<PAGE>
U. S. Securities and Exchange Commission
Washington, DC 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from __________ to ___________
Commission file number 333-63363
---------
INNES STREET FINANCIAL CORPORATION
----------------------------------
(Exact name of small business issuer as
specified in its charter)
NORTH CAROLINA 56-2101799
-------------- ----------
State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
401 WEST INNES STREET
SALISBURY, NC 28144
-------------------
(Address of principal executive office)
(704) 633-2341
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
--- ---
As of April 30, 1999 there were 2,248,250 shares of the Registrant's
common stock outstanding.
<PAGE>
Innes Street Financial Corporation and Subsidiary
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information 3
- ------- ---------------------
Item 1. Financial Statements
Consolidated Statements of Condition at March 31, 1999 (unaudited)
and September 30, 1998 4
Consolidated Statements of Income for the Six and Three Months
Ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Shareholders' Equity for the Six and Three
Months Ended March 31, 1999 and 1998 (unaudited) 6
Consolidated Statements of Cash Flows for the Six Months
Ended March 31, 1999 and 1998 7
Notes to Unaudited Consolidated Financial Statements 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Part II. Other Information 14
- -------- -----------------
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 15
Signature Page 16
</TABLE>
2
<PAGE>
Innes Street Financial Corporation and Subsidiary
Part I. Financial Information
3
<PAGE>
Item 1. Financial Statements
- ---- -- --------- ----------
Innes Street Financial Corporation and Subsidiary
Consolidated Statements of Condition
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 19,467,807 $ 8,927,380
Federal funds sold-overnight 7,034,000 4,355,000
------------- -------------
Cash and cash equivalents 26,501,807 13,282,380
------------- -------------
Federal funds sold-term - 2,000,000
Investments available for sale 11,998,643 -
Mortgage-backed securities available for sale 5,275,911 7,227,783
Mortgage-backed securities held to maturity (fair value of
$994,367 and $1,614,024 at March 31, 1999 and
September 30, 1998, respectively) 961,814 1,564,791
Loans receivable, net 156,495,354 159,248,042
Premises and equipment, net 2,060,077 1,178,903
Other 4,246,312 5,556,336
------------- -------------
Total assets $207,539,918 $190,058,235
============= =============
Liabilities and shareholders' equity
Deposit accounts 162,627,941 161,548,502
Advances from the Federal Home Loan Bank 7,000,000 10,000,000
Other 1,389,565 2,537,357
------------- -------------
Total liabilities 171,017,506 174,085,859
------------- -------------
Preferred stock, no par value:
Authorized - 5,000,000 shares; none issued and outstanding - -
Common stock, no par value:
Authorized - 20,000,000 shares; issued and outstanding:
2,248,250 shares at March 31, 1999 - -
Paid in Capital 21,606,648 -
Retained earnings (substantially restricted) 16,596,447 15,856,214
Unallocated ESOP stock (1,768,623 -
Accumulated other comprehensive income 87,940 116,162
------------- -------------
Total shareholders' equity 36,522,412 15,972,376
------------- -------------
Total liabilities and shareholders' equity $207,539,918 $190,058,235
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
Innes Street Financial Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Six months ended Three months ended
-------------------------------- --------------------------------
March 31, March 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
Interest and fee income:
Loans receivable $5,973,014 $5,989,474 $2,998,906 $2,995,368
Investments 44,910 - 44,910 -
Mortgage-backed securities 246,121 376,968 112,268 182,037
Other interest-earning assets 757,228 630,265 467,644 303,200
-------------- ---------------- ----------------- -------------
Total interest income 7,021,273 6,996,707 3,623,728 3,480,605
-------------- ---------------- ----------------- -------------
Interest expense:
Deposits 3,911,534 4,089,991 1,909,767 2,008,766
Borrowings 310,108 637,089 135,876 289,191
-------------- ---------------- ----------------- -------------
Total interest expense 4,221,642 4,727,080 2,045,643 2,297,957
-------------- ---------------- ----------------- -------------
Net interest income 2,799,631 2,269,627 1,578,085 1,182,648
Provision for loan losses - - - -
-------------- ---------------- ----------------- -------------
Net interest income after provision for loan losses 2,799,631 2,269,627 1,578,085 1,182,648
-------------- ---------------- ----------------- -------------
Non-interest income:
Loan servicing fees 76,802 109,809 35,003 54,809
Gain on sales of loans, net 39,418 47,775 - 33,324
Other 74,077 48,502 29,778 21,307
-------------- ---------------- ----------------- -------------
Total non-interest income 190,297 206,086 64,781 109,440
-------------- ---------------- ----------------- -------------
Non-interest expense:
Compensation and benefits 851,158 742,949 429,793 371,067
Occupancy and equipment 192,474 176,368 89,293 90,087
Advertising and promotion 44,222 103,137 19,405 38,076
Data processing 94,485 90,448 46,572 45,594
Deposit insurance premium 47,888 62,004 24,465 25,095
Other 415,984 309,821 236,013 144,697
-------------- ---------------- ----------------- -------------
Total non-interest expense 1,646,211 1,484,727 845,541 714,616
-------------- ---------------- ----------------- -------------
Income before income taxes 1,343,717 990,986 797,325 577,472
Provision for income taxes 500,065 367,364 297,718 215,804
-------------- ---------------- ----------------- -------------
Net income $ 843,652 $ 623,622 $ 499,607 $ 361,668
============== ================ ================= =============
Basic and diluted earnings per share (Note 2) $0.41 N/A $0.24 N/A
Weighted average shares outstanding (Note 2) 2,069,378 N/A 2,070,388 N/A
</TABLE>
See accompanying notes.
