0.56% 1.18% 1.18%
Return on average equity (3) 8.35% 6.59% 6.70% 0.72% 8.64% 20.25% 20.26%
Average equity to average assets 7.97% 7.27% 7.30% 7.29% 6.48% 5.81% 5.84%
Interest rate spread (4) 2.06% 1.70% 1.69% 1.53% 1.80% 2.69% 2.84%
Net yield on average interest-
earning assets (5) 2.47% 2.08% 2.08% 1.93% 2.15% 2.66% 2.94%
Average interest-earning assets
to average interest-bearing liabilities 108.43% 107.45% 107.59% 107.70% 107.17% 104.05% 104.79%
Ratio of non-interest expense to
average total assets (3) 1.54% 1.49% 1.50% 2.04% 1.42% 1.36% 1.47%
Non-performing assets to total assets (6) 0.07% 0.14% 0.17% 0.07% 0.02% 0.08% 0.10%
Non-performing loans to total lns (6) 0.07% 0.14% 0.21% - - 0.07% 0.01%
Allowce for loan losses to total loans 0.77% 0.76% 0.75% 0.74% 0.71% 0.74% 0.80%
Allowance for loan losses to
Nonperforming loans (6)
Provision for loan losses to total
loans receivable, net (3) - - - - - - -
Net charge-offs to average
loans outstanding - - - - 0.01% -0.01% -0.04%
EQUITY TO TOTAL ASSETS 8.10% 7.14% 7.33% 7.13% 6.65% 6.13% 5.77%
</TABLE>
(1) Includes interest-bearing deposits, certificates of deposit, FHLB stock and
investment securities.
(2) Loans, net, represents gross loans less net deferred loan fees, undisbursed
loan funds and 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) Nonperforming 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.
SOURCE: OFFERING CIRCULAR
7
<PAGE>
FERGUSSON & COMPANY SECTION I
- ------------------- ---------
TABLE I.3 - LOAN MATURITY SCHEDULE
<TABLE>
<CAPTION>
AT JUNE 30, 1998
1 Year More than 1 Year More than 5 Total
or Less to 5 Years Years
(In Thousands)
<S> <C> <C> <C> <C>
1-4 family - fixed $ 983 $ 526 $ 45,472 $ 46,981
1-4 family - adjustable 48,296 41,922 697 90,915
Home Equity - fixed - 131 1,195 1,326
Home Equity - adjustable 15,000 - 15,000
Construction and Development 1,129 649 241 2,019
Nonresidential - fixed 7 65 1,086 1,158
Nonresidential - adjustable 401 18 419
Residential multi-family - fixed - 15 15
Residential multi-family - adjustable 703 632 15 1,350
Commercial Loans - Fixed - 31 1,449 1,480
Other Loans 251 - 20 271
Allowance for loan losses (1,224) (1,224)
--------------------------------------------------------------------------------
Totals $ 65,546 $ 43,989 $ 50,175 $ 159,710
================================================================================
</TABLE>
SOURCE: OFFERING CIRCULAR.
8
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
TABLE I.4 INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
TERMS TO REPRICING AT JUNE 30, 1998
1 YEAR MORE THAN 1 MORE THAN 3 MORE THAN 5 TOTAL
OR LESS YEAR TO 3 YEARS TO 5 YEARS
YEARS YEARS
INTEREST EARNING ASSETS (Dollars in Thousands)
LOANS RECEIVABLE:
<S> <C> <C> <C> <C> <C>
Loans $ 87,681 $ 44,235 $ 16,339 $ 12,544 $160,799
Investments 24,354 808 1,237 1,296 27,695
---------- --------- ----------- --------- ---------
Total Earning Assets 111,935 45,133 17,576 13,840 188,495
---------- --------- ----------- --------- ---------
Cumulative Rate Sensitive Assets 111,935 157,068 174,644 188,495
INTEREST-BEARING LIABILITIES
Transaction Accounts 30,613 9,203 1,263 5,845 46,924
Certificates 78,413 32,704 273 129 111,519
Borrowings 9,000 4,000 13,000
---------- --------- ----------- --------- ---------
Total Paying Liabilities 118,028 45,907 1,536 5,974 171,445
---------- --------- ----------- --------- ---------
Cumulative Rate Sensitive Liabilities 118,208 163,935 166,557 171,443
GAP $ -6,273 -6,867 8,087 -17,052
Cumulative GAP $ -6,273 -13,140 -5,053 -22,105
Cumulative GAP to Total Assets -3.11 -0.45 8.32 4.09
</TABLE>
SOURCE: INTERNAL REPORT AND UNAUDITED FINANCIAL STATEMENTS.
TABLE I.5 - NET PORTFOLIO VALUE
AS OF JUNE 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CHANGES (IN BASIS POINTS) ESTIMATED CHANGE IN
IN INTEREST RATES (1) NET PORTFOLIO VALUE & CHANGE
-------------------- ------------------------------
(DOLLARS IN MILLIONS)
Market Amount Percentage
Value Of Change Change
-----------------------------------------
<S> <C> <C> <C>
+400 BP 11,359 -7,186 -38.75%
+300 BP 13.745 -4,800 -25.88%
+200 BP 16.132 -2,413 -13.01%
+100 BP 17.338 -1,207 -6.51%
BASE 0 BP 18.545 0 0
-100 BP 18.995 450 2.43%
-200 BP 19.445 900 4.85%
-300 BP 19.545 1,000 5.39%
-400 BP 19.644 1,099 5.93%
</TABLE>
(1) Assumes an instantaneous and sustained uniform change in interest rates at
all maturities.
SOURCE: FEDERAL HOME LOAN BANK OF ATLANTA, INTEREST RATE RISK SERVICE
JUNE 30. 1998.
9
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
INCOME AND EXPENSE TRENDS
Citizens was profitable for the five years and nine months ending June 30,
1998. Profits stated as a return on average assets have been declining until
the nine months reported in 1998. Return on average assets was 1.18%, 1.18%,
0.56%, 0.05%, 0.49%, and 0.67%, at September 30, 1993, 1994, 1995, 1996, 1997,
and for the nine months ending June 30, 1998, respectively (see Table I.2). As
discussed earlier, this earnings performance is below thrift peer average and
reflects the composition of the portfolio and the higher cost of funds. The
earnings for the year ending September 30, 1996, is one of the lowest in the
five years and nine months reported above, and that was the period that absorbed
the SAIF assessment. The decline in ROAA and the decline in ROAE mirrors the
decline in the net interest margins of the institution. The net interest margin
was 2.94%, 2.66%, 2.15%, 1.93%, 2.08%, and 2.47% at September 30, 1993, 1994,
1995, 1996, 1997, and the nine months ending June 30, 1998, respectively. Net
interest margins improved slightly in the last full year reporting and in the
nine months ending June 30, 1998. The improvement can be tied directly to the
increasing levels of home equity loans, which have a higher interest rate. The
ability to generate core earnings will further improve with the anticipated
infusion of capital generated by the Conversion. It is likely that Citizens
will continue to perform below its peers when measured in relation to return on
average assets and return on equity.
10
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
REGULATORY CAPITAL REQUIREMENTS
- -------------------------------
As Table I.6 demonstrates, Citizens Bank meets all regulatory capital
requirements and meets the regulatory definition of a "Well Capitalized"
institution. Moreover, the additional capital raised in the stock conversion
will add to the existing capital cushion.
<TABLE>
<CAPTION>
TABLE I.6 - REGULATORY CAPITAL COMPLIANCE
JUNE 30, 1998
CAPITAL
----------------------------------------------------
EXCESS
REQUIRED ACTUAL (DEFICIT)
-------- ----- --------
<S> <C> <C> <C>
(In thousands)
GAAP Capital $15,611
Tangible Capital $2,889 $15,472 $12,583
Core Capital $5,777 $15,472 $ 9,695
Risk-based Capital $8,157 $16,696 $ 8,539
</TABLE>
Source: Citizens Savings Bank, SSB, Call Reports of June 30, 1998, and F&C
calculations.
LENDING
Table I.7 provides an analysis of the Bank's loan portfolio by type of loan
security. This analysis shows that Citizens' loan composition reflects a major
commitment to one-to-four-family dwelling loans. However, there is a noticeable
increase in the amount of home equity loans, construction loans, and development
loans that are being added to the portfolio. This is a trend that must continue
if the institution is to increase core earnings and improve profitability.
Table I.8 provides information with respect to loan originations,
purchases, and repayments. It also clearly shows the changes that have been
made in the loan portfolio, more specifically, the increasing number of home
equity loans and the construction and development lending. Although theses
types of loans are typically more risky than the one-to-four residential loans,
they are the kind of loans that will add to the core earnings of the
institution. Management's conservative underwriting tendencies has served them
well as they have entered a higher risk-lending situation. Moreover, the table
relates the impact upon the types of loans originated by changing interest
rates. In the year ended September 30, 1995, the Bank originated $27.33 million
in loans. As rates fell in the years ending September 30, 1995, and 1996, we
can see the impact of the refinancing activity. In 1997, $32.31 million in
loans were originated. A large portion of the increase in these two years can
be attributed to refinancing activity. This is the only year showing a marked
increase in residential originations. However, in 1995, 1996, and in 1997, the
Bank sold $6.69 million, $4.43 million, and $5.51 million, respectively. This
was consistent with the strategy of selling the majority of fixed rate
residential loans into the secondary market. The nine months ending June 30,
1998 are notable because the sale of loans decreased to $3.09 million, which
annualizes to approximately $4.11 million.
Table I.9 provides rates, yields and average balances for the nine-month
period ended June 30, 1998. Table I.9a provides rates, yields, and average
balances for the three years ended September 30, 1995, 1996, 1997, and for the
six month period ended March 31, 1998. Net interest income decreased from $4.37
million at September 30, 1995, to $3.71 million at September 30, 1996, which was
the year of the SAIF assessment of $1.07 million. From September 30, 1996, to
September 30, 1997, earnings increased once again to $4.03 million. For the
nine months ending June 30, 1998, net interest income was $3.49 million,
11
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
which annualized to approximately $4.65 million. Net interest margins reflect
the same movement. Net interest margins were 2.15%, 1.93%, 2.08%, and 2.47% at
the end of September 30, l995, 1996, 1997, and the nine months ended June 30,
1998, respectively. Also contributing to the flat earnings is the static trend
in the relationship between interest earning assets ("IEA's"), and interest
bearing liabilities ("IBL's"). In 1995, IEA's were 107.17% of IBL's. In 1996,
they were 107.70% and 107.59% in 1997. This ratio increased slightly in the nine
months ending June 30, 1998, when IEA's were 108.40% of IBL's. The impact of
higher priced loan transactions and more adjustable rate transactions can be
seen. Coupled with a general rise in a more efficient use of assets, the
profitability of the Bank seems sustainable at current levels. The high- risk
portion of the portfolio (home equity loans, construction and development loans
and commercial loans) could eventually present some problems, but currently that
risk seems to be well reserved and well managed - but not impervious to
problems.
TABLE I.7 - LOAN PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------------
AT JUNE 30, 1998 1997 1996 1995
--------------------
Amount % of Total Amount % of Total Amount % of Total Amount % of Total
TYPE OF LOAN: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
1-4 family $138,295 86.59 $140,797 88.30 $145,342 91.13 $155,998 92.64
Home equity 16,035 10.04 11,063 6.94 7,746 4.86 4,507 2.68
Const. And Dev. 3,865 2.42 5,639 3.54 3,707 2.32 4,962 2.95
Nonresidential 1,633 1.02 2,220 1.39 2,633 1.65 2,897 1.72
Multi-family 1,365 0.85 1,592 1.00 1,879 1.18 2,302 1.37
TOTAL REAL ESTATE LNS 161,193 100.92 161,311 101.16 161,307 101.14 170,666 101.35
OTHER LOANS:
Commercial Loans 1,480 0.93 1,629 1.02 1,840 1.15 45 0.03
Consumer Loans 271 0.17 349 0.22 309 0.19 340 0.20
Total Other Loans 1,751 1.10 1,978 1.24 2,149 1.35 385 0.23
TOTAL GROSS LOANS 162,944 102.02 163,289 102.40 163,456 102.49 171,051 101.58
Less:
Const. LIP (1,844) (1.15) (2,447) (1.53) (2,619) (1.64) (1,248) (0.74)
Deferred Loan Fees (63) (0.04) (57) (0.04) (26) (0.02) (86) (0.05)
Unearned Income (103) (0.06) (104) (0.07) (105) (0.07) (106) (0.06)
Allow. For Loan Loss (1,224) (0.77) (1,223) (0.77) (1,215) (0.76) (1,215)
NET LOANS RECEIVABLE $159,710 100.00 $ 159,458 100.00 $ 159,491 100.00 $168,396 100.00
</TABLE>
SOURCE: OFFERING CIRCULAR
12
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
TABLE I.8 - LOAN ACTIVITY -ORIGINATION'S - SALES - REPAYMENTS
Table I.8 clearly demonstrates why Citizens is a traditional thrift. The
information reveals that the residential loan portfolio is still a significant
portion of the portfolio of the Bank. Additional emphasis is being placed on
the home equity loans, which have a positive impact on earnings.
<TABLE>
<CAPTION>
NINE MO. ENDED JUNE 30, YEAR ENDED SEPTEMBER 30,
----------------------------- ---------------------------
1998 1997 1997 1996 1995
------------ --------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
LOANS RECEIVABLE, (In Thousands)
NET, BEGINNING OF PERIOD $159,458 $159,491 $159,491 $168,396 $156,297
------------ --------- ------------ ------------ -------------
LOAN ORIGINATIONS:
1-4 family 27,990 16,192 21,955 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 -
Personal 172 148 343 123 24
------------ --------- ------------ ------------ -------------
Total loan originations 37,064 24,695 32,307 23,693 27,330
------------ --------- ------------ ------------ -------------
Loans purchased - - - - 10,854
Loan sales (3,088) (5,258) (5,509) (4,430) (6,699)
Principal repayments (33,716) (17,306) (26,792) (28,228) (19,472)
Other changes, net (1) (8) (21) (39) 60 86
------------ --------- ------------ ------------ -------------
LOANS, RECEIVABLE, NET, END OF PERIOD $158,010 $161,601 $159,458 $159,491 $168,396
============ ========= ============ ============ =============
</TABLE>
(1) Includes changes in deferred loan fees and the allowance for loan losses.
SOURCE: OFFERING CIRCULAR
13
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
TABLE I.9 - RATES, YIELDS & AVERAGE BALANCES (NINE MONTHS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JUNE 30
AT
JUNE
30
1998 1998 1997
AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
RATE(6) BALANCE YIELD/ BALANCE YIELD/
RATE(4) RATE(4)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets
("IEA's"):
Interest-bearing deposits 6.14% $ 11,046 $ 483 5.97% $ 7,850 $ 347 5.86%
Investments (1) 6.53% 20,356 953 6.26% 23,506 1,095 6.23%
Loans receivable, net (5) 7.59% 157,809 9,007 7.63% 160,848 8,929 7.43%
------- -------
Total interest earning assets 7.42% 189,211 $10,453 7.39% 192,041 $10,371 7.22%
------- -------
Non-interest earning assets 5,346 4,884
------- -------
TOTAL 194,657 196,925
======= =======
LIAB. AND RETAINED EARNINGS
Interest-bearing liab.
("IBL's"):
NOW and Money Market accts. 1.78% $ 8,524 $ 113 1.77% $ 8,042 120 2.00%
Passbook accounts 4.52% 34,211 1,172 4.58% 28,753 987 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 6,064 5.17% 162,055 6,097 5.28%
FHLB advances 6.89% 17,028 878 8.89% 28,670 1,873 6.88%
------- ------- ------- -------
Total interest-bearing 5.21% 174,494 $ 6,962 5.33% 178,725 $ 7,350 5.52%
------- -------
liabilities
Non-interest-bearing 3,564 3,809
liabilities
Equity 15,499 14,311
------- -------
TOTAL 194,567 195,925
------- -------
Net interest income and interest
rate spread (2) $ 3,491 2.06% $ 2,991 1.70%
Net yield on interest-earning assets (3) 2.47% 2.08%
Ratio of interest-earning assets
'to interest-bearing, liabilities 108.4% 107.5%
</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
IEA's and the average cost of IBL's.
(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.
SOURCE: OFFERING CIRCULAR
14
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
TABLE I.9A - RATES, YIELDS & AVERAGE BALANCES (THREE YEARS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------------
AVERAGE INTEREST AVG. AVERAGE INTEREST AVG. AVERAGE INTEREST AVG.
BALANCE YIELD/ BALANCE YIELD/ BALANCE YIELD/
RATE RATE RATE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest earning assets
("IEA's"):
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) 161,817 11,927 7.37% 161,607 11,766 7.28% 170,476 12,297 7.21%
--------- --------- -------- -------- --------- --------- --------- ------- -------
Total interest earning assets 193,983 $13,902 7.17% 192,474 $13,690 7.11% 203,099 $14,324 7.05%
--------- --------- -------- -------- --------- --------- --------- ------- -------
Non-interest earning assets 3,714 3,095 2,224
--------- -------- ---------
TOTAL 197,697 195,569 205,323
========= ======== =========
LIABILITIES AND RETAINED
EARNINGS
Interest-bearing liabilities
"IBL's"):
NOW and Money Market accounts $ 9,144 $ 158 1.73% $ 9,213 $ 176 1.91% $ 10,751 $ 238 2.21%
Passbook accounts 29,254 1,320 4.51% 23,537 1,013 4.30% 13,484 533 3.95%
Certificates of deposit 116,148 6,621 5.70% 118,964 6,932 5.83% 138,273 7,359 5.32%
--------- --------- -------- ------- -------- -------- --------- -------- -------
Total deposits 154,546 8,099 5.24% 151,714 8,121 5.35% 162,508 8,130 5.00%
FHLB advances 25,751 1,773 6.89% 27,000 1,862 6.90% 27,000 1,826 6.76%
--------- --------- -------- ------- -------- -------- --------- -------- -------
Total interest-bearing
liabilities 180,297 $ 9,872 5.48% 178,714 $ 9,983 5.59% 189,508 $ 9,956 5.25%
--------- -------- --------
Non-interest-bearing
liabilities 2,967 2,600 2,511
Equity 14,433 14,255 13,304
-------- -------- --------
TOTAL 197,697 195,569 205,323
======== ======== ========
Net interest income and
interest
Rate spread (2) $ 4,030 1.69% $ 3,707 1.53% $ 4,368 1.80%
======== ======== =======
Net yield on int.-earning
assets (3) 2.08% 1.93% 2.15%
Ratio of interest-earning
assets to
Interest-bearing liabilities 107.59% 107.70% 107.17%
</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 average cost of interest-bearing
liabilities.
(3) Net yield on interest earning assets represents net interest income
divided by average interest earning assets.
(4) Average yield/rate for the 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 principle balance associated with
each asset and liabilities.
SOURCE: OFFERING CIRCULAR.
Table I.10 provides a rate volume analysis, measuring differences in
interest earning assets ("IEA's") and interest bearing liabilities ("IBL's"),
and the interest rates thereon comparing the year ended September 30, 1995, with
September 30, 1996, and then comparing the year ended September 30, 1996, with
September 30, 1997, and finally comparing the nine months ending June 30, 1997,
with the nine months ending June 30, 1998. The table shows the effect of the
changes in interest income, and funding costs between 1995 and 1996 produced a
decrease in net interest income of $661 thousand. A portion of that $634
reduction in income for the period was the net of an increase in income of $120
thousand that was
15
<PAGE>
FERGUSON & COMPANY SECTION I
- ------------------ ---------
due to increases in rates and a negative $754 thousand that was the result of a
decrease in the volume of loans, investments and interest earning deposits. On
the liability side, interest expense increased $27 thousand. This was the
difference in an increase in interest expense of $712 thousand due to increases
in rate and a reduction in interest expense of $685 thousand due to volumes.
There was an increase in net income between September 30, 1996, and September
30, 1997. The $322 thousand increase in income is the result of an increase of
$212 thousand in income on earning assets and a reduction in interest expense of
$111 thousand. This increase in income was comprised of $116 thousand due to
increases in rates and $96 thousand due to increases in volumes. The decrease in
interest expense was the net result of a decrease in interest expense of $122
thousand due to rates and a $11 thousand increase due to volumes.
TABLE I.10 RATE VOLUME ANALYSIS
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended September 30, Year Ended September 30,
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
-------------------------------- -------------------------------- --------------------------------
Increase (Decrease) Attributable Increase (Decrease) Attributable Increase (Decrease) Attributable
to to to
-------------------------------- -------------------------------- --------------------------------
Rate Volume Net Rate Volume Net Rate Volume Net
-------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest-bearing deposits $ 5 $ 141 $ 146 $ (4) $ 11 $ 7 $ 32 $ (76) $ (44)
Investments 5 (147) (142) (26) 70 44 (29) (30) (59)
Loans receivable, net 237 (159) 78 146 15 161 117 (648) (531)
-------- ------ ------ ------ ----- ------ ----- ------ ------
Total interest income on
Interest earning assets 247 (165) 82 116 96 212 120 (754) (634)
-------- ------ ------ ------ ----- ------ ----- ------ ------
Interest expense on:
Liabilities and retained
earnings
Interest-bearing liabilities:
NOW and MMDA's (14) 7 (7) (18) 1 (17) (30) (32) (62)
Passbook accounts 18 187 205 49 256 305 51 429 480
Certificates of deposit (98) (23) (121) (150) (160) (310) 655 (1,082) (427)
FHLB advances 2 (497) (495) (3) (86) (89) 36 - 36
-------- ------ ------ ------ ----- ------ ----- ------ ------
Total interest expense on
Interest earning assets (92) (326) (418) (122) 11 (111) 712 (685) 27
-------- ------ ------ ------ ----- ------ ----- ------ ------
Increase (decrease) in net
interest income $ 500 $ 323 $ (661)
====== ======= ========
</TABLE>
SOURCE: OFFERING CIRCULAR
In the nine months ended June 30, 1998, there was an increase in net interest
income of $500 thousand. The $82 thousand increase is the result of an increase
in income on interest earning assets of $247 thousand due to rates, and a
decrease in interest income of $165 thousand due to volumes. The $418 thousand
reduction in interest expense was due to a $92 thousand decrease due to rates
and a $326 thousand decrease due to volumes. The net increase in income of $82
thousand plus the net decrease in interest expense of $418 provides an increase
in net interest income of $500 thousand.
16
<PAGE>
FERGUSON & COMPANY Section I.
- ------------------ ----------
TABLE I.11 - NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
AT JUNE 30, AT SEPTEMBER 30,
---------------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ------------- ---------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 130 $ 211 $ 348 $ 2 $ -
Accruing loans past due 90 days or more - - - -
Foreclosed real estate - 62 - 128 49
----------- ---------- -------- ---------- ---------
Total nonperforming assets $ 130 $ 273 $ 348 $ 130 $ 49
=========== ========== ======== ========== =========
----------- ---------- -------- ---------- ---------
Nonperforming loans to total gross loans 0.08% 0.13% 0.21% - -
=========== ========== ======== ========== =========
----------- ---------- -------- ---------- ---------
Nonperforming 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>
SOURCE: OFFERING CIRCULAR
NON-PERFORMING ASSETS
As shown in Table I.11 above, Citizens' total non-performing loans as of
June 30. 1998, were a nominal $130 thousand and represented 0.08% of gross loans
and 0.07% of total assets. All of the non-performing loans as of that date were
secured. The level of non-performing assets does not appear to be a significant
threat to the capitalization or future earnings of the institution.
TABLE I.12 - SCHEDULE OF CLASSIFIED ASSETS
<TABLE>
<CAPTION>
AT JUNE 30, DECEMBER 31,
------------
1998 1996
---------------------------
(Dollars in Thousands)
<S> <C> <C>
Loss. Assets
Doubtful Assets -
Substandard assets $ 268 $ 376
Special mention Assets 170 -
---------------------------
Total Classified Assets $ 438 $ 376
---------------------------
General loss allowances $1,224 $1,216
</TABLE>
SOURCE: UNAUDITED FINANCIAL STATEMENT AND INTERNAL REPORTS.
The volume of total classified assets is nominal for an institution this
size, and currently the classified assets are centered in Special Mention at
$170 thousand (0.10% of gross loans and 0.08% of total assets), with an
additional Substandard classification of $268 thousand (0.16% of gross loans and
0.14% of assets). It is apparent that Management has developed adequate
management techniques for dealing with the classified assets of the Bank.
17
<PAGE>
FERGUSON & COMPANY Section I.
- ------------------ ----------
LOAN LOSS ALLOWANCE
The following table (Table I.13) sets forth an analysis of the Bank's
allowance for possible loan losses for the periods indicated. As of June 30,
1998, the provision for loan and lease losses was equal to 0.75% of gross loans
and 9.42 times non-performing loans. Considering the conservative underwriting
of Management and that the majority of the loans in the portfolio are secured
residential loans, the Allowance for Loan and Lease Losses is adequate at this
time.
TABLE I.13 - ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30, YEAR ENDED SEPTEMBER 30,
1998 1997 1997 1996 1995
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $1,223 $1,216 $1,216 $1,215 $1,205
Charge-offs - - -
Provision - - - - -
Recoveries 1 9 7 1 10
Balance, end of period $1,224 $1,225 $1,223 $1,216 $1,215
</TABLE>
SOURCE: OFFERING CIRCULAR
18
<PAGE>
FERGUSON & COMPANY Section I.
- ------------------ ----------
Table I.14 shows the allocation of the loan loss allowance among the
various loan categories for the years ending September 30, 1995, 1996, 1997, and
June 30, 1998.
TABLE I.14 - ALLOCATION OF LOAN LOSS ALLOWANCE
<TABLE>
<CAPTION>
SEPTEMBER 30,
AT JUNE 30, 1998 1997 1996
Percent of Amount Percent of Amount Percent of
Allowance of Loans Allowance Of Loans Allowance
Amount of to Total to Gross Amount of to Total To Gross Amount of to Total
Allowance Allowance Loans Allowance Allowance Loans Allowance Allowance
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan
Real Estate Loans:
1-4 family 137 11.19 84.87 396 32.38 86.23 393 32.35
Home equity 484 39.54 9.84 - - 6.76 - -
Const. & Dev. 115 9.40 2.37 109 8.91 3.45 52 4.28
Non-residential 52 4.25 1.00 16 1.31 1.38 46 3.79
Multi-family 40 3.27 0.84 4 0.33 0.97 6 0.49
Total Real Estate Lns 828 67.64 98.92 525 42.93 98.79 497 40.91
Other Loans;
Commercial Loans 44 3.59 0.91 - - 1.00 - -
Consumer Loans 2 0.16 0.17 96 7.85 0.21 105 8.64
Total Other Loans 46 3.76 1.07 96 7.85 1.21 105 8.64
Unallocated 350 28.59 602 49.22 - 613 50.45
Total Allowance for LLL 1,224 100.00 100.00 1,223 100.00 100.00 1,215 100.00
<CAPTION>
1995
Amount Percent of Amount
of Loans Allowance of Loans
to Gross Amount of to Total to Gross
Loans Allowance Allowance Loans
<S> <C> <C> <C> <C>
Type of Loan
Real Estate Loans:
1-4 family 88.92 428 35.23 91.20
Home equity 4.74 - 2.63
Const. & Dev. 2.27 173 14.24 2.90
Non-residential 1.61 78 6.42 1.69
Multi-family 1.15 8 0.66 1.35
Total Real Estate Lns 98.69 687 56.54 99.77
Other Loans;
Commercial Loans 1.13 - 0.03
Consumer Loans 0.18 17 1.40 0.20
Total Other Loans 1.31 17 1.40 0.23
Unallocated - 511 42.06 -
Total Allowance for LLL 100.00 1,215 100.00 100.00
</TABLE>
SOURCE: OFFERING CIRCULAR
The preceding table (Table I.14) allocates the allowance for loan
losses by loan category at the dates indicated. The allocation of the
allowance to each category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any
other category.
19
<PAGE>
FERGUSON & COMPANY Section I.
- ------------------ ----------
MORTGAGE-BACKED SECURITIES AND INVESTMENTS
Table I.15 provides a breakdown of mortgage-backed securities and
investments as of June 30, 1998.
TABLE I.15 - CLASSIFICATION OF INVESTMENT SECURITIES
<TABLE>
<CAPTION>
ONE YEAR OR LESS AFTER ONE YEAR AFTER FIVE YEARS
THROUGH FIVE YEARS THROUGH TEN YEARS
CARRYING WEIGHTED CARRYING WEIGHTED CARRYING WEIGHTED
VALUE AVERAGE VALUE AVERAGE VALUE AVERAGE
YIELD YIELD YIELD
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agencies - $ 666 6.24% $ 185 9.02%
Securities held to maturity:
U.S. government and agencies - - 1,132 7.07%
Other:
Interest-earning deposits 10,961 6.14% - - - -
Term Federal Funds 4,000 5.55% - - - -
Federal Home Loan Bank stock - - - - - -
TOTAL $14,961 5.98% $1,798 6.76% $ 185 9.02%
AFTER TEN YEARS TOTAL
CARRYING WEIGHTED CARRYING WEIGHTED
VALUE AVERAGE VALUE AVERAGE
YIELD YIELD
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. government and agencies $6,979 6.64% $ 7,830 6.66%
Securities held to maturity:
U.S. government and agencies 739 7.20% 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% 1,825 7.50%
TOTAL $9,543 6.85% $26,486 6.37%
</TABLE>
SOURCE: OFFERING CIRCULAR
Table I.15 is notable for showing that as of June 30, 1998, the portion of
the investment portfolio that was classified as "Held to Maturity" totaled $1.87
million or 7.06% of the portfolio. Investment securities that were classified
as "Available for Sale" totaled $7.83 million or 29.79% of the portfolio. The
remainder of the portfolio, $16.79 million are short-term interest earning
deposits and Federal Home Loan Bank Stock. At June 30, 1998, Citizens had no
trading securities. Having a large portion of all investments classified
"Available for Sale" and having a large portion of their assets in short-term
deposits enhances actual liquidity of the institution and provides Management
with the flexibility to properly manage the investment portfolio of the Bank.
All securities classified as "Available for Sale" are carried at their fair
value as of June 30, 1998.
Management has not committed a significant amount of its assets to
Mortgage-Backed Securities ("MBS's"). This is due mainly to the strong demand
for loans in the primary assessment area. The majority of Citizens'
investments, $16.76 million, have a maturity that is less than 5 years.
20
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
TABLE I.16 - DEPOSIT PORTFOLIO
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------------
AT JUNE 30, 1998 1997
------------------------------- --------------------------- --------------
AMOUNT WEIGHTED % OF AMOUNT WEIGHTED % OF AMOUNT
AVERAGE DEPOSITS AVERAGE DEPOSITS
RATE RATE
--------- ------------------------------------ --------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Deposit accounts:
Passbook savings $ 38,194 4.62% 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 accts. 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 transaction 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>
AT SEPTEMBER 30,
------------------------------------------------
1996 1995
-------------------------------------------------
WEIGHTED % OF AMOUNT WEIGHTED % OF
AVERAGE DEPOSITS AVERAGE DEPOSITS
RATE RATE
---------------------------------------------------
(Dollars in Thousands)
<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 accts. 2.56% 2.42% 4,368 2.71% 2.74%
Non-interest bearing accounts -% 0.59% 876 -% 0.55%
--------- --------- ---------
Total transaction 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>
SOURCE: OFFERING CIRCULAR
Deposits in the Bank at June 30, 1998 were represented by the various types of
deposit programs described above.
21
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
SAVINGS DEPOSIT
The Bank offers a variety of deposit products that have a wide range of
interest rates and terms. As the general customer base continues to become more
sophisticated, Citizens is likely to become more susceptible to short-term
interest rate changes. The Bank experiences a higher cost of funds than its
peers mainly due to its pricing of transaction accounts and certificate
accounts. These higher costs associated with the deposits, coupled with a loan
portfolio that is mainly residential loans, has placed a strain on the earning
capacity of the institution, as evidenced by its spread and net interest
margins.
At June 30, 1998, Citizens deposit portfolio of $159.82 million was
composed as follows: total noninterest bearing accounts--$1.38 million, or
0.86%; savings deposits and passbook account--$38.19 million, or 23.90%, Now
accounts and MMDA accounts--$8.73 million or 5.46%, and certificate accounts--
$111.52 million, or 69.78%. Certificates totaling $78.41 million, or 49.06% of
total deposits, mature in less than one year.
Citizens has limited dependency on jumbo certificates of deposit. At June
30, 1998, the Bank had $18.13 million in certificates that were issued for $100
thousand or more, or 11.35% of its total deposits (see Table I.17). The jumbo
dependency is not considered excessive.
TABLE I.17 - JUMBO CD'S AT JUNE 30, 1998
Certificates 100,000 and Over
<TABLE>
<CAPTION>
Certificates of
Maturity Period Deposits
--------------- --------
($ in Thousands)
<S> <C>
Three months or less $ 2,097
Over three through six months 2,931
Over six through 12 months 7,185
Over 12 months 5,921
----------------
$ 18,134
================
</TABLE>
SOURCE: OFFERING CIRCULAR
BORROWINGS
At June 30, 1998, Citizens was a member of FHLB of Atlanta and had the
availability of advances from the FHLB. At June 30, 1998, the Bank had $13
million in advances from the FHLB. The $13 million in advances are broken down
into three transactions, one advance of $3 million is due September 30, 1998,
one advance of $6 million is due March 31, 1999, and the other $4 million
advance is due March 31, 2000. Advances are viable alternative sources of
funding to the Bank and are not considered excessive at this level. The use of
secured advances not only provides alternative sources of funding, but generally
produces less refunding risk than other types of large liabilities.
SUBSIDIARIES
Citizens has one inactive subsidiary, Carolina Service Corporation, with
total assets less than $3,000.00, which are cash. The subsidiary is being
liquidated concurrently with the offering.
22
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
LEGAL PROCEEDINGS
From time to time, Citizens becomes involved in legal proceedings
principally related to the enforcement of 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 proceedings that are expected to have a material effect on
its financial condition, or liquidity, or results of operations.
EARNINGS CAPACITY OF THE INSTITUTION
As in any interest sensitive industry, the future earnings capacity of
Citizens will be affected by the interest rate environment. Historically, the
thrift industry has performed at less profitable levels in periods of rising
interest rates. This performance is due principally to the general composition
of the assets and the limited repricing opportunities afforded even the
adjustable rate loans. The converse earnings situation (falling rates) does not
afford the same degree of profitability potential for thrifts due to the
tendency of borrowers to refinance both high rate loans, fixed rate loans, and
adjustable loans as rates decline.
Citizens is no exception to the aforementioned paradox. However, with its
current asset and liability structure, the effect of rising interest rates will
have less negative impact on earnings than in the past. Management's strategy
of new loan products, mainly home equity loans, that provide additional
repricing opportunities through the cash flow of payments or in the
adjustability of rates will mitigate the effects of interest rate risk, and help
sustain the Bank's current level of profitability.
The addition of capital through the conversion will allow Citizens to grow.
As growth is attained, the leverage of that new capital should, from a ratio of
expenses to total assets standpoint, reduce the operating expense ratio.
However, growth and additional leverage will likely be well controlled to
maintain the current acceptable risk levels inherent in the Bank's asset base.
ASSET-SIZE-EFFICIENCY OF ASSET UTILIZATION
At its current size and in its current asset configuration, Citizens is an
efficient operation. With total assets of approximately $192 million, Citizens
has 40 full time equivalent employees. Citizens has the infrastructure, the
officers, and the employees to grow without significant additional growth in
staff.
INTANGIBLE VALUES
Citizens has intangible assets totaling $67 thousand. Mortgage servicing
rights are recorded at $54 thousand, and an additional $12 thousand are
intangibles associated with the Bank's retirement plan. However, Citizens'
greatest intangible value lies in its loyal deposit base, its loan portfolio,
and in its staff of officers and employees. Citizens has a 91-year history of
sound operations, well-managed growth, and consistent earnings. The Bank
currently has 7.41% of the deposit market in its area, and it has the ability to
increase market share (see Table II.3 in Section II). In addition, the Bank has
generated mortgage loan servicing by selling loans into the secondary market,
service retained.
Citizens has no significant intangible values that could be attributed to
unrecognized asset gains on investments and real estate.
EFFECT OF GOVERNMENT REGULATIONS
Government regulations will have the greatest impact in the area of cost of
compliance and reporting. The Conversion will create an additional layer of
regulations and reporting, and thereby increase the cost to the Bank. Moreover,
no future plans currently exist to make additional acquisitions, purchase
additional branches, or complicate operations with matters that would add to
reporting and regulatory compliance. However,
23
<PAGE>
FERGUSON & COMPANY SECTION I.
- ------------------ ----------
economic situations change, and if an appropriate opportunity arises, it will be
considered, and a proper request will be made of the regulators, if necessary.
OFFICE FACILITIES
Citizens' main office is an adequately maintained facility. Table I.18
provides information on all of the Bank's offices. The Bank's facilities are
currently adequate for the convenience and needs of the Bank's customer base.
TABLE I.18 - OFFICE FACILITIES AND LOCATIONS
<TABLE>
<CAPTION>
NET BOOK
VALUE OF
PROPERTY OR OWNED OR USE OF
PHYSICAL ADDRESS IMPROVEMENTS LEASED PROPERTY
- ---------------- -------------- ---------- -------------------------
<S> <C> <C> <C>
407 West Innes Street $353,697 Owned Corporate Headquarters;
Salisbury, North Carolina 28144-4232 Retail loan and deposit
branch
427 West Innes Street
Salisbury, North Carolina 28144 176,287 Owned Currently Leased. Will
become operational center
in 1999. Current tenants
are on a month to month
basis.
3027 North Center Street 414,641 Owned Retail loan and deposit
Statesville, North Carolina 28677 branch. Some leased space
106 West Main Street 38,487 Owned Retail loan and deposit
Rockwell, North Carolina 28138 branch.
330 South Main Street $ 14,167 Leased Currently used as
Salisbury, North Carolina 28144 operational center; will
move to 427 West Innes
Street in 1999.
</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 Bank's management
to be in good condition.
SOURCE: CITIZENS' AUDITED AND UNAUDITED FINANCIAL STATEMENT AND THE OFFERING
CIRCULAR.
24
<PAGE>
SECTION II
MARKET AREA
<PAGE>
FERGUSON & COMPANY SECTION II.
- ------------------ -----------
II. MARKET AREA
DEMOGRAPHICS
Citizens operates from its main office at 407 West Innes Street, in
Salisbury, North Carolina. In addition to its home office, it has two banking
offices and one operational center. The operational center is in leased quarters
and the two banking offices are located in Statesville, North Carolina, and
Rockwell, North Carolina. Additional information is available in Section I,
Table I.18.
Citizens considers its primary market area to be the counties of Rowan and
Iredell. Table II.1, below, presents historical and projected trends for the
United States, North Carolina, Rowen County, and Iredell County. The information
addresses population, income, employment, and housing trends.
As indicated in Table II.1, below, the State of North Carolina, and the
counties of Rowen and Iredell have experienced extraordinary growth rates in
terms of population. The State of North Carolina experienced a growth rate from
1990 to 1996, of 10.37%, which is higher than the recorded growth rate of 6.67%
for the U. S. Within the trade area, Iredell County grew 13.79%, and Rowan
County grew 9.45%. Future prospects are similar, although slightly lower than
historical growth rates. Between 1996 and 2001, the State is expected to grow
7.52%; and Iredell and Rowan Counties are expected to grow 9.69% and 6.91%,
respectively.
Another impressive demographic factor about Citizens' assessment area is
the Household Income Distribution Estimate for 2001. Iredell County is expected
to have 62% of its population in the two household incomes that are between
$25,000 and $100,000. Rowan County is expected to have 59% of its population in
the same ranges. This compares to the 58% of the population in that range in
the United States and 57% of the State population in that range. Clearly, the
economic base of the market area is excellent. It records high household
incomes and rapid growth of this successful population base.
The population and industrial growth are obviously pushing along the growth
rates that have been experienced in the State. North Carolina is the 14/th/
most industrialized state in the United States. The demographics of the area
reflect that industrialization and diversification.
1
<PAGE>
FERGUSON & COMPANY SECTION II.