5
<PAGE>
Innes Street Financial Corporation and Subsidiary
Consolidated Statements of Shareholders' Equity
For the Six Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
Shares of Deferred
Common Paid in Retained Compensation
Stock Capital Earnings Plans
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 $14,522,513
Net income 623,622
Net changes in unrealized appreciation on securities
available for sale, net of taxes of $9,094
Comprehensive income *
-----------
Balance at March 31, 1998 $15,146,135
===========
Balance at September 30, 1998 $15,856,214
Net income 843,652
Net changes in unrealized appreciation on securities
available for sale, net of taxes of ($18,395)
Comprehensive income *
Dividends paid --- $0.05 a share (103,419)
Net proceeds from Initial Public Offering 2,248,250 $21,598,347
Shares purchased and held in Rabbi Trusts $ 1,225,879
Deferred compensation obligation (1,225,879)
Issuance of ESOP shares
Allocation of ESOP shares 8,301
----------- ----------- ------------ ------------
Balance at March 31, 1999 2,248,250 $21,606,648 $16,596,447 $ -
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Employee Other Total
Stock Ownership Comprehensive Shareholder's
Plan Income Equity
--------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1997 $106,383 $14,628,896
Net income 623,622
Net changes in unrealized appreciation on securities
available for sale, net of taxes of $9,094 14,119 14,119
-----------
Comprehensive income * 637,741
--------- -----------
Balance at March 31, 1998 $120,502 $15,266,637
========= ===========
Balance at September 30, 1998 $116,162 $15,972,376
Net income 843,652
Net changes in unrealized appreciation on securities
available for sale, net of taxes of ($18,395) (28,222) (28,222)
-----------
Comprehensive income * 815,430
Dividends paid --- $0.05 a share (103,419)
Net proceeds from Initial Public Offering 21,598,347
Shares purchased and held in Rabbi Trusts 1,225,879
Deferred compensation obligation (1,225,879)
Issuance of ESOP shares $(1,798,600) (1,798,600)
Allocation of ESOP shares 29,977 38,278
------------ --------- -----------
Balance at March 31, 1999 $(1,768,623) $ 87,940 $36,522,412
============ ========= ===========
</TABLE>
* Comprehensive income for the second quarters of 1999 and 1998 was $514,872 and
$372,175, respectively.
6
<PAGE>
Innes Street Financial Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended March 31,
-------------------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Operating activities
Net income $ 843,652 $ 623,622
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 77,749 76,634
Amortization of premium on investments 2,414 5,083
Amortization of deferred loan fees 21,314 42,624
Allocation of common stock by ESOP plan 38,278 -
Deferred income taxes (68,941) (22,378)
Gain on sales of loans, net (39,418) (47,775)
Other, net 48,406 (250,362)
-------------- ---------------
Net cash provided by operating activities 923,454 427,448
Investment activities
Purchases of federal funds sold-term - (7,000,000)
Proceeds from maturity of federal funds sold-term 2,000,000 6,100,000
Purchases of investment securities (11,989,500) -
Principal repayment of mortgage-backed securities 2,496,676 1,921,246
Net decrease (increase) in loans 310,557 (1,004,938)
Proceeds from sales of loans 2,460,235 2,457,650
Purchases of premises and equipment (956,205) (7,653)
Proceeds from sales of foreclosed real estate 116,402 -
-------------- ---------------
Net cash (used in) provided by investing activities (5,561,835) 2,466,305
Financing activities
Net increase (decrease) in deposit amounts 1,079,439 (822,474)
Repayment of FHLB advances (3,000,000) (6,000,000)
Net decrease in mortgage escrow funds 82,041 246,877
Net proceeds from issuance of common stock 21,598,347 -
Purchase of common stock by ESOP plan (1,798,600) -
Dividends paid (103,419) -
-------------- ---------------
Net cash provided by (used in) financing activities 17,857,808 (6,575,597)
Net increase (decrease) in cash and cash equivalents 13,219,427 (3,681,844)
Cash and cash equivalents at beginning of period 13,282,380 16,052,170
-------------- ---------------
Cash and cash equivalents at end of period $ 26,501,807 $12,370,326
============== ===============
</TABLE>
7
<PAGE>
Innes Street Financial Corporation and Subsidiary
Notes to Unaudited Consolidated Financial Statements
1. Organization
Innes Street Financial Corporation (the "Company") was incorporated on July 6,
1998 to serve as the holding company for Citizens Bank, FSB (the "Bank") upon
the Bank's conversion from a federally chartered mutual savings bank to a
federally chartered stock savings bank ("Conversion"). The Company completed
the Conversion on December 28, 1998 through the sale and issuance of 2,248,250
shares of common stock. Information set forth in this report relating to
periods prior to the Conversion, including financial statements and related data
relates to the Bank.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with instructions to Form 10-QSB. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim period.
The results of operations for the six and three months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the year ending
September 30, 1999. The consolidated financial statements and notes thereto
should be read in conjunction with the audited financial statements and notes
thereto for the year ended September 30, 1998.
2. Earnings Per Share
Earnings per share ("EPS") has been computed for the six and three months ended
March 31, 1999 based upon weighted average common shares outstanding of
2,248,250. The Company's initial public offering closed on December 28, 1998,
therefore the EPS calculation is not applicable for the six and three months
ended March 31, 1998. For purposes of earnings per share calculations for the
six and three months ended March 31, 1999, shares issued on December 28, 1998
have been assumed to be outstanding as of October 1, 1998. The Company had no
dilutive securities outstanding during the six and three months ended March 31,
1999, therefore diluted EPS is the same as basic EPS.
<TABLE>
<CAPTION>
Six Months Three Months
Ended Ended
March 31, March 31,
-------------- ---------------
1999 1999
-------------- ---------------
<S> <C> <C>
Net Income $ 843,652 $ 499,607
Weighted average shares outstanding 2,248,250 2,248,250
Less weighted average unallocated ESOP shares (178,872) (177,862)
-------------- ---------------
Total weighted average shares outstanding 2,069,378 2,070,388
Basic and diluted earnings per share $ 0.41 $ 0.24
</TABLE>
3. New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes new standards for reporting information about operating segments in
annual and interim financial statements. The Company adopted this statement
effective October 1, 1998. Management has determined
8
<PAGE>
that it operates in only one segment, Consumer Banking. Accordingly, the
financial results of the Company consist only of this one segment.
Also in June 1997, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new accounting
and reporting requirements for derivative instruments, including certain
derivative instruments embedded in other contracts and hedging activities.
Currently, the Company has no derivative instruments that fall within the
definition of a derivative as defined by the statement. The Company does not
anticipate that the adoption of this statement on October 1, 1999 will
significantly impact the financial results of the Company.
9
<PAGE>
Innes Street Financial Corporation and Subsidiary
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at March 31, 1999 and September 30, 1998
Total assets were $207.5 million at March 31, 1999 and $190.1 million at
September 30, 1998, an increase of $17.4 million or 9.2%. The Company's
issuance of common stock in December 1998 accounted for approximately $20
million of this increase. This increase was offset by a $3.0 million decrease
in advances from the Federal Home Loan Bank (FHLB).
Cash and cash equivalents increased from $13.3 million at September 30, 1998 to
$26.5 million at March 31, 1999. This increase of $13.2 million, or 99.2%, was
primarily due to the net proceeds from the issuance of common stock.
During the quarter ended March 31, 1999, $12.0 million of FHLB bonds were
purchased with $7.0 million maturing in February 2000 and the remaining $5.0
million maturing in March 2001. These bonds were classified as available for
sale.
Mortgage-backed securities available for sale and mortgage-backed securities
held to maturity decreased from $8.8 million at September 30, 1998 to $6.2
million at March 31, 1999. This decrease of $2.6 million, or 29.5%, was due to
scheduled repayments.
Loans receivable, net declined from $159.2 million at September 30, 1998 to
$156.5 million at March 31, 1999, a decrease of $2.7 million, or 1.7%. This
decrease was primarily due to increased payoffs during the six months ended
March 31, 1999.
Premises and equipment, net increased from $1.2 million at September 30, 1998 to
$2.1 million at March 31, 1999, an increase of $0.9 million. This increase
resulted from the Company installing a local area network and the upgrading of
its computer hardware to accommodate the requirements of its service bureau's
software. The new hardware will also be year 2000 compliant. Also, the Company
purchased $0.5 million in land for future expansion of its branch network.
Effective on the IPO date, 121,978 shares of the Company's stock were purchased
by certain employees and directors in conjunction with the respective
nonqualified deferred compensation plans. The purchase price of the shares, and
corresponding liability, have been recorded in shareholders' equity. The result
was a decrease in other assets and other liabilities of $1,219,780 at March 31,
1999 compared to September 30, 1998.
Advances from the FHLB decreased $3.0 million from $10.0 million at September
30, 1998 to $7.0 million at March 31, 1999 in accordance with the debt
agreement.
Paid in capital increased $21.6 million from September 30, 1998 due to the
Company issuing 2,248,250 shares of its common stock, no par value, at $10 per
share as part of the Conversion.
Unallocated ESOP stock increased by 100% to $1.8 million. This increase was a
result of the Company establishing an ESOP on behalf of its eligible employees.
Unallocated ESOP stock will continue to decrease in the future as the shares
acquired by the ESOP are allocated to its eligible employees.
Retained earnings increased by the net income earned during the six months ended
March 31, 1999 of $0.8 million. During the quarter ended March 31, 1999 the
Company paid a $0.05 a share dividend to stockholders as of record date March 8,
1999. This dividend resulted in a $0.1 million decrease in retained earnings.
10
<PAGE>
Results of Operations
The earnings of the Company depend primarily on its level of net interest income
which is the difference between interest earned on the Company's interest-
earning assets and the interest paid on its interest-bearing liabilities. Net
interest income is a function of the Company's spread, which is the difference
between 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 Six Months Ended March 31, 1999 and 1998
Net Income. Net income for the six months ended March 31, 1999 was $843,652
compared to $623,622 for the six months ended March 31, 1998, an increase of
35.3%. This increase was primarily a result of an increase in net interest
income offset by an increase in non-interest expense.