- ------------------ -----------
<TABLE>
<CAPTION>
TABLE II.1 DEMOGRAPHIC TRENDS
KEY ECONOMIC INDICATORS
United States, North Carolina, Iredell County and Rowan County
===================================================================================================
UNITED STATE COUNTY COUNTY
KEY ECONOMIC INDICATOR STATES N.CAROLINA IREDELL ROWAN
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Population, 2001 Est. 278,802,003 7,865,805 115,993 129,426
1996 - 2001 Percent Change, Est. 5.09 7.52 9.69 6.91
Total Population, 1996 Est. 265,294,885 7,315,856 105,745 121,062
1990 - 96 Percent Change, Est. 6.67 10.37 13.79 9.45
Total Population, 1990 248,709,873 6,628,637 92,931 110,605
- ---------------------------------------------------------------------------------------------------
Household Income, 2001 Est. 33,189 28,922 33,893 28,930
1996 - 2001 Percent Change, Est. (3.88) (5.37) (1.29) (3.61)
Household Income, 1996 Est. 34,530 30,562 34,337 30,012
Per Capita Income, 1990 16,738 15,147 15,889 14,131
- ---------------------------------------------------------------------------------------------------
Household Income Distribution-2001 Est. (%)
$15,000 and less 20 22 18 21
$ 15,000 - $25,000 16 18 16 18
$ 25,000 - $50,000 34 36 38 39
$ 50,000 - $100,000 24 21 24 20
$100,000 - $150,000 4 3 3 2
$150,000 and over 2 1 1 1
- ---------------------------------------------------------------------------------------------------
Unemployment rate, 1990 6.24 4.63 4.20 3.61
- ---------------------------------------------------------------------------------------------------
Median Age of Population, 1996 Est. 34.3 34.8 36.5 36.6
Median Age of Population, 1990 32.9 33.1 34.8 35.2
- ---------------------------------------------------------------------------------------------------
Average Housing Value, 1990 79,098 79,714 80,036 62,567
- ---------------------------------------------------------------------------------------------------
Total Households, 2001 Est. 103,293,062 3,005,720 44,480 49,872
1996 - 2001 Percent Change, Est. 5.14 7.79 9.80 7.04
Total Households, 1996 98,239,161 2,788,382 40,511 46,594
1990 - 96 Percent Change, Est. 6.84 10.78 13.88 9.60
Total Households, 1990 91,947,410 2,517,026 35,573 42,512
- ---------------------------------------------------------------------------------------------------
Total Housing Units, 1990 101,641,260 2,818,193 39,191 46,264
% Vacant 10.07 10.69 9.23 8.11
% Occupied 89.93 89.31 90.77 91.89
% By Owner 57.78 60.74 68.16 67.60
% By Renter 32.15 28.57 22.61 24.29
===================================================================================================
</TABLE>
SOURCE: SCAN/US, INC.
2
<PAGE>
FERGUSON & COMPANY SECTION II.
- ------------------ -----------
North Carolina, one of the South Atlantic states of the United States, is
bordered on the north by Virginia; on the east by the Atlantic Ocean; on the
south by South Carolina, Georgia, and Mississippi and on the west by Tennessee.
Raleigh is the capital of North Carolina, and Charlotte is the largest city.
North Carolina is the 29/th/ largest state in the United States. The population
estimate for 1996 is 7,315,856. North Carolina was predominately an agricultural
state as late as 1920 until the manufacture of textiles, furniture and tobacco
products began to provide the bulk of the State's annual income. Currently,
manufacturing remains an important source of income, along with trade,
distribution, tourism and other services, and government. /1/
Important to any financial institution that is in the business of financing
the construction and purchase of homes is the growth in the number of
households. Table II.1 shows that the prospects for the establishment of new
households in the trade area are excellent. From 1990 until 1996, the counties
in the trade area experienced an increase in the number of households. Iredell
County's households increased 13.88% between 1990 and 1996, and an additional
9.80% growth is expected between 1996 and 2001. Rowan County experienced 9.60%
growth between 1990 and 1996 and it also expects to grow 7.04% in the next five
years. Such levels of household growth presents a well capitalized and well
managed financial institution with multiple lending opportunities. Some of the
opportunities are the construction of new houses and commercial businesses, the
financing of the purchase of these houses and businesses, consumer goods such as
autos, boats and RV's, plus the financing of businesses to serve the new and
existing population.
When home ownership is compared to the United States and the State of North
Carolina, both of the counties in the trade area have a higher incidence of home
ownership than the United States and the State of North Carolina. Occupancy
rates can also reflect the economic viability of an area. Citizens' trade area
has occupancy levels of 90.77% in Iredell County and 91.89% in Rowan County.
The principal sources of employment in Citizens' trade area are shown in
Table II.2 below. On average, the major sources of employment are
manufacturing, trade, services, and public administration. The counties in the
delineated trade area show significantly more people engaging in manufacturing
activity than the State. The high incidence of people engaged in manufacturing
account for, in part, the large number of households that have incomes between
$25,000 and $50,000. The manufacturing and trade portion of the economic base
contributes to the generous measure of the local household incomes and gives
some dimension to the stability and diversification of the local economy.
_______________________
/1/ North Carolina, Encarta 96 Encyclopedia
3
<PAGE>
FERGUSON & COMPANY SECTION II.
- ------------------ -----------
TABLE II.2 - EMPLOYMENT BY INDUSTRY
<TABLE>
<CAPTION>
AS OF YEAR END 1995
STATE
UNITED OF NORTH ROWAN IREDELL
STATE CAROLINA COUNTY COUNTY
-------------------------------------------------------------------------
EMPLOYMENT BY INDUSTRY (PERCENT (%)
- -------------------------------
<S> <C> <C> <C> <C>
Construction/Agriculture/Mining 9.5% 6.3% 5.1% 5.4%
Manufacturing 17.7% 25.1% 32.4% 38.1%
Transportation/Utilities 7.1% 4.7% 3.1% 2.7%
Trade 21.2% 23.3% 23.1% 24.7%
Finance/Insurance 6.9% 4.2% 2.1% 1.8%
Services 32.7% 20.7% 17.8% 15.5%
Public Administration 4.9% 15.5% 16.4% 11.8%
--------------------------------------------------------------------------
TOTAL 100.0% 100.0% 100.0% 100.0%
=========================================================================
</TABLE>
SOURCE: STATE OF NORTH CAROLINA, DEPARTMENT OF ECONOMIC DEVELOPMENT
This information gives rise to understanding the other demographic
information. With manufacturing, trade, services, and public administration
employing such high percentages of the population and contributing to the
earnings of the citizenry, the concentration of income in the middle range is
clearer. Obviously, on average, the population within the assessment area of
Citizens is better employed than the State average. This should assist
continuing economic growth, which should translate into more homebuyers, more
consumer goods being purchased, more businesses being started, and a growing,
stable economy.
In summary, the demographics of the assessment area are very favorable.
The area has and is expected to have an overall growth in population. This
growth in population is being accompanied with an anticipated increase in
household income that is creating a more stable per capita income and an
anticipated increase in the number of new households that will be created.
These factors, coupled with a strong tradition of home ownership in the area,
should translate into an increased number of housing units being built and a
good market for previously owned housing. Moreover, the robust economic growth
of the area should provide more than an average amount of business opportunity
to Citizens.
4
<PAGE>
FERGUSON & COMPANY SECTION II.
- ------------------ -----------
COMPETITION
Based on information publicly available on deposits as of June 30, 1997
(see Table II.3), in the two counties which citizens considers its trade area,
there are $2.161 billion in total deposits. Banks controlled $1.816 billion,
credit unions $38.0 million, and other savings banks $174.16 million. As of
that date, Citizens had 7.41% of the total deposit market, or $160.11 million.
Citizens is a major influence in the total market area that is located
within the delineated market area. The statistics reveal success and
opportunities for the institution. Additional capital infused by the Conversion
will assist the Bank in becoming more competitive.
TABLE II.3 - MARKET AREA DEPOSITS
<TABLE>
<CAPTION>
As of June 30,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
CITIZENS SAVINGS BANK, SSB - Total $ 160,106 $ 149,807 $ 163,397
-----------------------------------------------------
Number of Offices 3 3 3
TOTAL SAVINGS AND LOAN ASSOCIATION DEPOSITS $ 147,164 $ 139,539 $ 129,037
-----------------------------------------------------
Total Number of Branches 3 3 3
TOTAL CREDIT UNION DEPOSITS $ 38,001 $ 36,630 $ 33,110
-----------------------------------------------------
Total Number of Branches 4 4 4
TOTAL BANK DEPOSITS (17 BANKS) $1,816,132 $1,754,487 $1,687,697
-----------------------------------------------------
Total Number of Branches 72 73 71
TOTAL MARKET AREA DEPOSITS $2,161,403 $2,080,463 2,013,241
=====================================================
CITIZENS SAVING BANK, SSB - MARKET SHARE 7.41% 7.20% 8.12%
- ----------------------------------------
=====================================================
</TABLE>
SOURCE: BRANCHSOURCE, JUNE 30, 1997, A PRODUCT OF SHESHUNOFF INFORMATION
SERVICES.
Growth opportunities for Citizens can be assessed by reviewing economic
factors in its market area. The salient factors include growth trends, economic
trends, and competition from other financial institutions. We have reviewed
these factors to assess the potential for the market area. In assessing the
growth potential of Citizens Savings Bank, we must also assess the willingness
and flexibility of Management to respond to the competitive factors that exist
in the market area. It is our analysis that the economic environment and the
potential of the area is excellent, moreover, we feel that the current
Management team can realize a portion of the potential afforded by the area's
economic base. Our analysis of the economic potential and the potential of
Management has a positive effect on the valuation of the institution.
5
<PAGE>
SECTION III
COMPARISON WITH PUBLICLY
TRADED THRIFTS
<PAGE>
FERGUSON & COMPANY SECTION III.
- ------------------ ------------
III. COMPARISON WITH PUBLICLY TRADED THRIFTS
COMPARATIVE DISCUSSION
This section presents an analysis of Citizens relative to a group of 11
publicly traded thrift institutions ("Comparative Group"). Such analysis is
necessary to determine the adjustments that must be made to the pro forma market
value of Citizens' stock. Table III.1 presents a listing of the comparative
group with general information about the group. Table III.2 presents key
financial indicators relative to profitability, balance sheet composition and
strength, and risk factors. Table III.3 presents a pro forma comparison of
Citizens to the comparative group, all North Carolina thrifts, Southeast Region
thrifts and selected publicly traded thrifts. Exhibits III and IV contain
selected financial information on Citizens and the comparative group. This
information is derived from quarterly TFR's filed with the OTS and call reports
filed with the FDIC. The selection criteria and comparison with the Comparative
Group are discussed below.
SELECTION CRITERIA
Ideally, the comparative group would consist of thrifts in the same geographic
region with identical local economies, asset size, capital level, earnings
performance, asset quality, etc. However, there are few comparably sized
institutions with stock that is liquid enough to provide timely, meaningful
market values. Therefore, we have selected a group of comparatives that are
listed on either the New York Stock Exchange ("NYSE"), the American Stock
Exchange ("AMEX"), or NASDAQ. We excluded companies that are apparent takeover
targets and companies with unusual characteristics that tend to distort both
mean and median calculations. For example, we have excluded all companies with
losses during the trailing 12 months (see Exhibit II.1).
The principal source of data was SNL Securities, Charlottesville, Virginia.
There are 384 publicly traded thrifts listed on NYSE, AMEX, or NASDAQ. In
developing statistics for the entire country, we eliminated certain institutions
that skewed the results, in order to make the data more meaningful:
. We eliminated companies with losses,
. We eliminated indicated acquisition targets,
. We eliminated companies with price/earnings ratios in excess of 35, and
. We eliminated companies that had not reported as a stock institution for
one complete year.
The resulting group of 252 publicly traded thrifts is included in Exhibit
II.1.
Because of the limited number of similar size thrifts with sufficient trading
volume, we refined the search looking for members of the comparative groups
among thrifts with assets between $100 million and $300 million. From that
group we then eliminated the following:
. Eliminated MHC's,
. Eliminated companies with loans to assets greater than 85%,
. Eliminated companies with loans to deposits greater than 120%,
. Eliminated companies with non-performing assets greater than 1.0%,
. Eliminated companies with equity to assets greater than 18%, and
. Eliminated companies with equity to assets less than 7.5%.
The result was a group of 11 thrifts. Normally, we consider 10 to be the
desired sample, but provided an extra comparative in case there are changes
before this Conversion is completed.
1
<PAGE>
FERGUSON & COMPANY SECTION III.
- ------------------ ------------
The selected group of comparatives has sufficient trading volume to provide
meaningful price data. Two of the comparative group members are located in the
Midwest, two in the Mid-Atlantic, one in the Southwest, four are in the
Northeast, and two in the Southeast. Three of the group are located in
Massachusetts, and one each in Indiana, Kentucky, Maine, Alabama, North
Carolina, Maryland, Texas, and Pennsylvania. With total assets of approximately
$192.72 million, Citizens is near the group selected, which has average assets
of $182.37 million and median assets of $179.79 million.
PROFITABILITY
Using the comparison of profitability components as a percentage of average
assets, Citizens was below the comparative group in return on assets, 0.67% to
1.03%, and core income, 0.67% to 0.99%. Citizens was slightly below the
comparative group in other operating income, 0.19% to 0.21%. However, net
interest income was significantly below the group, 2.39% to 3.52%. This is due
mainly to composition of the loan portfolio. Citizens makes up some of the
difference by being an efficient operation and is below the comparative group in
operating expense, 1.53% to 1.75%. After conversion, deployment of the proceeds
will provide additional income, and Citizens will compare slightly more
favorably with the comparative group in terms of return on average assets, with
a return of 0.76% at the midpoint of the appraisal range. Pro forma return on
average equity is 4.99% at the midpoint, versus a mean of 9.83%, and a median of
9.22% for the comparative group. After conversion, the employment of funds and
the growth of assets and liabilities will improve the profitability of this
institution. However, the asset composition of Citizens will continue to have a
debilitating influence upon profitability. The continuing dependency upon
single family loans is the main problem and is being slowly and conservatively
addressed by Management.
BALANCE SHEET CHARACTERISTICS
The general asset composition of Citizens is more oriented to loans than that
of the comparative group. Citizens has a lower level of passive investments
with 14.58% of its assets invested in cash, investments, and mortgage-backed
securities, versus 26.91% for the comparative group. In the investment
portfolio, Citizens has 9.55% in cash and investment securities, and 5.03% in
mortgage backed securities. The comparative group has 20.09% in cash and
investments, and 6.82% in mortgage backed securities. Citizens has a higher
percentage of its assets in loans at 82.87%, versus 67.97% for the comparative
group. The Bank's percentage of interest earning assets to interest bearing
liabilities is less than that of the group. Citizens has 108.43%, and the
comparative group averages 111.95%. Citizens is considered "Well Capitalized"
with 8.10% of assets in equity capital, and the comparative group has an average
of 11.20% in equity to assets. After conversion, and after the utilization of
the capital infusion for earning assets and supporting growth, Citizens' ratio
of 15.74% at the midpoint will be higher than that of the group of comparatives.
Management plans to utilize the capital from the Conversion to increase asset
and liabilities, but does not plan to lower lending and underwriting standards.
Consequently, the capital will not be completely utilized for some time, and the
ROAE will be lower until the capital can be leveraged.
The liability side differs mainly in that the Bank has limited borrowings and
a higher percentage of deposits. The Bank funds its assets with 82.93%
deposits, expressed as a percentage of total assets and borrowings of 6.75%. On
the other hand, the comparative group has deposits of 77.77% and borrowings of
9.78%. The comparison between the Bank's capital level and that of the
comparative group will improve after conversion. After the Conversion, the
Bank's equity to assets will be 15.74%, at the midpoint. The average equity to
assets of the comparative group is 11.20%, and the median is 10.64%.
2
<PAGE>
FERGUSON & COMPANY SECTION III.
- ------------------ ------------
RISK FACTORS
Both Citizens and the comparative group have well-controlled levels of non-
performing assets, with the Bank being lower than the comparative group, 0.07%
to 0.44% of assets. Citizens' loan loss allowance is 0.77% of net loans, which
compares favorably with the comparative group's 1.04%. Currently, the loan loss
allowance of Citizens is adequate considering the conservative composition of
the loan portfolio. As the composition of the portfolio changes, there may be a
future need for increasing provisions, but it is adequate for now. In the area
of interest rate risk and the implications of one-year gap assets, Citizens and
the comparative group are not far apart. Citizens has a negative one-year gap
of 13.43%, and the group has a negative 10.42%. Citizens' acceptable level of
interest rate risk is managed by making adjustable rate residential loans for
the portfolio and selling the fixed rate loans into the secondary market,
supplemented by liquidity and MBS's that are available for sale. The
comparatives manage interest rate risk with short-term investments and a lesser
level of adjustable loans portfolio. Citizens' concentration in adjustable rate
residential lending negatively impacts the earnings capacity of the institution.
Additional capital raised by the Conversion will enhance the profitability.
SUMMARY OF FINANCIAL COMPARISON
Based on the above discussion of operational, balance sheet, and risk
characteristics of Citizens compared with the group, we believe that Citizens'
performance is below that of the comparative group. Moreover, the profitability
of Citizens is currently sustainable only at the lower levels due to the
composition of the loan portfolio. The conversion proceeds will improve the
profitability.
FUTURE PLANS
Citizens' future plans are to remain an independent, well capitalized,
profitable institution with good asset quality, with a commitment to serving the
needs of its trade area. Portfolio composition will mainly be changed by
increasing the volume in home equity loans and initiating commercial lending
(commercial real estate and non-real estate loans) in the first quarter of 1999.
The current strategy, which is reflected in the business plan, projects
increased growth in commercial real estate lending, commercial loans, and home
equity loans. Management recognizes that it will take time to invest the
proceeds of its capital infusion in a manner consistent with its historic
performance and current lending policies. During that period of time,
Management is willing to accept a lower return on assets, as well as a lower
return on equity capital.
Citizens has adhered to a limited-growth policy. In fact, the Bank has
experienced a decline in asset and liability growth since December 31, 1994.
However, the decline in assets, coupled with continued modest profitability, has
caused the capital of the institution to grow both in dollar amount and as a
percentage of total assets. This disciplined approach to capital maintenance
has produced a strong institution that is well capitalized and moderately
profitable. The additional capital raised by the sale of Common Stock will
initially be used to purchase short-term investment securities. Adjustable rate
loans will continue to be emphasized. The Bank will continue to minimize long
term, fixed rate loans. The Bank's business plan projects that it will
experience growth in loans, deposits, and liquidity.
The additional capital and the holding company concept would make the
acquisition of another institution or branches a viable option, along with de
novo branching. At this time, there are no plans for acquisition of
institutions or new branches. If an economically viable opportunity arises,
proper approval will be sought from the regulatory agencies.
Increasing market penetration by increasing the number of services and
products available, coupled with expanded marketing efforts and improved
service, are the most likely methods to be employed to achieve growth.
3
<PAGE>
FERGUSON & COMPANY TABLE III - COMPARATIVES CHARACTERTICS SECTION III
- ------------------ -----------
<TABLE>
<CAPTION>
Total Current Current
Number Type Assets Stock Market
of of ($000) Price Value
Ticker Short Name City State Offices Institution Mst RctQ IPO Date ($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC AMB Financial Corp. Munster IN 4 Traditional 111,338.0 1-Apr-96 14.75 13.51
CLAS Classic Bancshares Inc. Ashland KY 5 Traditional (1) 137,984.0 29-Dec-95 15.25 19.82
& Banking
FCME First Coastal Corp. Westbrook ME 8 Traditional 171,719.0 NA 10.50 14.29
FFDB FirstFed Bancorp Inc. Bessemer AL 8 Traditional (1) 179,893.0 19-Nov-91 12.75 31.04
& Banking
HBS Haywood Bancshares Inc. Waynesville NC 4 Traditional 151,718.0 18-Dec-87 19.00 23.76
HIFS Hingham Instit. for Savings Hingham MA 5 Traditional 239,148.0 20-Dec-88 24.63 32.25
HRBF Harbor Federal Bancorp Inc. Baltimore MD 9 Traditional 235,733.0 12-Aug-94 18.13 33.76
IPSW Ipswich Savings Bank Ipswich MA 7 Traditional 233,662.0 26-May-93 12.00 28.68
JXVL Jacksonville Bancorp Inc. Jacksonville TX 7 Traditional 242,673.0 1-Apr-96 16.25 39.35
LARL Laurel Capital Group Inc. Allison Park PA 6 Traditional 220,986.0 20-Feb-87 19.00 41.64
MFLR Mayflower Co-operative Bank Middleboro MA 4 Traditional 135,518.0 23-Dec-87 19.50 17.54
Maximum 9 242,673.0 24.63 41.64
Minimum 4 111,338.0 10.50 13.51
Average 6 187,306.5 16.52 26.88
Median 6 179,893.0 16.25 28.68
</TABLE>
(1) Holding company owns one bank and one thrift.
4
<PAGE>
FERGUSON & COMPANY SECTION III
- ------------------ -----------
TABLE III.2 - KEY FINANCIAL INDICATORS
<TABLE>
<CAPTION>
CITIZENS COMPARATIVE
SAVINGS GROUP
------------ -------------
<S> <C> <C>
PROFITABILITY
(% of average assets)
Net income 0.67 1.03
Net interest income 2.39 3.52
Loss (recovery) provisions - 0.07
Other operating income 0.19 0.21
Operating expense 1.53 1.75
Core income ( excluding gains
and losses on asset sales) 0.67 0.99
BALANCE SHEET FACTORS
(% of assets)
Cash and investments 9.55 20.09
Mortgage-backed securities 5.03 6.82
Loans 82.87 67.97
Savings deposits 82.93 77.77
Borrowings 6.75 9.78
Equity 8.10 11.20
Tangible equity 8.10 10.93
RISK FACTORS
(%)
Earning assets/costing liabilities 108.43 111.95
Non-performing assets/assets 0.07 0.44
Loss allowance/non performing assets 941.54 229.80
Loss allowance/loans 0.77 1.04
One year gap/assets (13.43) (10.42)
</TABLE>
5
<PAGE>
FERGUSON & COMPANY SECTION III
- ------------------ -----------
TABLE III.3 - PRO FORMA COMPARISON
CONVERTING INSTITUTION TO COMPARATIVE GROUP
AS OF AUGUST 28, 1998
<TABLE>
<CAPTION>
Ticker Name Price Mk Value PE P/Book P/TBook P/Assets Div Yld Assets
($) ($Mil) (X) (%) (%) (%) (%) ($000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CITIZENS SAVINGS FSB
--------------------
Before Conversion N/A N/A N/A N/A N/A N/A N/A 192,716
Pro Forma Supermax 30.000 27.77 15.94 71.38 71.38 12.86 2.00 216,013
Pro Forma Maximum 30.000 24.15 14.44 67.46 67.46 11.34 2.00 212,902
Pro Forma Midpoint 30.000 21.00 13.02 63.46 63.46 9.99 2.00 210,196
Pro Forma Minimum 30.000 17.85 11.50 58.75 58.75 8.6 2.00 207,490
COMPARATIVE GROUP
-----------------
Averages 16.523 26.88 15.98 133.41 136.66 14.16 2.35 187,307
Medians 16.250 28.68 14.03 113.71 113.71 14.32 2.27 179,893
NORTH CAROLINA PUBLIC THRIFTS
-----------------------------
Averages 14.813 36.91 16.61 111.99 112.43 20.88 3.30 182,962
Medians 14.250 28.86 16.94 111.75 113.51 19.72 3.44 141,130
SOUTHEAST REGION THRIFTS
------------------------
Averages 15.869 71.86 20.28 146.24 152.54 17.87 2.27 572906
Medians 15.750 43.13 18.06 125.89 124.88 16.93 2.26 183148
ALL PUBLIC THRIFTS
------------------
Averages 18.015 222.50 17.82 137.11 144.01 15.17 1.96 1757760
Medians 16.250 48.53 16.87 123.19 128.53 14.60 2.10 373915
COMPARATIVE GROUP
-----------------
AMFC AMBFinancial-IN 14.750 13.51 24.18 95.65 95.65 12.13 1.90 111,338
CLAS ClassicBcshs-KY 15.250 19.82 25.00 96.58 112.30 14.36 2.10 137,984
FCME FirstCoastal-ME 10.500 14.29 13.13 92.92 92.92 8.32 - 171,719
FFDB FirstFedBncpInc-AL 12.750 31.04 19.32 174.42 188.89 17.25 2.20 179,893
HBS HaywoodBcshs-NC 19.000 23.76 10.73 107.47 110.98 15.66 3.16 151,718
HIFS Hingham-MA 24.625 32.25 11.84 142.42 142.42 13.42 2.27 239,148
HRBF HarborFedBncp-MD 18.125 33.76 19.08 113.71 113.71 14.32 2.61 235,733
IPSW IpswichSB-MA 12.000 28.68 11.54 219.78 219.78 12.27 1.33 233,662
JXVL Jacksonville-TX 16.250 39.35 12.90 112.22 112.22 16.22 3.08 242,673
LARL LaurelCapital-PA 19.000 41.64 14.07 177.07 177.07 18.84 3.16 220,986
MFLR MayflowerCo-op-MA 19.500 17.54 14.03 135.32 137.32 12.94 4.10 135,518
</TABLE>
Note: Stock prices are closing prices or last trade. Pro forma
calculations for Citizens are based on sales at $30 per share
with a midpoint of $21,000,000, minimum of $17,850,000, and
maximum of $24,150,000.
6
<PAGE>
FERGUSON & COMPANY SECTION III.
- ------------------ ------------
TABLE III.3 - PRO FORMA COMPARISON
CONVERTING INSTITUTION TO COMPARATIVE GROUP
AS OF AUGUST 28, 1998
<TABLE>
<CAPTION>
Ticker Name Eq/A TEq/A EPS ROAA ROAE
(%) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C>
CITIZENS SAVINGS FSB
--------------------
Before Conversion 8.10 8.10 N/A 0.67 8.35
Pro Forma Supermax 18.01 18.01 3.14 0.79 4.57
Pro Forma Maximum 16.81 16.81 3.46 0.77 4.78
Pro Forma Midpoint 15.74 15.74 3.84 0.76 4.99
Pro Forma Minimum 14.64 14.64 4.35 0.74 5.24
COMPARATIVE GROUP
-----------------
Averages 11.20 10.93 1.14 1.01 9.83
Medians 10.64 10.64 1.04 0.98 9.22
NORTH CAROLINA PUBLIC THRIFTS
-----------------------------
Averages 19.63 19.58 0.94 1.29 6.60
Medians 17.95 17.95 0.74 1.32 6.68
SOUTHEAST REGION THRIFTS
------------------------
Averages 13.53 13.48 0.87 0.99 7.89
Medians 13.03 13.25 0.78 0.98 7.37
ALL PUBLIC THRIFTS
------------------
Averages 11.83 11.55 1.11 0.94 8.79
Medians 9.93 9.71 1.00 0.89 7.86
COMPARATIVE GROUP
-----------------
AMFC AMBFinancial-IN 12.68 12.68 0.61 0.53 3.77
CLAS ClassicBcshs-KY 14.87 13.06 0.61 0.56 3.72
FCME FirstCoastal-ME 8.95 8.95 0.80 0.73 7.42
FFDB FirstFedBncpInc-AL 9.89 9.21 0.66 0.89 9.22
HBS HaywoodBcshs-NC 14.57 14.17 1.77 1.44 9.97
HIFS Hingham-MA 9.43 9.43 2.08 1.25 12.94
HRBF HarborFedBncp-MD 12.60 12.60 0.95 0.75 5.88
IPSW IpswichSB-MA 5.58 5.58 1.04 1.18 21.92
JXVL Jacksonville-TX 14.46 14.46 1.26 1.33 9.13
LARL LaurelCapital-PA 10.64 10.64 1.35 1.46 13.93
MFLR MayflowerCo-op-MA 9.56 9.44 1.39 0.98 10.22
</TABLE>
7
<PAGE>
FERGUSON & COMPANY TABLE III.4 - SELECTION OF COMPARATIVES SECTION III.
- ------------------ -----------
<TABLE>
<CAPTION>
Deposit Current
Insurance Stock
Agency Price
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC AMB Financial Corp. Munster IN MW SAIF NASDAQ 04/01/96 18.375
CLAS Classic Bancshares Inc. Ashland KY MW SAIF NASDAQ 12/29/95 16.125
FCME First Coastal Corp. Westbrook ME NE BIF NASDAQ NA 13.563
FFDB FirstFed Bancorp Inc. Bessemer AL SE SAIF NASDAQ 11/19/91 24.500
HBS Haywood Bancshares Inc. Waynesville NC SE SAIF AMSE 12/18/87 22.875
HIFS Hingham Instit. for Savings Hingham MA NE BIF NASDAQ 12/20/88 36.750
HRBF Harbor Federal Bancorp Inc. Baltimore MD MA SAIF NASDAQ 08/12/94 23.500
IPSW Ipswich Savings Bank Ipswich MA NE BIF NASDAQ 05/26/93 18.000
JXVL Jacksonville Bancorp Inc. Jacksonville TX SW SAIF NASDAQ 04/01/96 20.875
LARL Laurel Capital Group Inc. Allison Park PA MA SAIF NASDAQ 02/20/87 20.500
MFLR Mayflower Co-operative Bank Middleboro MA NE BIF NASDAQ 12/23/87 25.000
Maximum 36.750
Minimum 13.563
Average 21.824
Median 20.875
</TABLE>
----------------------------------------------------
Selection of Comparatives
-------------------------
Start with 384
Delete:
Merger Targets 353
PE Greater than 35 + Non reporting 252
Assets Less than $100 million 225
Assets Greater than $300 million 83
MHC's 82
Equity to Assets Greater than 18% 68
NPA's Greater than 1% 58
Loans/Deposits Greater than 120% 49
Loans/Assets Greater than 85% 48
Deposits/Assets Less than 70% 12
Updated Merger Targets (1) 11
----------------------------------------------------
8
<PAGE>
FERGUSON & COMPANY TABLE III.4 SELECTION OF COMPARATIVES SECTION III.
- ------------------ ------------
<TABLE>
<CAPTION>
Current Price/ Price/ Current Current Current Total
Market LTM Core Price/ Price/Tang Price/ Dividend Assets
Value Core EPS EPS Book Value Book Value Assets Yield ($000)
Ticker ($M) (x) (x) (%) (%) (%) (%) Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC 16.82 28.71 35.34 118.24 118.24 16.68 1.52 106,201
CLAS 20.96 23.04 17.53 104.84 122.90 15.79 1.74 132,793
FCME 18.43 16.54 16.15 122.19 122.19 12.29 - 150,022
FFDB 28.30 17.75 18.01 163.33 177.92 15.83 2.04 178,792
HBS 28.60 12.92 11.21 126.73 130.86 18.82 2.62 152,002
HIFS 47.90 17.93 17.33 218.23 218.23 20.67 1.42 231,710
HRBF 39.80 23.98 21.76 135.68 135.68 17.22 2.21 231,140
IPSW 43.01 23.08 21.43 342.86 342.86 18.11 0.89 237,575
JXVL 51.04 15.35 18.64 146.08 146.08 21.52 2.40 237,102
LARL 44.86 15.89 15.53 194.50 194.50 20.68 2.54 216,781
MFLR 22.48 17.73 16.89 174.70 177.43 17.04 3.20 131,908
Maximum 51.04 28.71 35.34 342.86 342.86 21.52 3.20 237,575
Minimum 16.82 12.92 11.21 104.84 118.24 12.29 - 106,201
Average 32.93 19.36 19.07 167.94 171.54 17.70 1.87 182,366
Median 28.60 17.75 17.53 146.08 146.08 17.22 2.04 178,792
</TABLE>
9
<PAGE>
FERGUSON & COMPANY TABLE III.4 SELECTION OF COMPARATIVES SECTION III.
- ------------------ ------------
<TABLE>
<CAPTION>
Tangible Return on ROACE
Equity/ Equity/ Core Avg Assets Before NPAs/ Loans/
Assets Tang Assets EPS Before Extra Extra Merger Current Assets Deposits
(%) (%) ($) (%) (%) Target? Pricing (%) (%)
Ticker Mst RctQ Mst RctQ LTM LTM LTM (Y/N) Date Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC 14.10 14.10 0.64 1.02 6.94 N 05/29/98 0.33 112.34
CLAS 15.06 13.14 0.70 0.83 5.58 N 05/29/98 0.34 90.15
FCME 10.06 10.06 0.82 0.86 8.80 N 05/29/98 0.43 91.55
FFDB 9.69 8.97 1.38 0.96 9.89 N 05/29/98 0.99 75.88
HBS 14.85 14.45 1.77 1.45 10.19 N 05/29/98 0.37 98.62
HIFS 9.47 9.47 2.05 1.26 13.04 N 05/29/98 0.42 109.71
HRBF 12.69 12.69 0.98 0.75 5.86 N 05/29/98 0.42 85.82
IPSW 5.28 5.28 0.78 1.24 22.54 N 05/29/98 0.79 112.64
JXVL 14.73 14.73 1.36 1.45 9.83 N 05/29/98 0.75 91.70
LARL 10.63 10.63 1.29 1.43 13.78 N 05/29/98 0.37 86.20
MFLR 9.75 9.62 1.41 1.11 11.51 N 05/29/98 0.65 75.13
Maximum 15.06 14.73 2.05 1.45 22.54 0.99 112.64
Minimum 5.28 5.28 0.64 0.75 5.58 0.33 75.13
Average 11.48 11.19 1.20 1.12 10.72 0.53 93.61
Median 10.63 10.63 1.29 1.11 9.89 0.42 91.55
</TABLE>
10
<PAGE>
FERGUSON & COMPANY TABLE III.4 SELECTION OF COMPARATIVES SECTION III.
- ------------------ ------------
<TABLE>
<CAPTION>
Loans
Loans/ Deposits/ Borrowings/ Serviced
Assets Assets Assets For Others
(%) (%) (%) ($000)
Ticker Mst RctQ Mst RctQ Mst RctQ Mst RctY
<S> <C> <C> <C> <C>
AMFC 78.69 70.05 14.12 -
CLAS 67.70 75.09 8.71 -
FCME 72.33 79.00 10.74 42,525
FFDB 68.05 89.68 - 740
HBS 75.65 76.71 6.91 283
HIFS 77.41 70.56 19.03 5,615
HRBF 64.20 74.80 10.93 5,050
IPSW 80.89 71.81 21.06 45,358
JXVL 76.03 82.91 0.87 62,078
LARL 68.19 79.11 7.86 1,229
MFLR 58.05 77.27 12.13 30,141
Maximum 80.89 89.68 21.06 62,078
Minimum 58.05 70.05 - -
Average 71.56 77.00 10.21 17,547
Median 72.33 76.71 10.74 5,050
</TABLE>
11
<PAGE>
SECTION IV
CORRELATION OF MARKET VALUE
<PAGE>
FERGUSON & COMPANY SECTION IV.
- ------------------ -----------
IV. CORRELATION OF MARKET VALUE
MARKETABILITY & LIQUIDITY OF STOCK TO BE ISSUED
This section addresses the aforementioned factors and the estimated pro
forma market. Certain factors must be considered to determine whether
adjustments are required in correlating Citizens' market value to the
comparative group. Those factors include financial aspects, market area,
management, dividends, liquidity, thrift equity market conditions, and
subscription interest value of the to-be-issued common shares, and compares the
resulting market value of the Bank to the members of its comparative group and
the selected group of publicly held thrifts.
FINANCIAL ASPECTS
Section III includes a discussion regarding a comparison of Citizens'
earnings, balance sheet characteristics, and risk factors with its comparative
group. Table III.2 presents a comparison of certain key indicators, and Table
III.3 presents certain key indicators on a pro forma basis after conversion.
As shown in Table III.2, from an earnings viewpoint, Citizens is below its
comparative group in return on assets expressed as a percentage of average
assets. This is principally a result of Citizens' lower net interest income and
lower net interest margins. Another comparison is the core earnings of Citizens
to the comparative group. In that comparison Citizens is lower than the
comparative group in core earnings to assets (0.67% to 0.99%). Citizens has a
lower net interest income than the comparables, 2.39% to the comparative group's
3.52%. Citizens has no loan loss provision, and the comparative group has
0.07%. Citizens has a lower other operating income (0.19% vs. 0.21%), but lower
operating expenses than the comparative group (1.53% vs. 1.75%). After
considering all of the analytical factors and adjusting to core earnings,
Citizens has lower earnings, but is comparatively similar in results to the
group. After Citizens completes its stock conversion, its return on average
assets and core income as a percentage of average assets will increase, but will
not out perform the comparative group. Table III.3 projects that Citizens will
perform at a level below the comparative group in return on assets with 0.76% at
the midpoint, versus a mean of 1.01% and median of 0.98% for the comparative
group.
Citizens' pro forma equity to assets ratio at the midpoint is 15.74%,
versus a mean of 11.20%, and median of 10.64% for the comparative group.
Citizens' pro forma return on equity is lower than the comparative group - 4.99%
at the midpoint versus a mean of 9.83% and median of 9.22% for the comparative
group. The post-conversion ROAE is lower due to the high post-conversion
capital levels.
Citizens' recorded earnings did not require any adjustments for appraisal
purposes (see Table IV.1).
1
<PAGE>
FERGUSON & COMPANY SECTION IV.
- ------------------ -----------
<TABLE>
<CAPTION>
TABLE IV.1 - EARNINGS
FOR THE TWELVE MONTHS ENDING JUNE 30, 1998
(In Thousands)
<S> <C>
APPRAISAL EARNINGS
YEAR END SEPTEMBER 30, 1997 $ 967
------------
Less:
Earnings for 9 months ended
June 30, 1997 705
------------
Plus:
Earnings for 9 months ended
June 30, 1998 968
------------
EARNINGS FOR THE 12 MONTHS
ENDED JUNE 30, 1998 $1,230
============
</TABLE>
Source: Citizens Savings Bank's audited financial statements and F&C
calculations.
Citizens' asset composition is lending oriented, with 82.87% of total
assets dedicated to lending. The comparative group is also lending oriented
(more than 50% of total assets are in loans); however, the percentage of total
assets assigned to lending is only 67.97%. The comparative group uses mortgage-
backed securities to augment loans (6.82%). Taking loans and MBS's as a total,
Citizens has 87.90% of total assets in that combination, and the comparable
group has 74.79%. The different combinations also will produce different income
results. Citizens' mixture of loans and MBS's is less profitable than the mix
reported by the comparative group, because Citizens' interest earning assets are
concentrated in the lower yielding single family residential loans. Another
area of significant difference in assets is in cash and investments. Citizens
has 9.55% of its assets in that category, and the comparative group has 20.09%.
Citizens uses adjustable rate single-family loans to mitigate interest rate
risk, and the comparative group uses cash and investments to mitigate interest
rate risk. This is reflected in the higher net interest margins of the
comparative group. Another slight difference in Citizens and the comparative
group is the funding sources for the earning assets, besides capital. Citizens
has borrowings of 6.75% of total assets. The comparative group has deposits of
77.77% of assets and borrowings of 9.78% of total assets. Citizens has an
efficient branching operation, with three branches garnering $159.82 million in
deposits. Branch systems like the branch system of Citizens are not prevalent
in the comparative group, and the results are reflected in the low operating
expenses.
From the viewpoint of risk, Citizens is above but similar to the
comparative group. Citizens has 0.07% in non-performing assets, and the
comparative group has 0.44% in non-performing assets. Obviously, Citizens'
percentage is much smaller, but both levels are indicative of quality
portfolios, and neither should present any problems related to capital or future
earnings of Citizens or the comparative group. Citizens' loan loss allowance is
0.77% of net loans, comparing favorably with the comparative group, which is
1.04%. Citizens' loan loss reserve is lower that the comparative group, but
adequate for a loan portfolio that is concentrated in single-family residences.
Its ratio of interest earning assets to interest bearing liabilities (108.43%)
is less than the comparative group (111.95%). However, the difference is
2
<PAGE>
FERGUSON & COMPANY SECTION IV.
- ------------------ -----------
almost equal to the difference in capital levels. From an interest rate risk
factor, Citizens has more risk than the comparative group. Both Citizens and the
comparative group have amounts of interest rate risk that are manageable,
although the approaches to interest rate risk management may be different. The
Bank's interest rate risk will decrease further after the Conversion with the
employment of the subsequent capital infusion.
We believe that A DOWNWARD ADJUSTMENT is necessary relative to financial
---------------------
aspects of Citizens Savings due mainly to the lower earnings.
MARKET AREA
Section II describes Citizens' market area.
We believe that NO ADJUSTMENT is required for Citizens' market area.
-------------
MANAGEMENT
The CEO joined the Bank as President and CEO in 1990 and has served as a
Director since 1984. He holds a bachelor's degree in business from Duke
University and an MBA from Wake Forrest University. Prior to joining Citizens,
he served as chief fiscal officer for Rown-Cabarrus Community College for 23
years. He is well qualified for the position he holds.
The senior staff is qualified and possesses the necessary intellect,
skills, levels of expertise, and experience to maintain the integrity of the
assets and to implement the strategic goals of the organization. This
management team lacks executive management depth and experience. Citizens'
results are below the comparative group. There is no formal management
succession plan in effect and the Bank would be vulnerable to the loss of the
CEO.
We believe that NO ADJUSTMENT is required for Citizens' Management.
-------------
DIVIDENDS
Table III.3 provides dividend information relative to the comparative group
and the thrift industry as a whole. The comparative group is paying a mean
yield on a market price of 2.35% and a median of 2.27%, while all public thrifts
are paying a mean of 1.96% and median of 2.10%. North Carolina public thrifts
are paying a mean of 3.30% and a median of 3.44%. Citizens intends to pay a
dividend at an initial annual rate of 2.0%, on an offering price of $30.00 per
share ($0.60 per share). With market appreciation, Citizens' dividend rate will
be less than the comparative group.
We believe that NO ADJUSTMENT is required relative to Citizens' intention
-------------
to pay dividends.
LIQUIDITY
The Holding Company has never issued capital stock to the public, and as a
result, there is no existing market for the Common Stock. Although the Holding
Company has applied to list its Common Stock on NASDAQ Small-Cap Market, there
can be no assurance that a liquid trading market will develop. Moreover, it is
likely that insiders will purchase 102,000 shares and the ESOP another 56,000 at
the midpoint (700,000 shares), leaving only 77.43% (542,000 shares) available
for the general market.
A public market having the desirable characteristics of depth, liquidity,
and orderliness depends upon the presence in the marketplace of both willing
buyers and sellers of the Common Stock. These characteristics are not within
the control of the Bank or the market.
The peer group includes companies with sufficient trading volume to develop
meaningful pricing characteristics for the stock. The market value of the
comparative group ranges from $41.64 million to $13.51 million, with a mean
value of $26.88 million. The midpoint of Citizens' valuation range is $21.0
3
<PAGE>
FERGUSON & COMPANY SECTION IV.
- ------------------ -----------
million at $30.00 a share, or 700,000 shares. The liquidity of the stock can be
affected by the size of the issue ($21.00 million at the midpoint at $30.00 per
share). Of the 700,000 shares in the offering, approximately 102,000 shares
will be purchased by insiders, 56,000 by the ESOP, leaving approximately 542,000
shares available to the market. Such a number of shares may not produce the
trading volume necessary to develop a meaningful, liquid market.
We believe that A SLIGHT DOWNWARD ADJUSTMENT is required relative to the
----------------------------
liquidity of Citizens Savings Bank's stock.
THRIFT EQUITY MARKET CONDITIONS
As shown in Figure IV.1, which is a graph of the SNL Thrift Index covering
January 31, 1994, through August 28, 1998, the market, as reflected by the
index, experienced fluctuations but ended in 1994 - down 13.74, which is only
5.3%. Since year-end 1994, the market has continued with a well-defined
increase and has moved from 244.7 at December 31, 1994, to 376.51 at December
29, 1995, an increase of 53.84%. From that point, the SNL Index rose
consistently from the 376.51 reported at December 31, 1995, to 486.67 at
December 31, 1996. The Index increased further until the end of February 1997,
reaching 569.67. March 1997 brought the first retrenchment of the Index and it
fell to 517.63 in April of 1997. From April 11, 1997, forward, the Index
increased, with one noticeable decline in value in the third week of April 1997.
By the end of the month of April, the Index rebounded, and has rebounded
robustly since then, increasing from 537.21 at April 30, 1997, to 684.51
reported July 31, 1997. From July through the first three weeks of October
1997, the market continued to climb. Late October saw significant market
adjustments. The market fell sharply, then started an unsure rise. The SNL
Index fell from 773.33 at October 21, 1997, to 745.83 at October 28, 1997. At
November 7, 1997, the index had reclaimed some of its loss and closed at 755.07.
From November 7 until the end of May 1998, the SNL had some fluctuations, but
generally trended upward and reached 897.20. At that time the market began
adjusting downward. There were some up days, but the general trend was sharply
downward, and at August 28, 1998, the date of this appraisal, the SNL was
631.45. This represents a 29.62% downward adjustment from the 897.20 recorded
May 31, 1998.
EFFECT OF INTEREST RATES ON THRIFT STOCK
The current interest rate environment and the anticipated rate environment
will affect the pricing of thrift stocks and all other interest sensitive
stocks. As the economy continues to expand, the fear of inflation can return.
The Federal Reserve, in its resolve to curb inflation, has increased rates in
the past, but has more recently relented and passed several opportunities to
increase rates, until March 25, 1997, when the Federal Open Market Committee
(FOMC) increased the discount rate 25 basis points. In some minds, this was an
attempt to head off inflationary trends. According to the FOMC, "This action
was taken in light of persisting strength in demand, which is progressively
increasing the risk of inflationary imbalances developing in the economy that
would eventually undermine the long expansion."/1/ This increase was clearly
telegraphed by Chairman Greenspan who voiced concern about the levels of the
equity markets. Following the March 25 increase, unemployment rates were
announced at the 5.2% level, down from the 5.5% level at the beginning of 1996,
and significantly down from the 6.7% level at the beginning of 1994./2/ The
good news about unemployment gave way to speculation that the March 25 increase
was just the first of at least two or three increases, and the speculation was
given some credence at that time by rises in the Employment Cost Index, an
increase in Unit Labor Cost, and an upward trend in the price of crude oil. By
April 1, 1997, following the rate increase, the equities markets lost all of the
gains registered since the first
_______________________________
/1/ US Financial Data, August 20, 1998, published by the Research Division of
the Federal Reserve Bank of St. Louis, MO.
/2/ National Economic Trends, The Federal Reserve Bank of St. Louis, MO.
4
<PAGE>
FERGUSON & COMPANY SECTION IV.
- ------------------ -----------
of the year. By the end of April 1997, the market had begun a rebound and
trended upward until May 1998, when a period of adjustment began. There have
been specific days of price adjustment, but the overall trend is down,
notwithstanding recent dramatic ups and downs. During this period of adjustment,
the SNL Index has lost almost 30% of its value. Chairman Greenspan, in recent
public appearances (after August 28, 1998), suggested that rates might be cut
amid signs of an economic slowdown worldwide. Such comments should give heart to
investors and should also give rise to increased prices in interest sensitive
stocks. On the other hand, lower rates would generally hurt the value of the
dollar and reduce the yield on dollar-denominated deposits.
The thrift equities market is following the market in general. However,
the thrift equities market may also be influenced by the speculation that there
will eventually be a buyout and the knowledge that thrift IPO stock can be
purchased at significant discounts from book value. These two facts could keep
the thrift equities market from falling as much as the other general markets.
The large mergers are likely to slow, but at the regional level, merger activity
is likely to continue.
What is likely to happen in the short to intermediate term is that rates
will float around current levels for the next few months. If there is a
reduction in rates by the Fed, it will be nominal and more symbolic. The yield
curve will continue to be of normal configuration, but exceedingly flat. Some
economists feel that a flattening yield curve could be signaling a business
slowdown. The current spread (see Figure II) is 55 basis points between the
one-year T-Bill and the 30-year bond. Historically, when the yield curve become
flat, the "GDP" growth also slows.
With the Federal Reserve always ready to raise (or lower) rates as economic
conditions warrant, it is likely that during the next few months, rates will be
stable. The supply and demand portion of the equation is nicely balanced, but
could reflect an imbalance if the economic problems of Russia and the Pacific
Rim spread to the major trading partners of the United States or if the South
American economies should become unstable.
From an analytical view, there are several things on the economic horizon
at this time that would interfere with continuing economic expansion: problems
with the Russian economy, and continuing problems with the pacific economies.
However, unless there is a major devaluation in another major currency, our
economic expansion is likely to chug onward and upward at reduced levels.
Thrift net interest margins have remained stable. The equilibrium in the
supply and demand portion of the interest rate market has helped continue the
profitability mode of the industry that started in 1993. Access to mortgage-
backed securities and derivatives have made it possible for many thrifts to be
profitable without making loans in significant volumes. However, even with
portfolios replete with adjustable rate loans and adjustable MBS's, there
remains a real fear that a quickly rising rate environment can cause the cost of
funds to rise faster than the adjustable assets can accommodate, and
accordingly, spreads would narrow. If rates rise in a slow and orderly manner,
then the negative impact on spreads will be less, and the adjustable rate assets
will have time to rise and protect rate spreads. If rates are to be lowered, it
is unlikely that profitability will improve dramatically, for real estate loan
rates have generally factored in a slight decrease in rates. On the funding
side, thrifts are unlikely to lower transactional account rates and certificate
rates have a delayed impact on profitability due to their term.
Figure IV.2 graphically displays the rate environment since November 14,
1997. Since then, the yield curve has flattened with the high spread between
the one-year T-Bill and the 30 year long bond being 62 BP and the low 24 BP.
Mortgage rates follow closely the long-term government obligations.
5
<PAGE>
FERGUSON & COMPANY SECTION IV.
- ------------------ -----------
NORTH CAROLINA ACQUISITIONS
Table IV.2 provides information relative to acquisitions of financial
institutions in North Carolina between January 1, 1997, and August 28, 1998.
There were 13 acquisitions announced during that time frame. There are 57
publicly held thrifts in the Southeast region of the country. Acquisitions of
financial institutions in North Carolina completed since January 1, 1997 have
averaged 224.93% of tangible book value and 30.71 times earnings. The median
price has been 190.64% of tangible book value and 28.13 times earnings. Thrifts
generally sell at lower price/book multiples than do banks. This data reflects
that, and the database information makes it dangerous to deduce that the overall
prices of thrifts are nearing the price of banks. Disparity, or the lack
thereof, between the price of thrifts and banks aside, there is ample data shown
to conclude that speculators in thrift IPO stock have good reason to believe
that, in the event of a sell out, there would be a generous profit. Such
knowledge and hope for profits have created a whole new level of professional
investors (speculators) and that, in turn, has increased the demand for thrift
IPO stocks.
Table IV.3, which has information on recent conversions since February
1998, shows that recent price appreciation has been less vigorous than it was in
past periods and is likely reflecting the general equities market adjustments.
Table IV.3 provides information on 14 conversions completed since February 1998.
The average change in price since conversion is a gain of 23.51%, and the median
change is a gain of 15.21%. All thrifts but one within that group have
increased in value, ranging from a loss of 8.75% to an increase of 86.25%. The
average increase in value at one day, one week, and one month after conversion
has been 53.51%, 56.39%, and 56.49%, respectively. The median increase in value
at one day, one week, and one month after conversion has been 52.50%, 56.57%,
and 55.94%, respectively. A notable change in pricing patterns is that it is
taking longer for the stocks to increase in value. Moreover, the obvious
dichotomy in prices shown the first day, first week and first month when
compared to increases in value to date are due to the most recent downward move
in the market. That downward adjustment carried over into thrift and bank
issues as well as the general equities market.
When viewing recent conversions completed since February 1998, the average
price to pro forma book value was 77.08% and the median is 77.50%. However,
these percentages of pro forma book value do not reflect the drop in the market
values of the recent days. Citizens, which will likely close at the
supermaximum will have a price to pro forma book value of 63.46% at the midpoint
and 71.38% at the supermaximum. The recently converted stocks (Table IV.2) are
currently selling at an average price to book value of 93.85% and a median of
88.27%. If the Conversion is completed at the supermaximum and 71.38% of price
to pro forma book value, the discount is only 23.94%. A very reasonable
discount, after taking into consideration the limited earning capability of
Citizens and its dependency on single family residential loans.
We believe that a SLIGHT DOWNWARD ADJUSTMENT is required for the new issue
--------------------------
discount.
6
<PAGE>
FERGUSON & COMPANY SECTION IV.
- ------------------ -----------
ADJUSTMENTS CONCLUSION
ADJUSTMENTS SUMMARY
<TABLE>
<CAPTION>
NO CHANGE UPWARD DOWN
<S> <C> <C> <C>
Financial Aspects X
Market Area X
Management X
Dividends X
Liquidity X
Thrift Equity Market Conditions X
- ---------------------------------------------------------------------------------------------------
</TABLE>
VALUATION APPROACH
Typically, investors rely on the price/earnings ratio as the most
appropriate indicator of value. We consider price/earnings to be one of the
important pricing methods in valuing a thrift stock. Price/book is a well-
recognized yardstick for measuring the value of financial institution stocks in
general. Another method of viewing thrift values is price/assets, which is more
meaningful in situations where the subject is thinly capitalized. Given the
healthy condition of the thrift industry today, more emphasis is placed on
price/earnings and price/book. Generally, price/earnings and price/book should
be considered in tandem.
Table III.3 presents Citizens' pro forma ratios and compares them to the
ratios of its comparative group and the publicly held thrift industry as a
whole. Citizens' reported earnings for the 12 months ended June 30, 1998, were
approximately $1,230,000, with no adjustments (see Table IV.1). The Bank is
adequately positioned to manage interest rate variations. The Bank projects
approximately a 20% rate of growth over the next three years.
The comparative group traded at an average of 15.98 times earnings at
August 28, 1998, and at 133.41% of book value. The comparative group traded at
a median of 14.03 times earnings and a median of 113.71% of book value. At the
midpoint of the valuation range, Citizens is priced at 13.02 times earnings and
63.46% of book value. At the maximum end of the range, Citizens is priced at
14.44 times earnings and 67.46% of book value. At the supermaximum, Citizens is
priced at 15.94 times earnings and 71.38% of book value.
The midpoint valuation of $21,000,000 represents a discount of 52.4% from
the average and a discount of 44.2% from the median of the comparative group on
a price/book basis. The price/earnings ratio for Citizens at the midpoint
represents a discount of 18.5% from the comparative group's mean and 7.2% from
the median price/earnings ratio.
The maximum valuation of $24,150,000 represents a discount of 49.4% from
the average and 40.7% from the median of the comparative group on a price/book
basis. The price/earnings ratio for Citizens at the maximum represents a
discount of 9.6% from the average and a premium of 2.9% above the median of the
comparative group.
As shown in Table IV.3, conversions closing since February 1998, have
closed at an average price to book ratio of 77.08% and median of 77.50%.
Citizens' pro forma price to book ratio is 63.46% at the midpoint, 67.46% at the
maximum, and 71.38% at the supermaximum of the range. At the midpoint,
7
<PAGE>
FERGUSON & COMPANY SECTION IV.
- ------------------ -----------
Citizens is 17.7% below the average and 18.1% below the median. At the maximum
of the range, Citizens is 12.5% below the average and 13.0% below the median. At
the supermaximum of the range, Citizens' pro forma price to book ratio is 7.4%
below the average and 7.9% below the median.
Addressing the discounts between the pro forma book value of Citizens and
the current price to book values of the comparative group (see Table IV.4),
there are some notable factors. Should the issue close at the supermaximum,
which is likely, then it would be closing at a discount of 7.4% on the average
of recent conversion. It is important to realize that there is some point
beyond which most knowledgeable investors will not travel as it relates to the
price of thrift IPO stock. Those points are not fixed and are influenced by
many other market factors. The recent period of adjustment in the equities
market and in the thrift equities market have lowered the prices of thrift
stocks as the price adjustment of these stocks affects the marketability and
price of conversion stock.
VALUATION CONCLUSION
- --------------------
We believe that as of August 28, 1998, the estimated pro forma market value
of Citizens was $21,000,000. The resulting valuation range was $17,850,000 at
the minimum to $24,150,000 at the maximum, based on a range of 15% below and 15%
above the midpoint valuation. The supermaximum is $27,772,500, based on 1.15
times the maximum. Pro forma comparisons with the comparative group are
presented in Table III.3 based on calculations shown in Exhibit V.
8
<PAGE>
FERGUSON & COMPANY SECTION IV
- ------------------ ----------
TABLE IV.2 - WHOLE BANK AND THRIFT ACQUISITIONS IN NORTH CAROLINA
SINCE JANUARY 1, 1997
<TABLE>
<CAPTION>
Seller: Seller: Ann'd
1:Total 1:Eqty/ Deal Pr/
Bank/ Bank/ Announce Assets Assets Assets
Buyer ST Thrift Seller ST Thrift Date ($000) (%) (%)
- ----- -- ------ ------ -- ------ ---- ------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Centura Banks Inc. NC Bank Scotland Bncp Inc. NC Thrift 8/26/98 61,082 24.93 37.16
First Western Bank NC Bank Mitchell Bancorp NC Thrift 8/13/98 37,306 39.22 50.93
First Charter Corp NC Bank HFNC Financial Corp. NC Thrift 5/18/98 979,554 17.24 24.52
Carolina First BcShs NC Bank Community B&T NC Bank 4/15/98 94,982 10.41 33.69
Triangle Bancorp NC Bank United Federal Svgs NC Thrift 12/26/97 301,924 7.75 18.08
Hometown Bank, The NC Thrift Shelby Savings Bank NC Thrift 12/16/97 106,262 13.64 NA
Southern Bancshares NC Bank ESB Bncp NC Thrift 11/21/97 26,502 19.03 24.15
Triangle Bancorp NC Bank Guaranty State Bncp NC Bank 10/16/97 103,830 10.75 34.19
First Charter Corp NC Bank Carolina State Bank NC Bank 6/30/97 139,014 9.03 30.36
FNB Corp. NC Bank Home Savings Bank NC Thrift 6/3/97 53,446 17.74 27.13
First Citizens BcShs NC Bank First Savings Fin'l NC Thrift 4/3/97 55,850 16.44 18.98
Triangle Bancorp NC Bank Bank of Mecklenburg NC Bank 3/27/97 259,280 7.04 16.20
LSB Bancshares NC Bank Old North State Bank NC Bank 1/21/97 128,497 8.40 25.29
Maximum 979,554 39.22 50.93
Minimum 26,502 7.04 16.20
Average 180,579 15.51 28.39
Median 103,830 13.64 26.21
<CAPTION>
Ann'd Ann'd Ann'd
Deal Deal Pr/ Deal Pr/
Pr/Bk 4-Qtr Tg Bk
Buyer (%) EPS (x) (%)
- ----- --- ------- ---
<S> <C> <C> <C>
Centura Banks Inc. 147.61 23.50 147.61
First Western Bank 127.23 40.00 127.23
First Charter Corp 142.07 18.62 142.07
Carolina First BcShs 323.69 57.04 457.54
Triangle Bancorp 233.88 29.26 233.88
Hometown Bank, The NA NA NA
Southern Bancshares 126.91 25.30 126.91
Triangle Bancorp 301.50 30.67 301.50
First Charter Corp 336.34 35.08 356.75
FNB Corp. 150.93 NA 150.93
First Citizens BcShs 102.09 NA 102.09
Triangle Bancorp 217.77 20.60 230.34
LSB Bancshares 284.12 26.99 322.29
Maximum 336.34 57.04 457.54
Minimum 102.09 18.62 102.09
Average 207.85 30.71 224.93
Median 184.35 28.13 190.64
</TABLE>
9
<PAGE>
FERGUSON & COMPANY SECTION IV
- ------------------ ----------
TABLE IV.2 - WHOLE BANK AND THRIFT ACQUISITIONS IN NORTH CAROLINA SINCE
JANUARY 1, 1997
<TABLE>
<CAPTION>
Ann'd Ann'd Seller: Seller:
Deal TgBk Prem/ 1:YTD 1:YTD
Pr/Deps CoreDeps ROAA ROAE
Seller (%) (%) (%) (%)
- ------ --- --- --- ---
<S> <C> <C> <C> <C>
Scotland Bncp Inc. 50.69 18.18 0.96 3.95
Mitchell Bancorp 88.11 28.50 1.23 2.99
HFNC Financial Corp. 55.59 21.98 1.48 8.12
Community B&T 38.75 33.36 0.61 5.86
United Federal Svgs 20.69 13.30 0.66 8.84
Shelby Savings Bank NA NA 0.80 6.03
ESB Bncp 30.48 8.30 1.98 10.55
Guaranty State Bncp 39.44 31.77 1.15 10.71
Carolina State Bank 35.25 30.24 0.78 8.46
Home Savings Bank 33.98 12.28 0.96 5.36
First Savings Fin'l 23.40 3.88 -0.99 -5.64
Bank of Mecklenburg 23.83 19.18 0.82 11.27
Old North State Bank 29.59 24.83 0.98 11.64
88.11 33.36 1.98 11.64
20.69 3.88 -0.99 -5.64
39.15 20.48 0.88 6.78
34.62 20.58 0.96 8.12
</TABLE>
10
<PAGE>
FERGUSON & COMPANY SECTION 1V
- ------------------ ----------
TABLE 1V.3 - RECENT CONVERSIONS SINCE FEBRUARY 1998
<TABLE>
<CAPTION>
Conversion Gross Offering
Assets Proceeds Price
Ticker Short Name State IPO Date ($000) ($000) ($)
<S> <C> <C> <C> <C> <C> <C>
HFBC HopFed Bancorp Inc. KY 02/09/98 202,496 40,336 10.00
RCBK Richmond County Financial Corp NY 02/18/98 993,370 244,663 10.00
CAVB Cavalry Bancorp Inc. TN 03/17/98 275,925 75,383 10.00
ICBC Independence Comm. Bank Corp. NY 03/17/98 3,733,316 704,109 10.00
HLFC Home Loan Financial Corp. OH 03/26/98 60,401 22,483 10.00
BYS Bay State Bancorp MA 03/30/98 233,074 46,949 20.00
NEP Northeast PA Financial Corp. PA 04/01/98 369,242 59,515 10.00
HBSC Heritage Bancorp Inc. SC 04/06/98 247,499 69,431 15.00
EFC EFC Bancorp Inc. IL 04/07/98 315,910 69,365 10.00
CFKY Columbia Financial of Kentucky KY 04/15/98 104,006 26,715 10.00
FKAN First Kansas Financial Corp. KS 06/29/98 95,655 15,539 10.00
HRBT Hudson River Bancorp NY 07/01/98 664,996 173,337 10.00
UCFC United Community Finl Corp. OH 07/09/98 1,044,993 334,656 10.00
CITZ CFS Bancorp Inc. IN 07/24/98 746,050 178,538 10.00
Maximum 3,733,316 704,109 20.00
Minimum 60,401 15,539 10.00
Average 649,067 147,216 11.07
Median 295,918 69,398 10.00
</TABLE>
11
<PAGE>
FERGUSON & COMPANY SECTION IV
- ------------------ ----------
TABLE IV.3 - RECENT CONVERSIONS SINCE FEBRUARY 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) (%) ($) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
HFBC 75.40 75.43 12.40 16.60 16.875 116.70 116.70
RCBK 79.60 79.64 14.00 19.80 13.000 104.50 104.84
CAVB 79.80 79.80 14.30 21.50 18.625 139.30 139.30
ICBC 77.20 82.65 17.90 15.90 11.875 94.02 99.62
HLFC 75.90 75.95 17.00 27.10 14.500 103.28 103.28
BYS 78.60 78.65 20.90 16.80 20.375 74.80 74.80
NEP 75.40 75.42 18.70 13.90 10.188 70.90 70.90
HBSC 78.00 78.00 16.10 21.90 16.750 81.87 81.87
EFC 76.60 76.63 13.50 18.00 10.375 82.60 82.60
CFKY 74.50 74.49 19.60 20.40 12.375 88.27 88.27
FKAN 78.50 78.54 14.00 14.00 10.250 76.15 77.13
HRBT 80.10 80.14 22.30 20.70 10.375 NA NA
UCFC 77.80 77.81 14.10 24.30 14.000 NA NA
CITZ 71.70 71.66 18.20 19.30 9.125 NA NA
Maximum 80.10 82.65 22.30 27.10 20.38 139.30 139.30
Minimum 71.70 71.66 12.40 13.90 9.13 70.90 70.90
Average 77.08 77.49 16.64 19.30 13.48 93.85 94.48
Median 77.50 77.90 16.55 19.55 12.69 88.27 88.27
</TABLE>
12
<PAGE>
FERGUSON & COMPANY SECTION IV
- ------------------ ----------
TABLE IV.3 - RECENT CONVERSIONS SINCE FEBRUARY 1998
<TABLE>
<CAPTION>
POST CONVERSION INCREASES (DECREASES)
-------------------------------------------------------
Price One Price One Price One % Increase % Increase % Increase % Increase
Day After Week After Month After Price One Price One Price One To
Conversion Conversion Conversion Day After Week After Month After Date
Ticker ($) ($) ($) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
HFBC 16.813 16.000 16.750 68.13 60.00 67.50 68.75
RCBK 16.313 16.438 17.875 63.13 64.38 78.75 30.00
CAVB 20.563 24.375 24.000 105.63 143.75 140.00 86.25
ICBC 17.250 17.563 18.125 72.50 75.63 81.25 18.75
HLFC 15.250 16.188 16.750 52.50 61.88 67.50 45.00
BYS 29.375 29.625 30.125 46.88 48.13 50.63 1.88
NEP 15.500 15.375 15.438 55.00 53.75 54.38 1.88
HBSC NA 21.938 21.875 NA 46.25 45.83 11.67
EFC 14.750 14.938 14.125 47.50 49.38 41.25 3.75
CFKY 17.125 15.938 16.000 71.25 59.38 60.00 23.75
FKAN 12.313 12.250 11.500 23.13 22.50 15.00 2.50
HRBT 12.563 13.500 13.375 25.63 35.00 33.75 3.75
UCFC 15.000 16.000 15.750 50.00 60.00 57.50 40.00
CITZ 11.438 10.938 9.750 14.38 9.38 (2.50) (8.75)
Maximum 29.38 29.63 30.13 105.63 143.75 140.00 86.25
Minimum 11.44 10.94 9.75 14.38 9.38 (2.50) (8.75)
Average 16.48 17.22 17.25 53.51 56.39 56.49 23.51
Median 15.50 16.00 16.38 52.50 56.57 55.94 15.21
</TABLE>
13
<PAGE>
FERGUSON & COMPANY TABLE IV.4 - COMPARISON OF PRICING RATIOS SECTION IV
- ------------------ ----------
<TABLE>
<CAPTION>
Citizens Group Percent Premium
Savings Compared to (Discount) Versus
------------------------- ------------------------
Bank Average Median Average Median
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
COMPARISON OF PE RATIO AT
MIDPOINT TO:
- -------------------------------------------------
Comparative group 13.02 15.98 14.03 (18.5) (7.2)
North Carolina Thrifts 13.02 16.61 16.94 (21.6) (23.1)
Southeast Region Thrifts 13.02 20.28 18.06 (35.8) (27.9)
All public thrifts 13.02 17.82 16.87 (26.9) (22.8)
Recent conversions 13.02 16.64 16.55 (21.8) (21.3)
COMPARISON OF PE RATIO AT
MAXIMUM TO:
- -------------------------------------------------
Comparative group 14.44 15.98 14.03 (9.6) 2.9
North Carolina Thrifts 14.44 16.61 16.94 (13.1) (14.8)
Southeast Region Thrifts 14.44 20.28 18.06 (28.8) (20.0)
All public thrifts 14.44 17.82 16.87 (19.0) (14.4)
Recent conversions 14.44 16.64 16.55 (13.2) (12.7)
COMPARISON OF PE RATIO AT
SUPERMAXIMUM TO:
- -------------------------------------------------
Comparative group 15.94 15.98 14.03 (0.3) 13.6
North Carolina Thrifts 15.94 16.61 16.94 (4.0) (5.9)
Southeast Region Thrifts 15.94 20.28 18.06 (21.4) (11.7)
All public thrifts 15.94 17.82 16.87 (10.5) (5.5)
Recent conversions 15.94 16.64 16.55 (4.2) (3.7)
COMPARISON OF PB RATIO AT
MIDPOINT TO:
- -------------------------------------------------
Comparative group 63.46 133.41 113.71 (52.4) (44.2)
North Carolina Thrifts 63.46 111.99 111.75 (43.3) (43.2)
Southeast Region Thrifts 63.46 146.24 125.89 (56.6) (49.6)
All public thrifts 63.46 137.11 123.19 (53.7) (48.5)
Recent conversions 63.46 77.08 77.50 (17.7) (18.1)
COMPARISON OF PB RATIO AT
MAXIMUM TO:
- -------------------------------------------------
Comparative group 67.46 133.41 113.71 (49.4) (40.7)
North Carolina Thrifts 67.46 111.99 111.75 (39.8) (39.6)
Southeast Region Thrifts 67.46 146.24 125.89 (53.9) (46.4)
All public thrifts 67.46 137.11 123.19 (50.8) (45.2)
Recent conversions 67.46 77.08 77.50 (12.5) (13.0)
COMPARISON OF PB RATIO AT
SUPERMAXIMUM TO:
- -------------------------------------------------
Comparative group 71.38 133.41 113.71 (46.5) (37.2)
North Carolina Thrifts 71.38 111.99 111.75 (36.3) (36.1)
Southeast Region Thrifts 71.38 146.24 125.89 (51.2) (43.3)
All public thrifts 71.38 137.11 123.19 (47.9) (42.1)
Recent conversions 71.38 77.08 77.50 (7.4) (7.9)
</TABLE>
14
<PAGE>
FERGUSON & COMPANY
- ------------------
<TABLE>
<CAPTION>
Date Index
- ------------------------------
<S> <C>
31-Jan-94 258.47
28-Feb-94 249.53
31-Mar-94 241.57
29-Apr-94 248.31
31-May-94 263.34
30-Jun-94 269.58
29-Jul-94 276.69
31-Aug-94 287.18
30-Sep-94 279.69
31-Oct-94 236.12
30-Nov-94 245.84
30-Dec-94 244.73
28-Feb-95 277.00
31-Mar-95 278.40
28-Apr-95 295.44
31-May-95 307.60
23-Jun-95 313.95
31-Jul-95 328.20
31-Aug-95 355.50
29-Sep-95 362.29
31-Oct-95 354.05
30-Nov-95 370.17
29-Dec-95 376.51
31-Jan-95 370.69
29-Feb-96 373.64
29-Mar-96 382.13
30-Apr-96 377.24
31-May-96 382.99
28-Jun-96 387.18
30-Jul-96 388.38
30-Aug-96 408.34
30-Sep-96 429.28
30-Oct-96 456.70
29-Nov-96 485.83
31-Dec-96 486.63
31-Jan-97 520.08
27-Feb-97 569.67
31-Mar-97 527.74
30-Apr-97 537.21
30-May-97 577.94
30-Jun-97 624.55
30-Jul-97 684.51
28-Aug-97 661.21
2-Sep-97 677.20
12-Sep-97 698.55
23-Sep-97 729.07
30-Sep-97 737.50
9-Oct-97 766.19
21-Oct-97 773.33
28-Oct-97 745.83
28-Nov-97 767.35
19-Dec-97 793.02
31-Dec-97 797.56
9-Jan-98 720.16
30-Jan-98 768.35
23-Feb-98 814.61
20-Mar-98 872.70
31-Mar-98 869.32
30-Apr-98 882.10
31-May-98 897.20
15-Jun-98 819.02
30-Jun-98 833.56
17-Jul-98 846.63
24-Jul-98 824.71
24-Aug-98 696.15
28-Aug-98 631.45
</TABLE>
[Graph Appears Here]
Selected SNL Index From December 31, 1994 to August 28, 1998
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Percent Change
- ----------------------------------------------------------------------------------------------------------------------------
SNL Prev.
Date Index Date 12/31/95 12/31/96 12/31/97
<S> <C> <C> <C> <C> <C>
31-Dec-94 244.70
31-Mar-95 278.40 13.77%
30-Jun-95 313.50 12.61%
30-Sep-95 362.30 15.57%
31-Oct-95 354.10 -2.26%
30-Nov-95 370.20 4.55%
31-Dec-95 376.50 1.70%
12-Jan-96 372.40 -1.09% -1.09%
31-Jan-96 370.70 -0.46% -1.54%
29-Feb-96 373.60 0.78% -0.77%
29-Mar-96 382.10 2.28% 1.49%
30-Apr-96 377.20 -1.28% 0.19%
31-May-96 382.99 1.53% 1.72%
28-Jun-96 387.18 1.09% 2.84%
30-Jul-96 371.62 -4.02% -1.30%
30-Aug-96 408.34 9.88% 8.46%
20-Sep-96 419.50 2.73% 11.42%
30-Sep-96 429.28 2.33% 14.02%
30-Oct-96 456.70 6.39% 21.30%
29-Nov-96 485.83 6.38% 29.04%
13-Dec-96 473.64 -2.51% 25.80%
20-Dec-96 481.56 1.67% 27.90%
31-Dec-96 486.63 1.05% 29.25%
10-Jan-97 484.33 -0.47% 28.64% -0.47%
31-Jan-97 520.08 7.38% 38.14% 6.87%
14-Feb-97 547.17 5.21% 45.33% 12.44%
27-Feb-97 569.67 4.11% 51.31% 17.06%
14-Mar-97 560.67 -1.58% 48.92% 15.21%
31-Mar-97 527.74 -5.87% 40.17% 8.45%
15-Apr-97 525.48 -0.43% 39.57% 7.98%
30-Apr-97 537.21 2.23% 42.69% 10.39%
30-May-97 577.94 7.58% 53.50% 18.76%
12-Jun-97 604.15 4.54% 60.46% 24.15%
30-Jun-97 624.55 3.38% 65.88% 28.34%
17-Jul-97 652.44 4.47% 73.29% 34.07%
30-Jul-97 684.51 4.92% 81.81% 40.66%
22-Aug-97 663.36 -3.09% 76.19% 36.32%
28-Aug-97 661.21 -0.32% 75.62% 35.88%
2-Sep-97 677.20 2.42% 79.87% 39.16%
30-Sep-97 737.50 8.90% 95.88% 51.55%
21-Oct-97 773.33 4.86% 105.40% 58.92%
28-Oct-97 745.83 -3.56% 98.10% 53.26%
28-Nov-97 767.35 2.89% 103.81% 57.69%
19-Dec-97 793.02 3.35% 110.63% 62.96%
31-Dec-97 797.56 0.57% 111.84% 63.89%
30-Jan-98 768.35 -3.66% 104.08% 57.89% -3.66%
23-Feb-98 814.61 6.02% 116.36% 67.40% 2.14%
31-Mar-98 869.32 6.72% 130.90% 78.64% 9.00%
30-Apr-98 882.10 1.47% 134.29% 81.27% 10.60%
31-May-96 897.20 1.71% 138.30% 84.37% 12.49%
15-Jun-98 819.02 -8.71% 117.54% 68.30% 2.69%
30-Jun-98 833.54 1.77% 121.39% 71.29% 4.51%
17-Jul-98 846.63 1.57% 124.87% 73.98% 6.15%
24-Jul-98 824.71 -2.59% 119.05% 69.47% 3.40%
24-Aug-98 696.15 -15.59% 84.90% 43.06% -12.72%
28-Aug-98 631.45 -9.29% 67.72% 29.76% -20.83%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
FIGYRE IV.1 - SNL INDEX
15
<PAGE>
FERGUSON & COMPANY
- ------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------ -----------------
Fed Fds (*) 1 Year 5 Year 10 Year 30 Year 1 to 30
- ------------------------------------------------------------------------------------------------------
T-bill Treas. Treas. Treas. Yr. Spread
- ------------------------------------------------------------------------------------------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
14-Nov-97 5.50 5.43 5.81 5.88 6.12
28-Nov-97 5.49 5.50 5.82 5.86 6.06 0.56
- ------------------------------------------------------------------------------------------------------ -----------------
19-Dec-97 5.66 5.47 5.75 5.79 5.97
31-Dec-97 5.44 5.55 5.72 5.74 5.90 0.35
- ------------------------------------------------------------------------------------------------------ -----------------
16-Jan-98 5.45 5.17 5.32 5.45 5.74
30-Jan-98 5.53 5.27 5.48 5.63 5.89 0.62
- ------------------------------------------------------------------------------------------------------ -----------------
13-Feb-98 5.43 5.29 5.49 5.61 5.91
27-Feb-98 5.51 5.42 5.60 5.63 5.94 0.52
- ------------------------------------------------------------------------------------------------------ ----------------
13-Mar-98 5.45 5.36 5.57 5.62 5.93
27-Mar-98 5.43 5.40 5.62 5.63 5.92 0.52
- ------------------------------------------------------------------------------------------------------ -----------------
17-Apr-98 5.47 5.38 5.59 5.61 5.90
24-Apr-98 5.37 5.40 5.65 5.67 5.95 0.55
- ------------------------------------------------------------------------------------------------------ -----------------
15-May-98 5.49 5.46 5.67 5.70 5.98
29-May-98 5.45 5.43 5.57 5.57 5.83 0.40
- ------------------------------------------------------------------------------------------------------ -----------------
12-Jun-98 5.43 5.42 5.53 5.51 5.72
26-Jun-98 5.58 5.41 5.50 5.46 5.65 0.24
- ------------------------------------------------------------------------------------------------------ -----------------
17-Jul-98 5.49 5.35 5.47 5.49 5.71
31-Jul-98 5.54 5.36 5.51 5.50 5.73 0.37
- ------------------------------------------------------------------------------------------------------ -----------------
14-Aug-98 5.50 5.23 5.36 5.40 5.60
28-Aug-98 5.56 4.96 5.08 5.31 5.51 0.55
- ------------------------------------------------------------------------------------------------------ -----------------
</TABLE>
(*) Average of Rates Available
INREREST RATES FROM NOVEMBER 14, 1997 TO AUGUST 28, 1998
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------ -----------------
1 Year 5 Year 10 Year 30 Year 1 to 30
Fed Fds (*) T-bill Treas. Treas. Treas. Yr. Spread
- ------------------------------------------------------------------------------------------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
28-Aug-98 5.56 4.96 5.08 5.31 5.51 0.55
- ------------------------------------------------------------------------------------------------------ -----------------
</TABLE>
CURRENT YIELD CURVE
[GRAPH APPEARS HERE]
FIGURE IV.2 - INTEREST RATES
16
<PAGE>
EXHIBIT I
<PAGE>
FERGUSON & COMPANY
- ------------------
FERGUSON & COMPANY QUALIFICATIONS
Ferguson & Company (F&C) is a financial, economic, and regulatory
consulting firm providing services to financial institutions. It is located in
Hurst, Texas. Its services to financial institutions include:
. Mergers and acquisition services,
. Business plans,
. Fairness opinions and conversion appraisals,
. Litigation support,
. Loan review and valuation,
. Operational and efficiency consulting,
. Human resources evaluation and management, and
. Regulatory consulting.
F&C developed several financial institution databases of information
derived from periodic financial reports filed with regulatory authorities by
financial institutions. For example, F&C developed TAFS and BankSource. TAFS
includes thrifts filing TFR's with the OTS and BankSource includes banks and
savings banks filing call reports with the FDIC. Both databases of information
include information from the periodic reports plus numerous calculations derived
from F&C's analysis. In addition, both databases are interactive, permitting
the user to conduct merger analysis, do peer group comparisons, and a number of
other items. F&C recently sold its electronic publishing segment to Sheshunoff
Information Services Inc., Austin, Texas.
Brief biographical information is presented below on F&C's principals:
WILLIAM C. FERGUSON
- -------------------
Mr. Ferguson has approximately 30 years of experience providing various services
to financial institutions. He was a partner in a CPA firm prior to founding F&C
in 1984. Mr. Ferguson is a frequent speaker for financial institution seminars
and he has testified before Congressional Committees several times on his
analysis of the state of the thrift industry. Mr. Ferguson has a B.A. degree
from Austin Peay University and an M.S. degree from the University of Tennessee.
He is a CPA.
1
<PAGE>
FERGUSON & COMPANY
- ------------------
CHARLES M. HEBERT
- -----------------
Mr. Hebert has over 30 years of experience providing services to and managing
financial institutions. He spent 7 years as a national bank examiner, 14 years
in bank management, 5 years in thrift management, and has spent the last 10
years on the F&C consulting staff. Mr. Hebert holds a B.S. degree from
Louisiana State University. He is a certified commercial lender.