Net Interest Income. Net interest income increased from $2,269,627 for the six
months ended March 31, 1998 to $2,799,631 for the six months ended March 31,
1999. The decrease in interest expense on borrowings was the primary cause for
the improved net interest margin. Interest expense on borrowings decreased as a
result of a $9.5 million decrease in average borrowings outstanding during the
respective periods. This planned decrease was a result of the Company repaying
$9.0 million of FHLB advances since March 31, 1998.
Provision for Losses. No provision for loan losses was made in either the six
months ended March 31, 1999 or the six months ended March 31, 1998. In the
opinion of management, based on its review of specific loans and historical loss
experience, the allowance for loan losses is adequate to cover probable credit
losses that were incurred as of March 31, 1999 and 1998. Accordingly, no
provision for loan losses was recorded during the six months ended March 31,
1999 and 1998.
Non-interest income. Non-interest income decreased from $206,086 for the six
month period ended March 31, 1998 to $190,297 for the six month period ended
March 31, 1999.
Non-interest expense. Non-interest expense increased from $1,484,727 during the
six month period ended March 31, 1998 to $1,646,211 for the six month period
ended March 31, 1999. An increase in compensation and benefits during the six
month period ended March 31, 1999 accounts for the majority of this increase.
The increase in compensation and benefits was a result of an increase in the
number of employees, normal annual increases in salaries of existing employees
and ESOP expenses. Also, professional fees increased as a result of the
Conversion.
Provision for Income Taxes. The provision for income taxes increased from
$367,364 for the six month period ended March 31, 1998 to $500,065 for the six
month period ended March 31, 1999 as a result of higher pre-tax income.
Comparison of Operating Results for the Three Months Ended March 31, 1999 and
1998
Net Income. Net income for the three months ended March 31, 1999 was $499,607
compared to $361,668 for the three months ended March 31, 1998, an increase of
38.1%. This increase was primarily a result of an increase in net interest
income offset by an increase in non-interest expense.
Net Interest Income. Net interest income increased from $1,182,648 for the
three months ended March 31, 1998 to $1,578,085 for the three months ended March
31, 1999. The decrease in interest expense on borrowings and an increase in
investment income and other interest-earning assets were the primary cause for
the improved net interest margin. Interest expense on borrowings decreased as a
result of a $9.0 million decrease in average borrowings outstanding during the
respective periods. This planned decrease was a result of the Company repaying
$9.0 million of FHLB advances since March 31, 1998. Investment income and other
interest-earning assets income increased as a result of a $11.3 million increase
in the average balances of the associated assets.
Provision for Losses. No provision for loan losses was made in either the three
months ended March 31, 1999 or the three months ended March 31, 1998. In the
opinion of management, based on its review of specific loans and
11
<PAGE>
historical loss experience, the allowance for loan losses is adequate to cover
probable credit losses that were incurred as of March 31, 1999 and 1998.
Accordingly, no provision for loan losses was recorded during the three months
ended March 31, 1999 and 1998.
Non-interest income. Non-interest income decreased from $109,440 for the three
month period ended March 31, 1998 to $64,781 for the three month period ended
March 31, 1999. This decrease was a result of decreases in loan servicing fee
income and gain on sales of loans, net. Loan servicing fee income decreased due
to reduction in loans serviced for others. During the quarter ended March 31,
1999 no loans were sold.
Non-interest expense. Non-interest expense increased from $714,616 during the
three month period ended March 31, 1998 to $845,541 for the three month period
ended March 31, 1999. An increase in compensation and benefits during the three
month period ended March 31, 1999 accounts for the majority of this increase.
The increase in compensation and benefits was a result of an increase in the
number of employees, normal annual increases in salaries of existing employees
and ESOP expenses. Also, professional fees increased as a result of the
conversion.
Provision for Income Taxes. The provision for income taxes increased from
$215,804 for the three month period ended March 31, 1998 to $297,718 for the
three month period ended March 31, 1999 as a result of higher pre-tax income.
Year 2000 Compliance
As the year 2000 approaches, an important business issue has emerged regarding
how existing application software programs and operating systems can accommodate
this date value. Some of the existing application software products were
designed to accommodate only two-digits. For example, "96" is stored on the
system and represents 1996. The Company has identified potential problems
associated with the "Year 2000" issue and has implemented a plan designed to
ensure that all software used in connection with the Company'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 Company has prepared a critical issues schedule with a time line
and assigned responsibilities to address the Year 2000 problem. In addition,
the Company recognizes that its ability to be Year 2000 compliant is dependent
upon the cooperation of its vendors. The Company 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
Company has received representations from its primary third party vendors that
they will have identified any Year 2000 problems in their software and will have
these problems resolved by September 30,1999 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 Company, including some testing, have
been completed and any problems will be remedied by June 30, 1999. The Company
also is preparing contingency plans in the event there are any system
interruptions. The Company's contingency plan is designed to ensure continued
operation even in the event of a power failure. Telephone capability is being
analyzed in conjunction with vendors. The same analysis and monitoring is being
performed on the provider of security services. The Company's vaults are
mechanical and not subject to time or calendar failure. The Company believes
that its costs related to Year 2000 would be immaterial. There can be no
assurances however, that the contingency plan or the performance of the
Company's vendors will be effective to remedy all potential problems. To the
extent the Company'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 Company's business,
financial condition, results of operations and business prospects.