ROBIN L. FUSSELL
- ----------------
Mr. Fussell has over 25 years of experience providing professional services to
and managing financial institutions. He worked on the audit staff of a "Big
Six" accounting firm for 12 years, served as CFO of a thrift for 3 years, and
has worked in financial institution consulting for the last 12 years. He is a
co-founder of F&C. He holds a B.S. degree from East Carolina University. He is
a CPA.
2
<PAGE>
EXHIBIT II
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Deposit
Insurance
Agency
Ticker Short Name City State Region (BIF/SAIF) Exchange
<S> <C> <C> <C> <C> <C> <C>
AABC Access Anytime Bancorp Inc. Clovis NM SW SAIF NASDAQ
ABBK Abington Bancorp Inc. Abington MA NE BIF NASDAQ
ABCL Alliance Bancorp Hinsdale IL MW SAIF NASDAQ
ABCW Anchor BanCorp Wisconsin Madison WI MW SAIF NASDAQ
AFBC Advance Financial Bancorp Wellsburg WV SE SAIF NASDAQ
AHCI Ambanc Holding Co. Amsterdam NY MA BIF NASDAQ
ALBC Albion Banc Corp. Albion NY MA SAIF NASDAQ
ALLB Alliance Bank (MHC) Broomall PA MA SAIF NASDAQ
AMFC AMB Financial Corp. Munster IN MW SAIF NASDAQ
ANA Acadiana Bancshares Inc. Lafayette LA SW SAIF AMSE
ANDB Andover Bancorp Inc. Andover MA NE BIF NASDAQ
ANE Alliance Bncp of New England Vernon CT NE BIF AMSE
ASBI Ameriana Bancorp New Castle IN MW SAIF NASDAQ
ASBP ASB Financial Corp. Portsmouth OH MW SAIF NASDAQ
ASFC Astoria Financial Corp. Lake Success NY MA SAIF NASDAQ
BANC BankAtlantic Bancorp Inc. Fort Lauderdale FL SE SAIF NASDAQ
BDJI First Federal Bancorp. Bemidji MN MW SAIF NASDAQ
BFD BostonFed Bancorp Inc. Burlington MA NE SAIF AMSE
BFSB Bedford Bancshares Inc. Bedford VA SE SAIF NASDAQ
BKC American Bank of Connecticut Waterbury CT NE BIF AMSE
BKCT Bancorp Connecticut Inc. Southington CT NE BIF NASDAQ
BKUNA BankUnited Financial Corp. Coral Gables FL SE SAIF NASDAQ
BNKU Bank United Corp. Houston TX SW SAIF NASDAQ
BPLS Bank Plus Corp. Los Angeles CA WE SAIF NASDAQ
BVCC Bay View Capital Corp. San Mateo CA WE SAIF NASDAQ
CAFI Camco Financial Corp. Cambridge OH MW SAIF NASDAQ
CASB Cascade Financial Corp. Everett WA WE SAIF NASDAQ
CASH First Midwest Financial Inc. Storm Lake IA MW SAIF NASDAQ
CATB Catskill Financial Corp. Catskill NY MA BIF NASDAQ
CBCI Calumet Bancorp Inc. Dolton IL MW SAIF NASDAQ
CBES CBES Bancorp Inc. Excelsior Springs MO MW SAIF NASDAQ
CBSA Coastal Bancorp Inc. Houston TX SW SAIF NASDAQ
CEBK Central Co-operative Bank Somerville MA NE BIF NASDAQ
CENB Century Bancorp Inc. Thomasville NC SE SAIF NASDAQ
CFB Commercial Federal Corp. Omaha NE MW SAIF NYSE
CFCP Coastal Financial Corp. Myrtle Beach SC SE SAIF NASDAQ
CFFC Community Financial Corp. Staunton VA SE SAIF NASDAQ
CFNC Carolina Fincorp Inc. Rockingham NC SE SAIF NASDAQ
CFSB CFSB Bancorp Inc. Lansing MI MW SAIF NASDAQ
CFTP Community Federal Bancorp Tupelo MS SE SAIF NASDAQ
CIBI Community Investors Bancorp Bucyrus OH MW SAIF NASDAQ
CKFB CKF Bancorp Inc. Danville KY MW SAIF NASDAQ
CLAS Classic Bancshares Inc. Ashland KY MW SAIF NASDAQ
CMRN Cameron Financial Corp Cameron MO MW SAIF NASDAQ
CMSB Commonwealth Bancorp Inc. Norristown PA MA SAIF NASDAQ
CNIT CENIT Bancorp Inc. Norfolk VA SE SAIF NASDAQ
CNSB CNS Bancorp Inc. Jefferson City MO MW SAIF NASDAQ
CNY Carver Bancorp Inc. New York NY MA SAIF AMSE
COFI Charter One Financial Cleveland OH MW SAIF NASDAQ
COOP Cooperative Bankshares Inc. Wilmington NC SE SAIF NASDAQ
CRSB Crusader Holding Corp. Philadelphia PA MA SAIF NASDAQ
CRZY Crazy Woman Creek Bancorp Buffalo WY WE SAIF NASDAQ
CSBF CSB Financial Group Inc. Centralia IL MW SAIF NASDAQ
CVAL Chester Valley Bancorp Inc. Downingtown PA MA SAIF NASDAQ
DCBI Delphos Citizens Bancorp Inc. Delphos OH MW SAIF NASDAQ
DCOM Dime Community Bancshares Inc. Brooklyn NY MA BIF NASDAQ
DME Dime Bancorp Inc. New York NY MA BIF NYSE
DNFC D & N Financial Corp. Hancock MI MW SAIF NASDAQ
<CAPTION>
Current Current
Stock Market
Price Value
Ticker Short Name IPO Date ($) ($M)
<S> <C> <C> <C> <C>
AABC Access Anytime Bancorp Inc. 08/08/86 8.250 10.04
ABBK Abington Bancorp Inc. 06/10/86 14.875 52.09
ABCL Alliance Bancorp 07/07/92 18.438 210.83
ABCW Anchor BanCorp Wisconsin 07/16/92 22.000 391.16
AFBC Advance Financial Bancorp 01/02/97 14.375 15.43
AHCI Ambanc Holding Co. 12/27/95 13.750 56.45
ALBC Albion Banc Corp. 07/26/93 9.750 7.34
ALLB Alliance Bank (MHC) 03/03/95 20.000 65.46
AMFC AMB Financial Corp. 04/01/96 14.750 13.51
ANA Acadiana Bancshares Inc. 07/16/96 19.125 45.14
ANDB Andover Bancorp Inc. 05/08/86 33.000 213.86
ANE Alliance Bncp of New England 12/19/86 11.000 25.21
ASBI Ameriana Bancorp 03/02/87 18.750 60.99
ASBP ASB Financial Corp. 05/11/95 10.875 18.00
ASFC Astoria Financial Corp. 11/18/93 38.813 1,032.17
BANC BankAtlantic Bancorp Inc. 11/29/83 9.750 336.60
BDJI First Federal Bancorp. 04/04/95 14.500 14.47
BFD BostonFed Bancorp Inc. 10/24/95 18.500 99.77
BFSB Bedford Bancshares Inc. 08/22/94 12.375 28.44
BKC American Bank of Connecticut 12/01/81 21.875 102.52
BKCT Bancorp Connecticut Inc. 07/03/86 14.938 76.41
BKUNA BankUnited Financial Corp. 12/11/85 9.297 165.35
BNKU Bank United Corp. 08/09/96 32.500 1,026.91
BPLS Bank Plus Corp. NA 8.750 169.66
BVCC Bay View Capital Corp. 05/09/86 17.750 359.96
CAFI Camco Financial Corp. NA 16.625 91.00
CASB Cascade Financial Corp. 09/16/92 13.250 56.52
CASH First Midwest Financial Inc. 09/20/93 19.000 49.51
CATB Catskill Financial Corp. 04/18/96 13.750 61.00
CBCI Calumet Bancorp Inc. 02/20/92 26.750 84.14
CBES CBES Bancorp Inc. 09/30/96 19.000 17.85
CBSA Coastal Bancorp Inc. NA 18.750 141.86
CEBK Central Co-operative Bank 10/24/86 22.000 43.23
CENB Century Bancorp Inc. 12/23/96 14.000 17.79
CFB Commercial Federal Corp. 12/31/84 22.500 1,367.10
CFCP Coastal Financial Corp. 09/26/90 19.000 118.86
CFFC Community Financial Corp. 03/30/88 12.500 32.13
CFNC Carolina Fincorp Inc. 11/25/96 9.375 17.86
CFSB CFSB Bancorp Inc. 06/22/90 21.750 177.63
CFTP Community Federal Bancorp 03/26/96 16.000 70.37
CIBI Community Investors Bancorp 02/07/95 12.500 15.83
CKFB CKF Bancorp Inc. 01/04/95 17.375 14.65
CLAS Classic Bancshares Inc. 12/29/95 15.250 19.82
CMRN Cameron Financial Corp 04/03/95 16.625 40.46
CMSB Commonwealth Bancorp Inc. 06/17/96 14.000 213.84
CNIT CENIT Bancorp Inc. 08/06/92 18.250 91.58
CNSB CNS Bancorp Inc. 06/12/96 15.500 25.49
CNY Carver Bancorp Inc. 10/25/94 11.125 25.75
COFI Charter One Financial 01/22/88 26.625 3,393.60
COOP Cooperative Bankshares Inc. 08/21/91 14.500 43.90
CRSB Crusader Holding Corp. NA 13.500 51.74
CRZY Crazy Woman Creek Bancorp 03/29/96 13.875 13.03
CSBF CSB Financial Group Inc. 10/09/95 10.625 8.72
CVAL Chester Valley Bancorp Inc. 03/27/87 29.500 68.66
DCBI Delphos Citizens Bancorp Inc. 11/21/96 16.125 29.81
DCOM Dime Community Bancshares Inc. 06/26/96 18.000 219.18
DME Dime Bancorp Inc. 08/19/86 22.813 2,590.04
DNFC D & N Financial Corp. 02/13/85 18.750 171.70
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Deposit
Insurance
Agency
Ticker Short Name City State Region (BIF/SAIF) Exchange
<S> <C> <C> <C> <C> <C> <C>
DSL Downey Financial Corp. Newport Beach CA WE SAIF NYSE
EBSI Eagle Bancshares Tucker GA SE SAIF NASDAQ
EFBC Empire Federal Bancorp Inc. Livingston MT WE SAIF NASDAQ
EFBI Enterprise Federal Bancorp West Chester OH MW SAIF NASDAQ
EMLD Emerald Financial Corp. Strongsville OH MW SAIF NASDAQ
EQSB Equitable Federal Savings Bank Wheaton MD MA SAIF NASDAQ
ESBF ESB Financial Corp. Ellwood City PA MA SAIF NASDAQ
ESBK Elmira Savings Bank (The) Elmira NY MA BIF NASDAQ
FAB FIRSTFED AMERICA BANCORP INC. Swansea MA NE SAIF AMSE
FBBC First Bell Bancorp Inc. Pittsburgh PA MA SAIF NASDAQ
FBER 1st Bergen Bancorp Wood-Ridge NJ MA SAIF NASDAQ
FBHC Fort Bend Holding Corp. Rosenberg TX SW SAIF NASDAQ
FBSI First Bancshares Inc. Mountain Grove MO MW SAIF NASDAQ
FCB Falmouth Bancorp Inc. Falmouth MA NE BIF AMSE
FCBF FCB Financial Corp. Oshkosh WI MW SAIF NASDAQ
FCME First Coastal Corp. Westbrook ME NE BIF NASDAQ
FDEF First Defiance Financial Defiance OH MW SAIF NASDAQ
FED FirstFed Financial Corp. Santa Monica CA WE SAIF NYSE
FESX First Essex Bancorp Inc. Andover MA NE BIF NASDAQ
FFBH First Federal Bancshares of AR Harrison AR SE SAIF NASDAQ
FFBZ First Federal Bancorp Inc. Zanesville OH MW SAIF NASDAQ
FFCH First Financial Holdings Inc. Charleston SC SE SAIF NASDAQ
FFDB FirstFed Bancorp Inc. Bessemer AL SE SAIF NASDAQ
FFDF FFD Financial Corp. Dover OH MW SAIF NASDAQ
FFES First Federal of East Hartford East Hartford CT NE SAIF NASDAQ
FFFD North Central Bancshares Inc. Fort Dodge IA MW SAIF NASDAQ
FFHH FSF Financial Corp. Hutchinson MN MW SAIF NASDAQ
FFHS First Franklin Corp. Cincinnati OH MW SAIF NASDAQ
FFIC Flushing Financial Corp. Flushing NY MA BIF NASDAQ
FFKY First Federal Financial Corp. Elizabethtown KY MW SAIF NASDAQ
FFLC FFLC Bancorp Inc. Leesburg FL SE SAIF NASDAQ
FFOH Fidelity Financial of Ohio Cincinnati OH MW SAIF NASDAQ
FFSL First Independence Corp. Independence KS MW SAIF NASDAQ
FFWC FFW Corp. Wabash IN MW SAIF NASDAQ
FFWD Wood Bancorp Inc. Bowling Green OH MW SAIF NASDAQ
FFYF FFY Financial Corp. Youngstown OH MW SAIF NASDAQ
FGHC First Georgia Holding Inc. Brunswick GA SE SAIF NASDAQ
FISB First Indiana Corp. Indianapolis IN MW SAIF NASDAQ
FKFS First Keystone Financial Media PA MA SAIF NASDAQ
FKKY Frankfort First Bancorp Inc. Frankfort KY MW SAIF NASDAQ
FLAG FLAG Financial Corp. LaGrange GA SE SAIF NASDAQ
FLFC First Liberty Financial Corp. Macon GA SE SAIF NASDAQ
FLGS Flagstar Bancorp Inc. Bloomfield Hills MI MW SAIF NASDAQ
FLKY First Lancaster Bancshares Lancaster KY MW SAIF NASDAQ
FMCO FMS Financial Corp. Burlington NJ MA SAIF NASDAQ
FMSB First Mutual Savings Bank Bellevue WA WE BIF NASDAQ
FNGB First Northern Capital Corp. Green Bay WI MW SAIF NASDAQ
FSBI Fidelity Bancorp Inc. Pittsburgh PA MA SAIF NASDAQ
FSTC First Citizens Corp. Newnan GA SE SAIF NASDAQ
FTF Texarkana First Financial Corp Texarkana AR SE SAIF AMSE
FTFC First Federal Capital Corp. La Crosse WI MW SAIF NASDAQ
FTNB Fulton Bancorp Inc. Fulton MO MW SAIF NASDAQ
FTSB Fort Thomas Financial Corp. Fort Thomas KY MW SAIF NASDAQ
FWWB First Washington Bancorp Inc. Walla Walla WA WE SAIF NASDAQ
GAF GA Financial Inc. Pittsburgh PA MA SAIF AMSE
GDW Golden West Financial Oakland CA WE SAIF NYSE
GFCO Glenway Financial Corp. Cincinnati OH MW SAIF NASDAQ
GPT GreenPoint Financial Corp. New York NY MA BIF NYSE
<CAPTION>
Current Current
Stock Market
Price Value
Ticker Short Name IPO Date ($) ($M)
<S> <C> <C> <C> <C>
DSL Downey Financial Corp. 01/01/71 23.813 669.26
EBSI Eagle Bancshares 04/01/86 18.250 106.03
EFBC Empire Federal Bancorp Inc. 01/27/97 12.500 31.01
EFBI Enterprise Federal Bancorp 10/17/94 28.000 61.91
EMLD Emerald Financial Corp. 10/05/93 11.500 118.15
EQSB Equitable Federal Savings Bank 09/10/93 25.750 31.50
ESBF ESB Financial Corp. 06/13/90 16.250 91.47
ESBK Elmira Savings Bank (The) 03/01/85 25.750 18.71
FAB FIRSTFED AMERICA BANCORP INC. 01/15/97 15.375 120.82
FBBC First Bell Bancorp Inc. 06/29/95 16.625 108.02
FBER 1st Bergen Bancorp 04/01/96 17.250 44.60
FBHC Fort Bend Holding Corp. 06/30/93 18.000 32.70
FBSI First Bancshares Inc. 12/22/93 13.000 28.78
FCB Falmouth Bancorp Inc. 03/28/96 17.000 24.73
FCBF FCB Financial Corp. 09/24/93 28.625 110.41
FCME First Coastal Corp. NA 10.500 14.29
FDEF First Defiance Financial 10/02/95 12.500 101.97
FED FirstFed Financial Corp. 12/16/83 16.500 350.05
FESX First Essex Bancorp Inc. 08/04/87 16.688 126.20
FFBH First Federal Bancshares of AR 05/03/96 20.250 97.57
FFBZ First Federal Bancorp Inc. 07/13/92 11.125 35.05
FFCH First Financial Holdings Inc. 11/10/83 18.375 250.55
FFDB FirstFed Bancorp Inc. 11/19/91 12.750 31.04
FFDF FFD Financial Corp. 04/03/96 16.000 23.13
FFES First Federal of East Hartford 06/23/87 26.000 71.43
FFFD North Central Bancshares Inc. 03/21/96 15.063 46.74
FFHH FSF Financial Corp. 10/07/94 15.625 45.75
FFHS First Franklin Corp. 01/26/88 15.125 26.97
FFIC Flushing Financial Corp. 11/21/95 21.750 169.88
FFKY First Federal Financial Corp. 07/15/87 25.000 103.24
FFLC FFLC Bancorp Inc. 01/04/94 17.000 63.62
FFOH Fidelity Financial of Ohio 03/04/96 13.500 75.59
FFSL First Independence Corp. 10/08/93 11.250 10.77
FFWC FFW Corp. 04/05/93 17.125 24.97
FFWD Wood Bancorp Inc. 08/31/93 15.000 40.03
FFYF FFY Financial Corp. 06/28/93 32.125 128.85
FGHC First Georgia Holding Inc. 02/11/87 11.125 53.39
FISB First Indiana Corp. 08/02/83 22.125 282.78
FKFS First Keystone Financial 01/26/95 12.750 30.77
FKKY Frankfort First Bancorp Inc. 07/10/95 14.500 23.48
FLAG FLAG Financial Corp. 12/11/86 13.750 71.16
FLFC First Liberty Financial Corp. 12/06/83 19.000 254.01
FLGS Flagstar Bancorp Inc. NA 25.500 348.59
FLKY First Lancaster Bancshares 07/01/96 13.250 12.70
FMCO FMS Financial Corp. 12/14/88 11.500 83.03
FMSB First Mutual Savings Bank 12/17/85 14.000 59.42
FNGB First Northern Capital Corp. 12/29/83 11.500 101.88
FSBI Fidelity Bancorp Inc. 06/24/88 19.500 38.49
FSTC First Citizens Corp. 03/01/86 27.250 76.23
FTF Texarkana First Financial Corp 07/07/95 24.375 42.36
FTFC First Federal Capital Corp. 11/02/89 14.750 273.36
FTNB Fulton Bancorp Inc. 10/18/96 17.750 30.17
FTSB Fort Thomas Financial Corp. 06/28/95 15.750 23.22
FWWB First Washington Bancorp Inc. 11/01/95 19.938 232.22
GAF GA Financial Inc. 03/26/96 15.250 110.11
GDW Golden West Financial 05/29/59 79.063 4,554.00
GFCO Glenway Financial Corp. 11/30/90 20.000 45.67
GPT GreenPoint Financial Corp. 01/28/94 27.063 2,256.59
</TABLE>
2
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Deposit Current Current
Insurance Stock Market
Agency Price Value
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date ($) (SM)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GSFC Green Street Financial Corp. Fayetteville NC SE SAIF NASDAQ 04/04/96 12.875 52.57
GSLA GS Financial Corp. Metairie LA SW SAIF NASDAQ 4/01/97 2.250 40.02
GTPS Great American Bancorp Champaign IL MW SAIF NASDAQ 06/30/95 17.125 27.20
GUPB GFSB Bancorp Inc. Gallup NM SW SAIF NASDAQ 06/30/95 13.875 16.66
HALL Hallmark Capital Corp. West Allis WI MW SAIF NASDAQ 01/03/94 12.000 35.20
HARL Harleysville Savings Bank Harleysville PA MA SAIF NASDAQ 08/04/87 29.625 49.63
HAVN Haven Bancorp Inc. Westbury NY MA SAIF NASDAQ 09/23/93 17.188 152.10
HBFW Home Bancorp Fort Wayne IN MW SAIF NASDAQ 03/30/95 28.000 65.83
HBNK Highland Bancorp Inc. Burbank CA WE SAIF NASDAQ NA 38.500 89.68
HBS Haywood Bancshares Inc. Waynesville NC SE SAIF AMSE 12/18/87 19.000 23.76
HCFC Home City Financial Corp. Springfield OH MW SAIF NASDAQ 12/30/96 11.500 10.40
HFFB Harrodsburg First Fin Bancorp Harrodsburg KY MW SAIF NASDAQ 10/04/95 15.000 28.90
HFFC HF Financial Corp. Sioux Falls SD MW SAIF NASDAQ 04/08/92 18.125 79.66
HFSA Hardin Bancorp Inc. Hardin MO MW SAIF NASDAQ 09/29/95 18.250 14.90
HHFC Harvest Home Financial Corp. Cheviot OH MW SAIF NASDAQ 10/10/94 12.500 10.99
HIFS Hingham Instit. for Savings Hingham MA NE BIF NASDAQ 12/20/88 24.625 32.25
HMLK Hemlock Federal Financial Corp Oak Forest IL MW SAIF NASDAQ 04/02/97 15.063 29.60
HMNF HMN Financial Inc. Spring Valley MN MW SAIF NASDAQ 06/30/94 14.375 77.81
HOMF Home Federal Bancorp Seymour IN MW SAIF NASDAQ 01/23/88 25.000 128.48
HPBC Home Port Bancorp Inc. Nantucket MA NE BIF NASDAQ 08/25/88 22.250 40.98
HRBF Harbor Federal Bancorp Inc. Baltimore MD MA SAIF NASDAQ 08/12/94 18.125 33.76
HRZB Horizon Financial Corp. Bellingham WA WE BIF NASDAQ 08/01/86 13.500 101.09
HTHR Hawthorne Financial Corp. El Segundo CA WE SAIF NASDAQ NA 14.500 75.22
HWEN Home Financial Bancorp Spencer IN MW SAIF NASDAQ 07/02/96 8.000 7.43
HZFS Horizon Financial Svcs Corp. Oskaloosa IA MW SAIF NASDAQ 06/30/94 15.750 13.86
IFSB Independence Federal Svgs Bank Washington DC MA SAIF NASDAQ 06/06/85 13.000 16.65
INBI Industrial Bancorp Inc. Bellevue OH MW SAIF NASDAQ 08/01/95 18.500 92.78
IPSW Ipswich Savings Bank Ipswich MA NE BIF NASDAQ 05/26/93 12.000 28.68
ITLA ITLA Capital Corp. La Jolla CA WE BIF NASDAQ 10/24/95 17.750 136.68
IWBK InterWest Bancorp Inc. Oak Harbor WA WE SAIF NASDAQ NA 23.000 360.36
JSB JSB Financial Inc. Lynbrook NY MA BIF NYSE 06/27/90 46.000 453.27
JSBA Jefferson Savings Bancorp Ballwin MO MW SAIF NASDAQ 04/08/93 19.000 190.73
JXVL Jacksonville Bancorp Inc. Jacksonville TX SW SAIF NASDAQ 04/01/96 16.250 39.35
KFBI Klamath First Bancorp Klamath Falls OR WE SAIF NASDAQ 10/05/95 15.500 153.71
KNK Kankakee Bancorp Inc. Kankakee IL MW SAIF AMSE 01/06/93 26.000 35.88
KSBK KSB Bancorp Inc. Kingfield ME NE BIF NASDAQ 06/24/93 16.000 20.14
KYF Kentucky First Bancorp Inc. Cynthiana KY MW SAIF AMSE 08/29/95 13.875 17.22
LARK Landmark Bancshares Inc. Dodge City KS MW SAIF NASDAQ 03/28/94 21.625 33.50
LARL Laurel Capital Group Inc. Allison Park PA MA SAIF NASDAQ 02/20/87 19.000 41.64
LOGN Logansport Financial Corp. Logansport IN MW SAIF NASDAQ 06/14/95 15.000 18.93
LSBI LSB Financial Corp. Lafayette IN MW BIF NASDAQ 02/03/95 31.000 29.48
LSBX Lawrence Savings Bank North Andover MA NE BIF NASDAQ 05/02/86 12.375 53.58
LVSB Lakeview Financial Corp. Paterson NJ MA SAIF NASDAQ 12/22/93 19.000 94.58
LXMO Lexington B&L Financial Corp. Lexington MO MW SAIF NASDAQ 06/06/96 14.000 14.12
MAFB MAF Bancorp Inc. Clarendon Hills IL MW SAIF NASDAQ 01/12/90 23.750 536.20
MARN Marion Capital Holdings Marion IN MW SAIF NASDAQ 03/18/93 22.750 38.77
MASB MASSBANK Corp. Reading MA NE BIF NASDAQ 05/28/86 45.125 162.46
MBLF MBLA Financial Corp. Macon MO MW SAIF NASDAQ 06/24/93 19.875 24.78
MCBN Mid-Coast Bancorp Inc. Waldoboro ME NE SAIF NASDAQ 11/02/89 9.000 6.42
MDBK Medford Bancorp Inc. Medford MA NE BIF NASDAQ 03/18/86 36.750 163.71
MECH MECH Financial Inc. Hartford CT NE BIF NASDAQ 06/26/96 25.000 132.38
METF Metropolitan Financial Corp. Mayfield Heights OH MW SAIF NASDAQ NA 12.500 88.14
MFBC MFB Corp. Mishawaka IN MW SAIF NASDAQ 03/25/94 22.203 35.31
MFFC Milton Federal Financial Corp. West Milton OH MW SAIF NASDAQ 10/07/94 12.500 27.96
MFLR Mayflower Co-operative Bank Middleboro MA NE BIF NASDAQ 12/23/87 19.500 17.54
MRKF Market Financial Corp. Mount Healthy OH MW SAIF NASDAQ 03/27/97 10.750 14.36
MSBF MSB Financial Inc. Marshall MI MW SAIF NASDAQ 02/06/95 16.875 22.58
MWBI Midwest Bancshares Inc. Burlington IA MW SAIF NASDAQ 11/12/92 12.250 12.87
</TABLE>
3
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT 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>
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
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
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
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
PRBC Prestige Bancorp Inc. Pleasant Hills PA MA SAIF NASDAQ 06/27/96
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
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
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
RARB Raritan Bancorp Inc. Bridgewater NJ MA BIF NASDAQ 03/01/87
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
<CAPTION>
Current Current
Stock Market
Price Value
Ticker Short Name ($M) (SM)
<S> <C> <C> <C>
MWBX MetroWest Bank 6.375 90.85
NBN Northeast Bancorp 12.125 29.84
NEIB Northeast Indiana Bancorp 19.625 31.85
NHTB New Hampshire Thrift Bncshrs 14.750 30.89
NMSB NewMil Bancorp Inc. 11.000 42.17
NSLB NS&L Bancorp Inc. 16.250 10.55
NWEQ Northwest Equity Corp. 17.500 14.44
OCFC Ocean Financial Corp. 15.000 230.76
OFCP Ottawa Financial Corp. 23.875 135.71
OHSL OHSL Financial Corp. 15.500 38.69
PBCI Pamrapo Bancorp Inc. 25.000 71.07
PBKB People's Bancshares Inc. 16.000 53.06
PCBC Perry County Financial Corp. 20.000 16.56
PDB Piedmont Bancorp Inc. 10.000 27.51
PEEK Peekskill Financial Corp. 15.000 43.43
PERM Permanent Bancorp Inc. 12.500 47.85
PFDC Peoples Bancorp 20.625 69.61
PFED Park Bancorp Inc. 13.500 32.64
PFFB PFF Bancorp Inc. 14.063 228.53
PFNC Progress Financial Corp. 15.375 76.90
PFSB PennFed Financial Services Inc 11.125 104.42
PHBK Peoples Heritage Finl Group 17.000 1,491.11
PHFC Pittsburgh Home Financial Corp 15.250 28.99
PRBC Prestige Bancorp Inc. 14.375 15.12
PSFC Peoples-Sidney Financial Corp. 19.125 34.15
PSFI PS Financial Inc. 11.625 22.64
PTRS Potters Financial Corp. 14.750 14.03
PVFC PVF Capital Corp. 12.000 47.88
PVSA Parkvale Financial Corp. 30.875 159.71
PWBK Pennwood Bancorp Inc. 12.313 8.59
QCBC Quaker City Bancorp Inc. 16.375 95.42
QCFB QCF Bancorp Inc. 29.500 40.26
QCSB Queens County Bancorp Inc. 37.938 560.26
RARB Raritan Bancorp Inc. 27.250 64.66
RELY Reliance Bancorp Inc. 25.000 239.12
RIVR River Valley Bancorp 15.375 18.30
RSLN Roslyn Bancorp Inc. 16.000 662.40
SCBS Southern Community Bancshares 16.000 18.20
SCCB S. Carolina Community Bancshrs 20.250 11.74
SFFC StateFed Financial Corp. 12.000 18.79
SFIN Statewide Financial Corp. 15.875 69.21
SGVB SGV Bancorp Inc. 15.000 35.22
SKAN Skaneateles Bancorp Inc. 14.625 21.13
SMBC Southern Missouri Bancorp Inc. 17.250 25.60
SOBI Sobieski Bancorp Inc. 14.500 11.34
SOPN First Savings Bancorp Inc. 22.000 81.64
SPBC St. Paul Bancorp Inc. 18.594 754.32
SRN Southern Banc Co. 14.000 17.22
SSM Stone Street Bancorp Inc. 16.750 30.21
STFR St. Francis Capital Corp. 39.000 199.32
STSA Sterling Financial Corp. 16.375 124.54
SVRN Sovereign Bancorp Inc. 13.938 2,211.94
SZB SouthFirst Bancshares Inc. 16.875 16.33
THR Three Rivers Financial Corp. 16.500 13.60
THRD TF Financial Corp. 19.375 56.16
TRIC Tri-County Bancorp Inc. 12.000 14.01
TSH Teche Holding Co. 14.750 50.72
TWIN Twin City Bancorp 13.000 16.14
</TABLE>
4
<PAGE>
FERGUSON & COMPANY EXHIBIT 11.1 - SELECT 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>
UFBS Union Financial Bcshs Inc. Union SC SE SAIF NASDAQ NA
WAMU Washington Mutual Inc. Seattle WA WE BIF NASDAQ 03/11/83
WBST Webster Financial Corp. Waterbury CT NE SAIF NASDAQ 12/12/86
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
Maximum
Minimum
Average
Median
<CAPTION>
Current Current
Stock Market
Price Value
Ticker Short Name ($) ($M)
<S> <C> <C> <C>
UFBS Union Financial Bcshs Inc. 15.500 19.77
WAMU Washington Mutual Inc. 31.688 12,270.69
WBST Webster Financial Corp. 22.688 869.39
WEFC Wells Financial Corp. 17.500 32.12
WFI Winton Financial Corp. 12.250 49.18
WFSL Washington Federal Inc. 24.688 1,295.09
WHGB WHG Bancshares Corp. 11.000 15.28
WRNB Warren Bancorp Inc. 9.500 75.14
WSB Washington Savings Bank, FSB 5.063 22.38
WSFS WSFS Financial Corp. 17.000 212.92
WSTR WesterFed Financial Corp. 18.375 102.63
WVFC WVS Financial Corp. 15.563 56.29
YFCB Yonkers Financial Corp. 14.500 39.53
YFED York Financial Corp. 19.250 172.63
Maximum 79.063 12,270.69
Minimum 5.063 6.42
Average 18.015 222.50
Median 16.250 48.53
</TABLE>
---------------------------------
Start 374
Less:
Merger Targets 343
PE Ratio > 35 323
Non-Reporting 257
MHC's 246
End 246
---------------------------------
5
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible Core
Price/ Current Current Current Total Equity/ Equity/ Core Income/
LTM Price/ Price/ Tang Price/ Dividend Assets Assets Tang Assets EPS Avg Assets
Core EPS Book Value Book Value Assets Yield ($000) (%) (%) ($) (%)
Ticker (x) (%) (%) (%) (%) Mst RctQ Mst RctQ Mst RctQ LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AABC 7.50 108.41 108.41 8.59 - 116,921 7.93 7.93 1.10 1.24
ABBK 16.90 151.02 165.65 9.62 1.35 546,208 6.37 5.84 0.88 0.65
ABCL 12.54 116.70 117.66 10.19 2.39 2,068,197 8.73 8.67 1.47 0.89
ABCW 22.00 299.32 303.87 19.07 0.91 2,057,635 6.36 6.27 1.00 0.97
AFBC 16.15 99.00 99.00 13.95 2.23 110,668 14.09 14.09 0.89 0.84
AHCI 24.12 96.69 96.69 9.98 1.75 565,387 10.32 10.32 0.57 0.41
ALBC 20.31 116.49 116.49 9.90 1.23 74,118 8.49 8.49 0.48 0.50
ALLB 32.26 220.75 220.75 23.59 - 277,490 10.68 10.68 0.62 0.76
AMFC 24.18 95.65 95.65 12.13 1.90 111,338 12.68 12.68 0.61 0.53
ANA 16.78 109.16 109.16 16.07 2.30 298,148 14.72 14.72 1.14 0.98
ANDB 14.41 187.39 187.39 15.36 2.18 1,392,342 8.20 8.20 2.29 1.16
ANE 25.00 139.24 142.30 10.87 1.82 252,287 7.81 7.65 0.44 0.46
ASBI 18.75 133.64 136.07 16.25 3.41 375,297 12.16 11.97 1.00 0.84
ASBP 15.99 124.14 124.14 15.46 3.68 116,437 12.44 12.44 0.68 0.94
ASFC 13.25 115.38 161.05 8.90 2.06 11,575,551 8.14 6.09 2.93 0.76
BANC 32.50 140.09 181.23 9.52 0.99 3,756,571 6.79 5.34 0.30 0.38
BDJI 14.80 114.17 114.17 11.93 - 121,315 10.45 10.45 0.98 0.71
BFD 17.79 114.34 118.44 9.43 2.16 1,058,207 7.80 7.55 1.04 0.58
BFSB 16.28 137.20 137.20 18.17 2.59 156,509 13.25 13.25 0.76 1.23
BKC 14.49 172.92 178.28 14.96 3.66 685,545 8.65 8.41 1.51 1.15
BKCT 15.09 155.93 155.93 15.43 3.62 495,178 9.89 9.89 0.99 1.22
BKUNA 33.20 90.35 108.10 4.61 - 3,584,123 5.44 4.64 0.28 0.19
BNKU 10.09 153.37 168.83 7.84 1.97 13,095,947 5.11 4.67 3.22 0.84
BPLS 15.91 91.62 99.89 3.96 - 4,286,237 4.32 3.98 0.55 0.27
BVCC 12.33 91.35 140.87 6.29 2.25 5,720,109 6.89 4.58 1.44 0.58
CAFI 19.56 156.69 166.58 15.49 2.33 588,220 9.89 9.36 0.85 0.89
CASB 19.78 179.78 179.78 12.73 - 444,155 7.07 7.07 0.67 0.75
CASH 20.43 115.85 129.69 11.79 2.53 421,258 10.18 9.19 0.93 0.64
CATB 15.28 87.47 87.47 19.92 2.69 309,566 22.04 22.04 0.90 1.30
CBCI 9.52 96.43 96.43 17.10 - 491,961 17.74 17.74 2.81 1.97
CBES 23.75 105.91 105.91 14.43 2.53 123,710 13.63 13.63 0.80 0.67
CBSA 9.24 125.00 143.46 4.76 1.71 2,980,528 3.85 3.37 2.03 0.54
CEBK 18.33 116.16 127.54 11.32 1.46 381,857 9.74 8.96 1.20 0.63
CENB 13.33 94.98 94.98 18.37 4.86 96,866 19.34 19.34 1.05 1.21
CFB 11.25 147.16 166.05 10.69 0.98 8,852,640 7.26 6.49 2.00 0.95
CFCP 22.89 326.46 326.46 19.27 1.47 616,887 5.90 5.90 0.83 0.99
CFFC 18.94 124.38 124.88 17.53 - 183,230 14.09 14.04 0.66 0.96
CFNC 13.79 116.03 116.03 15.68 2.56 113,911 13.51 13.51 0.68 1.06
CFSB 17.98 269.18 269.18 20.95 2.39 847,769 7.78 7.78 1.21 1.23
CFTP 27.59 107.74 107.74 26.73 2.00 263,246 22.27 22.27 0.58 1.07
CIBI 17.86 149.34 149.34 16.40 1.92 101,734 10.99 10.99 0.70 0.95
CKFB 17.38 100.49 100.49 23.35 3.11 62,759 21.57 21.57 1.00 1.34
CLAS 25.00 96.58 112.30 14.36 2.10 137,984 14.87 13.06 0.61 0.56
CMRN 16.63 92.26 92.26 18.33 1.68 220,784 19.86 19.86 1.00 1.12
CMSB 23.33 108.44 137.66 9.15 2.29 2,368,247 8.43 6.77 0.60 0.41
CNIT 15.21 168.36 181.77 13.99 2.19 651,857 7.91 7.37 1.20 0.84
CNSB 34.44 105.01 105.01 26.02 1.94 97,988 24.78 24.78 0.45 0.76
CNY 26.49 71.73 74.22 6.02 - 427,371 8.40 8.14 0.42 0.22
COFI 14.96 229.72 244.04 17.15 2.10 19,813,254 7.47 7.06 1.78 1.16
COOP 21.32 145.00 145.00 11.52 - 381,054 7.95 7.95 0.68 0.60
CRSB 11.64 222.77 235.19 25.61 - 202,034 11.49 10.96 1.16 2.13
CRZY 16.72 90.39 90.39 21.19 2.88 61,478 23.43 23.43 0.83 1.23
CSBF 30.36 79.65 84.39 18.47 - 47,218 23.20 22.18 0.35 0.60
CVAL 20.07 215.64 215.64 18.21 1.49 377,012 8.45 8.45 1.47 0.98
DCBI 17.92 108.66 108.66 26.24 1.49 113,585 24.15 24.15 0.90 1.45
DCOM 17.31 117.65 135.03 13.50 2.22 1,623,926 11.48 10.15 1.04 0.86
DME 23.76 194.65 236.65 12.38 0.88 20,913,891 6.36 5.29 0.96 0.51
DNFC 13.99 162.34 163.61 9.05 1.07 1,898,004 5.57 5.53 1.34 0.71
<CAPTION>
Core
Income/
Avg Equity
(%)
Ticker LTM
<S> <C>
AABC 15.11
ABBK 9.70
ABCL 9.76
ABCW 14.73
AFBC 5.55
AHCI 3.52
ALBC 5.82
ALLB 6.88
AMFC 3.77
ANA 6.07
ANDB 14.67
ANE 6.20
ASBI 7.33
ASBP 6.67
ASFC 9.18
BANC 6.43
BDJI 6.72
BFD 6.81
BFSB 8.79
BKC 13.62
BKCT 11.90
BKUNA 3.70
BNKU 16.70
BPLS 6.35
BVCC 8.57
CAFI 9.23
CASB 10.78
CASH 5.95
CATB 5.39
CBCI 11.86
CBES 4.36
CBSA 15.00
CEBK 6.45
CENB 4.88
CFB 14.11
CFCP 16.06
CFFC 7.01
CFNC 5.85
CFSB 15.79
CFTP 4.28
CIBI 8.17
CKFB 5.97
CLAS 3.72
CMRN 5.36
CMSB 4.42
CNIT 11.65
CNSB 3.09
CNY 2.65
COFI 16.13
COOP 7.68
CRSB 26.04
CRZY 5.15
CSBF 2.55
CVAL 11.68
DCBI 5.56
DCOM 6.75
DME 8.82
DNFC 12.86
</TABLE>
6
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible Core Core
Price/ Current Current Current Total Equity/ Equity/ Core Income/ Income/
LTM Price/ Price/ Tang Price/ Dividend Assets Assets Tang Assets EPS Avg Assets Avg Equity
Core EPS Book Value Book Value Assets Yield ($000) (%) (%) ($) (%) (%)
Ticker (x) (%) (%) (%) (%) Mst RctQ Mst RctQ Mst RctQ LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DSL 14.01 145.82 147.36 11.48 1.34 5,832,102 7.87 7.79 1.70 0.82 11.21
EBSI 12.76 136.60 136.60 9.46 3.51 1,120,232 6.92 6.92 1.43 0.89 11.51
EFBC 18.66 80.03 80.03 29.00 2.56 106,940 36.22 36.22 0.67 1.45 3.94
EFBI 28.28 168.98 172.63 15.21 3.57 406,893 9.00 8.83 0.99 0.66 6.30
EMLD 19.49 225.05 227.72 19.14 1.22 617,369 8.50 8.41 0.59 1.04 12.96
EQSB 15.51 175.53 175.53 8.99 - 350,555 5.12 5.12 1.66 0.66 12.91
ESBF 15.78 137.25 153.74 9.63 2.22 956,146 7.01 6.31 1.03 0.66 8.61
ESBK 20.93 126.54 126.54 8.07 2.49 231,725 6.27 6.27 1.23 0.38 6.11
FAB 21.96 97.56 97.56 9.67 1.30 1,315,743 8.86 8.86 0.70 0.48 4.44
FBBC 13.09 141.13 141.13 14.34 2.41 756,638 10.16 10.16 1.27 1.08 10.17
FBER 20.54 127.87 127.87 14.83 1.62 300,755 11.60 11.60 0.84 0.72 5.49
FBHC 28.57 143.77 152.03 10.27 2.22 318,348 7.15 6.79 0.63 0.44 6.65
FBSI 15.48 118.07 123.11 16.71 0.92 172,173 14.15 13.65 0.84 1.09 7.86
FCB 28.33 104.68 104.68 22.38 1.41 110,523 21.38 21.38 0.60 0.84 3.59
FCBF 18.00 146.49 146.49 21.42 3.07 515,516 14.62 14.62 1.59 1.16 8.14
FCME 13.13 92.92 92.92 8.32 - 171,719 8.95 8.95 0.80 0.73 7.42
FDEF 19.84 98.74 98.74 17.52 2.88 582,124 17.74 17.74 0.63 0.89 4.72
FED 12.79 145.63 146.54 8.73 - 4,010,381 5.99 5.96 1.29 0.68 12.49
FESX 14.51 134.47 185.22 9.60 3.36 1,314,752 7.14 5.28 1.15 0.73 9.96
FFBH 17.16 115.98 115.98 17.06 1.38 578,142 14.71 14.71 1.18 0.99 6.63
FFBZ 23.67 212.72 212.72 16.90 1.26 207,381 7.95 7.95 0.47 0.77 10.08
FFCH 16.70 206.00 206.00 13.36 2.29 1,874,198 6.49 6.49 1.10 0.85 13.51
FFDB 19.32 174.42 188.89 17.25 2.20 179,893 9.89 9.21 0.66 0.89 9.22
FFDF 30.77 103.69 103.69 23.10 1.88 100,104 22.28 22.28 0.52 0.79 3.30
FFES 11.50 101.05 101.05 7.27 2.62 980,415 7.20 7.20 2.26 0.64 9.39
FFFD 11.86 95.76 110.51 14.22 2.12 331,124 14.85 13.13 1.27 1.49 8.16
FFHH 14.88 95.45 95.45 11.07 3.20 414,072 10.44 10.44 1.05 0.75 6.91
FFHS 16.81 124.38 124.90 11.35 1.98 237,679 9.12 9.09 0.90 0.70 7.65
FFIC 16.23 121.51 126.16 15.56 1.66 1,091,908 12.80 12.39 1.34 0.95 7.20
FFKY 17.01 188.82 198.89 25.20 2.40 409,651 13.35 12.76 1.47 1.53 11.38
FFLC 17.17 120.48 120.48 15.42 2.12 412,443 12.80 12.80 0.99 0.95 7.23
FFOH 15.88 114.50 128.69 14.21 2.37 531,926 12.41 11.19 0.85 0.86 6.90
FFSL 13.24 91.17 91.17 8.73 2.67 123,366 9.58 9.58 0.85 0.72 7.31
FFWC 14.89 130.53 141.88 12.28 2.45 203,311 9.41 8.72 1.15 0.86 9.02
FFWD 21.43 177.51 177.51 24.09 2.40 166,150 13.57 13.57 0.70 1.17 9.09
FFYF 16.56 152.98 152.98 19.77 2.49 651,746 12.92 12.92 1.94 1.21 9.10
FGHC 29.28 362.38 387.63 29.52 - 180,806 8.15 7.67 0.38 1.16 14.15
FISB 22.13 176.44 178.28 16.15 2.17 1,750,819 9.15 9.06 1.00 0.83 8.69
FKFS 11.92 121.08 121.08 7.87 1.57 390,970 6.50 6.50 1.07 0.67 9.87
FKKY 15.10 103.42 103.42 17.46 5.52 134,485 16.88 16.88 0.96 1.19 7.01
FLAG 27.50 184.32 184.32 16.07 1.75 442,879 8.71 8.71 0.50 0.68 7.69
FLFC 23.46 216.40 236.32 16.80 1.58 1,511,776 7.76 7.15 0.81 0.76 10.18
FLGS 11.86 244.25 250.98 13.55 1.10 2,573,280 5.55 5.41 2.15 1.37 23.46
FLKY 25.00 88.81 88.81 23.66 4.53 53,002 26.65 26.65 0.53 1.04 3.46
FMCO 16.20 202.11 203.54 12.29 1.04 673,699 6.08 6.04 0.71 0.85 13.56
FMSB 14.14 174.56 174.56 12.62 1.43 470,866 7.23 7.23 0.99 0.93 13.55
FNGB 17.16 135.45 135.45 14.76 3.13 690,372 10.89 10.89 0.67 0.91 8.20
FSBI 14.03 137.03 137.03 9.72 1.85 396,180 7.09 7.09 1.39 0.72 10.49
FSTC 18.05 200.96 244.83 20.06 1.17 379,694 9.98 8.34 1.51 1.28 12.77
FTF 13.93 150.18 150.18 22.34 2.30 189,557 14.88 14.88 1.75 1.66 10.88
FTFC 25.88 229.75 241.41 17.24 1.90 1,584,405 7.50 7.17 0.57 0.71 10.26
FTNB 29.10 117.86 117.86 27.54 1.35 109,622 23.37 23.37 0.61 0.95 3.88
FTSB 19.44 142.53 142.53 22.91 1.59 101,352 16.07 16.07 0.81 1.18 7.39
FWWB 17.19 121.94 147.58 17.12 1.81 1,362,063 12.56 10.62 1.16 1.06 7.88
GAF 14.25 102.07 103.04 13.14 - 838,272 12.87 12.77 1.07 0.96 6.67
GDW 11.63 155.76 155.76 11.66 0.63 39,067,229 7.48 7.48 6.80 1.00 14.59
GFCO 18.35 158.73 160.13 15.19 2.20 300,448 9.57 9.49 1.09 0.87 9.21
GPT 13.53 153.33 271.17 17.56 2.37 12,853,902 9.92 5.87 2.00 1.14 11.83
</TABLE>
7
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible Core Core
Price/ Current Current Current Total Equity/ Equity/ Core Income/ Income/
LTM Price/ Price/ Tang Price/ Dividend Assets Assets Tang Assets EPS Avg Assets Avg Equity
Core EPS Book Value Book Value Assets Yield ($000) (%) (%) ($) (%) (%)
Ticker (x) (%) (%) (%) (%) Mst RctQ Mst RctQ Mst RctQ LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GSFC 18.93 86.93 86.93 30.34 3.73 173,265 34.90 34.90 0.68 1.58 4.46
GSLA 28.49 76.51 76.51 27.57 2.29 145,151 36.04 36.04 0.43 1.01 2.41
GTPS 28.07 100.32 100.32 18.34 2.57 148,342 18.28 18.28 0.61 0.70 3.60
GUPB 17.56 114.29 114.29 14.10 2.16 118,175 12.33 12.33 0.79 0.90 6.67
HALL 13.79 99.67 99.67 8.03 - 438,374 7.63 7.63 0.87 0.63 8.30
HARL 14.67 195.67 195.67 12.55 - 395,383 6.41 6.41 2.02 0.97 14.71
HAVN 16.69 128.94 134.91 6.71 1.75 2,265,248 5.21 4.99 1.03 0.48 8.32
HBFW 22.40 153.26 153.26 18.27 1.14 360,286 11.92 11.92 1.25 0.83 6.68
HBNK 14.42 198.86 198.86 15.64 1.30 573,412 7.87 7.87 2.67 1.20 15.59
HBS 10.73 107.47 110.98 15.66 3.16 151,718 14.57 14.17 1.77 1.44 9.97
HCFC 11.27 96.07 96.07 13.33 3.13 78,042 13.87 13.87 1.02 1.29 6.93
HFFB 18.52 92.71 92.71 26.56 2.67 109,033 26.54 26.54 0.81 1.35 5.06
HFFC 14.74 140.72 140.72 13.97 - 570,060 9.93 9.93 1.23 0.98 10.18
HFSA 20.05 110.54 110.54 11.18 3.07 133,326 10.11 10.11 0.91 0.61 5.40
HHFC 21.93 106.84 106.84 11.44 3.52 96,085 10.71 10.71 0.57 0.56 4.98
HIFS 11.84 142.42 142.42 13.42 2.27 239,148 9.43 9.43 2.08 1.25 12.94
HMLK 17.52 101.71 101.71 15.40 2.12 192,271 15.14 15.14 0.86 0.92 5.28
HMNF 22.82 110.24 120.09 10.76 1.67 725,180 9.76 9.03 0.63 0.57 4.50
HOMF 16.78 191.86 196.85 17.86 1.60 719,549 9.30 9.09 1.49 1.16 13.09
HPBC 11.96 180.60 180.60 15.73 3.60 260,456 8.71 8.71 1.86 1.57 15.76
HRBF 19.08 113.71 113.71 14.32 2.61 235,733 12.60 12.60 0.95 0.75 5.88
HRZB 12.39 118.42 118.42 18.28 3.26 553,063 15.44 15.44 1.09 1.53 9.74
HTHR 8.06 96.22 96.22 3.83 - 1,201,331 3.97 3.97 1.80 1.18 23.83
HWEN 22.22 99.01 99.01 17.46 1.25 42,560 17.64 17.64 0.36 0.71 4.09
HZFS 19.21 163.21 163.21 15.41 1.14 89,947 9.44 9.44 0.82 0.79 8.26
IFSB 19.70 78.69 86.15 6.26 1.92 265,940 7.96 7.32 0.66 0.32 4.39
INBI 16.82 151.76 151.76 24.23 3.24 382,841 15.97 15.97 1.10 1.47 8.80
IPSW 11.54 219.78 219.78 12.27 1.33 233,662 5.58 5.58 1.04 1.18 21.92
ITLA 10.32 128.16 128.53 13.38 - 1,021,343 10.43 10.41 1.72 1.44 13.74
IWBK 18.70 214.55 221.37 15.33 2.32 2,351,248 7.15 6.94 1.23 0.80 11.66
JSB 12.04 119.02 119.02 28.93 3.48 1,563,460 24.31 24.31 3.82 2.52 10.72
JSBA 24.36 145.82 180.09 15.26 1.47 1,248,923 9.71 8.01 0.78 0.62 6.66
JXVL 12.90 112.22 112.22 16.22 3.08 242,673 14.46 14.46 1.26 1.33 9.13
KFBI 16.85 96.75 105.66 15.24 2.32 1,008,688 13.98 12.96 0.92 0.91 6.03
KNK 13.98 91.45 107.04 8.93 1.85 401,934 9.76 8.46 1.86 0.75 7.21
KSBK 11.59 160.48 182.65 12.77 0.63 157,745 7.96 7.06 1.38 1.11 14.65
KYF 18.75 119.51 119.51 20.99 3.60 82,046 17.56 17.56 0.74 1.06 6.23
LARK 18.17 111.81 111.81 14.61 - 229,337 13.07 13.07 1.19 0.90 6.45
LARL 14.07 177.07 177.07 18.84 3.16 220,986 10.64 10.64 1.35 1.46 13.93
LOGN 14.71 111.44 111.44 20.96 2.93 90,264 18.82 18.82 1.02 1.50 7.90
LSBI 19.02 151.52 151.52 13.52 1.29 218,633 8.40 8.40 1.63 0.72 8.52
LSBX 6.19 128.64 128.64 15.53 - 344,874 12.07 12.07 2.00 2.55 24.90
LVSB 18.81 156.90 230.02 15.26 1.32 619,638 9.73 6.85 1.01 0.86 8.20
LXMO 22.58 92.29 98.94 14.82 2.14 95,301 16.06 15.14 0.62 0.77 3.80
MAFB 15.63 191.53 214.54 15.02 1.18 3,569,656 7.84 7.06 1.52 1.04 13.42
MARN 17.91 102.99 105.23 19.99 3.87 193,963 19.41 19.08 1.27 1.25 5.94
MASB 17.91 148.24 150.22 17.44 - 929,672 11.76 11.63 2.52 1.00 8.98
MBLF 13.80 88.81 88.81 11.99 3.02 207,453 13.50 13.50 1.44 0.86 6.74
MCBN 16.98 122.45 122.45 9.83 2.22 65,309 8.02 8.02 0.53 0.61 7.27
MDBK 15.38 161.33 169.98 14.42 2.18 1,135,299 8.94 8.52 2.39 1.02 11.25
MECH 15.53 142.78 142.78 13.87 - 954,671 9.71 9.71 1.61 0.96 9.63
METF 15.63 222.82 240.38 8.32 - 1,058,887 3.73 3.47 0.80 0.61 15.47
MFBC 17.62 106.69 106.69 12.14 1.53 290,936 11.38 11.38 1.26 0.78 6.28
MFFC 21.93 99.36 99.36 11.89 4.80 235,105 11.07 11.07 0.57 0.56 4.70
MFLR 14.03 135.32 137.32 12.94 4.10 135,518 9.56 9.44 1.39 0.98 10.22
MRKF 21.50 91.26 91.26 26.76 2.61 53,653 29.33 29.33 0.50 1.09 3.15
MSBF 20.83 169.60 169.60 28.24 1.78 79,967 16.65 16.65 0.81 1.35 8.10
MWBI 11.67 112.90 112.90 8.07 2.61 159,460 7.15 7.15 1.05 0.76 10.90
</TABLE>
8
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible Core Core
Price/ Current Current Current Total Equity/ Equity/ Core Income/ Income/
LTM Price/ Price/ Tang Price/ Dividend Assets Assets Tang Assets EPS Avg Assets Avg Equity
Core EPS Book Value Book Value Assets Yield ($000) (%) (%) ($) (%) (%)
Ticker (x) (%) (%) (%) (%) Mst RctQ Mst RctQ Mst RctQ LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MWBX 11.81 188.05 188.05 13.80 3.14 658,462 7.34 7.34 0.54 1.26 16.88
NBN 16.17 124.74 137.32 8.73 1.75 310,623 7.64 7.05 0.75 0.72 9.20
NEIB 13.82 122.12 122.12 15.93 1.73 203,263 13.04 13.04 1.42 1.18 8.55
NHTB 11.61 117.06 133.97 9.53 4.07 324,320 8.14 7.19 1.27 0.86 11.02
NMSB 18.97 126.29 126.29 11.47 - 367,569 9.09 9.09 0.58 0.69 7.10
NSLB 25.00 96.27 96.96 17.79 3.08 62,648 18.48 18.37 0.65 0.67 3.48
NWEQ 12.68 122.89 122.89 14.97 - 96,452 12.19 12.19 1.38 1.13 9.74
OCFC 15.63 110.54 111.11 15.15 3.20 1,538,264 13.71 13.65 0.96 0.92 6.37
OFCP 20.94 180.46 220.25 14.84 1.68 919,865 8.23 6.84 1.14 0.79 9.33
OHSL 19.62 140.65 140.65 15.61 3.23 247,853 10.83 10.83 0.79 0.79 7.32
PBCI 15.63 144.51 145.26 18.03 4.48 394,271 12.47 12.42 1.60 1.21 9.36
PBKB 24.24 163.43 170.58 6.18 3.50 858,377 3.78 3.63 0.66 0.30 7.18
PCBC 18.69 99.90 99.90 18.45 2.50 89,761 18.47 18.47 1.07 0.97 5.11
PDB 16.95 127.39 127.39 21.07 4.80 130,541 16.55 16.55 0.59 1.23 7.50
PEEK 22.39 100.54 100.54 21.68 2.40 200,341 21.57 21.57 0.67 1.01 4.11
PERM 21.55 115.42 141.40 10.19 1.92 506,725 8.58 7.11 0.58 0.58 5.97
PFDC 16.37 151.99 151.99 22.75 2.13 304,320 14.97 14.97 1.26 1.45 9.56
PFED 17.31 81.57 81.57 16.58 - 196,812 20.34 20.34 0.78 0.93 4.36
PFFB 15.12 94.26 95.28 7.58 - 3,007,845 8.04 7.97 0.93 0.56 5.94
PFNC 21.06 193.40 216.85 13.39 0.99 602,326 6.92 6.22 0.73 0.74 13.03
PFSB 9.93 93.72 107.70 6.73 1.26 1,551,938 6.68 5.86 1.12 0.76 10.63
PHBK 13.08 205.81 247.81 15.24 2.59 9,768,079 7.41 6.23 1.30 1.20 16.11
PHFC 14.66 116.23 117.49 8.06 1.57 372,533 6.93 6.87 1.04 0.62 7.19
PRBC 20.54 94.95 94.95 9.18 1.21 164,656 9.67 9.67 0.70 0.45 4.29
PSFC 25.84 156.89 156.89 32.24 1.46 105,903 18.53 18.53 0.74 1.18 5.44
PSFI 17.10 103.06 103.06 27.61 4.13 85,000 26.78 26.78 0.68 1.72 5.52
PTRS 16.76 128.37 128.37 10.95 - 128,149 8.53 8.53 0.88 0.69 7.69
PVFC 10.17 158.73 158.73 11.43 - 418,928 7.20 7.20 1.18 1.27 17.72
PVSA 14.70 190.00 190.94 14.58 1.94 1,095,373 7.67 7.64 2.10 1.08 14.59
PWBK 33.28 99.78 99.78 18.64 2.27 46,080 17.28 17.28 0.37 0.53 2.91
QCBC 14.62 123.49 123.49 10.75 - 887,480 8.71 8.71 1.12 0.76 8.80
QCFB 13.66 147.65 147.65 26.13 - 154,089 17.70 17.70 2.16 1.66 9.55
QCSB 22.45 290.27 290.27 33.05 2.64 1,715,164 9.89 9.89 1.69 1.49 14.16
RARB 17.36 203.06 205.51 14.88 2.20 434,606 7.33 7.25 1.57 0.98 12.82
RELY 13.23 122.73 175.93 9.62 2.88 2,485,729 7.84 5.60 1.89 0.82 9.66
RIVR 15.07 99.00 100.23 13.49 1.43 135,683 13.63 13.48 1.02 0.82 6.27
RSLN 14.29 111.42 111.89 17.19 2.50 3,853,282 15.43 15.37 1.12 1.23 7.13
SCBS 17.58 154.44 154.44 26.79 1.88 67,920 17.34 17.34 0.91 1.22 6.49
SCCB 27.36 124.39 124.39 25.35 3.16 46,305 20.38 20.38 0.74 1.01 4.19
SFFC 18.18 116.85 116.85 20.92 1.67 89,802 17.91 17.91 0.66 1.16 6.49
SFIN 13.23 109.41 109.56 10.63 3.28 656,635 9.72 9.71 1.20 0.75 7.85
SGVB 25.42 109.25 110.54 8.63 - 408,346 7.89 7.81 0.59 0.36 4.69
SKAN 14.06 115.16 117.94 7.92 1.92 266,730 6.88 6.73 1.04 0.60 8.70
SMBC 24.64 106.22 106.22 16.42 2.90 155,924 15.46 15.46 0.70 0.69 4.23
SOBI 22.66 81.28 81.28 12.33 2.21 89,848 14.10 14.10 0.64 0.57 3.89
SOPN 16.92 117.46 117.46 26.85 4.55 304,088 22.86 22.86 1.30 1.76 7.64
SPBC 13.47 145.84 146.41 14.00 3.23 4,564,869 9.60 9.56 1.38 1.04 11.38
SRN 32.56 93.65 94.34 16.29 2.50 105,719 17.40 17.29 0.43 0.49 2.84
SSM 20.94 100.66 100.66 27.51 2.75 112,253 27.33 27.33 0.80 1.40 4.84
STFR 18.06 151.28 169.12 11.36 - 1,754,803 7.46 6.73 2.16 0.68 8.56
STSA 15.45 117.81 299.36 6.00 - 2,076,759 5.09 2.07 1.06 0.44 8.04
SVRN 16.79 198.55 225.17 11.27 0.57 18,847,318 5.51 4.88 0.83 0.71 12.80
SZB 25.57 100.75 103.34 10.02 3.56 162,975 9.94 9.72 0.66 0.41 3.71
THR 16.50 102.61 102.93 13.87 2.67 98,063 13.52 13.49 1.00 0.81 5.97
THRD 18.81 108.60 127.97 8.97 2.48 689,284 7.49 6.43 1.03 0.57 6.40
TRIC 16.22 98.44 98.44 16.19 3.67 86,549 16.44 16.44 0.74 1.03 6.60
TSH 12.83 88.86 88.86 12.30 3.39 412,426 13.84 13.84 1.15 0.93 6.84
TWIN 18.06 115.15 115.15 14.59 3.08 110,610 12.67 12.67 0.72 0.82 6.41
</TABLE>
9
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 -- SELECT PUBLICITY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible Core Core
Price/ Current Current Current Total Equity/ Equity/ Core Income/ Income/
LTM Price/ Price/ Tang Price/ Dividend Assets Assets Tang Assets EPS Avg Assets Avg Equity
Core EPS Book Value Book Value Assets Yield ($000) (%) (%) ($) (%) (%)
Ticker (x) (%) (%) (%) (%) Mst RctQ Mst RctQ Mst RctQ LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UFBS 16.67 134.08 NA 10.80 2.40 183,066 8.06 NA 0.93 0.70 8.86
WAMU 13.31 212.81 226.18 11.86 2.61 103,396,952 5.45 5.15 2.38 0.92 16.78
WBST 12.33 158.55 187.04 9.46 1.94 9,189,143 5.97 5.11 1.84 0.73 13.54
WEFC 15.22 113.42 113.42 17.43 3.43 188,677 15.37 15.37 1.15 1.10 7.63
WFI 17.01 188.75 191.71 13.71 2.04 358,573 7.26 7.15 0.72 0.90 12.34
WFSL 12.10 167.60 180.47 23.29 3.73 5,558,970 13.90 13.04 2.04 1.92 14.69
WHGB 22.45 75.76 75.76 11.58 - 131,967 15.29 15.29 0.49 0.59 3.21
WRNB 13.38 189.24 189.24 19.86 3.79 378,137 10.49 10.49 0.71 1.54 14.31
WSB 16.88 97.18 97.18 8.18 1.98 273,549 8.42 8.42 0.30 0.50 5.92
WSFS 12.98 223.10 224.27 13.72 0.71 1,551,631 6.15 6.12 1.31 1.09 18.58
WSTR 14.24 93.56 114.77 10.04 - 1,022,136 10.73 8.93 1.29 0.72 6.73
WVFC 14.68 170.65 170.65 18.95 3.86 297,054 11.10 11.10 1.06 1.29 11.27
YFCB 14.95 97.25 97.25 10.01 - 401,565 10.30 10.30 0.97 0.81 6.16
YFED 22.92 158.05 158.05 14.04 2.70 1,229,268 8.89 8.89 0.84 0.67 7.58
Maximum 34.44 362.38 387.63 33.05 5.52 103,396,952 36.22 36.22 6.80 2.55 26.04
Minimum 6.19 71.73 74.22 3.83 - 42,560 3.73 2.07 0.28 0.19 2.41
Average 17.82 137.11 144.01 15.17 1.96 1,757,760 11.83 11.55 1.11 0.94 8.79
Median 16.87 123.19 128.53 14.60 2.10 373,915 9.93 9.71 1.00 0.89 7.86
</TABLE>
10
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core
NPAs/ Price/ Core Income/ Income/
Merger Current Assets Core EPS Avg Assets Avg Equity
Target? Pricing (%) EPS ($) (%) (%)
Ticker (Y/N) Date Mst RctQ (x) Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
AABC N 08/28/98 0.08 103.13 0.02 0.10 1.25
ABBK N 08/28/98 0.14 23.24 0.16 0.46 7.25
ABCL N 08/28/98 0.13 14.40 0.32 0.80 8.86
ABCW N 08/28/98 0.58 20.37 0.27 1.00 15.11
AFBC N 08/28/98 0.20 14.38 0.25 0.90 6.17
AHCI N 08/28/98 0.52 21.48 0.16 0.40 3.56
ALBC N 08/28/98 0.47 20.31 0.12 0.47 5.56
ALLB N 08/28/98 0.99 31.25 0.16 0.75 7.05
AMFC N 08/28/98 0.19 23.05 0.16 0.49 3.68
ANA N 08/28/98 0.29 18.39 0.26 0.82 5.40
ANDB N 08/28/98 0.38 10.86 0.76 1.49 18.75
ANE N 08/28/98 0.47 21.15 0.13 0.54 6.88
ASBI N 08/28/98 0.49 19.53 0.24 0.83 7.02
ASBP N 08/28/98 0.28 14.31 0.19 1.04 7.51
ASFC N 08/28/98 0.38 12.60 0.77 0.76 9.25
BANC N 08/28/98 0.72 22.16 0.11 0.53 8.91
BDJI N 08/28/98 0.16 12.95 0.28 0.80 7.48
BFD N 08/28/98 0.17 19.27 0.24 0.50 6.25
BFSB N 08/28/98 0.21 14.06 0.22 1.33 9.92
BKC N 08/28/98 2.08 13.02 0.42 1.22 14.64
BKCT N 08/28/98 0.61 13.83 0.27 1.26 12.52
BKUNA N 08/28/98 0.46 NM - 0.02 0.49
BNKU N 08/28/98 0.68 12.13 0.67 0.66 13.09
BPLS N 08/28/98 1.75 NM - - 0.12
BVCC N 08/28/98 0.38 11.99 0.37 0.58 7.96
CAFI N 08/28/98 0.47 27.71 0.15 0.84 8.49
CASB N 08/28/98 0.54 19.49 0.17 0.75 10.24
CASH N 08/28/98 1.24 15.32 0.31 0.81 7.82
CATB N 08/28/98 0.22 14.95 0.23 1.26 5.57
CBCI N 08/28/98 1.21 16.72 0.40 1.12 6.39
CBES N 08/28/98 NA 26.39 0.18 0.54 3.90
CBSA N 08/28/98 0.49 9.19 0.51 0.54 14.16
CEBK N 08/28/98 0.40 18.97 0.29 0.60 6.11
CENB N 08/28/98 0.35 14.00 0.25 1.17 6.33
CFB N 08/28/98 0.78 11.72 0.48 0.89 12.87
CFCP N 08/28/98 0.48 21.59 0.22 0.95 15.91
CFFC N 08/28/98 1.30 19.53 0.16 0.95 6.78
CFNC N 08/28/98 0.14 12.34 0.19 1.15 6.36
CFSB N 08/28/98 0.21 16.99 0.32 1.33 17.02
CFTP N 08/28/98 0.28 26.67 0.15 1.01 4.51
CIBI N 08/28/98 0.05 18.38 0.17 0.92 8.16
CKFB N 08/28/98 0.08 19.74 0.22 1.12 5.21
CLAS N 08/28/98 0.28 23.83 0.16 0.58 3.83
CMRN N 08/28/98 0.40 14.84 0.28 1.19 5.88
CMSB N 08/28/98 0.41 35.00 0.10 0.25 2.87
CNIT N 08/28/98 0.17 16.90 0.27 0.76 10.30
CNSB N 08/28/98 0.07 48.44 0.08 0.58 2.33
CNY N 08/28/98 1.91 19.87 0.14 0.29 3.59
COFI N 08/28/98 0.31 13.31 0.50 1.33 17.87
COOP N 08/28/98 - 17.26 0.21 0.70 8.93
CRSB N 08/28/98 0.64 11.25 0.30 2.22 19.82
CRZY N 08/28/98 0.13 18.26 0.19 1.12 4.73
CSBF N 08/28/98 1.13 22.14 0.12 0.77 3.34
CVAL N 08/28/98 0.33 23.79 0.31 0.82 9.54
DCBI N 08/28/98 - 17.53 0.23 1.41 5.76
DCOM N 08/28/98 0.39 14.52 0.31 0.94 8.01
DME N 08/28/98 1.03 40.74 0.14 0.31 5.11
DNFC N 08/28/98 0.50 13.79 0.34 0.71 12.47
</TABLE>
11
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core
NPAs/ Price/ Core Income/ Income/
Merger Current Assets Core EPS Avg Assets Avg Equity
Target? Pricing (%) EPS ($) (%) (%)
Ticker (Y/N) Date Mst RctQ (x) Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
DSL N 08/28/98 0.84 14.88 0.40 0.77 10.05
EBSI N 08/28/98 1.20 10.14 0.45 0.95 14.68
EFBC N 08/28/98 - 18.38 0.17 1.44 3.95
EFBI N 08/28/98 0.03 22.58 0.31 0.74 7.84
EMLD N 08/28/98 0.25 17.97 0.16 1.13 13.59
EQSB N 08/28/98 NA 16.94 0.38 0.58 11.33
ESBF N 08/28/98 0.60 15.63 0.26 0.63 8.83
ESBK N 08/28/98 0.82 14.97 0.43 0.53 8.48
FAB N 08/28/98 0.29 21.35 0.18 0.44 4.61
FBBC N 08/28/98 0.05 12.59 0.33 1.10 10.27
FBER N 08/28/98 0.96 18.75 0.23 0.71 5.93
FBHC N 08/28/98 0.27 28.13 0.16 0.47 6.81
FBSI N 08/28/98 0.03 17.11 0.19 0.99 7.18
FCB N 08/28/98 - 30.36 0.14 0.75 3.44
FCBF N 08/28/98 0.22 19.34 0.37 1.09 7.52
FCME N 08/28/98 0.21 13.82 0.19 0.65 6.88
FDEF N 08/28/98 0.29 16.45 0.19 1.00 5.62
FED N 08/28/98 0.84 11.46 0.36 0.78 13.29
FESX N 08/28/98 0.45 17.38 0.24 0.60 8.07
FFBH N 08/28/98 0.85 16.88 0.30 0.99 6.72
FFBZ N 08/28/98 0.54 21.39 0.13 0.83 10.67
FFCH N 08/28/98 1.16 16.41 0.28 0.83 12.96
FFDB N 08/28/98 0.89 21.25 0.15 0.83 8.49
FFDF N 08/28/98 0.08 33.33 0.12 0.69 2.96
FFES N 08/28/98 0.30 11.61 0.56 0.64 9.08
FFFD N 08/28/98 0.12 10.76 0.35 1.35 8.79
FFHH N 08/28/98 0.20 16.28 0.24 0.66 6.31
FFHS N 08/28/98 0.34 16.44 0.23 0.68 7.39
FFIC N 08/28/98 0.31 14.70 0.37 0.99 7.79
FFKY N 08/28/98 0.03 16.89 0.37 1.51 11.38
FFLC N 08/28/98 0.26 14.66 0.29 1.07 8.36
FFOH N 08/28/98 0.26 16.07 0.21 0.84 6.79
FFSL N 08/28/98 0.49 10.42 0.27 0.87 9.15
FFWC N 08/28/98 0.43 23.78 0.18 0.51 5.37
FFWD N 08/28/98 0.02 23.44 0.16 1.04 7.79
FFYF N 08/28/98 0.51 16.73 0.48 1.15 8.81
FGHC N 08/28/98 1.65 27.81 0.10 1.15 14.40
FISB N 08/28/98 1.11 25.14 0.22 0.69 7.43
FKFS N 08/28/98 1.21 10.99 0.29 0.68 10.30
FKKY N 08/28/98 NA 15.10 0.24 1.26 7.43
FLAG N 08/28/98 1.26 31.25 0.11 0.58 6.74
FLFC N 08/28/98 0.77 22.62 0.21 0.83 10.98
FLGS N 08/28/98 2.26 8.73 0.73 1.49 29.40
FLKY N 08/28/98 1.70 23.66 0.14 0.95 3.44
FMCO N 08/28/98 0.70 15.97 0.18 0.79 13.27
FMSB N 08/28/98 0.05 14.58 0.24 0.92 12.99
FNGB N 08/28/98 0.12 16.91 0.17 0.91 8.31
FSBI N 08/28/98 0.17 14.34 0.34 0.70 10.04
FSTC N 08/28/98 1.08 20.04 0.34 1.11 11.10
FTF N 08/28/98 - 12.97 0.47 1.73 11.49
FTFC N 08/28/98 0.23 36.88 0.10 0.51 7.02
FTNB N 08/28/98 0.70 40.34 0.11 0.66 2.80
FTSB N 08/28/98 1.93 19.69 0.20 1.16 7.30
FWWB N 08/28/98 0.42 17.19 0.29 0.98 7.44
GAF N 08/28/98 0.24 15.89 0.24 0.82 5.99
GDW N 08/28/98 0.97 10.98 1.80 1.06 14.58
GFCO N 08/28/98 0.19 16.67 0.30 0.93 9.91
GPT N 08/28/98 2.54 12.53 0.54 1.21 12.57
</TABLE>
12
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core
NPAs/ Price/ Core Income/ Income/
Merger Current Assets Core EPS Avg Assets Avg Equity
Target? Pricing (%) EPS ($) (%) (%)
Ticker (Y/N) Date Mst RctQ (x) Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
GSFC N 08/28/98 0.07 18.93 0.17 1.60 4.52
GSLA N 08/28/98 0.12 51.04 0.06 0.54 1.38
GTPS N 08/28/98 0.01 23.78 0.18 0.75 4.09
GUPB N 08/28/98 0.37 16.52 0.21 0.87 7.00
HALL N 08/28/98 0.31 13.64 0.22 0.62 8.02
HARL N 08/28/98 - 14.24 0.52 0.95 14.49
HAVN N 08/28/98 0.45 21.49 0.20 0.35 6.53
HBFW N 08/28/98 - 21.21 0.33 0.84 6.99
HBNK N 08/28/98 1.84 12.18 0.79 1.37 17.38
HBS N 08/28/98 0.60 14.39 0.33 1.09 7.38
HCFC N 08/28/98 0.59 11.06 0.26 1.24 7.64
HFFB N 08/28/98 - 17.86 0.21 1.38 5.22
HFFC N 08/28/98 0.44 17.43 0.26 0.86 8.67
HFSA N 08/28/98 0.14 21.73 0.21 0.52 4.99
HHFC N 08/28/98 0.09 22.32 0.14 0.56 5.13
HIFS N 08/28/98 0.17 11.62 0.53 1.22 12.77
HMLK N 08/28/98 0.06 17.93 0.21 0.79 5.04
HMNF N 08/28/98 0.05 23.96 0.15 0.45 4.18
HOMF N 08/28/98 0.59 17.86 0.35 1.10 11.88
HPBC N 08/28/98 - 11.35 0.49 1.45 16.38
HRBF N 08/28/98 0.32 16.78 0.27 0.85 6.71
HRZB N 08/28/98 0.02 12.98 0.26 1.47 9.55
HTHR N 08/28/98 5.28 6.47 0.56 1.17 27.46
HWEN N 08/28/98 1.10 25.00 0.08 0.63 3.53
HZFS N 08/28/98 NA 18.75 0.21 0.76 8.17
IFSB N 08/28/98 NA 7.56 0.43 0.82 10.87
INBI N 08/28/98 0.23 15.95 0.29 1.47 9.14
IPSW N 08/28/98 0.80 12.50 0.24 1.03 19.19
ITLA N 08/28/98 1.07 9.65 0.46 1.45 13.92
IWBK N 08/28/98 0.67 20.54 0.28 0.77 10.90
JSB N 08/28/98 0.14 9.06 1.27 3.31 13.90
JSBA N 08/28/98 0.70 29.69 0.16 0.53 5.53
JXVL N 08/28/98 NA 13.10 0.31 1.26 8.64
KFBI N 08/28/98 0.05 15.50 0.25 0.93 6.51
KNK N 08/28/98 0.71 17.11 0.38 0.56 5.80
KSBK N 08/28/98 1.74 11.76 0.34 1.11 14.16
KYF N 08/28/98 0.04 21.68 0.16 0.96 5.56
LARK N 08/28/98 0.06 20.79 0.26 0.76 5.59
LARL N 08/28/98 0.32 12.50 0.38 1.39 13.04
LOGN N 08/28/98 0.26 15.00 0.25 1.44 7.65
LSBI N 08/28/98 1.20 19.87 0.39 0.68 8.05
LSBX N 08/28/98 0.24 7.73 0.40 2.10 18.14
LVSB N 08/28/98 0.96 14.39 0.33 0.98 10.06
LXMO N 08/28/98 0.47 23.33 0.15 0.66 3.88
MAFB N 08/28/98 0.50 15.22 0.39 1.03 13.24
MARN N 08/28/98 1.02 15.80 0.36 1.33 6.64
MASB N 08/28/98 0.20 18.20 0.62 1.00 8.52
MBLF N 08/28/98 0.55 12.74 0.39 0.93 7.10
MCBN N 08/28/98 0.38 32.14 0.07 0.33 4.01
MDBK N 08/28/98 0.18 15.06 0.61 1.03 11.23
MECH N 08/28/98 0.46 13.30 0.47 1.06 10.97
METF N 08/28/98 1.30 20.83 0.15 0.43 11.01
MFBC N 08/28/98 0.06 19.14 0.29 0.65 5.57
MFFC N 08/28/98 0.16 22.32 0.14 0.52 4.72
MFLR N 08/28/98 0.59 13.18 0.37 1.01 10.44
MRKF N 08/28/98 - 24.43 0.11 1.03 3.17
MSBF N 08/28/98 0.41 19.18 0.22 1.32 7.89
MWBI N 08/28/98 0.66 11.78 0.26 0.73 10.41
</TABLE>
13
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT PUBLICLY HELD THRIFTS
<TABLE>
<CAPTION>
Core Core
NPAs/ Price/ Core Income/ Income/
Merger Current Assets Core EPS Avg Assets Avg Equity
Target? Pricing (%) EPS ($) (%) (%)
Ticker (Y/N) Date Mst RctQ (x) Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
MWBX N 08/28/98 0.45 11.38 0.14 1.23 16.28
NBN N 08/28/98 1.08 11.66 0.26 0.96 12.11
NEIB N 08/28/98 0.41 12.91 0.38 1.16 8.82
NHTB N 08/28/98 1.00 11.52 0.32 0.86 10.76
NMSB N 08/28/98 0.29 68.75 0.04 0.18 2.02
NSLB N 08/28/98 0.01 19.35 0.21 0.87 4.68
NWEQ N 08/28/98 1.71 12.15 0.36 1.22 10.40
OCFC N 08/28/98 0.40 17.05 0.22 0.81 5.91
OFCP N 08/28/98 0.49 19.90 0.30 0.81 9.91
OHSL N 08/28/98 0.04 19.38 0.20 0.80 7.44
PBCI N 08/28/98 1.48 16.89 0.37 1.10 8.52
PBKB N 08/28/98 0.35 26.67 0.15 0.24 6.18
PCBC N 08/28/98 - 19.23 0.26 0.92 4.94
PDB N 08/28/98 0.71 19.23 0.13 1.14 6.96
PEEK N 08/28/98 0.61 22.06 0.17 0.93 4.18
PERM N 08/28/98 0.18 24.04 0.13 0.53 5.28
PFDC N 08/28/98 0.16 17.19 0.30 1.32 8.86
PFED N 08/28/98 0.07 14.06 0.24 1.08 5.35
PFFB N 08/28/98 1.06 13.52 0.26 0.56 6.54
PFNC N 08/28/98 0.41 20.23 0.19 0.76 11.55
PFSB N 08/28/98 0.44 9.93 0.28 0.72 10.28
PHBK N 08/28/98 0.68 12.88 0.33 1.26 16.82
PHFC N 08/28/98 1.24 14.12 0.27 0.55 7.81
PRBC N 08/28/98 0.35 18.91 0.19 0.45 4.65
PSFC N 08/28/98 NA 34.15 0.14 0.85 3.90
PSFI N 08/28/98 0.41 16.15 0.18 1.65 6.05
PTRS N 08/28/98 0.32 16.76 0.22 0.68 7.74
PVFC N 08/28/98 0.68 10.34 0.29 1.18 16.34
PVSA N 08/28/98 0.43 14.29 0.54 1.08 14.49
PWBK N 08/28/98 0.72 153.91 0.02 0.09 0.48
QCBC N 08/28/98 1.11 13.21 0.31 0.82 9.30
QCFB N 08/28/98 0.35 12.94 0.57 1.70 9.63
QCSB N 08/28/98 0.39 19.76 0.48 1.63 16.30
RARB N 08/28/98 0.43 17.03 0.40 0.96 12.80
RELY N 08/28/98 0.40 13.59 0.46 0.77 9.20
RIVR N 08/28/98 0.55 14.78 0.26 0.87 6.38
RSLN N 08/28/98 0.23 13.33 0.30 1.24 7.79
SCBS N 08/28/98 0.18 13.79 0.29 1.57 9.46
SCCB N 08/28/98 1.26 23.01 0.22 1.07 5.20
SFFC N 08/28/98 NA 18.75 0.16 1.12 6.31
SFIN N 08/28/98 0.42 16.54 0.24 0.62 6.23
SGVB N 08/28/98 NA 22.06 0.17 0.43 5.41
SKAN N 08/28/98 1.74 13.54 0.27 0.61 8.92
SMBC N 08/28/98 0.97 19.60 0.22 0.89 5.45
SOBI N 08/28/98 0.29 22.66 0.16 0.54 3.80
SOPN N 08/28/98 0.18 16.67 0.33 1.76 7.68
SPBC N 08/28/98 0.22 13.67 0.34 1.02 10.75
SRN N 08/28/98 - 26.92 0.13 0.57 3.25
SSM N 08/28/98 - 26.17 0.16 1.07 4.02
STFR N 08/28/98 0.18 16.81 0.58 0.69 9.03
STSA N 08/28/98 0.52 25.59 0.16 0.25 4.57
SVRN N 08/28/98 0.54 15.15 0.23 0.77 13.84
SZB N 08/28/98 0.05 60.27 0.07 0.15 1.49
THR N 08/28/98 0.98 19.64 0.21 0.67 4.94
THRD N 08/28/98 0.31 20.18 0.24 0.47 6.08
TRIC N 08/28/98 - 17.65 0.17 0.99 6.11
TSH N 08/28/98 0.18 12.29 0.30 0.96 6.91
TWIN N 08/28/98 0.37 18.06 0.18 0.80 6.29
</TABLE>
14
<PAGE>
FERGUSSON & COMPANY EXHIBIT II.1 - SELECT PUBLICITY HELD THRIFTS
- -------------------
<TABLE>
<CAPTION>
Core Core
NPAs/ Price/ Income/ Income/
Merger Current Assets Core EPS Avg Assets Avg Equity
Target? Pricing (%) EPS ($) (%) (%)
Ticker (Y/N) Date Mst RctQ (x) Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
UFBS N 08/28/98 NA 16.85 0.23 0.68 8.70
WAMU N 08/28/98 0.74 12.00 0.66 0.97 18.15
WBST N 08/28/98 0.41 15.33 0.37 0.61 11.10
WEFC N 08/28/98 0.14 15.63 0.28 1.12 7.63
WFI N 08/28/98 NA 16.12 0.19 0.92 12.60
WFSL N 08/28/98 0.70 11.87 0.52 1.98 14.34
WHGB N 08/28/98 0.59 18.33 0.15 0.63 3.93
WRNB N 08/28/98 1.15 13.19 0.18 1.57 14.64
WSB N 08/28/98 NA 15.82 0.08 0.51 5.96
WSFS N 08/28/98 1.12 12.50 0.34 1.12 18.11
WSTR N 08/28/98 0.43 14.82 0.31 0.70 6.44
WVFC N 08/28/98 0.20 14.41 0.27 1.29 11.52
YFCB N 08/28/98 0.15 18.13 0.20 0.59 5.10
YFED N 08/28/98 0.98 22.92 0.21 0.64 7.30
Maximum 5.28 153.91 1.80 3.31 29.40
Minimum - 6.47 - - 0.12
Average 0.54 19.22 0.28 0.90 8.56
Median 0.40 16.89 0.24 0.86 7.71
</TABLE>
15
<PAGE>
FERGUSON & COMPANY EXHIBIT II.2 - SELECT SOUTHEAST REGION PUBLICITY
- ------------------ HELD THRIFTS
<TABLE>
<CAPTION>
Deposit Current
Insurance Stock
Agency Price
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AFBC Advance Financial Bancorp Wellsburg WV SE SAIF NASDAQ 01/02/97 14.375
BANC BankAtlantic Bancorp Inc. Fort Lauderdale FL SE SAIF NASDAQ 11/29/83 9.750
BFSB Bedford Bancshares Inc. Bedford VA SE SAIF NASDAQ 08/22/94 12.375
BKUNA BankUnited Financial Corp. Coral Gables FL SE SAIF NASDAQ 12/11/85 9.297
CENB Century Bancorp Inc. Thomasville NC SE SAIF NASDAQ 12/23/96 14.000
CFCP Coastal Financial Corp. Myrtle Beach SC SE SAIF NASDAQ 09/26/90 19.000
CFFC Community Financial Corp. Staunton VA SE SAIF NASDAQ 03/30/88 12.500
CFNC Carolina Fincorp Inc. Rockingham NC SE SAIF NASDAQ 11/25/96 9.375
CFTP Community Federal Bancorp Tupelo MS SE SAIF NASDAQ 03/26/96 16.000
CNIT CENIT Bancorp Inc. Norfolk VA SE SAIF NASDAQ 08/06/92 18.250
COOP Cooperative Bankshares Inc. Wilmington NC SE SAIF NASDAQ 08/21/91 14.500
EBSI Eagle Bancshares Tucker GA SE SAIF NASDAQ 04/01/86 18.250
FFBH First Federal Bancshares of AR Harrison AR SE SAIF NASDAQ 05/03/96 20.250
FFCH First Financial Holdings Inc. Charleston SC SE SAIF NASDAQ 11/10/83 18.375
FFDB FirstFed Bancorp Inc. Bessemer AL SE SAIF NASDAQ 11/19/91 12.750
FFLC FFLC Bancorp Inc. Leesburg FL SE SAIF NASDAQ 01/04/94 17.000
FGHC First Georgia Holding Inc. Brunswick GA SE SAIF NASDAQ 02/11/87 11.125
FLAG FLAG Financial Corp. LaGrange GA SE SAIF NASDAQ 12/11/86 13.750
FLFC First Liberty Financial Corp. Macon GA SE SAIF NASDAQ 12/06/83 19.000
FSTC First Citizens Corp. Newnan GA SE SAIF NASDAQ 03/01/86 27.250
FTF Texarkana First Financial Corp Texarkana AR SE SAIF AMSE 07/07/95 24.375
GSFC Green Street Financial Corp. Fayetteville NC SE SAIF NASDAQ 04/04/96 12.875
HBS Haywood Bancshares Inc. Waynesville NC SE SAIF AMSE 12/18/87 19.000
PDB Piedmont Bancorp Inc. Hillsborough NC SE SAIF AMSE 12/08/95 10.000
SCBS Southern Community Bancshares Cullman AL SE SAIF NASDAQ 12/23/96 16.000
SCCB S. Carolina Community Bancshrs Winnsboro SC SE SAIF NASDAQ 07/07/94 20.250
SOPN First Savings Bancorp Inc. Southern Pines NC SE SAIF NASDAQ 01/06/94 22.000
SRN Southern Banc Co. Gadsden AL SE SAIF AMSE 10/05/95 14.000
SSM Stone Street Bancorp Inc. Mocksville NC SE SAIF AMSE 04/01/96 16.750
SZB SouthFirst Bancshares Inc. Sylacauga AL SE SAIF AMSE 02/14/95 16.875
TWIN Twin City Bancorp Bristol TN SE SAIF NASDAQ 01/04/95 13.000
UFBS Union Financial Bcshs Inc. Union SC SE SAIF NASDAQ NA 15.500
Maximum 27.250
Minimum 9.297
Average 15.869
Median 15.750
<CAPTION>
Current
Market
Value
Ticker Short Name City ($M)
<S> <C> <C> <C>
AFBC Advance Financial Bancorp Wellsburg 15.43
BANC BankAtlantic Bancorp Inc. Fort Lauderdale 336.60
BFSB Bedford Bancshares Inc. Bedford 28.44