The risks associated with not being Year 2000 compliant include financial and
legal risks. Legal risks include the failure to meet contractual service
agreements, leading to possible punitive actions including those of a regulatory
nature. Financial risks concern the possibility of lost revenues or even
business failure. Major risks associated with the date change event include a
shut down of voice and data communication systems due to failure by switching
systems, satellites, or telephone companies; excessive cash withdrawal activity;
cash couriers delayed or not available; and government offices or facilities not
opening or operating.
12
<PAGE>
The Company's loan portfolio consists primarily of residential mortgage loans to
individuals. These individuals generally are not affected by Year 2000
failures. The limited number of the Company's commercial borrowers are being
contacted to assure that timely payments will be made in January 2000. The
Company intends to amend its underwriting policies to address loan payment
problems associated with a borrower as a result of a disruption in income or a
commercial borrower's inability to make a timely payment.
13
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Innes Street Financial Corporation and Subsidiary
Part II. Other Information
14
<PAGE>
Innes Street Financial Corporation and Subsidiary
Item 1. Legal Proceedings
- ---- -- -----------------
From time to time Innes Street Financial Corporation is a party to various legal
proceedings incident to its business. At March 31, 1999, there were no legal
proceedings to which the Company or its subsidiary were a party, or to which any
of their property was subject, which were expected by management to result in a
material loss.
Item 6. Exhibits and Reports on Form 8-K
- ---- -- --------------------------------
(a) Exhibits.
The following Exhibits are included with this Report:
Exhibit
Number Description
------ -----------------------------------------------------
10(i) Second Directors' Deferred Compensation Plan of Citizens
Bank, FSB
10(ii) Second Nonqualified Deferred Compensation Plan for Key
Employees of Citizens Bank, FSB
27 Financial Data Schedule
(b) During the quarter ended March 31, 1999 the Company did not file any
reports on Form 8-K.
15
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Innes Street Financial Corporation and Subsidiary
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on behalf by the undersigned, thereunto duly
authorized.
Innes Street Financial Corporation
----------------------------------
(Registrant)
May 14, 1999 /s/ Ronald E. Bostian
------------ ----------------------------
(Date) Ronald E. Bostian
President and CEO
(Duly Authorized Representative)
May 14, 1999 /s/ Dianne E. Hawkins
------------ ----------------------------
(Date) Dianne E. Hawkins
Treasurer and Controller
(Principal Financial Officer)
16
<PAGE>
SECOND DIRECTORS' DEFERRED COMPENSATION PLAN
OF
CITIZENS BANK, FSB
EFFECTIVE DATE: December 28, 1998
<PAGE>
TABLE OF CONTENTS
SECOND DIRECTORS' DEFERRED COMPENSATION PLAN
OF CITIZENS BANK, FSB
<TABLE>
<CAPTION>
Page
----
<S> <C> <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 5
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 7
3.9 Termination events 8
Section 4. Vesting 9
Section 5. Adjustment of Accounts 9
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
</TABLE>
<PAGE>
SECOND DIRECTORS' DEFERRED COMPENSATION PLAN
OF CITIZENS BANK, FSB
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 date as of which Directors' meeting
fees are paid 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.
1.7 "Corporation" shall mean shall mean Citizens Bank, FSB, a North
Carolina banking corporation with its principal office at Salisbury, North
Carolina, or any successor thereto by merger, consolidation or otherwise.
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<PAGE>
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 December 28, 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.
1.16 "Plan" shall mean the deferred compensation plan as herein set out or
as duly amended.
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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.
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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 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.
2.3 Transfer credits: As of the effective date of the plan, the
Corporation shall credit to each participant's deferred compensation account
under this plan such amount as the participant shall direct from his or her
accrued benefit under the Amended and Restated Directors' Deferred Compensation
Plan of Citizens Savings Bank, and as set forth in Exhibit A hereto.
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
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<PAGE>
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 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
distributed to him by the Corporation in shares of common stock of Innes Street
Financial Corporation ("ISFC") 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 distributed to him in a single distribution of shares of ISFC common
stock or in equal annual installments of shares of ISFC common stock over a term
certain of five, ten, fifteen or
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<PAGE>
twenty years, as elected by the participant in his initial fee deferral
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 distribution
of his accrued benefit in annual installments for a term certain, the number of
shares in each succeeding annual installment shall be adjusted, as of the
adjustment date immediately preceding the date as of which such annual
installment shall be distributed, for additions to the participant's accounts
pursuant to Section 5. Such adjustment shall be made by dividing the aggregate
number of shares in his account balances as of such date (following adjustment
as of such date) by the number of annual installments remaining to be
distributed hereunder; provided, that the last annual installment due hereunder
shall be all of the remaining shares credited to the participant's accounts on
the date of payment.
3.6 Payment of benefit by reason of death:
3.6.1 If the participant dies while in service, the participant's
accrued benefit, determined as of his termination adjustment date, shall be
distributed to his beneficiary in the manner elected by the participant in
his initial fee deferral election, commencing as soon as practicable (but
no later than thirty days) following such adjustment date. Distributions
shall be made in shares of ISFC common stock.