BKUNA BankUnited Financial Corp. Coral Gables 165.35
CENB Century Bancorp Inc. Thomasville 17.79
CFCP Coastal Financial Corp. Myrtle Beach 118.86
CFFC Community Financial Corp. Staunton 32.13
CFNC Carolina Fincorp Inc. Rockingham 17.86
CFTP Community Federal Bancorp Tupelo 70.37
CNIT CENIT Bancorp Inc. Norfolk 91.58
COOP Cooperative Bankshares Inc. Wilmington 43.90
EBSI Eagle Bancshares Tucker 106.03
FFBH First Federal Bancshares of AR Harrison 97.57
FFCH First Financial Holdings Inc. Charleston 250.55
FFDB FirstFed Bancorp Inc. Bessemer 31.04
FFLC FFLC Bancorp Inc. Leesburg 63.62
FGHC First Georgia Holding Inc. Brunswick 53.39
FLAG FLAG Financial Corp. LaGrange 71.16
FLFC First Liberty Financial Corp. Macon 254.01
FSTC First Citizens Corp. Newnan 76.23
FTF Texarkana First Financial Corp Texarkana 42.36
GSFC Green Street Financial Corp. Fayetteville 52.57
HBS Haywood Bancshares Inc. Waynesville 23.76
PDB Piedmont Bancorp Inc. Hillsborough 27.51
SCBS Southern Community Bancshares Cullman 18.20
SCCB S. Carolina Community Bancshrs Winnsboro 11.74
SOPN First Savings Bancorp Inc. Southern Pines 81.64
SRN Southern Banc Co. Gadsden 17.22
SSM Stone Street Bancorp Inc. Mocksville 30.21
SZB SouthFirst Bancshares Inc. Sylacauga 16.33
TWIN Twin City Bancorp Bristol 16.14
UFBS Union Financial Bcshs Inc. Union 19.77
Maximum 336.60
Minimum 11.74
Average 71.86
Median 43.13
</TABLE>
16
<PAGE>
FERGUSON & COMPANY EXHIBIT II.2 - SELECT SOUTHEAST REGION PUBLICY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Tangible Core Core
Price/ Current Current Current Total Equity/ Equity/ Core Income/ Income/
LTM Price/ Price/ Tang Price/ Dividend Assets Assets Tang Assets EPS Avg Assets Avg Equity
Core EPS Book Value Book Value Assets Yield ($000) (%) (%) ($) (%) (%)
Ticker (x) (%) (%) (%) (%) Mst RctQ Mst RctQ Mst RctQ LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AFBC 16.15 99.00 99.00 13.95 2.23 110,668 14.09 14.09 0.89 0.84 5.55
BANC 32.50 140.09 181.23 9.52 0.99 3,756,571 6.79 5.34 0.30 0.38 6.43
BFSB 16.28 137.20 137.20 18.17 2.59 156,509 13.25 13.25 0.76 1.23 8.79
BKUNA 33.20 90.35 108.10 4.61 - 3,584,123 5.44 4.64 0.28 0.19 3.70
CENB 13.33 94.98 94.98 18.37 4.86 96,866 19.34 19.34 1.05 1.21 4.88
CFCP 22.89 326.46 326.46 19.27 1.47 616,887 5.90 5.90 0.83 0.99 16.06
CFFC 18.94 124.38 124.88 17.53 - 183,230 14.09 14.04 0.66 0.96 7.01
CFNC 13.79 116.03 116.03 15.68 2.56 113,911 13.51 13.51 0.68 1.06 5.85
CFTP 27.59 107.74 107.74 26.73 2.00 263,246 22.27 22.27 0.58 1.07 4.28
CNIT 15.21 168.36 181.77 13.99 2.19 651,857 7.91 7.37 1.20 0.84 11.65
COOP 21.32 145.00 145.00 11.52 - 381,054 7.95 7.95 0.68 0.60 7.68
EBSI 12.76 136.60 136.60 9.46 3.51 1,120,232 6.92 6.92 1.43 0.89 11.51
FFBH 17.16 115.98 115.98 17.06 1.38 578,142 14.71 14.71 1.18 0.99 6.63
FFCH 16.70 206.00 206.00 13.36 2.29 1,874,198 6.49 6.49 1.10 0.85 13.51
FFDB 19.32 174.42 188.89 17.25 2.20 179,893 9.89 9.21 0.66 0.89 9.22
FFLC 17.17 120.48 120.48 15.42 2.12 412,443 12.80 12.80 0.99 0.95 7.23
FGHC 29.28 362.38 387.63 29.52 - 180,806 8.15 7.67 0.38 1.16 14.15
FLAG 27.50 184.32 184.32 16.07 1.75 442,879 8.71 8.71 0.50 0.68 7.69
FLFC 23.46 216.40 236.32 16.80 1.58 1,511,776 7.76 7.15 0.81 0.76 10.18
FSTC 18.05 200.96 244.83 20.06 1.17 379,694 9.98 8.34 1.51 1.28 12.77
FTF 13.93 150.18 150.18 22.34 2.30 189,557 14.88 14.88 1.75 1.66 10.88
GSFC 18.93 86.93 86.93 30.34 3.73 173,265 34.90 34.90 0.68 1.58 4.46
HBS 10.73 107.47 110.98 15.66 3.16 151,718 14.57 14.17 1.77 1.44 9.97
PDB 16.95 127.39 127.39 21.07 4.80 130,541 16.55 16.55 0.59 1.23 7.50
SCBS 17.58 154.44 154.44 26.79 1.88 67,920 17.34 17.34 0.91 1.22 6.49
SCCB 27.36 124.39 124.39 25.35 3.16 46,305 20.38 20.38 0.74 1.01 4.19
SOPN 16.92 117.46 117.46 26.85 4.55 304,088 22.86 22.86 1.30 1.76 7.64
SRN 32.56 93.65 94.34 16.29 2.50 105,719 17.40 17.29 0.43 0.49 2.84
SSM 20.94 100.66 100.66 27.51 2.75 112,253 27.33 27.33 0.80 1.40 4.84
SZB 25.57 100.75 103.34 10.02 3.56 162,975 9.94 9.72 0.66 0.41 3.71
TWIN 18.06 115.15 115.15 14.59 3.08 110,610 12.67 12.67 0.72 0.82 6.41
UFBS 16.67 134.08 NA 10.80 2.40 183,066 8.06 NA 0.93 0.70 8.86
Maximum 33.20 362.38 387.63 30.34 4.86 3,756,571 34.90 34.90 1.77 1.76 16.06
Minimum 10.73 86.93 86.93 4.61 - 46,305 5.44 4.64 0.28 0.19 2.84
Average 20.28 146.24 152.54 17.87 2.27 572,906 13.53 13.48 0.87 0.99 7.89
Median 18.06 125.89 124.88 16.93 2.26 183,148 13.03 13.25 0.78 0.98 7.37
</TABLE>
17
<PAGE>
FERGUSON & COMPANY EXHIBIT II.2 - SELECT SOUTHEAST REGION PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Core Core
NPAs/ Price/ Core Income/ Income/
Merger Current Assets Core EPS Avg Assets Avg Equity
Target? Pricing (%) EPS ($) (%) (%)
Ticker (Y/N) Date Mst RctQ (x) Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
AFBC N 08/28/98 0.20 14.38 0.25 0.90 6.17
BANC N 08/28/98 0.72 22.16 0.11 0.53 8.91
BFSB N 08/28/98 0.21 14.06 0.22 1.33 9.92
BKUNA N 08/28/98 0.46 NM - 0.02 0.49
CENB N 08/28/98 0.35 14.00 0.25 1.17 6.33
CFCP N 08/28/98 0.48 21.59 0.22 0.95 15.91
CFFC N 08/28/98 1.30 19.53 0.16 0.95 6.78
CFNC N 08/28/98 0.14 12.34 0.19 1.15 6.36
CFTP N 08/28/98 0.28 26.67 0.15 1.01 4.51
CNIT N 08/28/98 0.17 16.90 0.27 0.76 10.30
COOP N 08/28/98 - 17.26 0.21 0.70 8.93
EBSI N 08/28/98 1.20 10.14 0.45 0.95 14.68
FFBH N 08/28/98 0.85 16.88 0.30 0.99 6.72
FFCH N 08/28/98 1.16 16.41 0.28 0.83 12.96
FFDB N 08/28/98 0.89 21.25 0.15 0.83 8.49
FFLC N 08/28/98 0.26 14.66 0.29 1.07 8.36
FGHC N 08/28/98 1.65 27.81 0.10 1.15 14.40
FLAG N 08/28/98 1.26 31.25 0.11 0.58 6.74
FLFC N 08/28/98 0.77 22.62 0.21 0.83 10.98
FSTC N 08/28/98 1.08 20.04 0.34 1.11 11.10
FTF N 08/28/98 - 12.97 0.47 1.73 11.49
GSFC N 08/28/98 0.07 18.93 0.17 1.60 4.52
HBS N 08/28/98 0.60 14.39 0.33 1.09 7.38
PDB N 08/28/98 0.71 19.23 0.13 1.14 6.96
SCBS N 08/28/98 0.18 13.79 0.29 1.57 9.46
SCCB N 08/28/98 1.26 23.01 0.22 1.07 5.20
SOPN N 08/28/98 0.18 16.67 0.33 1.76 7.68
SRN N 08/28/98 - 26.92 0.13 0.57 3.25
SSM N 08/28/98 - 26.17 0.16 1.07 4.02
SZB N 08/28/98 0.05 60.27 0.07 0.15 1.49
TWIN N 08/28/98 0.37 18.06 0.18 0.80 6.29
UFBS N 08/28/98 NA 16.85 0.23 0.68 8.70
Maximum 1.65 60.27 0.47 1.76 15.91
Minimum - 10.14 - 0.02 0.49
Average 0.54 20.23 0.22 0.97 7.98
Median 0.37 18.06 0.22 0.97 7.53
</TABLE>
18
<PAGE>
FERGUSON & COMPANY EXHIBIT II.1 - SELECT NORTH CAROLINA PUBLICLY HELD THRIFTS
- ------------------
<TABLE>
<CAPTION>
Deposit Current Current
Insurance Stock Market
Agency Price Value
Ticker Short Name City State Region (BIF/SAIF) Exchange IPO Date ($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CENB Century Bancorp Inc. Thomasville NC SE SAIF NASDAQ 12/23/96 14.000 17.79
CFNC Carolina Fincorp Inc. Rockingham NC SE SAIF NASDAQ 11/25/96 9.375 17.86
COOP Cooperative Bankshares Inc. Wilmington NC SE SAIF NASDAQ 08/21/91 14.500 43.90
GSFC Green Street Financial Corp. Fayetteville NC SE SAIF NASDAQ 04/04/96 12.875 52.57
HBS Haywood Bancshares Inc. Waynesville NC SE SAIF AMSE 12/18/87 19.000 23.76
PDB Piedmont Bancorp Inc. Hillsborough NC SE SAIF AMSE 12/08/95 10.000 27.51
SOPN First Savings Bancorp Inc. Southern Pines NC SE SAIF NASDAQ 01/06/94 22.000 81.64
SSM Stone Street Bancorp Inc. Mocksville NC SE SAIF AMSE 04/01/96 16.750 30.21
Maximum 22.000 81.64
Minimum 9.375 17.79
Average 14.813 36.91
Median 14.250 28.86
</TABLE>
19
<PAGE>
FERGUSON & COMPANY EXHIBIT II.3 - SELECT NORTH CAROLINA PUBLICLY HELD THRIFTS
<TABLE>
<CAPTION>
Tangible Core Core
Price/ Current Current Current Total Equity/ Equity/ Core Income/ Income/
LTM Price/ Price/ Tang Price/ Dividend Assets Assets Tang Assets EPS Avg Assets Avg Equity
Core EPS Book Value Book Value Assets Yield ($000) (%) (%) ($) (%) (%)
Ticker (x) (%) (%) (%) (%) Mst RctQ Mst RctQ Mst RctQ LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CENB 13.33 94.98 94.98 18.37 4.86 96,866 19.34 19.34 1.05 1.21 4.88
CFNC 13.79 116.03 116.03 15.68 2.56 113,911 13.51 13.51 0.68 1.06 5.85
COOP 21.32 145.00 145.00 11.52 - 381,054 7.95 7.95 0.68 0.60 7.68
GSFC 18.93 86.93 86.93 30.34 3.73 173,265 34.90 34.90 0.68 1.58 4.46
HBS 10.73 107.47 110.98 15.66 3.16 151,718 14.57 14.17 1.77 1.44 9.97
PDB 16.95 127.39 127.39 21.07 4.80 130,541 16.55 16.55 0.59 1.23 7.50
SOPN 16.92 117.46 117.46 26.85 4.55 304,088 22.86 22.86 1.30 1.76 7.64
SSM 20.94 100.66 100.66 27.51 2.75 112,253 27.33 27.33 0.80 1.40 4.84
Maximum 21.32 145.00 145.00 30.34 4.?6 381,054 34.90 34.90 1.77 1.76 9.97
Minimum 10.73 86.93 86.93 11.52 - 96,866 7.95 7.95 0.59 0.60 4.46
Average 16.61 111.99 112.43 20.88 3.30 182,962 19.63 19.63 0.94 1.29 6.60
Median 16.94 111.75 113.51 19.72 3.44 141,130 17.95 17.95 0.74 1.32 6.68
</TABLE>
20
<PAGE>
FERGUSON & COMPANY EXHIBIT II.3 - SELECT NORTH CAROLINA PUBLICLY HELD
- ------------------
THRIFTS
<TABLE>
<CAPTION>
Core Core
NPAs/ Price/ Core Income/ Income/
Merger Current Assets Core EPS Avg Assets Avg Equity
Target? Pricing (%) EPS ($) (%) (%)
Ticker (Y/N) Date Mst RctQ (x) Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
CENB N 08/28/98 0.35 14.00 0.25 1.17 6.33
CFNC N 08/28/98 0.14 12.34 0.19 1.15 6.36
COOP N 08/28/98 - 17.26 0.21 0.70 8.93
GSFC N 08/28/98 0.07 18.93 0.17 1.60 4.52
HBS N 08/28/98 0.60 14.39 0.33 1.09 7.38
PDB N 08/28/98 0.71 19.23 0.13 1.14 6.96
SOPN N 08/28/98 0.18 16.67 0.33 1.76 7.68
SSM N 08/28/98 - 26.17 0.16 1.07 4.02
Maximum 0.71 26.17 0.33 1.76 8.93
Minimum - 12.34 0.13 0.70 4.02
Average 0.26 17.37 0.22 1.21 6.52
Median 0.16 16.97 0.20 1.15 6.66
</TABLE>
21
<PAGE>
FERGUSON & COMPANY EXHIBIT II.4 - COMPARATIVES GENERAL
- ------------------
<TABLE>
<CAPTION>
Total Current Current
Number Assets Stock Market
of ($000) Price Value
Ticker Short Name City State Offices Mst RctQ IPO Date ($) ($M)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC AMB Financial Corp. Munster IN 4 111,338.0 1-Apr-96 14.75 13.51
CLAS Classic Bancshares Inc. Ashlandnc. KY 5 137,984.0 29-Dec-95 15.25 19.82
FCME First Coastal Corp. Westbrook ME 8 171,719.0 NA 10.50 14.29
FFDB FirstFed Banchares Inc. Bessemer AL 8 179,893.0 19-Nov-91 12.75 31.04
HBS Haywood Bancshares Inc. Waynesville NC 4 151,718.0 18-Dec-87 19.00 23.76
HIFS Hingham Instit. for Savings HinghamSavings MA 5 239,148.0 20-Dec-88 24.63 32.25
HRBF Harbor Federal Bancorp Inc. Baltimore Inc. MD 9 235,733.0 12-Aug-94 18.13 33.76
IPSW Ipswich Savings Bank Ipswich MA 7 233,662.0 26-May-93 12.00 28.68
JXVL Jacksonville Bancorp Inc. Jacksonville TX 7 242,673.0 1-Apr-96 16.25 39.35
LARL Laurel Capital Group Inc. Allison Park PA 6 220,986.0 20-Feb-87 19.00 41.64
MFLR Mayflower Co-operative Bank MiddleboroBank MA 4 135,518.0 23-Dec-87 19.50 17.54
Maximum 9 242,673.0 24.63 41.64
Minimum 4 111,338.0 10.50 13.51
Average 6 187,306.5 16.52 26.88
Median 6 179,893.0 16.25 28.68
</TABLE>
22
<PAGE>
FERGUSON & COMPANY EXHIBIT II.5 - COMPARATIVES BALANCE SHEET
- ------------------
<TABLE>
<CAPTION>
Cash and Mortgage-
Total Cash and Inv. Sec. Mortgage- Backed
Total Cash and Inv. Sec. Less MBS Backed Securities Net
Assets Investments Less MBS % of TA Securities % of TA Loans
($000) ($000) ($000) (%) ($000) (%) ($000)
Short Name Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC AMB Financial Corp. 111,338 18,617 15,591 14.00 3,026 2.72 87,349
CLAS Classic Bancshares Inc. 137,984 35,461 NA NA NA NA 92,337
FCME First Coastal Corp. 171,719 58,246 34,312 19.98 23,934 13.94 101,369
FFDB FirstFed Bancorp Inc. 179,893 55,211 NA NA NA NA 116,462
HBS Haywood Bancshares Inc. 151,718 32,712 NA NA NA NA 113,169
HIFS Hingham Instit. for Savings 239,148 52,258 39,551 16.54 12,707 5.31 181,552
HRBF Harbor Federal Bancorp Inc. 235,733 79,473 60,155 25.52 19,318 8.19 150,794
IPSW Ipswich Savings Bank 233,662 43,554 21,052 9.01 22,502 9.63 167,161
JXVL Jacksonville Bancorp Inc. 242,673 49,385 31,218 12.86 18,167 7.49 NA
LARL Laurel Capital Group Inc. 220,986 64,801 56,990 25.79 7,811 3.53 151,124
MFLR Mayflower Co-operative Bank 135,518 55,226 50,201 37.04 5,025 3.71 76,106
Maximum 242,673 79,473 60,155 37.04 23,934 13.94 181,552
Minimum 111,338 18,617 15,591 9.01 3,026 2.72 76,106
Average 187,307 49,540 38,634 20.09 14,061 6.82 123,742
Median 179,893 52,258 36,932 18.26 15,437 6.40 114,816
<CAPTION>
Net
Loans
% of TA
(%)
Short Name Mst RctQ
<S> <C> <C>
AMFC AMB Financial Corp. 78.45
CLAS Classic Bancshares Inc. 66.92
FCME First Coastal Corp. 59.03
FFDB FirstFed Bancorp Inc. 64.74
HBS Haywood Bancshares Inc. 74.59
HIFS Hingham Instit. for Savings 75.92
HRBF Harbor Federal Bancorp Inc. 63.97
IPSW Ipswich Savings Bank 71.54
JXVL Jacksonville Bancorp Inc. NA
LARL Laurel Capital Group Inc. 68.39
MFLR Mayflower Co-operative Bank 56.16
Maximum 78.45
Minimum 56.16
Average 67.97
Median 67.65
</TABLE>
23
<PAGE>
FERGUSON & COMPANY EXHIBIT II.5 - COMPARATIVES BALANCE SHEET
- ------------------
<TABLE>
<CAPTION>
Investment & Loan Total Total
Foreclosed Servicing Total Other Total Deposits Total Borrowings
Real Estate Rights Intangibles Assets Deposits % of TA Borrowings % of TA
($000) ($000) ($000) ($000) ($000) (%) ($000) (%)
Short Name Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMB Financial Corp. 1,391 - - 3,981 75,700 67.99 20,074 18
Classic Bancshares Inc. 271 - 2,872 7,043 108,400 78.56 7,350 5.33
First Coastal Corp. 121 NA - 9,328 139,002 80.95 17,179 10.00
FirstFed Bancorp Inc. 844 - 1,362 4,744 161,324 89.68 - -
Haywood Bancshares Inc. 7 1,959 701 3,170 116,963 77.09 10,500 6.92
Hingham Instit. for Savings - - - 5,338 170,381 71.25 44,166 18.47
Harbor Federal Bancorp Inc. - - - 5,466 178,032 75.52 23,310 9.89
Ipswich Savings Bank 864 1,060 - 4,148 175,773 75.23 41,568 17.79
Jacksonville Bancorp Inc. 498 508 - 6,477 198,904 81.96 4,051 1.67
Laurel Capital Group Inc. 143 - - 3,285 175,390 79.37 17,033 7.71
Mayflower Co-operative Bank - 106 190 3,890 105,518 77.86 16,000 11.81
1,391 1,959 2,872 9,328 198,904 89.68 44,166 18.47
- - - 3,170 75,700 67.99 - -
376 363 466 5,170 145,944 77.77 18,294 9.78
143 - - 4,744 161,324 77.86 17,033 9.89
<CAPTION>
Other
Liabilities
($000)
Short Name Mst RctQ
<S> <C>
AMB Financial Corp. 1,446
Classic Bancshares Inc. 1,719
First Coastal Corp. 166
FirstFed Bancorp Inc. 771
Haywood Bancshares Inc. 2,154
Hingham Instit. for Savings 2,057
Harbor Federal Bancorp Inc. 4,692
Ipswich Savings Bank 3,277
Jacksonville Bancorp Inc. 4,639
Laurel Capital Group Inc. 5,057
Mayflower Co-operative Bank 1,040
5,057
166
2,456
2,057
</TABLE>
24
<PAGE>
FERGUSON & COMPANY EXHIBIT II.5 - COMPARATIVES BALANCE SHEET
- ------------------
<TABLE>
<CAPTION>
Regulatory Regulatory Regulatory
Total Common Total Tangible Core Total Tangible
Liabilities Equity Equity Capital Capital Capital Capital/
($000) ($000) ($000) ($000) ($000) ($000) Tangible
Short Name Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Assets (%)
<S> <C> <C> <C> <C> <C> <C> <C>
AMB Financial Corp. 97,220 14,118 14,118 9,900 9,900 10,300 13.41
Classic Bancshares Inc. 117,469 20,515 20,515 7,987 7,987 8,498 NA
First Coastal Corp. 156,347 15,372 15,372 14,582 14,582 15,797 NA
FirstFed Bancorp Inc. 162,095 17,798 17,798 16,419 16,419 17,484 NA
Haywood Bancshares Inc. 129,617 22,101 22,101 NA NA NA NA
Hingham Instit. for Savings 216,604 22,544 22,544 NA 22,533 24,180 NA
Harbor Federal Bancorp Inc. 206,034 29,699 29,699 NA NA NA 10.98
Ipswich Savings Bank 220,618 13,044 13,044 NA 13,016 14,507 NA
Jacksonville Bancorp Inc. 207,594 35,079 35,079 NA NA NA 13.14
Laurel Capital Group Inc. 197,480 23,506 23,506 NA 22,841 24,286 NA
Mayflower Co-operative Bank 122,558 12,960 12,960 NA 12,960 13,929 NA
220,618 35,079 35,079 16,419 22,841 24,286 13.41
97,220 12,960 12,960 7,987 7,987 8,498 10.98
166,694 20,612 20,612 12,222 15,030 16,123 12.51
162,095 20,515 20,515 12,241 13,799 15,152 13.14
<CAPTION>
Core Risk-Based
Capital/ Capital/
Adj Tangible Risk-Weightd
Short Name Assets (%) Assets (%)
<S> <C> <C>
AMB Financial Corp. 13.41 26.61
Classic Bancshares Inc. NA NA
First Coastal Corp. NA NA
FirstFed Bancorp Inc. NA NA
Haywood Bancshares Inc. NA NA
Hingham Instit. for Savings NA NA
Harbor Federal Bancorp Inc. 10.98 26.68
Ipswich Savings Bank NA NA
Jacksonville Bancorp Inc. 13.14 26.65
Laurel Capital Group Inc. NA NA
Mayflower Co-operative Bank NA NA
13.41 26.68
10.98 26.61
12.51 26.65
13.14 26.65
</TABLE>
25
<PAGE>
FERGUSON & COMPANY EXHIBIT II.5 - COMPARATIVES BALANCE SHEET
- ------------------
<TABLE>
<CAPTION>
Loan Loss Publicly Tangible Earn Assets/ Full-Time
NPAs/ Reserves/ Reserves/ Reported Publicly Rep Int Bearing Equivalent
Assets Assets NPLs Book Value Book Value Liabilities Employees
(%) (%) (%) ($) ($) (%) (Actual)
Short Name Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
AMB Financial Corp. 0.19 0.41 214.55 15.42 15.42 113.76 NA
Classic Bancshares Inc. 0.28 0.62 764.29 15.79 13.58 111.46 NA
First Coastal Corp. 0.21 1.59 NM 11.30 11.30 108.98 76
FirstFed Bancorp Inc. 0.89 0.59 139.22 7.31 6.75 107.91 NA
Haywood Bancshares Inc. 0.60 0.49 83.04 17.68 17.12 115.07 NA
Hingham Instit. for Savings 0.17 0.69 396.87 17.29 17.29 112.87 65
Harbor Federal Bancorp Inc. 0.32 0.21 65.53 15.94 15.94 113.61 NA
Ipswich Savings Bank 0.80 0.74 171.50 5.46 5.46 111.83 69
Jacksonville Bancorp Inc. NA NA NA 14.48 14.48 116.36 NA
Laurel Capital Group Inc. 0.32 0.84 330.12 10.73 10.73 114.06 45
Mayflower Co-operative Bank 0.59 0.85 144.38 14.41 14.20 105.56 51
0.89 1.59 764.29 17.68 17.29 116.36 76
0.17 0.21 65.53 5.46 5.46 105.56 45
0.44 0.70 256.61 13.26 12.93 111.95 61
0.32 0.66 171.50 14.48 14.20 112.87 65
<CAPTION>
Loans
Serviced
For Others
($000)
Short Name Mst RctQ
<S> <C>
AMB Financial Corp. -
Classic Bancshares Inc. -
First Coastal Corp. 43,595
FirstFed Bancorp Inc. NA
Haywood Bancshares Inc. NA
Hingham Instit. for Savings 7,737
Harbor Federal Bancorp Inc. NA
Ipswich Savings Bank 91,877
Jacksonville Bancorp Inc. NA
Laurel Capital Group Inc. 1,118
Mayflower Co-operative Bank 36,590
91,877
-
25,845
7,737
</TABLE>
26
<PAGE>
FERGUSON & COMPANY EXHIBIT II.6 - COMPARATIVE OPERATIONS
- ------------------
<TABLE>
<CAPTION>
Net Income Return on
Average Before Return on Avg Assets
Assets Net Income Extra Items Avg Assets Before Extra
($000) ($000) ($000) (%) (%)
Short Name LTM LTM LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C>
AMFC AMB Financial Corp. 103,036 863 863 0.84 0.84
CLAS Classic Bancshares Inc. 132,589 980 980 0.74 0.74
FCME First Coastal Corp. 151,866 1,221 1,221 0.80 0.80
FFDB FirstFed Bancorp Inc. 178,734 1,595 1,595 0.89 0.89
HBS Haywood Bancshares Inc. 152,336 1,394 1,394 0.92 0.92
HIFS Hingham Instit. for Savings 223,458 2,819 2,819 1.26 1.26
HRBF Harbor Federal Bancorp Inc. 225,190 1,759 1,759 0.78 0.78
IPSW Ipswich Savings Bank 219,574 2,605 2,605 1.19 1.19
JXVL Jacksonville Bancorp Inc. 235,220 3,138 3,138 1.33 1.33
LARL Laurel Capital Group Inc. 214,094 3,051 3,051 1.43 1.43
MFLR Mayflower Co-operative Bank 129,364 1,494 1,494 1.15 1.15
Maximum 235,220 3,138 3,138 1.43 1.43
Minimum 103,036 863 863 0.74 0.74
Average 178,678 1,902 1,902 1.03 1.03
Median 178,734 1,595 1,595 0.92 0.92
<CAPTION>
Core
Income/ Return on
Avg Assets Avg Equity
(%) (%)
Short Name LTM LTM
<S> <C> <C> <C>
AMFC AMB Financial Corp. 0.53 5.93
CLAS Classic Bancshares Inc. 0.56 4.90
FCME First Coastal Corp. 0.73 8.23
FFDB FirstFed Bancorp Inc. 0.89 9.22
HBS Haywood Bancshares Inc. 1.44 6.34
HIFS Hingham Instit. for Savings 1.25 13.06
HRBF Harbor Federal Bancorp Inc. 0.75 6.09
IPSW Ipswich Savings Bank 1.18 21.98
JXVL Jacksonville Bancorp Inc. 1.33 9.13
LARL Laurel Capital Group Inc. 1.46 13.58
MFLR Mayflower Co-operative Bank 0.98 12.01
Maximum 1.46 21.98
Minimum 0.53 4.90
Average 1.01 10.04
Median 0.98 9.13
</TABLE>
27
<PAGE>
FERGUSON & COMPANY EXHIBIT II.6 - COMPARATIVE OPERATIONS
- ------------------
<TABLE>
<CAPTION>
Return on Core Loan Total Total Net Loan Common Dividend
Avg Equity Income/ Loss Noninterest Noninterest Chargeoffs/ LTM EPS Dividends Payout
Before Extra Avg Equity Provision Income Expense Avg Loans After Extra Per Share Ratio
(%) (%) ($000) ($000) ($000) (%) ($) ($) (%)
LTM LTM LTM LTM LTM LTM LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC 5.93 3.77 95 567 2,875 0.02 0.95 0.27 28.42
CLAS 4.90 3.72 135 509 4,082 0.09 0.79 0.28 35.44
FCME 8.23 7.42 - 642 5,253 (0.10) 0.88 - -
FFDB 9.22 9.22 510 868 4,089 0.15 0.66 0.25 37.95
HBS 6.34 9.97 20 422 1,797 - 1.13 0.59 52.21
HIFS 13.06 12.94 174 646 4,550 - 2.10 0.64 30.48
HRBF 6.09 5.88 90 458 4,158 - 0.98 0.45 46.39
IPSW 21.98 21.92 150 2,184 5,112 0.03 1.04 0.15 14.42
JXVL 9.13 9.13 20 1,352 5,426 NA 1.26 0.50 39.68
LARL 13.58 13.93 18 759 3,747 0.07 1.32 0.43 32.83
MFLR 12.01 10.22 90 491 3,126 0.12 1.63 0.69 42.33
Maximum 21.98 21.92 510 2,184 5,426 0.15 2.10 0.69 52.21
Minimum 4.90 3.72 - 422 1,797 (0.10) 0.66 - -
Average 10.04 9.83 118 809 4,020 0.04 1.16 0.39 32.74
Median 9.13 9.22 90 642 4,089 0.03 1.04 0.43 35.44
</TABLE>
28
<PAGE>
FERGUSON & COMPANY EXHIBIT II.6 - COMPARATIVE OPERATIONS
- ------------------
<TABLE>
<CAPTION>
Interest Interest Net Interest Gain on Real Noninterest G&A Noninterest Net Oper
Income/ Expense/ Income/ Sale/ Estate Income/ Expense/ Expense/ Expenses/
Avg Assets Avg Assets Avg Assets Avg Assets Expense Avg Assets Avg Assets Avg Assets Avg Assets
(%) (%) (%) (%) ($000) (%) (%) (%) (%)
LTM LTM LTM LTM LTM LTM LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC 7.34 4.06 3.27 0.47 (3) 0.55 2.79 2.79 2.24
CLAS 7.20 3.66 3.54 (0.01) 33 0.38 2.96 3.08 2.58
FCME 8.01 3.85 4.16 0.12 3 0.42 3.46 3.46 3.03
FFDB 7.55 4.07 3.48 - (481) 0.49 2.50 2.29 2.01
HBS 7.38 4.16 3.22 - (1,217) 0.28 1.94 1.18 1.67
HIFS 7.77 3.91 3.85 0.02 - 0.29 2.04 2.04 1.75
HRBF 7.42 4.45 2.96 0.04 - 0.20 1.85 1.85 1.64
IPSW 7.07 3.81 3.26 0.01 (48) 0.99 2.35 2.33 1.36
JXVL 7.63 3.99 3.64 - (158) 0.57 2.37 2.31 1.80
LARL 7.36 3.77 3.59 0.10 (5) 0.35 1.67 1.75 1.31
MFLR 7.43 3.71 3.72 0.22 20 0.38 2.39 2.42 2.01
Maximum 8.01 4.45 4.16 0.47 33 0.99 3.46 3.46 3.03
Minimum 7.07 3.66 2.96 (0.01) (1,217) 0.20 1.67 1.18 1.31
Average 7.47 3.95 3.52 0.09 (169) 0.45 2.39 2.32 1.95
Median 7.42 3.91 3.54 0.02 (3) 0.38 2.37 2.31 1.80
</TABLE>
29
<PAGE>
FERGUSON & COMPANY EXHIBIT II.6 - COMPARATIVE OPERATIONS
- ------------------
<TABLE>
<CAPTION>
Total Amortization
Nonrecurring of Tax Efficiency
Expense Intangibles Provision Ratio
($000) ($000) ($000) (%)
LTM LTM LTM LTM
<S> <C> <C> <C> <C>
AMFC - - 594 73.03
CLAS - 124 369 75.45
FCME - - 664 75.47
FFDB - 108 888 63.00
HBS 1,235 53 882 55.64
HIFS - - 1,755 49.16
HRBF - - 1,216 58.34
IPSW - - 1,486 55.23
JXVL - - 1,325 56.35
LARL 337 - 1,712 44.38
MFLR - 18 937 58.22
Maximum 1,235 124 1,755 75.47
Minimum - - 369 44.38
Average 143 28 1,075 60.39
Median - - 937 58.22
<CAPTION>
Yield on Cost of Interest
Int Earning Int Bearing Effective Yield
Assets Liabilities Tax Rate Spread
(%) (%) (%) (%)
LTM LTM LTM LTM
<S> <C> <C> <C> <C>
AMFC 7.50 4.82 40.80 2.68
CLAS 7.70 4.37 27.35 3.33
FCME 8.61 4.49 35.23 4.12
FFDB 7.85 4.54 35.76 3.31
HBS 7.68 4.95 38.75 2.73
HIFS 8.02 4.58 38.37 3.44
HRBF 7.57 5.17 40.87 2.40
IPSW 7.38 4.43 36.32 2.95
JXVL 7.82 4.78 29.69 3.04
LARL 7.54 4.50 35.94 3.04
MFLR 7.94 4.16 38.54 3.78
Maximum 8.61 5.17 40.87 4.12
Minimum 7.38 4.16 27.35 2.40
Average 7.78 4.62 36.15 3.17
Median 7.70 4.54 36.32 3.04
</TABLE>
30
<PAGE>
FERGUSON & COMPANY EXHIBIT II.7 - COMPARATIVE RISK FACTORS
- ------------------
<TABLE>
<CAPTION>
NPAs + Loans Net Loan
NPAs/ 90+ Pst Due/ NPAs/ Reserves/ Reserves/ Chargeoffs/ Loans/
Assets Assets Equity Loans NPAs Avg Loans Assets
(%) (%) (%) (%) (%) (%) (%)
Short Name Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC AMB Financial Corp. 0.19 0.19 1.51 0.52 214.55 0.03 78.86
CLAS Classic Bancshares Inc. 0.28 0.29 1.87 0.92 223.50 - 67.54
FCME First Coastal Corp. 0.21 0.24 2.37 2.55 748.90 (0.11) 62.17
FFDB FirstFed Bancorp Inc. 0.89 1.41 9.04 0.90 66.19 0.24 66.04
HBS Haywood Bancshares Inc. 0.60 0.60 4.11 0.66 82.40 - 75.09
HIFS Hingham Instit. for Savings 0.17 0.17 1.84 0.90 396.87 (0.01) 76.60
HRBF Harbor Federal Bancorp Inc. 0.32 0.32 2.57 0.33 65.53 - 64.18
IPSW Ipswich Savings Bank 0.80 0.80 14.40 0.94 92.60 0.03 79.51
JXVL Jacksonville Bancorp Inc. NA NA NA NA NA NA NA
LARL Laurel Capital Group Inc. 0.32 0.32 2.99 1.20 263.07 NA 69.96
MFLR Mayflower Co-operative Bank 0.59 0.59 6.17 1.49 144.38 0.01 57.01
Maximum 0.89 1.41 14.40 2.55 748.90 0.24 79.51
Minimum 0.17 0.17 1.51 0.33 65.53 (0.11) 57.01
Average 0.44 0.49 4.69 1.04 229.80 0.02 69.70
Median 0.32 0.32 2.78 0.91 179.47 - 68.75
</TABLE>
31
<PAGE>
FERGUSON & COMPANY EXHIBIT II.7 - COMPARATIVES RISK FACTORS
- ------------------
<TABLE>
<CAPTION>
Intangible One Year Earn Assets/
Assets/ Cum Gap/ Net Int Bearing
Equity Assets Loans Liabilities
(%) (%) ($000) (%)
Mst RctQ Mst RctY Mst RctQ Mst RctQ
<S> <C> <C> <C> <C>
AMFC - NA 87,349 113.76
CLAS 14.00 NA 92,337 111.46
FCME - 13.29 101,369 108.98
FFDB 7.65 (7.67) 116,462 107.91
HBS 3.17 (4.86) 113,169 115.07
HIFS - (17.18) 181,552 112.87
HRBF - NA 150,794 113.61
IPSW - (12.48) 167,161 111.83
JXVL - NA NA 116.36
LARL - NA 151,124 114.06
MFLR 1.47 (33.63) 76,106 105.56
Maximum 14.00 13.29 181,552 116.36
Minimum - (33.63) 76,106 105.56
Average 2.39 (10.42) 123,742 111.95
Median - (10.08) 114,816 112.87
</TABLE>
32
<PAGE>
FERGUSON & COMPANY EXHIBIT II.8 - COMPARATIVES PRICING
- ------------------
<TABLE>
<CAPTION>
Current Current Price/ Current Current
Stock Market LTM Price/ Price/ Tang
Abbreviated Price Value Core EPS Book Value Book Value
Ticker Name City State ($) ($M) (x) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC AMBFinancial-IN Munster IN 14.75 13.51 24.18 95.65 95.65
CLAS ClassicBcsh_KY Ashland KY 15.25 19.82 25.00 96.58 112.30
FCME FirstCoastal-ME Westbrook ME 10.50 14.29 13.13 92.92 92.92
FFDB FirstFedBncpInc-AL Bessemer AL 12.75 31.04 19.32 174.42 188.89
HBS HaywoodBcshs-NC Waynesville NC 19.00 23.76 10.73 107.47 110.98
HIFS Hingham-MA Hingham MA 24.63 32.25 11.84 142.42 142.42
HRBF HarborFedBncp-MD Baltimore MD 18.13 33.76 19.08 113.71 113.71
IPSW IpswichSB-MA Ipswich MA 12.00 28.68 11.54 219.78 219.78
JXVL Jacksonville-TX Jacksonville TX 16.25 39.35 12.90 112.22 112.22
LARL LaurelCapital-PA Allison Park PA 19.00 41.64 14.07 117.07 177.07
MFLR MayflowerCo-op-MA Middleboro MA 19.50 17.54 14.03 135.32 137.32
Maximum 24.63 41.64 25.00 219.78 219.78
Minimum 10.50 13.51 10.73 92.92 92.92
Average 16.52 26.88 15.98 133.41 136.66
Median 16.25 28.68 14.03 113.71 113.71
</TABLE>
33
<PAGE>
FERGUSON & COMPANY EXHIBIT II.8 - COMPARATIVES PRICING
- ------------------
<TABLE>
<CAPTION>
Tangible Core Core ROACE
Current Total Equity/ Equity/ Core Income/ Income/ Before
Price/ Dividend Assets Assets Tang Assets EPS Avg Assets Avg Equity Extra
Assets Yield ($000) (%) (%) ($) (%) (%) (%)
Ticker (%) (%) Mst RctQ Mst RctQ Mst RctQ LTM LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AMFC 12.13 1.90 111,338 12.68 12.68 0.61 0.53 3.77 5.93
CLAS 14.36 2.10 137,984 14.87 13.06 0.61 0.56 3.72 4.90
FCME 8.32 - 171,719 8.95 8.95 0.80 0.73 7.42 8.23
FFDB 17.25 2.20 179,893 9.89 9.21 0.66 0.89 9.22 9.22
HBS 15.66 3.16 151,718 14.57 14.17 1.77 1.44 9.97 6.34
HIFS 13.42 2.27 239,148 9.43 9.43 2.08 1.25 12.94 13.06
HRBF 14.32 2.61 235,733 12.60 12.60 0.95 0.75 5.88 6.09
IPSW 12.27 1.33 233,662 5.58 5.58 1.04 1.18 21.92 21.98
JXVL 16.22 3.08 242,673 14.46 14.46 1.26 1.33 9.13 9.13
LARL 18.84 3.16 220,986 10.64 10.64 1.35 1.46 13.93 13.58
MFLR 12.94 4.10 135,518 9.56 9.44 1.39 0.98 10.22 12.01
Maximum 18.84 4.10 242,673 14.87 14.46 2.08 1.46 21.92 21.98
Minimum 8.32 - 111,338 5.58 5.58 0.61 0.53 3.72 4.90
Average 14.16 2.35 187,307 11.20 10.93 1.14 1.01 9.83 10.04
Median 14.32 2.27 179,893 10.64 10.64 1.04 0.98 9.22 9.13
</TABLE>
34
<PAGE>
FERGUSON & COMPANY EXHIBIT II.8 - COMPARATIVES PRICING
- ------------------
<TABLE>
<CAPTION>
Core Core
NPAs/ Price/ Core Imcome/ Income
Merger Current Assets Core EPS Avg Assets Avg Equity
Target? Pricing (%) EPS ($) (%) (%)
Ticker (Y/N) Date Mst RctQ (x) Mst RctQ Mst RctQ Mst RctQ
<S> <C> <C> <C> <C> <C> <C> <C>
AMFC N 08/28/98 0.19 23.05 0.16 0.49 3.68
CLAS N 08/28/98 0.28 23.83 0.16 0.58 3.83
FCME N 08/28/98 0.21 13.82 0.19 0.65 6.88
FFDB N 08/28/98 0.89 21.25 0.15 0.83 8.49
HBS N 08/28/98 0.60 14.39 0.33 1.09 7.38
HIFS N 08/28/98 0.17 11.62 0.53 1.22 12.77
HRBF N 08/28/98 0.32 16.78 0.27 0.85 6.71
IPSW N 08/28/98 0.80 12.50 0.24 1.03 19.19
JXVL N 08/28/98 NA 13.10 0.31 1.26 8.64
LARL N 08/28/98 0.32 12.50 0.38 1.39 13.04
MFLR N 08/28/98 0.59 13.18 0.37 1.01 10.44
Maximum 0.89 23.83 0.53 1.39 19.19
Minimum 0.17 11.62 0.15 0.49 3.68
Average 0.44 16.00 0.28 0.95 9.19
Median 0.32 13.82 0.27 1.01 8.49
</TABLE>
35
<PAGE>
EXHIBIT III
<PAGE>
FERGUSON & COMPANY
- ------------------
CITIZENS SAVINGS BANK OF SALISBURY
SALISBURY, NC 28144-4232
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 199,216 200,804 199,677 196,568 193,561 193,561
Securities 15,881 15,052 14,484 13,429 12,582 12,582
Held-to-Maturity Secs(AmortCost) 2,468 2,436 2,328 2,199 2,125 2,125
Avail for Sale Secs (Fair Value) 13,413 12,616 12,156 11,230 10,457 10,457
Total Loans & Leases(C) 174,621 167,525 166,618 167,070 166,064 166,064
Total Deposits 157,054 160,106 161,647 161,251 160,909 160,909
Total Loans/Total Deposits 111 105 103 104 103 103
Provision for Credit Loss - - - - - -
CAPITAL:
Total Equity Capital 14,070 14,344 14,629 14,894 15,267 15,267
Total Capital (Tier 1+2+3) 15,238 15,485 15,730 15,990 16,352 16,352
Tangible Equity Ratio 7.10 7.17 7.28 7.51 7.79 7.79
Risk-Adjusted Capital Ratio 15.22 15.28 15.67 16.02 16.35 16.35
Core Capital/Risk Weighted Assets 14.01 14.07 14.45 14.79 15.13 15.13
Core Capital/Adjusted Total Assets 7.10 7.17 7.28 7.51 7.79 7.79
Dividend Payout - - - - - -
PROFITABILITY:
Net Income (Loss) 212 238 262 262 362 362
Return on Average Assets 0.43 0.48 0.52 0.53 0.74 0.74
Return on Average Equity 6.07 6.70 7.23 7.10 9.60 9.60
Net Interest Spread/AEA 2.11 2.17 2.17 2.30 2.54 2.54
Net Interest Margin/AA 2.07 2.13 2.12 2.25 2.48 2.48
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 0.01 1.36 2.21 1.15 0.75 0.75
Loan Loss Reserve/Nonperf Loans 60,800.00 580.57 351.44 664.67 1,003.28 1,003.28
Adjusted Nonperf Assets/TA 0.05 0.14 0.17 0.09 0.06 0.06
PastDue 90 Days:Loans & Leases/GL - - - - - -
Loan Loss Reserve/TL 0.70 0.73 0.73 0.73 0.74 0.74
Net Charge-Offs(YTD)/Average Loans - (0.01) - - - -
Real Estate Loans/GDL 91.94 95.99 95.15 94.04 94.68 94.68
LIQUIDITY:
Brokered Deposits/TD - - - - - -
$100,000+ Time Deposits/TDD 10.55 10.81 11.14 10.93 10.99 10.99
Avg Int-Bear Asset/Avg Int-Bear Liab 107.38 107.80 107.71 107.84 108.39 108.39
Pledged Securities/Total Securities 6.28 9.89 13.51 13.39 15.97 15.97
Tot Secs:Fair Val to Amrtzd Cost 100.58 101.15 101.54 101.75 102.02 102.02
</TABLE>
1
<PAGE>
EXHIBIT IV
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
AMFC
AMERICAN SAVINGS, FSB,
MUNSTER, IN 46321
<TABLE>
<CAPTION>
S&L Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 92,961 92,670 101,168 97,353 103,215 103,215
%CH:Total Assets N/A N/A N/A 14 11 11
Total Loans $(000) 69,577 71,481 75,821 77,803 83,896 83,896
Total Deposits 68,637 65,758 73,981 71,949 74,561 74,561
Deps:Broker Originated 695 694 694 - - -
CAPITAL:
Consol:Equity Capital 11,274 11,569 9,298 9,563 9,726 9,726
Total Equity Capital 11,274 11,569 9,298 9,563 9,726 9,726
Tier 1 (Core) Capital 11,342 11,562 9,251 9,502 9,665 9,665
Total Risk-based Capital 11,677 11,926 9,624 9,897 10,083 10,083
Total Equity Capital/TA 12.13 12.48 9.19 9.82 9.42 9.42
Tier 1 Risk-Based Capital Ratio 22.17 23.62 17.49 17.79 16.97 16.97
Tier 1 Leverage Capital Ratio 12.19 12.48 9.15 9.77 9.37 9.37
Tangible Capital/Tang Assets 12.19 12.48 9.15 9.77 9.37 9.37
Total Risk-Based Capital Ratio 22.82 24.36 18.20 18.53 17.70 17.70
PROFITABILITY
Net Income (Loss) 196 187 172 129 147 147
Return on Average Assets 0.88 0.81 0.71 0.52 0.59 0.59
Return on Average Equity 6.98 6.55 6.59 5.47 6.10 6.10
Net Interest Margin/AA 3.56 3.41 3.19 3.05 3.18 3.18
Total Noninterest Income/AA 0.54 0.72 0.69 0.65 0.58 0.58
Total Overhead Expense/AA 2.66 2.73 2.68 2.58 2.81 2.81
Yield on Average Earning Assets 7.87 7.85 7.84 7.76 7.85 7.85
LIQUIDITY:
Avg Int-Bear Asset/Avg Int-Bear Liab 112.05 111.20 109.22 107.74 108.14 108.14
Brokered Deposits/TD 1.00 1.05 0.93 - - -
ASSET QUALITY:
Nonaccruing Loans/GL 0.79 0.94 0.27 0.40 0.39 0.39
Nonperf Lns/Loan Loss Reserve 155.71 176.25 52.06 75.12 75.29 75.29
Repossessed Assets (incl OREO)/TA - 0.11 0.12 0.03 0.03 0.03
Net Charge-Offs(YTD)/Average Loans 0.01 - 0.01 0.01 - -
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
First NB of Paintsville
Paintsville, KY 41240-0710
<TABLE>
<CAPTION> Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 71,378 68,227 69,693 69,660 72,226 72,226
Securities 19,494 20,894 19,910 20,086 16,751 16,751
Held-to-Maturity Secs(AmortCost) - - - - - -
Avail for Sale Secs (Fair Value) 19,494 20,894 19,910 20,086 16,751 16,751
Total Loans & Leases(C) 36,217 35,926 36,719 37,598 37,561 37,561
Total Deposits 54,969 52,853 54,181 53,638 56,228 56,228
Total Loans/Total Deposits 65.89 67.97 67.77 70.10 66.80 66.80
Provision for Credit Loss 33.00 37.00 37.00 16.00 15.00 15.00
CAPITAL:
Total Equity Capital 10,376 10,558 10,877 11,200 11,441 11,441
Total Capital (Tier 1+2+3) 7,837 8,057 8,378 8,658 8,925 8,925
Tangible Equity Ratio 11.19 11.51 11.88 12.22 12.39 12.39
Risk-Adjusted Capital Ratio 21.90 22.74 22.82 23.16 23.20 23.20
Core Capital/Risk Weighted Assets 20.65 21.49 21.57 21.91 21.95 21.95
Core Capital/Adjusted Total Assets 11.19 11.51 11.88 12.22 12.39 12.39
Dividend Payout 109.33 - 14.15 - - -
PROFITABILITY:
Net Income (Loss) 193 194 318 239 224 224
Return on Average Assets 1.10 1.11 1.84 1.37 1.26 1.26
Return on Average Equity 7.43 7.41 11.87 8.66 7.91 7.91
Net Interest Spread/AEA 5.15 4.93 4.92 4.80 4.60 4.60
Net Interest Margin/AA 4.58 4.39 4.39 4.29 4.13 4.13
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 1.92 2.61 1.21 0.55 1.33 1.33
Loan Loss Reserve/Nonperf Loans 318.54 226.54 496.08 1,043.75 430.25 430.25
Adjusted Nonperf Assets/TA 0.68 0.80 0.53 0.37 0.45 0.45
PastDue 90 Days:Loans & Leases/GL 0.27 0.45 0.17 0.06 0.30 0.30
Loan Loss Reserve/TL 1.33 1.33 1.38 1.33 1.36 1.36
Net Charge-Offs(YTD)/Average Loans 0.11 0.11 0.02 0.06 - -
Real Estate Loans/GDL 74.84 77.03 77.34 77.37 76.44 76.44
LIQUIDITY:
Brokered Deposits/TD - - - - - -
$100,000+ Time Deposits/TDD 10.15 11.99 11.89 12.92 13.25 13.25
Avg Int-Bear Asset/Avg Int-Bear Liab 122.03 122.80 123.27 124.11 124.07 124.07
Pledged Securities/Total Securities 48.05 41.03 36.15 40.96 44.12 44.12
Tot Secs:Fair Val to Amrtzd Cost 99.68 99.62 99.95 100.59 100.86 100.86
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
CLAS
Classic Bank
Ashland, KY 41105-1527
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 63,235 65,827 66,261 66,993 69,080 69,080
%CH:Total Assets N/A N/A N/A 10 9 9
Total Loans $(000) 46,682 51,334 52,571 52,606 53,721 53,721
Total Deposits 46,662 46,568 45,774 46,025 49,115 49,115
Deps:Broker Originated 695 695 198 - - -
CAPITAL:
Consol:Equity Capital 7,575 7,735 7,804 7,912 8,107 8,107
Total Equity Capital 7,575 7,735 7,804 7,912 8,107 8,107
Tier 1 (Core) Capital 7,593 7,676 7,674 7,747 7,919 7,919
Total Risk-based Capital 7,913 8,003 8,001 8,073 8,238 8,238
Total Equity Capital/TA 11.98 11.75 11.78 11.81 11.74 11.74
Tier 1 Risk-Based Capital Ratio 24.58 23.00 22.23 22.52 21.58 21.58
Tier 1 Leverage Capital Ratio 12.00 11.67 11.62 11.59 11.49 11.49
Tangible Capital/Tang Assets 12.00 11.67 11.62 11.59 11.49 11.49
Total Risk-Based Capital Ratio 25.62 23.98 23.18 23.46 22.45 22.45
PROFITABILITY
Net Income (Loss) 106 73 (2) 73 49 49
Return on Average Assets 0.68 0.45 (0.01) 0.44 0.29 0.29
Return on Average Equity 5.61 3.81 (0.10) 3.72 2.45 2.45
Net Interest Margin/AA 2.56 2.60 2.46 2.59 2.59 2.59
Total Noninterest Income/AA 0.64 0.35 0.20 0.37 0.41 0.41
Total Overhead Expense/AA 2.40 2.36 2.71 2.39 2.67 2.67
Yield on Average Earning Assets 7.16 7.45 7.36 7.46 7.45 7.45
LIQUIDITY:
Avg Int-Bear Asset/Avg Int-Bear Liab 111.07 111.29 112.77 112.22 112.13 112.13
Brokered Deposits/TD 1.49 1.49 0.43 - - -
ASSET QUALITY:
Nonaccruing Loans/GL 1.02 0.86 0.46 0.37 0.37 0.37
Nonperf Lns/Loan Loss Reserve 176.56 187.16 153.82 85.63 67.40 67.40
Repossessed Assets (incl OREO)/TA - - 0.02 0.03 0.03 0.03
Net Charge-Offs(YTD)/Average Loans - 0.01 0.03 0.02 0.04 0.04
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
Coastal Bank
Westbrook, ME 04092
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 148,099 149,302 145,441 143,218 146,775 146,775
Securities 30,605 29,554 22,195 24,202 23,344 23,344
Held-to-Maturity Secs(AmortCost) 7,803 7,801 7,800 7,000 3,197 3,197
Avail for Sale Secs (Fair Value) 22,802 21,753 14,395 17,202 20,147 20,147
Total Loans & Leases(C) 101,615 104,151 106,310 107,730 108,505 108,505
Total Deposits 117,199 117,900 116,608 115,133 119,005 119,005
Total Loans/Total Deposits 87 88 91 94 91 91
Provision for Credit Loss -- -- -- -- -- --
CAPITAL:
Total Equity Capital 13,813 14,534 14,079 14,504 14,389 14,389
Total Capital (Tier 1+2+3) 13,937 14,635 14,349 15,050 15,145 15,145
Tangible Equity Ratio 8.73 9.16 9.02 9.58 9.65 9.65
Risk-Adjusted Capital Ratio 15.67 16.33 15.95 16.30 16.43 16.43
Core Capital/Risk Weighted Assets 14.40 15.06 14.68 15.03 15.16 15.16
Core Capital/Adjusted Total Assets 8.73 9.16 9.02 9.58 9.65 9.65
Dividend Payout 135.87 -- 217.86 -- 128.53 128.53
PROFITABILITY:
Net Income (Loss) 368 441 459 412 389 389
Return on Average Assets 1.01 1.19 1.25 1.14 1.07 1.07
Return on Average Equity 10.52 12.45 12.83 11.53 10.77 10.77
Net Interest Spread/AEA 4.34 4.63 4.75 5.01 4.90 4.90
Net Interest Margin/AA 4.09 4.37 4.49 4.74 4.65 4.65
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 14.31 17.79 14.30 2.95 2.20 2.20
Loan Loss Reserve/Nonperf Loans 121.54 91.49 116.84 546.11 736.61 736.61
Adjusted Nonperf Assets/TA 1.64 1.98 1.63 0.33 0.28 0.28
PastDue 90 Days:Loans & Leases/GL 0.11 0.08 0.08 0.09 0.10 0.10
Loan Loss Reserve/TL 2.65 2.52 2.49 2.47 2.48 2.48
Net Charge-Offs(YTD)/Average Loans (0.03) 0.07 (0.02) (0.01) (0.03) (0.03)
Real Estate Loans/GDL 90.96 90.78 90.89 90.03 88.27 88.27
LIQUIDITY:
Brokered Deposits/TD -- -- -- -- -- --
$100,000+ Time Deposits/TDD 2.84 3.12 2.78 2.63 3.41 3.41
Avg Int-Bear Asset/Avg Int-Bear Liab 109.11 109.31 110.78 112.00 111.99 111.99
Pledged Securities/Total Securities 7.02 7.27 0.68 0.62 3.43 3.43
Tot Secs:Fair Val to Amrtzd Cost 98.31 99.50 100.04 100.34 100.37 100.37
</TABLE>
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
FFDB
FIRST FEDERAL SAVINGS BANK
BESSEMER, AL 35021-0340
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 140,431 137,903 137,981 137,298 138,622 138,622
%CH:Total Assets N/A N/A N/A (2) (1) (1)
Total Loans $(000) 106,935 104,448 102,660 99,185 95,877 95,877
Total Deposits 127,486 124,601 125,271 126,008 126,567 126,567
Deps:Broker Originated - - - - - -
CAPITAL:
Consol:Equity Capital 10,916 11,322 10,938 11,012 10,679 10,679
Total Equity Capital 10,916 11,322 10,938 11,012 10,679 10,679
Tier 1 (Core) Capital 10,933 11,336 10,945 11,016 10,679 10,679
Total Risk-based Capital 11,360 11,764 11,413 11,866 11,471 11,471
Total Equity Capital/TA 7.77 8.21 7.93 8.02 7.70 7.70
Tier 1 Risk-Based Capital Ratio 13.26 14.06 13.32 14.20 13.28 13.28
Tier 1 Leverage Capital Ratio 7.78 8.22 7.93 8.02 7.70 7.70
Tangible Capital/Tang Assets 7.78 8.22 7.93 8.02 7.70 7.70
Total Risk-Based Capital Ratio 13.78 14.59 13.89 15.30 14.26 14.26
PROFITABILITY
Net Income (Loss) 418 387 343 38 309 309
Return on Average Assets 1.19 1.11 0.99 0.11 0.90 0.90
Return on Average Equity 15.63 13.92 12.33 1.38 11.40 11.40
Net Interest Margin/AA 3.30 3.54 3.49 3.32 3.30 3.30
Total Noninterest Income/AA 0.57 0.35 0.34 0.41 0.43 0.43
Total Overhead Expense/AA 2.04 2.11 2.23 2.29 2.35 2.35
Yield on Average Earning Assets 8.15 8.37 8.33 8.22 8.10 8.10
LIQUIDITY:
Avg Int-Bear Asset/Avg Int-Bear Liab 105.00 105.33 104.40 103.38 104.92 104.92
Brokered Deposits/TD - - - - - -
ASSET QUALITY:
Nonaccruing Loans/GL 0.59 0.48 0.82 1.01 1.12 1.12
Nonperf Lns/Loan Loss Reserve 401.87 279.21 286.54 183.29 197.47 197.47
Repossessed Assets (incl OREO)/TA 0.09 0.55 0.60 0.44 0.46 0.46
Net Charge-Offs(YTD)/Average Loans (0.02) - - 0.01 0.08 0.08
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
FFDB
FIRST ST BK OF BIBB CTY
WEST BLOCTON, AL 35184
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
BALANCE SHEET:
<S> <C> <C> <C> <C> <C> <C>
Total Assets 37,863 38,882 37,817 41,515 43,471 43,471
Securities 10,584 10,370 11,159 12,535 12,040 12,040
Held-to-Maturity Secs(AmortCost) 2,094 2,068 2,022 2,326 2,720 2,720
Avail for Sale Secs (Fair Value) 8,490 8,302 9,137 10,209 9,320 9,320
Total Loans & Leases(C) 21,763 21,935 21,846 23,483 24,594 24,594
Total Deposits 32,034 32,835 32,966 36,524 38,221 38,221
Total Loans/Total Deposits 68 67 66 64 64 64
Provision for Credit Loss 6 6 6 6 6 6
CAPITAL:
Total Equity Capital 4,546 4,698 4,373 4,480 4,301 4,301
Total Capital (Tier 1+2+3) 3,373 3,505 3,181 3,332 3,190 3,190
Tangible Equity Ratio 8.81 8.83 7.94 7.70 7.08 7.08
Risk-Adjusted Capital Ratio 16.24 16.88 15.40 14.66 13.53 13.53
Core Capital/Risk Weighted Assets 14.99 15.62 14.15 13.41 12.28 12.28
Core Capital/Adjusted Total Assets 8.81 8.83 7.94 7.70 7.08 7.08
Dividend Payout - - 450.00 - - -
PROFITABILITY:
Net Income (Loss) 73 104 100 99 105 105
Return on Average Assets 0.78 1.08 1.04 1.00 0.99 0.99
Return on Average Equity 6.45 9.00 8.82 8.95 9.57 9.57
Net Interest Spread/AEA 4.59 4.75 4.64 4.65 4.58 4.58
Net Interest Margin/AA 4.00 4.15 4.13 4.18 4.14 4.14
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 4.97 5.07 7.04 10.04 9.01 9.01
Loan Loss Reserve/Nonperf Loans 180.00 171.11 138.16 91.10 108.65 108.65
Adjusted Nonperf Assets/TA 0.45 0.46 0.61 0.82 0.71 0.71
PastDue 90 Days:Loans & Leases/GL 0.34 0.33 0.36 0.87 0.59 0.59
Loan Loss Reserve/TL 1.41 1.40 1.44 1.31 1.28 1.28
Net Charge-Offs(YTD)/Average Loans 0.02 0.02 - 0.06 - -
Real Estate Loans/GDL 58.60 58.98 62.98 60.87 62.53 62.53
LIQUIDITY:
Brokered Deposits/TD - - - - - -
$100,000+ Time Deposits/TDD 20.38 20.36 20.43 18.97 17.34 17.34
Avg Int-Bear Asset/Avg Int-Bear Liab 124.11 125.16 127.21 125.23 124.74 124.74
Pledged Securities/Total Securities 21.28 21.83 20.33 40.17 50.20 50.20
Tot Secs:Fair Val to Amrtzd Cost 99.32 100.12 100.55 100.70 100.65 100.65
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
HBS
HAYWOOD SAVINGS BANK
WAYNESVILLE, NC 28786-3844
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 146,679 150,693 152,868 153,591 152,266 152,266
Securities 26,379 26,428 27,381 28,476 29,141 29,141
Held-to-Maturity Secs(AmortCost) 10,572 10,495 10,405 11,243 12,054 12,054
Avail for Sale Secs (Fair Value) 15,807 15,933 16,976 17,233 17,087 17,087
Total Loans & Leases(C) 111,103 112,350 115,271 114,896 115,003 115,003
Total Deposits 113,559 117,125 118,377 118,753 116,691 116,691
Total Loans/Total Deposits 98 96 97 97 99 99
Provision for Credit Loss - 10 5 5 5 5
CAPITAL:
Total Equity Capital 20,577 20,926 21,687 21,994 22,592 22,592
Total Capital (Tier 1+2+3) 20,858 21,045 21,795 21,717 22,351 22,351
Tangible Equity Ratio 14.31 13.71 13.88 13.74 14.22 14.22
Risk-Adjusted Capital Ratio 27.26 27.27 27.54 27.17 28.67 28.67
Core Capital/Risk Weighted Assets 26.32 26.32 26.62 26.25 27.71 27.71
Core Capital/Adjusted Total Assets 14.31 13.71 13.88 13.74 14.22 14.22
Dividend Payout 54.01 46.30 19.84 50.13 28.10 28.10
PROFITABILITY:
Net Income (Loss) 324 378 882 375 669 669
Return on Average Assets 0.93 1.02 2.32 0.98 1.75 1.75
Return on Average Equity 6.31 7.29 16.56 6.87 12.00 12.00
Net Interest Spread/AEA 3.33 3.45 3.20 3.32 3.47 3.47
Net Interest Margin/AA 3.15 3.25 3.02 3.15 3.30 3.30
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 6.08 4.92 3.73 2.85 2.65 2.65
Loan Loss Reserve/Nonperf Loans 56.66 70.37 90.28 119.42 125.68 125.68
Adjusted Nonperf Assets/TA 2.08 1.87 0.67 0.56 0.39 0.39
PastDue 90 Days:Loans & Leases/GL - - - - - -
Loan Loss Reserve/TL 0.65 0.65 0.64 0.64 0.65 0.65
Net Charge-Offs(YTD)/Average Loans - - - - - -
Real Estate Loans/GDL 99.32 99.36 99.48 99.50 99.30 99.30
LIQUIDITY:
Brokered Deposits/TD - - - - - -
$100,000+ Time Deposits/TDD 11.43 11.95 11.94 11.77 11.72 11.72
Avg Int-Bear Asset/Avg Int-Bear Liab 112.93 111.49 111.97 113.01 113.44 113.44
Pledged Securities/Total Securities - 2.27 2.19 - 1.03 1.03
Tot Secs:Fair Val to Amrtzd Cost 98.39 99.82 100.19 100.07 99.85 99.85
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
HIFS
Hingham Institute For Savings
Hingham, MA 02043-2590
<TABLE>
<CAPTION>
Financial Highlights
<S> <C> <C> <C> <C> <C> <C>
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
BALANCE SHEET:
Total Assets 205,631 217,524 216,214 222,540 231,687 231,687
Securities 33,768 38,008 37,836 37,292 40,347 40,347
Held-to-Maturity Secs(AmortCost) - - - - - -
Avail for Sale Secs (Fair Value) 33,768 38,008 37,836 37,292 40,347 40,347
Total Loans & Leases(C) 157,441 165,386 166,656 174,399 179,371 179,371
Total Deposits 155,047 158,404 159,648 161,011 164,108 164,108
Total Loans/Total Deposits 102 104 104 108 109 109
Provision for Credit Loss 39 39 48 48 39 39
CAPITAL:
Total Equity Capital 19,642 20,358 20,987 21,377 21,954 21,954
Total Capital (Tier 1+2+3) 21,448 22,021 22,595 22,987 23,577 23,577
Tangible Equity Ratio 9.85 9.83 9.77 9.80 9.72 9.72
Risk-Adjusted Capital Ratio 16.15 15.67 15.97 15.66 15.54 15.54
Core Capital/Risk Weighted Assets 15.07 14.62 14.90 14.60 14.49 14.49
Core Capital/Adjusted Total Assets 9.85 9.83 9.77 9.80 9.72 9.72
Dividend Payout 20.66 23.68 22.91 48.02 23.67 23.67
PROFITABILITY:
Net Income (Loss) 634 663 681 681 714 714
Return on Average Assets 1.25 1.25 1.26 1.24 1.26 1.26
Return on Average Equity 13.05 13.26 13.18 12.86 13.18 13.18
Net Interest Spread/AEA 3.95 4.04 4.03 4.00 3.99 3.99
Net Interest Margin/AA 3.82 3.90 3.90 3.87 3.86 3.86
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 5.32 4.05 8.54 7.43 4.08 4.08
Loan Loss Reserve/Nonperf Loans 125.50 165.13 78.90 91.33 166.84 166.84
Adjusted Nonperf Assets/TA 0.55 0.41 0.89 0.77 0.42 0.42
PastDue 90 Days:Loans & Leases/GL - - - - - -
Loan Loss Reserve/TL 0.91 0.89 0.91 0.89 0.89 0.89
Net Charge-Offs(YTD)/Average Loans - - - 0.01 - -
Real Estate Loans/GDL 98.56 99.07 99.27 99.31 99.33 99.33
LIQUIDITY:
Brokered Deposits/TD - - - - - -
$100,000+ Time Deposits/TDD 12.91 12.90 12.88 14.17 13.66 13.66
Avg Int-Bear Asset/Avg Int-Bear Liab 112.39 113.59 114.61 113.79 113.10 113.10
Pledged Securities/Total Securities 2.93 2.62 2.64 2.68 2.48 2.48
Tot Secs:Fair Val to Amrtzd Cost 98.14 99.15 99.62 99.77 99.93 99.93
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
HRBF
Harbor Federal Savings Bank
Baltimore, MD 21204-2562
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 220,318 217,517 218,343 234,486 232,305 232,305
%CH:Total Assets N/A N/A N/A 7 5 5
Total Loans $(000) 147,849 150,816 152,812 151,365 151,469 151,469
Total Deposits 179,296 177,347 182,242 187,191 183,174 183,174
Deps:Broker Originated - - - - - -
CAPITAL:
Consol:Equity Capital 24,143 24,970 21,607 22,110 22,450 22,450
Total Equity Capital 24,143 24,970 21,607 22,110 22,450 22,450
Tier 1 (Core) Capital 24,479 24,905 21,353 21,775 22,215 22,215
Total Risk-based Capital 24,859 25,315 21,773 22,235 22,705 22,705
Total Equity Capital/TA 10.96 11.48 9.90 9.43 9.66 9.66
Tier 1 Risk-Based Capital Ratio 26.75 25.10 21.34 21.34 21.59 21.59
Tier 1 Leverage Capital Ratio 11.24 11.61 9.92 9.41 9.69 9.69
Tangible Capital/Tang Assets 11.24 11.61 9.92 9.41 9.69 9.69
Total Risk-Based Capital Ratio 27.17 25.51 21.76 21.79 22.07 22.07
PROFITABILITY
Net Income (Loss) 420 420 417 390 421 421
Return on Average Assets 0.76 0.77 0.77 0.69 0.72 0.72
Return on Average Equity 6.98 6.84 7.16 7.14 7.56 7.56
Net Interest Margin/AA 2.81 2.88 2.85 2.58 2.78 2.78
Total Noninterest Income/AA 0.20 0.23 0.32 0.46 0.36 0.36
Total Overhead Expense/AA 1.76 1.81 1.91 1.86 1.75 1.75
Yield on Average Earning Assets 7.45 7.50 7.52 7.38 7.60 7.60
LIQUIDITY:
Avg Int-Bear Asset/Avg Int-Bear Liab 110.90 111.77 110.86 108.45 108.72 108.72
Brokered Deposits/TD - - - - - -
ASSET QUALITY:
Nonaccruing Loans/GL 0.20 0.07 0.15 0.27 0.55 0.55
Nonperf Lns/Loan Loss Reserve 137.80 86.13 72.21 266.59 235.64 235.64
Repossessed Assets (incl OREO)/TA 0.21 - 0.03 - - -
Net Charge-Offs(YTD)/Average Loans - - - - - -
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
IPSW
Ipswich Savings Bank
Ipswich, MA 01938-2212
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
MAR-97 JUN-97 SEP-97 DEC-97 MAR-98 MAR 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 165,512 189,379 202,509 227,244 237,575 237,575
Securities 31,277 37,666 39,614 42,991 36,610 36,610
Held-to-Maturity Secs(AmortCost) 12,739 22,153 25,575 27,351 23,066 23,066
Avail for Sale Secs (Fair Value) 18,538 15,513 14,039 15,640 13,544 13,544
Total Loans & Leases(C) 125,545 139,468 153,391 173,485 192,180 192,180
Total Deposits 139,173 154,476 166,651 173,669 173,499 173,499
Total Loans/Total Deposits 90 90 92 100 111 111
Provision for Credit Loss 30 30 30 30 45 45
CAPITAL:
Total Equity Capital 10,203 10,818 11,370 11,833 12,538 12,538
Total Capital (Tier 1+2+3) 11,307 11,904 12,496 13,192 14,017 14,017
Tangible Equity Ratio 6.39 6.13 5.79 5.56 5.43 5.43
Risk-Adjusted Capital Ratio 13.31 12.56 12.29 11.60 11.51 11.51
Core Capital/Risk Weighted Assets 12.05 11.31 11.03 10.35 10.26 10.26
Core Capital/Adjusted Total Assets 6.39 6.13 5.79 5.56 5.43 5.43
Dividend Payout 12.58 12.82 12.57 15.42 11.94 11.94
PROFITABILITY:
Net Income (Loss) 477 546 573 616 804 804
Return on Average Assets 1.18 1.23 1.17 1.15 1.38 1.38
Return on Average Equity 19.03 20.78 20.66 21.24 26.39 26.39
Net Interest Spread/AEA 3.91 3.85 3.53 3.50 3.45 3.45
Net Interest Margin/AA 3.72 3.65 3.35 3.34 3.30 3.30
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 7.99 2.40 7.82 7.07 8.78 8.78
Loan Loss Reserve/Nonperf Loans 167.94 551.85 165.34 176.11 137.00 137.00
Adjusted Nonperf Assets/TA 1.50 0.91 1.02 0.95 0.89 0.89
PastDue 90 Days:Loans & Leases/GL 0.49 0.17 0.23 - 0.12 0.12
Loan Loss Reserve/TL 1.26 1.18 1.09 0.96 0.89 0.89
Net Charge-Offs(YTD)/Average Loans (0.01) (0.02) - 0.01 0.01 0.01
Real Estate Loans/GDL 99.26 99.19 99.02 99.07 99.21 99.21
LIQUIDITY:
Brokered Deposits/TD - - - - - -
$100,000+ Time Deposits/TDD 6.77 7.10 7.75 6.73 5.71 5.71
Avg Int-Bear Asset/Avg Int-Bear Liab 110.39 110.39 110.44 110.32 111.72 111.72
Pledged Securities/Total Securities 0.30 0.26 0.50 0.85 1.54 1.54
Tot Secs:Fair Val to Amrtzd Cost 100.54 101.02 101.30 101.16 101.23 101.23
</TABLE>
10
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
JXVL
Jacksonville Saving Bank, SSB
Jacksonville, TX 75766
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets N/A N/A 233,771 235,523 236,937 236,937
Securities N/A N/A 48,993 49,525 44,951 44,951
Held-to-Maturity Secs(AmortCost) N/A N/A 32,287 31,090 28,513 28,513
Avail for Sale Secs (Fair Value) N/A N/A 16,706 18,435 16,438 16,438
Total Loans & Leases(C) N/A N/A 175,019 175,972 180,101 180,101
Total Deposits N/A N/A 196,774 198,315 199,466 199,466
Total Loans/Total Deposits N/A N/A 89 89 90 90
Provision for Credit Loss N/A N/A 105 - 5 5
CAPITAL:
Total Equity Capital N/A N/A 31,716 32,451 32,929 32,929
Total Capital (Tier 1+2+3) N/A N/A 32,870 33,548 34,042 34,042
Tangible Equity Ratio N/A N/A 13.66 13.76 14.04 14.04
Risk-Adjusted Capital Ratio N/A N/A 26.37 26.58 26.88 26.88
Core Capital/Risk Weighted Assets N/A N/A 25.41 25.66 25.97 25.97
Core Capital/Adjusted Total Assets N/A N/A 13.66 13.76 14.04 14.04
Dividend Payout N/A N/A 10.58 37.20 47.69 47.69
PROFITABILITY:
Net Income (Loss) N/A N/A 2,381 922 692 692
Return on Average Assets N/A N/A 8.15 1.57 1.17 1.17
Return on Average Equity N/A N/A 60.06 11.50 8.47 8.47
Net Interest Spread/AEA N/A N/A 23.01 3.81 3.85 3.85
Net Interest Margin/AA N/A N/A 22.32 3.69 3.73 3.73
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&Ln N/A N/A 1.96 2.14 2.36 2.36
Loan Loss Reserve/Nonperf Loans N/A N/A 185.09 162.03 144.21 144.21
Adjusted Nonperf Assets/TA N/A N/A 0.51 0.55 0.63 0.63
PastDue 90 Days:Loans & Leases/GL N/A N/A - - - -
Loan Loss Reserve/TL N/A N/A 0.68 0.66 0.64 0.64
Net Charge-Offs(YTD)/Average Loans N/A N/A 0.01 0.02 0.01 0.01
Real Estate Loans/GDL N/A N/A 93.70 93.06 92.67 92.67
LIQUIDITY:
Brokered Deposits/TD N/A N/A - - - -
$100,000+ Time Deposits/TDD N/A N/A 11.79 12.54 11.95 11.95
Avg Int-Bear Asset/Avg Int-Bear Liab N/A N/A 116.47 115.84 115.78 115.78
Pledged Securities/Total Securities N/A N/A - - - -
Tot Secs:Fair Val to Amrtzd Cost N/A N/A 100.21 100.31 100.25 100.25
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
LARL
LAUREL SAVING BANK
ALLISON PARK, PA 15101-1402
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 208,707 212,135 210,140 213,568 216,989 216,989
Securities 54,885 55,830 55,775 57,969 58,142 58,142
Held-to-Maturity Secs(AmortCost) 16,736 16,714 18,147 21,613 13,860 13,860
Avail for Sale Secs (Fair Value) 38,149 39,116 37,628 36,356 44,282 44,282
Total Loans & Leases(C) 147,732 148,440 147,539 149,343 147,822 147,822
Total Deposits 173,594 178,367 174,200 176,427 174,234 174,234
Total Loans/Total Deposits 85 83 85 85 85 85
Provision for Credit Loss 7 8 7 2 4 4
CAPITAL:
Total Equity Capital 21,526 21,028 21,746 22,283 22,690 22,690
Total Capital (Tier 1+2+3) 22,854 22,175 22,760 23,282 23,737 23,737
Tangible Equity Ratio 10.40 9.91 10.19 10.33 10.36 10.36
Risk-Adjusted Capital Ratio 21.41 20.61 21.27 21.13 21.71 21.71
Core Capital/Risk Weighted Assets 20.15 19.35 20.02 19.88 20.45 20.45
Core Capital/Adjusted Total Assets 10.40 9.91 10.19 10.33 10.36 10.36
Dividend Payout 23.32 22.88 22.11 28.23 34.30 34.30
PROFITABILITY:
Net Income (Loss) 729 743 769 673 831 831
Return on Average Assets 1.42 1.41 1.46 1.27 1.54 1.54
Return on Average Equity 13.56 13.97 14.38 12.23 14.78 14.78
Net Interest Spread/AEA 3.81 3.80 3.74 3.69 3.79 3.79
Net Interest Margin/AA 3.77 3.76 3.70 3.64 3.74 3.74
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 5.03 4.02 3.51 3.41 2.28 2.28
Loan Loss Reserve/Nonperf Loans 163.90 212.35 225.74 225.09 333.58 333.58
Adjusted Nonperf Assets/TA 0.58 0.43 0.43 0.42 0.37 0.37
PastDue 90 Days:Loans & Leases/GL 0.10 - - - - -
Loan Loss Reserve/TL 1.31 1.31 1.25 1.22 1.24 1.24
Net Charge-Offs(YTD)/Average Loans - - 0.07 0.02 (0.01) (0.01)
Real Estate Loans/GDL 84.64 84.63 84.71 84.36 83.80 83.80
LIQUIDITY:
Brokered Deposits/TD - - - - - -
$100,000+ Time Deposits/TDD 3.85 4.10 4.38 4.03 4.01 4.01
Avg Int-Bear Asset/Avg Int-Bear Liab 116.79 116.91 117.01 116.92 117.35 117.35
Pledged Securities/Total Securities 1.82 1.79 1.79 3.45 3.44 3.44
Tot Secs:Fair Val to Amrtzd Cost 99.71 100.59 101.07 101.22 101.05 101.05
</TABLE>
1
<PAGE>
FERGUSON & COMPANY EXHIBIT IV
- ------------------
MFLR
Mayflower Co-Op Bank
Middleboro, MA 02346-2395
<TABLE>
<CAPTION>
Financial Highlights
Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Mar 1998 (YTD)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets 123,765 125,116 127,590 133,249 135,701 135,701
Securities 38,611 41,665 44,631 47,568 46,893 46,893
Held-to-Maturity Secs(AmortCost) 14,986 14,889 17,495 17,056 12,545 12,545
Avail for Sale Secs (Fair Value) 23,625 26,776 27,136 30,512 34,348 34,348
Total Loans & Leases(C) 73,921 72,579 72,895 76,272 75,933 75,933
Total Deposits 101,721 100,611 100,673 104,843 106,041 106,041
Total Loans/Total Deposits 72.67 72.14 72.41 72.75 71.61 71.61
Provision for Credit Loss 30 30 30 20 15 15
CAPITAL:
Total Equity Capital 11,536 11,949 12,294 12,651 12,847 12,847
Total Capital (Tier 1+2+3) 12,445 12,670 12,896 13,282 13,555 13,555
Tangible Equity Ratio 9.61 9.55 9.58 9.29 9.45 9.45
Risk-Adjusted Capital Ratio 17.93 17.89 17.64 16.69 16.23 16.23
Core Capital/Risk Weighted Assets 16.67 16.64 16.38 15.44 14.97 14.97
Core Capital/Adjusted Total Assets 9.61 9.55 9.58 9.29 9.45 9.45
Dividend Payout 40.12 39.70 47.20 37.78 45.92 45.92
PROFITABILITY:
Net Income (Loss) 334 335 322 405 392 392
Return on Average Assets 1.09 1.08 1.02 1.24 1.17 1.17
Return on Average Equity 11.60 11.41 10.63 12.99 12.30 12.30
Net Interest Spread/AEA 4.10 4.11 4.00 3.95 3.91 3.91
Net Interest Margin/AA 3.88 3.87 3.78 3.75 3.71 3.71
ASSET QUALITY:
Nonperf Ln&Debt Sec/CoreCap&LnLsRsrv 9.32 8.34 6.66 6.58 5.90 5.90
Loan Loss Reserve/Nonperf Loans 96.46 102.60 129.67 128.65 143.42 143.42
Adjusted Nonperf Assets/TA 1.02 0.99 0.74 0.66 0.59 0.59
PastDue 90 Days:Loans & Leases/GL 0.00 0.01 0.01 0.10 0.01 0.01
Loan Loss Reserve/TL 1.55 1.52 1.55 1.49 1.52 1.52
Net Charge-Offs(YTD)/Average Loans -0.02 0.10 0.00 0.02 -0.01 -0.01
Real Estate Loans/GDL 94.12 94.29 94.42 94.15 94.46 94.46
LIQUIDITY:
Brokered Deposits/TD 0.00 0.00 0.00 0.00 0.00 0.00
$100,000+ Time Deposits/TDD 7.38 7.56 8.14 7.90 7.79 7.79
Avg Int-Bear Asset/Avg Int-Bear Liab 109.62 109.49 110.49 110.94 111.39 111.39
Pledged Securities/Total Securities 0.00 0.00 0.00 0.00 0.00 0.00
Tot Secs:Fair Val to Amrtzd Cost 98.37 99.71 100.44 100.66 100.57 100.57
</TABLE>
1
<PAGE>
EXHIBIT V
<PAGE>
FERGUSON & COMPANY EXHIBIT V. - PRO FORMA ASSUMPTIONS
- ------------------ ----------------------------------
1. Net proceeds from the conversion were invested at the beginning of the
period at 5.45%, 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. Citizen's 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 10% annually of the initial ESOP expense.