3.6.2 If the participant dies following his termination of service and
before all distributions 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
distributed to the participant's beneficiary in the manner elected by the
participant in his initial fee deferral election, treating the beneficiary
for this purpose as the participant. Distributions shall be made in shares
of ISFC common stock.
3.7 Prepayment: Notwithstanding any other provisions of this plan, if
a participant or any other person (a "recipient") is entitled to receive
distributions under the plan, the Committee in its sole discretion may direct
the prepayment of all or any part of the distributions remaining to be made to
or in behalf of the recipient, or to shorten the distribution period. The amount
of such prepayment shall be in full satisfaction of the
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<PAGE>
Employer's obligations hereunder to the recipient and to all persons claiming
under or through the recipient with respect to the distributions 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
distributions 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 distribution 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 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 3.8.1 shall be made by the
Committee in its sole and absolute discretion, and its decision to grant or
deny a distribution on account of hardship shall be final. The Committee
shall apply uniform and nondiscriminatory standards in making its decision.
3.8.2 The participant's request for a distribution 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 distributed and the
total amount of the actual expense incurred or to be incurred on account of
hardship.
3.8.3 If a distribution under this Section 3.8 is approved, such
distribution 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 distribution 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
distribution because of financial hardship shall be made within any plan
year.
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<PAGE>
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
(ii) The Corporation shall terminate the plan pursuant to Section
11.
3.9.2 If a Termination Event shall occur prior to the date
distribution 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 distributed to the participant (or his beneficiary)
in a single distribution of shares of ISFC common stock within thirty days
of the occurrence of such event.
3.9.3 If a Termination Event shall occur after the date installment
distributions under this plan have commenced, the remaining installment
payments to be made shall be paid to the participant (or his beneficiary)
in a
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single distribution of shares of ISFC common stock 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 Corporation" (as defined in
Section 3.9.1(i)) occurs, and if, prior to the effective date of such
change in control, the Corporation 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 deemed to be invested in shares of ISFC common stock. The
number of shares of common stock credited to a participant's account as of each
adjustment date shall be determined by dividing the amount to be credited to
such account as of the adjustment date (including fee deferral credits and
dividends, if any, deemed to be paid on shares of ISFC common stock held in such
account) by the fair market value of the ISFC common stock as of such adjustment
date.
5.3 Adjustments to deferred compensation accounts: With respect to each
participant who has a deferred compensation account under the plan, the amount
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<PAGE>
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 number of shares distributed 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 number of shares (including fractional shares) determined pursuant to
Section 5.2.
5.3.3 The deferred compensation account shall be credited or debited,
as the case may be, with the amount of any deemed investment gain or loss
attributable to the shares held in the account since the immediately
preceding adjustment date.
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 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
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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).
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
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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 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.
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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:
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;
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(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.
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
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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 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:
- ---------- ---------------------------------
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The Board may amend any provision of the plan, including the provisions of
Section 3.7, 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 3.7) 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 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;
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(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 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.
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<PAGE>
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 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
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<PAGE>
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 as of the 28th day of December, 1998.
CITIZENS BANK, FSB
By: /s/Ronald E. Bostian
-----------------------------
President
/s/Raphelle Butler
--------------------
Secretary
[Corporate Seal]
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<PAGE>
SECOND NONQUALIFIED DEFERRED COMPENSATION PLAN
FOR KEY EMPLOYEES
OF
CITIZENS BANK, FSB
EFFECTIVE DATE: December 28, 1998
<PAGE>
EXHIBIT 10(ii)
TABLE OF CONTENTS
SECOND NONQUALIFIED DEFERRED COMPENSATION PLAN
FOR KEY EMPLOYEES OF CITIZENS BANK, FSB
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Purpose 1
Section 2. Definitions 1
Section 3. Credits to Deferred Compensation Account 4
Section 4. Retirement; Termination of Service; Death 5
4.1 Normal retirement 5
4.2 Delayed retirement 5
4.3 Disability retirement 6
4.4 Termination of service 6
4.5 Payment of benefit by reason of retirement 6
4.6 Payment of benefit by reason of death 7
4.7 Prepayment 7
4.8 Hardship distributions 8
4.9 Termination events 9
Section 5. Vesting 10
Section 6. Accounts; Adjustment of Accounts 10
Section 7. Administration by Committee 11
Section 8. No Funding 13
Section 9. Allocation of Responsibilities 14
Section 10. Benefits Not Assignable; Facility of Payments 15
Section 11. Beneficiary 15
Section 12. Amendment and Termination of Plan 16
Section 13. Communication to Participants 16
Section 14. Claims Procedure 16
Section 15. Parties to the Plan 18
Section 16. Miscellaneous Provisions 19
</TABLE>
<PAGE>
SECOND NONQUALIFIED DEFERRED COMPENSATION PLAN
FOR KEY EMPLOYEES OF CITIZENS BANK, FSB
Section 1. Purpose:
- --------- -------
This Second Nonqualified Deferred Compensation Plan for Key
Employees of Citizens Bank, FSB (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 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.
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 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 6.
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 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."
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<PAGE>
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 Bank, FSB,
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 "Company" shall mean Citizens Bank, FSB, 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 Company 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.