3. Citizen's RP will acquire 4% of the stock through open market purchases at
$30 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%.
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 calculations have ignored AICPA OP 93-6. Calculating
earnings per share under SOP 93-6 and assuming 10% of the ESOP shares are
committed to be released and allocated to individual accounts at the beginning
of the period would yield earnings per share of $4.69, $4.14, $3.73 and $3.38
and a price to earnings ratio of 11.50, 13.02, 14.44 and 15.94, at the minimum,
midpoint, maximum and super maximum, respectively.
1
<PAGE>
EXHIBIT V
PRO FORMA EFFECT OF CONVERSION PROCEEDS
AT THE MINIMUM OF THE CONVERSION VALUATION RANGE
30-JUN-98
CITIZENS SAVINGS, FSB, SALISBURY, NC
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. Conversion Proceeds
Pro Forma Market Value (Minimum) $ 17,850,000
Less: Estimated Expenses (934,000)
----------------
Net Conversion Proceeds $ 16,916,000
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 16,916,000
Less: ESOP Contributions (1,428,000)
MRP Contributions (714,000)
----------------
Net Conversion Proceeds after ESOP & MRP $ 14,774,000
Estimated Incremental Rate of Return(1) 3.38%
----------------
Estimated Additional Income $ 499,213
Less: ESOP Expense (88,536)
MRP Expense (88,536)
----------------
$ 322,141
================
</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
30-Jun-98 $ 1,230,467 $ 322,141 $ 1,552,608
b. Pro Forma Net Worth
30-Jun-98 $ 15,611,497 $ 14,774,000 $ 30,385,497
c. Pro Forma Net Assets
30-Jun-98 $ 192,715,508 $ 14,774,000 $ 207,489,508
</TABLE>
(1) Investment rate of 5.45%, subject to an effective tax rate of 38%.
2
<PAGE>
EXHIBIT V
PRO FORMA EFFECT OF CONVERSION PROCEEDS
AT THE MIDPOINT OF THE CONVERSION VALUATION RANGE
30-JUN-98
CITIZENS SAVINGS, FSB, SALISBURY, NC
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation (Midpoint) $ 21,000,000
Less: Estimated Expenses (1,000,000)
-------------------
Net Conversion Proceeds $ 20,000,000
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 20,000,000
Less: ESOP Contributions (1,680,000)
MRP Contributions (840,000)
-------------------
Net Conversion Proceeds after ESOP & MRP $ 17,480,000
Estimated Incremental Rate of Return(1) 3.38%
-------------------
Estimated Additional Income $ 590,649
Less: ESOP Expense (104,160)
MRP Expense (104,160)
-------------------
$ 382,329
===================
</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
30-Jun-98 $ 1,230,467 $ 382,329 $ 1,612,796
b. Pro Forma Net Worth
30-Jun-98 $ 15,611,497 $ 17,480,000 $ 33,091,497
c. Pro Forma Net Assets
30-Jun-98 $ 192,715,508 $ 17,480,000 $ 210,195,508
</TABLE>
(1) Investment rate of 5.45%, subject to an effective tax rate of 38%.
3
<PAGE>
EXHIBIT V
PRO FORMA EFFECT OF CONVERSION PROCEEDS
AT THE MAXIMUM OF THE CONVERSION VALUATION RANGE
30-JUN-98
CITIZENS SAVINGS, FSB, SALISBURY,NC
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation (Maximum) $ 24,150,000
Less: Estimated Expenses (1,066,000)
------------------
Net Conversion Proceeds $ 23,084,000
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 23,084,000
Less: ESOP Contributions (1,932,000)
MRP Contributions (966,000)
------------------
Net Conversion Proceeds after ESOP & MRP $ 20,186,000
Estimated Incremental Rate of Return(1) 3.38%
------------------
Estimated Additional Income $ 682,085
Less: ESOP Expense (119,784)
MRP Expense (119,784)
------------------
$ 442,517
==================
</TABLE>
3. Pro Forma Calculations
<TABLE>
<CAPTION>
Before Conversion After
Period Conversion Results Conversion
-------------------------------------------------------------------
<S> <C> <C> <C>
Pro Forma Earnings
Twelve Months Ended
30-Jun-98 $ 1,230,467 $ 442,517 $ 1,672,984
Pro Forma Net Worth
30-Jun-98 $ 15,611,497 $ 20,186,000 $ 35,797,497
Pro Forma Net Assets
30-Jun-98 $ 192,715,508 $ 20,186,000 $ 212,901,508
</TABLE>
(1) Investment rate of 5.45%, subject to an effective tax rate of 38%.
4
<PAGE>
EXHIBIT V
PRO FORMA EFFECT OF CONVERSION PROCEEDS
AT THE SUPERMAX OF THE CONVERSION VALUATION RANGE
30-JUN-98
CITIZENS SAVINGS, FSB, SALISBURY, NC
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1. Conversion Proceeds
Pro Forma Market Valuation (Final) $ 27,772,500
Less: Estimated Expenses $ (1,142,000)
-------------------
Net Conversion Proceeds $ 26,630,500
2. Estimated Additional Income From Conversion Proceeds
Net Conversion Proceeds $ 26,630,500
Less: ESOP Contributions $ (2,221,800)
MRP Contributions $ (1,110,900)
-------------------
Net Conversion Proceeds after ESOP & MRP $ 23,297,800
Estimated Incremental Rate of Return(1) 3.38%
-------------------
Estimated Additional Income $ 787,233
Less: ESOP Expense $ (137,752)
MRP Expense $ (137,752)
-------------------
$ 511,729
===================
</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
30-Jun-98 $ 1,230,467 $ 511,729 $ 1,742,196
b. Pro Forma Net Worth
30-Jun-98 $ 15,611,497 $ 23,297,800 $ 38,909,297
c. Pro Forma Net Assets
30-Jun-98 $ 192,715,508 $ 23,297,800 $ 216,013,308
</TABLE>
(1) Investment rate of 5.45%, subject to an effective tax rate of 38%.
5
<PAGE>
EXHIBIT V
PRO FORMA ANALYSIS SHEET
<TABLE>
<CAPTION>
Name of Association: CITIZENS SAVINGS, FSB, SALISBURY, NC
Date of Letter to Assn.: Undated State of North Carolina
-----------------------
Date of Market Prices: 30-Jun-98 Southeast Publicly All Publicly
Comparatives Held Thrifts Held Thrifts
------------ ------------ ------------
Symbols Value Mean Median Mean Median Mean Median
------------------------- ---- ------ ---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price-Earnings Ratio P/E
- --------------------
Last Twelve Months N/A
At Minimum of Range 11.50 16.61 16.94
-----------------------
At Midpoint of Range 13.02 15.98 14.03 20.28 18.06 17.82 16.87
At Maximum of Range 14.44
At SuperMax of Range 15.94
Price-Book Ratio P/B
- ----------------
Last Twelve Months N/A
At Minimum of Range 58.75% 111.99 111.75
-----------------------
At Midpoint of Range 63.46% 133.41 113.71 146.24 125.89 137.11 123.19
At Maximum of Range 67.46%
At SuperMax of Range 71.38%
Price-Asset Ratio P/A
- -----------------
Last Twelve Months N/A
At Minimum of Range 8.60% 20.88 19.72
-----------------------
At Midpoint of Range 9.99% 14.16 14.32 17.87 16.93 15.17 14.60
At Maximum of Range 11.34%
At SuperMax of Range 12.86%
Twelve Mo. Earnings Base Y $ 1,230,467
Period Ended 30-Jun-98
Book Value B $ 15,611,497
As of 30-Jun-98
Total Assets A $ 192,715,508
As of 30-Jun-98
Return on Money (1) R 3.38%
Conversion Expense X $ 1,000,000
Underwriting Commission C 0.00%
Percentage Underwritten S 0.00%
Estimate Dividend
Dollar Amount DA $ -
Yield DY
ESOP Contributions P $ 1,680,000
MRP Contributions I $ 840,000
ESOP Annual Expense E $ 104,160
MRP Annual Contributions M $ 104,160
Cost of ESOP Borrowings F 0.00%
</TABLE>
(1) Investment rate of 5.45%, subject to an effective tax rate of 38%.
6
<PAGE>
EXHIBIT V
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) $ 21,000,000
-------------------------
1-P/A(1-(CxS))
2. V= P/B(B-X-P-I) $ 21,000,000
-------------------------
1-P/B(1-(CxX))
3. V= P/E(Y-R(X+P+I)-(E+M+ST)) $ 21,000,000
----------------------------
1-P/E(R(1-(CxX))
Value
Estimated Value Per Share Total Shares Date
---------------------- ------------- ------------------- -------------
$21,000,000 $30.00 700,000 30-Jun-98
</TABLE>
Range of Value
$21.0 million x 1.15 = $24.150 million or 805,000 shares at $30.00 per share.
$21.0million x .085 = $17.85 million or 595,000 shares at $30.00 per share.
7
<PAGE>
Innes Street
Financial Corporation
Stock Order Form
--------------------------------------
CITIZEN'S BANK, FSB EXPIRATION DATE
401 WEST INNES STREET for Stock Order
P.O. BOX 1929 Forms:
SALISBURY, NC November, 1998
28145-1929 12:00 Noon,
(704)633-2341 Eastern Time
- --------------------------------------------------------------------------------
IMPORTANT--PLEASE NOTE: A properly completed original stock order form must
be used to subscribe for common stock. Faxes or copies of this form are not
required to be accepted. Please read the Stock Ownership Guide and Stock
Order Form Instructions as you complete this Form.
- --------------------------------------------------------------------------------
(1) NUMBER OF SUBSCRIPTION (2) TOTAL The minimum number of shares that
SHARES PRICE PAYMENT DUE may be subscribed for is 15
shares and the maximum purchase
[_] X $30.00 = [_] by any purchaser or by any
purchasers exercising
subscription rights through a
single account together with all
Associates as defined in the
Prospectus, is 20,000 shares,
except for purchases by the
Employee Stock Ownership Plan of
Citizens Bank, FSB ("Citizens
Bank") or as otherwise
determined by the Board of
Directors. The maximum
purchase limits are subject to
possible change.
- --------------------------------------------------------------------------------
[_] (3) EMPLOYEE/OFFICER/DIRECTOR INFORMATION
Check here if you are a director, officer or employee of Citizens
Bank or a member of such person's immediate family.
- --------------------------------------------------------------------------------
[_] (4) METHOD OF PAYMENT/CHECK Check Amount
Enclosed is a check, bank draft or money
order made payable to Innes Street
Financial Corp. in the amount of: [_____]
- --------------------------------------------------------------------------------
[_] (5) METHOD OF PAYMENT/WITHDRAWAL
The undersigned authorizes withdrawal from the following account(s) at
Citizens Bank. There is no penalty for early withdrawal for purposes
of this payment.
- --------------------------------------------------------------------------------
Account Number(s) Withdrawal Amount(s)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total Withdrawal Amount
----------------------------------------
- --------------------------------------------------------------------------------
(6) PURCHASER INFORMATION
A. [_] Eligible Account Holder -- Check here if you were a depositor of at
least $50.00 at Citizens Bank on December 31, 1996. Enter information below
for all deposit accounts that you had at Citizens Bank on December 31, 1996.
B. [_] Supplemental Eligible Account Holder--Check here if you were a
depositor of at least $50.00 at Citizens Bank on September 30, 1998 but are
not an Eligible Account Holder. Enter information below for all deposit
accounts that you had at Citizens Bank on September 30, 1998.
C. [_] Other Member -- Check here if you were a borrower from Citizens Bank on
__________, 1998 (the Voting Record Date) or a depositor of Citizens Bank on
__________, 1998 who did not have a deposit on December 31, 1996 or
September 30, 1998. Enter information below for all loan and deposit
accounts that you had at Citizens Bank on __________, 1998 (the Voting
Record Date).
D. [_] Local Community Resident --Check here if you are a permanent resident
of Iredell or Rowan County, North Carolina.
- --------------------------------------------------------------------------------
Account Title (Names on Accounts) Account Number(s)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE NOTE: FAILURE TO LIST ALL YOUR ACCOUNTS MAY RESULT IN THE LOSS OF PART
OR ALL OF YOUR SUBSCRIPTION RIGHTS. IF ADDITIONAL SPACE IS NEEDED, PLEASE
UTILIZE THE BACK OF THIS STOCK ORDER FORM.
(7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP
<TABLE>
<S> <C> <C>
[_] Individual [_] Joint Tenants [_] Tenants in Common
[_] Fiduciary (i.e. trust, estate, etc.) [_] Corporation or Partnership [_] Uniform Transfer to Minors Act [_] Other ________
(8) NAME(S) IN WHICH STOCK IS TO BE REGISTERED (PLEASE PRINT CLEARLY) Social Security # or Tax ID
</TABLE>
<TABLE>
<S> <C>
- ---------------------------------------------------- ----------------------------
Name(s) continued Social Security # or Tax ID
- ---------------------------------------------------- ----------------------------
- ---------------------------------------------------- ----------------------------
Street Address City State Zip Code
- ---------------------------------------------------- ------------ ---------------
- ---------------------------------------------------- ---------------------------
(9) TELEPHONE INFORMATION Daytime Evening County of Residence
- ---------------------------------------------------- ----------------------------
( ) ( )
- ---------------------------------------------------- ----------------------------
</TABLE>
[_] (10) NASD AFFILIATION
Check here if you are a member of the National Association of Securities
Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of
the immediate family of any such person to whose support such person
contributes, directly or indirectly, or the holder of an account in which an
NASD member or person associated with an NASD member has a beneficial
interest. To comply with conditions under which an exemption from the NASD's
Interpretation With Respect to Free-Riding and Withholding is available, you
agree, if you have checked the NASD Affiliation box, (i) not to sell,
transfer or hypothecate the stock for a period of 90 days following
issuance, and (ii) to report this subscription in writing to the applicable
NASD member within one day of payment therefor.
- --------------------------------------------------------------------------------
[_] (11) ASSOCIATE--ACTING IN CONCERT
Check here, and complete the reverse side of this Form, if you or any
associate (as defined on the reverse side of this Form) or persons acting in
concert with you have submitted other orders for shares in the Subscription
and/or Community Offerings.
- --------------------------------------------------------------------------------
(12) ACKNOWLEDGMENT To be effective, this fully completed Stock Order Form
must be actually received by Citizens Bank, no later than 12:00 p.m. Noon,
Eastern Time, on November __, 1998, unless extended; otherwise this Stock
Order Form and all subscription rights will be void. Completed Stock Order
Forms, together with the required payment or withdrawal authorization, may
be delivered to Citizens Bank or may be mailed to the Post Office Box
indicated on the enclosed business reply envelope. All rights exercisable
hereunder are not transferable and shares purchased upon exercise of such
rights must be purchased for the account of the person exercising such
rights. It is understood that this Stock Order Form will be accepted in
accordance with, and subject to, the terms and conditions of the Plan of
Holding Company Conversion ("Plan of Conversion") of Citizens Bank described
in the accompanying Prospectus. If the Plan of Conversion is not approved by
the voting members of Citizens Bank at a Special Meeting to be held on
November __, 1998, or any adjournment thereof, all orders will be cancelled
and funds received as payment, with accrued interest, will be returned
promptly.
The undersigned agrees that after receipt by Citizens Bank, this Stock Order
Form may not be modified, withdrawn or cancelled (unless the conversion is
not completed within 45 days after the completion of the Subscription
Offering) without Citizens Bank's consent, and if authorization to withdraw
from deposit accounts at Citizens Bank has been given as payment for shares,
the amount authorized for withdrawal shall not otherwise be available for
withdrawal by the undersigned.
Under penalty of perjury, I certify that the Social Security or Tax ID
Number and the other information provided under number 8 of this Stock Order
Form are true, correct and complete, that I am not subject to back-up
withholding, that I am purchasing for my own account and that there is no
agreement or understanding regarding the transfer of my subscription rights
or the sale or transfer of these shares.
Applicable Federal Regulations prohibit any person from transferring or
entering into any agreement directly or indirectly to transfer, the legal or
beneficial ownership of conversion subscription rights, or the underlying
securities to the account of another. Citizens Bank and Innes Street
Financial Corporation may pursue any and all legal and equitable remedies in
the event they become aware of the transfer of subscription rights and will
not honor orders known by them to involve such transfer. I acknowledge that
the common stock offered is not a savings or deposit account and is not
insured by the Savings Association Insurance Fund, the Bank Insurance Fund,
the Federal Deposit Insurance Corporation, or any other government agency,
may lose value and is not guaranteed by Innes Street Financial Corp.
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED TWICE: BELOW AND ON THE
FORM OF CERTIFICATION ON THE REVERSE HEREOF.
SIGNATURE DATE SIGNATURE DATE
- --------------------------- ------------------------- DATE REC'D _________
CATEGORY ___________
- --------------------------- ------------------------- ORDER # __ BATCH ___
DEPOSIT ____________
A SIGNED FORM OF CERTIFICATION MUST ACCOMPANY ALL STOCK ORDER FORMS
(SEE REVERSE SIDE)
<PAGE>
ITEM (6)A, B, C--(CONTINUED)
Account Title (Names on Account Account Title (Names on Account
Accounts) Number(s) Accounts) Number(s)
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
ITEM (11)--(CONTINUED)
List below all other orders "Associate" is defined as: (i) any
submitted by you or your corporation or organization (other than
Associates (as defined) or by Citizens Bank, FSB, Innes Street Financial
persons acting in concert with Corporation, or a majority-owned subsidiary
you. of Citizens Bank, FSB or Innes Street
Financial Corporation) of which such person
Number of is an officer or partner or is, directly or
Name(s) listed on Shares indirectly, the beneficial owner of 10% or
other Stock Order Ordered more of any class of equity securities; (ii)
Forms any trust or other estate in which such
- -------------------------------- person has a substantial beneficial interest
- -------------------------------- or as to which such person serves as a
- -------------------------------- trustee or in a similar fiduciary capacity;
- -------------------------------- except for any tax-qualified employee stock
- -------------------------------- benefit plan or any charitable trust which
is exempt from federal taxation pursuant to
Section 501(c)(3) of the Code; and (iii) any
relative or spouse of such person, or any
relative of such spouse, who either has the
same home as such person or who is a
director or officer of Citizens Bank, FSB,
Innes Street Financial Corporation or any
subsidiaries thereof.
- --------------------------------------------------------------------------------
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED BELOW AND ON THE FRONT OF
THIS FORM.
FORM OF CERTIFICATION
I/WE ACKNOWLEDGE THAT THIS SECURITY IS NOT A DEPOSIT OR SAVINGS ACCOUNT AND
IS NOT FEDERALLY INSURED, AND IS NOT GUARANTEED BY CITIZENS BANK, FSB (THE
"BANK") OR BY THE FEDERAL GOVERNMENT.
I/We further certify that, before purchasing the common stock, no par value
per share, of Innes Street Financial Corporation, the proposed holding
company for Citizens Bank, FSB, I/we received a Prospectus dated ,
1998 (the "Prospectus").
The Prospectus that I/we received contains disclosure concerning the nature
of the security being offered and describes the risks involved in the
investment, including but not limited to:
1. Geographic Concentration of Credit Risk and Origination
Policy of the Bank (page )
2. Interest Rate Risk (page )
3. Competition (page )
4. Anticipated Low Return on Equity Following Conversion (page )
5. Limited Market for the Common Stock (page )
6. Increase in Overhead Expenses (page )
7. Year 2000 Compliance (page )
8. Cost and Possible Dilutive Effect of the MRP and Option
Plan (page )
9. Anti-Takeover Considerations (page )
10. Regulatory Oversight (page )
11. Best Efforts Offering (page )
12. Possible Adverse Tax Consequences of the Distribution of
Subscription Right (page )
Signature Date Signature Date
- ------------------------------------- -----------------------------------
- ------------------------------------- -----------------------------------
Name (Please Print) Name (Please Print)
- ------------------------------------- -----------------------------------
- ------------------------------------- -----------------------------------
<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 November 19, 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 November 19, 1998 at
_______ _.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 __________, 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
_______________, 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......................................................... 30
Dividend Policy......................................................... 32
Market for Common Stock................................................. 33
Registration Requirements............................................... 33
Additional Information and Order Forms.................................. 33
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 NOVEMBER 19, 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 November 19, 1998 at ___________ ____.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 ___________, 1998, and is first being mailed
to members of the Bank, together with the Prospectus dated ______________, 1998
(the "Prospectus"), on or about _____________, 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.
<PAGE>
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
4within 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 42
to 63.
INFORMATION RELATING TO VOTING AT THE SPECIAL MEETING
The Board of Directors of the Bank has fixed the close of business on
_________________, 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.
2
<PAGE>
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
---
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
---
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
-------
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.
3
<PAGE>
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 ____________, 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 November 19, 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
<PAGE>
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 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."
5
<PAGE>
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.
6
<PAGE>
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
7
<PAGE>
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." 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. 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
8
<PAGE>
subscribed for in the Offering. The same per share price ($30.00) 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 November 19, 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 4, 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 (deposit account holders 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 (deposit
account holders 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 _______________, 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."
9
<PAGE>
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.
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
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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 4, 1999, unless further extended with the consent of the OTS. The
Offering may not be extended beyond November 19, 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 20,000 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
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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 $30.00 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 4, 1999, unless further extended with the consent of the OTS.
The Offering may not be extended beyond November 19, 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
$30.00 per share. The purchase price was determined by the Boards of Directors
of the Company and the Bank in consultation with the Bank's financial advisor
and sales agent, Trident Securities, and was based upon a number of factors. The
Board of Directors considered a purchase price of $30.00 preferable to a lower
per share price for several reasons. It was hoped that, in the event of an
oversubscription, the higher price would result in a wider distribution of the
Common Stock. See "--Subscription Offering - Eligible Account Holders."
Additionally, the Board of Directors would like the Company and the Bank to be
more closely identified with the commercial banks doing business in its market
area which have common stock trading at per share prices in the range of
approximately $50.00 to $90.00.
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. 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.
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.
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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
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 August 28, 1998, the Estimated
Valuation Range of the Bank and the Company was from a minimum of $17,850,000 to
a maximum of $24,150,000, with a midpoint of $21,000,000. Based upon such
valuation and a purchase price for shares offered in the Conversion of $30.00
per share, the number of shares to be offered ranges from a minimum of 595,000
shares to a maximum of 805,000 shares, with a midpoint of 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 $27,772,500 (925,750 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
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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."
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 November 19, 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
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<PAGE>
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 ____________, 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
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<PAGE>
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.
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,
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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.
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 $312,000 and $519,000 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.
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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 15 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
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<PAGE>
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.
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
20
<PAGE>
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 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.
21
<PAGE>
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.
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 -- $30.00 -- 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 of Percent of Shares Percent of Shares
Amount 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 20,000 3.36% 2.48%
Chairman, CEO, and
President
Harold C. Earnhardt 420,000 14,000 2.35% 1.74%
Vice Chairman
Malcolm B. Blankenship, Jr. 390,000 13,000 2.18% 1.61%
Director
James W. Duke 270,000 9,000 1.51% 1.12%
Director
K.V. Epting, Jr. 105,000 3,500 0.59% 0.44%
Director
Gordon P. Hurley 600,000 20,000 3.36% 2.48%
Director
Bobby A. Lomax 180,000 6,000 1.01% 0.75%
Director
Jeffrey C. Chisholm 600,000 20,000 3.36% 2.48%
Senior Vice President/
Chief Lending Officer
Dianne E. Hawkins 105,000 3,500 0.59% 0.44%
Vice President, Treasurer
and Controller
---------- ------- ----- -----
Total $3,270,000 109,000 18.32% 13.54%
========== ======= ===== =====
</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 47,600 and 64,400 shares assuming the
issuance of between 595,000 and 805,000 shares.
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" in the Prospectus.
25
<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 the Employee Retirement Income
Security Act of 1974, as amended.
The ESOP may be considered an "anti-takeover" device since the ESOP may
become the owner of a sufficient percentage of the total outstanding Common
Stock of the Company that the vote or decision whether to tender shares of the
ESOP may be used as a defense in a contested takeover. See "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 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
26
<PAGE>
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 805,000 shares in the Conversion and receipt of
stockholder approval, 32,200 shares would be issued pursuant to the MRP and
allocated as follows:
27
<PAGE>
Estimated Number Percentage of
of Restricted Shares Total Restricted
Recipient Title to be Granted Shares Issued
- --------- ----- --------------- ---------------
Malcolm B. Blankenship, Jr. Director 3,220 10%
James W. Duke Director 3,220 10%
Harold C. Earnhardt Vice Chairman 3,220 10%
K. V. Epting, Jr. Director 3,220 10%
Gordon P. Hurley Director 1,610 5%
Bobby A. Lomax Director 3,220 10%
Ronald E. Bostian Chairman, 6,440 20%
President, and
Chief Executive
Officer
Jeffrey C. Chisholm Senior Vice 4,025 12.5%
President and
Chief Lending
Officer
Dianne E. Hawkins Vice 4,025 12.5%
President, ----- ----
Treasurer, and
Controller
Total 32,200 100%
====== ====
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 595,000 and 805,000 shares in the Conversion, an aggregate
of between 59,500 and 80,500 shares of Common Stock would be reserved for
issuance. However, some or
28
<PAGE>
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
29
<PAGE>
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 805,000 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>
Estimated
Number
of Shares
Subject Percentage of
Recipient Title to Option Options Issued
--------- ------ -------------- --------------
Malcolm B. Blankenship, Jr. Director 2,415 3%
James W. Duke Director 2,415 3%
Harold C. Earnhardt Vice Chairman 2,415 3%
K. V. Epting, Jr. Director 2,415 3%
Gordon P. Hurley Director 2,415 3%
Bobby A. Lomax Director 2,415 3%
Ronald E. Bostian Chairman, 16,100 20%
President, and
Chief Executive
Officer
Jeffrey C. Chisholm Senior Vice 8,050 10%
President and
Chief Lending
Officer
Dianne E. Hawkins Vice President, 8,050 10%
Treasurer, and
Controller
Other Employees 33,810 42%
------ ---
Total 80,500 100%
====== ===
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 $16.9 million and $23.1 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 $26.6 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
which are expected to be purchased by the ESOP in the Subscription Offering at
$30.00 per share with funds borrowed from the Company. The amount loaned to the
ESOP to enable such purchases is estimated to range from $1,428,000
31
<PAGE>
(if 595,000 shares are issued) to $1,932,000 (if 805,000 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
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.
32
<PAGE>
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. See "DIVIDEND
POLICY" below.
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 23,800 and 32,200
shares may be acquired by the MRP, assuming the issuance of between 595,000 and
805,000 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 $30.00 per share, the Bank would contribute between $714,000 and
$966,000, 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 annual rate of $0.60 per share which is equal to 2% of the
offering price for the Common Stock in the Conversion. In addition, the Board of
Directors may determine from time to time that it is prudent to pay special
nonrecurring cash dividends. Special cash dividends, if paid, may be in addition
to, or in lieu of, regular cash dividends. The Company's Board of Directors will
periodically review its policy concerning dividends. Declarations of dividends,
if any, by the Board of Directors will depend upon a number of factors,
including investment opportunities available to the Company and the Bank,
capital requirements, regulatory limitations, the Company's and the Bank's
results of operations and financial condition, tax considerations and general
economic conditions. Upon review of such considerations, the Board of Directors
of the Company may authorize dividends to be paid in the future if it deems such
payment appropriate and in compliance with applicable law and regulation. No
assurances can be given that any dividends will in fact be paid on the Common
Stock or, if dividends are paid, that they will not be reduced or discontinued
in the future.
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--
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.
33
<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. Following the completion of
the Offering, it is anticipated that the Common Stock will be traded on the
over-the-counter market with quotations available through the OTC Electronic
Bulletin Board. Trident Securities is expected to make a market in the Common
Stock by developing and maintaining historical stock trading records, soliciting
potential buyers and sellers of shares and attempting to match buy and sell
orders. In connection with its market making activities, Trident Securities may
buy or sell shares from time to time for its own account. However, it will not
be subject to any obligation with respect to such efforts. If the Common Stock
cannot be quoted and traded on the OTC Electronic Bulletin Board, it is expected
that the transactions in the Common Stock will be reported in the pink sheets of
the National Quotation Bureau, Inc.
An active and liquid public trading market for the securities of any
issuer, including the Common Stock, depends upon the presence in the marketplace
of both willing buyers and willing sellers of the securities at any given time.
Due to the size of the Company's Offering (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
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
34
<PAGE>
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, 407 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.
35
<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 of Citizens Bank, FSB with
account balances of at least $50.00 as of the close of
business on December 31, 1996
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 $17,850,000 to $24,150,000. The maximum
of the Estimated Valuation Range may be increased to
$27,772,500 without a resolicitation of subscribers
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Time 12:00 noon, local time, on November 19, 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
Option Plan 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
A-1
<PAGE>
Other Members Savings account holders (other than Eligible Account
Holders and Supplemental Eligible Account Holders) and
certain borrowers (borrowers whose loans were
outstanding on ________________, 1998 and continue to
be outstanding) who are entitled to vote at the
Special Meeting due to the existence of a savings
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 $30.00 per share price of the Common Stock
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
Special Meeting Special Meeting of members of the Bank on November 19,
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 Depositors, who are not Eligible Account Holders of
Account Holders 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 the
Offering 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 __________________, 1998, the
date for determining members entitled to vote at the
Special Meeting.
A-3