2.8 "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.
2.9 "Deferred compensation account" shall mean the separate account
to be kept for each participant, as described in Sections 3 and 6, to which
salary reduction credits shall be credited.
2.10 "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 an employee of the Company. 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.
2.11 "Effective date of the plan" shall be December 28, 1998.
2
<PAGE>
2.12 "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 2.13 and
2.15 with respect to provisions governing participation in the plan by an
eligible employee.
2.13 "Employee" shall mean an individual in the service of the Company
if the relationship between the individual and the Company is the legal
relationship of employer and employee.
2.14 "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 by the participant
of his normal retirement age.
2.15 "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
Company and who later returns to service will not be eligible to defer
compensation 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."
2.16 "Plan" shall mean the nonqualified deferred compensation plan as
herein set out or as duly amended.
3
<PAGE>
2.17 "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).
2.18 "Retire" or "retirement" shall mean retirement within the meaning
of Section 4.1, 4.2 or 4.3.
2.19 "Salary reduction agreement" shall mean a written agreement
entered into between a participant and the Company pursuant to the provisions of
Section 3.
2.20 "Salary reduction credits" shall mean the amounts credited to the
participant's deferred compensation account by the Company pursuant to the
provisions of Section 3.
2.21 "Service" shall mean employment by the Company as an employee.
2.22 "Spouse" or "surviving spouse" shall mean, except as otherwise
provided in the plan, the legally married spouse or surviving spouse of a
participant.
2.23 "Termination adjustment date" shall mean the adjustment date
coincident with or next following the date as of which a participant terminates
service with the Company for any reason (including retirement or death).
Section 3. Credits to Deferred Compensation Account:
- --------- ----------------------------------------
3.1 Transfer credits: As of the effective date of the plan, the
Company shall credit to each participant's deferred compensation account under
this plan such amount as the participant shall direct from his or her accrued
benefit under the Amended and Restated Nonqualified Deferred Compensation Plan
of Citizens Savings Bank, and as set forth in Exhibit A hereto.
3.2 Salary reduction credits: Each active participant may elect, by
entering into a salary reduction agreement with the Company, to reduce his
compensation from the Company 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 Company to the deferred compensation
account maintained for the participant pursuant to
4
<PAGE>
Section 6. The Company 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. The
following special rules shall apply:
(a) An election pursuant to Section 3.1 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 limits set forth in Section 3.1, or to terminate salary
reduction credits under the plan) by providing a written modification
of the salary reduction agreement to the Company. 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.
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 receive
distribution of his accrued benefit, determined as of his termination adjustment
date, pursuant to Section 4.5.
5
<PAGE>
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 receive a distribution of his accrued benefit, determined as of 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 accrued benefit,
determined as of his termination adjustment date, shall be distributed 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 Company 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 distributed to him in shares of common
stock of Innes Street Financial Corporation ("ISFC") 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 sixty, such accrued benefit shall be distributed 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 distributed to him in a single distribution of shares of ISFC
common stock or in equal annual installments of shares of ISFC common stock over
a term certain of five, ten, fifteen or
6
<PAGE>
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 distribution
of his accrued benefit in annual installments for a term certain, the number of
shares in each succeeding annual installment shall be adjusted, as of the
adjustment date immediately preceding the date as of which such annual
installment shall be distributed, for additions to the participant's accounts
pursuant to Section 6. Such adjustment shall be made by dividing the aggregate
number of shares in his account balances as of such date (following adjustment
as of such date) by the number of annual installments remaining to be
distributed hereunder; provided, that the last annual installment due hereunder
shall be all of the remaining shares credited to the participant's accounts on
the date of payment.
4.6 Payment of benefit by reason of death:
4.6.1 If the participant dies while in service, the participant's
accrued benefit, determined as of his termination adjustment date, shall be
distributed 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.
Distributions shall be made in shares of ISFC common stock.
4.6.2 If the participant dies following his termination of service
and before all distributions 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 distributed 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.
Distributions shall be made in shares of ISFC common stock.
4.7 Prepayment: Notwithstanding any other provisions of this plan,
if a participant or any other person (a "recipient") is entitled to receive
distributions under the plan, the Committee in its sole discretion may direct
the prepayment of all or any part of the distributions remaining to be made to
or in behalf of the recipient, or to shorten the
7
<PAGE>
distribution 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 distributions 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 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
distributions 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 distribution 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 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 distribution 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 distribution 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 distributed and
the total amount of the actual expense incurred or to be incurred on
account of hardship.
4.8.3 If a distribution under this Section 4.8 is approved, such
distribution 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 distribution 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
8
<PAGE>
provisions of the plan. Only one distribution 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 Company. For
purposes of this subsection (iii), a "change in control of the
Company" 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 Company representing twenty-five
percent or more of the combined voting power of the Company's then
outstanding securities and thereafter, the membership of the Board of
Directors of the Company 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 Company, 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
Company outstanding immediately prior to such acquisition or
combination; or
(ii) The Company shall terminate the plan pursuant to Section 12.
4.9.2 If a Termination Event occurs prior to the date distribution 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
distributed to the participant (or his beneficiary) in a single
distribution of shares of ISFC common stock within thirty days of the
occurrence of such event.
4.9.3 If a Termination Event occurs after the date installment
distributions under this plan have commenced, the remaining installment
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<PAGE>
payments to be made shall be paid to the Employee (or his beneficiary) in a
single distribution of shares of ISFC common stock 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 Company" (as defined in Section
4.9.1(i)) occurs, and if, prior to the effective date of such change in
control, the Company 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
shall be fully vested (that is, nonforfeitable) at all times.
Section 6. Accounts; Adjustment of Accounts:
- --------- --------------------------------
6.1 Accounts: The Committee shall establish a book reserve account,
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 6.3.
6.2 Deemed investment: The deferred compensation account of a
participant shall be deemed to be invested in shares of ISFC common stock. The
number of shares of common stock credited to a participant's account as of each
adjustment date shall be determined by dividing the amount to be credited to
such account as of the adjustment date (including salary reduction credits and
dividends, if any, deemed to be paid on shares of ISFC common stock held in such
account) by the fair market value of the ISFC common stock as of such adjustment
date.
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:
10
<PAGE>
6.3.1 The deferred compensation account shall be debited with the
total number of shares distributed 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 number of shares (including fractional shares) determined pursuant to
Section 6.2.
6.3.3 The deferred compensation account shall be credited or debited,
as the case may be, with the amount of any deemed investment gain or loss
attributable to the shares held in the account since the immediately
preceding adjustment date.
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.
11
<PAGE>
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 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
12
<PAGE>
and to make determinations as to eligibility and benefits under the plan.
Determinations by the plan administrator and the Committee shall 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 Company 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 Company
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
Company 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 Company's own assets), each member of the Committee and each other
officer, employee, or director of the Company 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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<PAGE>
Section 8. No Funding:
- --------- ----------
The obligation of the Company to make payments hereunder shall
constitute a contractual liability of the Company to the participant. Such
payments shall be made from the general funds of the Company, and the Company
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
Company 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 Company and the participant or any other
person. To the extent that any person acquires a right to receive payment from
the Company, such right shall be no greater than the right of an unsecured
creditor of the Company. Notwithstanding the foregoing, the Company 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.
14
<PAGE>
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;
(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 Company 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.
15
<PAGE>
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:
- ---------- -----------
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.
16
<PAGE>
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 4.7) without the participant's
written consent.
Section 13. Communication to Participants:
- ---------- -----------------------------
The Company shall make a copy of the plan available for inspection
by participants and their beneficiaries during reasonable hours at the principal
office of the Company.
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
17
<PAGE>
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 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.
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.
18
<PAGE>
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 Bank, FSB ("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 Company 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 Company a party to the plan:
15.1 As used in the plan, except as otherwise specifically set forth
herein, the term "Company" 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 Company-party, and service for purposes of the plan shall be
interchangeable among Company-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 Company-party to the plan to service of another Company-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
19
<PAGE>
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
Company 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 Company 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 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.
20
<PAGE>
16.4 Reliance on data: The Company, 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
Company, 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 Company 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.
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 Company to discharge any employee or to deal with him without
regard to the effect thereof under the plan.
16.8 Merger or consolidation: Neither Citizens Bank, nor Innes Street
Financial Corporation, shall 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 Bank, FSB and/or Innes Street Financial Corporation
under the plan and upon such assumption, the Successor Entity shall become
obligated to perform the terms and conditions of the plan.
21
<PAGE>
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 28th day of December,
1998.
CITIZENS BANK, FSB
By: /s/Ronald E. Bostian
---------------------------
President
Attest:
/s/Raphelle Butler
- --------------------
Secretary
[Corporate Seal]
22
<PAGE>
DEFERRED COMPENSATION PLAN
FOR KEY EMPLOYEES OF CITIZENS BANK, FSB
Exhibit A
Schedule of Participants
Initial
Name Shares
-------------------- -------
Ronald E. Bostian 45,000
Jeffrey C. Chisholm 406
Dianne E. Hawkins 5,220
Ann T. Venrick 525
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 3/31/99
1OQSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,437,889
<INT-BEARING-DEPOSITS> 18,029,908
<FED-FUNDS-SOLD> 7,034,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,274,554
<INVESTMENTS-CARRYING> 961,814
<INVESTMENTS-MARKET> 994,367
<LOANS> 157,718,981
<ALLOWANCE> 1,223,627
<TOTAL-ASSETS> 207,539,918
<DEPOSITS> 162,627,941
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,389,565
<LONG-TERM> 7,000,000
0
0
<COMMON> 0
<OTHER-SE> 36,522,412
<TOTAL-LIABILITIES-AND-EQUITY> 207,539,918
<INTEREST-LOAN> 5,973,014
<INTEREST-INVEST> 291,031
<INTEREST-OTHER> 757,228
<INTEREST-TOTAL> 7,021,273
<INTEREST-DEPOSIT> 3,911,534
<INTEREST-EXPENSE> 4,221,642
<INTEREST-INCOME-NET> 2,799,631
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,646,211
<INCOME-PRETAX> 1,343,717
<INCOME-PRE-EXTRAORDINARY> 1,343,717
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 843,652
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 2.42
<LOANS-NON> 354,658
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,223,627
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,223,627
<ALLOWANCE-DOMESTIC> 1,223,627
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 341,510
</TABLE>
